-----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, HcmdgnDnZwxYc6X0yoesFhjdlfv8OZNXYWlJdSg0WVReOnZxc/rdv00LXntp40fx bxp5RLtNcsAKK1GYdO8nTw== 0000897101-97-001189.txt : 19971117 0000897101-97-001189.hdr.sgml : 19971117 ACCESSION NUMBER: 0000897101-97-001189 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: US BANCORP \DE\ CENTRAL INDEX KEY: 0000036104 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 410255900 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22363 FILM NUMBER: 97719151 BUSINESS ADDRESS: STREET 1: FIRST BANK PL STREET 2: 601 SECOND AVE S CITY: MINNEAPOLIS STATE: MN ZIP: 55402-4302 BUSINESS PHONE: 6129731111 MAIL ADDRESS: STREET 1: 601 2ND AVENUE SOUTH-FIRST BANK PLACE STREET 2: 601 2ND AVENUE SOUTH-FIRST BANK PLACE CITY: MINNEAPOLIS STATE: MN ZIP: 55402-4302 FORMER COMPANY: FORMER CONFORMED NAME: FIRST BANK SYSTEM INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FIRST BANK STOCK CORP DATE OF NAME CHANGE: 19720317 10-Q 1 3 FORM 10-Q / SEPTEMBER 30, 1997 [LOGO] U.S. BANCORP - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM (NOT APPLICABLE) COMMISSION FILE NUMBER 1-6880 U.S. BANCORP (Exact name of registrant as specified in its charter) DELAWARE 41-0255900 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 601 SECOND AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55402-4302 (Address of principal executive offices and Zip Code) 612-973-1111 (Registrant's telephone number, including area code) (NOT APPLICABLE) (Former name, former address and former fiscal year, if changed since last report). ----------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months and (2) has been subject to such filing requirements for the past 90 days. YES __X__ NO _____ Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. Class Outstanding as of October 31, 1997 Common Stock, $1.25 Par Value 245,472,252 shares - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FINANCIAL SUMMARY
Three Months Ended Nine Months Ended -------------------------- -------------------------- September 30 September 30 September 30 September 30 (Dollars in Millions, Except Per Share Data) 1997 1996 1997 1996 ============ ============ ============ ============ Income before nonrecurring items .................. $ 324.8 $ 290.6 $ 919.7 $ 850.3 Nonrecurring items ................................ (372.4) (34.9) (370.1) 76.3 --------- --------- --------- --------- Net income (loss) ................................. $ (47.6) $ 255.7 $ 549.6 $ 926.6 ========= ========= ========= ========= PER COMMON SHARE Primary net income (loss) ......................... $ (.20) $ .98 $ 2.17 $ 3.59 Fully diluted net income (loss) ................... (.20) .98 2.16 3.55 Earnings (loss) on a cash basis (fully diluted)* .. (.09) 1.08 2.49 3.95 Dividends paid .................................... .4650 .4125 1.3950 1.2375 Common shareholders' equity ....................... 22.82 22.97 PER COMMON SHARE BEFORE NONRECURRING ITEMS Primary income .................................... 1.30 1.12 3.66 3.29 Fully diluted income .............................. 1.29 1.11 3.64 3.26 Earnings on a cash basis (fully diluted)* ......... 1.41 1.22 3.97 3.54 --------- --------- --------- --------- FINANCIAL RATIOS Return on average assets .......................... (.28)% 1.50% 1.07% 1.84% Return on average common equity ................... (3.5) 17.3 12.8 21.5 Efficiency ratio .................................. 84.3 56.8 61.7 53.3 Net interest margin (taxable-equivalent basis) .... 5.03 5.05 5.05 5.03 SELECTED FINANCIAL RATIOS BEFORE NONRECURRING ITEMS Return on average assets .......................... 1.88 1.70 1.80 1.69 Return on average common equity ................... 22.3 19.7 21.5 19.7 Efficiency ratio .................................. 47.7 51.6 49.3 52.4 ========= ========= ========= ========= September 30 December 31 1997 1996 --------- --------- PERIOD END Loans ............................................. $ 54,143 $ 52,355 Allowance for credit losses ....................... 1,020 993 Assets ............................................ 70,174 69,749 Total shareholders' equity ........................ 5,741 5,763 Tangible common equity to total assets** .......... 6.7% 6.7% Tier 1 capital ratio .............................. 7.2 7.6 Total risk-based capital ratio .................... 11.4 11.9 Leverage ratio .................................... 7.3 7.5 ========= =========
* CALCULATED BY ADDING AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS TO NET INCOME. ** DEFINED AS COMMON EQUITY LESS GOODWILL AS A PERCENTAGE OF TOTAL ASSETS LESS GOODWILL. REFER TO MANAGEMENT'S DISCUSSION AND ANALYSIS ON PAGE 2 FOR A DESCRIPTION OF NONRECURRING ITEMS. TABLE OF CONTENTS AND FORM 10-Q CROSS-REFERENCE INDEX PART I -- FINANCIAL INFORMATION Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 2) .............................................................................. 2 Financial Statements (Item 1) ........................................................... 15 PART II -- OTHER INFORMATION Exhibits and Reports on Form 8-K (Item 6) ............................................... 28 Signature ............................................................................... 28 Exhibit 10(a) -- Employment Agreement with John F. Grundhofer ........................... *** Exhibit 10(b) -- Employment Agreement with Philip G. Heasley ............................ *** Exhibit 10(c) -- Employment Agreement with Richard A. Zona .............................. *** Exhibit 10(d) -- Employment Agreements with Gerry B. Cameron, Gary T. Duim and Robert D. Sznewajs. Filed as Exhibits 10.1 - 10.3 to Registration Statement on Form S-4, File No. 333-29409 and incorporated herein by reference ...... *** Exhibit 11 -- Computation of Primary and Fully Diluted Net Income Per Common Share ...... 29 Exhibit 12 -- Computation of Ratio of Earnings to Fixed Charges ......................... 30 Exhibit 27 -- Article 9 Financial Data Schedule ......................................... ***
*** COPIES OF THIS EXHIBIT WILL BE FURNISHED UPON REQUEST AND PAYMENT OF THE COMPANY'S REASONABLE EXPENSES IN FURNISHING THE EXHIBIT. FORWARD-LOOKING STATEMENTS This form 10-Q includes forward-looking statements that involve inherent risks and uncertainties. U.S. Bancorp cautions readers that a number of important factors could cause actual results to differ materially from those in the forward-looking statements. These factors include economic conditions and competition in the geographic and business areas in which the Company operates, inflation, fluctuations in interest rates, legislation and governmental regulation and the progress of integrating former U. S. Bancorp. MANAGEMENT'S DISCUSSION AND ANALYSIS U.S. Bancorp, formerly known as First Bank System, Inc. (the "Company"), is the organization created by the merger of First Bank System, Inc. ("FBS") and U. S. Bancorp ("USBC") of Portland, Oregon. The merger was completed on August 1, 1997 as a pooling-of-interests, and prior period financial statements have been restated to reflect the merger. EARNINGS SUMMARY -- The Company reported third quarter 1997 operating earnings (net income excluding nonrecurring items) of $324.8 million, compared with $290.6 million in the third quarter of 1996. On a fully diluted per share basis, operating earnings were $1.29 in the third quarter of 1997, compared with $1.11 in the third quarter of 1996, an increase of 16 percent. Return on average assets and return on average common equity, excluding nonrecurring items, were 1.88 percent and 22.3 percent, respectively, in the third quarter of 1997, compared with returns of 1.70 percent and 19.7 percent in the third quarter of 1996. Excluding nonrecurring items, the efficiency ratio (the ratio of expenses to revenues) improved to 47.7 percent in the third quarter of 1997 from 51.6 percent in the third quarter of 1996. Operating earnings for the third quarter of 1997 reflected growth in both net interest income and noninterest income and a decrease in noninterest expense from the third quarter of 1996. Third quarter net interest income on a taxable-equivalent basis increased $9.8 million (1 percent) from the third quarter of 1996 to $779.8 million, due primarily to an increase in earning assets. Noninterest income, excluding nonrecurring items, increased $44.3 million (12 percent) from the third quarter of 1996. The increase was the result of growth in all categories of fee revenue. Third quarter noninterest expense, excluding nonrecurring items, decreased $18.1 million (3 percent) from the third quarter of 1996, reflecting the initial benefits of the merger. As a result of merger-related charges, the Company recorded a net loss for the third quarter of 1997 of $47.6 million, or $.20 per fully diluted share, compared with net income of $255.7 million, or $.98 per fully diluted share, in the third quarter of 1996. Nonrecurring items decreased net income $372.4 million ($525.8 million on a pretax basis) or $1.49 per share in the third quarter of 1997. Nonrecurring pretax gains included a $9.4 million gain on the sale of USBC's affinity credit card portfolio. Nonrecurring pretax charges of $535.2 million consisted of $440.2 million of merger-related expenses and a $95.0 million merger-related provision for credit losses. Merger-related expenses included: $232.3 million of severance costs; $65.8 million of occupancy/equipment writedowns; $43.4 million of capitalized software and other asset write-offs; $35.0 million of investment banking and other transaction costs; $27.1 million of conversion expenses incurred; and, $36.6 million of other merger-related expenses. Approximately $190.0 million of additional merger-related expenses are expected to be incurred over the next four quarters. The $95.0 million merger-related provision for credit losses and a related $62.3 million of charge-offs were recorded as a result of efforts to align the classification and charge-off practices of the former USBC with those of the Company. Nonrecurring items decreased net income $34.9 million ($56.2 million on a pretax basis) or $.13 per share in the third quarter 1996. Nonrecurring pretax gains included a $4.2 million gain on the sale of premises and $.9 million of net securities gains. Nonrecurring pretax charges consisted of a $61.3 million one-time special assessment by the Federal Deposit Insurance Corporation ("FDIC") on Savings Association Insurance Fund ("SAIF") deposits. Operating earnings for the first nine months of 1997 were $919.7 million compared with $850.3 million in the first nine months of 1996. On a fully diluted per share basis, operating earnings were $3.64 in the first nine months of 1997, compared with $3.26 in the first nine months of 1996, an increase of 12 percent. Year-to-date return on average assets and return on average common equity, excluding nonrecurring items, were 1.80 percent and 21.5 percent, respectively, in the first nine months of 1997, compared with returns of 1.69 percent and 19.7 percent, in the first nine months of 1996. Excluding nonrecurring items, the year-to-date efficiency ratio improved to 49.3 percent from 52.4 percent in 1996. Net income for the first nine months of 1997 was $549.6 million, compared with $926.6 million for the first nine months of 1996. Nonrecurring items decreased net income $370.1 million ($522.2 million on a pre-tax basis), or $1.48 per share for the first nine months of 1997. In addition to the third quarter 1997 nonrecurring items discussed above, nonrecurring items in the first nine months of 1997 included $3.6 million of pretax net securities gains. Nonrecurring items increased net income $76.3 million ($144.6 million on a pretax basis) or $.29 per share for the first nine months of 1996. For the nine months ended September 30, 1996, nonrecurring gains included: $190 million, net of expenses, received for the termination of the First Interstate Bancorp merger agreement; a $65 million state income tax refund, including interest; a $45.8 million gain on the sale of the Company's mortgage banking operations; a $25.6 million gain on branch and credit card portfolio sales; a $4.2 million gain on the sale of premises; and, $20.3 million in net securities gains. TABLE 1 SUMMARY OF CONSOLIDATED INCOME
Three Months Ended Nine Months Ended ---------------------------- --------------------------- (Taxable-Equivalent Basis; September 30 September 30 September 30 September 30 Dollars In Millions, Except Per Share Data) 1997 1996 1997 1996 =========== =========== =========== =========== Interest income ...................................... $ 1,346.6 $ 1,310.5 $ 3,989.3 $ 3,859.4 Interest expense ..................................... 566.8 540.5 1,668.0 1,602.8 ----------- ----------- ----------- ----------- Net interest income ................................. 779.8 770.0 2,321.3 2,256.6 Provision for credit losses .......................... 185.0 73.1 370.3 195.7 ----------- ----------- ----------- ----------- Net interest income after provision for credit losses 594.8 696.9 1,951.0 2,060.9 Securities gains ..................................... -- .9 3.6 20.3 Other nonrecurring gains ............................. 9.4 4.2 9.4 330.6 Other noninterest income ............................. 400.3 356.0 1,181.7 1,071.4 Merger-related charges ............................... 440.2 -- 440.2 88.1 Other nonrecurring charges ........................... -- 61.3 -- 118.2 Other noninterest expense ............................ 562.9 581.0 1,727.9 1,744.9 ----------- ----------- ----------- ----------- Income before income taxes .......................... 1.4 415.7 977.6 1,532.0 Taxable-equivalent adjustment ........................ 14.5 16.1 44.2 48.2 Income taxes ......................................... 34.5 143.9 383.8 557.2 ----------- ----------- ----------- ----------- Net income (loss) ................................... $ (47.6) $ 255.7 $ 549.6 $ 926.6 =========== =========== =========== =========== Return on average assets ............................. (.28)% 1.50% 1.07% 1.84% Return on average common equity ...................... (3.5) 17.3 12.8 21.5 Net interest margin .................................. 5.03 5.05 5.05 5.03 Efficiency ratio ..................................... 84.3 56.8 61.7 53.3 Efficiency ratio before nonrecurring items ........... 47.7 51.6 49.3 52.4 =========== =========== =========== =========== Per Common Share: Net income (loss) .................................... $ (.20) $ .98 $ 2.17 $ 3.59 Dividends paid ....................................... .4650 .4125 1.3950 1.2375 =========== =========== =========== ===========
Nonrecurring charges in the first nine months of 1996 included: $49.5 million of merger and integration charges; $38.6 million in branch distribution resizing expenses; a $29.5 million valuation adjustment to reduce the carrying value of credit card and core deposit intangibles to their estimated fair value; $10.1 million for a one-time $750 per-employee bonus; $17.3 million to acquire credit card and revolving credit software and to write-off other miscellaneous assets; and, a $61.3 million one-time special assessment on SAIF deposits. Operating results reflect the following acquisition and divestiture activity: the April 1997 acquisition of Business and Professional Bank of Sacramento, California; the February 1997 securitization and sale of $420 million of corporate charge card receivables; the January 1997 acquisitions of Sun Capital Bancorp of St. George, Utah and the bond indenture services and paying agency business of Comerica Incorporated; the June 1996 acquisition of California Bancshares, Inc.; and, the February 1996 acquisition of Omaha-based FirsTier Financial, Inc. On September 15, 1997, the Company announced that it would acquire Zappco, Inc., a bank holding company headquartered in St. Cloud, Minnesota, with three banks, six banking locations and total assets of $360 million. The acquisition is subject to regulatory approval and is expected to close late in the fourth quarter of 1997. LINE OF BUSINESS FINANCIAL REVIEW Financial performance is measured by major lines of business, which include: Retail Banking, Payment Systems, Business Banking and Private Financial Services, Commercial Banking, and Corporate Trust and Institutional Financial Services. Business line results are derived from the Company's business unit profitability reporting system. Designations, assignments, and allocations may change from time to time as management accounting systems are enhanced or product lines change. During 1997 certain organization and methodology changes were made and 1996 results are presented on a consistent basis. RETAIL BANKING -- Retail Banking delivers products and services to the broad consumer market and small-business through branch offices, telemarketing, direct mail, and automated teller machines ("ATM's"). Operating earnings TABLE 2 LINE OF BUSINESS FINANCIAL PERFORMANCE
Retail Payment Banking Systems ------------------------------------------------------------- For the Three Months Ended September 30 Percent Percent (Dollars in Millions) 1997 1996 Change 1997 1996 Change - ----------------------------------------------------------------------------------------------------- CONDENSED INCOME STATEMENT: Net interest income (taxable-equivalent basis) $373.3 $384.9 (3.0)% $56.5 $60.2 (6.1)% Provision for credit losses 39.8 27.3 45.8 35.4 37.4 (5.3) Noninterest income 131.3 119.7 9.7 114.4 97.1 17.8 Noninterest expense 302.5 330.5 (8.5) 71.0 62.9 12.9 Income taxes and taxable-equivalent adjustment 62.4 56.5 24.7 21.9 -------------------- ------------------- Income before nonrecurring items $99.9 $90.3 10.6 $39.8 $35.1 13.4 ==================== =================== Net nonrecurring items (after-tax) Net income AVERAGE BALANCE SHEET DATA: Commercial loans $1,854 $1,795 3.3 $1,095 $1,234 (11.3) Consumer loans, excluding residential mortgage 10,933 10,481 4.3 4,320 4,137 4.4 Residential mortgage loans 4,676 5,232 (10.6) -- -- -- Assets 22,338 24,275 (8.0) 6,561 6,453 1.7 Deposits 36,180 37,728 (4.1) 42 37 13.5 Common equity 1,727 2,001 (13.7) 509 548 (7.1) -------------------- ------------------- Return on average assets 1.77% 1.48% 2.41% 2.16 % Return on average common equity ("ROCE") 22.9 18.0 31.0 25.5 Net tangible ROCE ** 39.5 30.1 50.4 40.3 Efficiency ratio 59.9 65.5 41.5 40.0 Efficiency ratio on a cash basis** 57.3 63.1 38.9 37.2 - -----------------------------------------------------------------------------------------------------
*Not meaningful **Calculated by excluding goodwill and other intangibles and the related amortization. Note: Nonrecurring items are not allocated to the business lines. were $99.9 million in the third quarter of 1997 compared with $90.3 million in the third quarter of 1996. Third quarter return on average assets increased to 1.77 percent from 1.48 percent in the same quarter a year ago. Net tangible return on average common equity increased to 39.5 percent compared with 30.1 percent in the third quarter of the prior year. Net interest income declined 3 percent from the third quarter of the prior year, due primarily to the planned runoff of the residential mortgage loan portfolio. Noninterest income increased 10 percent in the third quarter as compared to the same period in the prior year, due primarily to increases in service charges on deposits and investment products and fees. Noninterest expense decreased, reflecting the benefits of continued streamlining of branch operations, as well as the integration of recent business combinations. The third quarter 1997 efficiency ratio on a cash basis improved to 57.3 percent from 63.1 percent in the third quarter of 1996. PAYMENT SYSTEMS -- Payment Systems includes consumer and business credit cards, corporate and purchasing card services, card-accessed secured and unsecured lines of credit, ATM processing, and merchant processing. Operating earnings increased 13 percent in the third quarter of 1997 to $39.8 million compared with $35.1 million in the third quarter of 1996. Third quarter return on average assets was 2.41 percent compared with 2.16 percent in the third quarter of 1996, and net tangible return on average common equity was 50.4 percent compared with 40.3 percent for the same quarter in the previous year. Fee-based noninterest income increased 18 percent in the third quarter of 1997 compared with the same period in 1996. Excluding the reduction in fees related to the first quarter 1997 Corporate Card securitization, fee-based noninterest income increased 23 percent. The increase was due to growth in the sales volume of the Corporate Card, the Purchasing Card, and the FBS WorldPerks(R) VISA(R) card. Net interest income decreased 6 percent in the third quarter of 1997 compared with the same period in 1996 due to a higher proportion of retail customers who choose to pay off their credit card balance in full each month and lower retail late fees. Noninterest expense increased due to increased technology spending and higher variable transaction costs related to increased sales volume. BUSINESS BANKING AND PRIVATE FINANCIAL SERVICES -- Business Banking and Private Financial Services includes middle-market banking services, private banking, and personal trust. Operating earnings increased 9 percent to
Corporate Trust and Business Banking and Commercial Institutional Financial Consolidated Private Financial Services Banking Services Company - ----------------------------------------------------------------------------------------------------------------------------- Percent Percent Percent Percent 1997 1996 Change 1997 1996 Change 1997 1996 Change 1997 1996 Change - ----------------------------------------------------------------------------------------------------------------------------- $157.3 $147.1 6.9% $176.9 $165.8 6.7% $15.8 $12.0 31.7% $779.8 $770.0 1.3% 5.8 3.3 75.8 9.0 5.1 76.5 -- -- -- 90.0 73.1 23.1 44.7 42.8 4.4 40.3 34.0 18.5 69.6 62.4 11.5 400.3 356.0 12.4 80.4 80.0 .5 61.8 64.5 (4.2) 47.2 43.1 9.5 562.9 581.0 (3.1) 44.4 40.9 56.2 50.0 14.7 12.0 202.4 181.3 -------------------- --------------------- ------------------- --------------------- $71.4 $65.7 8.7 $90.2 $80.2 12.5 $23.5 $19.3 21.8 324.8 290.6 11.8 ==================== ===================== =================== (372.4) (34.9) -- --------------------- ($47.6) $255.7 -- ===================== $11,667 $10,736 8.7 $18,258 $16,742 9.1 $ -- $ -- -- $32,874 $30,507 7.8 562 551 2.0 -- -- -- -- -- -- 15,815 15,169 4.3 325 332 (2.1) -- -- -- -- -- -- 5,001 5,564 (10.1) 15,860 14,547 9.0 22,345 21,206 5.4 1,319 1,390 (5.1) 68,423 67,871 .8 5,531 5,227 5.8 3,785 3,273 15.6 1,497 1,308 14.4 47,035 47,573 (1.1) 1,448 1,424 1.7 1,662 1,484 12.0 390 332 17.5 5,736 5,789 (.9) -------------------- --------------------- ------------------- --------------------- 1.79% 1.80% 1.60% 1.50% * * 1.88% 1.70% 19.6 18.4 21.5 21.5 23.9% 23.1% 22.3 19.7 33.3 30.0 21.9 21.9 38.9 42.1 32.0 28.4 39.8 42.1 28.5 32.3 55.3 57.9 47.7 51.6 37.1 39.1 28.2 32.1 49.2 51.6 45.2 49.2 - -----------------------------------------------------------------------------------------------------------------------------
$71.4 million in the third quarter 1997. Third quarter 1997 return on average assets was 1.79 percent compared with 1.80 percent in the third quarter of 1996. Third quarter net tangible return on average common equity was 33.3 percent compared with 30.0 percent in the third quarter of the prior year. Net interest income increased 7 percent, reflecting growth in average loan balances. The increase in noninterest income was primarily due to higher personal trust fees. Noninterest expense was flat in the third quarter of 1997 compared with the third quarter of the prior year, helping the efficiency ratio on a cash basis to improve to 37.1 percent in the third quarter of 1997 from 39.1 percent in the third quarter of 1996. COMMERCIAL BANKING -- Commercial Banking provides lending, treasury management, and other financial services to middle-market, large corporate and mortgage banking companies. Operating earnings were $90.2 million in the third quarter of 1997 compared with $80.2 million in the third quarter of 1996. Third quarter 1997 return on average assets was 1.60 percent compared with 1.50 percent in third quarter 1996, and third quarter 1997 net tangible return on average common equity was 21.9 percent, unchanged from the third quarter of 1996. Net interest income increased 7 percent, reflecting growth in average loan balances. Third quarter noninterest income increased $6.3 million or 19 percent from the same period in 1996, due partially to the recognition of a number of transaction fees during the quarter which are recurring on an annual basis but do not occur in a regular quarterly pattern. The efficiency ratio on a cash basis remained low at 28.2 percent in the third quarter of 1997 compared with 32.1 percent in the third quarter of 1996. CORPORATE TRUST AND INSTITUTIONAL FINANCIAL SERVICES -- Corporate Trust and Institutional Financial Services includes institutional and corporate trust services, investment management services, and a full-service brokerage company. Operating earnings increased 22 percent to $23.5 million in the third quarter of 1997 compared with $19.3 million in the third quarter of 1996. The net tangible return on average common equity was 38.9 percent in the third quarter of 1997 compared with 42.1 percent in the third quarter of the prior year. Net interest income increased 32 percent over 1996, reflecting the acquisitions of the corporate trust businesses of BankAmerica and Comerica Incorporated. Noninterest income increased 12 percent from the third quarter of the prior year due primarily to increases in mutual fund advisory fees and corporate trust fees. The efficiency ratio on a cash basis improved to 49.2 percent in the third quarter of 1997 from 51.6 percent in the third quarter of 1996, reflecting the TABLE 3 NET INTEREST INCOME
Three Months Ended Nine Months Ended -------------------------- -------------------------- September 30 September 30 September 30 September 30 (Dollars In Millions) 1997 1996 1997 1996 ========== ========== ========== ========== Net interest income (taxable-equivalent basis) ...................... $ 779.8 $ 770.0 $ 2,321.3 $ 2,256.6 ========== ========== ========== ========== Average balances of earning assets supported by: Interest-bearing liabilities ....................................... $ 47,764 $ 47,593 $ 47,954 $ 47,357 Noninterest-bearing liabilities .................................... 13,777 13,046 13,489 12,623 ---------- ---------- ---------- ---------- Total earning assets .............................................. $ 61,541 $ 60,639 $ 61,443 $ 59,980 ========== ========== ========== ========== Average yields and weighted average rates (taxable-equivalent basis): Earning assets yield ............................................... 8.68% 8.60% 8.68% 8.59% Rate paid on interest-bearing liabilities .......................... 4.71 4.52 4.65 4.52 ---------- ---------- ---------- ---------- Gross interest margin ............................................... 3.97% 4.08% 4.03% 4.07% ========== ========== ========== ========== Net interest margin ................................................. 5.03% 5.05% 5.05% 5.03% ========== ========== ========== ========== Net interest margin without taxable-equivalent increments ........... 4.93% 4.95% 4.95% 4.92% ========== ========== ========== ==========
effective integration of acquisitions, process re-engineering efforts, and revenue growth. INCOME STATEMENT ANALYSIS NET INTEREST INCOME -- Net interest income on a taxable-equivalent basis increased $9.8 million (1 percent) to $779.8 million in the third quarter of 1997, and $64.7 million (3 percent) to $2.32 billion in the first nine months of 1997, compared with $770.0 million and $2.26 billion in the third quarter and first nine months of 1996. The increases were primarily the result of growth in earning assets, driven by loan production, partially offset by reductions in investment securities and residential mortgages. Third quarter and year-to-date average loans were up $2.5 billion (5 percent) and $2.8 billion (6 percent) from the same periods in the prior year. Excluding residential mortgage loans and the effect of the $420 million first quarter corporate card securitization, average loans for the third quarter and year-to-date were higher by $3.4 billion (8 percent) and $3.8 billion (9 percent), than the same periods of 1996. These increases reflected growth in both core commercial and consumer loans. Average securities for the third quarter and first nine months of 1997 were lower by $942 million and $911 million compared with the same periods in 1996, reflecting both maturities and sales of securities. The net interest margin in the third quarter and first nine months of 1997 was essentially unchanged at 5.03 percent and 5.05 percent compared with 5.05 percent and 5.03 percent in 1996. PROVISION FOR CREDIT LOSSES -- The provision for credit losses, before the $95.0 million merger-related provision, was $90.0 million in the third quarter and $275.3 million in the first nine months of 1997, up $16.9 million (23 percent) and $79.6 million (41 percent) from the third quarter and first nine months of 1996. Third quarter and year-to-date net charge-offs, before merger-related net charge-offs of $62.3 million, totaled $102.2 million and $284.1 million, up from $69.9 million and $190.3 million in the same periods of 1996. These increases resulted from increased loan volumes and higher commercial net charge-offs. The $95.0 million merger-related provision and $62.3 million of charge-offs were taken as a result of efforts to align the classification and charge-off practices of former USBC with those of the Company. Refer to "Corporate Risk Management" for further information on credit quality. NONINTEREST INCOME -- Third quarter 1997 noninterest income was $409.7 million, an increase of $48.6 million (13 percent) from the third quarter of 1996. Noninterest income in the first nine months of 1997 was $1.19 billion, compared with $1.42 billion in the first nine months of 1996. A number of nonrecurring gains affected third quarter and year-to-date noninterest income in 1997 and 1996 as summarized in Table 4. Nonrecurring gains in the third quarter of 1997 consisted of a $9.4 million gain on the sale of USBC's $45 million affinity credit card portfolio. Nonrecurring gains recorded in the first nine months of 1997 included $3.6 million in net securities gains, in addition to the $9.4 million gain on the sale of the credit card portfolio, discussed above. Nonrecurring gains in the third quarter of 1996 included a $4.2 million gain on the sale of premises and $.9 million of net securities gains. Year-to-date 1996 nonrecurring gains included: $190 million, net of expenses, received for the TABLE 4 NONINTEREST INCOME
Three Months Ended Nine Months Ended ------------------------- ---------------------------- September 30 September 30 September 30 September 30 (Dollars In Millions) 1997 1996 1997 1996 ======== ======== ======== ======== Credit card fee revenue ...................... $ 106.2 $ 90.1 $ 295.7 $ 260.2 Service charges on deposit accounts .......... 102.2 96.4 295.0 279.8 Trust fees ................................... 87.4 74.2 259.2 225.0 Investment products fees and commissions ..... 16.5 13.1 49.0 44.9 Trading account profits and commissions ...... 6.5 8.4 23.8 22.4 Other ........................................ 81.5 73.8 259.0 239.1 -------- -------- -------- -------- Subtotal .................................... 400.3 356.0 1,181.7 1,071.4 Gain on branch and credit card portfolio sales 9.4 -- 9.4 25.6 Securities gains ............................. -- .9 3.6 20.3 Termination fee, net ......................... -- -- -- 190.0 State income tax refund ...................... -- -- -- 65.0 Gain on sale of mortgage banking operations... -- -- -- 45.8 Other ........................................ -- 4.2 -- 4.2 -------- -------- -------- -------- Nonrecurring gains .......................... 9.4 5.1 13.0 350.9 -------- -------- -------- -------- Total noninterest income ................... $ 409.7 $ 361.1 $1,194.7 $1,422.3 ======== ======== ======== ========
termination of the First Interstate Bancorp merger agreement; a $65 million state income tax refund, including interest; a $45.8 million gain on the sale of the Company's mortgage banking operations; a $25.6 million gain on branch and credit card portfolio sales; a $4.2 million gain on the sale of premises; and, $20.3 million of net securities gains. Excluding nonrecurring items, third quarter 1997 noninterest income was $400.3 million, an increase of $44.3 million (12 percent), from the same quarter of 1996 and year-to-date 1997 was $1.18 billion, an increase of $110.3 million (10 percent) from year-to-date 1996. Excluding the reduction in fees related to the first quarter corporate card securitization, noninterest income (before nonrecurring items) increased by $49.4 million (14 percent) and $122.0 million (11 percent) for the third quarter and year-to-date 1997, compared with the same periods in 1996. Credit card fee revenue increased as a result of higher sales volumes for Purchasing and Corporate cards and the First Bank WorldPerks VISA card, partially offset by the first quarter corporate card securitization. Excluding the effect of the corporate card securitization, credit card fee revenue would have increased 24 percent in the third quarter and 18 percent in the first nine months of 1997, compared with the same periods of 1996. Trust fees were up due to growth in corporate, institutional and personal trust businesses. NONINTEREST EXPENSE -- Noninterest expense increased in 1997 as compared to 1996 as a result of nonrecurring charges. As summarized in Table 5, nonrecurring items in 1997 consisted of merger-related charges of $440.2 million incurred in connection with the USBC transaction, including: $232.3 million of severance costs; $65.8 million of occupancy/equipment writedowns; $43.4 million of capitalized software and other asset write-offs; $35.0 million of investment banking and other transaction costs; $27.1 million of conversion expenses incurred; and, $36.6 million of other merger-related expenses. Third quarter 1996 nonrecurring charges included a $61.3 million one-time special assessment by the FDIC on SAIF deposits. Additional nonrecurring charges recorded in the first nine months of 1996 totaled $145.0 million, including: merger and integration charges of $49.5 million for the acquisitions of FirsTier, the BankAmerica corporate trust business and West One Bancorp; $38.6 million in branch distribution resizing expenses; a $29.5 million valuation adjustment to reduce the carrying value of credit card and core deposit intangibles to their estimated fair value; $10.1 million for a one-time $750 per-employee bonus; and, $17.3 million to acquire credit card and revolving credit software and to write-off other miscellaneous assets. Excluding nonrecurring items, third quarter and year-to-date noninterest expense was $562.9 million and $1.73 billion, compared with $581.0 million and $1.74 billion in the same periods of 1996. Expense reductions in a number of categories reflect the initial benefits of the merger with USBC. The reduction in other personnel reflects lower contract labor expense associated with 1996 technology projects now complete. Offsetting a portion of the favorable variance in contract labor was an increase in professional service expense related to several 1997 technology initiatives which involve third party consulting TABLE 5 NONINTEREST EXPENSE
Three Months Ended Nine Months Ended -------------------------- ------------------------- September 30 September 30 September 30 September 30 (Dollars In Millions, Except Per Employee Data) 1997 1996 1997 1996 =========== ========= =========== ========== Salaries** ....................................................... $ 242.2 $ 238.1 $ 729.7 $ 715.3 Employee benefits** .............................................. 49.2 52.2 167.5 167.2 ----------- --------- ----------- ---------- Total personnel expense ........................................ 291.4 290.3 897.2 882.5 Net occupancy .................................................... 45.3 44.6 136.3 133.9 Furniture and equipment .......................................... 40.4 42.1 127.4 131.4 Goodwill and other intangible assets** ........................... 29.1 27.1 82.3 73.2 Professional services** .......................................... 18.9 13.5 47.5 40.6 Other personnel costs ............................................ 14.3 23.8 47.1 61.1 Telephone ........................................................ 15.5 15.9 44.8 44.7 Advertising and marketing ........................................ 13.3 15.7 42.2 46.3 Postage .......................................................... 11.3 10.8 34.0 32.5 Printing, stationery and supplies ................................ 8.6 11.0 28.5 32.7 Third party data processing ...................................... 9.0 8.1 28.0 26.3 FDIC insurance ................................................... 2.4 2.5 6.9 11.4 Other** .......................................................... 63.4 75.6 205.7 228.3 ----------- --------- ----------- ---------- Subtotal ....................................................... 562.9 581.0 1,727.9 1,744.9 Merger-related ................................................... 440.2 -- 440.2 49.5 SAIF special assessment .......................................... -- 61.3 -- 61.3 Branch distribution resizing ..................................... -- -- -- 38.6 Goodwill and other intangible assets valuation adjustment ........ -- -- -- 29.5 Special employee bonus ........................................... -- -- -- 10.1 Other ............................................................ -- -- -- 17.3 ----------- --------- ----------- ---------- Nonrecurring charges ........................................... 440.2 61.3 440.2 206.3 ----------- --------- ----------- ---------- Total noninterest expense ..................................... $ 1,003.1 $ 642.3 $ 2,168.1 $ 1,951.2 =========== ========= =========== ========== Efficiency ratio* ................................................ 84.3% 56.8% 61.7% 53.3% Efficiency ratio before nonrecurring items ....................... 47.7 51.6 49.3 52.4 Average number of full-time equivalent employees ................. 25,477 27,229 26,171 27,325 Annualized personnel expense per employee** ...................... $ 45,751 $ 42,646 $ 45,710 $ 43,062 =========== ========= =========== ==========
* COMPUTED AS NONINTEREST EXPENSE DIVIDED BY THE SUM OF NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS AND NONINTEREST INCOME NET OF SECURITIES GAINS AND LOSSES. ** BEFORE EFFECT OF NONRECURRING ITEMS IN 1996. arrangements. Total salaries and benefits expense, before nonrecurring items, increased due to acquisitions in the first quarter of 1997. However, average full-time equivalent employees decreased 6 percent to 25,477 in third quarter 1997 from 27,229 in third quarter 1996. Excluding nonrecurring items, the Company's efficiency ratio improved to 47.7 percent for the quarter and 49.3 percent year-to-date, compared with 51.6 percent and 52.4 percent for the same periods a year ago. The Company has incurred charges in connection with making its computer systems year 2000 compliant and expects to continue to incur charges related to this project through 1999. However, none of these costs are expected to have a significant impact on the results of operations. PROVISION FOR INCOME TAXES -- The provision for income taxes was $34.5 million in the third quarter and $383.8 million in the first nine months of 1997, compared with $143.9 million and $557.2 million in the same periods of 1996. The decreases were primarily the result of lower levels of taxable income due to several nonrecurring items occurring in the third quarter and first nine months of 1997, as discussed above. BALANCE SHEET ANALYSIS LOANS -- The Company's loan portfolio was $54.1 billion at September 30, 1997, compared with $52.4 billion at December 31, 1996. The portfolio of commercial loans totaled $33.4 billion at September 30, 1997, up $1.8 billion from December 31, 1996, despite $420 million of corporate charge card receivables securitized and sold in the first quarter of 1997. The increase was primarily attributable to growth in core commercial loans. Excluding residential mortgage loan balances, consumer loans were $15.9 billion at September 30, 1997, compared with $15.4 billion at December 31, 1996, reflecting growth in credit card, student, and home equity and second mortgage loans. SECURITIES -- At September 30, 1997, available-for-sale and held-to-maturity securities were $6.8 billion compared with $7.3 billion at December 31, 1996, reflecting both maturities and sales of securities. DEPOSITS -- Noninterest-bearing deposits were $14.4 billion at September 30, 1997, compared with $14.3 billion at December 31, 1996. Interest-bearing deposits totaled $33.9 billion at September 30, 1997, compared with $35.0 billion at December 31, 1996. The decrease in interest-bearing deposit balances reflects customers moving funds into alternative investment vehicles and a reduction in time certificates greater than $100,000 of $231 million. BORROWINGS -- Short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings, were $4.5 billion at September 30, 1997, down from $6.6 billion at year-end 1996. The decrease was due to the net maturity of $1.1 billion of short-term bank notes and a $908 million reduction in federal funds purchased and securities sold under agreements to repurchase. Long-term debt was $8.7 billion at September 30, 1997, up from $5.4 billion at December 31, 1996. The Company issued $4.1 billion of debt, with an average original maturity of 2.0 years, under its bank note program, during the first nine months of 1997, as short-term borrowings were replaced with long-term debt. These issuances were partially offset by net maturities of $368 million of Federal Home Loan Bank Advances and $445 million of other debt. CORPORATE RISK MANAGEMENT CREDIT MANAGEMENT -- The Company's strategy for credit risk management includes stringent, centralized credit policies, and standard underwriting criteria for specialized lending categories, such as mortgage banking, real estate construction, and consumer credit. The strategy also emphasizes diversification on both a geographic and customer level, regular credit examinations, and quarterly management reviews of large loans and loans experiencing deterioration of credit quality. The Company strives to identify potential problem loans early, take any necessary charge-offs promptly, and maintain strong reserve levels. In the Company's retail banking operations, a standard credit scoring system is used to assess consumer credit risks and to price consumer products accordingly. Commercial banking operations rely on a strong credit culture that combines prudent credit policies and individual lender accountability. In addition, commercial lenders generally focus on middle-market companies within their regions. In evaluating credit risk, the Company considers loan portfolio composition, the level of allowance coverage, and macroeconomic factors. Most economic indicators in the Company's seventeen state primary operating region (Minnesota, Oregon, Washington, Colorado, California, Idaho, Nebraska, North Dakota, Nevada, South Dakota, Montana, Iowa, Illinois, Utah, Wisconsin, Kansas, and Wyoming) compare favorably with national trends. Approximately 85 percent of the Company's loan portfolio TABLE 6 ANNUALIZED NET CHARGE-OFFS AS A PERCENTAGE OF AVERAGE LOANS OUTSTANDING
Three Months Ended Nine Months Ended ----------------------------- ---------------------------- September 30 September 30 September 30 September 30 1997 1996 1997 1996 ============== ============== ============== ============= COMMERCIAL: Commercial ................. 1.44% .20% .77% .12% Real estate: Commercial mortgage ....... .02 (.23) (.20) (.08) Construction .............. .24 (.02) .20 .09 ------ ----- ----- ----- Total commercial .......... 1.01 .08 .49 .07 CONSUMER: Residential mortgage ....... .13 .06 .09 .05 Credit card ................ 4.23 4.18 4.20 3.83 Other ...................... 1.28 .88 1.24 .89 ------ ----- ----- ----- Total consumer ............ 1.54 1.22 1.47 1.14 ------ ----- ----- ----- Total ..................... 1.22% .54% .87% .50% ====== ===== ===== =====
TABLE 7 SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
Three Months Ended Nine Months Ended ------------------------- ---------------------------- September 30 September 30 September 30 September 30 (Dollars In Millions) 1997 1996 1997 1996 ========= ========= ========= ========= Balance at beginning of period .................. $ 999.4 $ 984.2 $ 992.5 $ 908.0 CHARGE-OFFS: Commercial: Commercial .................................... 93.8 21.0 156.7 60.3 Real estate: Commercial mortgage .......................... 3.8 2.1 8.6 16.8 Construction ................................. 1.5 .2 4.2 1.5 --------- --------- --------- --------- Total commercial ............................. 99.1 23.3 169.5 78.6 Consumer: Residential mortgage .......................... 1.9 1.6 4.4 4.2 Credit card ................................... 44.2 40.7 128.7 109.4 Other ......................................... 47.4 33.2 137.3 100.8 --------- --------- --------- --------- Total consumer ............................... 93.5 75.5 270.4 214.4 --------- --------- --------- --------- Total ........................................ 192.6 98.8 439.9 293.0 RECOVERIES: Commercial: Commercial .................................... 11.8 10.4 29.7 41.8 Real estate: Commercial mortgage .......................... 3.4 6.5 20.8 21.5 Construction ................................. .1 .3 .8 .4 --------- --------- --------- --------- Total commercial ............................. 15.3 17.2 51.3 63.7 Consumer: Residential mortgage .......................... .2 .7 .9 2.0 Credit card ................................... 4.1 3.7 15.2 11.9 Other ......................................... 8.5 7.3 26.1 25.1 --------- --------- --------- --------- Total consumer ............................... 12.8 11.7 42.2 39.0 --------- --------- --------- --------- Total ........................................ 28.1 28.9 93.5 102.7 NET CHARGE-OFFS: Commercial: Commercial .................................... 82.0 10.6 127.0 18.5 Real estate: Commercial mortgage .......................... .4 (4.4) (12.2) (4.7) Construction ................................. 1.4 (.1) 3.4 1.1 --------- --------- --------- --------- Total commercial ............................. 83.8 6.1 118.2 14.9 Consumer: Residential mortgage .......................... 1.7 .9 3.5 2.2 Credit card ................................... 40.1 37.0 113.5 97.5 Other ......................................... 38.9 25.9 111.2 75.7 --------- --------- --------- --------- Total consumer ............................... 80.7 63.8 228.2 175.4 --------- --------- --------- --------- Total ........................................ 164.5 69.9 346.4 190.3 Provision charged to operating expense .......... 185.0 73.1 370.3 195.7 Additions related to acquisitions and other ..... -- -- 3.5 74.0 --------- --------- --------- --------- Balance at end of period ........................ $ 1,019.9 $ 987.4 $ 1,019.9 $ 987.4 ========= ========= ========= ========= Allowance as a percentage of period-end loans ... 1.88% 1.91% Allowance as a percentage of nonperforming loans 343 357 Allowance as a percentage of nonperforming assets 302 286 ========= =========
TABLE 8 NONPERFORMING ASSETS*
September 30 December 31 (Dollars In Millions) 1997 1996 ============ ============ COMMERCIAL: Commercial ...................................................... $ 176.2 $ 143.7 Real estate: Commercial mortgage ............................................ 47.0 44.4 Construction ................................................... 15.4 18.8 -------- -------- Total commercial ............................................... 238.6 206.9 CONSUMER: Residential mortgage ............................................ 53.7 57.6 Other ........................................................... 4.8 4.8 -------- -------- Total consumer ................................................. 58.5 62.4 -------- -------- Total nonperforming loans ...................................... 297.1 269.3 OTHER REAL ESTATE ................................................ 29.0 43.2 OTHER NONPERFORMING ASSETS ....................................... 12.1 7.5 -------- -------- Total nonperforming assets ..................................... $ 338.2 $ 320.0 ======== ======== Accruing loans 90 days or more past due ** ....................... $ 79.5 $ 90.6 Nonperforming loans to total loans ............................... .55% .51% Nonperforming assets to total loans plus other real estate ....... .62 .61 ======== ========
* THROUGHOUT THIS DOCUMENT, NONPERFORMING ASSETS AND RELATED RATIOS DO NOT INCLUDE LOANS MORE THAN 90 DAYS PAST DUE AND STILL ACCRUING. ** THESE LOANS ARE NOT INCLUDED IN NONPERFORMING ASSETS AND CONTINUE TO ACCRUE INTEREST BECAUSE THEY ARE SECURED BY COLLATERAL AND/OR ARE IN THE PROCESS OF COLLECTION AND ARE REASONABLY EXPECTED TO RESULT IN REPAYMENT OR RESTORATION TO CURRENT STATUS. consists of credit to businesses and consumers in this operating region. NET CHARGE-OFFS AND ALLOWANCE FOR CREDIT LOSSES -- Net loan charge-offs totaled $164.5 million and $346.4 million in the third quarter and first nine months of 1997, compared with $69.9 million and $190.3 million in the same periods of 1996. Included in third quarter and year-to-date net charge-offs was $62.3 million of merger-related charge-offs, taken to align the classification and charge-off practices of the former USBC with those of the Company. Commercial loan net charge-offs for the quarter and year-to-date, excluding merger-related charge-offs of $55.3 million, were $28.5 million and $62.9 million compared with $6.1 million in the third quarter of 1996 and $14.9 million in the first nine months of 1996. The majority of the third quarter 1997 charge-offs was attributable to one large credit. Third quarter and year-to-date consumer loan net charge-offs, excluding merger-related charge-offs of $7.0 million, were $73.7 million and $221.2 million compared with $63.8 million in the third quarter of 1996 and $175.4 million in the first nine of 1996. The increases over corresponding 1996 periods reflect higher average nonmortgage loan balances and higher loss ratios in several categories, including bankruptcies. NONPERFORMING ASSETS -- Nonperforming assets include all nonaccrual loans, restructured loans, other real estate and other nonperforming assets owned by the Company. At September 30, 1997, nonperforming assets totaled TABLE 9 DELINQUENT LOAN RATIOS* September 30 December 31 90 days or more past due 1997 1996 ============ =========== COMMERCIAL: Commercial ................. .78% .70% Real estate: Commercial mortgage ....... .58 .55 Construction .............. .66 .91 ----- ----- Total commercial .......... .72 .68 CONSUMER: Residential mortgage ....... 1.39 1.35 Credit card ................ .59 .88 Other ...................... .38 .35 ----- ----- Total consumer ............ .66 .70 ----- ----- Total ..................... .70% .69% ===== ===== * RATIOS INCLUDE NONPERFORMING LOANS AND ARE EXPRESSED AS A PERCENT OF ENDING LOAN BALANCES. $338.2 million, up $18.2 million (6 percent) from December 31, 1996. The ratio of nonperforming assets to loans and other real estate was .62 percent at September 30, 1997, compared with .61 percent at December 31, 1996, and .66 percent at September 30, 1996. Consumer loans 30 days or more past due were 2.56 percent of the consumer loan portfolio at September 30, 1997, compared with 2.57 percent at December 31, 1996. The percentage of consumer loans 90 days or more past due of the total consumer loan portfolio totaled .65 percent at September 30, 1997, compared with .71 percent at December 31, 1996. INTEREST RATE RISK MANAGEMENT -- The Company's policy is to maintain a low interest rate risk position. The Company limits the exposure of net interest income to risks associated with interest rate movements through asset/liability management strategies. The Company's Asset and Liability Management Committee ("ALCO") uses three methods for measuring and managing interest rate risk: Net Interest Income Simulation Modeling, Market Value/Duration Analysis, and Repricing Mismatch Analysis. NET INTEREST INCOME SIMULATION: The Company uses a net interest income simulation model to measure near-term (next 12 months) risk due to changes in interest rates. The model incorporates substantially all the Company's assets and liabilities and off-balance sheet instruments, together with forecasted changes in the balance sheet mix and assumptions that reflect the current interest rate environment. Balance sheet changes are based on forecasted prepayments of loans and securities, loan and deposit growth, and historical pricing spreads. The model is updated monthly with the current balance sheet structure and the current forecast of expected balance sheet changes. ALCO uses the model to simulate the effect of immediate and sustained parallel shifts in the yield curve of 1 percent, 2 percent and 3 percent as well as the effect of immediate and sustained flattening and steepening of the yield curve. ALCO also calculates the sensitivity of the simulation results to changes in the key assumptions, such as the Prime/LIBOR spread. The results from the simulation are reviewed by ALCO monthly and are used to guide ALCO's hedging strategies. ALCO guidelines, approved by the Company's Board of Directors, limit the estimated change in net interest income over the succeeding 12 months to 2 percent of forecasted net interest income, assuming static Prime/LIBOR spreads and modest changes in deposit pricing lags, given a 1 percent change in interest rates. MARKET VALUE/DURATION ANALYSIS: The net interest income simulation model is limited by its dependence upon accurate forecasts of future business activity and the resulting effect on balance sheet assets and liabilities. As a result, its usefulness is greatly diminished for periods beyond one to two years. The Company measures this longer-term component of interest rate risk (referred to as market value or duration risk) by modeling the effect of interest rate changes on the estimated discounted future cash flows of the Company's assets, liabilities and off-balance sheet instruments. The amount of market value risk is subject to limits approved by the Company's Board of Directors. REPRICING MISMATCH ANALYSIS: A traditional gap analysis provides a point-in-time measurement of the relationship between the amounts of interest rate sensitive assets and liabilities repricing in a given time period. While the analysis provides a useful snapshot of interest rate risk, it does not capture all aspects of interest rate risk. As a result, ALCO uses the repricing mismatch analysis primarily for managing interest rate risk beyond one year and has established limits, approved by the Company's Board of Directors, for gap positions in the one-to three-year time periods. TABLE 10 INTEREST RATE SWAP HEDGING PORTFOLIO NOTIONAL BALANCES AND YIELDS BY MATURITY DATE
At September 30, 1997 (Dollars in Millions) Weighted Weighted Average Average Receive Fixed Swaps* Notional Interest Rate Interest Rate Maturity Date Amount Received Paid ---------- --------------- -------------- 1997 (remaining three months) ............... $ 100 7.81% 5.66% 1998 ........................................ 813 6.03 5.68 1999 ........................................ 1,067 6.31 5.66 2000 ........................................ 388 6.57 5.68 2001 ........................................ 360 6.53 5.66 After 2001 .................................. 1,463 6.83 5.67 ------- Total ....................................... $ 4,191 6.51% 5.67% ======= ==== ====
* AT SEPTEMBER 30, 1997, THE COMPANY HAD NO SWAPS IN ITS HEDGING PORTFOLIO THAT REQUIRED IT TO PAY FIXED-RATE INTEREST. USE OF DERIVATIVES TO MANAGE INTEREST RATE RISK: While each of the interest rate risk measurements has limitations, taken together they represent a comprehensive view of the magnitude of the Company's interest rate risk over various time intervals. The Company manages its interest rate risk by entering into off-balance sheet transactions (primarily interest rate swaps), investing in fixed rate assets or issuing variable rate liabilities. To a lesser degree, the Company also uses interest rate caps and floors to hedge this risk. The Company does not enter into derivative contracts for speculative purposes. As of September 30, 1997, the Company received payments on $4.2 billion notional amount of interest rate swap agreements based on fixed interest rates, and made payments based on variable interest rates. These swaps had a weighted average rate paid of 5.67 percent and a weighted average rate received of 6.52 percent. The remaining maturity of these agreements ranges from two months to 10 years with an average remaining maturity of 3.7 years. Swaps increased net interest income for the quarters ended September 30, 1997 and 1996 by $6.2 million and $7.3 million, and the nine months ended September 30, 1997 and 1996 by $18.0 million and $24.4 million. The Company also purchases interest rate caps and floors to minimize the impact of fluctuating interest rates on earnings. There were no caps outstanding at September 30, 1997. To hedge against falling interest rates, the Company uses interest rate floors. The total notional amount of floor agreements purchased as of September 30, 1997, was $850 million. LIBOR-based floors totaled $550 million and Constant Maturity Treasury floors totaled $300 million. The impact of caps and floors on net interest income was not material for the nine months ended September 30, 1997 and 1996. CAPITAL MANAGEMENT -- At September 30, 1997, total tangible common equity was $4.6 billion, or 6.7 percent of assets, compared with 6.7 percent at December 31, 1996. Tier 1 and total risk-based capital ratios were 7.2 percent and 11.4 percent at September 30, 1997 compared with 7.6 percent and 11.9 percent at December 31, 1996. The September 30, 1997 leverage ratio was 7.3 percent compared with 7.5 percent at year-end 1996. On August 1, 1997, the Company issued 109.9 million common shares to acquire USBC. The Company exchanged .755 shares of its common stock for each share of USBC common stock. USBC's outstanding stock options were also converted into stock options for the Company's common stock. In addition, each outstanding share of USBC cumulative preferred stock was converted into one share of preferred stock of the combined company, having substantially identical terms. Approximately 30.6 million common shares have been repurchased under 1996 Board authorizations, including 4.5 million during 1997. All authorizations were either completed or rescinded prior to the USBC acquisition. On November 14, 1997, the Company redeemed all outstanding shares of its preferred stock at a redemption price of $25 per share, together with accrued and unpaid dividends. ACCOUNTING CHANGES ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS -- Effective January 1, 1997, the Company adopted Statement of Financial Accounting Standards No. ("SFAS") 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The Statement uses a "financial components" approach which focuses on control to determine whether the assets have been sold. If the entity has surrendered control over the transferred assets, the transaction is considered a sale. Control is considered surrendered only if the seller has no legal rights to the assets, even in bankruptcy; the buyer has the right to pledge or exchange the assets; and, the seller does not maintain effective control over the assets through an agreement to repurchase or redeem them. If control is retained, the transaction is then considered to be a financing. The adoption of SFAS 125 did not have a material effect on the Company. SFAS 127 amended SFAS TABLE 11 CAPITAL RATIOS September 30 December 31 (Dollars in Millions) 1997 1996 ============ =========== Tangible common equity* ..................... $ 4,625 $ 4,625 As a percent of assets ..................... 6.7% 6.7% Tier 1 capital .............................. $ 4,915 $ 4,983 As a percent of risk-adjusted assets ...... 7.2% 7.6% Total risk-based capital .................. $ 7,753 $ 7,777 As a percent of risk-adjusted assets ...... 11.4% 11.9% Leverage ratio .............................. 7.3 7.5 ======== ======== * DEFINED AS COMMON EQUITY LESS GOODWILL. 125, deferring for one year its adoption in the accounting for securities lending, repurchase agreements and other secured financing transactions. The eventual adoption of SFAS 125 relating to these transaction types is not expected to have a material effect on the Company. EARNINGS PER SHARE -- SFAS 128, "Earnings per Share," supersedes APB Opinion 15 "Earnings per Share," by replacing the method currently used to compute earnings per share with basic and diluted earnings per share. Under the new requirements, the dilutive effect of stock options will be excluded from the calculation of basic earnings per share. Diluted earnings per share will be calculated similarly to the current fully diluted earnings per share. SFAS 128 is effective for the Company's 1997 year-end financial statements. All prior period earnings per share data shall be restated to conform to the provisions of this statement. The adoption of SFAS 128 will not have a material impact on the calculation of the Company's earnings per share. DERIVATIVE FINANCIAL INSTRUMENTS -- "Disclosure of Accounting Policies for Derivative Financial Instruments," a final rule issued by the Securities and Exchange Commission, clarifies and expands existing disclosure requirements for derivative financial instruments, other financial instruments and derivative commodity instruments. Specifically, the rule requires descriptions of accounting policies for derivatives and quantitative and qualitative information about market risk for derivatives that is to be presented outside of the financial statements. The Company's derivative trading activities are not material to the consolidated financial statements; the cash flows from these activities are included in operating activities. The quantitative and qualitative information about market risk disclosure requirements are effective with the 1997 year-end financial statements. COMPREHENSIVE INCOME -- SFAS 130, "Reporting Comprehensive Income," establishes standards for the reporting and display of comprehensive income and its components in a full set of financial statements. The Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed as prominently as other financial statements. The statement requires the classification of items of other comprehensive income by their nature in a financial statement and the display of other comprehensive income separately from retained earnings and capital surplus in the equity section of the statement of financial position. SFAS 130 is effective January 1, 1998, with all prior periods presented restated to conform to the provisions of this statement. SEGMENT DISCLOSURE -- SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," requires the disclosure of financial and descriptive information about reportable operating segments. Operating segments are components of an enterprise about which financial information is available and is evaluated regularly in deciding how to allocate resources and assess performance. The Statement requires the disclosure of profit or loss, certain specific revenue and expense items, and assets of all operating segments, with reconciliations to the financial statements. The Statement also requires the disclosure of descriptive information about the way the operating segments were determined, the products and services provided by the segments, differences between measurements used in reporting segment information and those used in the financial statements, and changes in the measurement of segment amounts from period to period. SFAS 131 is effective with the 1998 year-end financial statements, with comparative information for prior periods required. CONSOLIDATED BALANCE SHEET
September 30 December 31 (In Millions, Except Shares) 1997 1996 ============ =========== (Unaudited) ASSETS Cash and due from banks .......................................................... $ 4,342 $ 4,813 Federal funds sold ............................................................... 56 95 Securities purchased under agreements to resell .................................. 473 803 Trading account securities ....................................................... 156 231 Available-for-sale securities .................................................... 6,832 6,473 Held-to-maturity securities (fair value: 12/31/96 - $811) ........................ -- 797 Loans ............................................................................ 54,143 52,355 Less allowance for credit losses ................................................ 1,020 993 ------- ------- Net loans ....................................................................... 53,123 51,362 Bank premises and equipment ...................................................... 885 1,018 Interest receivable .............................................................. 401 377 Customers' liability on acceptances .............................................. 591 497 Other assets ..................................................................... 3,315 3,283 ------- ------- Total assets ................................................................... $70,174 $69,749 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing ............................................................. $14,433 $14,344 Interest-bearing ............................................................... 33,941 35,012 ------- ------- Total deposits ................................................................. 48,374 49,356 Federal funds purchased .......................................................... 1,199 1,672 Securities sold under agreements to repurchase ................................... 1,294 1,729 Other short-term funds borrowed .................................................. 2,004 3,191 Long-term debt ................................................................... 8,710 5,369 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company ......... 600 600 Acceptances outstanding .......................................................... 591 497 Other liabilities ................................................................ 1,661 1,572 ------- ------- Total liabilities .............................................................. 64,433 63,986 Shareholders' equity: Preferred stock ................................................................. 150 150 Common stock, par value $1.25 a share - authorized 500,000,000 shares; issued: 9/30/97 - 245,029,789 shares; 12/31/96 - 252,883,487 shares ............ 306 316 Capital surplus ................................................................. 1,767 1,929 Retained earnings ............................................................... 3,472 3,809 Unrealized gain on securities, net of tax ....................................... 46 5 Less cost of common stock in treasury: 12/31/96 - 6,877,497 shares .................................................... -- (446) ------- ------- Total shareholders' equity ..................................................... 5,741 5,763 ------- ------- Total liabilities and shareholders' equity ..................................... $70,174 $69,749 ======== =======
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended -------------------------------- (In Millions, Except Per Share Data) September 30 September 30 (Unaudited) 1997 1996 ============ ============ INTEREST INCOME Loans .......................................................................... $ 1,211.1 $ 1,149.3 Securities: Taxable ....................................................................... 89.0 104.5 Exempt from federal income taxes .............................................. 16.8 18.0 Other interest income .......................................................... 15.2 22.6 ------------ ------------ Total interest income ........................................................ 1,332.1 1,294.4 INTEREST EXPENSE Deposits ....................................................................... 362.3 363.6 Federal funds purchased and repurchase agreements .............................. 41.9 51.2 Other short-term funds borrowed ................................................ 28.2 48.2 Long-term debt ................................................................. 122.1 77.5 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company 12.3 -- ------------ ------------ Total interest expense ....................................................... 566.8 540.5 ------------ ------------ Net interest income ............................................................ 765.3 753.9 Provision for credit losses .................................................... 185.0 73.1 ------------ ------------ Net interest income after provision for credit losses .......................... 580.3 680.8 NONINTEREST INCOME Credit card fee revenue ........................................................ 106.2 90.1 Service charges on deposit accounts ............................................ 102.2 96.4 Trust fees ..................................................................... 87.4 74.2 Gain on sale of mortgage banking operations, branches and other assets ......... 9.4 -- Securities gains ............................................................... -- .9 Termination fee ................................................................ -- -- State income tax refund ........................................................ -- -- Other .......................................................................... 104.5 99.5 ------------ ------------ Total noninterest income ..................................................... 409.7 361.1 NONINTEREST EXPENSE Salaries ....................................................................... 242.2 238.1 Employee benefits .............................................................. 49.2 52.2 Net occupancy .................................................................. 45.3 44.6 Furniture and equipment ........................................................ 40.4 42.1 Goodwill and other intangible assets ........................................... 29.1 27.1 Professional services .......................................................... 18.9 13.5 Other personnel costs .......................................................... 14.3 23.8 Merger, integration, and resizing .............................................. 440.2 -- SAIF special assessment ........................................................ -- 61.3 Other .......................................................................... 123.5 139.6 ------------ ------------ Total noninterest expense .................................................... 1,003.1 642.3 ------------ ------------ Income (loss) before income taxes .............................................. (13.1) 399.6 Applicable income taxes ........................................................ 34.5 143.9 ------------ ------------ Net income (loss) .............................................................. $ (47.6) $ 255.7 ============ ============ Net income (loss) applicable to common equity .................................. $ (50.7) $ 251.1 ============ ============ EARNINGS PER COMMON SHARE Average common and common equivalent shares .................................... 248,459,568 254,981,925 Net income (loss) .............................................................. $ (.20) $ .98 ============ ============
WIDE TABLE CONTINUED FROM ABOVE: CONSOLIDATED STATEMENT OF INCOME
Nine Months Ended ----------------------------------- (In Millions, Except Per Share Data) September 30 September 30 (Unaudited) 1997 1996 =============== =============== INTEREST INCOME Loans .......................................................................... $ 3,561.9 $ 3,370.3 Securities: Taxable ....................................................................... 281.0 319.4 Exempt from federal income taxes .............................................. 51.5 53.5 Other interest income .......................................................... 50.7 68.0 ------------ ------------ Total interest income ........................................................ 3,945.1 3,811.2 INTEREST EXPENSE Deposits ....................................................................... 1,077.7 1,078.7 Federal funds purchased and repurchase agreements .............................. 140.6 150.2 Other short-term funds borrowed ................................................ 98.2 149.2 Long-term debt ................................................................. 314.6 224.7 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company 36.9 -- ------------ ------------ Total interest expense ....................................................... 1,668.0 1,602.8 ------------ ------------ Net interest income ............................................................ 2,277.1 2,208.4 Provision for credit losses .................................................... 370.3 195.7 ------------ ------------ Net interest income after provision for credit losses .......................... 1,906.8 2,012.7 NONINTEREST INCOME Credit card fee revenue ........................................................ 295.7 260.2 Service charges on deposit accounts ............................................ 295.0 279.8 Trust fees ..................................................................... 259.2 225.0 Gain on sale of mortgage banking operations, branches and other assets ......... 9.4 71.4 Securities gains ............................................................... 3.6 20.3 Termination fee ................................................................ -- 190.0 State income tax refund ........................................................ -- 65.0 Other .......................................................................... 331.8 310.6 ------------ ------------ Total noninterest income ..................................................... 1,194.7 1,422.3 NONINTEREST EXPENSE Salaries ....................................................................... 729.7 724.5 Employee benefits .............................................................. 167.5 168.1 Net occupancy .................................................................. 136.3 133.9 Furniture and equipment ........................................................ 127.4 131.4 Goodwill and other intangible assets ........................................... 82.3 102.7 Professional services .......................................................... 47.5 40.6 Other personnel costs .......................................................... 47.1 61.1 Merger, integration, and resizing .............................................. 440.2 88.1 SAIF special assessment ........................................................ -- 61.3 Other .......................................................................... 390.1 439.5 ------------ ------------ Total noninterest expense .................................................... 2,168.1 1,951.2 ------------ ------------ Income (loss) before income taxes .............................................. 933.4 1,483.8 Applicable income taxes ........................................................ 383.8 557.2 ------------ ------------ Net income (loss) .............................................................. $ 549.6 $ 926.6 ============ ============ Net income (loss) applicable to common equity .................................. $ 540.4 $ 912.6 ============ ============ EARNINGS PER COMMON SHARE Average common and common equivalent shares .................................... 248,819,246 254,385,569 Net income (loss) .............................................................. $ 2.17 $ 3.59 ============ ============
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common (In Millions, Except Shares) Shares Preferred Common Capital (Unaudited) Outstanding* Stock Stock Surplus =========== =========== =========== ============= BALANCE DECEMBER 31, 1995 ....... 241,031,881 $ 253.2 $ 311.6 $ 1,867.9 Net income ...................... Dividends declared: Preferred ...................... Common ......................... Purchase and retirement of treasury stock ................. (18,985,330) (13.1) (521.8) Issuance of common stock: Acquisitions ................... 23,751,183 19.8 677.2 Dividend reinvestment .......... 242,080 .1 4.3 Stock option and stock purchase plans ................ 2,895,153 1.3 49.0 Redemption/conversion of preferred stock ................ 549,061 (15.9) Change in unrealized gains/(losses) ................. ----------- -------- -------- ---------- BALANCE SEPTEMBER 30, 1996 ...... 249,484,028 $ 237.3 $ 319.7 $ 2,076.6 ============ ========= ========= =========== BALANCE DECEMBER 31, 1996 ....... 246,005,990 $ 150.0 $ 316.1 $ 1,929.1 Net income ...................... Dividends declared: Preferred ...................... Common ......................... Purchase and retirement of treasury stock ................. (4,848,906) (13.6) (293.9) Issuance of common stock: Acquisitions ................... 302,352 .4 14.4 Dividend reinvestment .......... 165,946 .2 8.9 Stock option and stock purchase plans ................ 3,404,407 3.2 108.7 Change in unrealized gains/(losses) ................. ----------- -------- -------- ---------- BALANCE SEPTEMBER 30, 1997 ...... 245,029,789 $ 150.0 $ 306.3 $ 1,767.2 ============ ========= ========= ===========
WIDE TABLE CONTINUED FROM ABOVE: CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Unrealized Gains/(Losses) (In Millions, Except Shares) Retained on Securities, Treasury (Unaudited) Earnings Net of Tax Stock** Total ========== ================ ============ ============= BALANCE DECEMBER 31, 1995 ....... $ 3,275.1 $ 31.9 $ (397.8) $ 5,341.9 Net income ...................... 926.6 926.6 Dividends declared: Preferred ...................... (14.0) (14.0) Common ......................... (306.1) (306.1) Purchase and retirement of treasury stock ................. (508.0) (1,042.9) Issuance of common stock: Acquisitions ................... (44.4) 384.2 1,036.8 Dividend reinvestment .......... 9.1 13.5 Stock option and stock purchase plans ................ (78.6) 99.1 70.8 Redemption/conversion of preferred stock ................ (16.1) 32.0 -- Change in unrealized gains/(losses) ................. (58.7) (58.7) ---------- ------- --------- ---------- BALANCE SEPTEMBER 30, 1996 ...... $ 3,742.5 $ (26.8) $ (381.4) $ 5,967.9 ========== ======= ========= ========== BALANCE DECEMBER 31, 1996 ....... $ 3,809.4 $ 4.7 $ (445.9) $ 5,763.4 Net income ...................... 549.6 549.6 Dividends declared: Preferred ...................... (9.2) (9.2) Common ........................ (331.4) (331.4) Purchase and retirement of treasury stock ................. (514.5) 395.8 (426.2) Issuance of common stock: Acquisitions ................... 14.8 Dividend reinvestment .......... 5.6 14.7 Stock option and stock purchase plans ................ (32.2) 44.5 124.2 Change in unrealized gains/(losses) ................. 41.2 41.2 ---------- ------- --------- ---------- BALANCE SEPTEMBER 30, 1997 ..... $ 3,471.7 $ 45.9 $ -- $ 5,741.1 ========== ======= ========= ==========
* REPRESENTS TOTAL COMMON SHARES LESS COMMON STOCK HELD IN TREASURY. ** ENDING TREASURY SHARES WERE 6,877,497 AT DECEMBER 31, 1996; 6,300,788 AT SEPTEMBER 30, 1996; AND 8,297,756 AT DECEMBER 31, 1995. CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended --------------------------- September 30 September 30 (Unaudited, In Millions) 1997 1996 ============ ============ OPERATING ACTIVITIES Net cash provided by operating activities ................................ $ 1,075.0 $ 1,657.8 ---------- ---------- INVESTING ACTIVITIES Net cash provided (used) by: Interest-bearing deposits with banks ...................................... 3.1 (1.1) Loans outstanding ......................................................... (2,150.8) (1,278.1) Securities purchased under agreements to resell ........................... 331.5 (163.8) Available-for-sale securities: Sales ..................................................................... 982.5 1,600.8 Maturities ................................................................ 1,130.9 1,633.0 Purchases ................................................................. (1,629.9) (1,172.2) Maturities of held-to-maturity securities .................................. 37.4 86.0 Proceeds from sales of other real estate ................................... 52.2 94.2 Net purchases of bank premises and equipment ............................... (43.5) (86.6) Securitization of corporate charge card balances ........................... 418.1 -- Cash and cash equivalents of acquired subsidiaries ......................... 4.5 245.8 Acquisitions, net of cash received ......................................... (23.6) (37.9) Sales of subsidiary operations ............................................. -- (70.3) Other-net .................................................................. (82.3) (26.4) ---------- ---------- Net cash (used) provided by investing activities ......................... (969.9) 823.4 ---------- ---------- FINANCING ACTIVITIES Net cash (used) provided by: Deposits .................................................................. (1,226.9) 294.2 Federal funds purchased and securities sold under agreements to repurchase (908.6) (852.8) Short-term borrowings ..................................................... (1,186.6) (126.5) Long-term debt transactions: Proceeds .................................................................. 4,524.7 1,310.9 Principal payments ........................................................ (1,189.5) (840.5) Proceeds from issuance of common stock ..................................... 138.9 84.3 Purchase of treasury stock ................................................. (426.2) (1,042.9) Cash dividends ............................................................. (340.6) (300.3) ---------- ---------- Net cash used by financing activities .................................... (614.8) (1,473.6) ---------- ---------- Change in cash and cash equivalents ...................................... (509.7) 1,007.6 Cash and cash equivalents at beginning of period ........................... 4,908.1 4,508.3 ---------- ---------- Cash and cash equivalents at end of period ............................... $ 4,398.4 $ 5,515.9 ========== ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, and cash flow activity required under generally accepted accounting principles. In the opinion of management of the Company, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of results have been made and the Company believes such presentation is adequate to make the information presented not misleading. For further information, refer to the Company's Current Report on Form 8-K dated September 30, 1997, which includes the Company's restated supplemental financial statements and footnotes for the year ended December 31, 1996. The supplemental financial statements give effect to the merger of U. S. Bancorp into First Bank System, Inc., as discussed in Note C below. Certain amounts in prior periods have been reclassified to conform to the current presentation. NOTE B ACCOUNTING CHANGES ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES -- EFFECTIVE January 1, 1997, the Company adopted Statement of Financial Accounting Standards No. ("SFAS") 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The Statement uses a "financial components" approach which focuses on control to determine whether assets have been sold. If the entity has surrendered control over the transferred assets, the transaction is considered a sale. Control is considered surrendered only if the seller has no legal right to the assets, even in bankruptcy; the buyer has the right to pledge or exchange the assets; and the seller does not maintain effective control over the assets through an agreement to repurchase or redeem them. If control is retained, the transaction is then considered a financing. The adoption of SFAS 125 did not have a material effect on the Company. SFAS 125 has been amended (SFAS 127), deferring for one year its adoption in the accounting for securities lending, repurchase agreements and other secured financing transactions. The adoption of SFAS 125 relating to these transaction types is not expected to have a material effect on the Company. EARNINGS PER SHARE -- SFAS 128, "Earnings per Share," supersedes APB Opinion 15, "Earnings per Share," by replacing the method currently used to compute earnings per share with basic and diluted earnings per share. Under the new requirements, the dilutive effect of stock options will be excluded from the calculation of basic earnings per share. Diluted earnings per share will be calculated similarly to the current fully diluted earnings per share. SFAS 128 is effective for the Company's 1997 year-end financial statements. All prior period earnings per share data presented shall be restated to conform to the provisions of this statement. The adoption of SFAS 128 will not have a material impact on the calculation of the Company's earnings per share. DERIVATIVE FINANCIAL INSTRUMENTS -- "Disclosure of Accounting Policies for Derivative Financial Instruments," a final rule issued by the Securities and Exchange Commission, is intended to clarify and expand existing disclosure requirements for derivative financial instruments, other financial instruments and derivative commodity instruments. Specifically, the rule requires descriptions of accounting policies for derivatives and quantitative and qualitative information about market risk for derivatives that is to be presented outside of the financial statements. The Company's derivative trading activities are not material to the consolidated financial statements; the cashflows from these activities are included in operating activities. The quantitative and qualitative information about market risk disclosure requirements are effective with the 1997 year-end financial statements. COMPREHENSIVE INCOME -- SFAS 130, "Reporting Comprehensive Income," establishes standards for the reporting and display of comprehensive income and its components in a full set of financial statements. The Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed as prominently as other financial statements. The Statement requires the classification of items of other comprehensive income by their nature in a financial statement and the display of other comprehensive income separately from retained earnings and capital surplus in the equity section of the statement of financial position. SFAS 130 is effective January 1, 1998, with all prior periods presented restated to conform to the provisions of this statement. SEGMENT DISCLOSURE -- SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," requires the disclosure of financial and descriptive information about reportable operating segments. Operating segments are components of an enterprise about which financial information is available and is evaluated regularly in deciding how to allocate resources and assess performance. The Statement requires the disclosure of profit or loss, certain specific revenue and expense items, and assets of all operating segments, with reconciliations to the financial statements. The Statement also requires the disclosure of descriptive information about the way the operating segments were determined, the products and services provided by the segments, differences between measurements used in reporting segment information and those used in the financial statements, and changes in the measurement of segment amounts from period to period. SFAS 131 is effective with the 1998 year-end financial statements, with comparative information for prior periods required. NOTE C BUSINESS COMBINATIONS AND DIVESTITURES U. S. BANCORP -- On August 1, 1997, First Bank System, Inc. ("FBS") issued 109.9 million common shares to acquire U. S. Bancorp ("USBC"). As of the acquisition date, the combined institution, now known as U.S. Bancorp, had approximately $70 billion in assets, $49 billion in deposits and served nearly four million households and 475,000 businesses in 17 contiguous states from Illinois to Washington. The Company exchanged .755 shares of its common stock for each share of USBC common stock. USBC's outstanding stock options were also converted into stock options for the Company's common stock. In addition, each outstanding share of USBC cumulative preferred stock was converted into one share of preferred stock of the combined company having substantially identical terms. The transaction was accounted for as a pooling-of-interests. Accordingly, the Company's financial statements have been restated for all periods prior to the acquisition to include the accounts and operations of USBC. Operating results of FBS and USBC individually, as previously reported, and the combined company, reflecting certain reclassifications to conform to the current presentation, for the three months ended June 30, 1997, were: Three Months Ended (In Millions) June 30, 1997 =================== FBS Net interest income ........ $ 385.0 Net income ................. 178.3 USBC Net interest income ........ 403.3 Net income ................. 125.6 Combined Net interest income ........ 764.8 Net income ................. 303.9 ======== ZAPPCO, INC. -- On September 15, 1997, The Company announced that it would acquire Zappco, Inc., a bank holding company headquartered in St. Cloud, Minnesota, with three banks, six banking locations, and total assets of $360 million. The acquisition is subject to regulatory approval and is expected to close around year end 1997. COMERICA CORPORATE TRUST BUSINESS -- On January 31, 1997, the Company completed its acquisition of the bond indenture services and paying agency business of Comerica Incorporated. This business serves approximately 860 municipal and corporate clients with about 2,400 bond issues. CALIFORNIA BANCSHARES, INC. -- On June 6, 1996, the Company acquired California Bancshares, Inc. ("CBI"), a holding company for a multi-bank commercial banking operation serving the East San Francisco Bay Area and the Central Valley of Northern California. CBI had $1.6 billion in assets and $1.4 billion in deposits. The total value of the transaction, accounted for as a purchase, was approximately $325 million. FIRSTIER FINANCIAL, INC. -- On February 16, 1996, the Company completed its acquisition of Omaha-based FirsTier Financial, Inc. ("FirsTier"). FirsTier had $3.7 billion in assets, $2.9 billion in deposits, and 63 offices in Nebraska and Iowa. The total value of the transaction, accounted for as a purchase, was approximately $717 million. OTHER ACQUISITIONS -- Effective January 1, 1997, the Company completed its acquisition of the $70 million Sun Capital Bancorp of St. George, Utah. Effective April 30, 1997, the Company completed its acquisition of the $214 million Business and Professional Bank of Sacramento, California. These transactions were accounted for as purchase acquisitions. NOTE D SECURITIES The detail of the amortized cost and fair value of available-for-sale securities consisted of the following: September 30, 1997 December 31, 1996 -------------------- ---------------------- Amortized Fair Amortized Fair (In Millions) Cost Value Cost Value ======== ======== ========= ===== U.S. Treasury ............. $ 635 $ 631 $1,035 $1,028 Mortgage-backed ........... 4,304 4,335 4,097 4,104 Other U.S. agencies ....... 393 401 589 595 State and political ....... 1,322 1,349 574 573 Other ..................... 104 116 167 173 ------ ------ ------ ------ Total ................... $6,758 $6,832 $6,462 $6,473 ====== ====== ====== ====== NOTE E LOANS The composition of the loan portfolio was as follows: September 30 December 31 (In Millions) 1997 1996 ============ =========== COMMERCIAL: Commercial ............................... $22,908 $21,393 Real estate: Commercial mortgage ..................... 8,080 8,022 Construction ............................ 2,365 2,125 ------- ------- Total commercial ....................... 33,353 31,540 ------- ------- CONSUMER: Residential mortgage ..................... 4,693 5,225 Residential mortgage held for sale ....... 193 148 Home equity and second mortgage .......... 5,268 4,798 Credit card .............................. 3,933 3,632 Automobile and other installment ......... 4,526 4,851 Revolving credit ......................... 1,552 1,581 Student * ................................ 625 580 ------- ------- Total consumer ......................... 20,790 20,815 ------- ------- Total loans ............................ $54,143 $52,355 ======= ======= * ALL OR PART OF THE STUDENT LOAN PORTFOLIO MAY BE SOLD WHEN THE REPAYMENT PERIOD BEGINS. At September 30, 1997, the Company had $239 million in loans considered impaired under SFAS 114 included in its nonaccrual loans. The carrying value of the impaired loans was less than or equal to the appraised collateral value or the present value of expected future cash flows and, accordingly, no allowance for credit losses was specifically allocated to impaired loans. For the quarter ended September 30, 1997, the average recorded investment in impaired loans was approximately $249 million. No interest income was recognized on impaired loans during the quarter. NOTE F LONG-TERM DEBT Long-term debt (debt with original maturities of more than one year) consisted of the following:
September 30 December 31 (In Millions) 1997 1996 ============ =========== Fixed-rate subordinated notes (6.00%to 8.35%) - maturities to June 2026 ..... $1,850 $1,850 Step-up subordinated notes - due August 15, 2005 ............................ 100 100 Floating-rate notes - due February 27, 2000 ................................. 250 -- Floating-rate notes - due November 15, 2006 ................................. 200 200 Floating-rate subordinated notes - due November 30, 2010 .................... 107 107 Federal Home Loan Bank advances (5.05%to 9.11%) - maturities to October 2026 1,176 1,543 Medium-term notes (5.53% to 7.12%) - maturities to August 2001 .............. 935 671 Bank notes (5.53%to 6.38%) - maturities to September 2002 ................... 4,004 814 Other ....................................................................... 88 84 ------- ------- Total ..................................................................... $8,710 $5,369 ====== ======
NOTE G SHAREHOLDERS' EQUITY Approximately 30.6 million common shares have been repurchased under 1996 Board authorizations, including 4.5 million during 1997. All authorizations were either completed or rescinded prior to the USBC acquisition. Refer to Note C for further information about the USBC acquisition. On November 14, 1997, the Company redeemed all outstanding shares of its preferred stock at a redemption price of $25 per share, together with accrued and unpaid dividends. NOTE H MERGER, INTEGRATION AND RESIZING CHARGES The Company recorded merger and integration charges of $440.2 million in the third quarter of 1997. The charges associated with the acquisition of USBC included: $232.3 million in severance costs; $65.8 million of occupancy and equipment writedowns; $43.4 million of capitalized software and other asset writeoffs; $35.0 million of investment banking and other transaction costs; $27.1 million of conversion expense incurred; and, $36.6 million of other merger-related expenses. Merger and integration charges of $49.5 million recorded in 1996 were associated with the acquisitions of FirsTier, the BankAmerica corporate trust business, and West One Bancorp. Resizing charges of $38.6 million were associated with the Company's streamlining of the branch distribution network and trust operations as the Company expands its alternative distribution channels, including telemarketing, automated teller machines and in-store branches. The components of the charges are shown below: Nine Months Ended September 30 ----------------- 1997 1996 ========= ======= Severance ....................... $ 232.3 $ 27.4 Premises writedowns ............. 65.8 27.4 Systems conversions and other merger-related expenses ........ 142.1 33.3 ------- ------ Total merger, integration and resizing charges ............... $ 440.2 $ 88.1 ======= ====== Systems conversions and other merger-related expenses are recorded as incurred and are associated with the preparation and mailing of numerous customer communications for the acquisitions and conversion of customer accounts, printing and distribution of training materials and policy and procedure manuals, outside consulting fees, and similar expenses relating to the conversions and integration of acquired branches and operations. Premise writedowns represent write-offs for redundant office space, equipment and branches. Severance charges include the cost of terminations, other benefits, and outplacement costs associated with the elimination of employees primarily in branch offices and centralized corporate support and data processing functions. The following table presents a summary of activity with respect to the Company's merger, integration and resizing accrual: Nine Months Ended September 30 (In Millions) 1997 ================= BALANCE AT DECEMBER 31, 1996 ................. $ 33.6 Provision charged to operating expense ....... 440.2 Cash outlays ................................. 115.1 Noncash writedowns ........................... 101.5 ------ Balance at September 30, 1997 ................ $257.2 ====== The Company expects to incur an additional $190.0 million of merger-related expenses through the third quarter of 1998. NOTE I INCOME TAXES The components of income tax expense were:
Three Months Ended Nine Months Ended --------------------------- ---------------------------- September 30 September 30 September 30 September 30 (In Millions) 1997 1996 1997 1996 ============ ============ ============ ============ FEDERAL: Current tax ........................... $ 16.8 $ 116.9 $ 293.8 $ 450.8 Deferred tax provision ................ 10.6 7.4 31.8 38.3 ------- -------- -------- ------- Federal income tax ................... 27.4 124.3 325.6 489.1 STATE: Current tax ........................... 10.1 18.5 58.6 64.4 Deferred tax (credit) provision ....... (3.0) 1.1 (.4) 3.7 ------- -------- -------- ---------- State income tax ..................... 7.1 19.6 58.2 68.1 ------- -------- -------- ------- Total income tax provision ........... $ 34.5 $ 143.9 $ 383.8 $ 557.2 ======= ======== ======== =======
The reconciliation between income tax expense and the amount computed by applying the statutory federal income tax rate was as follows:
Three Months Ended Nine Months Ended ---------------------------- -------------------------- September 30 September 30 September 30 September 30 (In Millions) 1997 1996 1997 1996 ============ ============ ============ ============ Tax at statutory rate (35%) ............................................ $ (4.6) $ 139.9 $ 326.7 $ 519.3 State income tax, at statutory rates, net of federal tax benefit ....... 7.5 12.7 37.8 44.2 Tax effect of: Tax-exempt interest: Loans ................................................................ (9.8) (1.1) (11.7) (3.5) Securities ........................................................... (3.6) (8.7) (18.2) (25.9) Amortization of goodwill .............................................. 5.2 5.8 19.3 29.6 Merger and integration charges ........................................ 39.1 -- 39.1 -- Tax credits and other items ........................................... .7 (4.7) (9.2) (6.5) -------- --------- --------- --------- Applicable income taxes ................................................ $ 34.5 $ 143.9 $ 383.8 $ 557.2 ======== ========= ========= =========
The Company's net deferred tax asset was $118.0 million at September 30, 1997, and $174.0 million at December 31, 1996. NOTE J COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS In the normal course of business, the Company uses various off-balance sheet financial instruments to meet the financing need of its customers and to manage its interest rate risk. These instruments carry varying degrees of credit, interest rate or liquidity risk. The contract or notional amounts of these financial instruments were as follows:
September 30 December 31 (In Millions) 1997 1996 ============ =========== Commitments to extend credit: Commercial ................................................................ $ 24,240 $ 24,482 Corporate and purchasing cards ............................................ 19,611 13,820 Consumer credit card ...................................................... 15,034 14,140 Other consumer ............................................................ 4,389 4,665 Letters of credit: Standby ................................................................... 2,694 2,634 Commercial ................................................................ 453 355 Interest rate swap contracts: Hedges .................................................................... 4,191 3,651 Intermediated ............................................................. 922 590 Options contracts: Hedge interest rate floors purchased ...................................... 850 1,250 Hedge interest rate caps purchased ........................................ -- 100 Intermediated interest rate and foreign exchange caps and floors purchased 198 134 Intermediated interest rate and foreign exchange caps and floors written 199 169 Liquidity support guarantees ............................................... -- 81 Forward contracts ............................................................ 193 197 Commitments to sell loans .................................................... -- 3 Mortgages sold with recourse ................................................. 98 114 Foreign currency commitments: Commitments to purchase ................................................... 834 952 Commitments to sell ....................................................... 830 953 ======== ========
The Company received fixed rate interest and paid floating rate interest on all swap hedges as of September 30, 1997. Activity for the nine months ended September 30, 1997, with respect to interest rate swaps which the Company uses to hedge loans, deposits and long-term debt was as follows: (In Millions) Notional amount outstanding at December 31, 1996 ......... 3,651 Additions ................................................ 1,684 Maturities ............................................... (336) Terminations ............................................. (808) ------ Notional amount outstanding at September 30, 1997 ....... 4,191 ====== Weighted average interest rates paid ..................... 5.67% Weighted average interest rates received ................. 6.51 ====== LIBOR-based interest rate floors totaling $550 million with an average remaining maturity of eight months at September 30, 1997, and $950 million with an average remaining maturity of 12 months at December 31, 1996, hedged floating rate commercial loans. The strike rate on these LIBOR-based floors ranged from 3.25 percent to 4.00 percent at September 30, 1997, and December 31, 1996. Constant Maturity Treasury (CMT) interest rate floors totaling $300 million with an average remaining maturity of nine months at September 30, 1997, and 18 months at December 31, 1996, hedged the prepayment risk of fixed rate residential mortgage loans. The strike rate on these CMT floors ranged from 5.60 percent to 5.70 percent at September 30, 1997, and December 31, 1996. The total notional amount of interest rate cap agreements purchased was $100 million with a 3-month LIBOR strike rate of 6.00 percent at December 31, 1996. Net unamortized deferred gains relating to swaps, options and futures, which amortize through the year 2006, were $3.5 million at September 30, 1997. NOTE K SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET -- Time certificates of deposit in denominations of $100,000 or more totaled $3,171 million and $3,402 million at September 30, 1997, and December 31, 1996, respectively. CONSOLIDATED STATEMENT OF CASH FLOWS -- Listed below are supplemental disclosures to the Consolidated Statement of Cash Flows.
Nine Months Ended -------------------------- September 30 September 30 (In Millions) 1997 1996 ============ ============ Income taxes paid .................................................. $ 441.6 $ 401.1 Interest paid ...................................................... 1,625.2 1,585.2 Net noncash transfers to foreclosed property ....................... 36.7 98.2 Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $24.6 in 1997 and $36.6 in 1996 ................. 41.2 (58.7) ========= ========== Cash acquisitions of businesses: Fair value of noncash assets acquired ........................... $ 194.6 $ 37.9 Liabilities assumed ............................................. (171.0) -- --------- ---------- Net ............................................................ $ 23.6 $ 37.9 ========= ========== Stock acquisitions of businesses: Fair value of noncash assets acquired ........................... $ 77.2 $ 5,284.9 Net cash acquired ............................................... 4.5 245.8 Liabilities assumed ............................................. (66.9) (4,493.9) --------- ---------- Net value of common stock issued ............................... $ 14.8 $ 1,036.8 ========= ==========
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
For the Three Months Ended September 30 1997 --------------------------------------- Yields (In Millions) and (Unaudited) Balance Interest Rates ========= =========== ======== ASSETS Securities: U.S. Treasury ............................................ $ 664 $ 9.7 5.80% Mortgage-backed .......................................... 4,166 71.1 6.77 State and political ...................................... 1,077 21.1 7.77 U.S. agencies and other .................................. 512 7.5 5.81 ------ ------- Total securities ........................................ 6,419 109.4 6.76 Unrealized gain (loss) on available-for-sale securities ... 44 ------ Net securities ......................................... 6,463 Held-to-maturity securities ............................... 254 5.0 7.81 Trading account securities ................................ 153 2.3 5.96 Federal funds sold and resale agreements .................. 515 6.8 5.24 Loans: Commercial: Commercial .............................................. 22,574 465.0 8.17 Real Estate: Commercial Mortgage .................................... 8,006 183.0 9.07 Construction ........................................... 2,294 55.6 9.62 ------ ------- Total Commercial ....................................... 32,874 703.6 8.49 Consumer: Residential Mortgage .................................... 4,835 96.8 7.94 Residential mortgage held for sale ...................... 166 3.2 7.65 Home equity and second mortgage ......................... 5,204 127.6 9.73 Credit card ............................................. 3,764 117.9 12.43 Other ................................................... 6,847 167.8 9.72 ------ ------- Total consumer ......................................... 20,816 513.3 9.78 ------ ------- Total loans ............................................ 53,690 1,216.9 8.99 Allowance for credit losses .............................. 991 ------ Net loans ............................................... 52,699 Other earning assets ...................................... 510 6.2 4.82 ------ ------- Total earning assets* .................................. 61,541 1,346.6 8.68 Cash and due from banks ................................... 3,483 Other assets .............................................. 4,346 ------ Total assets ........................................... $68,423 ======= LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits .............................. $12,620 Interest-bearing deposits: Interest checking ........................................ 5,410 22.8 1.67 Money market accounts .................................... 10,453 102.0 3.87 Other savings accounts ................................... 2,736 14.9 2.16 Savings certificates ..................................... 12,265 169.4 5.48 Certificates over $100,000 ............................... 3,551 53.2 5.94 ------ ------- Total interest-bearing deposits ......................... 34,415 362.3 4.18 Short-term borrowings ..................................... 4,741 70.1 5.87 Long-term debt ............................................ 8,008 122.1 6.05 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company ............ 600 12.3 8.18 ------ ------- Total interest-bearing liabilities ..................... 47,764 566.8 4.71 Other liabilities ......................................... 2,153 Preferred equity .......................................... 150 Common equity ............................................. 5,709 Unrealized gain (loss) on available-for-sale securities, net of tax ................................... 27 ------ Total liabilities and shareholders' equity ............. $68,423 ======= Net interest income ....................................... $ 779.8 ======= Gross interest margin ..................................... 3.97% ===== Gross interest margin without taxable-equivalent increments ............................................... 3.88% ===== Net interest margin ....................................... 5.03% ===== Net interest margin without taxable- equivalent increments .................................... 4.93% =====
WIDE TABLE CONTINUED FROM ABOVE: CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
For the Three Months Ended September 30 1996 ----------------------------------- Yields % Change (In Millions) and Average (Unaudited) Balance Interest Rates Balance --------- ----------- -------- --------- ASSETS Securities: U.S. Treasury ............................................ $ 1,188 $ 17.4 5.83% (44.1)% Mortgage-backed .......................................... 4,181 69.6 6.62 (.4) State and political ...................................... 587 12.3 8.34 83.5 U.S. agencies and other .................................. 952 17.0 7.10 (46.2) ------- ------- Total securities ........................................ 6,908 116.3 6.70 (7.1) Unrealized gain (loss) on available-for-sale securities ... (89) ** ------- Net securities ......................................... 6,819 (5.2) Held-to-maturity securities ............................... 840 16.1 7.63 (69.8) Trading account securities ................................ 188 2.7 5.71 (18.6) Federal funds sold and resale agreements .................. 976 13.3 5.42 (47.2) Loans: Commercial: Commercial .............................................. 21,009 432.0 8.18 7.4 Real Estate: Commercial Mortgage .................................... 7,702 173.5 8.96 3.9 Construction ........................................... 1,796 43.8 9.70 27.7 ------- ------- Total Commercial ....................................... 30,507 649.3 8.47 7.8 Consumer: Residential Mortgage .................................... 5,344 108.9 8.11 (9.5) Residential mortgage held for sale ...................... 220 3.9 7.05 (24.5) Home equity and second mortgage ......................... 4,636 110.4 9.47 12.3 Credit card ............................................. 3,519 113.4 12.82 7.0 Other ................................................... 7,014 169.3 9.60 (2.4) ------- ------- Total consumer ......................................... 20,733 505.9 9.71 .4 ------ ------- Total loans ............................................ 51,240 1,155.2 8.97 4.8 Allowance for credit losses .............................. 988 .3 ------- Net loans ............................................... 50,252 4.9 Other earning assets ...................................... 487 6.9 5.64 4.7 ------- ------- Total earning assets* .................................. 60,639 1,310.5 8.60 1.5 Cash and due from banks ................................... 3,687 (5.5) Other assets .............................................. 4,622 (6.0) ------- Total assets ........................................... $67,871 .8% ======= LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits .............................. $12,091 4.4% Interest-bearing deposits: Interest checking ........................................ 5,614 22.4 1.59 (3.6) Money market accounts .................................... 10,164 95.6 3.74 2.8 Other savings accounts ................................... 3,211 18.0 2.23 (14.8) Savings certificates ..................................... 13,039 177.1 5.40 (5.9) Certificates over $100,000 ............................... 3,454 50.5 5.82 2.8 ------- ------- Total interest-bearing deposits ......................... 35,482 363.6 4.08 (3.0) Short-term borrowings ..................................... 7,091 99.4 5.58 (33.1) Long-term debt ............................................ 5,020 77.5 6.14 59.5 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company ............ -- -- -- ** ------- ------- Total interest-bearing liabilities ..................... 47,593 540.5 4.52 .4 Other liabilities ......................................... 2,160 (.3) Preferred equity .......................................... 238 (37.0) Common equity ............................................. 5,835 (2.2) Unrealized gain (loss) on available-for-sale securities, net of tax ................................... (46) ** ------- Total liabilities and shareholders' equity ............. $67,871 .8% ======= === Net interest income ....................................... $ 770.0 ======= Gross interest margin ..................................... 4.08% ===== Gross interest margin without taxable-equivalent increments ............................................... 3.97% ===== Net interest margin ....................................... 5.05% ===== Net interest margin without taxable- equivalent increments .................................... 4.95% =====
INTEREST AND RATES ARE PRESENTED ON A FULLY TAXABLE-EQUIVALENT BASIS UNDER A TAX RATE OF 35 PERCENT. INTEREST INCOME AND RATES ON LOANS INCLUDE LOAN FEES. NONACCRUAL LOANS ARE INCLUDED IN AVERAGE LOAN BALANCES. * BEFORE DEDUCTING THE ALLOWANCE FOR CREDIT LOSSES AND EXCLUDING THE UNREALIZED GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES. ** NOT MEANINGFUL CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
For the Nine Months Ended September 30 1997 ----------------------------------- Yields (In Millions) and (Unaudited) Balance Interest Rates --------- ---------- -------- ASSETS Securities: U.S. Treasury ........................................... $ 776 $ 33.9 5.84% Mortgage-backed ......................................... 4,207 216.8 6.89 State and political ..................................... 747 43.8 7.84 U.S. agencies and other ................................. 624 28.5 6.11 ------- -------- Total securities ....................................... 6,354 323.0 6.80 Unrealized loss on available-for-sale securities ......... (23) ------- Net securities ........................................ 6,331 Held-to-maturity securities .............................. 600 35.5 7.91 Trading account securities ............................... 167 7.2 5.76 Federal funds sold and resale agreements ................. 587 24.3 5.53 Loans: Commercial: Commercial ............................................. 22,194 1,358.0 8.18 Real estate: Commercial mortgage ................................... 8,031 542.8 9.04 Construction .......................................... 2,222 159.9 9.62 ------- -------- Total commercial ...................................... 32,447 2,060.7 8.49 Consumer: Residential mortgage ................................... 4,985 298.2 8.00 Residential mortgage held for sale ..................... 160 9.1 7.60 Home equity and second mortgage ........................ 5,041 363.5 9.64 Credit card ............................................ 3,613 339.5 12.56 Other .................................................. 6,973 508.9 9.76 ------- -------- Total consumer ........................................ 20,772 1,519.2 9.78 ------- -------- Total loans ........................................... 53,219 3,579.9 8.99 Allowance for credit losses ............................. 991 ------- Net loans .............................................. 52,228 Other earning assets ..................................... 516 19.4 5.03 ------- -------- Total earning assets* ................................ 61,443 3,989.3 8.68 Cash and due from banks .................................. 3,588 Other assets ............................................. 4,383 ------- Total assets ......................................... $68,400 ======= LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits ............................. $12,470 Interest-bearing deposits: Interest checking ....................................... 5,534 68.7 1.66 Money market accounts ................................... 10,432 298.6 3.83 Other savings accounts .................................. 2,849 46.9 2.20 Savings certificates .................................... 12,310 500.2 5.43 Certificates over $100,000 .............................. 3,698 163.3 5.90 ------- -------- Total interest-bearing deposits ........................ 34,823 1,077.7 4.14 Short-term borrowings .................................... 5,681 238.8 5.62 Long-term debt ........................................... 6,850 314.6 6.14 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company ........... 600 36.9 8.18 ------- -------- Total interest-bearing liabilities ................... 47,954 1,668.0 4.65 Other liabilities ........................................ 2,169 Preferred equity ......................................... 150 Common equity ............................................ 5,671 Unrealized loss on available-for-sale securities, net of tax .................................. (14) ------- Total liabilities and shareholders' equity ........... $68,400 ======= Net interest income ...................................... $2,321.3 ======== Gross interest margin .................................... 4.03% ===== Gross interest margin without taxable-equivalent increments .............................................. 3.93% ===== Net interest margin ...................................... 5.05% ===== Net interest margin without taxable- equivalent increments ................................... 4.95% =====
WIDE TABLES CONTINUED FROM ABOVE: CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
For the Nine Months Ended September 30 1996 ----------------------------------- Yields % Change (In Millions) and Average (Unaudited) Balance Interest Rates Balance - ---------------------------------------------------------- ---------- ---------- -------- --------- ASSETS Securities: U.S. Treasury ........................................... $ 1,310 $ 58.1 5.92 % (40.8)% Mortgage-backed ......................................... 4,153 209.9 6.75 1.3 State and political ..................................... 548 35.1 8.56 36.3 U.S. agencies and other ................................. 1,036 51.4 6.63 (39.8) -------- -------- Total securities ....................................... 7,047 354.5 6.72 (9.8) Unrealized loss on available-for-sale securities ......... (27) 14.8 ------- Net securities ........................................ 7,020 (9.8) Held-to-maturity securities .............................. 841 48.3 7.67 (28.7) Trading account securities ............................... 252 10.6 5.62 (33.7) Federal funds sold and resale agreements ................. 950 37.9 5.33 (38.2) Loans: Commercial: Commercial ............................................. 20,738 1,271.0 8.19 7.0 Real estate: Commercial mortgage ................................... 7,552 510.6 9.03 6.3 Construction .......................................... 1,592 116.5 9.77 39.6 ------- -------- Total commercial ...................................... 29,882 1,898.1 8.48 8.6 Consumer: Residential mortgage ................................... 5,561 336.6 8.09 (10.4) Residential mortgage held for sale ..................... 276 14.4 6.97 (42.0) Home equity and second mortgage ........................ 4,286 304.2 9.48 17.6 Credit card ............................................ 3,400 329.7 12.95 6.3 Other .................................................. 7,030 506.2 9.62 (.8) ------- -------- Total consumer ........................................ 20,553 1,491.1 9.69 1.1 ------- -------- Total loans ........................................... 50,435 3,389.2 8.98 5.5 Allowance for credit losses ............................. 968 2.4 ------- Net loans .............................................. 49,467 5.6 Other earning assets ..................................... 455 18.9 5.55 13.4 --- -------- Total earning assets* ................................ 59,980 3,859.4 8.59 2.4 Cash and due from banks .................................. 3,704 (3.1) Other assets ............................................. 4,467 (1.9) ------- Total assets ......................................... $67,156 1.9% ======= LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits ............................. $11,790 5.8% Interest-bearing deposits: Interest checking ....................................... 5,701 67.6 1.58 (2.9) Money market accounts ................................... 9,971 280.9 3.76 4.6 Other savings accounts .................................. 3,210 54.0 2.25 (11.2) Savings certificates .................................... 13,067 530.4 5.42 (5.8) Certificates over $100,000 .............................. 3,335 145.8 5.84 10.9 ------- -------- Total interest-bearing deposits ........................ 35,284 1,078.7 4.08 (1.3) Short-term borrowings .................................... 7,237 299.4 5.53 (21.5) Long-term debt ........................................... 4,836 224.7 6.21 41.6 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company ........... -- -- -- ** ------- ------- Total interest-bearing liabilities ................... 47,357 1,602.8 4.52 1.3 Other liabilities ........................................ 2,090 3.8 Preferred equity ......................................... 243 (38.3) Common equity ............................................ 5,695 (.4) Unrealized loss on available-for-sale securities, net of tax .................................. (19) 26.3 ------- Total liabilities and shareholders' equity ........... $67,156 1.9% ======= ===== Net interest income ...................................... $2,256.6 ======== Gross interest margin .................................... 4.07% ===== Gross interest margin without taxable-equivalent increments .............................................. 3.97% ===== Net interest margin ...................................... 5.03% ===== Net interest margin without taxable- equivalent increments ................................... 4.92% =====
INTEREST AND RATES ARE PRESENTED ON A FULLY TAXABLE-EQUIVALENT BASIS UNDER A TAX RATE OF 35 PERCENT. INTEREST INCOME AND RATES ON LOANS INCLUDE LOAN FEES. NONACCRUAL LOANS ARE INCLUDED IN AVERAGE LOAN BALANCES. * BEFORE DEDUCTING THE ALLOWANCE FOR CREDIT LOSSES AND EXCLUDING THE UNREALIZED GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES. ** NOT MEANINGFUL PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 10(a) Employment Agreement with John F. Grundhofer* 10(b) Employment Agreement with Philip G. Heasley* 10(c) Employment Agreement with Richard A. Zona* 10(d) Employment Agreements with Gerry B. Cameron, Gary T. Duim and Robert D. Sznewajs. Filed as Exhibits 10.1 - 10.3 to Registration Statement on Form S-4, File No. 333-29409 and incorporated herein by reference.* 11 Computation of Primary and Fully Diluted Net Income Per Common Share 12 Computation of Ratio of Earnings to Fixed Charges 27 Article 9 Financial Data Schedule* * COPIES OF THIS EXHIBIT WILL BE FURNISHED UPON REQUEST AND PAYMENT OF THE COMPANY'S REASONABLE EXPENSES IN FURNISHING THE EXHIBIT. (b) REPORTS ON FORM 8-K During the three months ended September 30, 1997, the Company filed the following reports on Form 8-K: Form 8-K filed August 1, 1997, announcing the completion of the merger of First Bank System, Inc. and U.S. Bancorp of Portland, Oregon, the name change of the registrant to U.S. Bancorp, and the increases in authorized capitalization and the size of the Board of Directors. Form 8-K filed October 1, 1997 (dated September 30, 1997), which includes the Company's 1996 supplemental financial statements reflecting the merger of U.S. Bancorp into First Bank System, Inc. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. U.S. BANCORP /s/ DAVID J. PARRIN By: ------------------------------------------ David J. Parrin Senior Vice President and Controller DATE: November 14, 1997 (Chief Accounting Officer and Duly Authorized Officer) [LOGO] U.S. BANCORP P.O. Box 522 Minneapolis, Minnesota 55480 http://www.fbs.com SHAREHOLDER INQUIRIES COMMON STOCK TRANSFER AGENT AND REGISTRAR First Chicago Trust Company of New York acts as transfer agent and registrar, dividend paying agent, and dividend reinvestment plan agent for U.S. Bancorp, and maintains all shareholder records for the corporation. For information about U.S. Bancorp stock, or if you have questions regarding your stock certificates (including transfers), address or name changes, lost dividend checks, lost stock certificates, or Form 1099s, please call First Chicago's Shareholder Services Center at (800) 446-2617, weekdays, 8:00 a.m. to 10:00 p.m. EST, and Saturdays, 8:00 a.m. to 3:30 p.m. EST. The TDD telephone number for the hearing impaired is (201) 222-4955. First Chicago Trust Company of New York P.O. Box 2500 Jersey City, New Jersey 07303-2500. Telephone: (201) 324-0498 Fax: (201) 222-4892 Internet address: http://www.fctc.com E-mail address: fctc@em.fcnbd.com COMMON STOCK LISTING AND TRADING U.S. Bancorp Common Stock is listed and traded on the New York Stock Exchange under the ticker symbol USB. DIVIDENDS U.S. Bancorp currently pays quarterly dividends on its Common Stock on or about the 15th of March, June, September and December, subject to prior Board approval. Shareholders may choose to have dividends electronically deposited directly into their bank accounts. For enrollment information, please call First Chicago at (800) 446-2617. DIVIDEND REINVESTMENT PLAN U.S. Bancorp shareholders can take advantage of a plan that provides automatic reinvestment of dividends and/or optional cash purchases of additional shares of U.S. Bancorp Common Stock up to $60,000 per calendar year. If you would like more information, please contact First Chicago Trust Company of New York, P.O. Box 2598, Jersey City, New Jersey 07303-2598, (800) 446-2617. INVESTMENT COMMUNITY CONTACTS John R. Danielson Senior Vice President, Investor and Corporate Relations (612) 973-2261 Judith T. Murphy Vice President, Investor Relations (612) 973-2264 General Information, Investor and Corporate Relations (612) 973-2263 U.S. Bancorp P.O. Box 522 Minneapolis, MN 55480 FINANCIAL INFORMATION U.S. Bancorp news and financial results are available by fax, mail and the Company's web site. FAX. To access our fax-on-demand service, call (800) 758-5804. When asked, enter U.S. Bancorp's extension number, "312402." Enter "1" for the most current news release or "2" for a menu of releases. Enter your fax and telephone numbers as directed. The information will be faxed to you promptly. MAIL. At your request we will mail to you our quarterly earnings news releases. To be added to U.S. Bancorp's mailing list, please contact Investor and Corporate Relations, U.S. Bancorp, 601 Second Avenue South, Minneapolis, Minnesota 55402-4302, (612) 973-2434. WEB SITE. For information about U.S. Bancorp, including news and financial results, product information, and service locations, access our home page on the World Wide Web. The address is http://www.fbs.com. Additional information for customers of our U.S. Bank affiliates is available at http://www.usbank.com. EX-10.A 2 EMPLOYMENT AGREEMENT Exhibit 10(a) EMPLOYMENT AGREEMENT THIS AGREEMENT, dated as of August 1, 1997, by and between U.S. Bancorp (formerly First Bank System, Inc.), a Delaware corporation (as further defined in Section 8.13.11 hereof, "Employer"), and John F. Grundhofer ("Executive"), replacing the Amended and Restated Employment Agreement by and between Executive and Employer dated as of August 15, 1996 (the "Prior Agreement"). In consideration of the respective undertakings of Employer and Executive set forth below, Employer and Executive agree as follows: 1. Employment. Employer hereby employs Executive, and Executive accepts such employment and agrees to perform services for the Employer, for the period and upon the other terms and conditions set forth in this Agreement. 2. Term of Employment. The term of Executive's employment pursuant to this Agreement will commence on August 1, 1997 (the "Commencement Date") and, unless terminated at an earlier date in accordance with Section 5 of this Agreement, shall continue in effect until the fifth anniversary of the Commencement Date; and, commencing on the first anniversary of the Commencement Date and on each anniversary thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than 30 days prior to any such date of automatic extension of this Agreement, Employer or Executive shall have given the other party to this Agreement written notice that the Agreement will not be so extended. The term of Executive's employment commencing on the Commencement Date and ending pursuant to the terms hereof is hereinafter referred to as the "Period of Employment." 3. Position and Duties. 3.01 Service with Employer. During the Period of Employment, Executive agrees to perform such reasonable executive employment duties as Employer shall assign to him from time to time and shall have the title of President and Chief Executive Officer and upon the earlier of (x) the retirement of Gerry B. Cameron, and (y) January 1, 1999, the Executive shall have the additional title of Chairman of the Board of Directors of the Employer; provided, however, that Employer may name another executive President during the Period of Employment so long as Executive retains the other titles as herein provided. Executive also agrees to serve, for any period for which he is elected, as a director on the Board of Directors of Employer and to serve as a member of any committee of the Board of Directors of Employer to which Executive may be elected or appointed. 3.02 Performance of Duties. Executive agrees to serve Employer faithfully and to the best of his ability and to devote his full business time, attention and efforts to the business and affairs of Employer during the Period of Employment; provided, however, that Executive may engage in other activities, such as activities involving charitable, educational, religious and similar types of organizations, speaking engagements, membership on the boards of directors of other organizations (as Employer may from time to time approve), management of Executive's personal investments, and similar types of activities to the extent that such other activities do not inhibit in any material way or prohibit the performance of Executive's duties under this Agreement, or inhibit in any material way or conflict with the business of Employer and its subsidiaries. 4. Compensation. 4.01 Base Salary. As base compensation for all services to be rendered by Executive under this Agreement, Employer will pay to Executive during the Period of Employment a base annual salary ("Annual Salary") to be paid in substantially equal installments in accordance with Employer's standard payroll procedures and policies. The Annual Salary will be at least $840,000, but the Annual Salary may be increased (but not reduced) from time to time in the sole discretion of Employer; provided, however, that for any of the three years beginning after a Change in Control, as defined in Section 8.13, during the Period of Employment Executive's Annual Salary shall be increased by a percentage not less than the average percentage increase in the base annual salary for each of the next five highest paid officers of Employer for such year. 4.02 Annual Bonus. During the Period of Employment, Executive will be entitled to participate in the Employer's Executive Incentive Plan (or, if such Plan shall cease to exist, Employer's annual bonus award program, if any, for Employer's executives at Executive's grade level) with a target bonus opportunity at least as great as that provided to the Executive immediately prior to the Commencement Date. The award of an annual bonus is highly discretionary and is subject to the terms and provisions of the Executive Incentive Plan (or, if such Plan shall cease to exist, Employer's annual bonus award program, if any, for Employer's executives at Executive's grade level). 4.03 Options and Restricted Stock. During the Period of Employment, Executive will be eligible to receive grants of Employer's stock options and restricted stock, or other awards pursuant to equity-based plans of Employer. Such grants are highly discretionary and would be subject to the terms of the applicable agreements prescribed by Employer from time to time. Notwithstanding the foregoing, the Executive shall be granted on the date hereof 50,000 shares of restricted common stock of the Employer (the "Restricted Stock"). The Restricted Stock shall vest in five equal installments on each of the first through fifth anniversaries of the date of grant but shall vest immediately upon the Executive's death or Disability (as defined in the Employer's Disability Program) or upon a termination of the Executive's employment by the Employer without Cause or by the Executive for Good Reason, or upon a Full Change in Control. The Executive shall be granted as of the date hereof an option (the "Option") to acquire 150,000 shares of the Employer's common stock at their Fair Market Value on the date of grant (as defined in the Employer's 1997 Stock Incentive Plan). The Option shall have a term of 10 years and shall vest and become exercisable in full on the fifth anniversary of the date of grant, subject to acceleration in the event of achievement of performance targets set forth in the grant of the Option, and shall be subject to all other terms and conditions currently applicable to options granted under such Plan to other executive officers of the Employer. The Option shall vest and become immediately exercisable upon the Executive's death or Disability (as defined in the Employer's Disability Program) or upon a termination of the Executive's employment by the Employer without Cause or by the Executive for Good Reason, or upon a Full Change in Control. 4.04 Participation in Other Benefit Plans. During the Period of Employment, Executive will be entitled to participate in such retirement plans, major medical, hospital, surgical and dental plans, executive disability plans and other Employer benefits not described elsewhere in this Section 4 as are being provided by Employer to executives at Executive's grade level from time to time to the extent that Executive's age, positions and other factors qualify him for such benefits. If, for any period during the Period of Employment, Executive is not eligible by reason of length of service to participate in such plans maintained by Employer, Employer shall provide Executive with benefits equivalent to those provided under such plans and, with respect to benefits provided by Employer equivalent to those provided under Employer's major medical, hospital, surgical and dental plans, shall compensate Executive on an after-tax basis for any additional income taxes payable by Executive by reason of Employer providing such benefits directly rather than through such plans. Upon a termination of employment for any reason and for the remainder of the Executive's life and that of his current spouse, the Employer shall continue to provide medical and dental benefits in the aggregate to the Executive and his current spouse pursuant to the Employer's Retiree Health Care Program at a subsidized cost on the same basis as the Employer subsidizes premiums for retirees of the Employer who retired prior to January 1, 1993 (collectively "Medical Benefits"). The Executive and his current spouse's entitlement to Medical Benefits shall survive the termination of this Agreement. 4.05 Long-Term Disability Benefits. During the Period of Employment, Executive's annual benefit under Employer's long-term disability plan not be less than 60% of the total of (i) Executive's base annual salary at the date of disability plus (ii) the annual average of bonuses received by Executive during the three prior Executive Incentive Plan years (or, if such Plan shall cease to exist, such other annual bonus award program, if any, pursuant to which Executive received annual bonus payments), and Employer agrees to pay Executive (at the time benefits are payable under the long-term disability plan) the excess, if any, of such annual benefit over the annual benefit provided by Employer's long-term disability plan. 4.06 Survivor Benefit Programs; Life Insurance. During the Period of Employment, Executive will be entitled to participate in survivor benefit programs covering Employer's executives at Executive's grade level in effect on the Commencement Date or as modified or supplemented by Employer from time to time. If, for any period during the Period of Employment, Executive is not eligible to participate in such survivor benefit programs, Employer shall provide Executive with benefits equivalent to those provided under such programs. In addition, during the Period of Employment Employer shall continue to provide a life insurance policy with a face value of at least $1 million for the benefit of a beneficiary designated by Executive (or, if no beneficiary is designated, for the benefit of Executive's spouse). Such insurance policy shall be in addition to the amount of group term insurance, if any, provided to Executive under an insurance plan maintained by Employer for its employees generally. Executive hereby represents to Employer that Executive is insurable on normal terms and conditions. 4.07 Retirement Benefits. The Executive shall be entitled to a retirement benefit pursuant to the Employer's Non-Qualified Supplemental Executive Retirement Plan in effect as of the date hereof (the "NQSRP"), with the following modifications: (i) the Executive's lifetime annual pension benefit commencing at age 65 shall be 57.5% of his final three year's average compensation, (ii) the Executive shall be fully vested in this benefit at age 60, with no actuarial or other reduction for retirement prior to age 65 but after age 60 but with a reduction for commencement of benefits prior to age 65, (iii) the Prior Plans' Offset (as defined in the NQSRP) shall be fixed at $270,000 per year, and (iv) the Executive's minimum actual pension from all Employer qualified plans and the NQSRP shall not be less than $1 million per year, commencing at age 65 and, if the joint and survivor form of benefit is elected, his spouse's minimum total survivor benefit from all sources upon executive's death at or after age 65 shall not be less than $500,000 per year. In the event of any conflict between the terms of this Section 4.07 and the NQSRP, the provisions of this Section 4.07 shall prevail. 4.08 Vacation and Sick Leave. During the Period of Employment, Executive will be entitled to reasonable paid vacation periods each year, will be entitled to carry over to subsequent years unused vacation periods, and upon termination of employment will be entitled to be paid for unused vacation periods, in each case in accordance with Employer's policy for executives at Executive's grade level from time to time. Executive will also be entitled to reasonable sick leave in accordance with Employer's policy for executives at Executive's grade level from time to time. 4.09 Perquisites. During the Period of Employment, Employer will provide Executive with such perquisites as Employer from time to time provides to executives at Executive's grade level including, without limitation, (a) an automobile or automobile allowance consistent with Employer's policies for an executive at Executive's grade level, (b) reimbursement of initiation fees, if any, and dues for one country club and one business club of Executive's choice, and (c) the reimbursement of the cost of financial and tax counseling (subject to an annual limit of two percent of current base annual salary). Additionally, during the Period of Employment, Employer will reimburse Executive for the difference between (i) interest payments made by Executive on Executive's real estate mortgage loan for his personal residence (with the loan amount not to exceed 80% of the purchase price for such residence) and (ii) the interest payments that would apply to such loan if the interest rate on such loan were one percentage point less than the interest rate generally prevailing in the market at the time the loan was entered into. 4.10 Expenses. Employer will reimburse Executive for all expenses and disbursements reasonably incurred by Executive in the performance of his duties during the Period of Employment, and such other facilities or services as Employer and Executive may, from time to time, agree are reimbursable, subject to the presentment of appropriate vouchers in accordance with the Employer's normal policies for expense verification. 4.11 Indemnity and Hold Harmless. Except to the extent inconsistent with Employer's charter or bylaws, Employer will indemnify Executive and hold Executive harmless to the fullest extent permitted by law with respect to acts of Executive as an officer and director of Employer during the Period of Employment. Employer further agrees that if and to the extent Employer in its sole discretion maintains directors' and officers' insurance policies, Executive will be covered by such policies with respect to acts of Executive as an officer and director of Employer during the Period of Employment to the same extent as all other officers and directors of Employer under such policies. 4.12 Payments on Account of Restricted Stock Relating to Former Employment. Employer has established and is maintaining a bookkeeping account for Executive (the "Bookkeeping Account"), which account was initially credited with $305,074, representing the amount agreed to be paid to Executive and not paid to date in respect of shares of Wells Fargo & Company ("Wells Fargo") Common Stock transferred by Wells Fargo to Executive, but not vested, as of January 30, 1990. The amount credited to the Bookkeeping Account shall be deemed to have been invested in such stock, bonds or other securities as Executive shall, from time to time, designate in writing to Employer's Executive Vice President, Human Resources, or such other individual as Employer shall designate, which deemed investments must be reasonably acceptable to Employer and must be of a type that Employer would be permitted to make under applicable laws and regulations. The Bookkeeping Account shall be credited or debited, as the case may be, with gains or losses deemed incurred as a result of such designated, deemed investments. Certain debits have been made to the Bookkeeping Account as provided in the Employment Agreement dated December 30, 1992 by and between Employer and Executive (the "1992 Employment Agreement"). The balance of the Bookkeeping Account shall become payable to, or with respect to, Executive upon the earliest of the following events (i) January 30, 2003, (ii) Executive's death or (iii) Executive's termination of employment for any reason within 24 months after a Change in Control. In the event the balance of the Bookkeeping Account becomes payable upon Executive's termination of employment for any reason other than death within 24 months after a Change in Control, the entire balance shall be paid within 30 days of such event. In the event the balance of the Bookkeeping Account becomes payable upon Executive's death, the entire balance shall be paid by December 31 of the calendar year in which Executive dies. Upon the occurrence of any other event giving rise to Employer's obligation to pay Executive the balance of the Bookkeeping Account, on January 30 of each year beginning in the year 2003 and for each of the next nine consecutive years, after taking into account any amount credited or debited to the Bookkeeping Account as a result of the deemed investment thereof or otherwise pursuant to the terms of this Section 4.12, the following proportions of the Bookkeeping Account shall be paid to Executive: 1/10, 1/9, 1/8, 1/7, 1/6, 1/5, 1/4, 1/3, 1/2 and the entire remaining balance thereof. Employer, in its sole and absolute discretion, may alter the timing or manner of payment of the balance of the Bookkeeping Account in the event that Executive establishes to the satisfaction of Employer severe financial hardship. Severe financial hardship will be deemed to have occurred in the event of Executive's impending bankruptcy, a dependent's long and serious illness or other events of similar magnitude. Executive may designate a beneficiary or beneficiaries who, upon his death, are to receive distributions that otherwise would have been paid to Executive. All designations shall be in writing and shall be effective only if and when delivered to Employer during the lifetime of Executive. Employer shall have the right to deduct from all payments made pursuant to this Section 4.12 any federal, state or local taxes required by law to be withheld with respect to such payments. Executive and Employer understand and agree that the timetable set forth above with respect to the payment of the balance of the Bookkeeping Account is irrevocable and shall not be subject to any amendment or modification. Further, Executive and Employer understand and agree that Employer is under a contractual obligation to make payments to Executive in accordance with this Section 4.12. Such payments shall not be financed from any trust fund, insurance or otherwise and shall be paid solely out of the general funds of Employer, and Executive shall have no interest whatsoever in any investments made by Employer on account of Executive's request with respect to deemed investments of the Bookkeeping Account. Executive will not have any interest whatsoever in any specific asset of Employer as a result of this Agreement, and Executive's rights to payments hereunder shall be no greater than the right of any other general, unsecured creditor of Employer. In no event shall Employer make any payment hereunder to any assignee or creditor of Executive or a beneficiary. Prior to the time of payment hereunder, Executive or a beneficiary thereof shall have no rights by way of anticipation or otherwise to assign or otherwise dispose of any interest under this Section 4.12, nor shall such rights be assigned or transferred by operation of law. 5. Termination. 5.01 Grounds for Termination. The Period of Employment will terminate prior to the expiration of the term set forth in Section 2 of this Agreement in the event that: (a) Executive shall die. (b) Executive shall qualify for and accrue payments under Employer's Disability Program for a period covering 90 consecutive days. (c) Employer shall terminate the Period of Employment for Cause. "Cause" means termination upon (i) the willful and continued failure by Executive to substantially perform his duties with Employer (other than any such failure resulting from his disability or from termination by Executive for Good Reason), after a written demand for substantial performance is delivered to Executive that specifically identifies the manner in which Employer believes that Executive has not substantially performed his duties, and Executive has failed to resume substantial performance of his duties on a continuous basis within 14 days of receiving such demand, (ii) the willful engaging by Executive in conduct which is demonstrably and materially injurious to Employer, monetarily or otherwise, (iii) Executive's conviction of a felony which impairs his ability substantially to perform his duties with Employer or (iv) the issuance of an order under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIC") by which Executive is removed and/or permanently prohibited from participating in the conduct of the affairs of Employer and/or any other Affiliate of Employer. For purposes of this paragraph, no act, or failure to act, on Executive's part will be deemed "willful" unless done, or omitted to be done, by Executive not in good faith and without reasonable belief that his action or omission was in the best interest of Employer. Failure to perform Executive's duties with Employer during any period of disability shall not constitute Cause. (d) Executive shall terminate the Period of Employment for Good Reason. "Good Reason" means termination by Executive upon the occurrence, without Executive's consent, of any one or more of the following: (i) the assignment to Executive of any duties inconsistent in any respect with Executive's position (including status, offices, titles, and reporting requirements), authorities, duties, or other responsibilities as in effect immediately prior to such assignment or any other action of Employer which results in a diminishment in such position, authority, duties, or responsibilities, other than an insubstantial and inadvertent action which is remedied by Employer promptly after receipt of notice thereof given by Executive, and other than the Employer's providing the title of President of the Employer to another executive, provided that the Executive continues as Chairman of the Board (if he is then Chairman of the Board) and Chief Executive Officer of the Employer; (ii) a reduction by Employer in Executive's base salary as in effect on the Commencement Date or as the same shall be increased from time to time; (iii) Employer's requiring Executive to be based at a location in excess of 30 miles from the location of Executive's principal office as of the Commencement Date; (iv) the failure by Employer to provide Executive with compensation and benefits at least equal (in terms of benefit levels and/or reward opportunities) to those provided for under each compensation or benefit plan, program, policy and practice as in effect at the Commencement Date (or as in effect following the Commencement Date, if greater); (v) the failure of Employer to obtain a satisfactory agreement from the Resulting Corporation (as hereinafter defined) or any other successor to Employer to assume and agree to perform this Agreement; (vi) a material breach by Employer of its obligations under this Agreement after notice in writing from Executive and a reasonable opportunity for Employer to correct such conduct; (vii) any purported termination by Employer of Executive's employment that is not effected pursuant to a Notice of Termination (as hereinafter defined); (viii) for the 24 month period following a Full Change in Control (as hereinafter defined) (or prior to a Full Change in Control in the event of an Anticipatory Termination (as hereinafter defined)), the failure by the Employer to provide Executive total cash compensation (consisting of base salary plus cash bonus) with respect to any fiscal year or portion thereof at least equal to the greater of (x) actual total cash compensation paid to Executive with respect to the prior fiscal year or (y) the average annual total cash compensation paid to Executive with respect to the prior two fiscal years (total cash compensation with respect to any fiscal year or portion thereof shall be determined at the time the bonus with respect to such fiscal year or portion thereof is determined, even if such bonus is determined after the 24-month period following a Full Change in Control, and the bonus portion of cash compensation for services rendered in any portion of a fiscal year within 24 months following a Full Change in Control shall be determined by reference to the pro-rata portion of any annual bonus for such fiscal year) and (ix) within 24 months following a Partial Change in Control (as hereinafter defined) (or prior to a Partial Change in Control in the event of an Anticipatory Termination), a reduction by Employer in Executive's annual target bonus or maximum bonus award opportunities as in effect in the prior fiscal year Executive's right to terminate the Period of Employment for Good Reason shall not be affected by Executive's incapacity due to physical or mental illness. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason. Termination by Executive of the Period of Employment for Good Reason shall constitute termination for Good Reason for all purposes of this Agreement, notwithstanding that Executive may also thereby be deemed to have "retired" under any applicable retirement programs of Employer. (e) Employer terminates the Period of Employment other than for "Cause." (f) Executive terminates the Period of Employment for any reason not constituting Good Reason. Notwithstanding any termination of the Period of Employment, Executive, in consideration of his employment hereunder to the date of such termination, will remain bound by the provisions of this Agreement that specifically relate to periods, activities or obligations upon or subsequent to the termination of Executive's employment. 5.02 Effect of Termination. (a) In the event of termination of the Period of Employment pursuant to the provisions of Section 5.01(a) above, Executive's trust estate or estate, as the case may be (as determined in accordance with Section 8.02 of this Agreement), will be entitled to be paid the base annual salary otherwise payable to Executive pursuant to Section 4.01 of this Agreement only through the date of such termination. Additionally, Executive's survivors will be entitled to any benefits provided under Employer's survivor benefit program. If the joint and survivor form of benefit is elected, the Executive's current spouse, should she survive the Executive, shall be entitled to a survivor benefit based on a 50% joint and survivor annuity pursuant to the Executive's retirement benefits described in Section 4.07, commencing on what would have been the Executive's 65th birthday. In addition, the Restricted Stock shall vest immediately and the Option shall vest and become immediately exercisable. The Executive's current spouse shall also be entitled to the provision of Medical Benefits. (b) In the event of termination of the Period of Employment pursuant to the provisions of Section 5.01(b) above, Executive will be entitled to be paid the base annual salary otherwise payable to Executive pursuant to Section 4.01 of this Agreement only through the date of such termination. Executive will be entitled to benefits under Employer's Disability Program and to the benefits provided for in Section 4.05 in connection with Employer's Disability Plan. If Executive shall cease to be eligible for long-term disability payments pursuant to the Disability Plan within three years following the date of such termination, Employer will pay Executive a lump sum payment in the amount of Executive's annual base salary at the time of such termination. The Executive shall receive the retirement benefits described in Section 4.07 commencing on his 65th birthday. In addition, the Restricted Stock shall vest immediately and the Option shall vest and become immediately exercisable. The Executive and his current spouse shall also be entitled to the provision of Medical Benefits. (c) In the event of termination of the Period of Employment pursuant to the provisions of Section 5.01(c) or (f) above, Employer will have no further obligations hereunder except that Employer will pay Executive his base salary, at the rate then in effect, and continue to provide Executive and his current spouse Medical Benefits. Executive will not be paid any annual bonus pursuant to Section 4.02 of this Agreement for the calendar year in which the termination occurs or any subsequent calendar year. (d) In the event of termination of the Period of Employment pursuant to the provisions of Sections 5.01(d) or 5.01(e) above, Employer will (i) pay Executive his full base salary through the date of termination at the rate in effect at the time Notice of Termination is given; (ii) pay as damages to Executive, not later than 30 days following the date of termination, a lump sum payment equal to three times the sum of (A) Executive's annual base salary in effect at the time Notice of Termination is given and (B) the annual target bonus potential available to Executive at the time Notice of Termination is given (or, in the event of termination within 24 months following a Change in Control or in the event of an Anticipatory Termination, if either of the following amounts is greater, the bonus earned in the last fiscal year prior to the date of termination or the average bonus earned in the last three fiscal years prior to the date of termination, whichever is larger), (iii) continue to provide the employee benefits described in Sections 4.04, 4.05 (with disability benefits to be calculated as of the date of termination), and 4.06 to which Executive was entitled on the date of such termination for a period of three years from the date of such termination and thereafter, to provide the Executive and his current spouse with Medical Benefits, (iv) continue to provide the perquisites described in Section 4.09 to which Executive was entitled on the date of such termination for a period of three years from the date of such termination, (v) cause the acceleration of the exercisability of any stock option or the vesting of any restricted stock grants (other than those pursuant to Employer's Restricted Stock and Performance Plan) that would have become exercisable or vested, as the case may be, during the remaining Period of Employment had no such termination occurred, and cause the Restricted Stock and the Option to become immediately vested and exercisable, as the case may be, (vi) cause the acceleration of vesting of restrcted stock grants under Employer's Restricted Stock and Performance Plan if the vesting schedule has been determined at the time of such termination and such vesting would have occurred during the remaining Period of Employment had no such termination occurred, (vii) give Executive credit for three additional years of age and service (or five additional years in the event of termination within 24 months following a Change in Control or in the event of an Anticipatory Termination) for all purposes in determining Executive's retirement benefits pursuant to Section 4.07 and the NQSRP, (viii) in the event of termination within 24 months following a Change in Control or in the event of an Anticipatory Termination, pay Executive the full amount of any long-term cash incentive award for any plan periods then in progress to the extent not provided for in any Employer long-term cash incentive plan or plans, (ix) in the event of termination within 24 months following a Change in Control or in the event of an Anticipatory Termination, pay Executive the year-to-date pro-rata amount of any annual cash incentive award for any plan as in effect immediately prior to the Change in Control to the extent not provided for in such plan or plans, and (x) pay for individual outplacement counseling services to Executive up to a maximum of $60,000. Except as otherwise provided in clause (ix) of this Section 5.02(d), Executive will not be paid any annual bonus pursuant to Section 4.02 of this Agreement for the calendar year in which the termination occurs. 5.03 Notice of Termination. Any purported termination by Employer or Executive of the Period of Employment shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which indicates the specific termination provision in Section 5.01 above relied upon. 5.04 Offsets. Executive shall have no duty to seek other employment. However, in the event of termination of the Period of Employment pursuant to the provisions of Sections 5.01(d) or 5.01(e), the following offsets will apply to reduce the payments and benefits which Executive shall be entitled to receive pursuant to Section 5.02(d): (i)(A) in the event of termination within 24 months following a Change in Control or in the event of an Anticipatory Termination, the amount payable to Executive pursuant to Section 5.02(d)(ii) will be offset by any salary, cash bonus and other earned income (within the meaning of Section 911(d)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code")) received by Executive for services rendered by Executive to persons or entities other than the Employer during or with respect to the 36-month period after the date of termination, or (B) in the event of termination at any time not within 24 months following a Change in Control and that is not an Anticipatory Termination, one-third of the amount payable to Executive pursuant to Section 5.02(d)(ii)(A) and the entire amount payable to Executive pursuant to Section 5.02(d)(ii)(B) shall be offset by amounts received by Executive which are described in subparagraph (A) above; (ii) the benefits payable to Executive pursuant to Section 5.02(d)(iii) and (iv) shall be discontinued if Executive obtains full-time employment providing welfare benefits during the 36-month period following the date of termination; and (iii) in the event of termination at any time within 24 months following a Change in Control or in the event of an Anticipatory Termination, any additional benefits under Employer's SERP pursuant to Section 5.02(d) will be reduced by the amount of vested defined benefit pension benefits and vested defined benefit non-qualified supplemental retirement benefits actually payable to Executive without any risk of forfeiture from persons or entities other than Employer which are attributable to services rendered by Executive to such other persons or entities during the 36 months following the date of termination of Executive's employment. Such reduction shall be calculated based on the vested benefits payable at age 65 under the single life annuity form of payment under the applicable plans which are accrued by Executive during such period. The foregoing calculations for a particular plan shall be made by the actuary for such plan in accordance with generally accepted actuarial principles. The amount of such reduction at age 65 shall be actuarially reduced if Executive's benefits under the Employer's NQSRP, as modified by Section 4.07, commence before Executive attains age 65. Not less frequently than annually (by December 31 of each year), Executive shall account to Employer with respect to all payments and benefits received by Executive which are required hereunder to be offset against payments or benefits received by Executive from Employer. If the Employer has paid amounts in excess of those to which Executive is entitled (after giving effect to the offsets provided above), Executive shall reimburse Employer for such excess by December 31 of such year. The requirements imposed under this paragraph shall terminate on December 31 of the calendar year which includes the third anniversary of the date of termination. 5.05 Additional Payments. In the event any payment or distribution of any type by Employer to Executive or for his benefit, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (the "Total Payments"), would be subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "Excise Tax"), then Executive shall be entitled to receive an additional cash payment (a "Gross-Up Payment") equal to an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, Executive would retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments. For purposes of determining the amount of the Gross-Up Payment, which determination shall be made by the Employer's independent auditors, at the Employer's sole expense, Executive's tax rate shall be deemed to be the highest statutory marginal state and Federal tax rate (on a combined basis) (including Executive's share of F.I.C.A. and Medicare taxes) then in effect. If no determination by Employer's auditors is made prior to the time a tax return reflecting the Total Payments is required to be filed by Executive, Executive will be entitled to receive a Gross-Up Payment calculated on the basis of the Total Payments reported by Executive in such tax return, within 30 days of the filing of such tax return. In all events, if any tax authority determines that a greater Excise Tax should be imposed upon the Total Payments than is determined by the Employer's independent auditors or reflected in Executive's tax return pursuant to this Section 5.05, Executive shall be entitled to receive the full Gross-Up Payment calculated on the basis of the amount of Excise Tax determined to be payable by such tax authority from Employer within 30 days of such determination. 5.06 Nonexclusivity of Rights. Nothing in this Agreement shall prevent or limit Executive from continuing or future participation in any benefit, bonus, incentive, retirement or other plan or program provided by Employer and for which Executive may qualify, nor, except as expressly provided in this Agreement, shall anything herein limit or reduce such rights as Executive may have under any other agreement with, or plan, program, policy or practice of, Employer. Amounts which are vested benefits or which Executive is otherwise entitled to receive under any agreement with, or plan, program, policy or practice of, Employer (including, without limitation, the cash-out of unused vacation days upon termination of employment) shall be payable in accordance with such agreement, plan, program, policy or practice, except as explicitly modified by this Agreement. Notwithstanding the foregoing, if Executive becomes entitled to benefits under Article 5 of this Agreement, Executive shall not be entitled to receive payments under any other severance pay plan or program sponsored or maintained by Employer or any of its Affiliates. 6. Non-Competition and Unfair Competition. 6.01 Agreement Not to Compete. Without the approval by resolution of the Board of Directors of Employer, upon termination of Executive's employment with Employer by Employer for Cause pursuant to Section 5.01(c) or by Executive without Good Reason pursuant to Section 5.01(f), Executive will not, for a period of three years thereafter, become an officer, employee, agent, partner, director or substantial stockholder (holding more than 5% of the voting securities), of any bank, savings bank, trust company, bank and trust company, savings and loan association or holding company thereof, in each case if such entity conducts business in the State of California, the State of Colorado, the State of Idaho, the State of Illinois, the State of Iowa, the State of Kansas, the State of Minnesota, the State of Montana, the State of Nebraska, the State of Nevada, the State of North Dakota, the State of Oregon, the State of South Dakota, the State of Utah, the State of Washington, the State of Wisconsin, the State of Wyoming or any other State in which Employer has substantial operations. 6.02 Agreement Not to Solicit. Without the approval by resolution of the Board of Directors of Employer, upon termination of Executive's employment with Employer for any reason whatsoever, Executive will not, for the remainder of the Period of Employment if no termination had occurred (or, if longer, for the one-year period following such termination), (i) solicit or aid in soliciting as a customer or client of banking or related financial services (including, without limitation trust, credit card and investment management services) any person, firm, corporation, association or other entity (A) that was a customer or client of Employer or any other Affiliate of Employer, and for which Executive or anyone under Executive's supervision performed any services or with which substantial business relations were maintained by Employer or any other Affiliate of Employer at any time during the five years prior to the termination of the Period of Employment or (B) whose identity or particular needs Executive otherwise discovered as a result of his employment with Employer, or (ii) solicit or aid in soliciting any employees of Employer or any other Affiliate of Employer to leave their employment. Without the approval by resolution of the Board of Directors of Employer, upon termination of Executive's Employment with Employer for any reason whatsoever, Executive agrees never to copy, remove from Employer or its Affiliates, dispose or make any use of any confidential customer list, confidential business information with respect to customers, confidential materials relating to the practices or procedures of Employer or its Affiliates, or any other proprietary information. 7. Taxes. All payments to be made to Executive under this Agreement will be net of required withholding of federal, state and local income and employment taxes. Whenever under this Agreement Executive is to be compensated or reimbursed on an "after-tax basis," Executive will be assumed to be subject to federal income taxes at the highest marginal rate applicable to individuals and to state income taxes at the highest marginal effective rate for residents of Minneapolis, Minnesota. 8. Miscellaneous. 8.01 Governing Law. This Agreement is made under and shall be governed by and construed in accordance with the laws of the State of Minnesota. 8.02 Successor. This Agreement shall be binding upon and inure to the benefit of Employer and its successors. This Agreement will inure to the benefit of, be enforceable by, and any amounts and benefits owed to Executive at the time of Executive's death, unless otherwise provided herein, will be paid to, the Trustee under the John F. and Beverly J. Grundhofer Living Trust Agreement, or, if such Trust is not then in existence, the personal representative or personal representatives of Executive's estate. Reference to the "John F. and Beverly J. Grundhofer Living Trust Agreement" means that certain Declaration of Trust, John F. and Beverly J. Grundhofer Living Trust, dated February 22, 1988, by and between John F. and Beverly J. Grundhofer, as donors and as original Trustees, as amended and existing at John F. Grundhofer's death. Reference to the Trustee under the John F. and Beverly J. Grundhofer Living Trust Agreement means the then acting Trustee or Trustees under the John F. and Beverly J. Grundhofer Living Trust Agreement and any successor Trustees. Employer will require the Resulting Corporation or any other successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or consolidated assets of Employer and its subsidiaries to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Employer would be required to perform if no such succession had taken place. Failure of Employer to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from Employer in the same amount and on the same terms as Executive would be entitled to hereunder if Executive terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date of termination and Notice of Termination shall be deemed to have been given on such date. In any case where a successor assumes the Employer's obligations under this Agreement by operation of law, the requirements imposed in this paragraph will be satisfied if the successor acknowledges to Executive in writing that it has assumed the Employer's obligations under this Agreement by operation of law within 30 days of receipt of a written notice from Executive requesting such acknowledgment. 8.03 Prior Agreements. This Agreement contains the entire agreement of the parties relating to the employment of Executive by Employer and the other matters discussed herein and supersedes all prior agreements and understandings with respect to such subject matter, and the parties hereto have made no agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein. The Prior Agreement is hereby terminated and shall have no further force or effect. The Change in Control Severance Pay Agreement entered into between Employer and Executive on March 16, 1992, which was attached as Exhibit A to the 1992 Employment Agreement with Employer, remains terminated and of no force or effect. 8.04 Amendments. No amendment or modification of this Agreement will be deemed effective unless made in writing and signed by each party hereto. 8.05 No Waiver. No term or condition of this Agreement will be deemed to have been waived, nor will there be any estoppel to enforce any provisions of this Agreement, except by a statement in writing signed by the party against whom enforcement of the waiver or estoppel is sought. Any written waiver will not be deemed a continuing waiver unless specifically stated, will operate only as to the specific term or condition waived and will not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 8.06 Assignment. This Agreement is not assignable, in whole or in part, by any party without the written consent of the other party. 8.07 Injunctive Relief. Executive agrees that it would be difficult to compensate Employer fully for damages for any violation of the provisions of this Agreement, including without limitation the provisions of Section 6. Accordingly, Executive specifically agrees that Employer will be entitled to temporary and permanent injunctive relief to enforce the provisions of this Agreement and that such relief may be granted without the necessity of proving actual damages. This provision with respect to injunctive relief will not, however, diminish the right of Employer to claim and recover damages in addition to injunctive relief. 8.08 Disputes and Legal Fees. (a) Before a Change in Control. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, which is not resolved by the parties will not sooner than 30 days after the dispute shall arise, be settled by arbitration before three arbitrators in accordance with the rules of the American Arbitration Association, and judgment upon an award rendered by the arbitrators, or at least a majority of them, may be entered in any court having jurisdiction thereof; provided, however, that Employer will be entitled to seek injunctive or other equitable relief in a court of law to enforce the provisions of Section 6. Such arbitration shall be conducted in Minneapolis, Minnesota. The expenses incurred in connection with any arbitration, including but not limited to each party's legal fees and the arbitrators' fees and expenses, will be allocated between the parties according to the relative fault of each, as determined by the arbitrators. (b) After a Change in Control. Subparagraph (a) above shall not apply after a Change in Control, and the provisions of this subparagraph (b) shall apply instead. If Executive so elects, any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. If Executive does not elect arbitration, Executive may pursue any and all legal remedies available to him. Employer shall pay to Executive any legal fees and expenses reasonably incurred by him after a Change in Control. If Executive elects arbitration, Employer will pay all fees and expenses of the arbitrator. 8.09 Severability. To the extent that any provision of this Agreement shall be determined to be invalid or unenforceable, the invalid or unenforceable portion of such provision will be deleted from this Agreement, and the validity and enforceability of the remainder of such provision and of this Agreement will be unaffected. In furtherance of and not in limitation of the foregoing, it is expressly agreed that should the duration of or geographical extent of, or business activities covered by, the noncompetition covenant contained in Section 6 be determined to be in excess of that which is valid or enforceable under applicable law, then such provision will be construed to cover only that duration or extent, or those activities which may validly or enforceably be covered. Executive acknowledges the uncertainty of the law in this respect and expressly stipulates that this Agreement will be construed in a manner which renders its provisions valid and enforceable to the maximum extent (not exceeding its express terms) possible under applicable law. 8.10 Notices. All notices under this Agreement will be in writing and will be deemed effective when delivered in person (in Employer's case, to its Secretary) or twenty-four (24) hours after deposit thereof in the U.S. mails, postage prepaid, for delivery as registered or certified mail -- addressed, the case of Executive, to him at his last residential address known by Employer and, in the case of Employer, to its corporate headquarters attention of its Secretary, or to such other address as Executive or Employer may designate in writing at any time or from time to time to the other party. In lieu of notice by deposit in the U.S. mails, a party may give notice by telegram, telex or telecopy, in which case such notice will be deemed effective upon receipt. 8.11 Counterparts. This Agreement may be executed by the parties hereto in counterparts, each of which will be deemed to be an original, but all such counterparts will together constitute one and the same instrument. 8.12 Headings. The headings of paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 8.13 Change in Control. For purposes of this Agreement, the following additional definitions shall apply: 8.13.1 "Acquiring Person" shall mean any Person who or which, together with all Affiliates and Associates of such person, is the Beneficial Owner, directly or indirectly, of securities of Employer representing 20% or more of the combined voting power of Employer's then outstanding securities, but shall not include any Company Entity. 8.13.2 "Affiliate" shall have the meaning ascribed to such term in Rule 12b-2 promulgated under the Exchange Act. 8.13.3 "Announcement Date" shall mean the date of the public announcement of the transaction, event or course of action that results in a Change in Control. 8.13.4 "Anticipatory Termination" shall mean a termination of employment pursuant to Section 5.01(d) or 5.01(e) hereof as a result of an act or event that occurs prior to a Change in Control and after the Announcement Date and either (i) at the request of any other party to a transaction, or any Person associated with the event or course of events (other than Employer or a Company Entity), that results in a Change in Control, or (ii) otherwise in contemplation of a Change in Control; provided, that no termination shall be deemed an Anticipatory Termination unless the Change in Control to which it relates actually occurs. 8.13.5 "Associate" shall have the meaning ascribed to such term in Rule 12b-2 promulgated under the Exchange Act. 8.13.6 "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 promulgated under the Exchange Act. 8.13.7 "Board of Directors" shall mean the board of directors of Employer. 8.13.8 "Change in Control" shall mean a Full Change in Control or a Partial Change in Control. 8.13.9 "Company Entity" shall mean Employer, any subsidiary of Employer or any employee benefit plan of Employer or of any subsidiary of Employer or any entity holding shares of the voting capital stock of Employer organized, appointed or established for, or pursuant to the terms of, any such plan. 8.13.10 "Continuing Director" shall mean any person who is a member of the Board of Directors, while such person is a member of the Board of Directors, who is not an Acquiring Person or an Affiliate or Associate of an Acquiring Person, or a representative of an Acquiring Person or of any such Affiliate or Associate, and who (x) was a member of the Board of Directors as of the date of this Agreement or (y) subsequently becomes a member of the Board of Directors, if such person's initial nomination for election or initial election to the Board of Directors has been approved in advance by the Continuing Directors; provided that any director designated by or on behalf of a Person who has entered into an agreement with Employer (or who is contemplating entering into such an agreement) to effect a consolidation or merger of Employer or a Company Entity, or other reorganization, with or into one or more entities which are not Company Entities, and any director that serves in connection with the act of the Board of Directors of increasing the number of directors and filling vacancies in connection with, or in contemplation of, any such transaction, shall not be deemed to have received such advance approval for initial nomination or election, and any such director shall not be deemed to be a Continuing Director; provided, further, that any such director shall subsequently become a Continuing Director at such time as a new term of office as a director is approved by Employer's shareholders at an annual meeting of shareholders occurring subsequent to the completion of any such transaction (and excluding any annual meeting at which the shareholders approve any such transaction), and, provided, further, that in the case of a Permitted Transaction, any such director shall not become a Continuing Director until the later of (i) the end of the three-year period following consummation of such Permitted Transaction or (ii) such time as a new term of office as a director is approved by Employer's shareholders at an annual meeting of shareholders occurring subsequent to the completion of such Permitted Transaction. 8.13.11 "Employer" shall mean U.S Bancorp (formerly First Bank System, Inc.), a Delaware corporation, or any successor thereto pursuant to Section 8.02 hereof (including a Resulting Corporation) or by operation of law. 8.13.12 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 8.13.13 "Full Change In Control" shall mean: (A) the public announcement (which, for purposes of this definition, shall include, without limitations a report filed pursuant to Section 13(d) of the Exchange Act) by Employer or any Person that a Person (other than a Company Entity) has become the Beneficial Owner, directly or indirectly, of securities of Employer (x) representing 20% or more, but not more than 50% of the combined voting power of Employer's then outstanding securities unless the transaction resulting in such ownership has been approved in advance by the Continuing Directors or (y) representing more than 50% of the combined voting power of Employer's then outstanding securities (regardless of any approval by the Continuing Directors); or (B) the Continuing Directors cease to constitute a majority of the Board of Directors of Employer or the Resulting Corporation, except in accordance with the terms of a Permitted Transaction and except as a result of the death, retirement or disability of one or more Continuing Directors (unless any such death, retirement or disability occurs following a Permitted Transaction and any vacancies created thereby are not filled in accordance with the terms of the written agreement governing such Permitted Transaction); or (C) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the consolidated assets of Employer and its subsidiaries or the adoption of any plan of liquidation or dissolution of Employer. 8.13.14 "Partial Change in Control" shall mean: (A) a consolidation or merger of Employer or a Company Entity, or other reorganization, with or into one or more entities which are not Company Entities, as a result of which less than 60% of the outstanding voting securities of the Resulting Corporation are, or are to be, owned by former shareholders of Employer as determined immediately prior to consummation of such transaction (excluding voting securities of the Resulting Corporation owned, or to be owned, by such shareholders by reason of their ownership prior to such transaction of securities of any entity other than Employer) and as a result of which the Continuing Directors constitute (i) more than 50% of the Board of Directors of the Resulting Corporation or (ii) exactly 50% of the Board of Directors of the Resulting Corporation if the transaction resulting in such event is a Permitted Transaction; (B) the public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by Employer or any Person that a Person (other than a Company Entity) has become the Beneficial Owner, directly or indirectly, of securities of Employer representing 20% or more, but not more than 50% of the combined voting power of Employer's then outstanding securities if the transaction resulting in such ownership has been approved in advance by the Continuing Directors; or (C) the effective date of the merger of First Bank System, Inc. and U.S. Bancorp. 8.13.15 "Permitted Transaction" shall mean a transaction in which, pursuant to a written agreement between Employer and all Persons who have entered into an agreement with Employer to effect a transaction described in paragraph (A) of the definition of Partial Change in Control, it is agreed that (w) the Chief Executive Officer of Employer immediately prior to the consummation of such transaction shall be the Chief Executive Officer of the Resulting Corporation for not less than three years following consummation of such transaction, (x) upon termination of service of any Continuing Director for any reason, including upon death, disability or retirement, prior to the expiration of such director's term during such three-year period, the vacancy thereby created shall be filled by a nominee selected solely by the Continuing Directors, (y) upon expiration of the term of any such director during such three-year period, the nominee to succeed such director shall be selected solely by the Continuing Directors and (z) the parties will take other appropriate steps to ensure that the Board of Directors of the Resulting Corporation will be evenly divided between Continuing Directors and all directors designated by other parties to the transaction during such three-year period. 8.13.16 "Person" shall have the meaning ascribed to such term as such term is used in Sections 13(d) and l4(d) of the Exchange Act. 8.13.17 "Resulting Corporation" shall mean the surviving corporation in any consolidation, merger or other reorganization to which Employer is a party; provided, however, that if the surviving corporation in any such transaction is a subsidiary of another corporation, then the Resulting Corporation is the ultimate parent corporation of such surviving corporation; and provided, further, that in the event of a consolidation, merger or other reorganization to which a Company Entity (other than Employer) is a party, then Employer shall be deemed the Resulting Corporation. 8.14 Code Section 162(m). Notwithstanding any other provision of this Agreement to the contrary, to the extent that Employer's tax deduction for remuneration in respect of the payment of any amount under Sections 5.02, 5.05 or 8.02 of this Agreement would be disallowed under Code Section 162(m) by reason of the fact that Executive's applicable employee remuneration, as defined in Code Section 162(m)(4), either exceeds or, if such amount were paid, would exceed the $1,000,000 limitation in Code Section 162(m)(1), Employer may, in its sole discretion, defer the payment of such amount, but only to the extent that, and for so long as, Employer's tax deduction in respect of the payment thereof would be so disallowed under Code Section 162(m); provided that no payment may be deferred beyond three months after the end of Employer's fiscal year in which Executive's termination of employment occurs, and Employer may accelerate the payment of previously deferred amounts if it determines that the amount of the tax deduction that would be disallowed is not significant. Amounts which are deferred under this Section 8.14 will be credited with interest at a rate determined by Employer from time to time, but in no event less than the long-term applicable federal rate under Code Section 1274(d) in effect from time to time. IN WITNESS WHEREOF, Executive and Employer have executed this Agreement as of the date set forth in the first paragraph hereof. U.S. BANCORP By /s/ Lee R. Mitau ------------------------------------- Its Executive Vice President, General Counsel and Secretary /s/ John F. Grundhofer --------------------------------------- John F. Grundhofer EX-10.B 3 EMPLOYMENT AGREEMENT Exhibit 10(b) EMPLOYMENT AGREEMENT AGREEMENT by and between First Bank System, Inc., a Delaware corporation (the "Company") and Philip G. Heasley (the "Executive") dated as of the 24th day of July, 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 pending the merger (the "Merger") of the Company and U.S. Bancorp, an Oregon corporation ("USB") pursuant to the Agreement and Plan of Merger dated as of March 19, 1997 and to provide the surviving corporation after the Merger with continuity of management. 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. Effective Date. The "Effective Date" shall mean the effective date of the Merger. 2. Employment Period. The Company hereby agrees to employ the Executive, and the Executive hereby agrees to enter into 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 thereof (the "Employment Period"). 3. Terms of Employment. (a) Position and Duties. (i) (A) During the Employment Period, the Executive shall serve as Vice Chairman of the Company, the Executive shall be the head of Retail Product Group, Payment Systems, the Business Technology Center and the Business Operations Center, reporting directly to the Chief Executive Officer of the Company with such other authority, duties and responsibilities as are commensurate with such position and as may be consistent with such position and (B) the Executive's services shall be performed in Minneapolis, Minnesota. (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 substantially all of his 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 the highest rate paid to any other Vice Chairman of the Company. 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. During the Employment Period, the Executive shall receive an annual cash bonus ("Annual Bonus") in an amount at least equal to the highest annual cash bonus paid to any other Vice Chairman of the Company. (iii) Other Employee Benefit Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, employee benefit, pension, retirement, major medical, hospital, surgical, dental, disability, other welfare and other plans, practices, policies and programs on a basis no less favorable than that provided to the Chief Executive Officer of the Company. (iv) 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 Company's policies. (v) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, payment of club dues, and, if applicable, an automobile allowance, to the extent applicable to the Vice Chairmen of the Company. (vi) 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 as provided generally at any time thereafter with respect to other Vice Chairmen of the Company. (vii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the plans, policies, programs and practices of the Company and its affiliated companies as in effect with respect to the Vice Chairmen of the Company. 4. 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 11(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 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, or (iii) conviction of a felony or guilty or nolo contendere plea by the Executive with respect thereto. 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 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 two-thirds 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 in the absence of a written consent of the Executive: (i) subject to the following provisos, (A) the assignment to the Executive of any duties inconsistent in any material respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a) of this Agreement, or any other action by the Company which results in a material 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; or (B) the Company's requiring the Executive to be based at any office or location more than 35 miles from that provided in Section 3(a)(i)(B) hereof, provided, however, that this paragraph 4(c)(i) shall apply only in the event that John F. Grundhofer shall no longer be the Chief Executive Officer of the Company; and, in addition, clause 4(c)(i)(B) shall apply only in the third year of the Employment Period; (ii) any material failure by the Company to comply with any of the provisions of Section 3(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) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (iv) any failure by the Company to comply with and satisfy Section 10(c) 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 11(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 within 30 days of such notice, 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. 5. 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: (i) 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, and (2) the product of (x) the highest annual bonus paid to the Executive for any of the three years prior to the Effective Date (the "Recent Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the fiscal year in which the Date of Termination occurs through the Date of Termination, and the denominator of which is 365, in each case to the extent not therefore paid (the sum of the amounts described in clauses (1) and (2), shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to three times the sum of (x) the Executive's Annual Base Salary and (y) the Recent Annual Bonus; and C. an amount equal to the excess of (a) the actuarial equivalent of the benefit under the qualified defined benefit retirement plan in which the Executive participates at the Date of Termination (the "Retirement Plan") (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the 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 3(b)(i) and Section 3(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) all unvested stock-based awards shall vest immediately; and (iii) 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 on the Date of Termination (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. In addition, all unvested stock-based awards shall vest immediately. Accrued Obligations shall be paid to the 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 5(b) shall include death benefits as in effect on the date of the Executive's death with respect to the Vice Chairmen of the Company and his 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. In addition, the Option and the Restricted Stock shall vest immediately. 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 5(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits as in effect at any time thereafter generally with respect to the Vice Chairmen of the Company. (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause or the Executive terminates his employment without Good Reason 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, and (y) Other Benefits, in each case to the extent theretofore unpaid. 6. Non-exclusivity of Rights. Except as specifically provided, 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 11(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. 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. 7. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise 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"). 8. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary not withstanding 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 8) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties 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 8(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 8(c), all determinations required to be made under this Section 8, 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 Ernst & Young LLP or such other certified public accounting firm reasonably acceptable to the Company 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. 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 8, shall be paid by the Company to the Executive within five days of (i) the later of the due date for the payment of any Excise Tax, and (ii) 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 8(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 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 8(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 8(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 8(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 8(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. 9. Confidential Information. (a) 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 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. (b) In the event the Executive terminates his employment for Good Reason or the Company terminates the Executive's employment other than for Cause, in consideration of the obligations of the Company pursuant to Section 5 of this Agreement, the Executive agrees that he shall not, for a period of three years following the Date of Termination, directly or directly, become an employee with, partner or holder of more than 20% of the voting securities of, or serve as a consultant or independent contractor for, any business entity or individual, or an affiliate thereof, that is engaged in the banking or other financial services business in the states where the Company then conducts any of its banking business through a physical branch location. (c) In the event of a breach or threatened breach of this Section 9, the Executive agrees that the Company shall be entitled to injunctive relief in a court of appropriate jurisdiction to remedy any such breach or threatened breach, the Executive acknowledges that damages would be inadequate and insufficient. (d) Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 9. 10. 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. 11. 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 (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: Philip G. Heasley 18085 Breezy Point Road Woodland, Minnesota 55391 If to the Company: First Bank Place 601 Second Avenue South Minneapolis, Minnesota 55402 Attention: General Counsel 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 4(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 prior to the Effective Date, the Executive's employment may be terminated by either the Executive or the Company at any time, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other employment, severance or change of control agreement between the parties with respect to the subject matter hereof; except that certain Executive Change in Control Agreement between the Company and Executive dated August 15, 1996 which shall survive this Agreement and shall remain in effect, provided, however, that cash payments under the Change in Control Agreement shall be offset against any payments due under this Agreement and all other terms of this Agreement and the Change in Control Agreement shall be interpreted to provide the maximum benefit provided under either of such agreements but not to cumulate benefits under such agreements. (g) Notwithstanding any provision of this Agreement, the Company shall have no obligation to make any payments to Executive if or to the extent such payments are prohibited by any applicable law or regulation, including, without limitation, the FDIC's regulation regarding golden parachute and indemnification payments promulgated under the Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990. 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. EXECUTIVE: /s/ Philip G. Heasley Philip G. Heasley FIRST BANK SYSTEM, INC. By /s/ John F. Grundhofer Its __________________ EX-10.C 4 EMPLOYMENT AGREEMENT Exhibit 10(c) EMPLOYMENT AGREEMENT AGREEMENT by and between First Bank System, Inc., a Delaware corporation (the "Company") and Richard A. Zona (the "Executive") dated as of 23rd day of July, 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 pending the merger (the "Merger") of the Company and U.S. Bancorp, an Oregon corporation ("USB") pursuant to the Agreement and Plan of Merger dated as of March 19, 1997 and to provide the surviving corporation after the Merger with continuity of management. 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. Effective Date. The "Effective Date" shall mean the effective date of the Merger. 2. Employment Period. The Company hereby agrees to employ the Executive, and the Executive hereby agrees to enter into 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 thereof (the "Employment Period"). 3. Terms of Employment. (a) Position and Duties. (i) (A) During the Employment Period, the Executive shall serve as Vice Chairman of the Company, the Executive shall be the head of Commercial and Business Banking and Private Financial Services in the Company's pre-Merger geographical region, Corporate Trust, Finance, Investor and Corporate Relations, reporting directly to the Chief Executive Officer of the Company with such other authority, duties and responsibilities as are commensurate with such position and as may be consistent with such position and (B) the Executive's services shall be performed in Minneapolis, Minnesota. (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 substantially all of his 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. For the period ending on the third anniversary of the Effective Date, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate at least equal to the highest rate paid to any other Vice Chairman of the Company. 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. During the Employment Period, the Executive shall receive an annual cash bonus ("Annual Bonus") in an amount at least equal to the highest annual cash bonus paid to any other Vice Chairman of the Company. (iii) Other Employee Benefit Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, employee benefit, pension, retirement, life insurance, major medical, hospital, surgical, dental, disability, other welfare and other plans, practices, policies and programs not described elsewhere in this Section 3(b) on a basis no less favorable than that provided to the other senior executives of the Company who do not have written employment agreements. (iv) 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 Company's policies. (v) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, payment of club dues, and, if applicable, an automobile allowance, to the extent applicable to the Vice Chairmen of the Company. (vi) 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 as provided generally at any time thereafter with respect to other Vice Chairmen of the Company. (vii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the plans, policies, programs and practices of the Company and its affiliated companies as in effect with respect to the Vice Chairmen of the Company. 4. 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 11(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 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, or (iii) conviction of a felony or guilty or nolo contendere plea by the Executive with respect thereto. 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 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 two-thirds 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 in the absence of a written consent of the Executive: (i) subject to the following proviso, (A) the assignment to the Executive of any duties inconsistent in any material respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a) of this Agreement, or any other action by the Company which results in a material 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; or (B) the Company's requiring the Executive to be based at any office or location more than 35 miles from that provided in Section 3(a)(i)(B) hereof; provided, however, that this Section 4(c)(i) shall apply only in the event that John F. Grundhofer shall no longer be the Chief Executive Officer of the Company; and, in addition, clause 4(c)(i) (B) shall apply only in the third year of the Employment Period. (ii) any material failure by the Company to comply with any of the provisions of Section 3(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) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (iv) any failure by the Company to comply with and satisfy Section 10(c) 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 11(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 within 30 days of such notice, 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. 5. 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: (i) 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, and (2) the product of (x) the highest annual bonus paid to the Executive for any of the three years prior to the Effective Date (the "Recent Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the fiscal year in which the Date of Termination occurs through the Date of Termination, and the denominator of which is 365, in each case to the extent not therefore paid (the sum of the amounts described in clauses (1) and (2), shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to three times the sum of (x) the Executive's Annual Base Salary and (y) the Recent Annual Bonus; and C. an amount equal to the excess of (a) the actuarial equivalent of the benefit under the qualified defined benefit retirement plan in which the Executive participates at the Date of Termination (the "Retirement Plan") (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the 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 3(b)(i) and Section 3(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) all unvested stock-based awards shall vest immediately; and (iii) 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 on the Date of Termination (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. In addition, all unvested stock-based awards shall vest immediately. Accrued Obligations shall be paid to the 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 5(b) shall include death benefits as in effect on the date of the Executive's death with respect to the Vice Chairmen of the Company and his 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. In addition, all unvested stock-based awards shall vest immediately. 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 5(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits as in effect at any time thereafter generally with respect to the Vice Chairmen of the Company. (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause or the Executive terminates his employment without Good Reason 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, and (y) Other Benefits, in each case to the extent theretofore unpaid. 6. Non-exclusivity of Rights. Except as specifically provided, 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 11(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. 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. 7. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise 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"). 8. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary not withstanding 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 8) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties 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 8(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 8(c), all determinations required to be made under this Section 8, 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 Ernst & Young LLP or such other certified public accounting firm reasonably acceptable to the Company 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. 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 8, shall be paid by the Company to the Executive within five days of (i) the later of the due date for the payment of any Excise Tax, and (ii) 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 8(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 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 8(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 8(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 8(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 8(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. 9. Confidential Information; Noncompete. (a) 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 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. (b) In the event the Executive terminates his employment for Good Reason or the Company terminates the Executive's employment other than for Cause, in consideration of the obligations of the Company pursuant to Section 5 of this Agreement, the Executive agrees that he shall not, for a period of three years following the Date of Termination, directly or directly, become an employee with, partner or holder of more than 20% of the voting securities of, or serve as a consultant or independent contractor for, any business entity or individual, or an affiliate thereof, that is engaged in the banking or other financial services business in the states where the Company then conducts any of its banking business through a physical branch location. (c) In the event of a breach or threatened breach of this Section 9, the Executive agrees that the Company shall be entitled to injunctive relief in a court of appropriate jurisdiction to remedy any such breach or threatened breach, the Executive acknowledges that damages would be inadequate and insufficient. (d) Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 9. 10. 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. 11. 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. (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: Richard A. Zona 55 Arbor Court Tonka Bay, Minnesota 55331 If to the Company: First Bank Place 601 Second Avenue South Minneapolis, Minnesota 55402 Attention: General Counsel 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 4(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 prior to the Effective Date, the Executive's employment may be terminated by either the Executive or the Company at any time, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other employment, severance or change of control agreement between the parties with respect to the subject matter hereof; except that certain Executive Change in Control Agreement between the Company and Executive dated August 15, 1996 which shall survive this Agreement and shall remain in effect, provided, however, that cash payments under the Change in Control Agreement shall be offset against any payments due under this Agreement and all other terms of this Agreement and the Change in Control Agreement shall be interpreted to provide the maximum benefit provided under either of such agreements but not to cumulate benefits under such agreements. (g) Notwithstanding any provision of this Agreement, the Company shall have no obligation to make any payments to Executive if or to the extent such payments are prohibited by any applicable law or regulation, including, without limitation, the FDIC's regulation regarding golden parachute and indemnification payments promulgated under the Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990. 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. EXECUTIVE: /s/ Richard A. Zona Richard A. Zona FIRST BANK SYSTEM, INC. By /s/ John F. Grundhofer Its __________________ EX-11 5 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 COMPUTATION OF PRIMARY AND FULLY DILUTED NET INCOME PER COMMON SHARE
Three Months Ended September 30 ---------------------------------- (Dollars in Millions, Except Per Share Data) 1997 1996 =============== =============== PRIMARY: Average shares outstanding 243,823,676 251,483,750 Net effect of the assumed purchase of stock under the stock option and stock purchase plans--based on the treasury stock method using average market price ........................................ 4,635,892 3,498,175 --------------- --------------- 248,459,568 254,981,925 =============== =============== Net income (loss) $ (47.6) $ 255.7 Preferred dividends ................................................ (3.1) (4.6) --------------- --------------- Net income (loss) applicable to common equity ...................... $ (50.7) $ 251.1 =============== =============== Net income (loss) per common share ................................. $ (.20) $ .98 =============== =============== FULLY DILUTED:* Average shares outstanding 243,823,676 251,483,750 Net effect of the assumed purchase of stock under the stock option and stock purchase plans--based on the treasury stock method using average market price or period-end market price, whichever is higher ............................................................ 5,184,626 3,871,924 Assumed conversion of Series 1991A Preferred Stock -- 3,032,761 --------------- --------------- 249,008,302 258,388,435 =============== =============== Net income (loss) $ (47.6) $ 255.7 Preferred dividends, excluding 1991A Preferred Stock ............... (3.1) (3.0) --------------- --------------- Net income (loss) applicable to common equity ...................... $ (50.7) $ 252.7 =============== =============== Net income (loss) per common share ................................. $ (.20) $ .98 =============== ===============
WIDE TABLE CONTINUED FROM ABOVE: COMPUTATION OF PRIMARY AND FULLY DILUTED NET INCOME PER COMMON SHARE
Nine Months Ended September 30 ---------------------------------- (Dollars in Millions, Except Per Share Data) 1997 1996 =============== =============== PRIMARY: Average shares outstanding 244,380,679 250,783,722 Net effect of the assumed purchase of stock under the stock option and stock purchase plans--based on the treasury stock method using average market price ........................................ 4,438,567 3,601,847 --------------- --------------- 248,819,246 254,385,569 =============== =============== Net income (loss) $ 549.6 $ 926.6 Preferred dividends ................................................ (9.2) (14.0) --------------- --------------- Net income (loss) applicable to common equity ...................... $ 540.4 $ 912.6 =============== =============== Net income (loss) per common share ................................. $ 2.17 $ 3.59 =============== =============== FULLY DILUTED:* Average shares outstanding 244,380,679 250,783,722 Net effect of the assumed purchase of stock under the stock option and stock purchase plans--based on the treasury stock method using average market price or period-end market price, whichever is higher ............................................................ 5,644,026 4,325,824 Assumed conversion of Series 1991A Preferred Stock -- 3,193,986 --------------- --------------- 250,024,705 258,303,532 =============== =============== Net income (loss) $ 549.6 $ 926.6 Preferred dividends, excluding 1991A Preferred Stock ............... (9.2) (9.1) --------------- --------------- Net income (loss) applicable to common equity ...................... $ 540.4 $ 917.5 =============== =============== Net income (loss) per common share ................................. $ 2.16 $ 3.55 =============== ===============
* THIS CALCULATION IS SUBMITTED IN ACCORDANCE WITH REGULATION S-K ITEM 601(b)(11) ALTHOUGH NOT REQUIRED BY FOOTNOTE 2 TO PARAGRAPH 17 OF APB OPINION NO. 15 BECAUSE IT RESULTS IN DILUTION OF LESS THAN 3%. EX-12 6 EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Nine Months Ended September 30 ------------ (Dollars in Millions) 1997 ============ EARNINGS 1. Net income .................................................................... $ 549.6 2. Applicable income taxes ....................................................... 383.8 --------- 3. Net income before taxes (1 + 2) ............................................... $ 933.4 ========= 4. Fixed charges: a Interest expense excluding interest on deposits ............................. $ 590.3 b. Portion of rents representative of interest and amortization of debt expense 26.0 --------- c. Fixed charges excluding interest on deposits (4a + 4b) ...................... 616.3 d. Interest on deposits ........................................................ 1,077.7 --------- e. Fixed charges including interest on deposits (4c + 4d) ...................... $ 1,694.0 ========= 5. Amortization of interest capitalized .......................................... $ -- 6. Earnings excluding interest on deposits (3 + 4c + 5) .......................... 1,549.7 7. Earnings including interest on deposits (3 + 4e + 5) .......................... 2,627.4 8. Fixed charges excluding interest on deposits (4c) ............................. 616.3 9. Fixed charges including interest on deposits (4e) ............................. 1,694.0 RATIO OF EARNINGS TO FIXED CHARGES 10. Excluding interest on deposits (line 6/line 8) ................................ 2.51 11. Including interest on deposits (line 7/line 9) ................................ 1.55 =========
NOTE: DUE TO $532.2 MILLION OF NONRECURRING CHARGES FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997, EARNINGS ARE DEFICIENT IN COVERING FIXED CHARGES BY $13.1 MILLION. EX-27 7 ARTICLE 9 FINANCIAL DATA SCHEDULE FOR 10-Q
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE U.S. BANCORP SEPTEMBER 30, 1997, 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 4,342,000 0 529,000 156,000 6,832,000 0 0 54,143,000 1,019,900 70,174,000 48,374,000 4,497,000 1,661,000 8,710,000 306,000 0 150,000 5,285,000 70,174,000 3,561,900 332,500 50,700 3,945,100 1,077,700 1,668,000 2,277,100 370,300 3,600 2,168,100 933,400 549,600 0 0 549,600 2.17 2.16 5.05 293,200 79,500 3,900 0 992,500 439,900 93,500 1,019,900 0 0 0
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