-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FGJIQ6i2ms1oqFsn6PyaEKdllijItoC0pAk2aZqUzkilZ7b46RxfzRoCnkJ0wl/r 6iI6PHKctx2B8mYeJoxVVg== 0000891020-97-000325.txt : 19970314 0000891020-97-000325.hdr.sgml : 19970314 ACCESSION NUMBER: 0000891020-97-000325 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970313 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: US BANCORP /OR/ CENTRAL INDEX KEY: 0000101542 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 930571730 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-03505 FILM NUMBER: 97555845 BUSINESS ADDRESS: STREET 1: 111 SW FIFTH AVE T-2 STREET 2: SUITE 3500 CITY: PORTLAND STATE: OR ZIP: 97204 BUSINESS PHONE: 5032756111 MAIL ADDRESS: STREET 1: 111 S W FIFTH AVENUE STREET 2: SUITE 3500 CITY: PORTLAND STATE: OR ZIP: 97204 10-K 1 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 0-3505 U. S. BANCORP (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) OREGON 93-0571730 (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 111 S.W. FIFTH AVENUE, PORTLAND, OREGON 97204 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (503) 275-6111 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: 8 1/8% CUMULATIVE PREFERRED STOCK, SERIES A (TITLE OF CLASS) COMMON STOCK, PAR VALUE FIVE DOLLARS PER SHARE (TITLE OF CLASS) 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 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates of the registrant. $5,509,308,056 at February 7, 1997 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT FEBRUARY 7, 1997 Common Stock, Par Value Five Dollars Per Share 147,934,549 Shares
DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents if incorporated by reference and the Part of the Form 10-K into which the document is incorporated: Portions of the U. S. Bancorp Definitive Proxy Statement dated March 13, 1997, are incorporated by reference into Part III of Form 10-K. 2 INDEX
Page ---- PART I Item 1. Business 1 General 1 Commercial Banking 1 Retail Banking 1 Corporate Banking 2 Investment Services and Trust 2 Nonbank Subsidiaries 2 Competition 3 Employees 3 Monetary Policies 3 Supervision and Regulation 3 U. S. Bancorp 3 Bank Subsidiaries 4 Nonbank Subsidiaries 5 Item 2. Properties 5 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security Holders 6 Executive Officers of the Registrant 6 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 8 Item 6. Selected Financial Data 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 8. Financial Statements and Supplementary Data 32 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 68 PART III Item 10. Directors and Executive Officers of the Registrant 68 (See Part I for Executive Officers of the Registrant) Item 11. Executive Compensation 68 Item 12. Security Ownership of Certain Beneficial Owners and Management 68 Item 13. Certain Relationships and Related Transactions 68 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 68 SIGNATURES 69 EXHIBIT INDEX 71
3 PART I Item 1. Business GENERAL U. S. Bancorp ("Bancorp") is a regional bank holding company incorporated in the state of Oregon in 1968 and headquartered in Portland, Oregon. Bancorp's principal activities are located in the Northwest, but it has operations throughout the Far West and, to a lesser extent, the rest of the United States. At December 31, 1996, Bancorp had consolidated assets of $33.3 billion and shareholders' equity of $2.7 billion. Bancorp is among the 30 largest bank holding companies in the United States in terms of total assets. The principal banking subsidiaries of Bancorp at December 31, 1996, were United States National Bank of Oregon ("U.S. Bank of Oregon"), U.S. Bank of Washington, National Association ("U.S. Bank of Washington"), U.S. Bank of Idaho, U.S. Bank of California, U.S. Bank of Nevada, and U.S. Bank of Utah (collectively the "banking subsidiaries"). It is anticipated that the banking subsidiaries will be merged into U.S. Bank of Oregon by September 1997 as permitted by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. See also "Supervision and Regulation." The banking subsidiaries of Bancorp are engaged in general retail and corporate banking, and provide investment and trust services. U.S. Bank of Oregon and U.S. Bank of Idaho are each the largest commercial banks, in terms of deposits, in their states, while the other banking subsidiaries have significant presences in their states and chosen markets. Other subsidiaries of Bancorp provide financial services related to banking, including lease financing, discount brokerage, investment advisory services, and insurance agency and credit life insurance services. In addition, the investment advisor subsidiary of U.S. Bank of Oregon, Qualivest Capital Management, Inc. advises a group of mutual funds, the Qualivest Funds. Bancorp actively reviews proposals for various acquisition opportunities with which it is regularly presented. In 1996, Bancorp completed the integration of operations and subsidiaries acquired through its 1995 merger with West One Bancorp. Additionally, in June 1996 Bancorp acquired California Bancshares, Inc. ("CBI"), a bank holding company operating in the east San Francisco Bay Area and the Central Valley of Northern California. Effective January 1, 1997, Bancorp acquired Sun Capital Bancorp, a single bank holding company, with operations in Utah and Nevada. Operations of the bank subsidiaries of CBI and Sun Capital Bancorp are expected to be merged with U.S. Bank of California and U.S. Bank of Utah, respectively, during 1997. Bancorp intends to continue to consolidate operations and subsidiaries in connection with ongoing acquisitions and to maximize cost management, and operating efficiencies, while meeting its corporate objectives and the needs of regional customers. In December 1996, Bancorp entered into a definitive agreement to acquire Business and Professional Bank, located in Sacramento, California, with assets of $214 million. Bancorp has given Business and Professional Bank written notice under the agreement that the bank has 45 days to cure the adverse effects of having inadvertently distributed certain borrower information with its proxy materials for the merger vote. COMMERCIAL BANKING Bancorp's banking subsidiaries provide full-service retail and corporate banking and a wide range of investment and trust services to individuals, businesses and governmental entities throughout their respective states of operation and, to a lesser extent, in other areas of the United States and abroad. At December 31, 1996, Bancorp's banking subsidiaries had more than 600 banking offices and 1,300 automated teller machines located in Oregon, Washington, Idaho, Northern California, Nevada and Utah. RETAIL BANKING Bancorp's banking subsidiaries provide products and services to individual customers and business banking customers throughout Bancorp's primary six state region. Services include traditional bank and in-store branch checking, savings, and 1 4 other time deposit and loan services, UBANK(R) automated teller machines at more than 1,300 locations, 24-hour telephone banking, U.S. LOAN LINE(R), a full service loan center by telephone, and UBANK ON-Line for personal computer banking. Loan services offered by Bancorp's banking subsidiaries include real property loans (including for home improvements), extensions of credit for purchases of automobiles and other consumer goods and services, and individual lines of credit both unsecured and secured. Major purchase lines of credit secured by real estate are also available from any of the banking subsidiaries. CORPORATE BANKING Bancorp's banking subsidiaries provide financial services to commercial customers in business and industry. The services provided include loans; mortgage and interim construction financing on residential, industrial and commercial properties; inventory financing; equipment leasing; acceptance financing; commodity loans and other specialized types of credit; merchant and investment banking, and cash management services, including balance and deposit reporting. Small business loans are available through business banking centers. Additionally, the banking subsidiaries maintain financial relationships with numerous companies based outside the Northwest, providing lines of credit and other financial services. Bancorp's banking subsidiaries also provide a broad range of international banking products and services including letters of credit, collections, remittance services, foreign exchange, overseas banking, and import/export trade financing through offices throughout Bancorp's region. Bancorp's International Banking Division also maintains correspondent account relationships with foreign banks throughout the world to facilitate loans, letters of credit, acceptances, collections and exchange services abroad. Bancorp maintains comprehensive lending policies and guidelines associated with the many and varied loan products offered by its retail and corporate operations. The policies and guidelines require sequential levels of credit review for distribution, risk, and loan documentation. The information included herein regarding loan products is a brief summary. Information included under the headings "Loan Portfolio" and "Provision and Allowance for Credit Losses" on pages 18 and 24 respectively of this report is incorporated herein by reference. INVESTMENT SERVICES AND TRUST A full range of investment services and trust services are provided to Bancorp customers. The bank subsidiaries act as trustee or agent for living trusts, testamentary trusts, investment management relationships, pension plans, profit sharing plans and IRA relationships. Trust assets under management by the banking subsidiaries at December 31, 1996, totaled over $9 billion. Investment advisory services may also be obtained directly through Qualivest Capital Management, Inc., a registered investment advisor. Sales of investment securities and certain insurance products are distributed through direct marketing and by individual licensed representatives of U.S. Bancorp Securities or Bancorp's insurance subsidiaries. See also "Nonbank Subsidiaries." NONBANK SUBSIDIARIES Bancorp's major wholly-owned nonbank subsidiaries, including subsidiaries of banks, totaled 18 companies as of December 31, 1996. These subsidiaries operate in the fields of insurance services, equipment leasing, investment advisory services and brokerage, among others. Among Bancorp's nonbank subsidiaries are the following:
COMPANY OFFICE LOCATIONS - --------------------------------------------------------------------------------------- California, Idaho, Nevada, Oregon, Utah, Qualivest Capital Management, Inc. Washington U.S. Bancorp Securities California, Idaho, Nevada, Oregon, Washington U.S. Bancorp Insurance Agency, Inc. Oregon U.S. Bancorp Insurance Oregon, Idaho West One Life Insurance Company Oregon U.S. Bancorp Leasing and Financial 54 offices in 25 states - ---------------------------------------------------------------------------------------
2 5 COMPETITION Bancorp competes for deposits, loans, trust accounts, and the provision of other financial services with independent locally controlled banks, branches of foreign banks, and banks which are subsidiaries of bank holding companies based outside the Northwest, local and national personal loan companies, local and national insurance companies, local and national finance companies and other institutions such as brokerage houses and financial units of out-of-state bank holding companies. All of these entities are actively engaged in marketing various types of loans and other financial services. Quality of service to customers, price of products, range of products and services and ease of accessibility to facilities are among the principal methods of meeting competition in the banking and financial services industries. Bancorp emphasizes responsive service, delivery of high quality service, and value throughout the organization. EMPLOYEES As of December 31, 1996, Bancorp and its subsidiaries had 14,055 full-time equivalent employees. A number of benefit programs are provided to all eligible employees, including officers, of Bancorp and its subsidiaries, including: retirement and 401(k) plans, medical, dental and long-term disability plans, life insurance, accidental death and dismemberment insurance, a travel accident plan, paid vacations and a sick leave program. MONETARY POLICIES The growth of Bancorp and its subsidiaries is affected by both the prevailing economic environment and the fiscal and monetary policies of branches and agencies of the U.S. Government. The Board of Governors of the Federal Reserve System (the "Federal Reserve Board") directly influences corporate performance through management of such factors as the reserves required of financial institutions, the growth and contraction of the nation's money supply, and interest rates paid by banks in their borrowings from and through the Federal Reserve System. The Federal Reserve Board carries additional regulatory authority over member banks and holding company activities. These powers allow federal authorities substantial control of financial activity in general and also of the operations of financial institutions. Monetary policies of the Federal Reserve Board have had and will continue to have a significant effect on the operating results of financial institutions. SUPERVISION AND REGULATION U. S. BANCORP Bancorp, as a bank holding company, is subject to regulation under the Bank Holding Company Act of 1956, as amended (the "Act"), and is registered with the Federal Reserve Board. Bancorp is required by the Act to file reports of its operations with the Federal Reserve Board and is subject to inspection by the Federal Reserve Board. The Federal Reserve Board has authority to issue cease and desist orders against holding companies and their nonbank subsidiaries where the action of either of them constitutes a serious threat to the safety, soundness or stability of a subsidiary bank and to pursue criminal penalties for willful violations and civil penalties for violations under the Act. The Act and the Federal Reserve Board's regulations pursuant thereto require every bank holding company to obtain the prior approval of the Federal Reserve Board before merging with any bank holding company or acquiring substantially all the assets of any bank, or direct or indirect ownership or control of more than five percent of the voting shares of any bank or bank holding company. The Act provides that the Federal Reserve Board shall not approve any acquisition or merger which would result in a monopoly, or which would be in furtherance of any attempt to monopolize the business of banking in any part of the United States, or any other proposed acquisition or merger, the effect of which may be in furtherance of any attempt to monopolize the business of banking in any part of the United States, or any other proposed acquisition or merger, the effect of which may be substantially to lessen competition or to tend to create a monopoly in any section of the country or which in any other manner would be in restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly 3 6 outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served. In reviewing applications, the Federal Reserve Board analyzes the financial and managerial resources and future prospects of the companies and banks involved and the convenience and needs of the community to be served. The Act also prohibits a bank holding company, with certain exceptions, from engaging in or acquiring direct or indirect control of more than five percent of the voting shares of any company engaged in nonbanking activities. The Federal Reserve Board is authorized to approve, among other things, the ownership of shares by a bank holding company in any company the activities of which the Federal Reserve Board has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making such determination, the Federal Reserve Board is required to weigh the expected benefits to the public, such as greater convenience, increased competition or gains in efficiency, against the risks of possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. Bancorp and its banking subsidiaries are subject to the Community Reinvestment Act ("CRA"), which is aimed particularly at encouraging financial institutions to give special attention to the needs of low and moderate income areas in meeting the credit needs of the communities in which they operate. If the regulatory evaluation of a banking subsidiary's CRA activities is less than satisfactory, regulatory approval of the bank's or a related entity's proposed acquisitions, branch openings, expansion of activities related to banking, or other applications requiring Federal Reserve Board approval may be delayed until the bank's CRA performance is deemed satisfactory by the appropriate bank regulatory agency. Bancorp's banking subsidiaries that are subject to the CRA each have regulatory evaluations of satisfactory or better. Most of Bancorp's banking subsidiaries received CRA regulatory evaluations of outstanding in 1996, including its three largest, U.S. Bank of Oregon, U.S. Bank of Washington, and U.S. Bank of Idaho. Bancorp, its banking subsidiaries, and its nonbank subsidiaries are affiliates of each other within the meaning of the Federal Reserve Act. The Federal Reserve Act, the Federal Deposit Insurance Act, and the Home Owners' Loan Act impose certain restrictions on loans by Bancorp's banking subsidiaries to Bancorp or certain nonbank affiliates, on purchases of certain assets by Bancorp's banking subsidiaries from Bancorp or certain nonbank affiliates, on investments by Bancorp's banking subsidiaries in their stock or securities and on Bancorp's banking subsidiaries taking such stock and securities as collateral for loans. Bancorp and its subsidiaries, as affiliates of Bancorp's banking subsidiaries, are also subject to certain restrictions with respect to engaging in the issue, flotation, underwriting, public sale and distribution of securities. Under Section 106 of the 1970 amendments to the Act and the regulations of the Federal Reserve Board, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of any property or service. BANK SUBSIDIARIES In 1994, Congress enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which allows adequately capitalized and managed bank holding companies to acquire and operate banks across state lines beginning in 1997. Commencing in June 1997, banks will be permitted to cross state lines to merge with other banks, subject to individual states' adoption of various nondiscriminatory opt-in and opt-out provisions. Each of the states in which Bancorp operates has opted into interstate banking. Bancorp has announced its intention to become a fully integrated interstate financial institution with mergers and consolidation of operations and services among most of its banking subsidiaries expected to be completed by September 1997. There are various requirements and restrictions affecting Bancorp's bank subsidiaries, including the requirement to maintain reserves against deposits, restrictions on the nature and amount of loans, and restrictions relating to investments, branching and other activities of the banks. Bancorp's national banking subsidiaries are subject to regulation by the Office of the Comptroller of the Currency (the "Comptroller"), the Federal Reserve Board and the Federal Deposit Insurance Corporation (the "FDIC"), and are examined by the Comptroller, which is the primary supervisory authority for national banks. Other bank subsidiaries of Bancorp may be subject to regulation by the appropriate state regulatory agency, the Federal Reserve Board, or the FDIC. 4 7 Each of Bancorp's national banking subsidiaries can initiate dividend payments in a given year, without the prior approval of the Comptroller, in amounts equal to net profits (as defined by regulation) for that year combined with its retained net profits for the preceding two calendar years, less any required transfers to surplus or a fund for the retirement of any preferred stock. In addition, a national bank may not pay a dividend in an amount greater than its net profits then on hand after deducting statutory bad debt in excess of the bank's allowance for loan losses. The payment of dividends by Bancorp's national bank subsidiaries may also be affected by other factors, such as requirements for the maintenance of adequate capital. In addition, federal bank regulatory agencies have issued policy statements which provide that national banks, banks that are members of the Federal Reserve System, and bank holding companies should generally pay dividends only out of current operating earnings. Bancorp's state chartered banking subsidiaries are subject to state law restrictions on dividend payments. Dividend payments which are considered extraordinary or a reduction of capital under state law are generally subject to prior approval by state regulators and the FDIC. The federal banking laws contain a "cross-guarantee" provision which could result in Bancorp or one of the insured depository institutions which it owns being assessed for losses incurred by the FDIC in connection with assistance provided to, or the failure of, any other depository institution owned by Bancorp. The FDIC Improvement Act of 1991 authorized the imposition of stricter capital requirements on banks. If a bank is undercapitalized, the bank will be required to develop and submit a plan for the restoration of its capital. If the bank's efforts to restore capital are inadequate, the parent holding company, if any, may be required to contribute additional capital to the bank, up to the lesser of the full amount needed to bring the bank's capital level into compliance or five percent of the bank's total assets at the time it became undercapitalized. Each federal banking agency is also required to promulgate regulations and specify standards in numerous areas of bank operations, addressing such issues as internal control and audit systems, loan documentation, credit underwriting, interest rate risk, asset growth, executive officer and director compensation, asset quality, and other operational and managerial standards. These regulatory requirements have increased and may continue to increase the cost of, and the regulatory burden associated with, the banking business. Bancorp's bank subsidiaries pay assessments on their domestic deposits to the FDIC's Bank Insurance Fund ("BIF") and Savings Association Insurance Fund ("SAIF"). Under the FDIC's risk-based insurance premium assessment system, each bank whose deposits are insured by the BIF or SAIF is assessed premiums with rates dependent upon certain capital and supervisory measures. All of Bancorp's bank subsidiaries qualify for the lowest assessed premium rate. Additionally, in 1996, Bancorp paid a one-time special assessment of $10.3 million for recapitalization of the SAIF-insured deposits in various Bancorp institutions. The FDIC has authority to impose special assessments from time to time. Bancorp's bank subsidiaries also are required to pay annual FICO premium assessments to FICO, the FDIC's Financing Corporation, for the recapitalization of the Federal Savings and Loan Insurance Corporation. Activities of Bancorp and its banking subsidiaries in other countries are also subject to restrictions imposed by the laws and banking authorities of such countries and the Federal Reserve Board. The foregoing references to applicable statutes and regulations are brief summaries thereof which do not purport to be complete and which are qualified in their entirety by reference to such statutes and regulations. The information included under the heading "Capital and Dividends" on page 27 of this report is incorporated herein by reference. NONBANK SUBSIDIARIES Nonbank subsidiaries of Bancorp in the states of Oregon, Washington, California, Idaho, Nevada, and Utah and other jurisdictions are subject to the supervision and inspection of various federal and/or state regulatory agencies. Item 2. Properties The headquarters of Bancorp and U.S. Bank of Oregon are located in downtown Portland, Oregon, in the U.S. Bancorp Tower. The Tower contains approximately 751,600 rentable square feet of space and was, as of December 31, 1996, 94 percent committed for occupancy including the approximately 299,787 square feet utilized by Bancorp and its subsidiaries. Bancorp 5 8 owns five additional buildings located in the Portland metropolitan area, including the Bancorp operations center. The operations facility, with approximately 360,000 square feet of space, houses Bancorp's information services and data processing functions. The banking subsidiaries own or lease other land and buildings adequate to house their full service branch offices and other banking facilities, including headquarter office buildings in Seattle, Boise, Sacramento, Reno, and Salt Lake City. Item 3. Legal Proceedings There were no legal proceedings requiring disclosure pursuant to this item pending at December 31, 1996, or at the date of this report. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of shareholders of Bancorp's common stock during the fourth quarter of 1996. EXECUTIVE OFFICERS OF THE REGISTRANT All officers of the registrant are elected or appointed by the board of directors to hold their offices at the pleasure of the board. At February 7, 1997, the executive officers of Bancorp were as follows:
SERVED AS AGE AT EXECUTIVE OFFICER JOINED NAME 12/31/96 POSITION SINCE BANCORP - ---------------------------------------------------------------------------------------------------------------------------- Dwight V. Board 52 Executive Vice President and Secretary December 1995 1995 Gerry B. Cameron 58 Director, Chairman of the Board, Chief Executive Officer, March 1979 1956 and President Phyllis J. Campbell 45 President and Chief Executive Officer, U.S. Bank of November 1989 1987 Washington; Executive Vice President, U.S. Bancorp Thomas P. Ducharme 45 Executive Vice President and Treasurer June 1994 1994 Gary T. Duim 52 Executive Vice President January 1993 1987 Steven P. Erwin 53 Executive Vice President and Chief Financial Officer July 1994 1994 John D. Eskildsen 59 President and Chief Executive Officer, U.S. Bank of Oregon; July 1989 1959 Executive Vice President, U.S. Bancorp Arland D. Hatfield 61 Executive Vice President July 1989 1987 Robert J. Lane 51 Executive Vice President December 1995 1995 Judith L. Rice 49 Executive Vice President May 1990 1973 V. Lamoine Saunders 55 Executive Vice President July 1994 1994 Robert D. Sznewajs 50 Vice Chairman April 1994 1994 There are no family relationships among any of the above listed persons. - ----------------------------------------------------------------------------------------------------------------------------
The following paragraphs describe the principal occupations, titles and employment of each of the above persons during the past five years. Many of the above listed persons hold additional titles in other Bancorp subsidiaries. (a) Mr. Board has been Executive Vice President in charge of Corporate, Government and Legal Affairs since December 1995. Mr. Board has been Secretary since February 1997. For more than five years prior to 1995, Mr. Board served as Senior Vice President, Secretary and General Counsel of West One Bancorp. (b) Mr. Cameron has been Chief Executive Officer and a director since January 1994 and Chairman of the Board since April 1994. He was also President from April 1994 until December 1995 and was reelected President in February 1997. Mr. Cameron was Vice Chairman from January 1993 until April 1994. He was Executive Vice President of U.S. Bank of Oregon from March 1979 until July 1993. Mr. Cameron was elected a director of U.S. Bank of Oregon in January 1993 and was elected Chairman of the Board in July 1993. He was President and Chief Executive Officer of U.S. Bank of Washington from October 1991 until January 1993. (c) Ms. Campbell has been President and Chief Executive Officer of U.S. Bank of Washington and Executive Vice President of Bancorp since January 1993. From 1989 through 1992, Ms. Campbell was Executive Vice President and Manager of the Distribution Group of U.S. Bank of Washington. 6 9 (d) Mr. Ducharme has been Executive Vice President and Treasurer since June 1994. Previously, Mr. Ducharme provided personal investment and financial advice and services as an asset management and financial consultant. From 1988 through 1993, Mr. Ducharme was Executive Vice President and Treasurer of Valley National Bank in Phoenix, Arizona. (e) Mr. Duim has been Executive Vice President in charge of the Retail Banking Group since October 1996. Previously he headed the Corporate Banking Group, a position he assumed in January 1993. From 1988 through 1992, Mr. Duim was Executive Vice President of U.S. Bank of Washington managing its Commercial Services Group. (f) Mr. Erwin has been Executive Vice President and Chief Financial Officer since July 1994. Mr. Erwin served as Treasurer of BayBanks, Inc. in Boston, Massachusetts from 1987 until 1994. (g) Mr. Eskildsen has been Executive Vice President of Bancorp since April 1992 and became President and Chief Executive Officer of U.S. Bank of Oregon in January 1993. For more than five years prior to 1993, he was Executive Vice President of U.S. Bank of Oregon and managed its Commercial Services Group. (h) Mr. Hatfield has been Executive Vice President and Chief Credit Officer of Bancorp since October 1991 and has headed the Credit Administration and Policy Group since October 1992. (i) Mr. Lane has been Executive Vice President since December 1995, and currently heads the Corporate Banking Group. From 1987 until September 1996, Mr. Lane served as President and Chief Executive Officer, and director until December 1996, of U.S. Bank of Idaho (formerly known as West One Bank, Idaho). (j) Ms. Rice has been Executive Vice President and Manager of the Human Resources Group since May 1990. (k) Mr. Saunders has been Executive Vice President heading the systems and operations areas since August 1994. Mr. Saunders served as Chief Operations Officer of Valley National Bank of Arizona in Phoenix, Arizona from 1983 until 1992. From 1992 through 1993, Mr. Saunders served as President of BancStar, Inc. From 1993 until 1994, Mr. Saunders served as National Operations Manager for BancOne Corporation. (l) Mr. Sznewajs has been Vice Chairman since May 1995. From April 1994 until May 1995, Mr. Sznewajs was Executive Vice President of Bancorp in charge of the Support and Financial Services and Products Group. Since April 1994, he has also served as Executive Vice President of U.S. Bank of Oregon and U.S. Bank of Washington. From 1989 until 1993, Mr. Sznewajs was Executive Vice President and Manager of Retail Banking for Valley National Bank of Arizona in Phoenix, Arizona. In early 1993, Mr. Sznewajs became Chairman of Bank of America, N.A., the credit card bank of BankAmerica Corporation. 7 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Bancorp's common stock is traded in The Nasdaq Stock Market under the symbol USBC. At December 31, 1996, 36 independent brokerage firms were registered as market makers in Bancorp's common stock. Also at that date, there were 21,089 shareholders of record of Bancorp's common stock. Approximately 88 percent of those shareholders live in California, Idaho, Oregon or Washington while approximately 26 percent of the total shares issued and outstanding are owned by California, Idaho, Oregon and Washington residents. The following table presents the interday high and low sales prices of Bancorp's common stock for each quarterly period for the last two years as reported by The Nasdaq Stock Market:
1996 1995 ------------------------------- -------------------------------- 4 3 2 1 4 3 2 1 ------------------------------------------------------------------------------------------------------------------- High $ 47 40 3/4 37 3/8 34 5/8 $ 36 29 1/2 27 3/4 26 3/4 Low 38 3/4 33 31 5/8 29 1/4 28 1/4 23 7/8 23 1/2 22 -------------------------------------------------------------------------------------------------------------------
The following table presents quarterly per share cash dividends declared information for the two-year period 1996-1995:
1996 1995 --------------------- --------------------- 4 3 2 1 4 3 2 1 ----------------------------------------------------------------------------------------------------------------- Common dividends declared $.31 .31 .28 .28 $.28 .28 .25 .25 -----------------------------------------------------------------------------------------------------------------
Bancorp's common dividend payout ratio for each of its last three fiscal years was as follows: 1996 - 38.3%; 1995 - 50.7%; 1994 - 58.8%. Reference should be made to Item 1 of this report on page 5 and Note 3 to the Consolidated Financial Statements on page 45 for a description of restrictions on the ability of Bancorp's banking subsidiaries to pay dividends to Bancorp. 8 11 Item 6. Selected Financial Data The following selected financial data should be read in conjunction with Bancorp's Consolidated Financial Statements and the accompanying notes presented elsewhere herein.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------- % INCREASE (DECREASE) (IN MILLIONS, EXCEPT SHARE DATA) 1996 1995 1996 TO 1995 1994 1993 1992(1) - --------------------------------------------------------------------------------------------------------------------------- EARNINGS Interest income $ 2,483.3 $ 2,392.5 4% $ 2,074.4 $ 1,962.2 $ 1,944.7 Interest expense 1,016.7 993.1 2 738.7 698.1 825.2 --------- --------- --------- --------- --------- Net interest income 1,466.6 1,399.4 5 1,335.7 1,264.1 1,119.5 Net interest income (taxable-equivalent)(2) 1,510.1 1,449.5 4 1,389.5 1,317.5 1,169.3 Provision for credit losses 135.2 124.1 9 120.1 106.3 148.8 Noninterest revenues 585.2 524.7 12 552.7 620.3 519.3 Noninterest expenses 1,156.6 1,191.9 (3) 1,305.1 1,273.4 1,098.1 Merger and integration costs 18.2 98.9 (82) - - - Restructuring charge - - - 100.0 - - Total noninterest expenses 1,174.8 1,290.8 (9) 1,405.1 1,273.4 1,098.1 Income before cumulative effect of accounting changes 478.9 329.0 46 254.7 341.1 271.5 Cumulative effect of accounting changes - - - - - 59.9 Net income $ 478.9 $ 329.0 46 $ 254.7 $ 341.1 $ 211.6 - --------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE Income before accounting changes $ 3.08 $ 2.09 47% $ 1.60 $ 2.23 $ 1.87 Net income 3.08 2.09 47 1.60 2.23 1.45 Book value 17.40 16.38 6 15.40 15.23 13.45 Cash dividends declared(3) 1.18 1.06 11 .94 .85 .76 Average common shares outstanding (000's) 151,313 151,554 - 151,392 147,518 142,609 - --------------------------------------------------------------------------------------------------------------------------- FINANCIAL RATIOS Return on average common equity 17.99% 12.90% 10.62% 15.71% 14.06% Return on average assets 1.50 1.09 .87 1.22 1.07 Overhead ratio 56.07 65.38 72.34 65.71 65.03 Net interest margin 5.32 5.38 5.35 5.31 5.17 Average total shareholders' equity to average assets 8.60 8.63 8.35 8.01 7.50 - --------------------------------------------------------------------------------------------------------------------------- CAPITAL RATIOS Leverage capital ratio 8.17% 7.89% 7.82% 7.64% 7.10% Risk-based capital ratios Tier 1 capital ratio 8.11 8.44 8.72 8.95 8.63 Total capital ratio 11.83 11.79 11.38 11.75 11.51 - --------------------------------------------------------------------------------------------------------------------------- CREDIT QUALITY RATIOS Nonperforming assets as a % of loans and foreclosed assets .73% .73% 1.06% 1.44% 1.77% Allowance as a % of loans 1.90 1.91 1.79 1.77 1.81 Allowance as a % of nonperforming loans 320 336 192 144 117 - --------------------------------------------------------------------------------------------------------------------------- PERIOD-END BALANCES Assets $33,260.4 $31,794.3 5% $30,609.1 $29,086.8 $27,874.8 Interest-earning assets 29,242.0 27,883.3 5 27,004.4 25,945.9 24,643.2 Loans 25,046.7 22,784.8 10 21,643.4 19,445.3 18,039.8 Deposits 24,977.0 23,264.7 7 21,859.3 21,447.7 21,061.6 Long-term debt 1,811.5 1,377.0 32 1,244.2 1,161.2 1,437.2 Capital qualifying securities 300.0 - - - - - Common shareholders' equity 2,560.8 2,467.0 4 2,343.0 2,291.7 1,971.1 Preferred stock 150.0 150.0 - 150.0 150.0 150.0 Full-time equivalent employees 14,055 14,081 - 15,388 17,340 16,273 - ---------------------------------------------------------------------------------------------------------------------------
(1) 1992 net income includes a $59.9 million after-tax charge from the adoption of Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and SFAS No. 112, "Employers' Accounting for Postemployment Benefits". 1992 income before accounting changes per common share on a primary and fully diluted basis was $1.84 and $1.79, respectively; net income per share on a primary and fully diluted basis was $1.42 and $1.40, respectively. Dilution was not material in the other periods presented. 1992 returns on average common equity and assets were computed before accounting changes. After accounting changes, return on average assets was .84% and return on average common equity was 11.25%. (2) Includes taxable-equivalent adjustment related to income on certain loans and securities that is exempt from federal and applicable state income taxes. The federal statutory tax rate was 34% for 1992 and 35% for subsequent years presented. (3) Dividends per share are based on historical Bancorp common cash dividends declared. 9 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following is management's assessment of U. S. Bancorp and Subsidiaries (Bancorp) financial condition including the principal factors that affect results of operations. This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented on pages 41 through 66. PERFORMANCE OVERVIEW Bancorp achieved record earnings of $478.9 million for 1996, up 46 percent from $329.0 million in 1995, and up 88 percent from $254.7 million in 1994. Earnings per common share were $3.08 in 1996, compared with $2.09 per share in 1995, and $1.60 per share in 1994. The 1995 and 1994 periods included significant charges for merger costs and restructuring, respectively. Bancorp's 1996 results reflect loan growth, an increase in noninterest revenue and disciplined cost control. Average loans in 1996 totaled $23.9 billion, an increase of $1.7 billion, or eight percent, from the prior year. This followed an increase of $1.8 billion, or nine percent, in 1995 compared with 1994. In 1996, Bancorp completed the integration of subsidiaries and operations of West One Bancorp (West One), and accomplished cost saving objectives ahead of schedule. Improvement in operating efficiency, as measured by the overhead ratio (noninterest expenses as a percentage of tax-equivalent net interest income and noninterest revenues) was achieved in 1996 when the overhead ratio improved to 56 percent in 1996, down from 65 percent in 1995. Bancorp continued to expand its market presence through strategic acquisitions. In June 1996, Bancorp purchased California Bancshares, Inc. (CBI), a bank holding company with $1.6 billion in assets, operating in the East San Francisco Bay Area and the Central Valley of Northern California. Effective January 1, 1997, Bancorp completed the purchase acquisition of Sun Capital Bancorp, based in St. George, Utah, with $70 million in assets. The quarterly dividend on common shares was increased in the third quarter of 1996 to $.31 per share. Following Bancorp's announcement in October 1996 of its plans to repurchase up to 7.5 million shares of its outstanding common stock, Bancorp purchased 4 million shares in the fourth quarter of 1996. During 1996, Bancorp's bank subsidiaries continued to maintain capital ratios above the regulatory "well capitalized" level based on notification from the banks' primary regulators, the Federal Reserve Bank of San Francisco and the Office of the Comptroller of the Currency. Bancorp presents, in the table on the next page, a supplemental operating income analysis to accompany the consolidated statement of income. This additional table should not be viewed as a substitute for the generally accepted accounting principle-based financial statements presented elsewhere in this report. Management believes that the analysis is meaningful to understand the results and trends in operating income separately from nonrecurring transactions, noncore activities, certain provisions and other real estate owned transactions. There are four primary differences between the consolidated statement of income and the operating income analysis. First, the operating income analysis presents net interest income on a tax-equivalent basis. Second, the line items are presented in a slightly different order. Third, certain transactions that are nonrecurring or that are not related to what management believes is core business are not included in noninterest revenues and noninterest expenses in determining operating income. Finally, operating income is income before the provision for credit losses, other real estate owned transactions (OREO), noncore/nonrecurring items and income taxes. The provision for credit losses is deducted from operating income as its amount is based on the analysis of the required level of the allowance for credit losses and can be subject to fluctuation due to the prevailing level of charge-offs. Due to the format of this presentation, not all line items agree directly to the Consolidated Financial Statements. For detailed information on the items presented as noncore or nonrecurring, refer to the respective discussions of "Noninterest Revenues" and "Noninterest Expenses." 10 13 SUMMARY OF OPERATIONS ANALYSIS (TAX-EQUIVALENT BASIS)
PERCENT PERCENT (IN MILLIONS) 1996 1995 CHANGE 1994 CHANGE - ------------------------------------------------------------------------------------------------------------------------ Net interest income $1,510.1 $1,449.5 4% $1,389.5 4% Noninterest revenues 521.8 504.7 3 514.7 (2) Noninterest expenses 1,147.1 1,187.6 (3) 1,277.1 (7) -------------------------------------------------------- Operating income 884.8 766.6 15 627.1 22 Provision for credit losses 135.2 124.1 9 120.1 3 OREO transaction income (loss) .8 2.9 N/M (.8) N/M -------------------------------------------------------- 750.4 645.4 16 506.2 27 Noncore/nonrecurring items Equity investment income (loss) 27.8 3.2 (5.4) Gain on sale of operations and loans 25.6 8.9 62.9 Other noninterest revenue items 10.0 7.9 (19.5) Merger and integration costs (18.2) (98.9) - Restructuring charge - - (100.0) SAIF assessment (10.3) - - Other noninterest expense items - (7.2) (27.2) -------------------------------------------------------- 34.9 (86.1) (89.2) -------------------------------------------------------- Income before income taxes 785.3 559.3 417.0 Less tax-equivalent adjustment included above 43.5 50.1 53.8 Provision for income taxes 262.9 180.2 108.5 -------------------------------------------------------- Net income $ 478.9 $ 329.0 46% $ 254.7 29% ======================================================== - ------------------------------------------------------------------------------------------------------------------------
(N/M Not Meaningful.) Operating income for 1996 increased 15 percent over 1995, after increasing 22 percent in 1995 compared with 1994. Highlights for the periods included: - Return on average common equity was 17.99 percent in 1996 and the return on average assets was 1.50 percent, compared with 12.90 percent and 1.09 percent, respectively in 1995. - Net interest income increased $60.6 million, or four percent, in 1996 compared with 1995 and $60.0 million, or four percent in 1995 compared with 1994. The growth in net interest income in 1996 resulted primarily from an increase in average earning assets. - Noninterest revenues, before noncore/nonrecurring items, increased $17.1 million, or three percent, in 1996 compared with 1995. The increase reflected the growth in service charges on deposit accounts, trust and investment management and mortgage banking income. - Noninterest expenses, before noncore/nonrecurring items, decreased $40.5 million, or three percent, in 1996 compared with 1995, and decreased $89.5 million, or seven percent, in 1995 compared with 1994. The decreases reflected the impact of the restructuring initiatives begun in 1994, the cost savings as a result of the merger with West One, and the reduction of Federal Deposit Insurance Corporation (FDIC) deposit insurance premiums. - The higher provisions for credit losses in 1996 and 1995 reflected the impact of the integration of loan portfolios of acquired companies and, in 1996, also reflected an increase in charge-offs as a percentage of loans. The ratio of nonperforming assets to total loans and foreclosed assets declined from 1.06 percent at year-end 1994 to .73 percent for year-ends 1995 and 1996. 11 14 FORWARD-LOOKING INFORMATION Statements appearing in this report which are not historical in nature, including the discussions of the effects of recent mergers and the adequacy of Bancorp's capital resources, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual future results to differ materially. Such risks and uncertainties with respect to Bancorp include those related to the economic environment, particularly in the region in which Bancorp operates, competitive products and pricing, fiscal and monetary policies of the federal government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management and asset/liability management, the financial and securities markets, and the availability of and costs associated with sources of liquidity. NET INTEREST INCOME (TAX-EQUIVALENT BASIS) Net interest income, the principal source of Bancorp's operating income, includes interest income and fees generated by interest-earning assets, primarily loans and investment securities, less interest expense on interest-bearing liabilities, primarily deposits, purchased funds and long-term debt. Net interest income is affected by the volume and relative mix of both earning assets and interest-bearing and noninterest-bearing sources of funds, as well as fluctuations in interest rates. The following table sets forth, on a tax-equivalent basis, a summary of the changes in net interest income resulting from changes in volumes and rates. Since changes in interest income and expense are calculated independently for each line in the table, the totals in the volume and rate columns are not the sum of the individual lines. Changes not due solely to volume or rate changes are allocated to rate. RATE-VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
1996 VERSUS 1995 1995 VERSUS 1994 ----------------------- ------------------------ INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO CHANGE IN CHANGE IN ----------------------- ------------------------ AVERAGE AVERAGE NET AVERAGE AVERAGE NET (IN MILLIONS) VOLUME RATE CHANGE VOLUME RATE CHANGE - -------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Other short-term investments $ 7.2 $ (1.7) $ 5.5 $ (4.0) $ 3.4 $ (.6) Trading account securities (2.2) (.5) (2.7) - .9 .9 Loans held for sale 2.5 (2.5) - (16.3) 1.9 (14.4) Securities available for sale 42.8 7.3 50.1 (10.4) 15.2 4.8 Securities held to maturity (71.8) 4.2 (67.6) (23.2) 3.7 (19.5) Loans and lease financing 155.6 (56.7) 98.9 151.1 192.1 343.2 ------------------------------------------------------- Total interest income 131.5 (47.3) 84.2 77.2 237.2 314.4 - -------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits Savings (8.2) (1.6) (9.8) (9.9) 4.3 (5.6) NOW accounts and interest checking .9 5.7 6.6 (3.4) 6.1 2.7 Money market deposit accounts 29.1 (15.5) 13.6 15.9 59.5 75.4 Time -- $100,000 or more 43.9 (8.0) 35.9 22.8 27.6 50.4 Other time 10.9 .9 11.8 4.5 58.9 63.4 ------------------------------------------------------- Total 56.7 1.4 58.1 14.6 171.7 186.3 Federal funds purchased and security repurchase agreements (22.8) (14.7) (37.5) (8.1) 38.1 30.0 Commercial paper and other short-term borrowings (13.1) (1.7) (14.8) 10.8 23.3 34.1 Long-term debt 22.0 (4.2) 17.8 .8 3.2 4.0 ------------------------------------------------------- Total interest expense 48.1 (24.5) 23.6 22.8 231.6 254.4 - -------------------------------------------------------------------------------------------------------------------------- Changes in net interest income $ 83.4 $ (22.8) $ 60.6 $ 54.4 $ 5.6 $ 60.0 ======================================================= - --------------------------------------------------------------------------------------------------------------------------
12 15 Net interest margin on interest-bearing assets is the average yield on interest-earning assets less the average rate paid for all sources of funding, including the benefit of interest-free funds. The net interest margin in 1996 was 5.32 percent compared with 5.38 percent and 5.35 percent in 1995 and 1994, respectively. The decrease in the net interest margin in 1996 compared with 1995 was primarily due to the decrease in the spread between loans and deposits, as loan yields fell while deposit rates increased one basis point from a year ago. The increase in the margin in 1995 compared with 1994 was predominantly due to a higher proportion of interest-earning assets supported by noninterest-bearing sources of funds in 1995. Average earning assets in 1996 totaled $28.4 billion, an increase of $1.5 billion, or six percent, from the prior year. The impact of the CBI acquisition was largely offset by the decrease in loans associated with divestitures of branches related to the West One acquisition. Average earning assets increased $989 million, or four percent, in 1995 from 1994. The increase in average earning assets during 1996 reflected primarily the growth in average loans, which increased $1.7 billion, or eight percent, over 1995. Average commercial loans increased $781 million, real estate construction loans increased $272 million, and real estate mortgages were up $252 million in 1996 from the prior year. Average securities decreased $308 million in 1996 as maturities were used to fund loan growth. The volume-related changes in interest income for the securities portfolios reflected the impact of the reclassification of approximately $800 million of securities held to maturity to the available for sale portfolio at year-end 1995. Average interest-bearing liabilities totaled $22.7 billion in 1996, an increase of $1.0 billion, or five percent, from the prior year. Average interest-bearing deposits increased $1.3 billion, or eight percent, in 1996. Changes in the deposit mix reflected the movement of balances from savings into money market and time deposits. Average long-term debt increased $316 million in 1996 from 1995, reflecting the issuance of senior and subordinated debt during 1996. These increases were offset by a decrease in average federal funds purchased, commercial paper and other short-term borrowings of $621 million. NONINTEREST REVENUES Noninterest revenues for 1996, excluding noncore/nonrecurring revenues identified in the table below, increased $17.1 million, or three percent, over 1995. Noninterest revenues, excluding noncore/nonrecurring revenues, in 1995 decreased two percent over 1994. The principal components of noninterest revenues are shown in the table below.
CHANGE CHANGE ------------- ------------- (IN MILLIONS) 1996 1995 AMOUNT PERCENT 1994 AMOUNT PERCENT - ----------------------------------------------------------------------------------------------------------------------------- NONINTEREST REVENUES Service charges on deposit accounts $197.4 $189.5 $ 7.9 4% $191.6 $ (2.1) (1)% Trust and investment management 71.6 65.8 5.8 9 65.3 .5 1 Bank card revenue, net 59.7 73.4 (13.7) (19) 73.3 .1 - Exchange fees 40.4 42.6 (2.2) (5) 36.7 5.9 16 Insurance revenue 23.5 21.4 2.1 10 25.4 (4.0) (16) Mortgage banking income, net 22.9 15.2 7.7 51 22.8 (7.6) (33) ATM revenue 21.8 21.6 .2 1 21.1 .5 2 Brokerage and other commissions 16.2 13.2 3.0 23 12.9 .3 2 Trading account 16.0 17.4 (1.4) (8) 15.4 2.0 13 Other 52.3 44.6 7.7 17 50.2 (5.6) (11) ------------------------------------------------------------------- 521.8 504.7 17.1 3 514.7 (10.0) (2) NONCORE/NONRECURRING REVENUE ITEMS Equity investment income (loss) 27.8 3.2 (5.4) Gain on sale of operations and loans 25.6 8.9 62.9 Gain (loss) on sale of securities 5.8 3.0 (9.2) Other nonrecurring noninterest revenue items 4.2 4.9 (10.3) -------------------------------------------------------------------- $585.2 $524.7 $ 60.5 12% $552.7 $(28.0) (5)% ==================================================================== - -------------------------------------------------------------------------------------------------------------------------------
Revenues from service charges on deposit accounts, the largest component of noninterest revenue, increased four percent to $197.4 million in 1996 compared with 1995. Overdraft and non-sufficient funds charges, improved service fee 13 16 collection and a change in check processing largely accounted for the increase. Service charges on deposit accounts decreased one percent to $189.5 million in 1995 from $191.6 million in 1994. The decrease in 1995 was related to a decline in consumer product service charges, partially offset by increases in overdraft and non-sufficient funds charges. Trust and investment management revenues were $71.6 million in 1996, compared with $65.8 million in 1995 and $65.3 million in 1994. The nine percent increase in 1996 was due mainly to an increase in revenues associated with employee benefit plan administration. In 1996, Bancorp introduced a bundled 401(k) product for mid-sized companies, combining investment management through Bancorp's capital management subsidiary, trust services and record keeping. Brokerage and other commissions increased 23 percent in 1996, compared with 1995, due to the growth in Qualivest Capital Management's primary businesses: trust investment management, mutual fund and institutional money management. Managed mutual fund assets increased by 44 percent in 1996 over 1995. A strong equity market in 1996 also contributed to increases in retail brokerage commissions. The decline in bank card revenues in 1996 resulted primarily from the September 1995 sale of an interest in the merchant processing service business and the allocation of the merchant contract base to a co-owned business alliance. As a result, Bancorp receives a share of net profits of the business alliance, where previously Bancorp recorded both bank card revenues and related noninterest expenses. Certain expenses also declined as a result of this transaction, as discussed in the analysis of noninterest expenses following. The sale of $350 million of noncore affinity credit card balances in late 1995 also decreased annual membership fee and other income related to these portfolios included in bank card revenue. Mortgage banking income increased 51 percent in 1996 compared with 1995 largely due to a higher volume of mortgage loan originations. In addition, the implementation of Statement of Financial Accounting Standards (SFAS) No. 122, "Accounting for Mortgage Servicing Rights," in 1996 resulted in the recognition of approximately $3.8 million of income related to originated mortgage servicing rights. The 1995 decrease in mortgage banking income relates to Bancorp's 1994 sale of most of the residential mortgage loan servicing portfolio and 50 loan origination offices of its subsidiary U.S. Bancorp Mortgage Company. Noncore/nonrecurring revenue items Equity investment revenue results mainly from Bancorp's investment as a limited partner in several limited partnerships and, to a lesser degree, in venture capital investments. Bancorp has no control over investment sales activities by the general partners, and realized gains of $19.1 million in 1996 related to sales of limited partnership investments by the general partners. Gains of $8.5 million in 1996 were realized on disposition of venture capital investments. Gain on sale of operations and loans in 1996 consisted primarily of a $28.8 million gain on sale of branches divested in May 1996 in conjunction with the West One merger and $3.0 million of net losses on credit card portfolio sales. Gain on sale of operations and loans in 1995 included a $5.5 million gain on sale of affinity card portfolios, and a $3.0 million gain on sales of adjustable-rate mortgage loans and student loans. The 1994 gain on sale of operations and loans included $50.8 million from the previously mentioned sale of mortgage subsidiary assets. Gains on sales of bank card and student loans in 1994 totaled $11.2 million. Sale of securities from the available for sale portfolio relates to Bancorp's management of liquidity and interest rate risk. The gain on the sale of securities in 1996 resulted primarily from the sale of adjustable rate, mortgage-backed securities. Losses incurred in 1994 related to repositioning the available for sale securities portfolio to increase the overall yield in subsequent periods. Other nonrecurring noninterest revenue in 1996 related to a gain on sale of idle facilities. The 1995 period included a $5.2 million gain on sale of facilities, a $1.7 million gain on sale of mortgage loan servicing rights, and $2.0 million of losses related to Bancorp's import/export financing subsidiary that was closed in 1995. The 1994 period included $3.9 million of losses incurred by the import/export financing subsidiary and $8.3 million of trading losses related to the sale of certain collateralized mortgage obligations. 14 17 NONINTEREST EXPENSES Several categories of noninterest expense in 1996 were favorably affected by the cost savings achieved as a result of the West One merger and restructure initiatives begun in 1994. Certain categories of expense in 1996 also reflect the impact of the mid-1996 acquisition of CBI. Excluding the impact of CBI, noninterest expenses before noncore/nonrecurring items decreased $75.4 million in 1996 as compared with 1995. Significant improvement in the overhead ratio (defined as noninterest expenses as a percentage of tax-equivalent net interest income and noninterest revenues) was achieved in 1996 as the ratio improved to 56 percent in 1996, down from 65 percent in 1995.
CHANGE CHANGE ----------------- ----------------- (IN MILLIONS) 1996 1995 AMOUNT PERCENT 1994 AMOUNT PERCENT - ------------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSES Employee compensation $ 498.9 $ 486.5 $ 12.4 3% $ 522.0 $ (35.5) (7)% Benefits 116.3 115.6 .7 1 122.0 (6.4) (5) Equipment rentals, depreciation and maintenance 118.8 127.4 (8.6) (7) 130.0 (2.6) (2) Net occupancy expense 81.7 85.4 (3.7) (4) 86.4 (1.0) (1) Stationery, supplies and postage 63.2 63.9 (.7) (1) 59.2 4.7 8 Regulatory agency fees 9.3 35.5 (26.2) (74) 54.1 (18.6) (34) Telecommunications 32.9 33.3 (.4) (1) 35.2 (1.9) (5) Marketing and advertising 31.2 33.3 (2.1) (6) 35.3 (2.0) (6) Amortization of goodwill and core deposit intangibles 22.8 16.6 6.2 37 16.0 .6 4 Contract personnel 18.0 13.7 4.3 31 14.5 (.8) (6) Other taxes and licenses 16.0 15.7 .3 2 12.9 2.8 22 Travel 13.5 12.4 1.1 9 15.9 (3.5) (22) Other 124.5 148.3 (23.8) (16) 173.6 (25.3) (15) -------------------------------------------------------------------------- 1,147.1 1,187.6 (40.5) (3) 1,277.1 (89.5) (7) NONCORE/NONRECURRING EXPENSE ITEMS Merger and integration costs 18.2 98.9 - SAIF assessment 10.3 - - OREO transaction (income) loss (.8) (2.9) .8 Asset write-downs - 3.2 18.4 Restructuring charge - - 100.0 Other nonrecurring noninterest expense items - 4.0 8.8 -------------------------------------------------------------------------- $1,174.8 $1,290.8 $(116.0) (9)% $1,405.1 $(114.3) (8)% ========================================================================== - ------------------------------------------------------------------------------------------------------------------------------
Employee compensation for 1996 increased $12.4 million over 1995 and benefits increased $.7 million over the prior year. The acquisition of CBI, accounted for as a purchase, increased compensation $12.8 million and benefits $2.6 million. Most other categories of expense declined in 1996, reflecting the successful integration of West One, accounted for on a pooling-of-interests basis, with Bancorp. Excluding noncore/nonrecurring items in both periods, the impact of the CBI acquisition and technology expenditures discussed below, fourth quarter 1996 expenses would have been $270 million, compared to $297 million in the fourth quarter of 1995, a reduction of $108 million on an annualized basis. In 1996, Bancorp implemented a five-year strategy to upgrade several facets of its technological infrastructure. These include a new retail teller system, corporate banking revenue initiatives, interstate banking development and "Year 2000" projects. During the second half of 1996, Bancorp expended approximately $6 million towards these technology initiatives. Technology costs were included in salaries, contract personnel and to a lesser extent, in several other categories. The decline in regulatory agency fees was due to the reduction in FDIC assessment rates on Bank Insurance Fund insured deposits. In May 1995, the FDIC reduced the assessment rates for well capitalized and highest-rated institutions from 23 cents to 4 cents per $100 of eligible deposits, and the rate was reduced to zero in 1996. Included in noncore/nonrecurring expense is a special one-time assessment of $10.3 million to recapitalize the FDIC's Savings Association Insurance Fund. 15 18 Amortization of goodwill and core deposit intangibles was $22.8 million in 1996 compared with $16.6 million in 1995. The increase in 1996 compared with 1995 reflects the increase in goodwill and core deposit intangible asset balances as a result of the CBI acquisition in June 1996. Other noninterest expense decreased $23.8 million, or 16 percent, in 1996 compared with 1995. The decrease reflects the reduction in expenses as a result of the West One merger and a decrease in certain expenses related to the sale of Bancorp's merchant processing service business. NONCORE/NONRECURRING EXPENSE ITEMS In connection with the merger with West One, pre-tax merger and integration costs of $18.2 million and $98.9 million were recognized in 1996 and 1995, respectively. These costs were incurred primarily for employee severance, professional fees, and costs to eliminate redundant computer systems, administrative functions, premises and equipment. Asset write-downs in 1995 were primarily the write-down of premises vacated by Bancorp's affinity card banking subsidiary. Included in asset write-downs in 1994 was the write-off of $12.1 million of capitalized expenses related to the development and installation of computer software. Also incurred in 1994 were write-downs of intangibles totaling $3.3 million, and deferred costs of $3.0 million related to agent-originated consumer loans held for sale. Other nonrecurring noninterest expense items in 1995 related to additional business consolidation expenses for the consolidation of computer operations and reconfiguration of branch support functions not related to the merger with West One. In 1994, expenses related to system conversions of $6.2 million, interest accrued on pending settlements with tax authorities of $1.2 million and other items totaling $1.4 million were recorded. In the first quarter of 1994, a $100 million restructuring charge was recorded related to a comprehensive program designed to allow Bancorp to become a more efficient, competitive and customer-focused financial institution. The program, which was completed in 1995, included staff reductions accomplished through an early retirement opportunity for certain employees, other severance programs and attrition; divestiture of certain business activities; and the consolidation and integration of certain operations and facilities that no longer fit Bancorp's corporate objectives or the needs of its regional customers. INCOME TAXES Bancorp's effective income tax rate was 35.4 percent in 1996 and 1995, and 29.9 percent in 1994. The effective tax rate increased in 1996 and 1995 as the level of pre-tax income and nondeductible expenses increased, with a corresponding decrease in the proportion of tax-exempt interest income. In 1994, Bancorp recorded a higher amount of tax credits associated with low income housing investments, as compared with 1995. FINANCIAL CONDITION SECURITIES PORTFOLIOS Securities available for sale totaled $3.0 billion at December 31, 1996, compared with $3.3 billion at December 31, 1995. The average yield on the available for sale securities portfolio at year-end 1996 was 6.59 percent. Securities held to maturity decreased to $797 million at December 31, 1996 from approximately $865 million at December 31, 1995, mainly the result of maturing securities used to fund loan growth. The average yield on the held to maturity portfolio was 5.22 percent at December 31, 1996. The securities portfolios are managed to maximize yield over an entire interest rate cycle while minimizing market exposure to changes in interest rates. At December 31, 1996, the available for sale securities portfolio had unrealized gains of $24.9 million and unrealized losses of $18.7 million. At December 31, 1995, unrealized gains were $28.0 million and unrealized losses were $10.4 million. During 1996, Bancorp repositioned a portion of its available for sale portfolio. Proceeds from sales and maturities of 16 19 collateralized mortgage obligations (CMO's) and U.S. Treasury securities were reinvested in instruments with shorter-term maturities, reducing the interest rate sensitivity of the portfolio as a whole. At December 31, 1996, the carrying value of the securities portfolios included $1.6 billion of mortgage-backed securities (MBS's) and CMO's, compared with $1.5 billion at December 31, 1995. Substantially all of these securities were issued by Federal agencies or backed by Federal agency pass-through securities. The overall yield earned on MBS's and CMO's depends on the amount of interest earned over the life of the security, adjusted for the amortization of any premium or discount. Actual maturities and yields of these securities depend on when the underlying mortgage principal and interest are repaid. Prepayment experience is affected by changes in market interest rates, as well as loan types and maturities, geographical location of the related properties, seasonality, age and mobility of borrowers and whether loans are assumable. Bancorp invests primarily in government agency-sponsored CMO's, which effectively eliminates credit risk. The majority of CMO purchases were made at a point in the yield curve to reduce interest rate risk. Government agency sponsored MBS's of intermediate duration held at December 31, 1996 have minimal credit risk and have reduced interest rate risk. Very seasoned, longer-maturity MBS's are sometimes acquired for their stable cash flows. Bancorp reclassified approximately $800 million of securities held to maturity to the available for sale portfolio in December 1995. As a result of this reclassification, the held to maturity securities portfolio consists mainly of state and municipal bonds. The reclassification was done in accordance with guidance provided by the Financial Accounting Standards Board regarding the classification of securities among portfolios for financial reporting purposes. MATURITY DISTRIBUTION AND YIELDS OF SECURITIES
AVAILABLE FOR SALE HELD TO MATURITY ----------------------------------------- -------------------------------------- ESTIMATED FAIR VALUE AMORTIZED COST Weighted Weighted Average ------------------------------ Average -------------------------- (IN MILLIONS) Yield(1) 1996 1995 1994 Yield 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- U.S. TREASURY OBLIGATIONS DUE One year or less 5.46% $ 311.7 $ 382.6 $ 270.5 -% $ - $ - $ - One to five years 6.02 152.1 368.3 722.6 - - - 10.0 Five to ten years 6.01 18.9 10.2 - - - - - Over ten years - - - - - - - - ------------------------------------------------------------------------------- Total 5.66 482.7 761.1 993.1 - - - 10.0 - ----------------------------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCY SECURITIES DUE One year or less 5.62 53.1 59.4 37.7 - - - - One to five years 6.91 216.9 23.8 58.9 - - - - Five to ten years 7.24 213.2 133.1 50.7 - - - - Over ten years 7.38 70.3 387.5 269.4 - - - 116.2 ------------------------------------------------------------------------------- Total 6.97 553.5 603.8 416.7 - - - 116.2 - ----------------------------------------------------------------------------------------------------------------------------- STATE AND MUNICIPAL BONDS DUE One year or less 4.29 5.0 10.5 - 5.97 78.9 60.5 68.2 One to five years 5.29 8.8 22.1 - 5.16 407.1 348.4 300.2 Five to ten years 4.82 41.8 6.6 - 5.09 299.4 385.3 500.0 Over ten years 5.22 52.8 52.6 - 6.72 .9 18.8 62.5 ------------------------------------------------------------------------------- Total 5.03 108.4 91.8 - 5.22 786.3 813.0 930.9 - ----------------------------------------------------------------------------------------------------------------------------- OTHER SECURITIES DUE(2) One year or less - - 2.0 88.7 - - - - One to five years 8.12 8.5 43.2 55.9 - - - .2 Five to ten years 6.84 .3 19.2 18.1 - - - 118.8 Over ten years 5.94 218.0 205.6 182.9 - - - - ------------------------------------------------------------------------------- Total 6.02 226.8 270.0 345.6 - - - 119.0 - ----------------------------------------------------------------------------------------------------------------------------- SERIAL MATURITIES(3) 6.90 1,676.5 1,550.0 753.8 4.67 10.4 52.1 809.9 ------------------------------------------------------------------------------- 6.59% $3,047.9 $3,276.7 $2,509.2 5.22% $796.7 $865.1 1,986.0 =============================================================================== - -----------------------------------------------------------------------------------------------------------------------------
(1) For available for sale securities carried at estimated fair value, the weighted average yield is computed using amortized cost. (2) Equity securities with no stated maturity date are presented as due after ten years. (3) Included in serial maturities are mortgage-backed securities, collateralized mortgage obligations and asset-backed securities. 17 20 LOAN PORTFOLIO In 1996, the average loan portfolio increased eight percent over the prior year. Loan growth was particularly strong in commercial, real estate and lease financing. Commercial loans, representing 49 percent of the period-end portfolio, increased to $12.2 billion at December 31, 1996 from $11.5 billion at December 31, 1995. Average real estate mortgage and construction loans increased 11 percent in 1996 compared with 1995. Average leases increased 25 percent in 1996 compared with 1995, and 14 percent in 1995 compared with 1994. Average consumer loans increased two percent in 1996 compared with 1995. Consumer loans at year-end 1995 were $5.5 billion, a decrease from $5.6 billion at year-end 1994, due primarily to sales during 1995 of affinity credit card portfolios totaling approximately $350 million. LOAN PORTFOLIO ANALYSIS
DECEMBER 31, ----------------------------------------------------------- (IN MILLIONS) 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------------- Loans (net of unearned income) Commercial $12,241.2 $11,470.3 $10,605.3 $10,036.1 $ 9,143.2 Lease financing 1,416.0 1,187.4 980.4 933.9 859.4 Real estate construction 1,411.2 833.0 791.4 776.6 923.4 Real estate mortgage 4,287.8 3,808.7 3,656.3 2,906.2 2,907.4 Consumer 5,690.5 5,485.4 5,610.0 4,792.5 4,206.4 ------------------------------------------------------------- $25,046.7 $22,784.8 $21,643.4 $19,445.3 $18,039.8 ============================================================= - --------------------------------------------------------------------------------------------------------------------------
It is Bancorp's objective to maintain a loan portfolio that is diverse in loan type, industry concentration, geographic distribution and borrower concentration in order to reduce the overall credit risk by minimizing the adverse impact of any single event or set of occurrences. The Commercial Loan Distribution table below shows the commercial loan portfolio stratified by significant Standard Industrial Code (SIC) classifications. It should be noted that within these classifications, there are subclassifications that are monitored. COMMERCIAL LOAN DISTRIBUTION BY SIC CLASSIFICATION
DECEMBER 31, --------------- 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Manufacturing 14.5% 15.1% Service 13.8 14.1 Retail 12.0 11.7 Agricultural 10.3 8.9 Wholesale 8.8 8.8 Brokers, Dealers, and Insurance 7.1 5.5 Financial 5.0 3.7 Forest Products 4.9 4.9 Transportation 4.9 4.7 Contractors 4.4 4.3 Other 14.3 18.3 --------------- 100.0% 100.0% =============== - ------------------------------------------------------------------------------------------------------------------
Bancorp has collateral management policies in place to ensure that collateral lending of all types is approached on a basis consistent with standards of safety and soundness. Valuation analysis is utilized to take into consideration the potentially adverse economic conditions under which liquidation could occur. Collateral accepted against the commercial loan portfolio includes accounts receivable, equipment, commercial real estate and inventory. Loan to value ratios on commercial real estate are set in conformance with the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). Commercial loans were primarily local middle-market credits and loans to small businesses, comprising a diversified group of customers. United States National Bank of Oregon (U. S. Bank of Oregon), U. S. Bank of Washington, National 18 21 Association (U. S. Bank of Washington) and U. S. Bank of Idaho are leaders in small business lending in their respective states. Bancorp also has financial relationships with companies outside its six-state operating region. Consumer lending includes installment loans, credit card loans and credit lines. Risk associated with consumer lending is managed by utilizing uniform credit standards, credit limits, collateralization and monitoring of delinquencies. The majority of consumer loans outstanding are to customers residing in Oregon, Washington and Idaho, where general economic trends and conditions have been favorable. Real estate mortgage loans increased $479 million to $4.3 billion at year-end 1996 compared with 1995, primarily due to an increase in one-to-four family residential real estate mortgage loans. The majority of Bancorp's real estate mortgage loans outstanding are collateralized by properties located in the six-state region in which it operates. Bancorp closely monitors the composition of its real estate portfolio through prudent underwriting criteria and by monitoring loan concentrations by geographic region and property type. An analysis of the real estate portfolio is presented in the tables below. REAL ESTATE LOANS OUTSTANDING
DECEMBER 31, 1996 ------------------------------ (IN MILLIONS) RESIDENTIAL COMMERCIAL TOTAL - ---------------------------------------------------------------------------------------------------------------------- Construction $ 497.2 $ 914.0 $1,411.2 Mortgage 1,614.8 2,673.0 4,287.8 -------------------------------- $2,112.0 $3,587.0 $5,699.0 ================================ - ----------------------------------------------------------------------------------------------------------------------
REAL ESTATE LOANS OUTSTANDING CONCENTRATIONS BY STATE AND TYPE OF COLLATERAL
DECEMBER 31, 1996 ---------------------------------------------------- (IN MILLIONS) WASHINGTON CALIFORNIA OREGON OTHER TOTAL - -------------------------------------------------------------------------------------------------------------------------- Residential $ 629.8 $ 804.2 $ 371.4 $ 306.6 $2,112.0 Commercial Apartment/Condominium 298.3 84.2 120.9 122.5 625.9 Office 287.2 66.0 208.9 88.4 650.5 Retail 93.8 10.2 46.8 77.5 228.3 Hotel/Motel 124.5 80.3 146.7 244.9 596.4 Land 43.0 50.9 16.6 48.9 159.4 Other 489.2 164.4 423.7 249.2 1,326.5 -------------------------------------------------------- Total Commercial 1,336.0 456.0 963.6 831.4 3,587.0 -------------------------------------------------------- Total $1,965.8 $1,260.2 $1,335.0 $1,138.0 $5,699.0 ======================================================== - --------------------------------------------------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT The primary objective of Bancorp's asset/liability management is to maximize net interest income while maintaining acceptable levels of interest-rate sensitivity. The asset/liability management committee (ALCO) sets specific rate sensitivity limits for Bancorp. The committee monitors and adjusts Bancorp's exposure to changes in interest rates to achieve predetermined risk targets that it believes are consistent with current and expected market conditions. It is management's objective to minimize the negative impact on net interest income caused by changes in rates. An asset/liability management simulation model is used to quantify the exposure and impact of changing interest rates on earnings. In general, the simulation model is a dynamic tool which uses forecasting and option adjusted cash flow analysis in order to model portfolios and the entire balance sheet. Specifically, the simulation model: (i) captures all on- and off-balance sheet financial instruments; (ii) anticipates balance sheet mix changes and trends; (iii) utilizes both a standardized set-rate scenario, as well as multiple, randomly generated rate scenarios to forecast net interest income; (iv) includes derivative instruments used to hedge "natural balance sheet" dynamics; and (v) simulates pro forma balance sheets, cash flows, net 19 22 interest margin sensitivity and net interest income. Interest rate sensitivity is also based on simulated impacts on net interest income for the succeeding twelve months under standardized rising, flat and falling rate scenarios. The simulation model combines the significant factors that affect interest rate sensitivity into a comprehensive earnings simulation. Earning assets and interest-bearing liabilities with longer lives (duration) may be subject to more volatility than those with shorter duration. The model accounts for these differences in its simulations. At December 31, 1996, the simulation modeled the impact of assumptions that the treasury yield curve would: (i) increase linearly during the year by 200 basis points, or (ii) decrease linearly by 100 basis points, and compared both of these rate scenarios to a flat rate scenario. ALCO policy guidelines provide that the difference between a flat rate scenario compared with higher rate and lower rate scenarios should not result in more than a ten percent decline in return on equity. Simulations as of December 31, 1996, indicated Bancorp was positioned within these guidelines and was slightly asset sensitive. It should be noted that the simulation model neither takes into account future management actions that could be undertaken to alter the simulated results, if there were a change in actual market interest rates during the year, nor does it contemplate a change in anticipated interest rate level/volatility. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are interest rate sensitive and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is interest rate sensitive within a specific time period if it will reprice within that time period. The interest rate sensitivity gap is defined as the difference between the anticipated amount of interest-earning assets and interest-bearing liabilities, based upon certain assumptions, to mature or reprice within a specific time period. The overriding philosophy for the year-end gap report is based on the contractual interest repricing date (or in the case of fixed rate instruments, the contractual maturity date). The only exceptions are for financial instruments that have no contractual terms as follows: (i) other assets, other liabilities and demand deposit accounts are assumed to be noninterest sensitive, and (ii) savings, interest checking and money market accounts are assumed to be immediately interest sensitive. A gap is considered positive when the amount of interest rate sensitive assets maturing or repricing within a specific time frame exceeds the amount of interest rate sensitive liabilities maturing or repricing within that same time frame. The simulation model process provides a dynamic assessment of interest rate sensitivity, whereas a static interest rate gap table is compiled as of a point in time. The model simulations differ from a traditional gap analysis because a traditional gap analysis does not reflect the multiple effects of interest rate movements on the entire range of assets, liabilities and off-balance sheet financial instruments, and ignores the future impact of new business strategies. The simulation model is dynamic because it includes significant variables (balance sheet mix, volumes, and pricing methodologies) that are identified as being affected by interest rates. For example, the factors the simulation model captures, which traditional gap tables do not, include: (i) rate of change (magnitude) differentials, such as federal funds rates versus savings account rates; (ii) maturity effects, such as refinanced loans; (iii) rate barrier effects, such as caps or floors on loans; (iv) changing balance sheet, both volume and mix changes; (v) floating rate loans that may be related to prime, LIBOR, Treasury notes or other rate indices, which do not necessarily move correspondingly with market rate changes; (vi) leads and lags that occur as market rates change; and (vii) the effects of prepayment volatility on various fixed-rate assets such as residential mortgages, mortgage-backed securities and consumer loans. These and certain other effects were evaluated to develop the multiple scenarios from which sensitivity of earnings to changes in interest rates was determined. 20 23 The above mentioned effects included in the simulation are difficult to properly present in a gap analysis. Notwithstanding these limitations, a traditional banking industry gap table is presented on page 22. To improve interest rate sensitivity disclosure, the table has been modified to include the effect of off-balance sheet instruments. For presentation purposes, (i) all earning assets that are marked-to-market or have variable rate features are included in the 1-30 day category, (ii) earning assets and interest-bearing liabilities with contractual repricing characteristics are presented according to contractual maturity. Residential real estate loans and mortgage-backed securities are presented based on expected maturities, (iii) savings, NOW accounts, interest checking and money market accounts, which can theoretically be repriced at any time, are included in the 1-30 day category, (iv) noninterest-bearing deposits are presented as noninterest/nonmarket sensitive, and (v) off-balance sheet financial instruments reflect the most likely expected impact for the succeeding twelve month period. Off-balance sheet financial instruments used in interest rate risk management include forward and futures contracts and interest rate swap agreements. Interest rate swaps are primarily used to change the floating or fixed rate characteristics of existing assets and liabilities or to manage the repricing relationship between certain floating rate assets and floating rate liabilities. Managing the interest rate sensitivity position of the organization is the primary purpose. All counterparties to these off-balance sheet financial instruments are subject to the same credit analysis and approval applied to borrowing customers of Bancorp. 21 24 INTEREST RATE GAP ANALYSIS
DECEMBER 31, 1996 ------------------------------------------------------------------------------------------- TOTAL 1 YEAR NONINTEREST/ 31 DAYS WITHIN TO 3 YEARS TO OVER NONMARKET (IN MILLIONS) 1-30 DAYS TO 1 YEAR 1 YEAR 3 YEARS 5 YEARS 5 YEARS SENSITIVE TOTAL - ------------------------------------------------------------------------------------------------------------------------------ Assets Earning assets Investment activities Money market investments $ 85.1 $ - $ 85.1 $ - $ - $ - $ - $ 85.1 Loans held for sale 180.5 - 180.5 - - - - 180.5 Trading securities and securities available for sale 3,133.0 - 3,133.0 - - - - 3,133.0 Securities held to maturity 17.7 82.7 100.4 204.0 210.6 281.7 - 796.7 ----------------------------------------------------------------------------------------------- Total investment activities 3,416.3 82.7 3,499.0 204.0 210.6 281.7 - 4,195.3 Loans and lease financing, net of deferred fees 13,233.4 5,294.0 18,527.4 3,211.7 1,396.5 1,341.6 569.5 25,046.7 ----------------------------------------------------------------------------------------------- Total earning assets 16,649.7 5,376.7 22,026.4 3,415.7 1,607.1 1,623.3 569.5 29,242.0 Other assets - - - - - - 4,018.4 4,018.4 ----------------------------------------------------------------------------------------------- Total assets 16,649.7 5,376.7 22,026.4 3,415.7 1,607.1 1,623.3 4,587.9 33,260.4 =============================================================================================== - ------------------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Interest-bearing liabilities Savings, NOW and interest checking accounts 4,210.2 - 4,210.2 - - - - 4,210.2 Money market deposit accounts 5,990.7 - 5,990.7 - - - - 5,990.7 Time deposits 1,221.0 5,259.8 6,480.8 1,282.3 503.7 36.1 - 8,302.9 Short-term borrowings 1,800.6 691.1 2,491.7 - 3.2 - - 2,494.9 Long-term debt 60.7 647.6 708.3 210.2 72.2 820.8 - 1,811.5 ----------------------------------------------------------------------------------------------- Total interest bearing liabilities 13,283.2 6,598.5 19,881.7 1,492.5 579.1 856.9 - 22,810.2 Noninterest-bearing deposits - - - - - - 6,473.2 6,473.2 Other liabilities - - - - - - 966.2 966.2 Capital qualifying securities - - - - - - 300.0 300.0 Shareholders' equity - - - - - - 2,710.8 2,710.8 ----------------------------------------------------------------------------------------------- Total liabilities and equity 13,283.2 6,598.5 19,881.7 1,492.5 579.1 856.9 10,450.2 33,260.4 =============================================================================================== - ------------------------------------------------------------------------------------------------------------------------------- Interest sensitive gap 3,366.5 (1,221.8) 2,144.7 1,923.2 1,028.0 766.4 569.5 6,431.8 Derivatives affecting interest rate sensitivity Pay -- floating interest rate swaps (117.0) (770.1) (887.1) - - - - (887.1) Pay -- fixed interest rate swaps - - - (100.0) - (8.2) - (108.2) Receive -- floating interest rate swaps - 608.2 608.2 - - - - 608.2 Receive -- fixed interest rate swaps - 161.4 161.4 222.5 3.2 - - 387.1 ----------------------------------------------------------------------------------------------- Interest sensitive gap adjusted for derivative instruments $ 3,249.5 $(1,222.3) $ 2,027.2 $2,045.7 $ 1,031.2 $ 758.2 $ 569.5 $ 6,431.8 =============================================================================================== - ------------------------------------------------------------------------------------------------------------------------------- Gap adjusted for derivative instruments as a percent of total earning assets 11.11% (4.18)% 6.93% 7.00% 3.53% 2.59% 1.95% 22.00% =============================================================================================== - -------------------------------------------------------------------------------------------------------------------------------
22 25 LIQUIDITY Another objective of asset/liability management is to manage liquidity. Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as the operating cash needs of Bancorp, are met. Bancorp manages its liquidity at both the parent and subsidiary level. The major sources of funds for the parent are debt and equity issues, dividend and interest income from its subsidiaries, the commercial paper market and a revolving credit agreement. The primary sources of funds for bank subsidiaries are retail deposits and a bank note program for U.S. Bank of Oregon and U.S. Bank of Washington. Core deposits, defined as deposits other than time deposits of $100,000 or more, are Bancorp's primary source of funding. Core deposits provide a sizable source of relatively stable and low-cost funds. Average core deposits and shareholders' equity, which totaled $24.0 billion in 1996 and $22.8 billion in 1995, funded 75 percent and 76 percent of average total assets in those years, respectively. In 1996, average noninterest-bearing deposits increased $441 million, or nine percent compared with 1995. Other sources of liquidity included purchased funds, comprised of time deposits of $100,000 or more, federal funds purchased and security repurchase agreements, commercial paper and other short-term borrowings. Average purchased funds totaled $5.4 billion in 1996 and $5.3 billion in 1995. Average time deposits of $100,000 or more increased to $2.5 billion in 1996 from $1.8 billion in 1995 as these deposits provided an attractive wholesale funding alternative to other sources of funds. A portion of the remaining funding of average total assets came from long-term debt, which averaged $1.5 billion and $1.2 billion in 1996 and 1995, respectively. Bancorp's liquidity is enhanced by its accessibility to diverse sources of national market funds. At December 31, 1996, Bancorp had available various uncommitted capacities, including an effective $1.0 billion shelf registration with the Securities and Exchange Commission, providing for the issuance of senior or subordinated debt. In addition, Bancorp had $478 million remaining capacity under an $800 million debt shelf registration, of which $178 million has been designated as medium term notes. At December 31, 1996, Bancorp had $500 million available in a committed line of credit arrangement through a syndication of unaffiliated banks, which serves as commercial paper back-up lines and provides general liquidity for the parent company. Bancorp also has available $150 million of remaining capacity under a $300 million uncommitted preferred stock shelf registration. The subsidiary banks individually maintain liquidity in the form of money market investments, anticipated prepayments and maturities of securities and the maturity structure of their loan portfolios. Another source of liquidity is securities classified as available for sale, which totaled $3.0 billion at December 31, 1996. Also, several bank subsidiaries are members of the Federal Home Loan Bank System which provides a stable source of attractive, alternative funding and liquidity. The analysis of liquidity should also include a review of the changes that appear in the consolidated statement of cash flows for 1996. The statement of cash flows includes operating, investing and financing categories. Operating activities include net income for 1996 of $479 million, which is adjusted for non-cash items including the non-cash portion of the merger and integration costs. Investing activities consisted primarily of both proceeds from and purchases of securities, and the impact of loans made and principal collected on loans. Financing activities present the net change in Bancorp's deposit accounts, short-term borrowings, $434 million in net proceeds from the issuance of long-term debt, $300 million in net proceeds from the issuance of capital qualifying securities, $551 million of common stock purchases and $180.9 million in dividends paid. 23 26 The following table summarizes Bancorp's ratings by major credit rating agencies at December 31, 1996; such ratings are subject to revision or withdrawal at anytime. With respect to commercial paper, an A-1 or P-1 rating indicates a very strong capacity for timely payment. The Standard & Poor's long-term investment grade ratings range from AAA to BBB, with an A rating indicating a strong capacity. With respect to Moody's long-term ratings, the range is from A to Baa (or baa), with an A rating applied to upper-medium-grade obligations with adequate repayment capacity. Ratings modified by 1 are at the higher end of the category.
STANDARD & POOR'S MOODY'S - ----------------------------------------------------------------------------------------------------------------------- Bancorp (Parent) Commercial paper A-1 P-1 Senior debt A A2 Subordinated debt A- A3 USBO and USBW Short-term bank notes A-1 P-1 Long-term bank notes A+ A1 - -----------------------------------------------------------------------------------------------------------------------
PROVISION AND ALLOWANCE FOR CREDIT LOSSES Bancorp's allowance for credit losses totaled $476 million at December 31, 1996, representing 1.90 percent of loans outstanding, compared with 1.91 percent at year-end 1995. The provision for credit losses for 1996 was $135.2 million, compared with a $124.1 million provision in 1995 and $120.1 million in 1994. The higher provisions in 1996 and 1995 primarily reflected the impact of the integration of loan portfolios of acquired companies and, in 1996, a higher level of net charge-offs. The provision for credit losses in 1996 included $5 million related to the integration of CBI's loan portfolio, and 1995 included a $27 million provision for the West One loan portfolio integration. The allowance for credit losses as a percentage of nonperforming loans was 320 percent at December 31, 1996 and 336 percent at December 31, 1995. Net charge-offs for 1996 were $108.7 million, or .46 percent of average loans, compared with net charge-offs of $74.1 million, or .33 percent, of average loans in 1995. The increase was primarily due to higher charge-offs of commercial and bank card loans, as well as a lower level of loan recoveries. The increase in bank card net charge-offs related primarily to charge-offs in noncore, private label portfolios. Other consumer loan net charge-offs were .74 percent in 1996, compared with .68 percent in 1995. Management performs a quarterly analysis to establish the appropriate level of the allowance, taking into consideration such factors as loan loss experience, an evaluation of potential losses in the portfolio, credit concentrations and trends in portfolio volume, maturity, delinquencies and nonaccruals, risks associated with standby letters of credit which guarantee the debt of others and other off-balance sheet commitments, and prevailing and anticipated economic conditions. This analysis provides an allowance consisting of two components, allocated and unallocated. The allocated component reflects potential losses resulting from the analysis of individual loans and is developed through specific credit allocations for individual loans and historical loss experience for each loan category and risk classification within each category. The total of these allocations is then supplemented by the unallocated component of the allowance. The unallocated component reflects management's judgment and determination of the amounts necessary for loan concentrations, economic uncertainties and other subjective factors. Bancorp continues to closely monitor credit risk in its loan portfolio. Bancorp believes that its credit approval and review processes are effective and operating in accordance with sound banking practice and that the allowance for credit losses at December 31, 1996 was adequate to absorb potential credit losses inherent in loans, leases, loan commitments and standby letters of credit outstanding at that date. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. An impairment is recognized by 24 27 creating a valuation allowance with a corresponding charge to the provision for credit losses or by adjusting an existing valuation allowance with a corresponding charge or credit to the allowance for credit losses. Generally, it is Bancorp's policy to carry a loan at its net realizable value if impairment is determined, resulting in a direct loan charge-off, rather than a valuation allowance. At December 31, 1996, Bancorp's recorded investment in loans for which an impairment has been recognized totaled $115 million. Included in this amount was $36 million of impaired loans for which a valuation allowance of $14 million was being carried. The carrying value of impaired loans was based on the fair value of collateral. The balance of the allowance for credit losses is available to absorb losses from all loans, although allocations have been made for certain loans and loan categories as part of management's quarterly analysis of the allowance. ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES
(IN MILLIONS) 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------- Period-end loans (net of unearned income) $25,046.7 $22,784.8 $21,643.4 $19,445.3 $18,039.8 ================================================================= - ---------------------------------------------------------------------------------------------------------------------- Daily average loans (net of unearned income) $23,862.3 $22,162.8 $20,336.1 $18,493.3 $17,438.2 ================================================================= - ---------------------------------------------------------------------------------------------------------------------- Balance of allowance for credit losses at beginning of year $ 434.5 $ 387.6 $ 345.2 $ 327.4 $ 283.1 Acquisitions (dispositions) 14.9 (3.1) 2.6 .7 18.2 Loans charged-off Commercial 40.8 25.9 38.7 39.6 79.4 Lease financing 1.5 .7 1.2 6.2 10.5 Real estate construction .9 .5 12.1 4.9 4.2 Real estate mortgage 3.1 6.9 4.3 10.1 10.2 Consumer 47.6 44.8 32.2 32.6 32.1 Bank card 50.3 38.1 36.5 37.6 27.2 ----------------------------------------------------------------- Total 144.2 116.9 125.0 131.0 163.6 - ---------------------------------------------------------------------------------------------------------------------- Recoveries of loans previously charged off Commercial 13.3 17.7 18.3 16.4 20.3 Lease financing .3 .6 1.2 .8 1.2 Real estate construction .4 1.9 1.2 2.0 .9 Real estate mortgage 3.1 2.9 4.7 6.1 3.7 Consumer 12.3 13.5 12.7 11.6 12.3 Bank card 6.1 6.2 6.6 4.9 2.5 ----------------------------------------------------------------- Total 35.5 42.8 44.7 41.8 40.9 - ---------------------------------------------------------------------------------------------------------------------- Net charge-offs 108.7 74.1 80.3 89.2 122.7 Provision for credit losses 135.2 124.1 120.1 106.3 148.8 ----------------------------------------------------------------- Balance of allowance for credit losses at end of year $ 475.9 $ 434.5 $ 387.6 $ 345.2 $ 327.4 ================================================================= - ---------------------------------------------------------------------------------------------------------------------- Allowance as a percent of period-end loans 1.90% 1.91% 1.79% 1.77% 1.81% Ratio of net charge-offs by average loan category Commercial .23% .07% .20% .25% .68% Lease financing .08 .01 - .63 .99 Real estate construction .04 (.17) 1.35 .35 .36 Real estate mortgage - .10 (.01) .14 .22 Consumer .74 .68 .47 .59 .64 Bank card 5.51 3.69 3.03 3.61 3.07 Total loans .46% .33% .39% .48% .70% - ----------------------------------------------------------------------------------------------------------------------
25 28 ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES The allowance is available to absorb losses from all loans, although allocations have been made for certain loans and loan categories. The allocation of the allowance as shown below should not be interpreted as an indication that charge-offs in future periods will occur in these amounts or proportions, or that the allocation indicates future charge-off trends. In addition to the most recent analysis of individual loans and pools of loans, management's methodology also places emphasis on historical loss data, delinquency and nonaccrual trends by loan classification category and expected loan maturity. This analysis, management believes, identifies potential losses within the loan portfolio and therefore results in allocation of a portion of the allowance to specific loan categories. The loan category percent represents the percentage of loans in each category to total loans.
DECEMBER 31, --------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------------- ---------------- ---------------- ---------------- ---------------- Loan LOAN LOAN LOAN LOAN Category CATEGORY CATEGORY CATEGORY CATEGORY (IN MILLIONS) Balance Percent BALANCE PERCENT BALANCE PERCENT BALANCE PERCENT BALANCE PERCENT --------------------------------------------------------------------------------------------------------------------------------- Commercial and lease financing $ 147.7 54% $ 157.9 57% $ 135.5 55% $ 142.3 56% $ 166.3 55% Real estate 35.1 23 24.3 19 34.5 19 41.2 19 41.7 21 Consumer 99.1 23 67.2 24 63.2 26 61.0 25 60.0 24 Unallocated 194.0 - 185.1 - 154.4 - 100.7 - 59.4 - ---------------------------------------------------------------------------------------------------------------- $ 475.9 100% $ 434.5 100% $ 387.6 100% $ 345.2 100% $ 327.4 100% ================================================================================================================ ---------------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY Nonperforming assets consist of loans on which interest is no longer accrued, certain restructured loans for which the interest rate or other terms have been renegotiated, and real estate and equipment acquired in satisfaction of loans. During 1996, Bancorp continued to show strong asset quality. Nonperforming assets represented .73 percent of loans and foreclosed assets at December 31, 1996, unchanged from year-end 1995. The ratio of nonaccrual and restructured loans to total loans was .59 percent at December 31, 1996 compared with .57 percent at December 31, 1995. Nonperforming real estate loans and other real estate owned totaled $72 million, or 40 percent, of nonperforming assets at December 31, 1996. Loans or properties of less than $5 million each made up 64 percent, or $116 million, of nonperforming assets at that date. Of the balance, three commercial credits over $10 million each accounted for $42 million. In addition to the loans classified as nonperforming, Bancorp has other loans which it has internally classified, largely due to weakening financial strength of the borrowers or concern about specific industries. These loans, although currently performing in accordance with contractual terms, are monitored closely by management and have been specifically provided for in the evaluation of the allowance for credit losses. Bancorp's lending policies and loan portfolio, including internally classified loans, are examined by regulatory agencies as part of their supervisory activities. An event occurred subsequent to December 31, 1996 that caused Bancorp to place a $50 million commercial credit on nonaccrual status in the first quarter of 1997. The loan was fully collateralized. 26 29 NONPERFORMING ASSETS AND PAST DUE LOANS
DECEMBER 31, -------------------------------------------------- (IN MILLIONS) 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------- Nonaccrual loans $145.6 $118.4 $190.4 $238.5 $273.3 Restructured loans 3.3 11.0 11.5 1.8 6.0 Foreclosed assets Other real estate owned 21.4 28.8 22.0 35.6 35.7 Equipment repossessed 3.7 3.9 5.2 4.6 5.5 -------------------------------------------------- $174.0 $162.1 $229.1 $280.5 $320.5 ================================================== Bank properties pending disposition (included in other assets) $ 8.3 $ 4.5 $ 1.5 $ - $ - ================================================== - -------------------------------------------------------------------------------------------------------------------- Nonperforming loans as a % of loans .59% .57% .93% 1.24% 1.55% Nonperforming assets as a % of loans and foreclosed assets .73% .73% 1.06% 1.44% 1.77% Allowance for credit losses as a % of nonperforming loans 320% 336% 192% 144% 117% Accruing loans past due 90 days or more $ 41.0 $ 30.0 $ 16.8 $ 17.1 $ 21.6 Interest computed on contractual terms 21.4 18.0 20.8 23.0 27.8 Interest recognized 3.4 4.0 7.0 9.4 9.5 - --------------------------------------------------------------------------------------------------------------------
Included in accruing loans past due 90 days or more at December 31, 1996 were $28 million of bank card and consumer loans, which are reported as past due until 180 days and 120 days, respectively, at which time the loans are charged off. For an explanation of Bancorp's nonaccrual policy see Note 1. Summary of Significant Accounting Policies, Loans and Lease Financing page 41. ANALYSIS OF CHANGE IN NONACCRUAL LOANS
(IN MILLIONS) 1996 1995 - ----------------------------------------------------------------------------------------------------------------- Nonaccrual loans Beginning balance $118.4 $190.4 Additions 182.0 138.4 Payments/returned to accrual (92.7) (136.4) Charge-offs (29.1) (22.7) Transfer to other real estate and equipment owned (33.0) (51.3) ------------------- Ending balance $145.6 $118.4 =================== - -----------------------------------------------------------------------------------------------------------------
CAPITAL AND DIVIDENDS The federal bank regulatory agencies have jointly issued rules which implement a system of prompt corrective action for banks required by FDICIA. The rules define the relevant capital levels for five categories, ranging from "well capitalized" to "critically undercapitalized." An insured depository institution is generally deemed to be "well capitalized" if it has a total risk-based capital ratio of at least 10 percent, a Tier 1 risk-based capital ratio of at least six percent, and a leverage capital ratio of at least five percent. Risk-based capital guidelines issued by the Federal Reserve Board establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures for bank holding companies. The guidelines require a minimum total risk-based capital ratio of eight percent, with half of the total in the form of Tier 1 capital. Bancorp's Tier 1 capital is comprised of common equity, perpetual preferred stock and subsidiary trust issued capital securities, less goodwill and certain other intangibles, and excludes the equity impact of adjusting available for sale securities to market value. Total capital also includes subordinated debt and a portion of the allowance for credit losses, as defined. The risk-based capital rules have been supplemented by a leverage capital ratio, defined as Tier 1 capital to adjusted quarterly average total assets. Banking organizations other than those which are most highly rated are expected to maintain ratios at least 100 to 200 basis points above the minimum three percent level, depending on their financial condition. 27 30 Banks are subject to capital requirements similar to the requirements for bank holding companies. At December 31, 1996, the most recent regulatory notification categorized all of Bancorp's bank subsidiaries as "well capitalized." The bank subsidiaries' ratios are expected to be maintained at the "well capitalized" levels by the retention of earnings and, if necessary, the issuance of additional capital qualifying securities. The risk-based capital and leverage ratios for Bancorp and its three largest bank subsidiaries are presented in the table below: CAPITAL RATIOS
DECEMBER 31, 1996 --------------------------------------- RISK-BASED CAPITAL RATIOS -------------- LEVERAGE TOTAL TIER TOTAL CAPITAL (IN MILLIONS) ASSETS 1 CAPITAL RATIO - --------------------------------------------------------------------------------------------------------------------- U. S. Bancorp (Consolidated) $33,260.4 8.11% 11.83% 8.17% Bank Subsidiaries U. S. Bank of Oregon 14,289.6 7.24 10.95 7.75 U. S. Bank of Washington 9,703.8 6.93 10.54 7.44 U. S. Bank of Idaho 3,823.7 7.03 10.44 5.96 - ---------------------------------------------------------------------------------------------------------------------
At December 31, 1996, common shareholders' equity was $2.6 billion. Average common equity to average total assets was 8.13 percent for 1996 and 1995. The quarterly common dividend was increased 11 percent in the third quarter of 1996, to $.31 per share from $.28 per share. Dividends of $1.18 per share were declared in 1996, compared with $1.06 per share in 1995, based on historical Bancorp cash dividends paid. In the fourth quarter of 1996, Bancorp purchased four million shares of its common stock under a program approved by the Board of Directors. In addition, Bancorp systematically purchases common shares for employee benefit and dividend reinvestment plans under programs authorized in 1994. In December 1996, Bancorp issued $300 million of mandatory redeemable capital securities through a subsidiary grantor trust. The securities qualify for treatment as Tier 1 capital for regulatory capital purposes. In 1995, West One called for redemption and retired approximately $50 million of 7.75% convertible subordinated debentures. In connection with this redemption, West One purchased in the open market 2.7 million West One common shares (equivalent to 3.9 million Bancorp common shares) for issuance to debt holders. 28 31 The following tables on pages 29 to 31 present additional information on maturity and interest sensitivity of selected loan categories, time deposits -- $100,000 or more, certain short-term borrowings, average balances and tax-equivalent net interest margin. LOAN MATURITY AND INTEREST RATE SENSITIVITY
DECEMBER 31, 1996 ----------------------------------------------- ONE YEAR ONE TO OVER (IN MILLIONS) OR LESS FIVE YEARS FIVE YEARS TOTAL - -------------------------------------------------------------------------------------------------------------------------- Loans in domestic offices Commercial $8,355.3 $ 2,997.8 $888.1 $12,241.2 Real estate construction 1,010.1 339.1 62.0 1,411.2 ---------------------------------------------------- Total $9,365.4 $ 3,336.9 $950.1 $13,652.4 ==================================================== - -------------------------------------------------------------------------------------------------------------------------- Loans with predetermined rate $ 970.8 $ 1,177.6 $414.5 $ 2,562.9 Loans with floating rate 8,394.6 2,159.3 535.6 11,089.5 ---------------------------------------------------- Total $9,365.4 $ 3,336.9 $950.1 $13,652.4 ==================================================== - --------------------------------------------------------------------------------------------------------------------------
TIME DEPOSITS -- $100,000 OR MORE Maturities of domestic time deposits of $100,000 or more outstanding at December 31, 1996:
(IN MILLIONS) - ----------------------------------------------------------------------------------------------------------------- 3 months or less $1,354.3 3 to 6 months 428.8 6 to 12 months 376.8 Over 12 months 375.9 -------- Total $2,535.8 ======== - -----------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS
AVERAGE AVERAGE DAILY AVERAGE INTEREST RATE INTEREST RATE AMOUNTS ON AMOUNTS MAXIMUM ON AMOUNTS OUTSTANDING OUTSTANDING MONTH-END YEAR-END OUTSTANDING DURING THE DURING THE AMOUNTS (IN MILLIONS) BALANCE AT YEAR-END YEAR YEAR OUTSTANDING - ------------------------------------------------------------------------------------------------------------------------------ FEDERAL FUNDS PURCHASED AND SECURITY REPURCHASE AGREEMENTS 1996 $ 1,672.4 4.91% $ 2,102.2 4.97% $ 2,643.5 1995 2,731.1 5.44 2,503.2 5.67 3,070.6 1994 3,587.7 5.55 2,698.8 4.15 3,587.7 - --------------------------------------------------------------------------------------------------------------------------------- COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS 1996 $ 822.5 5.47% $ 806.6 5.30% $ 1,089.6 1995 868.2 5.43 1,026.4 5.60 1,489.8 1994 687.2 5.51 654.0 3.59 919.6 - ---------------------------------------------------------------------------------------------------------------------------------
29 32 AVERAGE BALANCES AND TAX-EQUIVALENT NET INTEREST MARGIN
1996 1995 ----------------------------- ---------------------------- Average AVERAGE Rate RATE Average Income/ Earned/ AVERAGE INCOME/ EARNED/ (IN MILLIONS) Balance Expense Paid BALANCE EXPENSE PAID - -------------------------------------------------------------------------------------------------------------------------- ASSETS Money market investments $ 381.6 $ 20.7 5.41% $ 259.2 $ 15.2 5.87% Trading account securities 139.4 8.1 5.81 174.1 10.8 6.20 Loans held for sale 187.0 13.2 7.10 156.9 13.2 8.38 Securities available for sale(1)(2) U.S. Treasury obligations 566.0 31.8 5.62 881.6 48.4 5.49 U.S. Government agency securities 1,819.1 119.0 6.54 1,065.8 71.4 6.70 Other securities 649.4 44.2 6.80 395.5 25.1 6.35 ----------------------------------------------------------------- Total securities available for sale 3,034.5 195.0 6.42 2,342.9 144.9 6.19 Securities held to maturity(2) U.S. Treasury obligations - - - 9.8 .6 5.76 U.S. Government agency securities - - - 825.9 54.7 6.63 State and municipal bonds 809.4 62.9 7.77 912.7 72.3 7.92 Other securities 24.0 1.1 4.52 84.3 4.0 4.82 ----------------------------------------------------------------- Total securities held to maturity 833.4 64.0 7.68 1,832.7 131.6 7.18 Loans and lease financing(2)(3) Commercial 11,866.3 1,029.4 8.67 11,085.1 1,029.7 9.29 Lease financing 1,294.3 94.9 7.33 1,034.2 78.0 7.55 Real estate construction 1,129.4 105.3 9.33 857.8 81.3 9.48 Real estate mortgage 3,965.8 331.8 8.37 3,714.2 289.7 7.80 Consumer 5,606.5 560.8 10.00 5,471.5 545.2 9.96 ----------------------------------------------------------------- Total loans 23,862.3 2,122.2 8.89 22,162.8 2,023.9 9.13 Loan fees - 103.6 - - 103.0 - ----------------------------------------------------------------- Total loans including fees 23,862.3 2,225.8 9.33 22,162.8 2,126.9 9.60 ----------------------------------------------------------------- Total interest earning assets/interest income 28,438.2 $2,526.8 8.89% 26,928.6 $2,442.6 9.07% - -------------------------------------------------------------------------------------------------------------------------- Allowance for credit losses (450.7) (396.3) Cash and due from banks 1,913.5 1,852.4 Other assets 2,023.9 1,813.7 ----------------------------------------------------------------- Total $31,924.9 $30,198.4 ================================================================= - -------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Savings $ 1,522.1 $ 35.9 2.36% $ 1,854.1 $ 45.7 2.47% NOW accounts and interest checking 2,704.4 50.3 1.86 2,647.8 43.7 1.65 Money market deposit accounts 5,790.7 225.9 3.90 5,093.9 212.2 4.17 Time -- $100,000 or more 2,533.1 144.9 5.72 1,806.2 109.0 6.03 Other time 5,755.3 311.2 5.41 5,554.2 299.4 5.39 ----------------------------------------------------------------- Total interest-bearing deposits 18,305.6 768.2 4.20 16,956.2 710.0 4.19 Federal funds purchased and security repurchase agreements 2,102.2 104.5 4.97 2,503.2 142.0 5.67 Commercial paper and other short-term borrowings(4) 806.6 42.9 5.30 1,026.4 57.7 5.60 Long-term debt 1,514.6 101.1 6.68 1,198.9 83.4 6.95 ----------------------------------------------------------------- Total interest-bearing liabilities/interest expense 22,729.0 $1,016.7 4.47% 21,684.7 $ 993.1 4.58% - -------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing deposits 5,503.6 5,062.3 Other liabilities 941.5 845.7 ----------------------------------------------------------------- Total liabilities 29,174.1 27,592.7 Mandatory redeemable capital securities of trust holding U. S. Bancorp junior subordinated debentures 6.6 - Shareholders' equity 2,744.2 2,605.7 ----------------------------------------------------------------- Total $31,924.9 $30,198.4 ================================================================= - -------------------------------------------------------------------------------------------------------------------------- Interest income as a percent of average earning assets 8.89% 9.07% Interest expense as a percent of average earning assets (3.57) (3.69) ----------------------------------------------------------------- Net interest income and margin $1,510.1 5.32% $1,449.5 5.38% ================================================================= - --------------------------------------------------------------------------------------------------------------------------
(1) Yields are based on amortized cost balances. (2) Includes taxable equivalent adjustments related to income on certain loans and securities that is exempt from federal and applicable state income taxes. The federal statutory tax rate was 34% for 1992 and 35% for years thereafter. 30 33
1994 1993 1992 - ---------------------------------- ---------------------------------- ---------------------------------- AVERAGE AVERAGE AVERAGE RATE RATE RATE AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/ BALANCE EXPENSE PAID BALANCE EXPENSE PAID BALANCE EXPENSE PAID - ---------------------------------------------------------------------------------------------------------------- $ 349.2 $ 15.8 4.53% $ 379.0 $ 11.3 2.99% $ 652.0 $ 24.7 3.80% 173.6 9.9 5.71 195.8 10.0 5.09 193.7 10.8 5.57 385.3 27.6 7.16 790.3 55.2 6.99 663.2 52.5 7.92 1,117.9 59.8 5.29 68.9 3.3 4.85 - - - 1,047.7 59.4 5.58 186.8 10.9 5.82 - - - 364.3 20.9 5.73 48.1 3.3 6.86 - - - - ---------------------------------------------------------------------------------------------------------------- 2,529.9 140.1 5.47 303.8 17.5 5.76 - - - 90.5 5.2 5.71 1,223.5 67.3 5.50 820.9 50.9 6.20 948.1 60.6 6.40 2,155.2 134.1 6.22 1,827.8 133.1 7.28 962.5 77.1 8.01 794.5 69.6 8.76 604.6 56.8 9.40 164.7 8.2 5.01 483.4 34.3 7.10 404.0 32.3 8.00 - ---------------------------------------------------------------------------------------------------------------- 2,165.8 151.1 6.98 4,656.6 305.3 6.56 3,657.3 273.1 7.47 10,148.8 811.8 8.00 9,427.6 680.4 7.22 8,678.0 673.2 7.76 905.7 68.0 7.51 871.8 73.6 8.44 945.6 89.7 9.49 800.6 64.5 8.06 809.1 61.3 7.57 914.6 72.0 7.87 3,329.1 247.9 7.45 2,935.3 249.3 8.49 3,005.4 280.5 9.33 5,151.9 489.3 9.50 4,449.5 445.9 10.02 3,894.6 427.3 10.97 - ---------------------------------------------------------------------------------------------------------------- 20,336.1 1,681.5 8.27 18,493.3 1,510.5 8.17 17,438.2 1,542.7 8.85 - 102.2 - - 105.9 - - 90.7 - - ---------------------------------------------------------------------------------------------------------------- 20,336.1 1,783.7 8.77 18,493.3 1,616.4 8.74 17,438.2 1,633.4 9.37 - ---------------------------------------------------------------------------------------------------------------- 25,939.9 $2,128.2 8.20% 24,818.8 $2,015.7 8.12% 22,604.4 $1,994.5 8.82% - ---------------------------------------------------------------------------------------------------------------- (361.2) (333.7) (306.0) 1,824.0 1,698.3 1,410.2 1,760.4 1,812.3 1,626.6 - ---------------------------------------------------------------------------------------------------------------- $29,163.1 $27,995.7 $25,335.2 ======================================================================================= - ---------------------------------------------------------------------------------------------------------------- $ 2,294.7 $ 51.3 2.23% $ 2,166.2 $ 53.7 2.48% $ 1,634.0 $ 54.4 3.33% 2,885.7 41.0 1.42 2,816.2 48.2 1.71 2,374.2 58.8 2.48 4,565.4 136.9 3.00 4,285.2 114.1 2.66 3,612.0 121.4 3.36 1,300.5 58.6 4.50 1,101.8 45.6 4.14 1,374.0 67.6 4.92 5,450.3 236.0 4.33 6,002.8 264.2 4.40 5,813.5 306.2 5.27 - ---------------------------------------------------------------------------------------------------------------- 16,496.6 523.8 3.18 16,372.2 525.8 3.21 14,807.7 608.4 4.11 2,698.8 112.0 4.15 2,156.8 63.7 2.95 2,426.1 89.0 3.67 654.0 23.6 3.59 645.6 20.5 3.15 594.8 25.9 4.32 1,186.6 79.3 6.69 1,283.3 88.2 6.88 1,347.6 102.4 7.60 - ---------------------------------------------------------------------------------------------------------------- 21,036.0 $ 738.7 3.51% 20,457.9 $ 698.2 3.41% 19,176.2 $ 825.7 4.31% - ---------------------------------------------------------------------------------------------------------------- 4,989.1 4,606.6 3,616.3 703.8 687.8 643.2 - ---------------------------------------------------------------------------------------------------------------- 26,728.9 25,752.3 23,435.7 - - - 2,434.2 2,243.4 1,899.5 - ---------------------------------------------------------------------------------------------------------------- $29,163.1 $27,995.7 $25,335.2 ======================================================================================= - ---------------------------------------------------------------------------------------------------------------- 8.20% 8.12% 8.82% (2.85) (2.81) (3.65) - ---------------------------------------------------------------------------------------------------------------- $1,389.5 5.35% $1,317.5 5.31% $1,168.8 5.17% =============================================================================================================== - ----------------------------------------------------------------------------------------------------------------
(3) Loans on nonaccrual status have been included in the computation of average balances. (4) Includes interest expense capitalized on property under construction. 31 34 Item 8. Financial Statements and Supplementary Data (a) The following audited consolidated financial statements and related documents are set forth in this Annual Report on Form 10-K on the pages indicated:
PAGE ------ Letter of Management 33 Independent Auditors' Reports 34-35 U. S. Bancorp and Subsidiaries: Consolidated Balance Sheet 36 Consolidated Statement of Income 37 Consolidated Statement of Changes in Shareholders' Equity 38 Consolidated Statement of Cash Flows 39 Notes to Consolidated Financial Statements 41
(b) The following supplementary data is set forth in this Annual Report on Form 10-K on the page indicated: Quarterly Financial Data 67
32 35 LETTER OF MANAGEMENT The management of U. S. Bancorp has prepared and is responsible for the integrity and fairness of the financial statements and other financial information included in this annual report. The financial statements are prepared in accordance with generally accepted accounting principles and, when appropriate, include amounts based on management's estimates and judgment. To meet its responsibility both for the integrity and fairness of these financial statements and information, management maintains accounting systems and related internal accounting controls. These controls are designed to provide reasonable assurance that transactions are properly authorized, assets are safeguarded and financial records are reliably maintained. The concept of reasonable assurance is based on the recognition that the cost of a system of internal controls must be related to the benefits derived. Management monitors the effectiveness and compliance of its internal control systems through a continuous program of internal audits. Management has reviewed the recommendations of the internal auditors and Deloitte & Touche LLP, independent auditors, and has responded in an appropriate, cost-effective manner. The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with U. S. Bancorp's management, internal auditors and the independent auditors to review matters relative to the quality of financial reporting and internal accounting controls and the results of the audit. The independent auditors and internal auditors meet with the Audit Committee, at least once a year, without management present. GERRY B. CAMERON ROBERT D. SZNEWAJS STEVEN P. ERWIN Chairman, Vice Chairman Executive Vice President Chief Executive Officer, and Chief Financial Officer and President
33 36 INDEPENDENT AUDITORS' REPORT TO THE DIRECTORS AND SHAREHOLDERS OF U.S. BANCORP: We have audited the accompanying consolidated balance sheet of U.S. Bancorp and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of U.S. Bancorp's management. Our responsibility is to express an opinion on the financial statements based on our audits. The consolidated financial statements give retroactive effect to the merger of U.S. Bancorp and subsidiaries and West One Bancorp and subsidiaries, which has been accounted for as a pooling-of-interests as described in Note 2 to the consolidated financial statements. We did not audit the consolidated statements of income, changes in shareholders' equity, and cash flows of West One Bancorp and subsidiaries for the year ended December 31, 1994, which statements reflect net interest income and noninterest revenues of $471,214,000 for the year ended December 31, 1994. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for West One Bancorp and subsidiaries for 1994, is based solely on the report of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of U.S. Bancorp and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP - ------------------------- Deloitte & Touche LLP Portland, Oregon January 31, 1997 34 37 REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS AND DIRECTORS OF WEST ONE BANCORP: We have audited the consolidated statements of income, shareholders' equity, and cash flows of West One Bancorp and subsidiaries for the year ended December 31, 1994 (not presented separately herein). These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above (not presented separately herein) present fairly, in all material respects, the consolidated results of operations and cash flows of West One Bancorp and subsidiaries for the year ended December 31, 1994, in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND L.L.P. - ---------------------------- Coopers & Lybrand L.L.P. Boise, Idaho January 19, 1995 35 38 U. S. BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
DECEMBER 31, ---------------------- (IN MILLIONS, EXCEPT SHARE DATA) 1996 1995 - ------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 2,401.1 $ 2,416.2 Federal funds sold and security resale agreements 70.9 506.4 Other short-term investments 14.2 10.1 Trading account securities 85.1 279.7 Loans held for sale 180.5 160.5 Securities available for sale, at fair value (amortized cost: 1996 -- $3,041.7; 1995 -- $3,259.1) 3,047.9 3,276.7 Securities held to maturity, at amortized cost (fair value: 1996 -- $810.9; 1995 -- $885.7) 796.7 865.1 Loans and lease financing, net of deferred fees 25,046.7 22,784.8 Allowance for credit losses (475.9) (434.5) ---------------------- Net loans and lease financing 24,570.8 22,350.3 Premises, furniture and equipment, net 614.1 633.8 Other real estate and equipment owned 25.1 32.7 Customers' liability on acceptances 327.7 306.7 Goodwill and core deposit intangibles 377.6 190.7 Other assets 748.7 765.4 ---------------------- $33,260.4 $31,794.3 ====================== - ------------------------------------------------------------------------------------------------------------------- LIABILITIES Interest-bearing deposits $18,503.8 $17,255.0 Noninterest-bearing deposits 6,473.2 6,009.7 ---------------------- Total deposits 24,977.0 23,264.7 Federal funds purchased and security repurchase agreements 1,672.4 2,731.1 Commercial paper and other short-term borrowings 822.5 868.2 Long-term debt 1,811.5 1,377.0 Acceptances outstanding 327.7 306.7 Other liabilities 638.5 629.6 ---------------------- Total liabilities 30,249.6 29,177.3 - ------------------------------------------------------------------------------------------------------------------- CAPITAL QUALIFYING SECURITIES U. S. Bancorp-obligated mandatory redeemable capital securities of subsidiary trust holding only junior subordinated deferrable interest debentures of U. S. Bancorp 300.0 - - ------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Preferred stock, authorized 50,000,000 shares: Series A, no par value, 6,000,000 shares outstanding 150.0 150.0 Common stock, $5 par value, authorized 250,000,000 shares, outstanding: 1996 -- 147,199,668; 1995 -- 150,592,468 736.0 752.9 Capital surplus 178.1 347.8 Retained earnings 1,644.5 1,356.9 Net unrealized gain on securities available for sale, net of tax 2.2 9.4 ---------------------- Total shareholders' equity 2,710.8 2,617.0 - ------------------------------------------------------------------------------------------------------------------- $33,260.4 $31,794.3 ====================== - -------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 36 39 U. S. BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, -------------------------------- (IN MILLIONS, EXCEPT SHARE DATA) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans and lease financing, including fees $2,207.9 $2,103.7 $1,758.8 Securities available for sale 190.1 141.9 137.7 Securities held to maturity 43.5 108.0 125.5 Loans held for sale 13.3 13.2 27.6 Trading account securities 7.8 10.5 9.0 Other interest income 20.7 15.2 15.8 -------------------------------- Total interest income 2,483.3 2,392.5 2,074.4 INTEREST EXPENSE Deposits 768.2 710.0 523.8 Short-term borrowings 147.4 199.7 135.6 Long-term debt 101.1 83.4 79.3 -------------------------------- Total interest expense 1,016.7 993.1 738.7 -------------------------------- NET INTEREST INCOME 1,466.6 1,399.4 1,335.7 Provision for credit losses 135.2 124.1 120.1 -------------------------------- Net interest income after provision for credit losses 1,331.4 1,275.3 1,215.6 - ------------------------------------------------------------------------------------------------------------------- NONINTEREST REVENUES Service charges on deposit accounts 197.4 189.5 191.6 Trust and investment management 71.6 65.8 65.3 Bank card revenue, net 59.7 73.4 73.3 Exchange fees 40.4 42.6 36.7 Other operating revenue 156.9 138.3 137.5 Equity investment income (loss) 27.8 3.2 (5.4) Gain on sale of operations and loans 25.6 8.9 62.9 Gain (loss) on sale of securities 5.8 3.0 (9.2) -------------------------------- Total noninterest revenues 585.2 524.7 552.7 - ------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSES Employee compensation and benefits 615.2 602.1 646.2 Equipment rentals, depreciation and maintenance 118.8 127.4 139.9 Net occupancy expense 81.7 85.4 87.5 Stationery, supplies and postage 63.2 63.9 59.2 Regulatory agency fees 9.3 35.5 54.1 Amortization of goodwill and core deposit intangibles 22.8 16.6 16.0 Other operating expenses 235.3 261.0 302.2 Merger and integration costs 18.2 98.9 - SAIF assessment 10.3 - - Restructuring charge - - 100.0 -------------------------------- Total noninterest expenses 1,174.8 1,290.8 1,405.1 - ------------------------------------------------------------------------------------------------------------------- Income before income taxes 741.8 509.2 363.2 Provision for income taxes 262.9 180.2 108.5 -------------------------------- NET INCOME $ 478.9 $ 329.0 $ 254.7 ================================ - ------------------------------------------------------------------------------------------------------------------- NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 466.7 $ 316.8 $ 242.5 NET INCOME PER COMMON SHARE $ 3.08 $ 2.09 $ 1.60 AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (000's) 151,313 151,554 151,392 - -------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 37 40 U. S. BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
NET UNREALIZED GAIN (LOSS) ON SHARES COMMON CAPITAL RETAINED SECURITIES, PREFERRED (DOLLARS IN MILLIONS) OUTSTANDING STOCK SURPLUS EARNINGS NET OF TAX STOCK TOTAL ------------------------------------------------------------------------------------------------------------------------------ BALANCE AT JANUARY 1, 1994 150,483,832 $752.4 $ 469.7 $1,042.4 $ 27.2 $ 150.0 $2,441.7 Net income - - - 254.7 - - 254.7 Exercise of stock options 904,235 4.5 8.4 - - - 12.9 Repurchase of common stock (2,228,300) (11.1) (46.0) - - - (57.1) Common stock issued in acquisition 2,410,340 12.1 4.1 12.6 (1.0) - 27.8 Common stock issued to redeem subordinated debt 8,689 - .1 - - - .1 Common dividends declared (per share -- $.94) - - - (120.5) - - (120.5) Preferred dividends declared - - - (12.2) - - (12.2) Dividends reinvested and other 545,757 2.7 9.0 (1.2) - - 10.5 Change in fair value of securities, net of tax - - - - (64.9) - (64.9) - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 152,124,553 760.6 445.3 1,175.8 (38.7) 150.0 2,493.0 Net income - - - 329.0 - - 329.0 Exercise of stock options 723,184 3.6 9.5 - - - 13.1 Repurchase of common stock (6,548,525) (32.7) (143.1) - - - (175.8) Common stock issued to redeem subordinated debt 3,921,225 19.6 30.1 - - - 49.7 Common dividends declared (per share -- $1.06) - - - (135.7) - - (135.7) Preferred dividends declared - - - (12.2) - - (12.2) Dividends reinvested and other 372,031 1.8 6.0 - - - 7.8 Change in fair value of securities, net of tax - - - - 48.1 - 48.1 - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 150,592,468 752.9 347.8 1,356.9 9.4 150.0 2,617.0 Net income - - - 478.9 - - 478.9 Exercise of stock options 1,396,132 7.0 26.6 - - - 33.6 Repurchase of common stock (14,603,800) (73.0) (477.6) - - - (550.6) Common stock issued in acquisition 9,656,911 48.3 276.3 - - - 324.6 Common dividends declared (per share -- $1.18) - - - (179.2) - - (179.2) Preferred dividends declared - - - (12.2) - - (12.2) Dividends reinvested and other 157,957 .8 5.0 .1 - - 5.9 Change in fair value of securities, net of tax - - - - (7.2) - (7.2) - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 147,199,668 $736.0 $ 178.1 $1,644.5 $ 2.2 $ 150.0 $2,710.8 ==================================================================================== - ---------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 38 41 U. S. BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------- (IN MILLIONS) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 478.9 $ 329.0 $ 254.7 Adjustments to reconcile net income to cash used in operating activities Deferred income tax (benefit) expense 41.0 (49.8) (47.7) Depreciation, amortization and accretion 153.8 129.0 146.0 Provision for credit losses 135.2 124.1 120.1 Noncash portion of merger and integration costs 14.3 87.6 - Noncash portion of restructuring charge - - 68.8 Net gain on sales of operations (28.8) - (51.7) Net (gain) loss on sale of equity investments (23.7) (2.4) 5.9 Net (gain) loss on sale of securities (5.8) (3.0) 9.2 Net gain on sale of trading securities (16.0) (16.2) (4.3) Net gain on sales of loans and property (17.2) (40.4) (25.8) Net gain on sales of mortgage loan servicing rights (4.0) - (1.0) Change in Loans held for sale (15.2) 229.8 552.7 Trading account securities 213.0 (124.3) 77.5 Deferred loan fees, net of amortization .3 5.4 7.1 Accrued interest receivable 19.6 (15.6) (22.9) Accrued interest payable (21.8) 27.1 7.5 Other assets and liabilities, net (27.6) 86.4 (66.6) ------------------------------------ Net cash provided by operating activities 896.0 766.7 1,029.5 - ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of interest-bearing deposits of nonbank subsidiaries 22.3 12.4 21.7 Purchase of interest-bearing deposits by nonbank subsidiaries (29.2) (13.0) (12.1) Net decrease in investments in interest-earning deposits by banking subsidiaries 2.8 1.5 5.8 Proceeds from maturities of securities held to maturity 114.2 367.2 777.0 Proceeds from sales of securities held to maturity - 3.9 - Purchase of securities held to maturity - (53.2) (426.1) Proceeds from sale of securities available for sale 468.1 993.9 610.1 Proceeds from maturities of securities available for sale 1,061.3 610.8 435.0 Purchase of securities available for sale (1,018.3) (1,555.2) (913.3) Proceeds from sales of equity investments 40.2 10.0 4.2 Purchase of equity investments (18.3) (39.8) (18.3) Principal collected on loans made by nonbank subsidiaries 1,713.0 1,191.5 849.8 Loans made to customers by nonbank subsidiaries (1,919.7) (1,398.9) (846.4) Net change in loans by banking subsidiaries (1,674.0) (1,681.6) (2,103.1) Proceeds from sales of loans 70.5 409.6 122.5 Purchase of loans - - (76.5) Proceeds from sales of premises and equipment 24.4 36.2 15.1 Purchase of premises and equipment (87.8) (81.9) (120.5) Proceeds from sales of mortgage servicing rights .7 3.2 24.9 Purchase of mortgage servicing rights - (6.6) (10.6) Proceeds from sales of foreclosed assets 79.2 63.4 47.2 Acquisitions/dispositions, net of cash and cash equivalents (103.1) 15.7 336.5 ------------------------------------ Net cash used in investing activities (1,253.7) (1,110.9) (1,277.1) - -----------------------------------------------------------------------------------------------------------------------
(Continued on next page) See Notes to Consolidated Financial Statements. 39 42 U. S. BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS -- (Continued)
YEAR ENDED DECEMBER 31, --------------------------------- (IN MILLIONS) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits 982.1 1,401.2 32.8 Net change in short-term borrowings (1,104.4) (824.7) 968.7 Proceeds from issuance of long-term debt 1,039.2 772.0 631.9 Repayment of long-term debt (605.2) (439.5) (555.1) Proceeds from issuance of capital qualifying securities issued by subsidiary trust 300.0 - - Proceeds from issuance of common stock 26.9 16.4 20.5 Common stock repurchased (550.6) (175.8) (57.1) Dividends paid (180.9) (145.3) (128.2) ----------------------------------- Net cash provided by financing activities (92.9) 604.3 913.5 ----------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (450.6) 260.1 665.9 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,922.6 2,662.5 1,996.6 ----------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,472.0 $ 2,922.6 $ 2,662.5 =================================== - ----------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES Cash paid during the period for Interest $ 1,038.4 $ 966.3 $ 732.6 Income taxes 192.5 190.5 151.2 Noncash investing activities Transfers Loans to other real estate owned $ 73.8 $ 78.2 $ 38.7 Loans to loans held for sale - 300.7 - Loans held for sale to loans 12.4 30.2 32.8 Consumer loans from loans held for sale - - 96.4 Securities held to maturity to available for sale - 800.1 - Securities available for sale to held to maturity - - 56.3 Fair value adjustment to securities available for sale 11.4 81.0 108.3 Income tax effect related to fair value adjustment 4.2 32.9 42.4 Redemption of convertible subordinated debentures - 49.9 - - -----------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 40 43 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES U. S. Bancorp and Subsidiaries (Bancorp) is a regional, multi-bank holding company that provides bank and bank-related services through its subsidiaries primarily serving domestic markets. The following is a description of the more significant policies. BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and prevailing practices within the banking industry. In preparing such financial statements, management is required to make estimates and judgments that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Bancorp and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year presentation. When an acquisition that is material to the consolidated financial statements occurs through a pooling-of-interests, prior period financial statements are restated to include the accounts of companies acquired. Results of operations of companies acquired and accounted for as purchases are included from their dates of acquisition. CASH AND CASH EQUIVALENTS Bancorp considers cash due from banks, federal funds sold and security resale agreements to be cash and cash equivalents for purposes of the Consolidated Statement of Cash Flows. SECURITIES Securities at acquisition are classified into three categories: trading, available for sale, and held to maturity. Trading account securities include securities and money market instruments bought and held principally for the purpose of sale in the near term. These securities are carried at fair value. Realized gains and losses on sale of trading account securities are computed using the average cost method. The realized gains and losses, together with any fair value adjustments, are included in noninterest revenue. Securities available for sale are securities that may be sold prior to maturity and are available for future liquidity requirements. These securities are carried at fair value. Realized gains and losses on sale of securities available for sale are computed on the specific identification method. Unrealized gains and losses on securities available for sale are excluded from earnings and are reported net of tax as a separate component of shareholders' equity until realized. Securities held to maturity are classified as such where Bancorp has the ability and positive intent to hold them to maturity. These securities are carried at cost, adjusted for amortization of premiums and accretion of discounts. Unrealized losses due to fluctuations in fair value of securities held to maturity are recognized when it is determined that an other than temporary decline in value has occurred. LOANS AND LEASE FINANCING Loans and direct financing leases, net of deferred fees, are generally reported at the principal amount outstanding (including lease residuals), net of unearned income. Loan origination, commitment fees and certain direct loan origination costs are capitalized and recognized as a yield adjustment over the lives of the loans. Loans held for sale are reported at the lower of cost or fair value. Loan fees from loans held for sale are deferred and recognized as a component of the gain or loss on 41 44 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS sale of the loans. Commitment fees based on a percentage of a customers' unused lines of credit and fees related to standby letters of credit are recognized in noninterest revenue over the commitment period. Interest income is recorded as earned. The accrual of interest income on business loans ceases when potential collection difficulties are foreseen and collateral is inadequate to cover principal and interest. A loan is placed on nonaccrual status when the collectibility of all amounts (principal and interest) due according to the contractual terms of the loan agreement is uncertain. Uncollected accrued interest is reversed against interest income. If ultimate collection of principal is in doubt, all cash receipts on nonaccrual loans are applied to reduce the principal balance. Bank card loans are charged off upon becoming 180 days past due. Other consumer loans are typically charged off upon becoming 120 days past due, and interest earned but not collected thereon is reversed at the time of charge-off. Consequently, such loans are not placed on nonaccrual status. Unearned income on direct financing leases is amortized to produce a level yield on the remaining net receivable balance. Income from leveraged leases is recognized over the term of the leases based on the unrecovered equity investment. ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses is established to absorb known and inherent losses in the credit portfolio. Amounts are added to the allowance for credit losses and charged against earnings to bring the allowance to a level which, in management's judgment, is considered adequate to absorb losses inherent in the portfolio. Management evaluates regularly the appropriate level of the allowance, taking into consideration factors such as general economic conditions, historical loss experience, credit concentrations and trends in portfolio volume, maturity, delinquencies, and nonaccruals. Actual credit losses, net of recoveries, are deducted from the allowance. While management uses the best information available on which to base estimates, future adjustments to the allowance may be necessary if economic conditions, particularly in Bancorp's markets, differ substantially from the assumptions used by management. A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts (principal and interest) due according to the contractual terms of the loan agreement. Consumer and residential real estate loans that are collectively evaluated for potential losses and leases are not evaluated for impairment. When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when, as a practical expedient, the current fair value of the collateral, reduced by costs to sell, is used. When the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs, and unamortized premium or discount), an impairment is recognized by creating or adjusting an allocation of the allowance for credit losses. PREMISES, FURNITURE AND EQUIPMENT Premises, furniture and equipment are stated at cost less accumulated depreciation and amortization. Construction costs and the cost of funds to finance major projects are capitalized. Maintenance and repairs are charged to expense as incurred and the cost of improvements is capitalized. Provisions for depreciation and amortization are computed using the straight-line method. Estimated useful lives range up to fifty years for buildings, up to the lease term for leasehold improvements, and three to ten years for furniture and equipment. OTHER REAL ESTATE AND EQUIPMENT OWNED Properties acquired by foreclosure or deed in lieu of foreclosure are carried at the lower of their recorded amounts or fair value less estimated costs of disposal. Any write-downs at, or prior to, the date of acquisition are charged to the allowance for credit losses. Subsequent write-downs, gains or losses recognized on the sale of these properties and net operating results are included in noninterest expenses. 42 45 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GOODWILL AND OTHER INTANGIBLE ASSETS In accordance with the purchase method of accounting, the assets and liabilities of purchased banking and financial organizations are stated at estimated fair values at the date of acquisition. The excess of cost over fair value of net assets acquired is accounted for as goodwill and is being amortized on the straight-line method ranging from 15 to 25 years. Core deposit intangibles represent the intangible value of depositor relationships resulting from deposit liabilities assumed in acquisitions. Core deposit intangibles are amortized on an accelerated basis over their estimated periods of benefit, ranging from 8 years to 10 years, or on a straight-line basis over 15 years. Costs associated with internally generated and purchased mortgage loan servicing rights are deferred and amortized on a method which relates the amortization of these costs to the estimated net servicing income. In the event of unanticipated prepayments, the future amortization rate is adjusted prospectively, such that the discounted future cash flows approximate the expected future net servicing income. Effective January 1, 1996, Bancorp adopted Statement of Financial Accounting Standards (SFAS) No. 122, "Accounting for Mortgage Servicing Rights," which requires that companies recognize mortgage servicing rights as separate assets, regardless of how those servicing rights are acquired. The amortization and valuation adjustments related to mortgage banking assets are included in mortgage banking income and shown net of certain other expenses in the Consolidated Statement of Income. Previously, only purchased servicing rights were capitalized as an asset, whereas the cost to internally originate mortgage servicing rights was expensed. This Statement also requires that capitalized mortgage servicing rights be assessed for impairment based on fair value, rather than an estimate of undiscounted future cash flows. The adoption of SFAS No. 122 resulted in the recognition of $3.8 million in income related to originated mortgage servicing rights. Effective January 1, 1996, Bancorp adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," issued in March 1995. This Statement requires that long-lived assets and certain identifiable intangibles related to those assets be reviewed for impairment whenever events or changes in circumstances indicate that assets' carrying value may not be recoverable. An impairment loss is recognized when the sum of the future cash flows is less than the carrying value of the asset. This Statement also requires that long-lived assets and identifiable intangibles, except for assets of a discontinued operation held for disposal, be accounted for at the lower of cost or fair value less selling costs. The adoption of SFAS No. 121 has not had a material impact on the financial position or results of operations of Bancorp. INTEREST RATE AND CURRENCY CONTRACTS Bancorp uses various interest rate and foreign currency contracts as accommodations for customers. All interest rate contracts entered into as customer accommodations are hedged with interest rate swaps or other interest rate contracts. The customer accommodations and the instruments used to hedge the accommodations are carried at fair value with all changes in fair value recorded in noninterest revenues. Foreign currency contracts are valued at current prevailing rates of exchange, and gains or losses resulting from such valuations are also included in noninterest revenues. As part of asset and liability management, Bancorp uses interest rate swaps to hedge interest rate risk. Gains and losses on interest rate contracts that qualify as hedges are deferred and recognized as interest income or interest expense over the lives of the related assets or liabilities. Income or expense on interest rate contracts used to manage interest rate exposure is recognized as an adjustment of the yield over the life of the underlying assets or liabilities. Gains and losses on derivative contracts such as futures and forward delivery commitments that qualify as hedges of anticipated transactions are deferred and are amortized into income over the term of the completed transactions. In conjunction with Bancorp's mortgage loan operations, mortgage-backed securities and mortgage loans are sold for delivery in future months, and over-the-counter options on mortgage-backed securities are purchased as hedges of closed 43 46 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS mortgage loans and hedges of interest rate and price fluctuations until mortgage loans are sold. Net positions are valued at the lower of cost or market. Gains or losses are recognized upon settlement of the forward sale contracts based on the difference between the net sales proceeds and the net carrying value of the loans sold. The cost of options and commitment fees, incurred on contracts to ensure future delivery of mortgage loans into mortgage-backed securities, are amortized straight-line over the option or commitment period and recorded as a component of the gain or loss on mortgage loan sales. The option premium paid, which represents loss exposure, is amortized over the life of the option. REVENUE RECOGNITION Income is recorded on a cash basis for most service charges, commissions and fees. Income related to equity investments results from dividends received and realized gains and losses upon disposition of investments. INCOME TAXES Income taxes are accounted for using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax bases of existing assets and liabilities are expected to be reported in Bancorp's income tax returns. The deferred tax provision for the year is equal to the change in the net deferred tax liability from the beginning to the end of the year. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. COMPUTATIONS OF EARNINGS PER SHARE Earnings per common share are based on net income after preferred dividend requirements and the weighted average number of common shares outstanding. The impact of common stock equivalents, such as stock options, and other potentially dilutive securities is not material; therefore, they are not included in the computation. STOCK COMPENSATION Bancorp accounts for stock compensation using the intrinsic value method as prescribed in Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. Under the intrinsic value based method, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the stock at grant date over the amount an employee must pay to acquire the stock. Most Bancorp stock options have no intrinsic value at the grant date, and under APB No. 25 there is no compensation cost to be recognized. Compensation cost is recognized for other types of stock-based compensation plans under APB No. 25, including plans with variable or performance-based criteria. The fair value approach measures compensation costs based on factors such as the term of the option, the market price at grant date and the option exercise price, with expense recognized over the vesting period. Regardless of the method used to account for stock-based compensation, SFAS No. 123 requires that an employer's financial statements include certain supplemental disclosures about stock compensation arrangements. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," in June 1996. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is not expected to have a significant impact on Bancorp's financial condition, results of operations, cash flows or related disclosures. 44 47 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. ACQUISITIONS Effective January 1, 1997, Bancorp completed the acquisition of Sun Capital Bancorp (Sun Capital), a banking operation based in St. George, Utah, with assets of approximately $70 million. Bancorp issued approximately 400,000 common shares in the transaction, accounted for as a purchase. On June 6, 1996, Bancorp acquired California Bancshares, Inc. (CBI), the holding company for a multi-bank commercial banking operation serving the East San Francisco Bay Area and the Central Valley of Northern California. In a transaction accounted for as a purchase, Bancorp issued 9.7 million shares of common stock. An equal number of common shares were repurchased by Bancorp in the open market around the time of the acquisition. On the merger date, CBI had $1.6 billion in assets and $1.4 billion in deposits. The total value of the transaction was approximately $325 million. Pro forma results of operations have not been presented because the effects of this acquisition were not significant to Bancorp's 1996 results of operations. In December 1996, Bancorp entered into a definitive agreement to acquire Business and Professional Bank, located in Sacramento, California, with assets of $214 million. Pursuant to the terms of the definitive agreement the transaction is subject to approval by regulators and shareholders of Business and Professional Bank as well as the covenants, representations and warranties of both parties. In December 1995, Bancorp merged with West One Bancorp (West One), a regional financial services company headquartered in Boise, Idaho. In a transaction accounted for as a pooling-of-interests, Bancorp issued 54.7 million shares of common stock. On the merger date West One had $9.2 billion in assets, $7.0 billion in deposits, and 227 branches in Oregon, Washington, Idaho and Utah. In connection with the West One merger, pre-tax merger and integration costs of $18.2 million and $98.9 million were recognized during 1996 and 1995, respectively. The merger and integration activity is summarized in the following table:
SEVERANCE, FACILITIES RETENTION AND AND OTHER EMPLOYEE- ACCOUNT PROFESSIONAL (IN MILLIONS) RELATED COSTS CONVERSIONS FEES OTHER TOTAL - --------------------------------------------------------------------------------------------------------------------------------- Merger and integration cost provision $29.4 $39.6 $ 13.9 $16.0 $98.9 Cash utilization for the period - .2 10.6 .5 11.3 ------------------------------------------------------- Balance at December 31, 1995 29.4 39.4 3.3 15.5 87.6 Additional provision 13.2 1.4 .7 2.9 18.2 Utilization for the period Cash 35.6 23.3 3.6 8.1 70.6 Noncash - 6.2 - 8.1 14.3 ------------------------------------------------------- Total 35.6 29.5 3.6 16.2 84.9 ------------------------------------------------------- Balance at December 31, 1996 $ 7.0 $11.3 $ .4 $ 2.2 $20.9 ======================================================= - ---------------------------------------------------------------------------------------------------------------------------------
In May, 1996, as part of the regulatory approval process for the West One merger, Bancorp divested 31 branches, mainly in Oregon, with deposits of approximately $700 million and loans of approximately $400 million. A pre-tax gain of $28.8 million was recognized in the second quarter of 1996. 3. CASH, LOAN AND DIVIDEND RESTRICTIONS The subsidiary banks are required to maintain reserves against customer deposits by keeping balances with the Federal Reserve Bank in a noninterest-bearing account. The average amount of those reserve balances for the year ended December 31, 1996 was approximately $227 million. Certain restrictions exist regarding the extent to which bank subsidiaries may transfer funds to the parent company in the form of dividends, loans or advances. Federal law prevents the parent company and its nonbank subsidiaries from 45 48 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS borrowing from bank subsidiaries unless the loans are secured by various types of collateral. Secured loans that may be made by bank subsidiaries to the parent company or any individual affiliate are generally limited to 10 percent of the bank's equity and 20 percent of the bank's equity for loans to all affiliates and the parent company in the aggregate. Payment of dividends to the parent company by its subsidiary banks is subject to review by banking regulators and is subject to various statutory limitations and in certain circumstances requires approval by banking regulatory agencies. These permissible dividends are further limited by the minimum capital constraints imposed on banks by banking regulatory agencies. The subsidiary banks can distribute as dividends to the parent company in 1997 (in addition to their 1997 net income) approximately $56 million. At December 31, 1996, the total amount that could be loaned to the parent company by its banking subsidiaries was approximately $354 million. As a result of the above regulatory restrictions, net assets of the subsidiary banks not available for dividends or loans amounted to approximately $2.2 billion. Restricted net assets of nonbank subsidiaries was not significant. 4. SECURITIES The amortized cost and approximate fair value of securities available for sale were as follows:
DECEMBER 31, 1996 -------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR (IN MILLIONS) COST GAINS LOSSES VALUE - ---------------------------------------------------------------------------------------------------------------------------- U.S. Treasury obligations $ 482.4 $ 1.0 $ .7 $ 482.7 U.S. government agency securities 547.2 8.7 2.4 553.5 Mortgage-backed securities 902.3 8.9 7.9 903.3 Collateralized mortgage obligations 740.5 2.4 5.6 737.3 State and municipal bonds 107.9 1.3 .8 108.4 Equity and other securities 261.4 2.6 1.3 262.7 ---------------------------------------------- $ 3,041.7 $ 24.9 $ 18.7 $3,047.9 ============================================== - ----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995 -------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR (IN MILLIONS) COST GAINS LOSSES VALUE - ---------------------------------------------------------------------------------------------------------------------------- U.S. Treasury obligations $ 759.9 $ 2.0 $ .8 $ 761.1 U.S. government agency securities 599.4 6.0 1.6 603.8 Mortgage-backed securities 816.4 10.3 2.1 824.6 Collateralized mortgage obligations 701.1 2.9 3.4 700.6 State and municipal bonds 89.7 2.3 .2 91.8 Equity and other securities 292.6 4.5 2.3 294.8 ---------------------------------------------- $ 3,259.1 $ 28.0 $ 10.4 $3,276.7 ============================================== - ----------------------------------------------------------------------------------------------------------------------------
The amortized cost and fair value of securities available for sale by remaining contractual maturity are shown on the next page. Expected maturities of mortgage-backed securities and collateralized mortgage obligations will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Equity securities were included in the table on the next page as due after ten years. 46 49 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 ----------------------- AMORTIZED FAIR (IN MILLIONS) COST VALUE ---------------------------------------------------------------------------------------------- One year or less $ 369.5 $ 369.8 One to five years 383.0 386.3 Five to ten years 272.2 274.2 Over 10 years 338.4 341.1 Serial maturities 1,678.6 1,676.5 ------------------------ $ 3,041.7 $3,047.9 ======================== ----------------------------------------------------------------------------------------------
In 1996, gains of $6.4 million and losses of $.6 million were realized on sales of securities available for sale. Gains of $6.3 million and losses of $3.3 million were realized in 1995 and gains of $1.3 million and losses of $10.5 million were realized in 1994. The net unrealized gain or loss on securities available for sale, net of income taxes, is included as a component of shareholders' equity. The amortized cost and approximate fair value of securities held to maturity were as follows:
DECEMBER 31, 1996 -------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR (IN MILLIONS) COST GAINS LOSSES VALUE -------------------------------------------------------------------------------------------------------- State and municipal bonds $ 786.3 $ 17.1 $2.9 $800.5 Other securities 10.4 - - 10.4 ------------------------------------------------- $ 796.7 $ 17.1 $2.9 $810.9 ================================================= --------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995 -------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR (IN MILLIONS) COST GAINS LOSSES VALUE -------------------------------------------------------------------------------------------------------- State and municipal bonds $ 813.0 $ 23.2 $2.3 $833.9 Other securities 52.1 - .3 51.8 ------------------------------------------------- $ 865.1 $ 23.2 $2.6 $885.7 ================================================= --------------------------------------------------------------------------------------------------------
The amortized cost and fair value of securities held to maturity by remaining contractual maturity are shown below.
DECEMBER 31, 1996 -------------------- AMORTIZED FAIR (IN MILLIONS) COST VALUE -------------------------------------------------------------------------------------------- One year or less $ 78.9 $ 79.9 One to five years 407.1 415.7 Five to ten years 299.4 304.0 Over 10 years .9 .9 Serial maturities 10.4 10.4 ------------------- $ 796.7 $810.9 =================== --------------------------------------------------------------------------------------------
At December 31, 1996 and 1995, the banks pledged securities aggregating $2.8 billion and $2.9 billion, respectively, to secure certain public and trust deposits and for other purposes as required or permitted by law. Interest earned on tax-exempt securities was $47.1 million, $48.6 million and $51.4 million for the years 1996, 1995 and 1994, respectively. In December 1995, Bancorp, in accordance with guidance provided by the FASB, reclassified approximately $800 million of held to maturity securities to available for sale classification. The related unrealized gains were $6.8 million and unrealized losses were $3.1 million which were included in shareholders' equity. 47 50 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES Loans and lease financing are comprised of the following categories:
DECEMBER 31, --------------------- (IN MILLIONS) 1996 1995 ------------------------------------------------------------------------------------------- Loans Commercial $12,241.2 $11,470.3 Real estate construction 1,411.2 833.0 Real estate mortgage 4,287.8 3,808.7 Consumer 5,690.5 5,485.4 --------------------- Total loans 23,630.7 21,597.4 --------------------- Lease financing Lease receivables 1,350.9 1,125.6 Estimated residual value 347.0 306.3 Unearned income (281.9) (244.5) --------------------- Lease financing, net of unearned income 1,416.0 1,187.4 --------------------- Total loans and leases $25,046.7 $22,784.8 ===================== -------------------------------------------------------------------------------------------
The minimum future lease payments related to direct finance receivables for each of the years 1997 through 2001 are $361.1 million, $326.8 million, $259.4 million, $193.3 million and $102.6 million, respectively. The following table summarizes the changes in the allowance for credit losses.
(IN MILLIONS) 1996 1995 1994 ------------------------------------------------------------------------------------------- Balance, beginning of year $434.5 $387.6 $345.2 Acquisitions (dispositions) 14.9 (3.1) 2.6 Provision for credit losses 135.2 124.1 120.1 Net charge-offs (108.7) (74.1) (80.3) ------------------------ Balance, end of year $475.9 $434.5 $387.6 ======================== -------------------------------------------------------------------------------------------
Bancorp's recorded investment in loans for which an impairment has been recognized totaled $115.0 million and $104.0 million at December 31, 1996 and 1995, respectively. Impaired loans at December 31, 1996 and 1995 consisted primarily of commercial and commercial real estate mortgage loans, and the carrying value was based on the fair value of collateral. Included in these amounts are $35.5 million of impaired loans for which the allocated allowance for credit losses was $14.1 million at December 31, 1996 and $7.2 million of impaired loans for which the allocated allowance for credit losses was $3.1 million at December 31, 1995. The balance of the allowance for credit losses in excess of these specific reserves is available to absorb losses from all loans, although allocations have been made for certain loans and loan categories as part of management's quarterly analysis of the allowance. The average recorded investment in impaired loans was $97.5 million and $142.8 million for the years 1996 and 1995, respectively. 6. RELATED PARTIES The banks have granted loans to the officers and directors of Bancorp and to their associates. These related party loans are made in the ordinary course of business and, management believes, do not involve more than a normal risk of collectibility. The aggregate dollar amount of these loans was $120.1 million and $148.4 million at December 31, 1996 and 1995, respectively. During 1996, $105.9 million of new loans were made and repayments totaled $134.2 million. In connection with the merger agreement relating to the acquisition of Peoples Ban Corporation (Peoples) in 1987, Bancorp entered into a shareholder agreement with certain holders (a current Board member and affiliates) of the common stock of Peoples pursuant to which such holders agreed to vote in favor of the merger of Peoples with a Bancorp subsidiary. 48 51 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pursuant to this agreement, Bancorp has agreed to afford such holders, which are the holders of approximately 8.4 million shares of common stock, certain registration rights with respect to such shares of common stock. Bancorp is obligated until December 22, 1997, under certain circumstances and subject to specified terms and conditions, at the request of such holders of common stock, to use its best efforts to register for sale the common stock under the federal and state securities laws, which request must relate to a minimum of 1,080,000 shares of common stock. 7. PREMISES, EQUIPMENT AND LEASES A summary of premises, furniture and equipment is as follows:
DECEMBER 31, ------------------- (IN MILLIONS) 1996 1995 ------------------------------------------------------------------------------------------- Land $ 86.0 $ 90.9 Buildings 433.0 435.8 Leasehold improvements 136.4 129.7 Furniture and equipment 555.8 506.0 Property under capital leases (principally equipment) 8.5 18.1 ------------------- Total 1,219.7 1,180.5 Less accumulated depreciation and amortization (605.6) (546.7) ------------------- Premises, furniture and equipment -- net $ 614.1 $ 633.8 =================== -------------------------------------------------------------------------------------------
Capital lease amortization expense is included in net occupancy and equipment expense. Accumulated amortization of capital leases was $4.9 million and $14.0 million at December 31, 1996 and 1995, respectively. Future minimum lease payments as of December 31, 1996 are shown below:
CAPITAL OPERATING (IN MILLIONS) LEASES LEASES --------------------------------------------------------------------------------------------- 1997 $1.0 $ 44.9 1998 1.0 35.6 1999 .9 27.8 2000 .9 22.3 2001 .8 19.9 Thereafter 2.0 149.7 ------------- Total minimum payments 6.6 $300.2 ====== Amount representing interest 2.4 ---- Present value of net minimum lease payments $4.2 ==== ---------------------------------------------------------------------------------------------
A majority of the leases apply to the banks premises and provide for renewal options for periods of up to 20 years. Total rental expense under operating leases was $48.0 million, $51.3 million and $56.2 million for 1996, 1995 and 1994, respectively. 49 52 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. INCOME TAXES The provision for income taxes for the last three years consisted of the following:
(IN MILLIONS) 1996 1995 1994 ------------------------------------------------------------------------------------------- Current Federal $189.9 $206.7 $137.0 State 32.0 23.3 19.2 ------------------------ 221.9 230.0 156.2 ------------------------------------------------------------------------------------------- Deferred Federal 34.6 (44.7) (43.8) State 6.4 (5.1) (3.9) ------------------------ 41.0 (49.8) (47.7) ------------------------------------------------------------------------------------------- Total Federal 224.5 162.0 93.2 State 38.4 18.2 15.3 ------------------------ $262.9 $180.2 $108.5 ======================== -------------------------------------------------------------------------------------------
A reconciliation between the statutory federal income tax rate and the effective rate is as follows:
1996 1995 1994 ------------------------------------------------------------------------------------------ Federal statutory rate 35.0% 35.0% 35.0% Adjusted for State income tax 3.4 2.3 2.7 Tax-exempt interest (3.3) (5.8) (8.4) Nondeductible expenses 1.4 2.8 1.5 Credits (1.6) (1.1) (1.9) Other-net .5 2.2 1.0 --------------------- Effective income tax rate 35.4% 35.4% 29.9% ===================== ------------------------------------------------------------------------------------------
Accrued income tax liabilities, net, consisted of:
DECEMBER 31, -------------- (IN MILLIONS) 1996 1995 ------------------------------------------------------------------------------------------ Current $ 60.1 $45.6 Deferred 42.2 14.4 -------------- $102.3 $60.0 ============== ------------------------------------------------------------------------------------------
50 53 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are presented below:
DECEMBER 31, --------------- (IN MILLIONS) 1996 1995 -------------------------------------------------------------------------------------------- DEFERRED TAX ASSETS Allowance for credit losses $170.3 $153.8 Postretirement/employment benefits 41.6 37.9 Accrued expenses 28.1 41.2 Deferred income 14.2 9.6 Deferred liabilities 9.8 5.2 Deferred gain on sale of assets 6.2 9.6 Unrealized gains 3.0 14.8 Interest not recorded 2.1 9.7 Retirement plans - 3.6 Other .6 3.1 --------------- 275.9 288.5 -------------------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES Leveraged leases 177.9 167.2 Lease financing 88.8 83.0 Accumulated depreciation and amortization 27.5 26.2 Purchase accounting adjustments 9.4 2.7 Equity investments 8.2 15.1 Securities 2.5 .8 Retirement plans 2.8 - Unrealized appreciation on securities available for sale .8 6.2 Other .2 1.7 --------------- 318.1 302.9 --------------- Net deferred tax liability $ 42.2 $ 14.4 =============== --------------------------------------------------------------------------------------------
In 1996, Bancorp recorded taxes of approximately $2.3 million related to realized gains on sale of securities available for sale. Taxes related to realized gains on the sale of securities were $1.2 million in 1995, and tax benefits related to realized losses on sale of securities in 1994 were $3.5 million. 51 54 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. LONG-TERM DEBT AND CREDIT ARRANGEMENTS Long-term debt is summarized as follows:
(IN MILLIONS) 1996 1995 --------------------------------------------------------------------------------------------- BANCORP (PARENT COMPANY) Medium-term notes due 1997-2001 $ 264.8 $ 245.8 Floating rate notes due 1999 200.0 - 8.125% notes due 2002 149.4 149.3 7.00% notes due 2003 149.8 149.8 6.75% notes due 2005 296.9 296.5 7.50% notes due 2026 198.5 - ------------------- 1,259.4 841.4 --------------------------------------------------------------------------------------------- BANKS FHLB notes due 1997-2025 538.2 535.3 Bank notes due 1997 13.8 - Mortgages and other notes payable .1 .3 ------------------- 552.1 535.6 ------------------- $1,811.5 $1,377.0 =================== ---------------------------------------------------------------------------------------------
Principal payments required to service Bancorp's total long-term debt during the next five years are as follows: 1997 -- $382.9 million; 1998 -- $229.4 million; 1999 -- $205.3 million; 2000 -- $53.6 million and 2001 -- $118.2 million. BANCORP (PARENT COMPANY) All long-term debt of the parent company is unsecured. The medium-term notes have fixed or variable rates ranging from 5.53% to 7.44% at December 31, 1996. The 8.125% notes due in 2002, the 7.00% notes due in 2003, the 6.75% notes due in 2005, and the 7.50% notes due 2026 are subordinated to all senior indebtedness of Bancorp. The notes are not redeemable by Bancorp, in whole or in part, prior to maturity and do not provide for a sinking fund. The 7.50% notes due 2026 are redeemable at par, at the option of the note holders, on June 1, 2006. The interest rate on the floating rate notes due 1999 adjusts quarterly at .15% over the London Interbank Offered Rate for three month United States dollar deposits (LIBOR-3). The interest rate on these notes was 5.71% at December 31, 1996. The floating rate notes are the only asset of the U. S. Bancorp Putable Asset Trust 1996-1 (Trust). The Trust entered into a call option, pursuant to which the call holder has the right to purchase the notes from the Trust at par on November 15, 1999. If the call is exercised, the notes would become fixed rate obligations due in 2006. If the call holder does not exercise the call option, Bancorp is required to redeem the notes immediately thereafter. At December 31, 1996, committed line of credit arrangements totaling $500 million were available to Bancorp through a syndication of unaffiliated banks. Such lines generally provide for interest at the lending bank's prime rate or other money market rates. These banking arrangements principally served as commercial paper back-up lines and provided general liquidity for the parent company. There were no borrowings outstanding or compensating balance requirements under these credit arrangements at December 31, 1996. During 1996, Bancorp paid commitment fees of .10 percent of the available lines. BANKS Various Bancorp subsidiary banks borrow from the Federal Home Loan Banks (FHLB) of Seattle and San Francisco. These banking subsidiaries pledge certain real estate loans and investment securities under blanket pledge agreements as collateral for secured notes. Interest rates ranged from 4.98% to 9.11% at December 31, 1996. 52 55 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. National Bank of Oregon (U. S. Bank of Oregon) and U. S. Bank of Washington, National Association (U.S. Bank of Washington) issue notes under a continuous bank note offering, which provides for maturities at issuance of 30 days to 15 years. The average interest rate on bank notes outstanding at December 31, 1996 was 5.61%. Mortgages and other notes payable are primarily mortgages on bank premises. Interest rates range from 8.5% to 12%. 10. EMPLOYEE BENEFIT PLANS RETIREMENT PLANS Bancorp provides noncontributory trusteed defined benefit pension plans (Pension Plans) which cover substantially all employees. West One's Pension Plan, substantially similar to Bancorp's, will be merged into the Bancorp plan at the end of 1997. Benefits are based on years of service and highest average level of compensation for any five consecutive years out of the last ten years of service. Bancorp's funding policy is to contribute annually an amount between the minimum required under ERISA and the maximum amount that is deductible for income tax purposes. Such contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Bancorp also maintains separate unfunded supplemental pension plans (Supplemental Plans) that provide certain officers with defined pension benefits in excess of limits imposed by federal tax law on benefit payments from qualified plans and for certain compensation not covered in the Pension Plans. The related retirement benefits are paid from Bancorp's assets. The assumptions used in computing the present value of the accumulated benefit obligation, the projected benefit obligation and net pension expense are substantially consistent with those assumptions used for the Pension Plans. Pension plan assets are invested approximately 70 percent in common stock and equity mutual funds and 30 percent in a fixed income mutual fund. The following table sets forth the aggregate Pension Plans' status and amounts recognized in Bancorp's consolidated financial statements at December 31, 1996 and 1995.
DECEMBER 31, ------------------------------------------------- 1996 1995 ----------------------- ----------------------- PENSION SUPPLEMENTAL PENSION SUPPLEMENTAL (IN MILLIONS) PLANS PLANS PLANS PLANS ------------------------------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations Vested benefit obligation $ 344.5 $ 21.6 $ 342.3 $ 20.5 ----------------------------------------------- Accumulated benefit obligation $ 363.1 $ 22.6 $ 365.3 $ 20.7 ----------------------------------------------- Projected benefit obligation $ 444.6 $ 28.8 $ 444.1 $ 27.1 Plan assets at fair value 523.3 - 466.1 - - ------------------------------------------------------------------------------------------------------------------------------ Projected benefit obligation (in excess of) or less than plan assets 78.7 (28.8) 22.0 (27.1) Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions (39.7) 6.9 6.6 7.3 Unrecognized prior service cost 11.2 3.0 13.9 3.4 Additional minimum liability - (4.8) - (5.7) Unrecognized net transition (asset) obligation at January 1, 1986 (5.8) 1.1 (10.1) 1.4 ----------------------------------------------- Prepaid pension cost (pension liability) $ 44.4 $(22.6) $ 32.4 $(20.7) =============================================== - -----------------------------------------------------------------------------------------------------------------------------
Pension cost for the Pension Plans and Supplemental Plans included the following components:
PENSION PLANS SUPPLEMENTAL PLANS ------------------------ -------------------- (IN MILLIONS) 1996 1995 1994 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Service cost -- benefits earned during the period $17.7 $ 15.5 $ 18.7 $ .6 $ .4 $ .4 Interest cost on projected benefit obligation 32.9 31.6 27.3 2.1 1.9 1.4 Net amortization and deferrals 21.5 60.8 (35.4) 1.2 .9 0.8 (Return) loss on plan assets (60.8) (99.9) .2 - - - --------------------------------------------------- Net periodic pension cost $11.3 $ 8.0 $ 10.8 $3.9 $3.2 $2.6 =================================================== - ---------------------------------------------------------------------------------------------------------------------------
53 56 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In determining the projected benefit obligation at each year-end, the following assumptions were used. The assumptions for both Pension Plans were the same for 1996 and 1995.
U. S. BANCORP WEST ONE ---------------------------------- ------- 1996 1995 1994 1994 - ------------------------------------------------------------------------------------------------------------------------ Weighted average discount rate 7.75% 7.25% 8.50% 8.75% Expected long-term rate of return 9.00 9.00 9.00 10.00 Rate of increase in future salary levels 4.25-8.75 3.75-8.25 5.0-9.50 4.00 - ------------------------------------------------------------------------------------------------------------------------
EMPLOYEE INVESTMENT PLAN Bancorp sponsors an Employee Investment Plan which allows qualified employees, at their option, to make contributions of up to certain percentages of pre-tax base salary through salary deductions under Section 401(k) of the Internal Revenue Code. A portion of these contributions is matched by Bancorp. All of Bancorp's matching contributions are invested in Bancorp common stock. Employee contributions are invested, at the employees' direction, among a variety of investment alternatives. Total expenses associated with the Employee Investment Plan were $17.5 million, $13.4 million and $9.6 million in 1996, 1995 and 1994, respectively. OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS Bancorp has a benefit plan which provides postretirement health benefits to all employees who have attained the age of 55 and have at least 10 years of service. Retiree health care benefits are offered under self-insured plans. The plans are contributory, with retirees' contributions adjusted annually to reflect certain cost-sharing provisions and benefit limitations. Certain retirees are covered under a plan that is noncontributory for retirees and contributory for dependents. Bancorp adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and elected to immediately recognize the accumulated postretirement benefit obligation measured as of January 1, 1992. Bancorp reserves the right to terminate the plan or make plan changes at any time. Bancorp also provides postemployment benefits other than retirement benefits to former or inactive employees, their beneficiaries and covered dependents. Those benefits include, but are not limited to, salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits (including workers' compensation), job training and counseling, and continuation of benefits such as health care benefits and life insurance coverage. The following table sets forth the aggregate status of the postretirement plans, reconciled with amounts recognized in Bancorp's balance sheet:
DECEMBER 31, ---------------- (IN MILLIONS) 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Accumulated postretirement benefit obligation Retirees $87.1 $ 93.4 Fully eligible active plan participants 1.1 .9 Other active participants 8.9 8.4 ---------------- 97.1 102.7 Unrecognized prior service cost 5.4 5.9 Unrecognized net loss from past experience different from that assumed and the effects of changes in assumptions (3.7) (9.7) ---------------- Accrued postretirement benefit liability $98.8 $ 98.9 ================ - ------------------------------------------------------------------------------------------------------------------
54 57 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The net periodic postretirement benefit cost included the following components:
(IN MILLIONS) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Service cost $ .9 $ .8 $ 1.6 Interest cost on accumulated postretirement benefit obligation 7.1 7.7 8.4 Net amortization of deferrals (.4) (.5) .9 ----------------------- Net periodic postretirement benefit cost $7.6 $8.0 $10.9 ======================= - -------------------------------------------------------------------------------------------------------------------
The assumed discount rate used in determining the accumulated postretirement benefit obligation was 7.75 percent and 7.25 percent at December 31, 1996 and 1995, respectively. The assumed discount rate at December 31, 1994 was 8.5 percent for the Bancorp plan and 8.75 percent for the West One Plan. The 1996 health care trend rate was projected to be 8.0 percent for pre-65 participants and 7.0 percent for post-65 participants. These rates were assumed to decrease gradually until they reach 5.0 percent in the year 2003 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of January 1, 1996 by $6.5 million and the aggregate of the service and interest components of net periodic postretirement cost for 1996 by $.6 million. 11. STOCK INCENTIVE PLANS Bancorp maintains various stock incentive plans which provide for its ability to grant stock options, stock appreciation rights, restricted share awards, performance shares and other stock-based awards to directors, officers and key employees. Under the terms of the employee and officer option agreements, the option price is the fair market value of the underlying stock at the time the option is granted and the option period cannot exceed ten years from the grant date. Options become exercisable pursuant to various alternative vesting structures. Stock options granted in 1996 and 1995 were generally under a vesting structure over a three-year period. Nonemployee directors may elect to acquire "deferred compensation options" in lieu of fees otherwise due for board services and may exercise those options after six months. Deferred compensation options granted to non-employee directors are issued at 40 percent of market price on grant date. The range of option prices is a function of the market price of Bancorp stock on the date the options were granted, the impact of stock dividends and stock splits, and the effect of business combinations. Stock option activity is summarized in the following table:
WEIGHTED- AVERAGE NUMBER OF EXERCISE SHARES PRICE ------------------------------------------------------------------------------------------------ Outstanding at January 1, 1995 4,840,355 $ 16.79 Grants 1,018,465 24.13 Options exercised (816,239) 12.16 Forfeited or cancelled (111,695) 25.15 ----------------------- Outstanding at December 31, 1995 4,930,886 18.84 ----------------------- Acquisition 542,417 15.08 Grants 1,229,247 34.60 Options exercised (1,403,537) 15.22 Forfeited or cancelled (55,064) 27.49 ----------------------- Outstanding at December 31, 1996 5,243,949 $ 23.02 ======================= - -----------------------------------------------------------------------------------------------------------
55 58 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 1996, shares of common stock reserved for issuance under all stock incentive plans totaled 10,891,429. Exercisable options totaled 3,552,030 and 3,747,787 at December 31, 1996 and 1995, respectively. Additional information regarding options outstanding as of December 31, 1996 is as follows:
OPTIONS OPTIONS OUTSTANDING EXERCISABLE -------------------------------- ----------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE RANGE OF CONTRACTUAL EXERCISE EXERCISE EXERCISE PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE ----------------------------------------------------------------------------------------------------- $5.50 - $8.25 168,582 1.5 $ 6.93 168,582 $ 6.93 $8.29 - $12.37 738,144 3.5 10.67 738,144 10.67 $13.13 - $19.22 1,084,516 4.2 16.19 1,076,256 16.20 $20.79 - $30.65 2,048,037 7.1 25.42 1,210,748 25.61 $31.75 - $41.59 1,204,670 9.2 34.93 358,300 33.18 ------------------------------------------------------ 5,243,949 6.3 $23.02 3,552,030 $19.53 ====================================================== -----------------------------------------------------------------------------------------------------
SFAS No. 123 requires the disclosure of pro forma net income and earnings per share had Bancorp adopted the fair value method as of the beginning of fiscal 1995. Under this statement, the fair value of stock-based awards to employees is calculated through the use of option pricing models. These models also require subjective assumptions, including future stock price volatility and expected time to exercise. Bancorp's calculations are based on a single option approach and forfeitures were estimated. The weighted average grant-date fair value of stock options granted equal to the market price of the underlying stock on the date of grant was $7.17 and $4.50 in 1996 and 1995, respectively. The weighted average grant-date fair value of stock options granted at less than the market price on the date of grant was $18.61 and $10.80 for 1996 and 1995, respectively. If the accounting provisions of the new pronouncement had been adopted as of the beginning of 1995, the effect on 1995 and 1996 net income and earnings per share would have been immaterial. The following weighted average assumptions were used in the computation of fair value of stock options:
EXPECTED RISK- FREE EXPECTED DIVIDEND INTEREST EXPECTED VOLATILITY YIELD RATE LIFE (YEARS) ------------------------------------------------------------------------------------------- Grants of stock options 1996 21.2% 3.6% 6.4% 5.0 1995 18.0 3.5 6.3 5.1 -------------------------------------------------------------------------------------------
Restricted Stock Units ("RSUs"), totaling 81,470 shares were issued in 1996 pursuant to Bancorp's 1993 Stock Incentive Plan, as well as dividend equivalent RSUs, if elected by the grantee. RSUs vest in 20 percent increments over five years and dividend equivalent RSUs vest either (1) in increments of 20 percent over five years or (2) in a lump sum after five years (at the election of the grantee). Unvested RSUs are forfeited on termination of employment other than retirement, disability or death, while dividend equivalent RSUs are not forfeited under any termination circumstances. The officers cannot use the RSUs or transfer them until they are converted into common shares. The weighted average grant-date fair value of RSUs in 1996 was $27.17. Performance shares are earned only if specified performance goals are attained during a designated performance cycle. Earned performance shares are paid at the end of the performance cycle in shares of common stock or a combination of cash and shares. Grants of performance shares totaled 100,112 as of December 31, 1996 and none have been paid. The weighted average grant-date fair value of performance shares issued in 1995 was $23.12; no performance shares were issued in 1996. Compensation expense recognized under APB No. 25 was not material for the years ended December 31, 1996 or 1995. 56 59 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. CAPITAL QUALIFYING SECURITIES In December 1996, Bancorp issued $300 million of mandatory redeemable capital securities through a subsidiary grantor trust. The Trust holds debt instruments of the parent company purchased with the proceeds of the securities issuance. The capital qualifying securities bear an interest rate of 8.27 percent and mature in December, 2026. Bancorp has the right to redeem the securities, with prior approval of the Federal Reserve Board, on or after December 15, 2006 at 104.135 percent of par, declining to par on or after December 15, 2016. Certain changes in tax law or Federal Reserve Board regulations regarding the treatment of the capital securities as Tier 1 capital could result in early redemption, at par, or a shortening in the maturity of the securities. 13. SHAREHOLDERS' EQUITY The 8 1/8% Cumulative Preferred Stock, Series A, is not redeemable prior to July 23, 1997. On or after such date, the Series A Preferred Stock will be redeemable, in whole or part, at the option of Bancorp at a liquidating preference of $25 per share plus accrued and unpaid dividends. Under current regulations, Bancorp may not exercise its option to redeem the Series A Preferred Stock without the prior approval of the Federal Reserve Board. The preferred dividend requirement used in the calculation of earnings per common share was $12.2 million for the years 1996, 1995 and 1994. In October 1996, Bancorp announced its plan to repurchase up to 7.5 million shares of outstanding common stock. This stock repurchase program is in addition to the program announced in 1994 to repurchase up to 6.5 million common shares. Repurchased shares will be used for employee benefit plans, dividend reinvestment and other corporate purposes. During 1996, Bancorp purchased 14.6 million shares of which 9.7 million shares were subsequently reissued in the acquisition of CBI. Of the total shares purchased in 1996, four million shares were acquired in November 1996 from a third party, who will receive a final settlement will be recorded as a component of shareholders' equity. In 1995, West One, before the merger with Bancorp, called for redemption and retired its 7.75% convertible subordinated debentures. In connection with the redemption, West One purchased in the open market 2.7 million West One common shares (equivalent to approximately 3.9 million Bancorp common shares) for issuance to debt holders. 14. CONTINGENCIES, COMMITMENTS, CONCENTRATIONS OF CREDIT AND OFF-BALANCE SHEET RISK CONTINGENCIES Bancorp and certain subsidiaries are defendants in various legal proceedings. Management, after reviewing these actions and proceedings with counsel, believes that the outcome of such proceedings will not have a materially adverse effect upon the consolidated financial position or results of operations of Bancorp or its subsidiaries. COMMITMENTS Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Bancorp evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Bancorp upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include deposits held in financial institutions, marketable securities, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. 57 60 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Standby letters of credit and financial guarantees written are conditional commitments issued by Bancorp to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including state and municipal obligations, industrial development revenue bonds, corporate debt, and similar transactions. The credit risk involved in issuing letters of credit and writing financial guarantees is essentially the same as that involved in extending loan facilities to customers. Generally, standby letters of credit and financial guarantees written are not secured, but, when required, collateral may include cash and securities. Approximately 70 percent of standby letters of credit at December 31, 1996 expire in less than five years and 36 percent in less than one year. The following table summarizes Bancorp's credit related financial instruments, which include both commitments to extend credit and letters of credit, each of which is considered in Bancorp's liquidity risk management practices. For these financial instruments, contract amounts represent credit risk.
CONTRACT OR NOTIONAL AMOUNT ----------------------- DECEMBER 31, ----------------------- (IN MILLIONS) 1996 1995 --------------------------------------------------------------------------------------------- Commitments to extend credit $21,032.7 $15,904.8 Standby letters of credit and financial guarantees (net of participations of $79.4 million and $68.5 million, respectively) 1,187.2 1,074.3 ---------------------------------------------------------------------------------------------
CONCENTRATIONS OF CREDIT Most of Bancorp's lending activity is with customers located within the Northwest. An economic downturn in the Northwest would likely have a negative impact on Bancorp's results of operations depending on the severity of the downturn. Bancorp maintains a diversified portfolio and does not have significant on- or off-balance sheet concentrations of credit risk in any one industry. OFF-BALANCE SHEET RISK In the normal course of business, Bancorp uses financial instruments with off-balance sheet risk to meet the financing needs of its customers and to adjust specific interest rate exposure that is identified by asset/liability management monitoring processes. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees, options related to customer accommodations, interest rate swaps, and futures and foreign exchange contracts. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. The contract or notional amounts of interest rate swaps, futures, foreign exchange contracts and options related to customer accommodations do not represent the credit or interest rate risk associated with these contracts, but rather give an indication of the volume of the transactions. Unless noted otherwise, Bancorp does not require collateral or other security to support financial instruments with off-balance sheet credit risk. Credit risk is defined as the possibility of sustaining a loss due to the failure of a counterparty to perform in accordance with the terms of the contract. Bancorp's exposure to credit loss, in the event of nonperformance by the other party to the financial instrument, for the commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. Bancorp uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR CUSTOMER ACCOMMODATION OR TRADING PURPOSES The amounts disclosed below represent the end-of-period contract or notional amounts and fair value of derivatives held or issued for customer accommodation or trading purposes, the average aggregate fair values during the year of those instruments and the associated credit exposures. Those amounts reflect the netting of offsetting transactions only to the extent that they could be offset under master netting agreements with various counterparties. Fair values are based upon the 58 61 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS estimated amounts that Bancorp would (receive) pay to terminate the contracts as of reporting dates. Dealer quotes and/or present value techniques, where dealer quotes are not available, have been used for computing fair values. Bancorp's credit exposure resulting from interest rate and foreign exchange contracts held for trading purposes is limited to the current fair value of contracts with unrealized gains.
DECEMBER 31, ------------------------------------------------------------------------ CONTRACT OR AVERAGE CREDIT NOTIONAL AMOUNTS FAIR VALUE FAIR VALUE EXPOSURE ----------------- ---------------- ---------------- ----------- (IN MILLIONS) 1996 1995 1996 1995 1996 1995 1996 1995 ---------------------------------------------------------------------------------------------------- Interest Rate Contracts Purchased options $ 12.0 $ 52.0 $ (.2) $ (.2) $ (.2) $ (.6) $ .2 $ .2 Written options 46.5 110.4 .2 .2 .2 .6 - - Swaps 416.3 237.2 3.7 4.3 Assets 2.2 1.5 2.3 2.1 Liabilities (3.7) (4.3) (3.7) (3.7) Futures 98.4 693.0 .5 - Assets .6 1.3 .5 .4 Liabilities (.5) - (.7) - Foreign Exchange Contracts 170.0 144.0 1.4 1.3 Commitments to sell 85.7 68.3 87.4 51.7 Commitments to purchase 81.9 75.2 81.9 49.8 ----------------------------------------------------------------------------------------------------
Bancorp acts as a principal in writing interest rate caps and floors for customers (written options). These interest rate caps and floors enable customers to transfer, modify, or reduce their interest rate risk and obligate one of the parties to make cash payments if an interest rate index exceeds a specified upper "capped" level or if the index falls below a specified lower "floor" level. Written options do not expose Bancorp to credit risk since the counterparty has already performed according to the terms of the contract by paying a premium up front. Purchased options represent offsetting positions intended to hedge certain written options for customers. Credit risk exists for purchased options and is measured as the replacement cost in the event of nonperformance by counterparties for those contracts in a gain position, plus an amount for residual credit risk. Normal credit reviews on each counterparty are performed, and exposure to the interest rate risk inherent in these items is managed by entering into offsetting positions or other hedging techniques. Cash requirements include the premium paid to purchase such options (premiums are received for options written) and if the option is exercised, the strike price in such contract, times the notional amount, would be paid to or received from the writer of the option, as appropriate. Interest rate caps and floors have maturities ranging from 1997 to 2000. Net gains realized related to interest rate caps and floors were not significant in 1996, 1995 and 1994. Interest rate swaps, with notional amounts totaling $257.3 million, were entered into as customer accommodations at December 31, 1996. Of this total, $159.0 million was matched by interest rate swaps with major financial institutions and $98.3 million was hedged by interest rate futures. Net realized gains related to customer swaps were approximately $5 million in 1996, $1 million in 1995 and were not significant in 1994. The current credit exposure on interest rate swaps is the replacement cost in the event of nonperformance by counterparties for those contracts in a gain position. Cash requirements include settling any net amounts due to or from the counterparties. The carrying amount of interest rate swap transactions as customer accommodations, which represent accrued interest, was not significant at December 31, 1996 and 1995. Financial futures contracts are contracts for delayed delivery of securities or money market instruments in which the seller agrees to make delivery at a specified future date of a specified instrument, at a specified price or yield. Initial margin requirements are met in cash or other instruments, and changes in the contract values are settled daily. Futures contracts have minimal credit risk because futures exchanges are the counterparties. The carrying amount of financial futures provided as customer accommodations, which represents deferred gains or losses, was not significant at December 31, 1996 and 1995. 59 62 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Futures contracts are sold to hedge market price risks of interest rate caps and swaps written for customers. Open contracts at December 31, 1996, had maturities ranging from 1997 to 2005. Market value changes on futures contracts that are designated as trading hedges are recognized in income in the period of change. Realized losses on futures used for hedging trading swaps and options were approximately $1.5 million in 1996, $1 million in 1995 and were not significant in 1994. Foreign exchange contracts, consisting of forward and spot commitments to purchase and sell foreign currencies, are agreements for delayed delivery of a foreign currency in which the buyer agrees to purchase and the seller agrees to deliver, at a specified future date, a specified amount at a specified exchange rate. Bancorp is party to foreign exchange spot and forward contracts to meet the needs of its customers. Customer transactions are generally covered by offsetting positions to reduce risk arising from fluctuations in exchange rates. Foreign exchange contracts generally relate to major foreign currencies and are highly liquid. The foreign exchange contracts have original terms to maturity of twelve months or less. Credit exposure for foreign exchange contracts is equal to the unrealized gains in such contracts. Realized gains on foreign exchange contracts totaled $3.5 million, $5.1 million, and $4.2 million for 1996, 1995 and 1994, respectively. The table below summarizes by notional amounts the annual maturities for each major category of swaps entered into for customer accommodation or trading as of December 31, 1996, based on the then current rates in effect (variable rates primarily LIBOR-based).
MATURITY OF INSTRUMENTS HELD FOR CUSTOMER ACCOMMODATION OR TRADING ------------------------------------------------------------------------------ 2002 AND (IN MILLIONS) 1997 1998 1999 2000 2001 AFTER TOTAL - ----------------------------------------------------------------------------------------------------------------------- Pay fixed rate $ 1.3 $43.2 $ 3.0 $ - $42.9 $68.6 $159.0 Weighted average pay rate 7.00% 5.76% 9.14% 6.16% 6.28% Weighted average receive rate 5.56% 5.53% 8.25% 5.55% 5.14% Receive fixed rate $ 4.0 $71.3 $27.8 $ 5.0 $68.0 $81.2 $257.3 Weighted average pay rate 5.63% 5.55% 5.56% 5.50% 5.54% 5.20% Weighted average receive rate 6.13% 6.02% 7.78% 6.53% 6.14% 6.48% - -----------------------------------------------------------------------------------------------------------------------
DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING Bancorp also holds or issues derivative instruments for asset/liability management purposes. Its principal objectives are to maximize net interest income while maintaining acceptable levels of interest rate and liquidity risk and to facilitate its funding needs. The amounts disclosed below represent the end of period contract or notional amounts of derivatives held or issued for purposes other than trading and the associated credit exposures for each class of instrument.
DECEMBER 31, -------------------------------------------------------- CONTRACT OR NOTIONAL CREDIT AMOUNTS FAIR VALUE EXPOSURE ------------------- -------------- ------------- (IN MILLIONS) 1996 1995 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------------------------------------- Hedges of interest rate risk on assets and liabilities Interest rate swaps $995.3 $1,467.5 $2.5 $8.1 Assets $ 3.1 $ 6.6 Liabilities (2.5) (8.1) Hedges of mortgage banking loan sales transactions Forward sales 91.0 51.9 .5 - Assets - .6 Liabilities (.5) - Purchased options 21.0 3.0 - - Assets .2 - Liabilities - - - -----------------------------------------------------------------------------------------------------------------------
Interest rate swap transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. Interest rate swaps are principally used to hedge interest rate risk 60 63 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS related to London Interbank Offered Rate (LIBOR)-based floating rate loans and variable rate liabilities such as certificates of deposit and term funds purchased. Inherent in the value of the interest rate swaps are gross unrealized gains totaling $2.5 million and $8.1 million and gross unrealized losses totaling $3.1 million and $6.6 million at December 31, 1996 and 1995, respectively. The carrying amount of interest rate swap transactions used for asset/liability management purposes, which represent accrued interest, was not significant at December 31, 1996 and 1995. In conjunction with Bancorp's mortgage loan operations, mortgage-backed securities and mortgage loans are sold for delivery in future months, and over-the-counter options on mortgage-backed securities are purchased to hedge closed mortgage loans and to hedge interest rate guarantee commitments for unclosed mortgage loans. These forward commitments and options are short-term in duration. Gross unrealized gains and losses were not significant for 1996 and 1995. If an interest rate instrument used to manage interest rate risk is terminated early and the hedged asset or liability remains, any resulting gain or loss is deferred and amortized as an adjustment to the yield of the underlying interest rate exposure position over the remaining period originally covered by the terminated instrument. Deferred losses-net of gains-on the termination of interest rate instruments used to manage interest rate risk totaled $2.7 million and $2.2 million at December 31, 1996 and 1995, respectively. The deferred losses at December 31, 1996 are scheduled to be amortized into income as follows: 1997-$1.2 million; 1998-$1.3 million; and 1999-$.2 million. The table below summarizes by notional amounts the annual maturities for each major category of swaps held for purposes other than trading as of December 31, 1996, based on the then current rates in effect (variable rates primarily LIBOR-based).
MATURITY OF INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING --------------------------------------------------------------------- 2002 AND (IN MILLIONS) 1997 1998 1999 2000 2001 AFTER TOTAL - ----------------------------------------------------------------------------------------------------------------------- Pay fixed rate $ - $100.0 $ - $ - $ - $ 8.2 $108.2 Weighted average pay rate 5.90% 8.34% Weighted average receive rate 5.50% 5.66% Receive fixed rate $161.4 $222.5 $ - $ 3.2 $ - $ - $387.1 Weighted average pay rate 5.48% 5.51% 5.63% Weighted average receive rate 6.02% 6.48% 7.33% Pay and receive variable rates $ - $ - $500.0 $ - $ - $ - $500.0 Weighted average pay rate 5.50% Weighted average receive rate 5.72% - -----------------------------------------------------------------------------------------------------------------------
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments." The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts Bancorp could realize in a current market exchange. Certain methods and assumptions were used to estimate the fair value of each financial instrument for which it is practicable to estimate that value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Off-balance sheet financial instruments, including fair market value, are discussed in Footnote 14, Contingencies, Commitments, Concentrations of Credit and Off-Balance Sheet Risk. The estimated fair values of Bancorp's financial instruments at December 31, 1996 and 1995 are presented on the next page. 61 64 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, ------------------------------------------------ 1996 1995 CARRYING FAIR CARRYING FAIR (IN MILLIONS) AMOUNT VALUE AMOUNT VALUE - ---------------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS Cash and short-term investments(1) $ 2,486.2 $ 2,486.2 $ 2,932.7 $ 2,932.7 Trading account securities(1) 85.1 85.1 279.7 279.7 Securities and equity investments(2) 3,975.0 4,080.0 4,290.2 4,367.9 Loans and loans held for sale, net(3) 23,335.3 24,010.6 21,323.4 22,061.3 FINANCIAL LIABILITIES Deposits Without stated maturities(1) (16,674.1) (16,674.1) (15,847.1) (15,847.1) With stated maturities(4) (8,302.9) (8,326.9) (7,417.6) (7,494.1) Federal funds purchased and security repurchase agreements(1) (1,672.4) (1,672.4) (2,731.1) (2,731.1) Commercial paper and other short-term borrowings(1) (822.5) (822.5) (868.2) (868.2) Long-term debt(5) (1,811.5) (1,856.4) (1,377.0) (1,422.4) Capital qualifying securities(6) (300.0) (307.1) - - Preferred stock(6) (150.0) (152.3) (150.0) (153.0) - ----------------------------------------------------------------------------------------------------------------------
(1) The carrying amount is a reasonable estimate of fair value, or equal to fair value. (2) The fair value equals quoted market price or dealer quotes. If quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Fair value of $32 million and $45 million at December 31, 1996 and 1995, respectively, of various investments in limited partnership equity investments was not available through market sources, and was not practical to estimate. In such cases, fair value indicated is equal to carrying value. (3) Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type and further segregated by variable and fixed rate, performing and nonperforming categories. The carrying value of variable rate loans and loans held for sale approximates fair value. The fair value of fixed rate loans is calculated by discounting contractual cash flows adjusted for prepayment estimates. The discount rate is estimated using rates currently offered for similar loans. Fair value of $45 million and $29 million at December 31, 1996 and 1995, respectively, of certain nonperforming loans was not available through market sources, and was not practical to estimate. In such cases, fair value indicated is equal to carrying value. (4) The fair value is calculated based on the discounted value of the contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar maturities. (5) The fair value is calculated based on the discounted value of the contractual cash flows. The discount rate used is the result of implied treasury forward rates plus a risk premium. (6) The fair value is its quoted market price. 16. RESTRUCTURING CHARGE In the first quarter of 1994, a $100 million restructuring charge was recorded related to a comprehensive program designed to allow Bancorp to become a more efficient, competitive and customer-focused financial institution. The program included staff reductions accomplished through an early retirement opportunity for certain employees, other severance programs and attrition; divestiture of certain business activities; and the consolidation and integration of certain operations and facilities that no longer fit Bancorp's corporate objectives or the needs of its regional customers. The program called for consolidation of branch operations centers for all states from seven to two, closure of certain branches and other activities. The $100 million charge represented the incremental costs that resulted from the restructuring plan, which was essentially completed in 1995. 62 65 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. U. S. BANCORP (PARENT COMPANY) SUMMARY FINANCIAL INFORMATION BALANCE SHEET
DECEMBER 31, --------------------- (IN MILLIONS) 1996 1995 - ------------------------------------------------------------------------------------------------------------------ ASSETS Cash $ 5.5 $ 4.0 Securities available for sale, at fair value (amortized cost: 1996 -- $118.1; 1995 -- $105.9) 119.0 105.9 Loans Bank subsidiaries 1,229.0 481.0 Nonbank subsidiaries 19.5 52.0 Other 24.5 14.8 --------------------- Total loans 1,273.0 547.8 Allowance for credit losses (2.0) (.3) --------------------- Net loans 1,271.0 547.5 Investment in subsidiaries Banking 2,910.8 2,804.6 Nonbank 34.1 47.7 Other equity investments 134.1 111.0 Other assets 276.2 308.0 --------------------- $4,750.7 $3,928.7 ===================== LIABILITIES AND SHAREHOLDERS' EQUITY Commercial paper and other short-term borrowings $ 161.2 $ 216.1 Other liabilities 310.0 254.2 Long-term debt 1,259.4 841.4 Junior subordinated debentures issued to trust subsidiary 309.3 - --------------------- Total liabilities 2,039.9 1,311.7 --------------------- Shareholders' equity 2,710.8 2,617.0 --------------------- $4,750.7 $3,928.7 ===================== - ------------------------------------------------------------------------------------------------------------------
63 66 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. U.S. BANCORP (PARENT COMPANY) SUMMARY FINANCIAL INFORMATION (continued) STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, ---------------------------- (IN MILLIONS) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------ REVENUES Dividends from subsidiaries Bank -- cash $727.4 $275.4 $245.5 Bank -- noncash 15.9 38.6 .2 Nonbank -- cash 15.3 2.8 3.1 Nonbank -- noncash 2.5 - .3 Interest from subsidiaries Bank 44.4 23.7 23.2 Nonbank 1.3 7.7 9.2 Other interest 6.6 9.8 7.4 Equity investment income (loss) 26.9 (6.7) (5.4) Other noninterest revenues 8.9 2.0 1.0 ---------------------------- Total revenues 849.2 353.3 284.5 ---------------------------- EXPENSES Employee compensation and benefits 79.7 98.5 91.0 Interest expense 86.7 69.3 71.9 Operating expenses 67.9 124.8 127.6 Merger and integration costs 12.9 45.6 - Restructuring charge - - 36.6 Less intercompany charges for services (112.9) (144.5) (151.1) ---------------------------- Net expenses 134.3 193.7 176.0 ---------------------------- Income before income taxes and equity in undistributed income of subsidiaries 714.9 159.6 108.5 Income tax benefit (3.1) (38.3) (46.8) ---------------------------- Income before equity in undistributed income of subsidiaries 718.0 197.9 155.3 Equity in undistributed income of subsidiaries(1) Bank (221.9) 119.4 112.3 Nonbank (17.2) 11.7 (12.9) ---------------------------- NET INCOME $478.9 $329.0 $254.7 ============================ - ------------------------------------------------------------------------------------------------------------------
(1) The equity in undistributed income of subsidiaries includes dividends paid in excess of current year earnings for certain subsidiaries. 64 67 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. U.S. BANCORP (PARENT COMPANY) SUMMARY FINANCIAL INFORMATION (continued) STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------- (IN MILLIONS) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 478.9 $ 329.0 $ 254.7 Adjustments to reconcile net income to cash used in operating activities Undistributed earnings of subsidiaries 239.1 (131.1) (99.5) Noncash dividends included in undistributed earnings of subsidiaries (18.4) (38.5) (.5) Depreciation, amortization and accretion 46.3 34.0 39.8 Noncash portion of merger/restructuring charges 10.7 35.6 21.9 Net (gain) loss on sale of equity investments (23.7) 8.3 5.9 Gain on sale of securities available for sale (6.2) (.9) (.2) Loss on sale of trading securities - - 1.4 Net gains on sale of premises and equipment .1 2.6 (.2) Change in other assets and liabilities, net 33.0 (18.7) 17.9 ------------------------------- Net cash provided by operating activities 759.8 220.3 241.2 - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Change in other short-term investments, maturities less than 90 days - 13.9 (.8) Proceeds from sale of securities available for sale 12.3 - - Proceeds from maturities of securities available for sale 60.0 135.9 73.1 Purchase of securities available for sale (71.2) (156.0) (95.3) Proceeds from sales of equity investments 37.7 8.4 1.0 Purchase of equity investments (8.9) (24.4) (8.3) Principal collected on loans 37.1 535.1 379.6 Loans made to subsidiaries and others (769.3) (653.0) (170.5) Equity contributed to subsidiaries (12.1) (20.7) (24.8) Proceeds from sales of premises and equipment 3.9 5.6 3.4 Purchase of premises and equipment (19.3) (15.0) (50.4) Acquisitions, net of cash and cash equivalents 4.2 - .1 ------------------------------- Net cash provided by (used in) investing activities (725.6) (170.2) 107.1 - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in short-term borrowings (54.9) 2.9 5.5 Proceeds from issuance of long-term debt 468.5 396.4 - Repayment of long-term debt (51.0) (206.8) (167.2) Proceeds from issuance of junior subordinated debentures to trust subsidiary 309.3 - - Dividends paid (180.9) (145.3) (128.2) Proceeds from issuance of common stock 26.9 16.4 20.5 Repurchase of common stock (550.6) (175.8) (57.1) ------------------------------- Net cash used in financing activities (32.7) (112.2) (326.5) ------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 1.5 (62.1) 21.8 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4.0 66.1 44.3 ------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5.5 $ 4.0 $ 66.1 =============================== - ------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES Cash paid during the period for: Interest $ 84.0 $ 66.1 $ 74.2 Income taxes 188.2 190.1 151.4 Noncash investing activities: Noncash equity contributed to subsidiaries $ 14.9 $ 4.4 $ 28.1 Fair value adjustment to securities available for sale .9 - 8.0 Income tax effect related to fair value adjustment .4 - 3.3 - -------------------------------------------------------------------------------------------------------------------
65 68 U.S. BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. REGULATORY MATTERS Banks are subject to risk-based capital guidelines requiring minimum capital levels based on the perceived credit risk of assets and off-balance sheet instruments. The federal bank regulatory agencies have jointly issued rules which implement a system of prompt corrective action for financial institutions required by FDICIA. The rules define the relevant capital levels for the five categories, ranging from "well capitalized" to "critically undercapitalized". Failure to meet minimum capital requirements can initiate actions by regulators that could have an effect on Bancorp's financial statements. Risk-based capital guidelines issued by the Federal Reserve Board establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures for bank holding companies. Bancorp's Tier 1 capital is comprised primarily of common equity, perpetual preferred stock and subsidiary trust issued capital securities, less goodwill and certain other intangibles, and excludes the equity impact of adjusting available for sale securities to market value. Total capital also includes subordinated debt and a portion of the allowance for credit losses, as defined. The risk-based capital rules have been supplemented by a leverage capital ratio, defined as Tier 1 capital to adjusted quarterly average total assets. Banking organizations other than those which are most highly rated are expected to maintain ratios at least 100 to 200 basis points above the minimum three percent level, depending on their financial condition. As of December 31, 1996, the most recent regulatory notification categorized Bancorp's three largest bank subsidiaries as "well capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that notification management believes have changed the banks' category. Capital adequacy for U.S. Bank of Oregon and U.S. Bank of Washington is monitored by the Office of the Comptroller of the Currency. Capital adequacy for Bancorp and U.S. Bank of Idaho is monitored by the Federal Reserve Bank of San Francisco. To be categorized as well capitalized, Bancorp must maintain minimum ratios. The required minimum ratios are: Total capital -- 8%; Tier 1 capital -- 4%; and leverage capital -- 4%. The minimum ratios required for "well capitalized" designation are: Total capital -- 10%; Tier 1 capital -- 6%; and leverage capital -- 5%. The risk-based capital and leverage capital ratios for Bancorp and its three largest bank subsidiaries are presented below:
DECEMBER 31, ------------------------------------------- 1996 1995 ------------------- ------------------- (IN MILLIONS) AMOUNT RATIO AMOUNT RATIO - ------------------------------------------------------------------------------------------------------------------- TOTAL CAPITAL (TO RISK WEIGHTED ASSETS) Consolidated $3,834.2 11.83% $3,377.9 11.79% U. S. Bank of Oregon 1,622.9 10.95 1,312.0 10.49 U. S. Bank of Washington 1,049.6 10.54 960.2 10.58 U. S. Bank of Idaho 338.4 10.44 380.1 11.25 TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS) Consolidated $2,628.3 8.11% $2,418.8 8.44% U. S. Bank of Oregon 1,072.5 7.24 1,080.5 8.64 U. S. Bank of Washington 689.9 6.93 758.0 8.35 U. S. Bank of Idaho 227.8 7.03 337.7 9.99 TIER 1 CAPITAL (TO AVERAGE ASSETS) Consolidated $2,628.3 8.17% $2,418.8 7.89% U. S. Bank of Oregon 1,072.5 7.75 1,080.5 9.61 U. S. Bank of Washington 689.9 7.44 758.0 8.41 U. S. Bank of Idaho 227.8 5.96 337.7 7.25 - -------------------------------------------------------------------------------------------------------------------
66 69 U.S. BANCORP AND SUBSIDIARIES QUARTERLY FINANCIAL DATA (UNAUDITED)
1996 1995 --------------------------------- --------------------------------- (IN MILLIONS, EXCEPT SHARE DATA) 4 3 2 1 4 3 2 1 - ----------------------------------------------------------------------------------------------------------------------- Interest income $640.6 $633.5 $609.2 $600.0 $606.0 $608.8 $595.9 $581.8 Interest expense 257.5 258.5 248.9 251.8 254.8 252.0 249.7 236.6 --------------------------------------------------------------------- Net interest income 383.1 375.0 360.3 348.2 351.2 356.8 346.2 345.2 Provision for credit losses 40.5 38.1 26.5 30.1 51.4 24.0 25.1 23.6 --------------------------------------------------------------------- Net interest income after provision for credit losses 342.6 336.9 333.8 318.1 299.8 332.8 321.1 321.6 Gain on sale of operations and loans - - 25.7 (.1) .8 3.0 4.6 .5 Other noninterest revenues 135.7 139.2 140.1 144.6 124.4 133.5 135.0 122.9 --------------------------------------------------------------------- Total noninterest revenues 135.7 139.2 165.8 144.5 125.2 136.5 139.6 123.4 --------------------------------------------------------------------- Noninterest expenses 290.8 285.3 291.4 278.8 296.0 286.4 304.1 305.4 Merger and integration costs - - 9.8 8.4 90.4 4.8 3.7 - SAIF assessment - 10.3 - - - - - - --------------------------------------------------------------------- Total noninterest expenses 290.8 295.6 301.2 287.2 386.4 291.2 307.8 305.4 --------------------------------------------------------------------- Income before income taxes 187.5 180.5 198.4 175.4 38.6 178.1 152.9 139.6 Provision for income taxes 66.8 62.3 71.3 62.5 17.2 64.0 54.2 44.8 --------------------------------------------------------------------- Net income $120.7 $118.2 $127.1 $112.9 $ 21.4 $114.1 $ 98.7 $ 94.8 ===================================================================== - ----------------------------------------------------------------------------------------------------------------------- Per common share Earnings per share $ .79 $ .75 $ .82 $ .73 $ .13 $ .73 $ .63 $ .60 - ----------------------------------------------------------------------------------------------------------------------- Dividends declared $ .31 $ .31 $ .28 $ .28 $ .28 $ .28 $ .25 $ .25 - ----------------------------------------------------------------------------------------------------------------------- U. S. Bancorp common stock High $47 $40 3/4 $37 3/8 $34 5/8 $36 $29 1/2 $27 3/4 $26 3/4 Low 38 3/4 33 31 5/8 29 1/4 28 1/4 23 7/8 23 1/2 22 Close 45 39 1/2 36 1/8 34 33 5/8 28 1/4 24 26 Average daily reported trading volume for the quarter (000's) 504.6 518.7 633.9 741.9 597.1 403.0 507.4 232.3 - -----------------------------------------------------------------------------------------------------------------------
67 70 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Incorporation of Certain Documents by Reference The information required by Item 10, Directors and Executive Officers of the Registrant, is incorporated herein by reference to Bancorp's definitive Proxy Statement dated March 13, 1997 ("Proxy Statement"), pages 1-5, under the headings "Voting Securities and Principal Shareholders" and "Proposal 1: Election of Directors" or appears under the heading "Executive Officers of the Registrant" on pages 6-7 of this report. The information required by Item 11, Executive Compensation, is incorporated herein by reference to the Proxy Statement, pages 7-14 and 18 under the headings "Executive Compensation" and "Compensation Committee Interlocks and Insider Participation." The information required by Item 12, Security Ownership of Certain Beneficial Owners and Management, is incorporated herein by reference to the Proxy Statement, pages 1-3 under the heading "Voting Securities and Principal Shareholders." The information required by Item 13, Certain Relationships and Related Transactions, is incorporated herein by reference to the Proxy Statement, pages 18-19, under the heading "Transactions with Bancorp." PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. and 2. The financial statements and supplementary data listed in the index set forth in Item 8 of this report are filed as part of this report. (a) 3. Exhibits are listed in the Exhibit Index beginning on page 71 of this report. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report is listed under Item 10, "Executive Compensation Plans and Arrangements and Other Management Contracts," in the Exhibit Index. (b) Reports on Form 8-K: No reports on Form 8-K were filed by Bancorp during the quarter ended December 31, 1996. 68 71 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 (REGISTRANT) DATE: MARCH 13, 1997 BY: /s/ GERRY B. CAMERON -------------------------------------- Gerry B. Cameron Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 13th day of March, 1997.
SIGNATURE TITLE - ----------------------------------- ---------------------------------------------------------------- /s/ GERRY B. CAMERON Principal Executive Officer and Director: - ----------------------------------- Chairman of the Board, Chief Executive Officer, and President Gerry B. Cameron /s/ STEVEN P. ERWIN Principal Financial and Accounting Officer: - ----------------------------------- Executive Vice President and Chief Financial Officer Steven P. Erwin Other Directors: HARRY L. BETTIS * Director - ----------------------------------- Harry L. Bettis Director - ----------------------------------- Carolyn Silva Chambers FRANKLIN G. DRAKE * Director - ----------------------------------- Franklin G. Drake ROBERT L. DRYDEN * Director - ----------------------------------- Robert L. Dryden JOHN B. FERY * Director - ----------------------------------- John B. Fery JOSHUA GREEN III * Director - ----------------------------------- Joshua Green III Director - ----------------------------------- Daniel R. Nelson ALLEN T. NOBLE * Director - ----------------------------------- Allen T. Noble PAUL A. REDMOND * Director - ----------------------------------- Paul A. Redmond N. STEWART ROGERS * Director - ----------------------------------- N. Stewart Rogers BENJAMIN R. WHITELEY * Director - ----------------------------------- Benjamin R. Whiteley *By /s/ D.V. BOARD - ----------------------------------- D.V. Board Attorney-in-Fact
69 72 [This page intentionally left blank.] 70 73 EXHIBIT INDEX
EXHIBITS - ------------------------------------------------------------------------------------------------------- 3.1 Restated Articles of Incorporation, U. S. Bancorp, as amended, incorporated by reference to Exhibit 4.2 to the registrant's Registration Statement on Form S-4 (No. 33-62067). 3.2 Bylaws, U. S. Bancorp, as amended and restated December 17, 1996. 4 The registrant has incurred long-term indebtedness as to which the amount involved is less than 10 percent of the total assets of the registrant and its subsidiaries on a consolidated basis. The registrant agrees to furnish copies of the instruments relating to such indebtedness to the Commission upon request. 10 Executive Compensation Plans and Arrangements and Other Management Contracts 10.1 U. S. Bancorp 1985 Stock Option and SAR Plan, as amended, incorporated by reference to Exhibit 10.2 to the registrant's annual report on Form 10-K for 1993. 10.2 1997 Amended and Restated Non-Employee Director Stock Incentive and Deferral Plan. 10.3 Second Amendment and Restatement of U. S. Bancorp Executive Annual Incentive Plan effective December 20, 1995, incorporated by reference to Exhibit 10.3 to the registrant's annual report on Form 10-K for 1995. 10.4 Second Amendment and Restatement of U. S. Bancorp Management Annual Incentive Plan effective January 2, 1996, incorporated by reference to Exhibit 10.4 to the registrant's annual report on Form 10-K for 1995. 10.5 U. S. Bancorp Amended and Restated Supplemental Benefits Plan, effective February 15, 1996. 10.6 Registration Rights Agreement between U. S. Bancorp and certain shareholders of Peoples Ban Corporation, incorporated by reference to Exhibit 2(B) to the registrant's report on Form 8-K dated June 16, 1987. (File No. 0-3505) 10.7 Peoples Ban Corporation Deferred Compensation Agreement with Joshua Green III, incorporated by reference to Exhibit (10)(N) to the registrant's annual report on Form 10-K for 1987 (File No. 0-3505) 10.8 Description of Retirement Benefits of Joshua Green III, incorporated by reference to Exhibit 10.6 to the registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1993. 10.9 Copy of resolutions of the Board of Directors of U. S. Bancorp adopted February 17, 1994, relating to the Executive Committee of U. S. Bancorp incorporated by reference to Exhibit 10.12 to the registrant's annual report on Form 10-K for 1993. 10.10 Form of Director Indemnification Agreement entered into between U. S. Bancorp and Directors Bettis, Cameron, Chambers, Drake, Dryden, Fery, Green, Nelson, Noble, Redmond, Rogers, and Whiteley, incorporated by reference to Exhibit 19 to the registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1988. (File No. 0-3505) 10.11 Description of retirement benefits of Daniel R. Nelson. (File No. 0-3505) 10.12 U. S. Bancorp 1991 Executive Deferred Compensation Plan, First Restatement, as amended effective November 15, 1995 incorporated to Exhibit 10.12 to the registrant's annual report on Form 10-K for 1995. 10.13 Form of Employment Agreement with certain executive officers of the registrant, including Messrs. Cameron, Duim, and Hatfield. 10.14 U. S. Bancorp Deferred Compensation Trust Agreement effective January 1, 1990, incorporated by reference to Exhibit (10)(U) to the registrant's annual report on Form 10-K for 1991. 10.15 Third Amendment and Restatement of U. S. Bancorp 1993 Stock Incentive Plan effective February 15, 1996, incorporated by reference to Exhibit 10.15 to the registrant's annual report on Form 10-K for 1995.
71 74
EXHIBITS - ------------------------------------------------------------------------------------------------------- 10.16 Description of health insurance premium reimbursement plan for U. S. Bancorp directors, incorporated by reference to Exhibit 10.18 to the registrant's annual report on Form 10-K for 1994. 10.17 U. S. Bancorp Performance Cash Award Plan effective January 1, 1996, incorporated by reference to Exhibit 10.20 to the registrant's annual report on Form 10-K for 1995. 10.18 Employment Agreement with Robert D. Sznewajs dated January 4, 1996, incorporated by reference to Exhibit 10.21 to the Registrants annual report on Form 10-K for 1995. 12.1 U. S. Bancorp and Subsidiaries Computation of Ratios of Consolidated Earnings to Fixed Charges. 12.2 U. S. Bancorp and Subsidiaries Capital Ratios. 12.3 U. S. Bancorp and Subsidiaries Computation of Ratios on a Before Accounting Change Basis. 21 Subsidiaries of the registrant. 23.1 Consent of Deloitte & Touche LLP with respect to financial statements of the registrant. 23.2 Consent of Coopers & Lybrand L.L.P. with respect to financial statements of West One Bancorp. 24 Power of attorney of certain officers and directors. 27 Financial Data Schedule.
72 EX-3.2 2 BYLAWS 1 Exhibit 3.2 BYLAWS of U. S. BANCORP ARTICLE I Meetings of Shareholders Section 1.1. Meetings. The regular Annual Meeting of the Shareholders of this Corporation for the election of directors and for the transaction of such other business as properly may come before the meeting shall be held in Portland, Oregon, or other place duly authorized by the Board of Directors, on the third Tuesday of April at such time as the Board of Directors may determine. If for any cause an election of directors is not made on the same day as the Annual Meeting, the Board of Directors shall order the election to be held on some subsequent day as soon thereafter as practicable according to the provisions of law, and notice thereof shall be given in the manner herein provided for the Annual Meeting. Business to be conducted at an Annual Meeting (other than procedural matters) shall be limited to (i) business specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) business otherwise properly brought before the meeting by or at the direction of the Board of Directors or the Chairman of the Board, or (iii) business properly brought before the meeting by a shareholder of record of any class of capital stock entitled to vote upon such business, provided that such shareholder shall first have given written notice, in the time and manner specified for shareholder notice of nominations for directors set forth in Section 1.2 of these Bylaws, briefly describing such business and stating his intention to present such business at the Annual Meeting. Special meetings of the shareholders may be called by the Board of Directors, the Chairman of the Board, the Chief Executive Officer, any Vice Chairman or the President. A special meeting shall be called upon receipt of a written demand therefor stating the purpose for which the meeting is to be called by any shareholder or shareholders owning in the aggregate not less than ten percent of the stock entitled to vote at such meeting. It shall be the duty of the Secretary to send out notices of such meetings to be held in Portland, Oregon, or other convenient place authorized by the Board of Directors and at such time as may be fixed by the Board of Directors. If the Board of Directors shall fail to fix a time or place, the meeting shall be held at such time as shall be fixed by the Chairman of the Board, the Chief Executive Officer, any Vice Chairman, the President, or the Secretary. Business conducted at a special meeting 1 2 Exhibit 3.2 (other than procedural matters) shall be limited to the matters stated in the notice thereof (or any supplement thereto). Notice of such annual and special meetings shall be mailed postage prepaid not less than ten nor more than sixty days prior to the date thereof, addressed to each shareholder of record at his or her address appearing on the books of the Corporation. The certificate of the Secretary of this Corporation shall be sufficient proof of the giving of said notice. The Board of Directors may adopt rules governing the order of business and conduct of any shareholders' meeting. Subject to the effect of any such rules, the Chairman of the Board (or other officer presiding at a shareholders' meeting) shall have general authority to determine the order of business and, in the Chairman's discretion, to regulate the conduct of such meeting. Section 1.2. Nominations for Director. Nominations for election to the Board of Directors may be made by the Board of Directors or by any shareholder of record of any outstanding class of capital stock entitled to vote for the election of directors. Nominations, other than those made by or on behalf of the existing Board of Directors, shall be made in writing and shall be delivered or mailed to the Chairman of the Board of the Corporation not less than twenty-five days nor more than sixty days prior to any meeting of shareholders called for the election of directors, provided, however, that if less than thirty days' notice of the meeting is given to shareholders, such nominations shall be mailed or delivered to the Chairman of the Board not later than the close of business on the fifth day following the day on which the notice of the meeting was mailed. Section 1.3. Disputed Ballots. In the event a dispute arises regarding the validity or tabulation of a ballot, vote, or proxy, the chairman of the meeting may appoint a committee of three directors or other persons who are not employees of the Corporation to resolve the dispute. The decision of the committee shall be final and binding upon all parties to the dispute. Section 1.4. Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his or her duly authorized attorney-in-fact. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after 11 months from the date of its execution unless otherwise expressly provided in the proxy. Section 1.5. Quorum. Manner of Acting. Shares entitled to vote as a separate voting group may take action on a matter only if a quorum of those shares exists with respect to the matter. A majority of the votes entitled to be cast on the matter by a voting group, represented in person or by proxy, shall constitute a quorum of that voting group for 2 3 Exhibit 3.2 action on that matter. If a quorum exists, action on a matter, other than the election of directors, shall be approved by a voting group if the votes cast within the voting group favoring the action exceed the votes cast opposing the action unless the Oregon Business Corporation Act or the articles of incorporation require a greater number of affirmative votes. Directors shall be elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. Once a share is represented for any purpose at a meeting, it shall be deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting. ARTICLE II Directors Section 2.1. Board of Directors. The Board of Directors (herein sometimes referred to as the "Board") shall have power to manage and direct the business and affairs of the Corporation. Section 2.2. Number. The Board shall consist of not less than five nor more than twenty-five persons, the exact number within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the full Board; provided, however, that a majority of the full Board of Directors may not increase the number of directors to a number which exceeds by more than four the number of directors last elected by shareholders, but in no event shall the number of directors exceed twenty-five. Section 2.3. Organization Meeting. The Secretary, upon receiving the results of the election, shall cause the same to be recorded upon the minute book of the Corporation and shall notify the directors-elect of their election. Promptly after the adjournment of the meeting of the shareholders at which they were elected, the newly elected Board shall meet at a convenient place for the purpose of organizing and to transact such business as properly may come before the Board and no notice of such organization meeting shall be required. If at that time there is not a quorum in attendance, the members present may adjourn from time to time until a quorum is secured. Section 2.4. Regular Meetings. The Board of Directors may establish a schedule of regular meetings for the transaction of business, the day and hour of which may be specified by resolution adopted in advance of such regular meetings. In the event of a failure of the Board of Directors to designate such day and hour, the Chairman of the Board may designate the day and hour upon which such meeting shall be held, which shall be specified in the notice of such meeting. Section 2.5. Special Meetings. The Board of Directors may also hold special meetings upon call of any officer who is a member of the Board of Directors, or any three or more 3 4 Exhibit 3.2 directors. Notice of special meetings of the Board of Directors shall be given by the Secretary or Assistant Secretary of the Corporation, or in case of their absence, refusal or inability to act, by any other officer who is a member of the Board of Directors, or by any three or more directors by giving 24 hours' notice to the last known address of each director. Calls for such special meetings must state in general terms the object of the meeting. Section 2.6. Retirement. Officer directors may be requested to resign from the Board upon the date of their retirement as an officer of the Corporation. Each other member of the Board of Directors will not be eligible for re-election as a director at the Annual Meeting of the Shareholders following the date on which such director shall reach the age of 70 years. Section 2.7. Quorum. A majority of the number of directors from time to time fixed as constituting the Board of Directors pursuant to Section 2.2 shall constitute a quorum at any meeting, except when otherwise provided by law; but a lesser number may adjourn any meeting, from time to time, and the meeting may be held, as adjourned, without further notice. Section 2.8. Vacancies. When any vacancy occurs among the directors, the remaining members of the Board, in accordance with the laws of Oregon and with the provisions of Section 2.2 of these Bylaws, may appoint a director to fill such vacancy at any meeting of the Board. Section 2.9. Notice. Notice of meetings of the Board of Directors or any committee appointed by the Board of Directors may be written or oral, and may be communicated in person, by telephone, telegraph, teletype, or other form of wire or wireless communication, or by mail or private courier. ARTICLE III Committees Section 3.1. Executive Committee. The Board of Directors may appoint an Executive Committee consisting of not more than four non-officer directors, the Chairman of the Board and the President. Members of the Executive Committee shall be appointed annually by the Board of Directors immediately after its election and organization and shall serve until the next such annual meeting or until their successors have been appointed. Members of the Executive Committee may be reappointed by the Board of Directors to succeed themselves. During intervals between meetings of the Board of Directors, the Executive Committee shall have and may exercise such authority of the Board of Directors as from time to time may be specifically delegated to the Committee by the Board; provided, however, 4 5 Exhibit 3.2 that neither the Executive Committee nor any other committee created and appointed pursuant to these Bylaws shall have the authority to (a) declare dividends or distributions with respect to the Corporation's capital stock, (b) approve or propose to shareholders actions or proposals required by law to be approved by shareholders, (c) fill vacancies on the Board of Directors or any committee thereof, (d) amend the articles of incorporation except as may be necessary to document a determination of the relative rights, preferences and limitations of a class or series of shares pursuant to authority granted by the Board of Directors, (e) adopt, amend, or repeal bylaws, (f) approve a plan of merger not requiring shareholder approval, (g) authorize or approve the reacquisition of shares of the Corporation's capital stock except within limits prescribed by the Board of Directors, or (h) authorize or approve the issuance or sale of or contract for sale of shares or determine the designation and relative rights, preferences and limitations of a class or a series of shares, except that the Board of Directors may authorize a committee of the Board to do so (i) pursuant to a stock option or other stock compensation plan or (ii) by approving the maximum number of shares to be issued and delegating the authority to determine all or any part of the terms of the issuance or sale or contract of sale and the designation and relative rights, preferences, and limitations of the class or series of shares. In addition to any other duties which the Board of Directors may assign, the Executive Committee shall consider potential candidates for new directors and make recommendations of candidates to the Board of Directors. Section 3.2. Audit Committee. There shall be an Audit Committee composed of not less than three members of the Board of Directors, no one of whom shall be an active officer of the Corporation or any of its subsidiaries and each of whom shall be independent of management of the Corporation. The Committee shall include at least two members with banking or related financial management expertise, and shall not include any large customers of the Corporation (as determined pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). The Committee shall be appointed by the Board of Directors annually at its organization meeting or more often. It shall be the duty of the Committee to recommend to the Board of Directors the accounting firm to be selected as independent auditor of the Corporation and its subsidiaries; to act on behalf of the Board in discussing with the appropriate corporate officers any termination of the independent auditor and any significant disagreements between the independent auditor and management, meeting and reviewing with the independent auditor and the appropriate corporate officers, matters relating to disclosure, corporate practices, regulatory and financial reporting, accounting procedures and policies, and adequacy of financial and accounting controls; to review the planned scope of the audits by the independent auditor; and to review, as appropriate, before or after the fact, compliance of the Corporation and its subsidiaries with laws and regulations concerning loans to insiders, related party transactions and other transactions involving potential conflicts of interest, and applicable federal and 5 6 Exhibit 3.2 state laws and regulations concerning dividend restrictions. The Committee shall review (a) with the independent auditor, the results of the annual audit, including the auditor's comment letter; (b) with the appropriate corporate officers, the annual report to the Securities and Exchange Commission, the annual report to shareholders, and the Proxy Statement; and (c) with management and the independent auditor, the basis for the reports issued by the Corporation under 12 CFR Part 363 and any successor or substitute regulations implementing the provisions of Section 112 of FDICIA, and shall promptly report thereon to the Board of Directors. The Audit Committee, in collaboration with the internal Auditor, shall set the scope, nature and frequency of examinations of the Corporation and its subsidiaries (with the exception of each subsidiary bank which has established and appointed a separate audit committee composed entirely of outside directors of such subsidiary bank in compliance with the requirements of FDICIA (an "independent audit committee")), and other responsibilities of the internal Auditor. The Committee shall monitor the internal audit group including a review of the planned audit activities, audit scope, and the degree of coordination with the independent auditors of the annual audit plan for the Corporation and its subsidiaries. The Committee shall periodically receive reports from the internal Auditor on results of audits on nonbank subsidiaries and on each subsidiary bank which has not established and appointed an independent audit committee, and on the status of audit coverage of the Corporation. The Committee shall promptly submit its report thereon and its recommendations to the Board of Directors of this Corporation and of each applicable subsidiary. The Committee shall perform such additional duties as may be requested or directed by the Board of Directors from time to time. The Committee shall additionally submit to the Board of Directors any recommendations relating to the scope of its responsibilities it may have from time to time. The Committee may at its discretion from time to time, without prior permission of the Board of Directors or any corporate officers, consult or retain legal counsel, whether internal counsel, this Corporation's regular outside counsel, or such independent outside counsel as the Committee may select. The Committee shall meet on call of the chairperson and shall keep minutes of all of its meetings showing all matters considered by it and the action taken thereon, and shall submit a report of such meetings at the next regular meeting of the Board of Directors. Section 3.3. Other Committees. The Board of Directors may appoint from time to time, either from its own members or from persons outside its membership, other committees for such purposes and with such powers as the Board may determine. ARTICLE IV 6 7 Exhibit 3.2 Titles, Duties, Qualifications and Terms of Officers Section 4.1. Officers. The officers of this Corporation shall hold positions determined under this Corporation's policy to encompass legal authority to bind the Corporation in its transactions with customers or other third parties by executing contracts or other legal instruments on the Corporation's behalf and whose decisionmaking authority relates to fundamental corporate operations in such a way as to affect potentially the public's trust in the Corporation, and shall include a Chief Executive Officer, a President, one or more Vice Presidents (one or more of whom may be designated an Executive Vice President or Senior Vice President), a Secretary, and an Auditor, and may include one or more Vice Chairmen, one or more group, region, area or other functional business unit Presidents (each a "Business Unit President'), and such other officers and assistant officers as from time to time may be deemed necessary and with such titles as shall be deemed appropriate. The same person may fill more than one office or position. The Board of Directors shall designate a member of the Board of Directors to be the Chairman of the Board and may appoint the Chairman of the Board an officer of this Corporation. Other officers may also be members of the Board of Directors. The Chairman of the Board shall be designated by and if appointed an officer, elected by, and the Chief Executive Officer shall be elected by, the Board of Directors at its annual organization meeting and each shall hold office for the year for which the Board of Directors was elected and until a successor is designated or elected, unless the Chairman of the Board or Chief Executive Officer resigns, becomes disqualified, or is removed, which removal may be at the pleasure of the Board. Any vacancy occurring in the position of the Chairman of the Board or in the office of the Chief Executive Officer shall be filled by the remaining members of the Board. Vice Chairmen and the President, Business Unit Presidents and Executive Vice Presidents (if any), the Auditor and the Secretary shall be elected or appointed by the Board of Directors to hold their offices respectively at the pleasure of the Board of Directors. Vice Presidents (other than Executive Vice Presidents), Assistant Vice Presidents and such other officers and assistant officers as may be deemed necessary may be appointed by the Board of Directors or chosen in such other manner as provided in these Bylaws or as the Board of Directors shall by resolution provide, to hold their offices respectively at the pleasure of the Board of Directors. The President (or other officer-director as the Board of Directors may designate by resolution) shall have authority to appoint or remove or fill vacancies among all officers excepting the Chairman of the Board (if an officer), the Chief Executive Officer, Vice Chairman, the President, Business Unit Presidents, Executive Vice Presidents, Auditor, and Secretary; such appointments or removals shall be subject to ratification or recision 7 8 Exhibit 3.2 at the next meeting of the Board of Directors. The provisions of this paragraph are supplementary to any other provisions of these Bylaws. Section 4.2. Chairman of the Board. The Chairman of the Board shall preside over meetings of shareholders, the Board of Directors, and the Executive Committee, and shall perform such duties as may be requested or directed by the Board of Directors. Section 4.3. Chief Executive Officer. The Chief Executive Officer shall be a member of the Board of Directors. The Chief Executive Officer shall be the principal executive officer of the Corporation and, subject to the control of the Board of Directors, shall supervise the carrying out of the policies adopted or approved by the Board of Directors. The Chief Executive Officer shall exercise general supervision over the business and affairs and personnel of the Corporation. Section 4.4. Vice Chairman. Each Vice Chairman shall perform such duties as may be requested or directed by the Board of Directors or by the Chief Executive Officer from time to time. Section 4.5. President. The President shall perform such duties as may be requested or directed by the Board of Directors or by the Chief Executive Officer from time to time. Section 4.6. Business Unit Presidents. Each Business Unit President shall perform such duties as may be requested or directed by the Board of Directors or the Chief Executive Officer from time to time. Section 4.7. Vice Presidents. Each Vice President shall have such powers and duties as may be assigned by the Board of Directors, by the Chief Executive Officer, or by the President. The Board of Directors shall designate a Vice President to be the Chief Financial Officer of the Corporation, who shall be the principal financial and accounting officer of the Corporation with responsibility for keeping regular books of account, disbursement of corporate funds, and preparation of financial reports. The Board of Directors shall also designate a Vice President to be the Treasurer, who shall have general responsibility for funding the operation of the Corporation and its subsidiaries and shall, as and to the extent authorized by the Board of Directors, borrow funds and issue securities on behalf of the Corporation. Section 4.8. Secretary. The Secretary shall be the recording officer of the Board of Directors and keep in written form the minutes of the meetings of the Board of Directors and of the Shareholders. The Secretary shall attend to the giving of all notices required by these Bylaws to be given, shall be the custodian of the corporate seal of the Corporation, and shall make such reports and perform such other duties as are incident to the office of Secretary, or as are assigned by the Board of Directors. 8 9 Exhibit 3.2 Section 4.9. Auditor. The internal Auditor shall make periodic examinations of the affairs of the Corporation and its subsidiaries, with the exception that the examination of each subsidiary bank which is required to establish and appoint an independent audit committee in compliance with the requirements of FDICIA shall be the responsibility of the auditor appointed by the Board of Directors of each such subsidiary bank. The Auditor shall collaborate with the Audit Committee in determining the scope, nature and frequency of such examinations. The Auditor shall also perform such other duties as may be assigned by the Board of Directors or the Chief Executive Officer of the Corporation. The results of such examinations and recommendations of the Auditor, if any, shall be submitted in writing by the Auditor to the Chief Executive Officer and to the Audit Committee. ARTICLE V Stock and Stock Certificates Section 5.1. Transfers. Shares of stock shall be transferable on the books of the Corporation, and a transfer book shall be kept in which all transfers of stock shall be recorded. Every person becoming a shareholder by such transfer shall, in proportion to his or her shares, succeed to all rights and liabilities of the prior holder of such shares. Section 5.2. Stock Certificates. Certificates of stock shall bear the signature of the Chief Executive Officer, the Chairman of the Board, or of the President, or of a Vice President and the Secretary or an Assistant Secretary of the Corporation, and shall be signed manually or by facsimile process, and shall be countersigned by an authorized officer of First Chicago Trust Company of New York as transfer agent, and the seal, manual or facsimile, of the Corporation shall be set forth thereon. No transfer shall be made of any certificate issued except on the surrender of the certificate or certificates previously issued therefor, or on proof of their loss and the furnishing of indemnity satisfactory to an appropriate officer of the Corporation as designated in writing by the Chief Executive Officer or the President of the Corporation. The Board of Directors shall have power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer, registration, and replacement of lost certificates for shares of the capital stock of the Corporation. Section 5.3. Dividends. All declarations of dividends shall fix the date for the payment thereof, and period of closing of stock books, and a record date, prior to the payment of dividends, for the purpose of determining the shareholders entitled to the same. The transfer books may be closed for the purpose of the annual election of directors, before meetings of shareholders, before the payment of dividends, for the purpose of obtaining written consents of shareholders, or for any other purpose, for such period not exceeding twenty days as the Board of Directors may by resolution direct. In lieu of 9 10 Exhibit 3.2 closing the transfer books the Board may in its discretion fix a day and hour not less than ten days nor more than seventy days prior to the holding of any meeting of shareholders or the day appointed for the payment of any dividend or for any other notice, as the time as of which shareholders entitled to notice of and to vote at such meeting, or to receive such dividend or for such other purpose shall be determined, and only shareholders of record at such time shall be entitled to notice of or to vote at such meeting or to receive such dividend or to be treated as shareholders for such other purposes. ARTICLE VI Corporate Seal The official seal of this Corporation shall be circular in form with the words "corporate seal" and "Oregon" and the name of the Corporation appearing thereon. ARTICLE VII Miscellaneous Provisions Section 7.1. Fiscal Year. The fiscal year of the Corporation shall be the calendar year. Section 7.2. Records. The organization papers of this Corporation, the results of elections of directors-elect, the proceedings of all regular and special meetings of the directors and of the shareholders, the Bylaws and any amendments hereto, shall be recorded in a minute book; and the minutes of each meeting shall be signed by the chairman and the secretary of the meeting. ARTICLE VIII Bylaws Section 8.1. Inspection. A copy of the Bylaws, with all amendments thereto, shall at all times be kept in a convenient place at the principal office of the Corporation and shall be open for inspection to all shareholders, during business hours. Section 8.2. Amendments. These Bylaws may be changed or amended by the vote of a majority of the whole number of directors. AMENDMENTS 12/19/96 Article III Section 3.1 Executive Committee Limits authority of committee. Article III Section 3.2 Executive Management Deletes Executive Management Committee. Committee
10 11 Exhibit 3.2 Article III Section 3.3 Audit Committee Renumbered as Section 3.2. Article III Section 3.4 Other Committees Renumbered Section 3.3. Article IV Section 4.1 Officers Clarifies legal and decisionmaking authority, creates Business Unit President officer title. Article IV Section 4.3 Chief Executive Officer Deletes reference to Executive Management Committee. Article IV Section 4.6 Business Unit Presidents Outlines powers and authorities. Article IV Section 4.7 Secretary Renumbered as Section 4.8. Article IV Section 4.8 Auditor Clarifies responsibilities regarding subsidiary bank audits, renumbered as Section 4.9.
11 EX-10.2 3 NON-EMPLOYEE DIRECTOR STOCK INCENTIVE & DEFERRAL 1 EXHIBIT 10.2 U. S. BANCORP 1997 AMENDED AND RESTATED NON-EMPLOYEE DIRECTOR STOCK INCENTIVE AND DEFERRAL PLAN ARTICLE 1 PURPOSE The purpose of this 1997 Amended and Restated Non-Employee Director Stock Incentive and Deferral Plan (the "Plan") is to advance the interests of U. S. Bancorp ("Bancorp") by encouraging members of Bancorp's Board of Directors (the "Board") who are not employees of Bancorp or any of its subsidiaries ("Non-Employee Directors") to acquire a proprietary interest in Bancorp, and provide them the opportunity to defer their compensation. It is anticipated that the Plan will assist Bancorp in attracting and retaining Non-Employee Directors. ARTICLE 2 DEFINITIONS When used in the Plan, the following terms shall have the meaning specified below. "Acquiring Person" shall mean any person, or any one or more related persons, that constitute a "group" for purposes of Section 13(d) and Section 14(b) of the Exchange Act and Rule 13d-5 and Rule 14b-2 thereunder; provided, that the term Acquiring Person shall not include (i) Bancorp or any of its Subsidiaries, (ii) any employee benefit plan of Bancorp or any of its Subsidiaries, (iii) any entity holding voting capital stock of Bancorp for or pursuant to the terms of any such employee benefit plan, or (iv) any person or group solely because such person or group has voting power with respect to capital stock of Bancorp arising from a revocable proxy or consent given in response to a public proxy or consent solicitation made pursuant to the Exchange Act. "Annual Meeting Date" shall mean the date of each Annual Meeting of Directors. "Annual Meeting of Directors" shall mean the meeting of the Board immediately following each annual meeting of Bancorp's shareholders. 2 "Annual Option" shall mean a stock option granted under the Plan on an Annual Meeting Date pursuant to Section 4.2. "Change in Control" shall mean: (1) The acquisition by any Acquiring Person of beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of 20 percent or more of the combined voting power of the then outstanding Voting Securities; provided, however, that for purposes of this paragraph (1) the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from Bancorp, (ii) any acquisition by Bancorp, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Bancorp or any corporation controlled by Bancorp, or (iv) any acquisition by any corporation pursuant to a transaction that complies with clauses (i), (ii), and (iii) of paragraph (3) of this definition of Change in Control; or (2) During any period of 12 consecutive calendar months, individuals who at the beginning of such period constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual who becomes a Director during the period whose election, or nomination for election, by Bancorp's shareholders was approved by a vote of at least a majority of the directors then constituting the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (3) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of Bancorp (a "Business Combination") in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners of the Voting Securities outstanding immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50 percent of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns Bancorp or all or substantially all of Bancorp's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, -2- 3 immediately prior to such Business Combination, of the Voting Securities, (ii) no Person (excluding any employee benefit plan, or related trust, of Bancorp or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly 20 percent or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (4) Approval by the shareholders of Bancorp of any plan or proposal for the liquidation or dissolution of Bancorp. "Code" shall mean the Internal Revenue Code of 1986, as amended and in effect from time to time. Where the context so requires, any reference to a particular Code section shall be construed to refer to the successor provision to such Code section. "Commencement Date" shall mean the date on which a Non-Employee Director becomes a member of the Board. "Committee" shall mean the Compensation Committee of the Board or any other committee appointed by the Board to administer the Plan. "Deferral Accounts" shall mean the accounts established to hold Directors Fees deferred pursuant to Section 5.6. "Directors Fees" shall mean all fees payable to a Non-Employee Director for service as a member of the Board or of a Subsidiary Board, including Retainers and fees for attendance at meetings of the Board or of a Subsidiary Board or a committee of the Board or a Subsidiary Board, and shall also include any fees or awards paid to a Non-Employee Director for extraordinary service as a member of the Board. Directors Fees shall not include Initial Options or Annual Options. "Disability" shall mean permanent and total disability as defined in Section 22(e)(3) of the Code. -3- 4 "Dividend Date" shall mean any date on which cash or stock dividends on Shares are payable. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended and in effect from time to time. Where the context so requires, any reference to a particular section of the Exchange Act, or to any rule promulgated under the Exchange Act, shall be construed to refer to the successor provisions to such section or rules. "Fair Market Value" shall mean the value of one of the Shares on a particular day, determined without regard to any restrictions , and shall equal : (1) The low sale price for Shares as reported for that day in The Wall Street Journal by the National Market System of the National Association of Securities Dealers Automated Quotation System (Nasdaq); or (2) If the low sale price is not reported in The Wall Street Journal for that day, the low sale price quoted by Nasdaq for that day. If no low sale price is reported in The Wall Street Journal or quoted by Nasdaq for that day, the low sale price for Shares as so reported or quoted for the immediately preceding day on which it was reported or quoted shall be used. "Grant Date" shall mean the date on which an option is granted. "Initial Option" shall mean a stock option granted pursuant to Section 4.1. "Option" shall mean an Annual Option, an Initial Option, or a Deferred Compensation Option. "Participant" shall mean a Non-Employee Director who has received a grant of an award or Option pursuant to the Plan. A person who ceases to be a Non-Employee Director shall remain a Participant so long as such person has the right to exercise any Option granted under the Plan or the right to receive any payment under the Plan. "Payment Date" shall mean January 5, April 5, July 5, and October 5 of each year: provided, that if any such day is a Saturday, Sunday or holiday, the Payment Date shall mean the next succeeding business day. "Plan Year" shall mean a calendar year. -4- 5 "Quarterly Fees" shall mean, for each calendar quarter, the total amount of Director Fees, including any installment of annual fees, payable to a Non-Employee Director for that quarter. "Restricted Shares" shall mean Shares subject to such terms and conditions as the Committee deems appropriate, including without limitation restrictions on the sale, assignment, transfer or other disposition of the Restricted Shares. "Retainer" shall mean annual retainer fees payable to a Non-Employee Director for service as a member of the Board or a Subsidiary Board. "Retirement" shall mean a Participant's retirement from the Board by reason of attaining the maximum age for directors specified in the bylaws of Bancorp, and shall also include a Participant's departure from the Board as a result of the dissolution of Bancorp. "Shares" shall mean the $5.00 par value common stock of Bancorp. "Stock Unit" shall mean a Stock Unit granted under the Plan in connection with a Deferral Election by a Non-Employee Director pursuant to Section 5.4. "Subsidiary" shall mean a subsidiary corporation of Bancorp as defined in Section 425(f) of the Code. "Subsidiary Board" shall mean the board of directors of a subsidiary of Bancorp. "Voting Securities" shall mean Bancorp's issued and outstanding securities ordinarily having the right to vote at elections for Bancorp's Board. Except when otherwise indicated by the context, any masculine or feminine terminology when used in the Plan shall also include the opposite gender; and the definition of any term herein in the singular shall also include the plural, and vice versa. ARTICLE 3 ELIGIBILITY Each Non-Employee Director of Bancorp shall be eligible to participate in this Plan. -5- 6 ARTICLE 4 INITIAL OPTIONS AND ANNUAL OPTIONS 4.1 GRANT OF INITIAL OPTIONS Each person who became a Non-Employee Director on or after October 18, 1990 (and who had not been an employee of Bancorp or a Subsidiary at any time after October 18, 1989) has been granted an Initial Option to purchase 4,000 Shares. The Grant Date for each such Initial Option was October 18, 1990 or the date specified in such Option. Each person who first becomes a Non-Employee Director after the 1997 Annual Meeting Date (and who has not been an employee of Bancorp or a Subsidiary at any time within the one year preceding such person's Commencement Date) shall be granted an Initial Option to purchase 4,000 Shares effective the Commencement Date. The Grant Date for each such Initial Option is the Commencement Date. 4.2 GRANT OF ANNUAL OPTIONS Each person who was a Non-Employee Director at the 1993 Annual Meeting of Directors has been granted an Annual Option to purchase 2,000 Shares. Commencing with the 1994 Annual Meeting of Directors, each Non-Employee Director at the time of such meeting shall be granted, effective as of such Annual Meeting Date, an Annual Option to purchase 2,000 Shares. The Grant Date for each Annual Option is the respective Annual Meeting Date, except that for 1993 the Grant Date was June 17, 1993. 4.3 PRICE AND TIME OF EXERCISE OF INITIAL OPTIONS AND ANNUAL OPTIONS The exercise price per Share of each Initial Option and Annual Option shall be equal to the Fair Market Value of one Share as of the respective Grant Date. Effective April 1, 1997, each Initial Option and Annual Option (other than Initial Options or Annual Options that have terminated or the time of whose exercisability has been accelerated in accordance with the Plan) may be exercised at any time or times commencing on the first anniversary of the Grant Date thereof. ARTICLE 5 ELECTIONS IN RESPECT OF DIRECTORS FEES 5.1 ELECTIONS IN LIEU OF CASH PAYMENT OF DIRECTORS FEES Commencing on July 1, 1997, each Participant shall have the right to elect, with respect to all or a portion of Directors Fees otherwise payable in cash, from -6- 7 among the optional methods of payment provided in this Article 5. Elections shall be subject to the terms and conditions of Article 9 and the other provisions of this Plan. All elections made under the Plan prior to July 1, 1997, shall remain in full force and effect until amended or terminated as provided in Section 9.1. 5.2 ELECTION TO RECEIVE SHARES Each Participant may elect to receive all or a portion of Directors Fees otherwise payable in cash in a whole number of Shares equal in number to the quotient obtained by dividing the foregone cash payment by the Fair Market Value of one Share on the Payment Date. Such Shares shall be delivered to each such Participant as soon as practicable after the Payment Date. The value of any fractional Shares shall be paid to the Participant in cash. 5.3 ELECTION TO RECEIVE RESTRICTED SHARES Each Participant may elect to receive all or a portion of Directors Fees otherwise payable in cash in a whole number of Restricted Shares equal in number to the quotient obtained by dividing the foregone cash payment by the Fair Market Value of one Share on the Payment Date. Each Participant receiving Restricted Shares shall be issued a stock certificate in respect of such Shares, registered in the name of the Participant, and shall execute a stock power in blank with respect to the Restricted Shares evidenced by the certificate. The certificate evidencing such Restricted Shares and the stock power shall be held in custody by Bancorp until the restrictions on such Restricted Shares shall have lapsed. Restricted Shares may provide that a Participant shall vest in such Shares, on the occurrence of the earliest of the following events, subject to such other conditions as the Committee may be prescribe: (i) the 65th birthday of the Participant if at such time the Participant is no longer a Non-Employee Director, (ii) the date on which the Participant terminates service on the Board after attaining age 65, (iii) the 70th birthday of the Participant, (iv) a Change in Control, or the dissolution of Bancorp, or (v) the Participant's death or Disability. During the period prior to the lapse of the restrictions and conditions applicable to the Restricted Shares (the "Restriction Period"), a Participant may not sell, assign, transfer, pledge, encumber or otherwise dispose of Restricted Shares. The Committee, in its sole discretion, may provide for the lapse of restrictions in installments during the Restriction Period. Upon expiration of the applicable Restriction Period (or lapse of restrictions during the Restriction Period if the restrictions lapse in installments), -7- 8 the legend on the Restricted Shares (or such of them as to which the restrictions have lapsed, if the restrictions lapse in installments) will be removed and the Participant's stock power will be returned and the Shares (or such of the Shares as to which all restrictions have lapsed) will no longer be Restricted Shares. The Shares shall be delivered to the Participant as soon as practicable thereafter. A Participant shall have, with respect to Restricted Shares held under this Plan, all of the rights of a shareholder of Bancorp, including the right to vote the shares and the right to receive cash dividends. At the election of the Participant, the cash value of any fractional Restricted Shares and all cash dividends on Restricted Shares shall be accumulated on the books and records of Bancorp. From time to time but not less often than annually, as of a Dividend Date or Payment Date, the Committee shall determine whether the accumulated cash credited to a Participant's account, as of such Dividend Date or Payment Date, exceeds the Fair Market Value of one or more Shares. If so, the Committee shall issue additional whole shares of Restricted Stock to the Participant, equal in number to the accumulated cash divided by the Fair Market Value of one Share, which shall remain in the custody of Bancorp until the restrictions thereon shall have lapsed. The accumulated cash shall be reduced in proportion. The additional shares of Restricted Stock issued hereunder shall vest in the same manner as other Restricted Shares, and shall be subject to such other conditions as the Committee may prescribe. Stock dividends issued with respect to Restricted Shares shall be treated as additional Restricted Shares and shall be subject to the same conditions and restrictions as the Restricted Shares with respect to which they were issued. 5.4 ELECTION TO RECEIVE STOCK UNITS Each Participant may elect to receive all or a portion of Directors Fees otherwise payable in cash in Stock Units, which shall be credited as of the Payment Date to a bookkeeping account (a "Stock Unit Account") maintained by Bancorp. The number of Stock Units credited to such account shall be equal to the amount of the foregone cash payment divided by the Fair Market Value of one Share on the Payment Date. The Deferral Election shall specify the date (the "Deferred Payment Date") on which the Non-Employee Director elects to receive payment for the Stock Units; provided, that the Deferred Payment Date with respect to any Deferral Election must be at least three years after the beginning of the calendar year during which the Stock -8- 9 Unit was credited to the Participant's Stock Unit Account. The Deferral Election shall also specify whether payment shall be in Shares or in cash. At the election of the Participant, the cash value of any fractional Stock Units and all cash dividends payable on such number of Shares as is equal to the number of Stock Units in the Participant's account shall be credited to such Participant's Stock Unit Account. From time to time but not less often than annually, as of a Dividend Date or Payment Date, the Committee shall determine whether the accumulated cash credited to a Participant's Stock Unit Account, as of such Dividend Date or Payment Date, exceeds the Fair Market Value of one or more Shares. If so, the Committee shall credit the Participant's Stock Unit Account with additional whole Stock Units equal to the accumulated cash divided by the Fair Market Value of one Share. The amount credited to cash shall be reduced in proportion. If stock dividends are issued with respect to Shares, the Committee shall proportionately increase the number of Stock Units in the Stock Unit Account. 5.5 ELECTION TO RECEIVE DEFERRED COMPENSATION OPTIONS Each Participant may elect to receive all or a portion of Directors Fees otherwise payable in cash in an option (a "Deferred Compensation Option") to purchase a number of Shares equal to the portion of the foregone cash payment divided by an amount equal to the difference between the Fair Market Value of one Share on such Payment Date and the exercise price determined under this Section 5.5 (rounded up to the next number of whole Shares). The exercise price per Share of each Deferred Compensation Option shall be equal to the greater of (a) 40 percent of the Fair Market Value of a Share as of the respective Grant Date (which will be the Payment Date of the Directors Fees in lieu of which the Deferred Compensation Option was granted) or (b) $5 per Share. The Committee may establish a different exercise price at its discretion. Unless a Deferred Compensation Option is terminated or the time of its exercisability is accelerated in accordance with the Plan, no Deferred Compensation Option shall be exercisable during the six months beginning on its Grant Date and shall thereafter be fully exercisable as provided in Article 7. 5.6 ELECTION TO DEFER RECEIPT OF CASH PAYMENT A Participant may elect to defer receipt of all or any portion of Directors Fees otherwise payable in cash. Amounts deferred by a Participant under this Section 5.6 ("Deferred Amounts") shall be credited to a Deferral Account established and -9- 10 maintained for such Participant on the books of Bancorp. Deferral Accounts heretofore established under the terms of Deferred Compensation Plan for Non-Employee Directors of Bancorp have been credited with interest at the rate in effect under the terms of such plan. Any remaining balance of Deferral Accounts being paid out to Participants in installments shall continue to be credited with interest hereunder, until paid in full. Commencing January 1, 1990, and until changed by the Committee, the rate of interest per annum shall equal the average annual interest rate on five-year Treasury Notes for the month of November in the immediately prior calendar year, as published in the Federal Reserve Statistical Release G.13 (or a corresponding or successor publication as determined by the Committee) plus 75 basis points. Effective January 1, 1996, Deferral Accounts (other than Deferral Accounts that on such date were being paid to Participants in installments) shall be credited with an amount (the "Growth Factor") from the date credited until the date of final payment of the balance of the Deferral Account. The Growth Factor for any period will equal the growth in value which the Deferred Amounts would have realized during such period, if invested in the Hypothetical Investment or Hypothetical Investments specified for that period by the Participant. For purposes of measuring the Growth Factor, a Participant may select one or a combination of Hypothetical Investments authorized from time to time by, or at the direction of, the Committee. Such selection, and any changes in selection, shall be made by the Participant on a form approved by the Committee, and shall be subject to approval by the Committee in its discretion. Changes in a Participant's selection of Hypothetical Investments shall become effective as of the first day of the calendar quarter following receipt by the Committee of the notice of change. A Participant's selection of Hypothetical Investments shall be effective for all amounts credited to the Participant's Deferral Account, including previously Deferred Amounts and the Growth Factor accrued thereon. Hypothetical Investments are solely bookkeeping entries, and Bancorp shall have no obligation to make actual investments corresponding to Hypothetical Investments. -10- 11 ARTICLE 6 MANDATORY PAYMENT OF RETAINER IN SHARES, SHARE UNITS OR DEFERRED COMPENSATION OPTIONS Commencing on July 1, 1997, the Board may require that all Non-Employee Directors be paid all or a portion of their Director Fees in Shares, Restricted Shares, Share Units or Deferred Compensation Options. Any Shares, Restricted Shares, Stock Units or Deferred Compensation Options acquired pursuant to any such requirement shall be subject to all of the terms and conditions of this Plan applicable thereto. ARTICLE 7 GENERAL TERMS AND CONDITIONS OF OPTIONS 7.1 TYPE OF OPTION; TERM Options granted under the Plan shall be nonqualified options which are not intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code. Options granted under Article 4 of the Plan will supplement other compensation for Non-Employee Directors. The term of each Initial Option, each Annual Option and each Deferred Compensation Option shall be unlimited unless terminated earlier in accordance with the Plan. 7.2 CONTINUATION AS DIRECTOR If a Participant ceases to be a member of the Board for any reason, the right to exercise each Initial Option, Annual Option and Deferred Compensation Option shall expire at the end of the following periods:
AFTER TERMINATION ON ACCOUNT OF: PERIOD ----------------------------- -------- Death 1 year Retirement 5 years Disability 1 year Any other reason 3 months
7.3 ACCELERATION OF EXERCISABILITY Notwithstanding the schedule provided in Section 4.3 for Initial and Annual Options and in Section 5.5 for Deferred Compensation Options, each Initial Option, Annual Option and Deferred Compensation Option shall become fully exercisable upon the occurrence of either: -11- 12 (a) The Participant's death or withdrawal from the Board by reason of Disability or Retirement; or (b) A Change in Control or the dissolution of Bancorp. 7.4 ASSIGNABILITY Each Option shall be nontransferable other than by will or by the laws of descent and distribution and shall be exercisable, during the life of a Participant, only by the Participant or, in the event the Participant becomes legally incompetent, by the Participant's guardian or legal representative, or by a permitted transferee as set forth below. Notwithstanding the foregoing, each Option may be transferred, without payment of consideration, to (i) a spouse or other immediate family member or (ii) any trust, partnership or other entity in which the Participant or the Participant's spouse or other immediate family member has a substantial beneficial interest; provided, however, that any Option so transferred shall be subject to all the same terms and conditions contained in the instrument evidencing the Option. 7.5 OPTION AGREEMENT Each Option shall be evidenced by an Option Agreement in a form approved by the Committee. 7.6 METHOD OF EXERCISE; PAYMENT Each Option may be exercised by delivery of written notice to Bancorp stating the number of Shares, form of payment, and proposed date of closing. The purchase price for the Shares purchased upon exercise of an Option shall be paid in full at or before closing by one or a combination of the following: (a) Payment in cash; or (b) Tendering (either actually or, if and so long as the Shares are registered under Section 12(b) or 12(g) of the Exchange Act, by attestation) Shares already owned by the Participant for at least six months (or any shorter period necessary to avoid a charge to the Company's earnings for financial reporting purposes) having a Fair Market Value on the day prior to the exercise date equal to the aggregate Option exercise price. -12- 13 7.7 PREVIOUSLY ACQUIRED SHARES Delivery of previously acquired Shares in full or partial payment for the exercise of an Option shall be subject to the following conditions: (a) The Shares tendered shall be in good delivery form; (b) The Fair Market Value of the Shares tendered, together with the amount of cash, if any, tendered shall equal or exceed the exercise price of the Option; (c) Any Shares remaining after satisfying the payment for the Option shall be reissued in the same manner as the Shares tendered; and (d) No fractional Shares will be issued and cash will not be paid to the Optionee for any fractional Share value not used to satisfy the Option purchase price. 7.8 OTHER DOCUMENTS The Participant shall furnish the Committee before closing such other documents or representations as the Committee may require to assure compliance with applicable laws and regulations. ARTICLE 8 SHARES SUBJECT TO THE PLAN The stock authorized to be issued under this Plan shall be Shares, which may either be authorized and unissued Shares or reacquired Shares. The total number of Shares which may be issued pursuant to this 1997 Amendment and Restatement shall not exceed five hundred and twenty-five thousand (525,000) Shares, or such greater number of Shares as is determined pursuant to an adjustment under this Article 8. In the event any outstanding Options granted under the Plan are canceled or expire for any reason, the Shares covered by such Options shall again become available for issuance under the Plan. In the event of a recapitalization, stock split, reverse stock split, stock dividend, combination or exchange of Shares, merger, consolidation, reorganization or liquidation, or any other change in the corporate structure or Shares of Bancorp, the Board may make such proportionate adjustments in the number and kind of shares for which Options may be granted under the Plan and, with respect to outstanding Options granted under the Plan, in the number and kind of shares covered thereby and in the -13- 14 exercise price, as the Board in its sole discretion may deem appropriate to give effect to such change in capitalization. ARTICLE 9 GENERAL TERMS AND CONDITIONS OF ELECTIONS 9.1 ELECTIONS; AMENDMENTS; TERMINATIONS An election under Article 5 shall be made by filing an election with the Committee on a form provided by the Committee. An election filed before December 31 is effective with respect to Directors Fees earned during the next succeeding calendar year and subsequent calendar years, until the election is amended or terminated. A person becoming a Non-Employee Director during a year may file an election to participate within 30 days after becoming a Non-Employee Director, and such election shall be effective with respect to Directors Fees earned during the remainder of the calendar year and in subsequent calendar years until the election is amended or terminated. Elections (and amendments to existing elections) received by the Committee on or prior to June 1, 1997, shall be effective as to Directors Fees payable with respect to services as a Non-Employee Director after July 1, 1997. An election may be amended by filing a notice of amendment with the Committee on a form provided by the Committee. An amendment is effective with respect to Directors Fees earned during the next succeeding calendar year and subsequent calendar years, until the amendment is further amended or the election to participate is terminated. An election may be terminated by filing a notice of termination with the Committee on a form provided by the Committee. A notice of termination is effective with respect to Directors Fees earned during the next succeeding calendar year and subsequent calendar years. Directors Fees with respect to which an election, or an amended election, has been in effect prior to the effective date of the termination will continue to be held subject to the provisions of this Plan and the terms of such election or amended election. A Non-Employee Director, having terminated an election under this Plan, may elect to resume participation by making an election pursuant to the first paragraph of this Section 9.1. -14- 15 9.2 UNFUNDED PLAN All amounts and accounts held by Bancorp under the Plan are unfunded obligations of Bancorp. The rights of a Participant with respect to any such amounts and accounts are no greater than the rights of any unsecured general creditor of Bancorp. Notwithstanding the foregoing, Bancorp may deposit funds from time to time in the U.S. Bancorp Deferred Compensation Trust for the purpose of paying benefits hereunder from the assets thereof. 9.3 NONASSIGNABILITY Except as provided in Section 7.4, a Participant's rights under this Plan, including without limitation the right to receive any distribution from Bancorp hereunder, may not be anticipated, assigned, pledged or in any other manner assigned, and shall not be subject to levy, attachment, garnishment or other process by or on behalf of any creditor of the Participant. 9.4 PAYMENT (a) A Participant, at the time of electing to participate in deferrals under Article 5.6, may elect the method of payment of the Deferral Account. Elections shall be filed with the Committee on a form approved by the Committee. If a Participant fails to file an election with the Committee, the Deferral Account will be paid as provided in clause (b)(i) of this Article 9.4. (b) A Participant may elect one of the following methods of payment: (i) A lump sum payment in cash to be made within 30 days following the end of the calendar year during which the Participant ceases to be a Non-Employee Director (the "Final Year"), or (ii) Payment in up to ten annual installments, with the first installment to be made within 30 days following the end of the Final Year. The first installment shall equal the product of the balance of the Participant's Deferral Account as of the end of the Final Year multiplied by a fraction in which the numerator equals one and the denominator equals the number of installment payments elected by the Participant. The second and any subsequent installments shall equal the product of the balance of the Participant's Deferral Account as of the end of the prior year multiplied by a fraction in which the numerator equals one and the denominator equals the remaining number of installment payments. The final installment shall equal the remaining balance of the Deferral Account. The Deferral Account will continue to be -15- 16 credited with Growth Factor earnings during the payout period, and the Participant may make or modify selections of Hypothetical Investments during such period. (c) An election of the method of payment filed on or before December 31 is effective for Directors Fees deferred under Section 5.6 during the succeeding calendar year and subsequent calendar years until the election is amended. A person becoming a Non-Employee Director during a year may file an election of method of payment within 30 days after becoming a Non-Employee Director, and such election shall be effective for Directors Fees deferred under Section 5.6 during the remainder of the calendar year and in subsequent calendar years until the election is amended. (d) An election of the method of payment may be amended by filing a notice of amendment with the Committee on a form approved by the Committee. A notice of amendment filed on or before December 31 is effective with respect to Directors Fees deferred during the succeeding calendar year and subsequent calendar years until the election is further amended. 9.5 ACCELERATION OF PAYMENT If a Participant ceases to be a Non-Employee Director, and becomes a proprietor, officer, director, partner, or employee of, or is otherwise associated with, any business that is in competition with Bancorp or any of its affiliates, the Participant's entire Deferral Account and the Fair Market Value of any Stock Units held under the Plan shall be immediately paid to the Participant in cash. 9.6 DEATH BENEFIT Upon the death of a Participant, the unpaid balance of the Participant's Deferral Account and (based upon the Participant's Deferral Election under Section 5.4) either the cash value of, or the number of Shares that is equal to, the Fair Market Value as of the date of death of any Stock Units in the Participant's account shall be paid or delivered to the beneficiary or beneficiaries selected by the Participant in writing, on a form approved by the Committee. If no beneficiary has been selected, amounts due hereundershall be paid to the Participant's surviving spouse, if any, or if there is no surviving spouse, to the Participant's estate. -16- 17 ARTICLE 10 ADMINISTRATION 10.1 GENERAL The Plan shall be administered by the Committee, which shall have full power and authority, subject to the provisions of the Plan, to supervise administration of the Plan and to interpret the provisions of the Plan and of any award or Options granted hereunder. Any decision by the Committee shall be final and binding on all parties. No member of the Committee shall be liable for any determination made, or any decision or action taken with respect to the Plan or any award or Options under the Plan. The Committee may delegate any of its responsibilities to one or more agents, including employees of Bancorp, and may retain advisors to advise it. No Non-Employee Director shall participate in the decision of any question relating to an award granted under the Plan exclusively to that Non-Employee Director. 10.2 RULES AND INTERPRETATION The Committee shall be vested with full authority to make such rules and regulations as it deems necessary to administer the Plan and to interpret and administer the provisions of the Plan in a uniform manner. Any determination, decision or action of the Committee in connection with the construction, interpretation, administration, or application of the Plan shall be final, conclusive, and binding on all parties. 10.3 RECORDS The Committee shall have overall responsibility for keeping records and providing necessary communications to Participants. The records of the Committee with respect to the Plan shall be conclusive and binding on all Participants and all persons or entities claiming through or under them. 10.4 EXPENSES The cost of making awards and settling Initial Options and Annual Options pursuant to this Plan, and the expenses of administering the Plan, shall be borne by Bancorp. -17- 18 ARTICLE 11 MISCELLANEOUS 11.1 CONDITION PRECEDENT The adoption of the Plan, and the grant of Options under the Plan, was conditioned upon the approval of the Plan by an affirmative vote of the holders of a majority of the voting stock of Bancorp present or represented and entitled to vote thereon at the 1991 annual meeting of Bancorp shareholders. The Second Amendment and Restatement, and the grant of Annual Options under the Plan, was conditioned upon similar approval by Bancorp shareholders at the 1994 Annual Meeting. The 1997 Amendment and Restatement, and the grant of Options under the Plan, are conditioned upon similar approval by Bancorp shareholders at the 1997 Annual Meeting. 11.2 TERMINATION AND AMENDMENT OF THE PLAN The Board may terminate or amend the Plan at any time, provided, that (except to the extent that the Participants shall have given their written consent thereto) no such termination or amendment shall affect any outstanding Options previously granted under the Plan or the accrued rights of any Participant under the Plan with respect to elections previously made by such Participant under Article 5. The Board may not, without approval of the shareholders of Bancorp: (a) Materially increase the number of Shares which may be issued under the Plan (other than by means of an adjustment described in Article 8); or (b) Materially modify the requirements as to eligibility for participation in the Plan. Notwithstanding the foregoing, if required to qualify the Plan as a formula plan for purposes of Rule 16b-3 under Section 16 of the Exchange Act, the Plan shall not be amended more than once every six months to change the amount, price, timing or exercisability of the awards other than amendments to comport with changes in the Code or the rules and regulations promulgated thereunder. 11.3 BOARD MEMBERSHIP Nothing in the Plan or in any award granted pursuant to the Plan shall confer upon any Participant any right to continue as a director of Bancorp or interfere in any way with the right of the shareholders of Bancorp to remove a director from the Board at any time. -18- 19 11.4 TAX REIMBURSEMENT Bancorp shall have the right, in connection with the exercise of an Option or any payment under the Plan, to require the Participant to pay to Bancorp an amount sufficient to provide for any withholding tax liability, including any liability for self-employment and social security taxes, imposed with respect to such exercise or payment. 11.5 SECURITIES LAWS Bancorp shall not be required to distribute any Shares pursuant to an award until it shall have taken any action required to comply with the provisions of the Securities Act of 1933 or any other then applicable securities laws. 11.6 APPLICABLE LAW To the extent that federal laws (such as the Code and the federal securities laws) do not control, the Plan shall be governed and construed in all respects in accordance with Oregon law. Bancorp adopted the U.S. Bancorp 1990 Non-Employee Director Stock Option Plan (the "1990 Plan") effective October 18, 1990. The 1990 Plan was amended and restated effective February 21, 1991; a First Amendment to the 1990 Plan, as restated, was adopted effective September 1, 1991; and a Second Amendment was adopted effective April 12, 1993. The 1990 Plan was further amended and restated in the form of the Second Amendment and Restatement effective June 17, 1993. The 1990 Plan is further amended and restated in the form of this 1997 Amendment and Restatement effective July 1, 1997 and is redesignated the "U.S. Bancorp Non-Employee Director Stock Incentive and Deferral Plan." This 1997 Amendment and Restatement was executed and approved on behalf of Bancorp as of February 20, 1997, subject to Section 11.1 hereof. -19- EX-10.5 4 SUPPLEMENTAL BENEFITS PLAN 1 Exhibit 10.5 U. S. BANCORP AMENDED AND RESTATED SUPPLEMENTAL BENEFITS PLAN EFFECTIVE FEBRUARY 15, 1996 2 TABLE OF CONTENTS PAGE ARTICLE I PURPOSE OF PLAN ............................................... 1 ARTICLE II NATURE OF PLAN ............................................... 1 ARTICLE III SPONSORING EMPLOYERS ........................................ 2 ARTICLE IV ELIGIBILITY .................................................. 2 ARTICLE V PARTICIPATION ................................................. 2 ARTICLE VI BENEFITS ..................................................... 3 6.1 Retirement Plan-Related Benefit ............................... 3 6.1.1 Retirement Benefits ................................... 3 (a) Restoration Benefit ................................ 3 (b) Early Retirement Subsidy Benefit ................... 6 (c) Additional Benefit Service Benefit ................. 6 (d) Change in Control Benefits ......................... 7 (1) Benefit ...................................... 7 (2) Change in Control Defined .................... 9 (3) Cause Defined ................................ 13 (4) Good Reason Defined .......................... 14 (5) Limitations and Reductions ................... 18 (e) Additional Eligibility Service Benefit ............. 18 (f) Enhanced Retirement Benefit ........................ 19 (1) Definitions .................................. 19 (2) Benefit ...................................... 20 (3) Benefit Service Credit ....................... 21 (4) Prior Employer Benefits ...................... 22 (5) Early Retirement Reduction ................... 22 (6) Vesting ...................................... 23 (7) Effect of Change in Control .................. 23 (8) Credit for Additional Benefit Service ........ 25 (g) Reduction of Change in Control Related Benefits .... 25 (h) Special Retirement Opportunity Benefit ............. 29 (1) Definitions .................................. 29 (2) Designation in Connection with Other Benefit . 30 - i - 3 (3) Benefit ...................................... 31 (4) Termination Date ............................. 31 6.1.2 Coordination of Benefits .............................. 31 6.1.3 Time and Manner of Payment ............................ 33 (a) Joint and Survivor Annuity ........................ 34 (b) Supplemental Income Option ........................ 34 6.1.4 Early Retirement Reduction ............................ 35 6.1.5 Benefit Forfeitability ................................ 36 6.1.6 Preretirement Death Benefit ........................... 37 6.1.7 Lump-Sum Payments of Small Benefits ................... 39 6.1.8 Arbitration ........................................... 39 6.2 Investment Plan-Related Benefit ............................... 40 6.2.1 Annual Credit ......................................... 40 (a) Deferred Compensation Credit ....................... 40 (b) Section 415 Limitation Credit ...................... 41 (c) Before-Tax Contribution Limitation Credit .......... 41 (d) Matching Credit .................................... 42 6.2.2 Investment Plan Benefit Account ....................... 43 6.2.3 Time and Manner of Payment ............................ 43 6.2.4 Death Benefit ......................................... 43 ARTICLE VII VESTING ..................................................... 43 ARTICLE VIII SOURCE OF BENEFITS ......................................... 44 ARTICLE IX ADMINISTRATION OF THE PLAN ................................... 45 ARTICLE X MISCELLANEOUS ................................................. 46 10.1 Nonassignability of Benefits .................................. 46 10.2 Governing Law ................................................. 46 10.3 No Right of Continued Employment .............................. 46 10.4 Withholding Taxes ............................................. 46 10.5 Severability .................................................. 47 ARTICLE XI CLAIMS PROCEDURE ............................................. 47 11.1 Initial Claim ................................................. 47 11.2 Decision on Initial Claim ..................................... 47 11.2.1 Time Period for Denial Notice ......................... 47 11.2.2 Contents of Notice .................................... 48 11.2.3 Deemed Denied ......................................... 48 11.3 Review of Denied Claim ........................................ 48 11.4 Decision on Review ............................................ 49 - ii - 4 ARTICLE XII AMENDMENTS AND TERMINATION .................................. 50 - iii - 5 U. S. BANCORP AMENDED AND RESTATED SUPPLEMENTAL BENEFITS PLAN THIS SUPPLEMENTAL BENEFITS PLAN (the "Plan") is amended and restated by U. S. Bancorp, an Oregon corporation ("Bancorp"), effective February 15, 1996. I PURPOSE OF PLAN The continued growth and success of Bancorp are dependent upon its ability to attract and retain the services of key executives of the highest competence and to provide incentives for their effective service and superior performance. The purpose of this Plan is to advance the interests of Bancorp and its shareholders through a supplemental compensation program that will attract, motivate, and retain key executives. II NATURE OF PLAN This Plan is intended to be and shall be administered and maintained by Bancorp as an income tax nonqualified, unfunded plan primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of -1- 6 the Employee Retirement Income Security Act of 1974, as amended. Notwithstanding any other provision of this Plan, no benefit shall be payable under this Plan that would cause the Plan to not be a select group plan. III SPONSORING EMPLOYERS Any corporation in which Bancorp owns (directly or indirectly) stock possessing 50 percent or more of the combined voting power may, by resolution of its board of directors, sponsor and maintain this Plan for its executives. Such corporations shall be referred to as "Sponsoring Employers." IV ELIGIBILITY Any key executive (including officers who may also be directors) of Bancorp and the Sponsoring Employers who is a member of a select group of management or highly compensated employees shall be eligible to participate in this Plan. V PARTICIPATION A "Participant" is an eligible employee who has been designated to receive one or more benefits under this Plan for one or more years. The Compensation Committee of Bancorp's Board -2- 7 of Directors (the "Compensation Committee") shall have the exclusive power to make and revise benefit designations, if any, with respect to Bancorp's Chairman of the Board, its Chief Executive Officer, and the members of Bancorp's Executive Committee (the "Executive Committee") and with respect to all benefit designations under 6.1.1(d) and 6.1.1(f). The Compensation Committee may, in its discretion, delegate by resolution to the Executive Committee the power to make and revise benefit designations, if any, for all other eligible employees, other than benefit designations under 6.1.1(d) and 6.1.1(f). In the absence of such delegation, the Compensation Committee shall retain the power and authority to make and revise all benefit designations under the Plan. By sponsoring and maintaining the Plan for its employees, the Board of Directors of each Sponsoring Employer expressly delegates to the Compensation Committee and the Executive Committee, respectively, the authority to make and revise benefit designations under the Plan for all employees of the Sponsoring Employer. VI BENEFITS .1 Retirement Plan-Related Benefit. -3- 8 .1 Retirement Benefits. Except as otherwise provided, a Participant shall receive a monthly U. S. Bancorp Retirement Plan-Related Benefit for the Participant's life only equal to the sum of the "Restoration Benefit," "Early Retirement Subsidy Benefit," "Additional Benefit Service Benefit," "Change in Control Benefits," "Additional Eligibility Service Benefit," and "Enhanced Retirement Benefit," as defined below, for which the Participant is designated. For purposes of this 6.1.1, any reference to a Participant's Retirement Plan benefit shall include any portion of such Retirement Plan benefit payable to an alternate payee pursuant to a qualified domestic relations order. (a) Restoration Benefit. A Participant designated to receive a "Restoration Benefit" (previously referred to as the "Additional Benefit") under this Plan shall receive a monthly benefit equal to the sum of: (1) the amount by which such Participant's early, normal, or delayed retirement benefit under the Retirement Plan, as set forth in Exhibit A attached hereto and incorporated by reference herein, is reduced by application of federal law limiting benefits under income tax qualified plans as provided in the Retirement Plan; and -4- 9 (2) the difference (to the extent such difference is not included in 6.1.1(a)(1) above) between: (i) the early, normal, or delayed retirement benefit that would have been payable to the Participant under the Retirement Plan: A) had deferred compensation (other than deferred compensation under the U. S. Bancorp Long-Term Management Incentive Plan or the U. S. Bancorp 1993 Stock Incentive Plan) counted as Compensation under the Retirement Plan at the time at which such compensation would have been paid had it not been deferred; and B) had any nondeferred awards payable to the Participant after retirement under the U. S. Bancorp Executive Annual Incentive Plan or Management Annual Incentive Plan (an "Annual Plan") counted as Compensation under the Retirement -5- 10 Plan at the time such awards were earned or accrued in lieu of the corresponding award for the first year of the five-year period for which Average Monthly Compensation is computed; and (ii) the Participant's actual early, normal, or delayed retirement benefit under the Retirement Plan. In calculating the benefit described in 6.1.1(a)(2)(i), the period of time used to determine a Participant's Average Monthly Compensation may be different than the period of time used to determine the Participant's Average Monthly Compensation in calculating the benefit actually payable under the Retirement Plan. Also, an award under an Annual Plan for a year shall be treated as earned pro-rata over the 12 months of the year (or such lesser portion of the year that the award relates to). Notwithstanding the foregoing, no Participant shall have a lesser monthly Restoration Benefit than the amount required to ensure that the sum of the Participant's early, normal, or delayed retirement benefit under the Retirement Plan plus the -6- 11 Participant's Restoration Benefit under this Plan is not less than the sum of such benefits as of December 31, 1988. (b) Early Retirement Subsidy Benefit. Upon early retirement at or after a designated age, a Participant designated to receive an "Early Retirement Subsidy Benefit" under this Plan, who was eligible for early retirement under the Retirement Plan on ceasing to be an employee of Bancorp and its affiliates, shall receive a monthly benefit equal to the amount by which such Participant's normal retirement benefit under the Retirement Plan is reduced by reason of such early retirement. (c) Additional Benefit Service Benefit. Upon retirement at or after a designated age with less than 25 years of Benefit Service, a Participant designated to receive an "Additional Benefit Service Benefit" under this Plan, who was eligible for retirement under the Retirement Plan on ceasing to be an employee of Bancorp and its affiliates, shall receive a monthly benefit equal to the difference between: (1) the early, normal, or delayed retirement benefit that would have been payable to the Participant under the Retirement Plan based on the lesser of: (i) 25 years of Benefit Service; or -7- 12 (ii) a designated number of years of Benefit Service; and (2) the Participant's actual early, normal, or delayed retirement benefit under the Retirement Plan. (d) Change in Control Benefits. The purpose of the benefits provided by this 6.1.1(d) is to encourage the designated Participants to continue in the employment of Bancorp. The designated Participants are innovative, highly experienced, and knowledgeable banking executives whose creativity, expertise, and effort have been instrumental in the development of the business and growth of Bancorp. For purposes of this 6.1.1(d), references to Bancorp or a Sponsoring Employer shall include any successor to Bancorp or the Sponsoring Employer. (1) Benefit. Upon termination from employment with Bancorp or a Sponsoring Employer within two years from the date of occurrence of any event constituting a "Change in Control" (it being recognized that more than one such event may occur in which case the two-year period shall run from the date of occurrence of each such event), other than termination by Bancorp or a Sponsoring Employer for "Cause" or by the Participant without "Good Reason," as those terms are defined below, a designated -8- 13 Participant who is vested by meeting the "Applicable Service Requirement," as described below, at termination of employment shall receive the benefit under (i) and/or (ii) below. A Participant may be designated for either or both of the following benefits: (i) A monthly benefit (a "Change in Control Early Retirement Subsidy Benefit") equal to the amount by which such Participant's normal retirement benefit under the Exhibit A Retirement Plan is reduced by reason of early retirement due to the termination. (ii) A monthly benefit (a "Change in Control Additional Benefit Service Benefit") equal to the difference between: A) the early, normal, or delayed retirement (which is the same as the type of actual retirement under 6.1.1(d)(1)(ii)B)) benefit that would have been payable to the Participant under the Exhibit A Retirement Plan based on the lesser of: -9- 14 1) 25 years of Benefit Service; or 2) a designated number of years of Benefit Service; and B) the Participant's actual early, normal, or delayed retirement benefit under the Exhibit A Retirement Plan. For purposes of the Change in Control Early Retirement Subsidy Benefit described in 6.1.1(d)(1)(i), the Applicable Service Requirement is at least ten years of Eligibility Service. For purposes of the Change in Control Additional Benefit Service Benefit described in 6.1.1(d)(1)(ii), the Applicable Service Requirement is at least five years of Eligibility Service. Participants continue to earn Eligibility Service after a Change in Control. The benefits in this 6.1.1(d) cannot be eliminated by amendment or termination of this Plan after a Change in Control. (2) Change in Control Defined. A "Change in Control" of Bancorp shall mean: -10- 15 (i) The acquisition by any Acquiring Person of beneficial ownership (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act")) of 20 percent or more of the combined voting power of the then outstanding Voting Securities; provided, however, that for purposes of this paragraph (i) the following acquisitions shall not constitute a Change in Control: (a) any acquisition directly from Bancorp, (b) any acquisition by Bancorp, (c) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Bancorp or any corporation controlled by Bancorp, or (d) any acquisition by any corporation pursuant to a transaction that complies with clauses (a), (b), and (c) of paragraph (iii) of this definition of Change in Control; or (ii) During any period of 12 consecutive calendar months, individuals who at the beginning of such period constitute the Board (the "Incumbent Board") cease for any reason to -11- 16 constitute at least a majority of the Board; provided, however, that any individual who becomes a director during the period whose election, or nomination for election, by Bancorp's shareholders was approved by a vote of at least a majority of the directors then constituting the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Consummation of a reorganization, merger, or consolidation or sale or other disposition of all or substantially all of the assets of Bancorp (a "Business Combination") in each case, unless, following such Business Combination, (a) all or substantially all of -12- 17 the individuals and entities who were the beneficial owners of the Voting Securities outstanding immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50 percent of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns Bancorp or all or substantially all of Bancorp's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Voting Securities, (b) no Person (excluding any employee benefit plan, or related trust, of Bancorp or such corporation resulting from such Business Combination) beneficially owns, -13- 18 directly or indirectly, 20 percent or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (c) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) Approval by the shareholders of Bancorp of any plan or proposal for the liquidation or dissolution of Bancorp. For purposes of this "Change in Control" definition, the term "Acquiring Person" means any person or related person or related persons which constitute a "group" for purposes of Section 13(d) and Rule 13d-5 under the -14- 19 Exchange Act; provided, however, that the term Acquiring Person shall not include (a) Bancorp or any of its subsidiaries, (b) any employee benefit plan or related trust of Bancorp or any of its subsidiaries, (c) any entity holding voting capital stock of Bancorp for or pursuant to the terms of any such employee benefit plan, or (d) any person or group solely because such person or group has voting power with respect to capital stock of Bancorp arising from a revocable proxy or consent given in response to a public proxy or consent solicitation made pursuant to the Exchange Act. (2) Cause Defined. For purposes of 6.1.1(d), "Cause" for termination of employment means: (i) A material act of fraud or dishonesty by the Participant within the course of performing his or her duties for Bancorp or a Sponsoring Employer; (ii) Gross negligence or intentional misconduct by the Participant in the performance of material duties for Bancorp or a Sponsoring Employer; -15- 20 (iii) Commission of an act (or failure to take an action) intentionally against the interest of Bancorp or a Sponsoring Employer that causes Bancorp or a Sponsoring Employer material injury; or (iv) An act of serious moral turpitude that causes Bancorp or a Sponsoring Employer material injury. Notwithstanding the foregoing, a Participant shall not be deemed to have been terminated for Cause unless and until there have been delivered to the Participant a copy of a resolution duly adopted by Bancorp's Board of Directors (the "Board") at a meeting of the Board called and held for that purpose (after reasonable notice to the Participant and an opportunity for the Participant, together with the Participant's counsel, to be heard before the Board) finding that in the good faith opinion of the Board, the Participant was guilty of conduct constituting Cause as defined in this Plan and specifying the particulars thereof in detail. -16- 21 Any dispute as to whether a designated Participant was terminated for Cause shall be submitted to arbitration pursuant to 6.1.8. (3) Good Reason Defined. Termination by a designated Participant of employment for "Good Reason" shall mean termination based on any of the following: (i) A change in the Participant's duties or position or positions with Bancorp which represents a demotion from his or her duties or position or positions as in effect immediately prior to the Change in Control, or a change in the Participant's duties or responsibilities which is inconsistent with such duties or position or positions, or any removal of the Participant from or any failure to reappoint or reelect the Participant to such position or positions, except in connection with the termination of the Participant's employment for Cause or disability or as a result of the Participant's death or the termination by the Participant other than for Good Reason; -17- 22 (ii) A reduction by Bancorp in the Participant's base salary as in effect immediately prior to the Change in Control; (iii) The failure by Bancorp to continue in effect any "Benefit Plan" (as defined below) in which the Participant is participating at the time of the Change in Control (or Benefit Plans providing the Participant with at least substantially similar benefits), other than as a result of the normal expiration of any such Benefit Plan in accordance with its terms or a modification of such Benefit Plan which modification is applicable to all employees who participate in such Benefit Plan, as in effect at the time of the Change in Control, or the taking of any action, or the failure to act, by Bancorp which would adversely affect the Participant's continued participation in any of such Benefit Plans on at least as favorable a basis to the Participant as is the case on the date of the Change in Control or which would materially reduce the Participant's benefits in -18- 23 the future under any of such Benefit Plans or deprive the Participant of any material benefit enjoyed by the Participant at the time of the Change in Control; (iv) The failure by Bancorp to provide and credit the Participant with the number of paid vacation days to which the Participant is then entitled in accordance with Bancorp's normal vacation policy as in effect immediately prior to the Change in Control; (v) Bancorp's requiring the Participant to be based anywhere more than 35 miles from where the Participant's office is located immediately prior to the Change in Control except for required travel on Bancorp's business to an extent substantially consistent with the business travel obligations which the Participant undertook on behalf of Bancorp prior to the Change in Control; (vi) The failure by Bancorp to obtain from any successor the assent to this 6.1.1(d); -19- 24 (vii) Any purported termination by Bancorp of a Participant's employment which is not effected pursuant to a Notice of Termination as defined below; and for purposes of this 6.1.1(d), no such purported termination shall be effective; or (viii) Any refusal by Bancorp to continue to allow the Participant to attend to matters or engage in activities not directly related to the business of Bancorp which, prior to the Change in Control, the Participant was permitted by the Board to attend to or engage in. For purposes of this "Good Reason" definition, "Notice of Termination" means any notice of any termination of the Participant's employment shall be communicated by written Notice of Termination to the other party. A "Notice of Termination" of a Participant's employment by Bancorp shall mean a notice which shall indicate the specific termination provision relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for -20- 25 termination of the Participant's employment under the provision so indicated. "Benefit Plan" shall mean any compensation plan (including this Plan) providing for incentive or deferred compensation, stock options or other stock or stock-related grants or awards, or any employee benefit plan such as a thrift, investment, savings, pension, profit sharing, medical, disability, accident, life insurance, cafeteria, or relocation plan or any other plan, policy, or program of Bancorp providing similar types of benefits to employees of Bancorp. Any dispute as to whether a designated Participant has Good Reason for termination of employment shall be submitted to arbitration pursuant to 6.1.8. (4) Limitations and Reductions. The Change in Control benefits otherwise payable under this 6.1.1(d) are subject to the limitations and reductions described in 6.1.1(g). (b) Additional Eligibility Service Benefit. A Participant designated to receive an "Additional Eligibility Service Benefit" shall be treated as having years of Eligibility Service equal to the designated Participant's actual years of -21- 26 Eligibility Service plus a designated number of additional years of Eligibility Service. The total of the actual and the additional designated years of Eligibility Services will be referred to as the "Designated Total." Upon ceasing to be an employee of Bancorp and its affiliates, a Participant designated for an Additional Eligibility Service Benefit: (1) shall receive a monthly benefit equal to the difference between: (i) the early, normal, or delayed retirement (which is the same as the type of actual retirement under 6.1.1(e)(1)(ii)) benefit that would have been payable to the Participant under the Retirement Plan had the Participant retired with the Designated Total number of years of Eligibility Service; and (ii) the Participant's actual early, normal, or delayed retirement benefits, if any, under the Retirement Plan; and (2) shall be treated as having the Designated Total number of years of Eligibility Service for purposes of any other Retirement Plan-Related Benefit under this Plan for which the Participant is designated. -22- 27 (c) Enhanced Retirement Benefit. (1) Definitions. As used in this 6.1.1(f), the following terms shall have the definitions set forth below: "ADJUSTED AVERAGE MONTHLY COMPENSATION means Average Monthly Compensation (as defined in Exhibit A to this Plan) adjusted in the manner described in 6.1.1(a). "CAUSE" has the meaning defined in 6.1.1(d)(3). "CHANGE IN CONTROL" has the meaning defined in 6.1.1(d)(2). "CHANGE IN CONTROL DATE" means the date of occurrence of an event constituting a Change in Control (it being recognized that more than one such event may occur, in which case the date of occurrence of each such event is a Change in Control Date). "EARLY RETIREMENT REDUCTION" has the meaning described in 6.1.1(f)(5). "GOOD REASON" has the meaning defined in 6.1.1(d)(4). "PRIOR EMPLOYER BENEFITS" has the meaning described in 6.1.1(f)(4). -23- 28 "TARGET BENEFIT" means a monthly benefit equal to 2.75 percent of a Participant's Adjusted Average Monthly Compensation multiplied by the Participant's years, and fractions thereof, of Benefit Service up to 20 years. "TERMINATION DATE" means the date a Participant ceases to be an employee of Bancorp or a Sponsoring Employer. (3) Benefit. A Participant designated to receive an "Enhanced Retirement Benefit" under this Plan shall receive, upon termination of employment with Bancorp or a Sponsoring Employer after attaining age 55 (providing the Participant is vested in such benefit as provided in 6.1.1(f)(6)), a monthly benefit equal to the Target Benefit, adjusted (in the event the Participant terminates employment before attaining age 62) by the amount, if any, of Early Retirement Reduction, and then reduced by the sum of the following: (i) A hypothetical Social Security benefit payable as of the Participant's age on the Termination Date or, if later, age 62, calculated based on the law in effect on the Termination Date assuming (A) that the -24- 29 Participant's covered compensation equaled or exceeded the Social Security wage base for all prior years and (B) the Participant will have no compensation in any year (or portion of a year) following the Termination Date; (ii) An amount equal to the single life annuity equivalent of the Retirement Plan benefit which would have become payable to the Participant as of the Termination Date had the Participant elected retirement under the Retirement Plan as of the Termination Date; (iii) The amount of Prior Employer Benefits payable to the Participant for such month or attributable to such month as described in 6.1.1(f)(4); and (iv) The amounts payable to the Participant as other Retirement Plan-Related Benefits under this Plan as described in 6.1.2(e). (2) Benefit Service Credit. For purposes of this 6.1.1(f), the Compensation Committee may, at the time a Participant is designated for an Enhanced Retirement -25- 30 Benefit, or at any time thereafter, credit the Participant with years of Benefit Service for service with a prior employer. The number of years, and fractions thereof, of Benefit Service credited shall be specified by resolution of the Compensation Committee. (3) Prior Employer Benefits. Whenever the Compensation Committee gives a Participant Benefit Service credit for service with a former employer, the Compensation Committee shall by resolution specify the amount of Prior Service Benefits, if any, to be offset against the Participant's Enhanced Retirement Benefit. Prior Service Benefits shall be a monthly offset amount determined by, or at the direction, of the Compensation Committee to reflect the Participant's accrued and vested benefits attributable to service with the prior employer from qualified and nonqualified pension, profit sharing, and similar deferred compensation arrangements (but excluding any such benefits attributable to the Participant's own contributions, whether made on a before-tax or after-tax basis). The Compensation Committee, or its delegates, shall determine for each Prior Employer Benefit a monthly offset amount based on a -26- 31 single life annuity form equivalent to the Prior Employer Benefit (assuming the same commencement date as the Participant's Enhanced Retirement Benefit). (4) Early Retirement Reduction. If a Participant who is otherwise vested in an Enhanced Retirement Benefit (as provided in 6.1.1(f)(6)) terminates employment with Bancorp or a Sponsoring Employer prior to attaining age 62, the Participant's Target Benefit shall be reduced by an Early Retirement Reduction equal to the accrued Target Benefit multiplied by the product of a Reduction Percentage (as described below) and the difference (in years and a fraction of a year based on whole calendar months) between the Participant's age at the Termination Date and 62. The Reduction Percentage shall be 7 percent except where a Participant's retirement or termination of employment is approved by the Compensation Committee, in which case the Reduction Percentage shall be 3 percent. However, the Compensation Committee may, in extraordinary circumstances, designate a different Reduction Percentage between 0 percent and 7 percent. (5) Vesting. Except as provided in 6.1.1(f)(7), a Participant's right to an Enhanced Retirement Benefit is -27- 32 vested and nonforfeitable when the Participant both attains age 55 and has at least 10 years of Eligibility Service while still an employee of Bancorp or a Sponsoring Employer. If a Participant designated for an Enhanced Retirement Benefit ceases to be an employee of Bancorp or a Sponsoring Employer either (A) before the Participant has 10 years of Eligibility Service or (B) before the Participant attains age 55, the Participant shall not receive any Enhanced Retirement Benefit. (6) Effect of Change in Control. Upon termination from Bancorp or a Sponsoring Employer within two years after a Change in Control Date, other than termination for Cause or without Good Reason, the Enhanced Retirement Benefit for a designated Participant shall be subject to the following provisions: (i) Notwithstanding 6.1.1(f)(6), upon a Change in Control, a Participant designated for an Enhanced Retirement Benefit who has at least five years of Eligibility Service shall become immediately vested in the accrued Enhanced Retirement Benefit, whether or not the Participant had attained age 55 as of the later -28- 33 of the Change in Control Date or the Termination Date. (ii) If a Participant has not attained age 55 as of the Termination Date, the Participant's Enhanced Retirement Benefit shall commence on the first day of the calendar month in which the Participant attains age 55. (iii) For purposes of computing a Participant's Target Benefit, a Participant will continue to accrue Benefit Service after a Change in Control. (iv) The Early Retirement Reduction Percentage for each Participant vested in an Enhanced Retirement Benefit (pursuant to 6.1.1(f)(6) or 6.1.1(f)(7)(i)) shall be 3 percent. (v) A Participant's Enhanced Retirement Benefit, as modified by this 6.1.1(f)(7) upon a Change in Control, is subject to the limitations and reductions described in 6.1.1(g). -29- 34 (vi) The provisions of this 6.1.1(f)(7) cannot be eliminated by amendment or termination of this Plan after a Change in Control. (7) Credit for Additional Benefit Service. For purposes of computing a designated Participant's Target Benefit, the Committee may, in special circumstances, credit the Participant with an additional number of years of Benefit Service as determined by the Committee. (b) Reduction of Change in Control Related Benefits. In the event that any portion of the Total Payments (as defined below) received by a Participant in connection with a Change in Control of Bancorp, after taking into account all other payments to which the Participant is entitled to receive from Bancorp or any affiliate of Bancorp, is subject to an excise tax under Section 4999 of the Internal Revenue Code, unless the Compensation Committee expressly provides by resolution that the Participant's benefits under the Plan in connection with the Change in Control will not be reduced, the Change in Control benefits otherwise payable under 6.1.1(d) or the Enhanced Retirement Benefit otherwise payable under 6.1.1(f), as modified by 6.1.1(f)(7), will be reduced to the extent required to avoid -30- 35 such excise tax if, and only if, such reduction would result in a larger after-tax benefit to the Participant, taking into account all applicable local, state, and federal income and excise taxes. If requested by a Participant, Bancorp will provide complete compensation and tax data on a timely basis to Participant and to tax counsel designated by the Participant in order to enable the Participant to determine the extent to which payments from Bancorp and its affiliates may result in an excise tax. If a Participant and Bancorp disagree as to whether a payment of such benefits will result in an excise tax or whether a reduction in any payment will result in a larger after-tax benefit to the Participant, the matter will be resolved by an opinion of tax counsel chosen by the Participant and reasonably acceptable to Bancorp. "Total Payments" mean all payments or benefits payable to a Participant in connection with a Change in Control of Bancorp, including Change in Control related benefits under 6.1.1(d) or 6.1.1(f) and "Other Payments." "Other Payments" include any payment or benefit payable to a Participant in connection with a Change in Control of Bancorp pursuant to any plan, arrangement, or agreement (other than 6.1.1(d) or 6.1.1(f)) with Bancorp, a person whose actions result in such Change in -31- 36 Control, or any person affiliated with Bancorp or such person. For purposes of this limitation: (1) No portion of the Total Payments, the receipt or enjoyment of which a Participant has effectively waived in writing prior to the date of payment of the Change in Control benefits, shall be taken into account; (2) No portion of the Total Payments shall be taken into account which, in the opinion of tax counsel selected by Bancorp and reasonably acceptable to the Participant ("Bancorp Tax Counsel"), does not constitute a "parachute payment" within the meaning of Section 280G of the Internal Revenue Code; (3) The Change in Control related benefits shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in 6.1.1(g)(1) and 6.1.1(g)(2) ) in their entirety constitute, in the opinion of Bancorp Tax Counsel, reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Internal Revenue Code; and (4) The value of any noncash benefit or any deferred payment or benefit included in the Total Payments, and whether or not all or a portion of any -32- 37 payment or benefit is a "parachute payment" for purposes of 6.1.1(g)(2), shall be determined by Bancorp's independent accountants in accordance with the principles of Section 280(G)(d)(3) and (4) of the Internal Revenue Code. To the extent possible, Bancorp and the Participant agree that reductions in benefits under any benefit plan shall be made (only to the extent necessary to avoid an excess parachute payment excise tax) in the following order of priority: (i) Severance payments under a change in control agreement other than 6.1.1(d) or 6.1.1(f); (ii) Continuation of benefits under any plan, policy, or program of Bancorp (whether or not on an insured basis) providing medical, dental, health, disability income, life insurance or other death benefits, or similar types of benefits to employees of Bancorp (other than under any plan or arrangement providing for vacation pay, bonuses or incentive compensation of any kind, or current or deferred salary or similar compensation); -33- 38 (iii) Any Change in Control related benefit payable under 6.1.1(d) or 6.1.1(f) of this Plan or a successor plan or a plan providing similar benefits; and (iv) The acceleration in the exercisability or vesting of any stock option or other stock related award granted by Bancorp. Notwithstanding any other provision of 6.1.1(d) or 6.1.1(f), Bancorp shall have no obligation to make any payments to a Participant pursuant to 6.1.1(d) or 6.1.1(f) if, or to the extent, such payments are prohibited by any applicable law or regulation, including without limitation the FDIC's regulations regarding Golden Parachute and Indemnification Payments promulgated under the Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990. (e) Special Retirement Opportunity Benefit. (1) Definitions. As used in this 6.1.1(h), the following terms shall have the definitions set forth below: "DEEMED AGE" means an age equal to five years more than a designated Participant's actual age as of August 31, 1994. -34- 39 "DEEMED BENEFIT YEARS" means a number of years of Benefit Service, as defined in the Retirement Plan, equal to 5.667 years more than a designated Participant's actual years of Benefit Service as of December 31, 1993. "DEEMED ELIGIBILITY YEARS" means a number of years of Eligibility Service, as defined in the Retirement Plan, equal to six years more than a designated Participant's actual years of Eligibility Service as of December 31, 1993. "SRO AVERAGE MONTHLY COMPENSATION" means the greater of: (i) The monthly average of the designated Participant's Compensation (adjusted as described in 6.1.1(a)) during the highest consecutive five of the ten Plan Years beginning in 1984; or (ii) The monthly average of the designated Participant's Compensation (adjusted as described in 6.1.1(a)) for the 60 months ending August 31, 1994, based on: A) The Participant's bonuses paid during the eight calendar months ending August 31, 1994, plus eight times the Participant's -35- 40 monthly base salary as in effect on January 1, 1994; B) The Participant's base salary and bonuses paid during calendar years 1990 through 1993; and C) A portion equal to four-twelfths (4/12) of the Participant's base salary (excluding bonuses) paid in calendar year 1989. "SRO CONNECTED BENEFIT" means the Benefit (either a Restoration Benefit, an Enhanced Retirement Benefit, or both) under the Plan in connection with which a Participant is designated for a Special Retirement Opportunity Benefit. (2) Designation in Connection with Other Benefit. A Special Retirement Opportunity Benefit shall be in connection with either (or both) of the following benefits for which the designated Participant is also designated: a Restoration Benefit under 6.1.1(a) or an Enhanced Retirement Benefit under 6.1.1(f). (3) Benefit. If a Participant is designated for a Special Retirement Opportunity Benefit under this 6.1.1(h), the Participant's SRO Connected Benefit (or Benefits) shall be based on treating the Participant: -36- 41 (i) As having attained the greater of the Participant's actual age as of the Annuity Starting Date (as defined in the Retirement Plan) or the Deemed Age; (ii) As having the Deemed Eligibility Years and the Deemed Benefit Years; and (iii) As having Average Monthly Compensation equal to the SRO Average Monthly Compensation. (4) Termination Date. The Committee may, in its discretion, condition the designation of a Participant for a Special Retirement Opportunity Benefit upon the Participant's termination of employment not later than a date specified by the Committee. .2 Coordination of Benefits. The following rules shall apply where a Participant is designated for more than one benefit under 6.1.1: (a) If a Participant receives an Early Retirement Subsidy Benefit under 6.1.1(b) or a Change in Control Early Retirement Subsidy Benefit under 6.1.1(d)(1), there shall be no early retirement reduction with respect to the Participant's benefits, if any, described in 6.1.1(a), 6.1.1(c), and 6.1.1(d)(2). -37- 42 (b) If a Participant receives an Additional Benefit Service Benefit under 6.1.1(c) or a Change in Control Additional Benefit Service Benefit under 6.1.1(d)(2), the Participant's benefits, if any, described in 6.1.1(a), 6.1.1(b), and 6.1.1(d)(1) shall be based on the lesser of 25 years of Benefit Service or the designated number of years of Benefit Service. (c) If a Participant is designated for an Early Retirement Subsidy Benefit under 6.1.1(b) and a Change in Control Early Retirement Subsidy Benefit under 6.1.1(d)(1), the Participant's Change in Control Early Retirement Subsidy Benefit under 6.1.1(d)(1) shall be reduced by the amount payable as an Early Retirement Subsidy Benefit under 6.1.1(b). (d) If a Participant is designated for an Additional Benefit Service Benefit under 6.1.1(c) and a Change in Control Additional Benefit Service Benefit under 6.1.1(d)(2), the Participant's Change in Control Additional Benefit Service Benefit under 6.1.1(d)(2) shall be reduced by the amount payable as an Additional Benefit Service Benefit under 6.1.1(c). (e) If a Participant is designated for an Enhanced Retirement Benefit under 6.1.1(f) and is also designated for any other Retirement Plan-Related Benefit under 6.1.1, the Participant's Enhanced Retirement Benefit under 6.1.1(f) shall be -38- 43 reduced by the aggregate amounts payable as any other Retirement Plan-Related Benefits under 6.1.1 (after taking into account any other applicable coordination provisions of this 6.1.2). .3 Time and Manner of Payment. A vested Participant's Retirement Plan-Related Benefit (other than an Enhanced Retirement Benefit pursuant to 6.1.1(f)) shall be paid after his or her ceasing to be an employee of Bancorp or a Sponsoring Employer, beginning with the earlier of the first day of the month after the Participant is age 55 and not yet age 65 and has at least ten years of Eligibility Service ("early retirement date") or after the Participant is at least age 65 and is vested or has had the fifth anniversary of the Participant's commencement of participation. A Participant who is vested in an Enhanced Retirement Benefit shall be paid such Enhanced Retirement Benefit after the Participant ceases to be an employee of Bancorp or a Sponsoring Employer, beginning with the first day of the first calendar month after the Participant terminates employment. A Participant's Retirement Plan-Related Benefit under the Plan is earned in the single life annuity form with no benefit payable to anyone on the Participant's post-retirement death. A Participant may make a one-time election to receive -39- 44 that benefit in one of the forms provided below. The Participant's election must be made before the Participant's commencing participation. If no election is made by that latest election date, then the Participant's benefit shall be paid in the single life annuity form. The following optional forms are available: (a) Joint and Survivor Annuity. An actuarial equivalent reduced monthly benefit for life to the Participant with 50 percent or 100 percent, as elected, of that amount payable to the survivor designated at retirement, if then living, for life after the death of the Participant. The straight life annuity is converted to a 50 percent survivor annuity by multiplying the straight life annuity amount by: .94 + .004 x (spouse's age - Participant's age at death)]; not greater than 1.000. The straight life annuity is converted to a 100 percent survivor annuity by multiplying it by: [.89 + .006 x (beneficiary's age - retired Participant's age)]; not greater than 1.000. If the designated survivor dies before the Participant retires, then the Participant shall select another survivor within 30 days. Except for death of the survivor the Participant shall have no power to name a new survivor. If there is no living -40- 45 designated survivor on the Participant's retirement, the benefit shall be paid in the straight life annuity form. If the designated survivor dies after the Participant retires but before the Participant dies, then payments will continue to the Participant in the same reduced amount and another survivor cannot be selected. No payments will be made to anyone after the death of both the Participant and the designated survivor. (a) Supplemental Income Option. An actuarial equivalent benefit whereby monthly straight life annuity or joint and survivor annuity payments to the Participant before the Participant is first eligible for Social Security benefits are greater than the remaining Participant life annuity payments so as to provide approximately equal payments throughout the Participant's life annuity payment period, including payments from Social Security. The actuarial equivalent factors are as follows: Amount of straight life annuity equivalent to $1 of temporary annuity to age 62 and 1/12 equals $.006 times months of payments. If this benefit form is elected in conjunction with a benefit form that provides payments after the Participant's death, the post-death payments shall be based on the payments that would have been made to the Participant after first eligibility for -41- 46 Social Security whether the retired Participant dies before or after such eligibility. .2 Early Retirement Reduction. Except as provided in 6.1.2, if a Participant's Retirement Plan-Related Benefit (other than an Enhanced Retirement Benefit under 6.1.1(f)) starts before the first of the month after age 65 ("normal retirement date") and the Participant was eligible for early retirement on terminating Bancorp employment, and the Participant is not eligible for an Early Retirement Subsidy Benefit under 6.1.1(b), the Participant's Retirement Plan-Related Benefit calculated under 6.1 shall be reduced by 1/3 of 1 percent of such normal retirement benefit for each month by which the early retirement date precedes the following reference age:
Years of Eligibility Service Reference Age Less than 25 65 25 or more 62
No reduction shall be made if the Participant is at least age 62 and has at least 25 years of Eligibility Service. If a Participant was not eligible for early retirement on terminating Bancorp employment, the 6.1 benefit shall be reduced by .5833 percent for each full month from age 60 to age 65 and 1/3 of 1 -42- 47 percent from age 55 to age 60 by which the early retirement date precedes the normal retirement date. .3 Benefit Forfeitability. A Participant shall forfeit the entire amount of the Participant's Retirement Plan-Related Benefit described in 6.1.1(b) and 6.1.1(c) or, if payments of said benefits have already begun, any remaining payments, if the Participant, either directly or indirectly, on the Participant's own behalf or as a partner, officer, employee, consultant, financier, stockholder (except by ownership of less than 1 percent of the outstanding stock of a publicly held corporation), director, or trustee of any person, firm, or corporation, or otherwise, engages in any business competing with the business carried on by Bancorp or any of its affiliates at the time of the Participant's termination of employment with Bancorp and its affiliates during the period ending on the later of (i) the date that is ten years after the Participant's termination of employment with Bancorp and its affiliates, or (ii) the Participant's normal retirement date under the Retirement Plan. .4 Preretirement Death Benefit. If a vested Participant dies prior to retirement under this Plan and has a surviving spouse, such surviving spouse or designated nonspouse -43- 48 beneficiary, shall receive a monthly preretirement death benefit equal to one-half of the Participant's straight life annuity calculated as provided below. No preretirement death benefit is payable to a designated nonspouse beneficiary if the Participant is not married on the date of death. The preretirement death benefit shall begin to be paid within 30 days after the Manager of the Human Resources Group or his or her designee (the "Manager") is notified of the Participant's death, if the Participant was an employee of Bancorp or a Sponsoring Employer at death, and if not, then within 30 days after the Participant would have first been eligible for early or normal retirement under this Plan had the Participant survived to that date, whether or not the corresponding benefit has begun under the Retirement Plan, and shall be payable for the life of the spouse. For Retirement Plan-Related Benefits other than an Enhanced Retirement Benefit, if the Participant was not an employee of Bancorp or a Sponsoring Employer and was not yet age 65 on the date of death, then the Participant's age 65 single life annuity benefit shall be reduced by the reduction factors in 6.1.3 for a Participant who is not eligible for early retirement on terminating employment. If the Participant was an employee of -44- 49 Bancorp or a Sponsoring Employer on the date of death then the Participant's age 65 single life annuity benefit shall be reduced by the reduction factors in 6.1.3 for a Participant who was eligible for early retirement on terminating Bancorp employment, but there shall be no reduction below age 55 if the Participant died before age 55. For Enhanced Retirement Benefits under 6.1.1(f), if the Participant was an employee of Bancorp or a Sponsoring Employer on the date of death and was vested in an Enhanced Retirement Benefit, the Participant's Target Benefit shall be reduced by applying the reduction factors in 6.1.1(f)(5) as if the Compensation Committee had approved the Participant's retirement or termination of employment. If the beneficiary is the spouse, then the above death benefit shall be paid for the life of the spouse with no further payments made after the spouse's death. If the beneficiary is a person other than the spouse and the beneficiary is more than five years younger than the Participant, then the survivor benefit shall be paid for the life of the nonspouse survivor but not to exceed the life expectancy of a beneficiary who is exactly five years younger than the Participant. If the nonspouse beneficiary is five or less years younger than the Participant, -45- 50 then the survivor shall receive the death benefit for life with no payments after the survivor's death. .5 Lump-Sum Payments of Small Benefits. Notwithstanding any other provision of this Plan, the Retirement Plan-Related Benefit or the preretirement death benefit shall be paid in an actuarial equivalent lump sum within 30 days after the Manager determines that the present value of such benefit is less than an amount fixed and revised from time to time, in the Manager's discretion. The actuarial equivalent shall be determined using the 1971 TPF&C forecast mortality for males, set back five years for the Participant and one year for the survivor, if any, at the "applicable interest rate". The "applicable interest rate" shall mean the interest rate or rates that would have been used as of the first day of the calendar year that contains the distribution date by the Pension Benefit Guaranty Corporation ("PBGC") for the purpose of determining the present value of the Participant's benefits under the Plan, assuming the Plan was insured by the PBGC even though it is not, and terminated on the date distribution commences with insufficient assets to provide benefits guaranteed by the PBGC on that date. -46- 51 .6 Arbitration. Any dispute with respect to whether a Participant designated for a benefit described in 6.1.1(d) or 6.1.1(f) was terminated for "Cause" or terminated employment with "Good Reason," as those terms are defined in 6.1.1(d), shall, after compliance with the claims procedure set forth in Article XI of this Plan, be submitted to arbitration for a binding determination by a single arbitrator agreed upon by the Participant and the Board, or if the Participant and the Board are unable to agree upon an arbitrator within 20 days after either the Participant or the Board demands arbitration, appointed by the presiding judge of the Circuit Court of the State of Oregon for Multnomah County. After the appointment of an arbitrator, the arbitration proceedings shall follow the rules of the American Arbitration Association but shall not be conducted under its auspices. The arbitrator shall have the power to grant limited discovery in his or her discretion upon good cause shown by the party seeking discovery. .2 Investment Plan-Related Benefit. .1 Annual Credit. Each Participant shall receive, for each calendar year for which the Participant has been designated for this benefit, a credit to the Participant's "Investment Plan Benefit Account" of an amount equal to the sum of the -47- 52 Participant's "Deferred Compensation Credit," "Section 415 Limitation Credit," "Before-Tax Contribution Limitation Credit," and "Matching Credit," to the extent such credits are not duplicative, as described below. (a) Deferred Compensation Credit. The amount of the Deferred Compensation Credit is the amount of the employer matching contribution that would have been allocated to the Participant's Bancorp Contribution Account under the U. S. Bancorp Employee Investment Plan (the "Investment Plan") had deferred compensation counted as nondeferred compensation under the Investment Plan. In computing the amount that would have been so allocated, the whole number percentage that has been actually elected by the Participant to determine the elective before-tax contribution under the Investment Plan shall be used. Furthermore, computation of the Participant's Deferred Compensation Credit shall not take into account (i) the limitation on annual additions required by Section 415 of the Internal Revenue Code, (ii) the federal income tax limitations on the amount of compensation that can be taken into account under the Investment Plan, and (iii) the federal income tax limitations on the amount of elective before-tax contributions. -48- 53 (b) Section 415 Limitation Credit. The amount of the Section 415 Limitation Credit is the amount by which the employer matching contribution that would have been allocated to the Participant's Bancorp Contribution Account under the terms of the Investment Plan is reduced by application of the limitation on annual additions required by Section 415 of the Internal Revenue Code. (c) Before-Tax Contribution Limitation Credit. The amount of the Before-Tax Contribution Limitation Credit is the difference between: (1) the amount of the employer matching contribution that would have been allocated to the Participant's Bancorp Contribution Account under the Investment Plan based on the Participant's actual compensation and the whole number percentage that has been actually elected by the Participant to determine the elective before-tax contribution, before application of federal income tax limitations on the amount of compensation that can be taken into account under the Investment Plan and the amount of elective before-tax contributions, and -49- 54 (2) the amount of the employer matching contribution actually allocated to the Participant's Bancorp Contribution Account under the Investment Plan. (d) Matching Credit. For any Participants not eligible to participate in the Investment Plan, the amount of the Matching Credit is the amount of the employer matching contribution that would have been allocated to the Participant's Bancorp Contribution Account under the Investment Plan had the Participant's deferred compensation under any applicable plan or plans counted as elective before-tax contributions under the Investment Plan. For this purpose, an applicable plan is a deferred compensation plan approved by the Board that specifically provides that compensation deferred under the plan is to be taken into account in determining the Matching Credit under this Plan. Also, computation of the Participant's Matching Credit shall not take into account (i) the limitation on annual addition required by Section 415 of the Internal Revenue Code, (ii) the federal income tax limitations on the amount of compensation that can be taken into account under the Investment Plan, and (iii) the federal income tax limitations on the amount of elective before-tax contributions. -50- 55 .2 Investment Plan Benefit Account. An Investment Plan Benefit Account shall be maintained for each Participant designated for the benefits described under 6.2.1. The balance in the Investment Plan Benefit Account shall be adjusted upward or downward as of each Investment Plan valuation date by the same percentage amount as the Participant's actual Bancorp Contribution Account under the Investment Plan is adjusted. .3 Time and Manner of Payment. The Investment Plan Benefit Account shall be paid to the Participant in a lump sum within 30 days after termination of employment with Bancorp and its affiliates (or as soon thereafter as practical), except that if prior to the adoption of this amended and restated Plan the Participant had terminated such employment and elected to receive payment of that Account on a date specific, then such Account shall be paid on that date. .4 Death Benefit. In the event of a Participant's death, the Investment Plan Benefit Account shall be paid to the beneficiary named in accordance with procedures established by the Manager or, in the absence of a named beneficiary, to the Participant's beneficiary under the terms of the Investment Plan, in a lump sum within 30 days after the Participant's death. -51- 56 ARTICLE II VESTING -52- 57 Except as provided in 6.1.1(d), 6.1.1(f), 6.1.4, and in this Article VII, a Participant's right to any benefit under the Plan is vested and nonforfeitable at the same time as and to the same extent as the Participant is vested in related plan benefits. In connection with the designation of a Participant for any benefit under the Plan, the Compensation Committee or the Executive Committee may specify different vesting provisions for a particular benefit. ARTICLE III SOURCE OF BENEFITS -53- 58 This Plan and the benefits payable hereunder shall be unfunded and shall be payable only from the general assets of Bancorp or a Sponsoring Employer. Bancorp and Sponsoring Employers do not represent that a specific portion of their assets will be used to provide the benefits hereunder. Participants, surviving spouses, and beneficiaries shall have no interest in any specific assets of Bancorp or any Sponsoring Employer. Nothing contained herein shall be deemed to create a trust of any kind or create any fiduciary relationship. To the extent that any person acquires a right to receive payments from Bancorp or any Sponsoring Employer under this Plan, such rights shall be no greater than the rights of their unsecured general creditors. Notwithstanding the foregoing, Bancorp and the Sponsoring Employer may deposit moneys under the U. S. Bancorp Deferred Compensation Trust Agreement (the "Trust") for the purpose of paying benefits hereunder from those moneys and the income thereon, unless such Trust assets are required to satisfy the obligations of Bancorp and the Sponsoring Employers to their general creditors. ARTICLE IV ADMINISTRATION OF THE PLAN -54- 59 Except for matters specifically reserved to the Compensation Committee, the Plan shall be administered by the Executive Committee. Except as otherwise provided and subject to review and supervision by the Compensation Committee, the Executive Committee shall have the authority and responsibility for all matters in connection with the operation and administration of the Plan. The Executive Committee's powers and duties shall include, but shall not be limited to, the following: (a) Responsibility for the compilation and maintenance of all records necessary in connection with the Plan, including records of Participant designations; (b) Authorizing the payment of all benefits and expenses of the Plan as they become payable under the Plan; and (c) Authority to engage such legal, accounting, and other professional services as it may deem proper. Decisions by the Executive Committee shall be final and binding upon all parties affected by the Plan, including the surviving spouses and beneficiaries of Participants. The Executive Committee may rely on information and recommendations provided by supervisory management. The Executive Committee may delegate to a subcommittee composed of -55- 60 less than all Executive Committee members or to supervisory management who are not Executive Committee members, the responsibility for decisions that it may make or actions that it may take under the terms of the Plan, subject to the reserved right of the Executive Committee and the Compensation Committee to review such decisions or actions and modify them when necessary or appropriate under the circumstances. The Executive Committee shall not allow any employee to engage directly or indirectly in any decisions or actions that affect that employee's Plan benefit. ARTICLE V MISCELLANEOUS .1 Nonassignability of Benefits. Benefits under this Plan cannot be sold, transferred, anticipated, assigned, pledged, hypothecated, seized by legal process, subjected to claims of creditors in any way, or otherwise disposed of. .2 Governing Law. This Plan and any amendments shall be construed, administered, and governed in all respects in accordance with applicable federal law and the laws of the State of Oregon. .3 No Right of Continued Employment. Nothing in this Plan shall be construed to give a Participant the right to remain -56- 61 an employee of Bancorp or any of its affiliates, and Bancorp and its affiliates reserve the right to discharge a Participant with or without cause at any time. .4 Withholding Taxes. Bancorp or the Sponsoring Employer shall withhold any taxes required by law to be withheld in connection with payment of benefits under this Plan. -57- 62 .5 Severability. The invalidity or unenforceability of any provision of this Plan shall not affect the validity or enforceability of any other provision of this Plan, and each provision of this Plan shall be severable and enforceable to the extent permitted by law. ARTICLE VI CLAIMS PROCEDURE .1 Initial Claim. Any person claiming a benefit under this Plan ("Claimant") shall present the claim in writing to the Manager. Any dispute with respect to a claim for benefits under 6.1.1(d) as to whether the designated Participant's termination was for "Cause" or with "Good Reason" shall, after compliance with the claims procedure of this Article XI, be submitted to binding arbitration pursuant to 6.1.8. .2 Decision on Initial Claim. -58- 63 .1 Time Period for Denial Notice. A decision shall be made on the claim as soon as practicable and shall be communicated in writing by the Manager to the Claimant within a reasonable period after receipt of the claim by the Manager. In no event shall the decision on an initial claim be given more than 90 days after the date the claim was filed, unless special circumstances require an extension of time for processing. If there is an extension, the Claimant shall be notified of such within 90 days of the date the claim was filed. The extension notice shall indicate the special circumstances and the date by which a decision is expected. The extension shall not exceed 90 days from the end of the initial response period. .2 Contents of Notice. If the claim is wholly or partially denied, the notice of denial shall indicate: (a) The specific reasons for the denial; (b) The specific references to pertinent Plan provisions on which the denial is based; (c) A description of additional material or information necessary for the Claimant to perfect the claim and an explanation of why such material or information is necessary; and -59- 64 (d) An explanation of the Plan's claim review procedure. .3 Deemed Denied. If written notice of the decision wholly or partially denying the claim has not been furnished within 90 days after the claim is filed or there has been an extension and no notice of a decision is furnished by the end of the extension period, and if the claim has not been granted within such period, the claim shall be deemed denied as of the end of the 90-day or 180-day period for purposes of proceeding to the review stage described in 11.3 and 11.4. .3 Review of Denied Claim. If a Claimant receives a notice of denial or his or her claim is deemed denied pursuant to 11.2 above, the Claimant may request a review of the claim. The request for review is made by personally delivering or mailing a written request for review, prepared by either the Claimant or his or her authorized representative, to the Executive Committee. The Claimant's request for review must be made within a reasonable period of time taking into consideration the nature of the benefit that is the subject of the claim and other attendant circumstances. In no event shall the period for requesting review expire less than 60 days after receipt of the notice of denial or the date on which the claim is deemed denied if no -60- 65 notice is received. If the written request for review is not made on a timely basis, the Claimant shall be deemed to waive his or her right to review. The Claimant or his or her duly authorized representative may, at or after the time of making the request, review all pertinent documents and submit issues and comments in writing. -61- 66 .4 Decision on Review. A review shall be promptly made by the Executive Committee after receipt of a timely filed request for review. A decision on review shall be made and furnished in writing to the Claimant. The decision shall be made not later than 60 days after receipt of the request for review. If special circumstances require an extension of time for processing (such as the need to hold a hearing), a decision shall be made and furnished to the Claimant not later than 120 days after such receipt. If an extension is required, the Claimant shall be notified of such within 60 days after the request for review was filed. The written decision shall include the reasons for such decision with reference to the provisions of the Plan upon which the decision is based. The decision shall be final and binding upon the Claimant and Bancorp and its affiliates and all other persons involved. If the decision on review is not furnished within the applicable time period, the claim shall be deemed denied on review. -62- 67 The scope of any subsequent review of the benefit claim, judicial or otherwise, shall be limited to a determination as to whether the Executive Committee acted arbitrarily or capriciously in the exercise of its discretion. In no event shall any such further review be on a de novo basis as the Executive Committee has discretionary authority to determine eligibility for benefits and to construe the terms of this Plan. ARTICLE VII AMENDMENTS AND TERMINATION Except as expressly provided in 6.1.1(d)(1) and 6.1.1(f)(7)(vi), the Board has the power to terminate this Plan at any time or to amend this Plan at any time and in any manner that it may deem advisable. IN WITNESS WHEREOF this amended and restated Plan was executed this ____ day of _____________, 1996. U. S. BANCORP By:________________________________ -63- 68 U. S. BANCORP SUPPLEMENTAL BENEFITS PLAN EXHIBIT A RETIREMENT PLAN BENEFIT (REFERENT SECTION 6.1.1(A)) A.1 Normal Retirement Benefit. Upon retirement at normal retirement date, a Participant is entitled to receive a monthly benefit payable for life, in an amount equal to the sum of the Participant's benefits under (A), (B) and (C) below but no less than the minimum benefit under (D) below as follows, except that the accrued normal retirement benefit of a Participant who was covered under the Peoples Ban Corporation Employee Pension Plan ("Peoples Pension Plan") before 1988, shall be determined as provided separately in this section. (A) 1.3 percent of the Participant's Average Monthly Compensation, multiplied by the Participant's years and fractions thereof of Benefit Service up to 25 years. (B) .4 percent of the Participant's Average Monthly Compensation in excess of Covered Compensation multiplied by the Participant's years and fractions thereof of Benefit Service up to 25 years. - 1 - 69 (C) .5 percent of the Participant's Average Monthly Compensation multiplied by the Participant's years and fractions thereof of Benefit Service in excess of 25 years of Benefit Service. (D) Minimum Benefit. Notwithstanding the foregoing, no Participant who is a Highly Compensated Employee as defined in Code Section 414(q)(1)(A) or (B) shall have a lesser accrued monthly normal retirement benefit than such Participant had as of December 31, 1988, and no other Participant shall have a lesser accrued monthly normal retirement benefit than such Participant had as of January 30, 1990. In no event shall the normal retirement benefit be less than the highest early retirement benefit to which the Participant was entitled. For the purpose of calculating the accrued benefit payable as a life annuity at normal retirement age, the formula to be used for a Participant who had an accrued benefit under the Peoples Pension Plan as of December 31, 1987, or who had a reinstatable benefit under the Peoples Pension Plan as of that date that was subsequently reinstated, shall be the formula set forth above, except that the percentage in A.1(A) shall be - 2 - 70 1 percent instead of 1.3 percent with respect to that portion of the Participant's first 25 years of Benefit Service prior to January 1, 1988. A.2 Maximum Annual Benefit. No benefit shall be payable with respect to a Participant which is based on Compensation in excess of the amount that can be used for computing benefits under an income tax qualified plan, $200,000 as of January 1, 1989, and $150,000 as of January 1, 1994, as provided in the Retirement Plan, or which exceeds the limitations of Code Section 415 as set forth therein. A.3 Compensation. Compensation for determining Average Monthly Compensation shall have the meaning given that term in Code Section 415(c)(3) and Treasury Regulation Section 1.415-2(d) thereunder, except that Compensation shall include only nondeferred amounts paid in cash and determined prior to any reduction for elective before-tax contributions under the U. S. Bancorp Investment Plan or any Code Section 401(k) cash or deferred arrangement, and prior to any reduction for salary reduction contributions under a Code Section 125 cafeteria plan. A.4 Average Monthly Compensation. Average Monthly Compensation is the monthly average of an eligible employee's Compensation during the highest five of the last ten calendar - 3 - 71 years or the monthly average during the last 60 consecutive months of service, if greater. A.5 Covered Compensation. Covered Compensation is current monthly 35-year average maximum earnings which may be considered wages subject to Social Security taxation which shall be determined for each Participant according to the year the Participant attains Social Security retirement age as of which unreduced benefits are payable. Covered Compensation will be changed and this Exhibit A will be automatically changed whenever the maximum earnings currently subject to Social Security tax are changed and such change is approved by the Internal Revenue Service. The current Covered Compensation is set forth in Appendix I, which is attached hereto and incorporated by reference herein, which may be replaced without formal Plan amendment upon a change in that Covered Compensation as described above. A.6 Benefit Guidelines. As the benefit payable under 6.1 as of any date relates to the benefit accrued or but for the applicable limitations or other restrictions would have been accrued under the U. S. Bancorp Retirement Plan as of that date, the actuarial equivalent value of the benefit payable under this Plan shall be neither more nor less than the actuarial equivalent - 4 - 72 value of the benefit under this Plan determined in relation to that Retirement Plan as if it was fully set forth in this Plan. - 5 - 73 Exhibit 10.5 U. S. BANCORP SUPPLEMENTAL BENEFITS EXHIBIT A APPENDIX I COVERED COMPENSATION
1993 1994 Monthly Monthly Year of Covered Covered Birth Compensation Compensation ----- ------------ ------------ 1926 $1,644 $1,644 1927 1,766 1,766 1928 1,893 1,893 1929 2,019 2,026 1930 2,144 2,159 1931 2,270 2,291 1932 2,396 2,424 1933 2,521 2,557 1934 2,647 2,690 1935 2,773 2,823 1936 2,894 2,951 1937 3,016 3,080 1938 3,253 3,331 1939 3,371 3,457 1940 3,490 3,583 1941 3,606 3,706 1942 3,717 3,824 1943 3,823 3,937 1944 3,926 4,048 1945 4,027 4,156 1946 4,125 4,261 1947 4,220 4,363 1948 4,303 4,453 1949 4,378 4,535 1950 4,445 4,609 1951 4,505 4,676 1952 4,557 4,735 1953 4,604 4,790
74 1954 4,647 4,840 1955 4,717 4,924 1956 4,747 4,961 1957 4,770 4,991 1958 4,785 5,013 1959 4,795 5,030 1960 4,800 5,042 1961 and later 4,800 5,050
- 7 - EX-10.11 5 RETIREMENT BENEFITS OF DANIEL R. NELSON 1 Exhibit 10.11 DESCRIPTION OF RETIREMENT BENEFITS OF DANIEL R. NELSON Retirement benefits for Daniel R. Nelson were calculated based on his years of benefit service at retirement. His benefits equal a fraction (65% multiplied by his years of benefit service, divided by 25) multiplied by his average compensation during the five consecutive calendar years out of the last ten years for which compensation was the highest. His benefits were reduced for retirement prior to age 65. Mr. Nelson retired from U. S. Bancorp effective January 1, 1997, at which time he had a total of 12.75 years of credited benefit service. His annual retirement benefit at this time, assuming single life annuity, reductions for estimates Social Security benefits and for employer contributions to the U. S. Bancorp Employee Investment Plan and deferred compensation account, and reduction for early retirement, is $192,267. EX-10.13 6 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.13 EMPLOYMENT AGREEMENT AGREEMENT by and between U.S. Bancorp, an Oregon corporation (the "Company") and (name) (the "Executive"), dated as of the 20th day of February, 1997. The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so 2 as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. 2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Ex change Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business 2 3 Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive here by agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary of such date (the "Employment Period"). 4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location. 3 4 (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus 4 5 (the "Annual Bonus") in cash at least equal to the Executive's highest bonus under the Company's Executive/Management Annual Incentive Plan, or any comparable bonus under any predecessor or successor plan, for the last three full fiscal years prior to the Effective Date (annualized in the event that the Executive was not employed by the Company for the whole of such fiscal year) (the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (iii) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more 5 6 favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect 6 7 to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the 7 8 instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or 8 9 (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the 30-day period immediately following the first anniversary of the Effective Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the disability Effective Date, as the case may be. 6. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: 9 10 (i) unless the Executive has made an election under the Company's 1991 Executive Deferred Compensation Plan to defer receipt of the amounts set forth in clauses A, B and C below, in which case those amounts shall be paid as provided by such election, the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the higher of (I) the Recent Annual Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount being referred to as the "Highest Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation and sick pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to the product of (1) three and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus; and C. an amount equal to the excess of (a) the actuarial equivalent of the benefit under the Company's qualified defined benefit retirement plan (the "Retirement Plan") (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the Company's Retirement Plan immediately prior to the Effective Date), and any excess or supplemental retirement plan in which the Executive participates (together, the "SERP") which the Executive would receive if the Executive's employment continued for three years after the Date of Termination assuming for this purpose that all accrued benefits are fully vested, and, assuming that the Executive's compensation in each of the three years is that required by Section 4(b)(i) and 10 11 Section 4(b)(ii), over (b) the actuarial equivalent of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan and the SERP as of the Date of Termination; (ii) for three years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until three years after the Date of Termination and to have retired on the last day of such period; (iii) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in his sole discretion; and (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the 11 12 Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favor able to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for 12 13 Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies, including, without limitation, any enhanced or similar retirement benefits under the Company's Amended and Restated Supplemental Benefits Plan. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and other wise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 13 14 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penal ties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 9(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Deloitte & Touche, LLP or such other certified public accounting firm as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, 14 15 shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30- day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an 15 16 after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 16 17 10. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. 17 18 (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: (Name) (Address1) (Address2) (State) If to the Company: U.S. Bancorp 111 SW Fifth Avenue, Pl-2 Portland Oregon 97204 Attention: Manager, Human Resources or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section 1(a) hereof, prior to the Effective Date, the Executive's employment and/or this Agreement may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive 18 19 shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. U. S. Bancorp By ______________________ Its _____________________ _________________________ (Name) 19 EX-12.1 7 COMPUTATION OF RATIOS OF CONSOLIDATED EARNINGS 1 Exhibit 12.1 U. S. Bancorp and Subsidiaries Computation of Ratios of Consolidated Earnings to Fixed Charges (in Thousands)
For the Years ended December 31, CONSIDERING INTEREST ON DEPOSITS AS AN OPERATING EXPENSE 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Net income 478,894 328,971 254,666 341,136 211,556 Accounting changes -- -- -- -- 59,890 Income taxes 262,958 180,268 108,531 163,691 120,503 --------- --------- --------- --------- --------- Earnings before income taxes and accounting changes 741,852 509,239 363,197 504,827 391,949 --------- --------- --------- --------- --------- Add: fixed charges Interest on borrowed funds including capitalized interest 248,485 283,059 215,004 172,414 217,261 Interest income from federal funds sold (A) (5,511) (3,959) (3,090) (5,259) (11,562) Interest component of leases (B) 16,192 17,623 18,510 17,310 15,257 Obligation of capital qualifying securities (C) 482 -- -- -- -- --------- --------- --------- --------- --------- Total fixed charges 259,648 296,723 230,424 184,465 220,956 Less: capitalized interest -- -- (93) (96) (470) --------- --------- --------- --------- --------- Fixed charges 259,648 296,723 230,331 184,369 220,486 --------- --------- --------- --------- --------- Earning before income taxes, accounting charges and fixed charges 1,001,500 805,962 593,528 689,196 612,435 ========= ========= ========= ========= ========= Ratios of earnings to total fixed charges 3.86x 2.72x 2.58x 3.74x 2.77x ==== ==== ==== ==== ==== CONSIDERING INTEREST ON DEPOSITS AS FIXED CHARGES (A) Fixed charges shown above 259,648 296,723 230,424 184,465 220,956 Interest on deposits 768,170 710,044 523,780 525,807 608,439 --------- --------- --------- --------- --------- Total fixed charges 1,027,818 1,006,767 754,204 710,272 829,395 Less: capitalized interest -- -- (93) (96) (470) --------- --------- --------- --------- --------- Fixed charges 1,027,818 1,006,767 754,111 710,176 828,925 Add: earnings before income taxes and accounting changes 741,852 509,239 363,197 504,827 391,949 --------- --------- --------- --------- --------- Earning before income taxes, accounting changes and fixed charges 1,769,670 1,516,006 1,117,308 1,215,003 1,220,874 ========= ========= ========= ========= ========= Ratios of earnings to total fixed charges 1.72x 1.51x 1.48x 1.71x 1.47x ==== ==== ==== ==== ====
A - Approximates interest expense related to federal funds purchased transactions for purposes other than funding of banking subsidiaries' operations. B - Interest component of leases includes imputed interest on capitalized leases and approximately one-third of rental expense, which approximates the interest component of operating leases. C - Amount distributed to holders of U.S. Bancorp - obligated mandatory redeemable capital securities of subsidiary trust holding only junior subordinated deferrable interest debentures of U.S. Bancorp. EX-12.2 8 SUBSIDIARIES OF CAPITAL RATIOS 1 U.S. BANCORP AND SUBSIDIARIES Exhibit 12.2 CAPITAL RATIOS (In Thousands)
1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- Total assets, as reported $33,260,398 $31,794,283 $30,609,108 $29,086,757 $27,874,784 Shareholders equity as reported 2,710,762 2,617,053 2,493,054 2,441,761 2,121,133 Tier 1 capital 2,628,254 2,418,782 2,312,598 2,184,839 1,951,425 Total capital 3,834,230 3,377,927 3,017,058 2,868,209 2,602,106 Weighted risk assets 32,408,161 28,656,662 26,521,830 24,417,553 22,611,197 Adjusted quarterly average assets 32,174,525 30,651,822 29,568,331 28,587,951 27,494,254 Risk-based capital ratios Tier 1 capital to weighted risk assets 8.11% 8.44% 8.72% 8.95% 8.63% Total capital to weighted risk assets 11.83 11.79 11.38 11.75 11.51 Leverage Ratio - Tier 1 capital to adjusted average assets 8.17 7.89 7.82 7.64 7.10
2 U.S. BANCORP AND SUBSIDIARIES CAPITAL RATIOS (In Thousands) (Continued)
1996 1995 ----------- ----------- Total assets, as reported U.S. Bank of Oregon $14,289,623 $12,125,235 U.S. Bank of Washington 9,703,758 9,263,179 U.S. Bank of Idaho 3,823,744 4,786,820 Shareholders equity as reported U.S. Bank of Oregon 1,094,263 1,090,899 U.S. Bank of Washington 689,582 761,127 U.S. Bank of Idaho 231,381 343,102 Tier 1 capital U.S. Bank of Oregon 1,072,459 1,080,548 U.S. Bank of Washington 689,948 758,039 U.S. Bank of Idaho 227,783 337,742 Total capital U.S. Bank of Oregon 1,622,921 1,312,035 U.S. Bank of Washington 1,049,596 960,244 U.S. Bank of Idaho 338,437 380,134 Weighted risk assets U.S. Bank of Oregon 14,820,203 12,506,018 U.S. Bank of Washington 9,953,908 9,078,265 U.S. Bank of Idaho 3,241,792 3,379,494 Adjusted quarterly average assets U.S. Bank of Oregon 13,835,773 11,241,854 U.S. Bank of Washington 9,267,325 9,017,317 U.S. Bank of Idaho 3,820,778 4,657,361 Risk-based capital ratios Tier 1 capital to weighted risk assets U.S. Bank of Oregon 7.24% 8.64% U.S. Bank of Washington 6.93 8.35 U.S. Bank of Idaho 7.03 9.99 Total capital to weighted risk assets U.S. Bank of Oregon 10.95% 10.49% U.S. Bank of Washington 10.54 10.58 U.S. Bank of Idaho 10.44 11.25 Leverage Ratio - Tier 1 capital to adjusted average assets U.S. Bank of Oregon 7.75% 9.61% U.S. Bank of Washington 7.44 8.41 U.S. Bank of Idaho 5.96 7.25
EX-12.3 9 SUBSIDIARIES COMPUTATION OF RATIOS 1 Exhibit 12.3 U.S. BANCORP AND SUBSIDIARIES COMPUTATION OF RATIOS ON A BEFORE ACCOUNTING CHANGE BASIS Year Ended December 31, 1992 ------------ (In Thousands) Income before cumulative effect of accounting changes $ 271,446 Less preferred dividend requirement (5,349) ----------- Income before cumulative effect of accounting changes to common stock $ 266,097 =========== Average common equity before accounting changes $ 1,893,022 Adjustment for cumulative effect of accounting changes (59,890) ----------- Average common equity, adjusted for accounting changes $ 1,833,132 =========== Average assets $25,335,202 =========== Returns on a before accounting change basis Return on average common equity 14.06% Return on average assets 1.07% EX-21 10 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21
SUBSIDIARY NAME STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION United States National Bank of Oregon U.S.A. [A wholly owned national banking association] Bancorp Merchant Services Alliance, Inc. Oregon [A wholly owned Oregon corporation] Qualivest Capital Management, Inc. Oregon [A wholly owned Oregon corporation] U. S. Bancorp Leasing & Financial Oregon [A wholly owned Oregon corporation] U. S. Bancorp Mortgage Company Oregon [A wholly owned inactive Oregon corporation] U. S. Bancorp Securities Oregon fka U. S. Bancorp Brokerage [A wholly owned Oregon corporation] U. S. Bank of Washington, National Association U.S.A. [A wholly owned national banking association] U. S. Bank of Idaho Idaho fka West One Bank, Idaho [A wholly owned State member bank] U. S. Bank of California California [A wholly owned State nonmember bank] U. S. Bank of Nevada Nevada fka Bank of America-Nevada [A wholly owned State nonmember bank] U.S. Bank of Utah Utah fka West One Bank, Utah [A wholly-owned State member bank]
2 First State Bank of Oregon Oregon fka First National Bank of Oregon [A wholly owned State nonmember bank] U. S. Bancorp Insurance Oregon fka First State Insurance, Inc. [A wholly owned Oregon corporation] Compass Group, Inc. Washington [A wholly owned Washington corporation] U. S. Bancorp Capital I Delaware [A Delaware Business Trust] U. S. Bancorp Insurance Agency, Inc. Oregon fka Mt. Hood Credit Life Insurance Agency, Inc. [A wholly owned Oregon corporation] U. S. Bank Insurance Agency, Inc. Oregon [A wholly owned Oregon corporation] U. S. Restco Inc. Oregon [A wholly owned Oregon corporation] U. S. Trade Services, Inc. Oregon [A wholly owned Oregon corporation] U. S. World Trade Corporation Oregon [A wholly owned Oregon corporation] Ward Cook, Inc. Oregon [A wholly-owned Oregon corporation] West One Insurance Services, Inc. Idaho [A wholly-owned Idaho corporation] West One Life Insurance Company Oregon fka Mt. Hood Life Insurance, Inc. [A wholly-owned Oregon corporation] West One Trust Company Utah dba U. S. Bank Trust Company [A wholly-owned Utah corporation]
3 Aloha LIH Apartments, Inc. Oregon [A wholly owned Oregon corporation] Ariel Glen L.P., Inc. Oregon [A wholly owned Oregon corporation] Bandon L.P., Inc. Oregon [A wholly owned Oregon corporation] Boardman L.P., Inc. Oregon [A wholly owned Oregon corporation] Boulder Creek L.P., Inc. Oregon [A wholly owned Oregon corporation] Brandenwood L.P., Inc. Oregon [A wholly owned Oregon corporation] Bristol Square L.P., Inc. Oregon [A wholly owned Oregon corporation] Clock Tower II LIH Apartments, Inc. Oregon [A wholly owned Oregon corporation] Clock Tower LIH Apartments, Inc. Oregon [A wholly owned Oregon corporation] Eaton L.P., Inc. Oregon [A wholly owned Oregon corporation] Fawnbrook L.P., Inc. Oregon [A wholly owned Oregon corporation] FB II L.P., Inc. Oregon [A wholly owned Oregon corporation] Graham L.P., Inc. Oregon [A wholly owned Oregon corporation] Gresham Apartments L.P., Inc. Oregon [A wholly owned Oregon corporation] Heritage Place L.P., Inc. Oregon [A wholly owned Oregon corporation]
4 Island Bancorp Leasing, Inc. California [A wholly-owned inactive California corporation] King's Garden L.P., Inc. Oregon [A wholly owned Oregon corporation] Laidlaw LIH Apartments, Inc. Oregon [A wholly owned Oregon corporation] McKenzie Meadow L.P., Inc. Oregon [A wholly owned Oregon corporation] Meadowbrook L.P., Inc. Oregon [A wholly owned Oregon corporation] Spokane II LIH Apartments, Inc. Oregon [A wholly owned Oregon corporation] St. James L.P., Inc. Oregon [A wholly owned Oregon corporation] St. John's Common L.P., Inc. Oregon [A wholly owned Oregon corporation] Truckee Pines L.P., Inc. Oregon [A wholly owned Oregon corporation] Twenty-Eight Avenue Apartments L.P., Inc. Oregon [A wholly owned Oregon corporation] Williams & Morris L.P., Inc. Oregon [A wholly owned Oregon corporation] CBI Mortgage California [A wholly-owned California corporation] Commercial Bank of Fremont California [A wholly-owned State member bank] Community First National Bank California [A wholly-owned national banking association.] Concord Commercial Bank California
5 Eden Financial Corporation California [A wholly-owned California corporation] Lamorinda National Bank California [A wholly-owned national banking association] LNB Corp. California [A wholly-owned California corporation] Modesto Banking Company California [A wholly-owned State nonmember bank] The Bank of Milpitas, National Bank California [A wholly-owned national banking association] The Bank of San Ramon Valley California [A wholly-owned State member bank] Tracy Mortgage Company (Salt Lake City, UT) Utah [A wholly owned inactive Utah corporation] Westside Bank California [A wholly-owned State member bank]
EX-23.1 11 CONSENT OF DELOITTE & TOUCHE LLP 1 Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-28785, 33-39861, 33-39860, 33-71904, 33-64429, 33-83158, 33-39765, 33-64435, 333-05329, and 33-18706 of U.S. Bancorp on Form S-8 and Nos. 33-86474, 33-43407, 33-48249, and 333-12733 of U.S. Bancorp on Form S-3 of our report dated January 31, 1997, appearing in this Annual Report on Form 10-K of U.S. Bancorp for the year ended December 31, 1996. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP March 11, 1997 EX-23.2 12 CONSENT OF COOPERS & LYBRAND L.L.P. 1 Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of U.S. Bancorp on Form S-3 (File Nos. 33-43407, 33-48249, 33-86474, and 333-12733) and on Form S-8 (File Nos. 33-18706, 33-28785, 33-39765, 33-39860, 33-39861, 33-64429, 33-64435, 33-71904, 33-83158, and 333-12733) of our report dated January 19, 1995, on our audit of the consolidated statements of income, shareholders' equity, and cash flows of West One Bancorp and subsidiaries for the year ended December 31, 1994, which report is included in this Annual Report on Form 10-K of U.S. Bancorp. /s/ Coopers & Lybrand L.L.P. Boise, Idaho March 12, 1997 EX-24 13 POWER OF ATTORNEY 1 EXHIBIT 24 POWER OF ATTORNEY Each person whose signature appears below designates and appoints GERRY B. CAMERON, STEVEN P. ERWIN, DWIGHT V. BOARD, and SHERYL W. DAWSON; and each of them, true and lawful attorneys-in-fact and agents to sign the annual report on Form 10-K of U. S. Bancorp, an Oregon corporation, for the year ended December 31, 1996, and to file said report, with all exhibits thereto, with the Securities and Exchange Commission under the Securities Exchange Act of 1934. Each person whose signature appears below also grants full power and authority to these attorneys-in-fact and agents to perform every act and execute any instruments that they deem necessary or desirable in connection with said report, as fully as he could do in person, hereby ratifying and confirming all that the attorneys-in-fact and agents or their substitutes may lawfully do or cause to be done. IN WITNESS WHEREOF, this power of attorney has been executed by the undersigned as of the 20th day of February, 1997. Signature Title - --------- ----- /s/ GERRY B. CAMERON - ----------------------------- Gerry B. Cameron Chairman, Chief Executive Officer, President and Director (Principal Executive Officer) - ----------------------------- Steven P. Erwin Executive Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer) /s/ HARRY L. BETTIS - ----------------------------- Harry L. Bettis Director - ----------------------------- Carolyn Silva Chambers Director /s/ FRANKLIN G. DRAKE - ----------------------------- Franklin G. Drake Director /s/ROBERT L. DRYDEN - ----------------------------- Robert L. Dryden Director /s/ JOHN B. FERY - ----------------------------- John B. Fery Director /s/ JOSHUA GREEN III - ----------------------------- Joshua Green III Director - ----------------------------- Daniel R. Nelson Director /s/ ALLEN T. NOBLE - ----------------------------- Allen T. Noble Director /s/ PAUL A. REDMOND - ----------------------------- Paul A. Redmond Director /s/ N. STEWART ROGERS - ----------------------------- N. Stewart Rogers Director /s/ BENJAMIN R. WHITELEY - ----------------------------- Benjamin R. Whiteley Director EX-27 14 FINACIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 2,401,100 0 70,900 85,100 3,047,900 796,700 810,900 25,046,700 475,900 33,260,400 24,977,000 2,494,900 638,500 1,811,500 0 150,000 736,000 1,824,800 33,260,400 2,207,900 233,600 41,800 2,483,300 768,200 1,016,700 1,466,600 135,200 5,800 1,174,800 741,800 478,900 0 0 478,900 3.08 3.08 5.32 145,600 41,000 3,300 50,000 434,500 144,200 35,500 475,900 281,900 0 194,000
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