10-Q/A 1 c59329ae10-qa.txt AMENDMENT NO. 1 TO FORM 10-Q/A 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------- FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM (NOT APPLICABLE) COMMISSION FILE NUMBER 1-6880 U.S. BANCORP (Exact name of registrant as specified in its charter) DELAWARE 41-0255900 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
U.S. BANK PLACE, 601 SECOND AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55402-4302 (Address of principal executive offices and Zip Code) 612-973-1111 (Registrant's telephone number, including area code) (NOT APPLICABLE) (Former name, former address and former fiscal year, if changed since last report). --------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months and (2) has been subject to such filing requirements for the past 90 days. YES X NO _____ Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. Class Outstanding as of April 30, 2000 Common Stock, $1.25 Par Value 751,832,861 shares
-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 FINANCIAL SUMMARY
Three Months Ended ------------------------------ March 31 March 31 (Dollars in Millions, Except Per Share Data) 2000 1999 -------------------------------------------------------------------------------------------------------- Income before merger-related charges and available-for-sale securities transactions $ 387.6 $ 368.6 Merger-related charges and available-for-sale securities transactions (8.6) (1.8) ----------- ----------- Net income $ 379.0 $ 366.8 ----------- ----------- PER COMMON SHARE Earnings per share $ .51 $ .51 Diluted earnings per share .51 .50 Dividends paid .215 .195 Common shareholders' equity 10.34 8.50 FINANCIAL RATIOS Return on average assets 1.86% 1.98% Return on average common equity 19.8 24.4 Efficiency ratio 54.3 50.6 Net interest margin (taxable-equivalent basis) 4.81 4.82 ----------- ----------- SELECTED FINANCIAL RATIOS BEFORE MERGER-RELATED CHARGES AND AVAILABLE-FOR-SALE SECURITIES TRANSACTIONS Return on average assets 1.91% 1.99% Return on average common equity 20.3 24.6 Efficiency ratio 53.6 50.4 Banking efficiency ratio* 45.3 43.3 ----------- -----------
March 31 December 31 2000 1999 ------------------------------ PERIOD END Loans $ 64,897 $ 62,885 Allowance for credit losses 1,011 995 Assets 83,072 81,530 Total shareholders' equity 7,745 7,638 Tangible common equity to total assets** 6.4% 6.5% Tier 1 capital ratio 6.6 6.8 Total risk-based capital ratio 10.9 11.1 Leverage ratio 7.2 7.4 --------------------------------------------------------------------------------------------------------
* Without investment banking and brokerage activity. **Defined as common equity less goodwill as a percentage of total assets less goodwill. TABLE OF CONTENTS AND FORM 10-Q/A CROSS-REFERENCE INDEX PART I -- FINANCIAL INFORMATION Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 2)........................ 2 Quantitative and Qualitative Disclosures About Market Risk (Item 3)................................................... 11 Financial Statements (Item 1)............................... 14 PART II -- OTHER INFORMATION Changes in Securities (Item 2).............................. 25 Submission of Matters to a Vote of Security Holders (Item 4)......................................................... 25 Exhibits and Reports on Form 8-K (Item 6)................... 25 Signature................................................... 25 Exhibit 12 -- Computation of Ratio of Earnings to Fixed Charges.................................................... 26
FORWARD-LOOKING STATEMENTS This Form 10-Q/A contains forward-looking statements. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including the following: (i) the Company's investments in its consumer banking, payment systems and wealth management businesses and in its Internet development could require additional incremental spending, and might not produce expected deposit and loan growth and anticipated contributions to Company earnings; (ii) general economic or industry conditions could be less favorable than expected, resulting in a deterioration in credit quality or a reduced demand for credit or fee-based products and services; (iii) changes in the domestic interest rate environment could reduce net interest income; (iv) the conditions of the securities markets could change, adversely affecting revenues from capital markets businesses or the availability and terms of funding necessary to meet the Company's liquidity needs; (v) changes in the extensive laws, regulations and policies governing financial services companies could alter the Company's business environment or affect operations; (vi) the potential need to adapt to industry changes in information technology systems, on which the Company is highly dependent, could present operational issues or require significant capital spending; (vii) competitive pressures could intensify and affect the Company's profitability, including as a result of continued industry consolidation, the increased availability of financial services from non-banks, technological developments such as the Internet, or bank regulatory reform; and (viii) acquisitions may not produce revenue enhancements or cost savings at levels or within time frames originally anticipated, or may result in unforeseen integration difficulties. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update them in light of new information or future events. U.S. Bancorp 1 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OVERVIEW EARNINGS SUMMARY U.S. Bancorp (the "Company") reported net income of $379.0 million in the first quarter of 2000, or $.51 per diluted share, compared with $366.8 million, or $.50 per diluted share, in the first quarter of 1999. Return on average assets and return on average common equity were 1.86 percent and 19.8 percent, respectively, in the first quarter of 2000, compared with returns of 1.98 percent and 24.4 percent in the first quarter of 1999. Net income reflects merger-related charges and available-for-sale securities transactions of $8.6 million ($13.4 million on a pre-tax basis) in the first quarter of 2000 compared with a decrease of $1.8 million ($2.9 million on a pre-tax basis) in the first quarter of 1999. The Company reported first quarter 2000 operating earnings (net income excluding merger-related charges and available-for-sale securities transactions) of $387.6 million, up 5.2 percent from the first quarter of 1999 operating earnings of $368.6 million. On a diluted share basis, operating earnings were $.52 in the first quarter of 2000, compared with $.51 in the first quarter of 1999, an increase of 2 percent. Operating earnings on a cash basis were $.59 per diluted share in the first quarter of 2000, compared with $.56 per diluted share in the first quarter of 1999, an increase of 5 percent. Return on average assets and return on average common equity, excluding merger-related charges and available-for-sale securities transactions, were 1.91 percent and 20.3 percent, respectively, in the first quarter of 2000, compared with returns of 1.99 percent and 24.6 percent, respectively, in the first quarter of 1999. The reduction in the Company's return on average common equity from the first quarter of 1999 reflects the impact of recent acquisitions, which were accounted for using the purchase method. Excluding merger-related charges and available-for-sale securities transactions, the efficiency ratio (the ratio of expenses to revenues) was 53.6 percent in the first quarter of 2000, compared with 50.4 percent in the first quarter of 1999. The change in the efficiency ratio was related to expenditures for customer-related initiatives and growth in capital markets business. The banking efficiency ratio (the ratio of expenses to revenues without the impact of investment banking and brokerage activity) before merger-related charges and available-for-sale securities transactions, was 45.3 percent in the first quarter of 2000, compared with 43.3 percent in the first quarter of 1999. Total revenue on a taxable-equivalent basis, before available-for-sale securities transactions, grew by $238.3 million, or 17 percent, over the first quarter of 1999. The increase in total revenue was driven by core loan growth, investment banking and brokerage activity and credit card fee revenue. Several acquisitions made during 1999 also contributed to the growth in revenue. Excluding the impact of acquisitions and portfolio divestitures, total revenue on a taxable-equivalent basis, before available-for-sale securities transactions, in the first quarter of 2000 would have been approximately 13 percent higher than the first quarter of 1999. Offsetting the growth in total revenue were increases in noninterest expense, before merger-related charges, of $172.0 million and provision for credit losses of $37.0 million over the first quarter of 1999. The growth in noninterest expense was primarily due to an increase in expense related to investment banking and brokerage revenue growth, acquisitions, and additional investments in sales and service and technology. In addition to the growth in the Company's ongoing technology spending on Internet-related products and services, the first quarter of 2000 included approximately $9.0 million of Internet infrastructure-related expense, which was offset in noninterest income by a $10.8 million gain on the sale of a building. The Company analyzes its performance based on amounts determined in accordance with generally accepted accounting principles, as well as on an operating basis before merger-related charges and available-for-sale securities transactions referred to in this analysis as "operating earnings". Operating earnings and related per share amounts are presented as supplementary information in this analysis to enhance the readers' understanding of, and highlight trends in, its core financial results including the non-recurring effects of discreet business acquisitions and other transactions. The Company has included these additional disclosures of operations before merger-related charges to meet the requests of analysts, investors and other readers that require additional information related to the comparability of the Company's performance without the effect of these items. Operating earnings and related per share information should not be viewed as a substitute for net income and earnings per share as determined in accordance with generally accepted accounting principles. Merger-related charges and other items excluded from net income to derive operating earnings may be significant, and may not be comparable to other companies. ACQUISITION AND DIVESTITURE ACTIVITY Operating results for the first quarter of 2000 reflect purchase and divestiture transactions from or to the date of completion. On January 14, 2000, the Company acquired Peninsula Bank of San Diego, which had 11 branches in San Diego county and total assets of $456 million. On November 15, 1999, the Company completed the acquisition of Western Bancorp. Western Bancorp had $2.5 billion in total assets with 31 branches in southern California in Los Angeles, Orange and San Diego counties. The purchase price of approximately $932 million was allocated to assets acquired and liabilities assumed based on their fair market values at 2 U.S. Bancorp 4 TABLE 1 SUMMARY OF CONSOLIDATED INCOME
Three Months Ended -------------------- (Taxable-Equivalent Basis; March 31 March 31 Dollars In Millions, Except Per Share Data) 2000 1999 ------------------------------------------------------------------------------------ CONDENSED INCOME STATEMENT Interest income............................................. $1,580.5 $1,362.7 Interest expense............................................ 718.2 569.3 ----------------- Net interest income...................................... 862.3 793.4 Provision for credit losses................................. 154.0 117.0 ----------------- Net interest income after provision for credit losses.... 708.3 676.4 Available-for-sale securities losses........................ (.3) -- Other noninterest income.................................... 795.7 626.3 Merger-related charges...................................... 13.1 2.9 Other noninterest expense................................... 887.9 715.9 ----------------- Income before income taxes............................... 602.7 583.9 Taxable-equivalent adjustment............................... 16.9 10.7 Income taxes................................................ 206.8 206.4 ----------------- Net income............................................... $ 379.0 $ 366.8 ----------------- FINANCIAL RATIOS Return on average assets.................................... 1.86% 1.98% Return on average common equity............................. 19.8 24.4 Net interest margin (taxable-equivalent basis).............. 4.81 4.82 Efficiency ratio............................................ 54.3 50.6 Efficiency ratio before merger-related charges.............. 53.6 50.4 Banking efficiency ratio before merger-related charges*..... 45.3 43.3 ----------------- PER COMMON SHARE Earnings per share.......................................... $ .51 $ .51 Diluted earnings per share.................................. .51 .50 Dividends paid.............................................. .215 .195 ------------------------------------------------------------------------------------
*Without investment banking and brokerage activity. the date of acquisition. On September 17, 1999, the Company completed its acquisition of the investment banking division of The John Nuveen Company, which became part of the U.S. Bancorp Piper Jaffray Fixed Income Capital Markets division. On September 13, 1999, the Company completed its acquisition of Voyager Fleet Systems, Inc., which is now part of the Payment Systems business unit. On July 15, 1999, the Company completed its acquisition of the San Diego-based Bank of Commerce, one of the nation's largest U.S. Small Business Administration ("SBA") lenders. On June 30, 1999, the Company completed its acquisition of Mellon Network Services' electronic funds transfer processing unit. On April 7, 2000, the Company acquired Oliver-Allen Corporation, a privately-held information technology leasing company. These transactions were all accounted for as purchase acquisitions. With respect to divestiture transactions, the Company completed the sale of 28 branches in Kansas and Iowa on September 24, 1999, with aggregate deposits of $364 million. On September 23, 1999, the Company sold $1.8 billion of indirect automobile loans and is in the process of exiting this business. LINE OF BUSINESS FINANCIAL REVIEW Within the Company, financial performance is measured by major lines of business which include: Wholesale Banking, Consumer Banking, Payment Systems, Wealth Management and Capital Markets, and Corporate Support. These segments are determined based on the products and services provided to respond effectively to the needs of a diverse customer base. 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 2000 certain organization and methodology changes were made and 1999 results are presented on a consistent basis. WHOLESALE BANKING Wholesale Banking includes lending, treasury management, corporate trust and other financial services to middle market, large corporate and U.S. Bancorp 3 5 TABLE 2 LINE OF BUSINESS FINANCIAL PERFORMANCE
Wholesale Consumer Banking Banking --------------------------------------------------------------------------- For the Three Months Ended March 31 Percent Percent (Dollars in Millions) 2000 1999 Change 2000 1999 Change --------------------------------------------------------------------------------------------------------------------------------- CONDENSED INCOME STATEMENT Net interest income (taxable-equivalent basis).... $ 403.6 $ 346.5 16.5% $ 330.5 $ 323.3 2.2% Provision for credit losses....................... 29.9 25.3 18.2 73.1 70.1 4.3 Noninterest income................................ 103.4 104.2 (.8) 117.6 103.7 13.4 Noninterest expense............................... 203.5 181.0 12.4 220.3 213.3 3.3 Goodwill and other intangible assets expense...... 21.7 15.5 40.0 12.1 9.2 31.5 Income taxes and taxable-equivalent adjustment.... 93.4 85.1 9.8 52.9 50.0 5.8 ---------------------- --------------------- Income before merger-related charges and available-for-sale securities transactions....... $ 158.5 $ 143.8 10.2 $ 89.7 $ 84.4 6.3 ---------------------- --------------------- Net merger-related charges and available-for-sale securities transactions (after-tax)*............. Net income........................................ AVERAGE BALANCE SHEET DATA Loans............................................. $ 39,580 $ 33,946 16.6 $11,169 $ 12,814 (12.8) Assets............................................ 43,086 37,262 15.6 12,359 13,995 (11.7) Deposits.......................................... 11,966 10,934 9.4 30,399 31,039 (2.1) Common equity..................................... 4,021 3,548 13.3 987 1,165 (15.3) ---------------------- --------------------- Return on average assets.......................... 1.48% 1.57% 2.92% 2.45% Return on average common equity ("ROCE").......... 15.9 16.4 36.6 29.4 Efficiency ratio.................................. 44.4 43.6 51.9 52.1 Efficiency ratio on a cash basis**................ 40.1 40.2 49.2 50.0 ---------------------------------------------------------------------------------------------------------------------------------
*Merger-related charges and available-for-sale securities transactions are not allocated to the business lines. All ratios are calculated without the effect of merger-related charges and available-for-sale securities transactions. **Calculated by excluding goodwill and other intangibles and the related amortization. ***Not meaningful. public sector clients. Operating earnings increased 10 percent to $158.5 million in the first quarter of 2000, compared with $143.8 million in the first quarter of 1999. Return on average assets was 1.48 percent in the first quarter of 2000, compared with 1.57 percent in the first quarter of the prior year, and return on average common equity was 15.9 percent in the first quarter of 2000, compared with 16.4 percent in the same period of 1999. Strong growth in net interest income was primarily due to core loan growth and the impact of bank acquisitions. Average loan balances increased 17 percent in the first quarter of 2000, compared with the first quarter of 1999. This growth includes the impact of the following acquisitions: Bank of Commerce acquired in July 1999, Western Bancorp acquired in November 1999, Peninsula Bank of San Diego acquired in January 2000. Excluding these bank acquisitions, average loan balances increased 10 percent in the first quarter of 1999. Noninterest income was relatively flat reflecting a downturn in the high yield investment banking sector and the timing of gains related to remarketing activities within the leasing division. Noninterest income from the high yield investment banking sector decreased $3.1 million or 29 percent in the first quarter of 2000, compared with the first quarter of 1999. Noninterest income from leasing activities decreased $5.7 million or 60 percent in the first quarter of 2000, compared with the first quarter of 1999. These decreases were offset by growth in Wholesale Banking's core business activities. Noninterest expense (excluding amortization of intangible assets) increased to $203.5 million in the first quarter of 2000, compared with $181.0 million in first quarter 1999. The increase was primarily due to acquisitions, which added incremental noninterest expense of $11.9 million in the first quarter of 2000, and growth in Wholesale Banking's business activities. Goodwill and other intangible assets expense increased $6.2 million or 40% in the first quarter of 2000, compared with the first quarter of 1999 primarily due to the acquisitions of Bank of Commerce in July 1999, Western Bancorp in November 1999, and Peninsula Bank of San Diego in January 2000. The efficiency ratio increased to 44.4 percent, compared with 43.6 percent a year ago. CONSUMER BANKING Consumer Banking delivers products and services to the broad consumer market and small-businesses through branch offices, telemarketing, online services, direct mail and automated teller machines ("ATMs"). Operating earnings increased 6 percent to $89.7 million in the first quarter of 2000, compared with $84.4 million in the same quarter of 1999. Return on average assets increased to 2.92 percent in the first quarter of 2000 from 2.45 percent in the same quarter a year ago. Total revenue grew $21.1 million or 5 percent compared with the first quarter of 1999, reflecting the increased value of deposits in a rising interest rate environment, growth in fee income and the impact of acquisitions. Deposit service charges and debit card fees increased $ 6.4 million or 8 percent over the first quarter of 1999. The growth was partially offset by planned reductions in revenue related to the indirect automobile portfolio. Total revenue from the indirect automobile portfolio decreased $15.4 million or 56 percent as compared with the first quarter of 1999. Average balances for the indirect automobile loan portfolio decreased $2,610.1 million or 73 percent for the same period, due to the September 1999 sale of $1.8 billion of indirect automobile loans and the continued run off of the remaining portfolio. Noninterest expense (excluding amortization of intangible assets) increased 3 percent to $220.3 million in the first quarter 2000, compared with $213.3 million in the first quarter 1999. The Company is currently investing in a number of customer service initiatives and enhanced technology designed to improve the earnings growth of the Consumer Banking business line. These initiatives include incremental investment in technology and processes, and the hiring of additional sales and customer service employees. As with any investment, successful achievement of the anticipated deposit and loan growth and related contribution to earnings is subject to a number of uncertainties. Goodwill and other intangible asset expense increased $2.9 million or 32 percent for the first quarter of 2000 primarily due to the acquisition of Bank of Commerce in July 1999, Western Bancorp in November 1999, and Peninsula Bank of San Diego in January 2000. 4 U.S. Bancorp 6
Wealth Management and Corporate Consolidated Payment Systems Capital Markets Support Company ----------------------------------------------------------------------------------------------------------------------------- Percent Percent Percent 2000 1999 Change 2000 1999 Change 2000 1999 2000 1999 Change ----------------------------------------------------------------------------------------------------------------------------- $ 94.9 $ 82.0 15.7% $ 45.0 $ 40.7 10.6% $ (11.7) $ .9 $ 862.3 $ 793.4 8.7% 46.5 52.6 (11.6) 1.3 1.0 30.0 3.2 (32.0) 154.0 117.0 31.6 177.3 139.9 26.7 399.1 273.0 46.2 (1.7) 5.5 795.7 626.3 27.0 101.7 83.2 22.2 326.1 227.3 43.5 (20.3) (26.7) 831.3 678.1 22.6 12.9 6.5 98.5 9.9 6.6 50.0 -- -- 56.6 37.8 49.7 41.2 29.6 39.2 39.6 29.3 35.2 1.4 24.2 228.5 218.2 4.7 ------------------- ------------------- ------------------- ------------------- $ 69.9 $ 50.0 39.8 $ 67.2 $ 49.5 35.8 $ 2.3 $ 40.9 387.6 368.6 5.2 ------------------- ------------------- ------------------- (8.6) (1.8) *** ------------------- $ 379.0 $ 366.8 3.3 ------------------- $ 8,185 $ 7,668 6.7 $ 2,740 $ 2,107 30.0 $ 2,035 $ 2,546 $ 63,709 $ 59,081 7.8 8,721 8,103 7.6 6,612 5,198 27.2 10,993 10,549 81,771 75,107 8.9 77 52 48.1 3,436 2,964 15.9 3,825 2,631 49,703 47,620 4.4 826 656 25.9 1,254 1,118 12.2 609 (399) 7,697 6,088 26.4 ------------------- ------------------- ------------------- ------------------- 3.22% 2.50% 4.09% 3.86% 1.91% 1.99% 34.0 30.9 21.6 18.0 20.3 24.6 42.1 40.4 75.7 74.6 53.6 50.4 37.4 37.5 73.4 72.5 50.1 47.8 -----------------------------------------------------------------------------------------------------------------------------
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 40 percent to $69.9 million in the first quarter of 2000, compared with $50.0 million in the same quarter of 1999. First quarter return on average assets was 3.22 percent, compared with 2.50 percent in the first quarter of 1999. Return on average common equity was 34.0 percent in the first quarter of 2000, compared with 30.9 percent in the same quarter of 1999. Net interest income increased 16 percent to $94.9 million in the first quarter of 2000, compared with $82.0 million in the same quarter a year ago. The change reflects core growth in loan balances of 6.7 percent and the benefit of pricing enhancements implemented in 1999. Despite growth in loans, the provision declined to $46.5 million in the first quarter of 2000, compared with $52.6 million in the first quarter of 1999. This improvement reflects lower net charge-offs in the credit card portfolio compared to a year ago. Fee-based noninterest income increased $37.4 million to $177.3 million in the first quarter of 2000, compared with $139.9 million in the first quarter of 1999. The increase reflects growth in credit card revenues and data processing fees related to ATM processing activities. Corporate and retail card product fees increased $31.6 million or 27 percent over the first quarter of 1999. Data processing fees related to ATM processing activities increased $13.4 million or 86 percent over the first quarter of 1999 primarily due to the acquisition of Mellon Network Services' electronic funds transfer processing unit in June 1999. Noninterest expense (excluding amortization of intangible assets) was $101.7 million in the first quarter 2000, compared with $83.2 million in first quarter 1999. The increase was primarily due to the Mellon Network Services acquisition, which added incremental direct expense of approximately $9.5 million in the first quarter of 2000, and expenditures supporting Internet initiatives designed to leverage the Company's electronic processing capabilities. Goodwill and other intangible assets expense increased $6.4 million or 99 percent for the first quarter of 2000 primarily due to the acquisition of Mellon Network Services' electronic funds transfer processing unit in June 1999. WEALTH MANAGEMENT AND CAPITAL MARKETS Wealth Management and Capital Markets engages in equity and fixed income trading activities, offers investment banking and underwriting services for corporate and public sector customers and provides securities, mutual funds, annuities and insurance products to consumers and regionally-based businesses through a network of banking centers and brokerage offices. It also offers institutional trust, investment management services, and private banking and personal trust services. Operating earnings increased 36 percent to $67.2 million in the first quarter of 2000, compared with $49.5 million in the first quarter of 1999. First quarter return on average U.S. Bancorp 5 7 TABLE 3 ANALYSIS OF NET INTEREST INCOME
Three Months Ended -------------------- March 31 March 31 (Dollars In Millions) 2000 1999 ------------------------------------------------------------------------------------ Net interest income, as reported............................ $845.4 $782.7 Taxable-equivalent adjustment............................ 16.9 10.7 ---------------- Net interest income (taxable-equivalent basis).............. $862.3 $793.4 ---------------- Average yields and weighted average rates (taxable-equivalent basis) Earning assets yield..................................... 8.81% 8.28% Rate paid on interest-bearing liabilities................ 5.05 4.35 ---------------- Gross interest margin....................................... 3.76% 3.93% ---------------- Net interest margin......................................... 4.81% 4.82% ---------------- Net interest margin without taxable-equivalent increments... 4.71% 4.76% ------------------------------------------------------------------------------------
common equity was 21.6 percent, compared with 18.0 percent in the first quarter of 1999. The business line's positive results were primarily due to increases in mutual fund fees and equity commissions, investment banking, trading profits, and growth in loans and deposits in its Private Financial Services. Total revenue increased by $130.4 million or 42 percent in the first quarter of 2000, compared with the first quarter of 1999. Mutual fund fees and equity commissions increased $25.7 million or 34 percent in the first quarter of 2000, compared with the first quarter of 1999, and investment banking and trading profits increased $93.5 million or 120 percent for the same period. Average loan balances in Private Financial Services increased $493.9 million or 24 percent over the first quarter 1999 while average deposit balances increased $318.5 million or 12 percent during the same period. The efficiency ratio was 75.7 percent in the first quarter of 2000, compared with 74.6 percent in the first quarter of 1999. CORPORATE SUPPORT Corporate Support includes the net effect of support units after internal revenue and expense allocations, balance sheet management and other corporate activities. The variance in operating earnings in the first quarter of 2000 from the first quarter of 1999 primarily reflects the change in the provision for credit losses from a year ago and residual allocations. The variance also reflects the reduction in net interest income due to planned declines in the residential real estate portfolio, the impact of contingency cash related to the millennium computer change (Y2K) and the effect of a rising rate environment. STATEMENT OF INCOME ANALYSIS NET INTEREST INCOME First quarter net interest income on a taxable-equivalent basis was $862.3 million, compared with $793.4 million in the first quarter of 1999. Net interest margin on a taxable-equivalent basis remained relatively flat at 4.81 percent in the first quarter of 2000, as compared with 4.82 percent in the first quarter of 1999. Average earning assets for the quarter increased $5.4 billion (8 percent) from the first quarter of 1999, primarily driven by core commercial, home equity and second mortgage loan growth and bank acquisitions, partially offset by reductions in securities, indirect automobile loans and residential mortgage loans. Average loans were up $4.6 billion (8 percent) from the first quarter of 1999. Excluding indirect automobile and residential mortgage loans, average loans for the first quarter of 2000 were higher by approximately $7.4 billion (14 percent) than the first quarter of 1999. Without the bank acquisitions, average loans, excluding indirect automobile and residential mortgage loans, were approximately 9 percent higher than the first quarter of 1999. The decline in indirect automobile TABLE 4 NONINTEREST INCOME
Three Months Ended -------------------- March 31 March 31 (Dollars in Millions) 2000 1999 ------------------------------------------------------------------------------------ Credit card fee revenue..................................... $ 159.5 $ 126.8 Trust and investment management fees........................ 117.1 117.2 Investment products fees and commissions.................... 116.2 88.6 Service charges on deposit accounts......................... 109.0 103.4 Investment banking revenue.................................. 94.0 36.2 Trading account profits and commissions..................... 83.6 51.5 Other....................................................... 116.3 102.6 ---------------- Total operating noninterest income....................... 795.7 626.3 Available-for-sale securities losses........................ (.3) -- ---------------- Total noninterest income................................. $ 795.4 $ 626.3 ------------------------------------------------------------------------------------
6 U.S. Bancorp 8 TABLE 5 NONINTEREST EXPENSE
Three Months Ended -------------------- March 31 March 31 (Dollars in Millions) 2000 1999 ------------------------------------------------------------------------------------ Salaries.................................................... $ 432.1 $ 354.1 Employee benefits........................................... 76.1 70.0 Net occupancy............................................... 57.1 50.0 Furniture and equipment..................................... 41.1 38.1 Telephone................................................... 21.3 18.0 Professional services....................................... 19.1 14.0 Advertising and marketing................................... 15.8 15.0 Other personnel costs....................................... 12.3 12.7 Goodwill and other intangible assets........................ 56.6 37.8 Other....................................................... 156.4 106.2 ---------------- Total operating noninterest expense...................... 887.9 715.9 Merger-related charges...................................... 13.1 2.9 ---------------- Total noninterest expense................................ $ 901.0 $ 718.8 ---------------- Efficiency ratio*........................................... 54.3% 50.6% Efficiency ratio before merger-related charges.............. 53.6 50.4 Banking efficiency ratio before merger-related charges**.... 45.3 43.3 Average number of full-time equivalent employees............ 28,686 27,040 ------------------------------------------------------------------------------------
*Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding available-for-sale securities gains and losses. **Without investment banking and brokerage activity. loans reflects a $1.8 billion loan sale completed in the third quarter of 1999. The Company is in the process of exiting this business. The residential portfolio continued its expected decline decreasing by $392 million (13 percent) from the first quarter of 1999. Average available-for-sale securities were $324 million (6 percent) lower in the first quarter of 2000, compared with the same quarter of 1999, primarily reflecting maturities and sales of securities. PROVISION FOR CREDIT LOSSES The provision for credit losses was $154.0 million in the first quarter of 2000, compared with $117.0 million in the same quarter of 1999. The provision for credit losses is recorded to bring the allowance for credit losses to a level deemed appropriate by management. Refer to "Corporate Risk Profile" for further information on factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses. NONINTEREST INCOME Excluding available-for-sale securities transactions, first quarter 2000 noninterest income was $795.7 million, an increase of $169.4 million (27 percent), from the first quarter of 1999. Investment banking revenue, trading account profits and commissions and investment products fees and commissions were significantly higher, due to growth in Wealth Management and Capital Markets. Credit card fee revenue was higher year over year by $32.7 million (26 percent) reflecting continued growth in corporate and retail card product fees, as well as merchant and ATM processing-related revenue. Service charges on deposit accounts increased 5 percent to $109.0 million for the first quarter of 2000. The increase in other income in the first quarter of 2000 included a $10.8 million gain on the sale of a building. NONINTEREST EXPENSE Excluding merger-related charges, first quarter 2000 noninterest expense was $887.9 million, an increase of $172.0 million (24 percent) from the first quarter of 1999. Approximately $99 million of the increase in expense quarter-over-quarter was due to the growth in investment banking and brokerage activities. The remaining increase was primarily the result of acquisitions and investments in sales and service and technology. In addition to on-going investments in Internet-related products and services, the first quarter of 2000 included approximately $9.0 million of incremental spending on Internet infrastructure-related initiatives. The banking efficiency ratio before merger-related charges was 45.3 percent for the first quarter of 2000, compared with 43.3 percent in the first quarter of 1999. The overall efficiency ratio increased slightly due to the planned investments in Internet technology and other customer-related initiatives. The Company has accelerated the development of its capabilities to deliver U.S. Bancorp 7 9 its products and services over the Internet. The expenditures associated with these initiatives are expected to result in a higher rate of expense growth in 2000 and, as with any such investment, the anticipated benefits are subject to a number of uncertainties. Noninterest expense included merger-related charges of $13.1 million in the first quarter of 2000, compared to $2.9 million in the first quarter of 1999. These merger-related charges related to the integration of the Company's various acquisitions including Western Bancorp and Peninsula Bank of San Diego. These merger-related charges are primarily system conversion and integration costs associated with consolidating redundant operations. INCOME TAX EXPENSE The provision for income taxes was $206.8 million (an effective rate of 35.3 percent) in the first quarter of 2000, compared with $206.4 million (an effective rate of 36.0 percent) in the same quarter of 1999. BALANCE SHEET ANALYSIS LOANS The Company's loan portfolio was $64.9 billion at March 31, 2000, compared with $62.9 billion at December 31, 1999. Commercial loans totaled $45.1 billion at March 31, 2000, up $2.2 billion (5 percent) from December 31, 1999. The increase was primarily attributable to continued growth in core commercial and commercial real estate loans and bank acquisitions. Total consumer loan outstandings were $19.8 billion at March 31, 2000, compared with $19.9 billion at December 31, 1999. Excluding indirect automobile loans and residential mortgage loans, consumer loans were $16.6 billion at March 31, 2000, and December 31, 1999. SECURITIES At March 31, 2000, available-for-sale securities totaled $4.7 billion, compared with $4.9 billion at December 31, 1999, primarily reflecting maturities and sales of securities. DEPOSITS Noninterest-bearing deposits were $14.7 billion at March 31, 2000, compared with $16.1 billion at December 31, 1999. The decrease was primarily due to seasonality of corporate trust and other business deposits. Interest-bearing deposits totaled $36.3 billion at March 31, 2000, compared with $35.5 billion at December 31, 1999. The increase in interest-bearing deposit balances was primarily due to the acquisition of Peninsula Bank of San Diego, as well as increases in money market indexed products and consumer savings certificates. BORROWINGS Short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings, increased to $3.3 billion at March 31, 2000, compared with $2.3 billion at December 31, 1999. The increase reflected low short-term borrowing levels at December 31, 1999, primarily due to the Company's Y2K liquidity planning. Long-term debt was $17.3 billion at March 31, 2000, up from $16.6 billion at December 31, 1999. To fund core asset growth during the first quarter of 2000, the Company issued $1.1 billion of debt with an average original maturity of 2.0 years under its medium-term and bank note programs. CORPORATE RISK PROFILE CREDIT MANAGEMENT The Company's strategy for credit risk management includes stringent, centralized credit policies, and uniform underwriting criteria for all loans including specialized lending categories such as mortgage banking, real estate construction and consumer credit. The strategy also emphasizes diversification on both a geographic and customer level, regular credit examinations, and quarterly management reviews of large loans and loans experiencing deterioration of credit quality. The Company strives to identify potential problem loans early, take any necessary charge-offs promptly, and maintain strong reserve levels. Commercial banking operations rely on a strong credit culture that combines prudent credit policies and individual lender accountability. In addition, the commercial lenders generally focus on middle market companies within their regions. The Company utilizes a credit risk rating system in order to measure the credit quality of individual commercial loan transactions. The risk rating system is intended to identify and measure the credit quality of lending transactions. In the Company's retail banking operations, standard credit scoring systems are used to assess consumer credit risks and to price consumer products accordingly. In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, the level of allowance coverage and macroeconomic factors. Generally, the domestic economy of the nation is considered strong, though financial markets have been volatile. Approximately 56 percent of the Company's loan portfolio consists of credit to businesses and consumers in Minnesota, Oregon, Washington and California. NET CHARGE-OFFS AND ALLOWANCE FOR CREDIT LOSSES Net loan charge-offs totaled $154.0 million in the first quarter of 2000, compared with $139.6 million in the first quarter of 1999. The increase in net charge-offs was primarily due to commercial loan charge-offs, the growing small business lending portfolio and an expected increase in losses on several consumer loan portfolios purchased in late 1998. This is offset somewhat by lower net charge-offs on credit card portfolios. The ratio of total net charge-offs to average loans was relatively flat at .97 percent in the first quarter of 2000, compared with .96 percent in the 8 U.S. Bancorp 10 TABLE 6 SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
Three Months Ended -------------------- March 31 March 31 (Dollars in Millions) 2000 1999 ------------------------------------------------------------------------------------ Balance at beginning of period.............................. $ 995.4 $1,000.9 CHARGE-OFFS Commercial Commercial............................................ 56.3 43.5 Real estate Commercial mortgage................................ 1.0 .3 Construction....................................... -- .2 ----------------- Total commercial................................... 57.3 44.0 Consumer Credit card........................................... 42.1 55.1 Other................................................. 83.9 81.2 ----------------- Subtotal........................................... 126.0 136.3 Residential mortgage.................................. 2.5 1.0 ----------------- Total consumer..................................... 128.5 137.3 ----------------- Total........................................... 185.8 181.3 RECOVERIES Commercial Commercial............................................ 10.7 18.4 Real estate Commercial mortgage................................ 1.5 1.7 Construction....................................... .3 -- ----------------- Total commercial................................... 12.5 20.1 Consumer Credit card........................................... 3.0 4.8 Other................................................. 16.1 16.6 ----------------- Subtotal........................................... 19.1 21.4 Residential mortgage.................................. .2 .2 ----------------- Total consumer..................................... 19.3 21.6 ----------------- Total........................................... 31.8 41.7 NET CHARGE-OFFS Commercial Commercial............................................ 45.6 25.1 Real estate Commercial mortgage................................ (.5) (1.4) Construction....................................... (.3) .2 ----------------- Total commercial................................... 44.8 23.9 Consumer Credit card........................................... 39.1 50.3 Other................................................. 67.8 64.6 ----------------- Subtotal........................................... 106.9 114.9 Residential mortgage.................................. 2.3 .8 ----------------- Total consumer..................................... 109.2 115.7 ----------------- Total........................................... 154.0 139.6 Provision charged to operating expense...................... 154.0 117.0 Acquisitions and other changes.............................. 15.7 4.2 ----------------- Balance at end of period.................................... $1,011.1 $ 982.5 ----------------- Allowance as a percentage of: Period-end loans......................................... 1.56% 1.65% Nonperforming loans...................................... 310 324 Nonperforming assets..................................... 276 302 Annualized net charge-offs............................... 163 174 ------------------------------------------------------------------------------------
U.S. Bancorp 9 11 TABLE 7 DELINQUENT LOAN RATIOS*
March 31 December 31 90 days or more past due 2000 1999 --------------------------------------------------------------------------------------- COMMERCIAL Commercial............................................... .65% .59% Real estate Commercial mortgage................................... .68 .84 Construction.......................................... .59 .59 ------------------- Total commercial...................................... .65 .65 CONSUMER Credit card.............................................. 1.11 .96 Other.................................................... .59 .57 ------------------- Subtotal.............................................. .71 .67 Residential mortgage..................................... 1.69 1.57 ------------------- Total consumer........................................ .84 .79 ------------------- Total.............................................. .71% .69% ---------------------------------------------------------------------------------------
*Ratios include nonperforming loans and are expressed as a percent of ending loan balances. first quarter of 1999. Commercial loan net charge-offs were $44.8 million for the first quarter of 2000, or .41 percent of average loans outstanding, compared with $23.9 million, or .26 percent of average loans outstanding, in the first quarter of 1999. Net charge-offs in the first quarter of 2000 included expected higher losses on a growing portfolio of scored small business and commercial payment systems products. Commercial loan net charge-offs, excluding net charge-offs of scored small business and commercial payment systems products, were $27.3 million, or .26 percent of average loans outstanding. Consumer loan net charge-offs of $109.2 million were less than $115.7 million in the same period of 1999 and $10.2 million more than the fourth quarter of 1999. The increase from the prior quarter reflected expected increases in net charge-offs on acquired portfolios and seasonally higher losses on credit cards, partially offset by a reduction in net charge-offs related to fraud. The decline in net charge-offs from a year ago reflects the reduction in fraud-related losses and improving trends in the credit card portfolios. Consumer loan net charge-offs as a percent of average loans outstanding were 2.22 percent in the first quarter of 2000, compared with 2.01 percent and 2.17 percent in the fourth quarter and first quarter of 1999, respectively. The allowance for credit losses provides coverage for probable losses inherit in the Company's loan portfolio. Management evaluates the allowance each quarter to determine that it is adequate to cover inherent losses. The evaluation of each element and the overall allowance is based on continuing assessment of problem loans and related off-balance sheet items, recent loss experience, and other factors, including regulatory guidance and economic conditions. The allowance for credit losses was $1,011.1 million at March 31, 2000, higher than the allowance for credit losses of $995.4 million at December 31, 1999, due to additions for acquisitions. The ratio of allowance for credit losses to TABLE 8 NET CHARGE-OFFS AS A PERCENTAGE OF AVERAGE LOANS OUTSTANDING
Three Months Ended -------------------- March 31 March 31 2000 1999 ------------------------------------------------------------------------------------ COMMERCIAL Commercial............................................... .62% .39% Real estate Commercial mortgage................................... (.02) (.07) Construction.......................................... (.03) .02 ---------------- Total commercial...................................... .41 .26 CONSUMER Credit card.............................................. 3.84 5.08 Other.................................................... 2.09 1.80 ---------------- Subtotal.............................................. 2.51 2.51 Residential mortgage..................................... .35 .11 ---------------- Total consumer........................................ 2.22 2.17 ---------------- Total.............................................. .97% .96% ------------------------------------------------------------------------------------
10 U.S. Bancorp 12 TABLE 9 NONPERFORMING ASSETS*
March 31 December 31 (Dollars in Millions) 2000 1999 --------------------------------------------------------------------------------------- COMMERCIAL Commercial............................................... $ 186.7 $ 161.2 Real estate Commercial mortgage................................... 68.0 78.9 Construction.......................................... 25.8 25.3 ------------------- Total commercial...................................... 280.5 265.4 CONSUMER Residential mortgage..................................... 38.0 36.0 Other.................................................... 7.9 8.6 ------------------- Total consumer........................................ 45.9 44.6 ------------------- Total nonperforming loans....................... 326.4 310.0 OTHER REAL ESTATE........................................... 23.8 20.7 OTHER NONPERFORMING ASSETS.................................. 16.4 16.8 ------------------- Total nonperforming assets...................... $ 366.6 $ 347.5 ------------------- Accruing loans 90 days or more past due**................... $ 133.4 $ 125.8 Nonperforming loans to total loans.......................... .50% .49% Nonperforming assets to total loans plus other real estate..................................................... .56 .55 ---------------------------------------------------------------------------------------
*Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due. **These loans are not included in nonperforming assets and continue to accrue interest because they are secured by collateral and/or are in the process of collection and are reasonably expected to result in repayment or restoration to current status. nonperforming loans was 310 percent at March 31, 2000, down slightly from the ratio of 321 percent at December 31, 1999. Management has determined that the allowance for credit losses is adequate. NONPERFORMING ASSETS Nonperforming assets include nonaccrual loans, restructured loans, other real estate and other nonperforming assets owned by the Company. Nonperforming assets at March 31, 2000, totaled $366.6 million, compared with $347.5 million at December 31, 1999. The ratio of nonperforming assets to loans and other real estate was .56 percent at March 31, 2000, compared with .55 percent at December 31, 1999. Accruing loans 90 days or more past due at March 31, 2000, totaled $133.4 million, compared with $125.8 million at December 31, 1999. These loans are not included in nonperforming assets because they are expected to be returned to current status. Consumer loans 30 days or more past due decreased to 2.57 percent of the portfolio at March 31, 2000, compared with 2.65 percent at December 31, 1999. The percentage of consumer loans 90 days or more past due of the total consumer loan portfolio totaled .84 percent at March 31, 2000, compared with .79 percent at December 31, 1999. INTEREST RATE RISK MANAGEMENT The Company's policy is to maintain a low interest rate risk position. The Company limits the exposure of net interest income associated with interest rate movements through asset/liability management strategies. The Company's Asset and Liability Management Committee ("ALCO") uses three methods for measuring and managing consolidated interest rate risk: Net Interest Income Simulation Modeling, Market Value Simulation Modeling, and Repricing Mismatch Analysis. NET INTEREST INCOME SIMULATION MODELING: The Company uses a net interest income simulation model to estimate near-term (next 24 months) risk due to changes in interest rates. The model, which is updated monthly, incorporates substantially all of the Company's assets and liabilities and off-balance sheet instruments, together with forecasted changes in the balance sheet and assumptions that reflect the current interest rate environment. 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 or steepening of the yield curve. ALCO also calculates the sensitivity of the simulation results to changes in key assumptions, such as the Prime/LIBOR spread or core deposit repricing. 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 to 1.5 percent of forecasted net interest income over the succeeding 12 months and 3 percent of forecasted net U.S. Bancorp 11 13 TABLE 10 INTEREST RATE SWAP HEDGING PORTFOLIO NOTIONAL BALANCES AND YIELDS BY MATURITY DATE
At March 31, 2000 (Dollars in Millions) ------------------------------------------------------------------------------------------------------------------- Weighted Weighted Average Average Notional Interest Rate Interest Rate Maturity Date Amount Received Paid ------------------------------------------------------------------------------------------------------------------- 2000........................................................ $ 155 6.39% 6.41% 2001........................................................ 290 6.56 6.05 2002........................................................ 545 6.22 5.98 2003........................................................ 2,662 6.06 6.26 2004........................................................ 1,475 6.60 6.02 Thereafter.................................................. 2,305 6.28 6.02 ----- Total....................................................... $7,432 6.27% 6.11% -------------------------------------------------------------------------------------------------------------------
*At March 31, 2000, the Company received fixed-rate interest and paid variable-rate interest on substantially all swaps in its hedging portfolio. interest income over the second 12 months given a 1 percent change in interest rates. At March 31, 2000, forecasted net interest income for the next 12 months would decrease $7 million from an immediate 100 basis point upward parallel shift in rates and increase $4 million from a downward shift of similar magnitude. Forecasted net interest income for the second 12 months would decrease $10 million from an immediate 100 basis point upward parallel shift in rates and increase $3 million from a downward shift of similar magnitude. MARKET VALUE SIMULATION MODELING: The net interest income simulation model is somewhat limited by its dependence upon accurate forecasts of future business activity and the resulting effect on balance sheet assets and liabilities. As a result, its usefulness is greatly diminished for periods beyond one or two years. To better measure all interest rate risk, both short-term and long-term, the Company uses a market value simulation model. This model estimates the effect of 1 percent, 2 percent and 3 percent rate shocks on the present value of substantially all future cash flows of the Company's outstanding assets, liabilities and off-balance sheet instruments. ALCO also calculates the sensitivity of the simulation results to changes in key assumptions, such as core deposit repricings and core deposit life. The amount of market value risk is subject to a limit, approved by the Company's Board of Directors, of .5 percent of assets for an immediate 100 basis point rate shock. The Company's market value risk position continues to be substantially lower than its limits. REPRICING MISMATCH ANALYSIS: A traditional gap analysis provides a static measurement of the relationship between the amounts of interest rate sensitive assets and liabilities repricing in a given time period. While the analysis provides a useful snapshot of interest rate risk, it does not capture all aspects of interest rate risk. As a result, ALCO uses the repricing mismatch analysis primarily for managing intermediate-term interest rate risk and has established limits, approved by the Company's Board of Directors, for the two- to three-year gap position of 5 percent of assets. USE OF DERIVATIVES TO MANAGE INTEREST RATE RISK: While each of the interest rate risk measurements has limitations, taken together they represent a comprehensive view of the magnitude of the Company's interest rate risk over various time intervals. The Company manages its interest rate risk by entering into off-balance sheet transactions, primarily interest rate swaps and, to a lesser degree, interest rate caps and floors. In the first quarter of 2000, the Company added $500 million of pay fixed interest rate swaps and terminated $674 million of receive fixed interest rate swaps to reduce its interest rate risk. Interest rate swap agreements involve the exchange of fixed- and variable-rate payments without the exchange of the underlying notional amount on which the interest payments are calculated. As of March 31, 2000, the Company received and made payments on $7.4 billion notional amount of interest rate swap agreements. These swaps had a weighted average interest rate received of 6.27 percent and a weighted average interest rate paid of 6.11 percent. The remaining maturities of these agreements ranged from 1 month to 15 years with an average remaining maturity of 4.6 years. Swaps increased net interest income for the quarters ended March 31, 2000, and 1999 by $1.7 million and $17.4 million, respectively. The Company also purchases interest rate caps and floors to minimize the impact of fluctuating interest rates on earnings. To hedge against rising interest rates, the Company uses interest rate caps. Counterparties to these interest rate cap agreements pay the Company based on the notional amount and the difference between current rates and strike rates. There were no caps outstanding at March 31, 2000. To hedge against 12 U.S. Bancorp 14 TABLE 11 CAPITAL RATIOS
March 31 December 31 (Dollars in Millions) 2000 1999 --------------------------------------------------------------------------------------- Tangible common equity*..................................... $ 5,161 $ 5,134 As a percent of assets................................... 6.4% 6.5% Tier 1 capital.............................................. $ 5,675 $ 5,631 As a percent of risk-adjusted assets..................... 6.6% 6.8% Total risk-based capital.................................... $ 9,311 $ 9,281 As a percent of risk-adjusted assets..................... 10.9% 11.1% Leverage ratio.............................................. 7.2 7.4 ---------------------------------------------------------------------------------------
*Defined as common equity less goodwill. falling interest rates, the Company uses interest rate floors. Like caps, counterparties to interest rate floor agreements pay the Company based on the notional amount and the difference between current rates and strike rates. The total notional amount of floor agreements purchased as of March 31, 2000, all of which were LIBOR-indexed, was $500 million. The impact of caps and floors on net interest income was not significant for the quarters ended March 31, 2000, and 1999. MARKET RISK MANAGEMENT Market valuation risk is subject to regular monitoring by management. The Company uses a value-at-risk ("VaR") model to measure and manage market risk in its broker/dealer activities. The VaR model uses an estimate of volatility appropriate to each instrument and a ninety-ninth percentile adverse move in the underlying markets. Market valuation risk limits are established subject to approval by the Company's Board of Directors. The Company's VaR limit was $40 million at March 31, 2000. The estimate of market valuation risk inherent in its broker/dealer activities, including equities, fixed income, high yield securities and foreign exchange as estimated by the VaR analysis, was $16.5 million at March 31, 2000. CAPITAL MANAGEMENT At March 31, 2000, tangible common equity (common equity less goodwill) was $5.2 billion, or 6.4 percent of assets, compared with $5.1 billion, or 6.5 percent at December 31, 1999. Tier 1 and total risk-based capital ratios were 6.6 percent and 10.9 percent at March 31, 2000, compared with 6.8 percent and 11.1 percent at December 31, 1999. The March 31, 2000 leverage ratio was 7.2 percent, compared with 7.4 percent at December 31, 1999. On February 16, 2000, the Company announced a share repurchase program of up to $2.5 billion of common stock over the period ending March 31, 2002. The new share repurchase program replaced a program that was scheduled to expire March 31, 2000. The purpose of these share repurchase programs is to ensure that appropriate capital levels are maintained. Shares acquired under the programs may be used for; 1) dividend reinvestment programs; 2) employee stock purchase and option programs; and 3) business acquisitions. During the first quarter of 2000, the Company repurchased 10.0 million shares under these programs for a total dollar value of $205.3 million. On January 14, 2000, the Company issued 4.0 million shares related to the acquisition of Peninsula Bank of San Diego. ACCOUNTING CHANGES ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Statement of Financial Accounting Standards No. ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In certain defined conditions, a derivative may be specifically designated as a hedge for a particular exposure. The accounting for changes in the fair value of the derivative depends on the intended use of the derivative and the resulting designation. The effective date has been deferred for one year with the issuance of SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133," which amended SFAS 133. SFAS 133, as amended, is effective for all fiscal years beginning after June 15, 2000, with earlier application permitted. The adoption of SFAS 133 is not expected to have a material impact on the Company. U.S. Bancorp 13 15 CONSOLIDATED BALANCE SHEET
March 31 December 31 (Dollars in Millions) 2000 1999 --------------------------------------------------------------------------------------- (Unaudited) ASSETS Cash and due from banks..................................... $ 3,602 $ 4,036 Federal funds sold.......................................... 131 713 Securities purchased under agreements to resell............. 427 324 Trading account securities.................................. 684 617 Available-for-sale securities............................... 4,704 4,871 Loans....................................................... 64,897 62,885 Less allowance for credit losses......................... 1,011 995 -------------------- Net loans................................................ 63,886 61,890 Premises and equipment...................................... 867 862 Interest receivable......................................... 471 433 Customers' liability on acceptances......................... 104 152 Goodwill and other intangible assets........................ 3,158 3,066 Other assets................................................ 5,038 4,566 -------------------- Total assets.......................................... $ 83,072 $ 81,530 -------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing...................................... $ 14,723 $ 16,050 Interest-bearing......................................... 36,292 35,480 -------------------- Total deposits........................................ 51,015 51,530 Federal funds purchased..................................... 1,640 297 Securities sold under agreements to repurchase.............. 1,004 1,235 Other short-term funds borrowed............................. 629 724 Long-term debt.............................................. 17,267 16,563 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company............ 950 950 Acceptances outstanding..................................... 104 152 Other liabilities........................................... 2,718 2,441 -------------------- Total liabilities..................................... 75,327 73,892 Shareholders' equity Common stock, par value $1.25 a share -- authorized 1,500,000,000 shares; issued: 3/31/00 -- 758,194,161 shares; 12/31/99 -- 754,368,668 shares................. 948 943 Capital surplus.......................................... 1,461 1,399 Retained earnings........................................ 5,607 5,389 Accumulated other comprehensive income................... (83) (62) Less cost of common stock in treasury: 3/31/00 -- 9,181,673 shares; 12/31/99 -- 1,038,456 shares.................................................. (188) (31) -------------------- Total shareholders' equity............................ 7,745 7,638 -------------------- Total liabilities and shareholders' equity............ $ 83,072 $ 81,530 ---------------------------------------------------------------------------------------
14 U.S. Bancorp 16 CONSOLIDATED STATEMENT OF INCOME
Three Months Ended ------------------- (Dollars in Millions, Except Per Share Data) March 31 March 31 (Unaudited) 2000 1999 --------------------------------------------------------------------------------- INTEREST INCOME Loans....................................................... $1,426.9 $1,238.5 Securities Taxable.................................................. 60.3 64.6 Exempt from federal income taxes......................... 14.0 14.7 Other interest income....................................... 62.4 34.2 ----------------- Total interest income................................. 1,563.6 1,352.0 INTEREST EXPENSE Deposits.................................................... 372.9 311.6 Federal funds purchased and repurchase agreements........... 43.8 39.4 Other short-term funds borrowed............................. 13.6 12.9 Long-term debt.............................................. 268.6 186.1 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company............ 19.3 19.3 ----------------- Total interest expense................................ 718.2 569.3 ----------------- Net interest income......................................... 845.4 782.7 Provision for credit losses................................. 154.0 117.0 ----------------- Net interest income after provision for credit losses....... 691.4 665.7 NONINTEREST INCOME Credit card fee revenue..................................... 159.5 126.8 Trust and investment management fees........................ 117.1 117.2 Investment products fees and commissions.................... 116.2 88.6 Service charges on deposit accounts......................... 109.0 103.4 Investment banking revenue.................................. 94.0 36.2 Trading account profits and commissions..................... 83.6 51.5 Available-for-sale securities losses........................ (.3) -- Other....................................................... 116.3 102.6 ----------------- Total noninterest income.............................. 795.4 626.3 NONINTEREST EXPENSE Salaries.................................................... 432.1 354.1 Employee benefits........................................... 76.1 70.0 Net occupancy............................................... 57.1 50.0 Furniture and equipment..................................... 41.1 38.1 Goodwill and other intangible assets........................ 56.6 37.8 Merger-related charges...................................... 13.1 2.9 Other....................................................... 224.9 165.9 ----------------- Total noninterest expense............................. 901.0 718.8 ----------------- Income before income taxes.................................. 585.8 573.2 Applicable income taxes..................................... 206.8 206.4 ----------------- Net income.................................................. $ 379.0 $ 366.8 ----------------- Earnings per share.......................................... $ .51 $ .51 Diluted earnings per share.................................. $ .51 $ .50 ---------------------------------------------------------------------------------
U.S. Bancorp 15 17 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Accumulated Other (Dollars in Millions) Common Shares Common Capital Retained Comprehensive Treasury (Unaudited) Outstanding* Stock Surplus Earnings Income Stock** Total --------------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1998............ 725,761,718 $931.0 $1,247.2 $4,455.8 $ 71.8 $(735.8) $5,970.0 Common dividends declared............ (141.7) (141.7) Purchase of treasury stock........... (1,397,940) (47.0) (47.0) Issuance of common stock Acquisitions...................... 1,027,276 (3.6) 40.0 36.4 Dividend reinvestment............. 168,650 (.4) 6.4 6.0 Stock option and stock purchase plans.......................... 809,189 (30.2) 34.5 4.3 --------------------------------------------------------------------------------------- 726,368,893 931.0 1,213.0 4,314.1 71.8 (701.9) 5,828.0 Comprehensive income Net income........................... 366.8 366.8 Other comprehensive income Change in unrealized gains on securities of $29.2 (net of $11.1 tax expense)...................... (18.1) (18.1) ------- Total comprehensive income..... 348.7 --------------------------------------------------------------------------------------- BALANCE MARCH 31, 1999............... 726,368,893 $931.0 $1,213.0 $4,680.9 $ 53.7 $(701.9) $6,176.7 --------------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1999............ 753,330,212 $943.0 $1,398.8 $5,389.2 $(61.8) $ (31.5) $7,637.7 Common dividends declared............ (161.5) (161.5) Purchase of treasury stock........... (10,025,000) (205.3) (205.3) Issuance of common stock Acquisitions...................... 4,326,950 4.0 62.0 32.3 98.3 Dividend reinvestment............. 340,012 (.7) 7.1 6.4 Stock option and stock purchase plans............................ 1,040,314 .7 .8 9.9 11.4 --------------------------------------------------------------------------------------- 749,012,488 947.7 1,460.9 5,227.7 (61.8) (187.5) 7,387.0 Comprehensive income Net income........................... 379.0 379.0 Other comprehensive income Change in unrealized losses on securities of $21.5 (net of $13.1 tax benefit) net of reclassification adjustment for losses included in net income of $.3 (net of $.1 tax benefit)...... (21.2) (21.2) ------- Total comprehensive income..... 357.8 --------------------------------------------------------------------------------------- BALANCE MARCH 31, 2000............... 749,012,488 $947.7 $1,460.9 $5,606.7 $(83.0) $(187.5) $7,744.8 ---------------------------------------------------------------------------------------------------------------------------------
*Defined as total common shares less common stock held in treasury. **Ending treasury shares were 9,181,673 at March 31, 2000; 1,038,456 at December 31, 1999; 18,428,964 at March 31, 1999; and 19,036,139 at December 31, 1998. 16 U.S. Bancorp 18 CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended --------------------- (Dollars in Millions) March 31 March 31 (Unaudited) 2000 1999 ------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net cash provided by operating activities................ $ 424.9 $ 611.6 ------------------ INVESTING ACTIVITIES Net cash (used) provided by: Loans outstanding........................................ (1,583.5) (512.6) Securities purchased under agreements to resell.......... (103.0) 14.6 Available-for-sale securities Sales.................................................... 83.8 53.2 Maturities............................................... 180.1 455.1 Purchases................................................ (51.5) (217.4) Proceeds from sales of other real estate.................... 5.6 7.8 Net purchases of bank premises and equipment................ (31.5) (30.1) Purchases of loans.......................................... (189.7) (127.7) Acquisitions, net of cash received.......................... -- (21.8) Cash and cash equivalents of acquired subsidiaries.......... 67.0 3.6 Other - net................................................. (222.4) (192.5) ------------------ Net cash used by investing activities.................... (1,845.1) (567.8) ------------------ FINANCING ACTIVITIES Net cash (used) provided by: Deposits................................................. (967.6) (1,362.7) Federal funds purchased and securities sold under agreements to repurchase................................ 1,112.1 367.2 Short-term borrowings.................................... (95.5) 429.5 Proceeds from long-term debt................................ 1,107.0 300.0 Principal payments on long-term debt........................ (402.9) (307.2) Proceeds from dividend reinvestment, stock option and stock purchase plans............................................. 17.8 10.3 Repurchase of common stock.................................. (205.3) (47.0) Cash dividends.............................................. (161.5) (141.7) ------------------ Net cash provided (used) by financing activities......... 404.1 (751.6) ------------------ Change in cash and cash equivalents...................... (1,016.1) (707.8) Cash and cash equivalents at beginning of period............ 4,748.8 4,855.3 ------------------ Cash and cash equivalents at end of period............... $ 3,732.7 $4,147.5 -------------------------------------------------------------------------------------
U.S. Bancorp 17 19 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 accounting principles generally accepted in the United States. In the opinion of management of the Company, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of results have been made, and the Company believes such presentation is adequate to make the information presented not misleading. For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Certain amounts in prior periods have been reclassified to conform to the current presentation. Accounting policies for the lines of business are the same as those used in preparation of the consolidated financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs and benefits, expenses and other financial elements to each line of business. Table 2 "Line of Business Financial Performance" on pages 3 through 6 provides details of segment results. This information is incorporated by reference into these Notes to Consolidated Financial Statements. NOTE B ACCOUNTING CHANGES ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In certain defined conditions, a derivative may be specifically designated as a hedge for a particular exposure. The accounting for changes in the fair value of the derivative depends on the intended use of the derivative and the resulting designation. The effective date has been deferred for one year with the issuance of SFAS 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133," which amended SFAS 133. SFAS 133, as amended, is effective for all fiscal years beginning after June 15, 2000, with earlier adoption permitted. The adoption of SFAS 133 is not expected to have a material impact on the Company. NOTE C BUSINESS COMBINATIONS The following table summarizes acquisitions by the Company completed during the past two years:
GOODWILL & INTANGIBLES ACCOUNTING (Dollars in Millions) DATE ASSETS DEPOSITS RECORDED SHARES ISSUED METHOD -------------------------------------------------------------------------------------------------------------------------- Oliver-Allen Corporation 4/7/00 280 -- 34 2,642,708 Purchase Peninsula Bank 1/14/00 491 452 71 4,041,568 Purchase Western Bancorp 11/15/99 2,508 2,105 773 27,768,465 Purchase Voyager Fleet Systems, Inc. 9/13/99 43 -- 25 -- Purchase Bank of Commerce 7/15/99 638 529 269 9,287,960 Purchase Mellon Network Services' Electronic 6/30/99 -- -- 78 -- Purchase Funds Transfer Processing Unit Libra Investments, Inc. 1/4/99 33 -- 4 1,027,276 Purchase
18 U.S. Bancorp 20 NOTE D AVAILABLE-FOR-SALE SECURITIES The detail of the amortized cost and fair value of available-for-sale securities consisted of the following:
March 31, 2000 December 31, 1999 --------------------------------------------------- Amortized Fair Amortized Fair (Dollars in Millions) Cost Value Cost Value ------------------------------------------------------------------------------------------------------------------- U.S. Treasury............................................... $ 380 $ 373 $ 388 $ 381 U.S. agencies and other mortgage-backed..................... 2,863 2,765 2,971 2,906 Other U.S. agencies......................................... 190 191 195 196 State and political......................................... 1,109 1,109 1,132 1,135 Other....................................................... 304 266 288 253 -------------------------------------------------- Total...................................................... $4,846 $4,704 $4,974 $4,871 -------------------------------------------------------------------------------------------------------------------
NOTE E LOANS The composition of the loan portfolio was as follows:
March 31 December 31 (Dollars in Millions) 2000 1999 ------------------------------------------------------------------------------------------ COMMERCIAL: Commercial............................................... $30,675 $28,863 Real estate Commercial mortgage................................... 10,033 9,784 Construction.......................................... 4,414 4,322 -------------------------- Total commercial................................... 45,122 42,969 -------------------------- CONSUMER: Home equity and second mortgage.......................... 8,802 8,681 Credit card.............................................. 4,096 4,313 Revolving credit......................................... 1,832 1,815 Installment.............................................. 1,193 1,245 Student.................................................. 677 563 -------------------------- Subtotal........................................... 16,600 16,617 Indirect automobile...................................... 543 638 Residential mortgage..................................... 2,632 2,661 -------------------------- Total consumer*.................................... 19,775 19,916 -------------------------- Total loans..................................... $64,897 $62,885 ------------------------------------------------------------------------------------------
*Loans held for sale were $740 at March 31, 2000, and $608 at December 31, 1999. This included residential mortgages held for sale and the student loan portfolio which may be sold when the repayment period begins. At March 31, 2000, the Company had $281 million in loans considered impaired under SFAS 114 included in its nonaccrual loans. The carrying value of the impaired loans was less than or equal to the appraised collateral value or the present value of expected future cash flows and, accordingly, no allowance for credit losses was specifically allocated to impaired loans. For the quarter ended March 31, 2000, the average recorded investment in impaired loans was approximately $273 million. No interest income was recognized on impaired loans during the quarter. U.S. Bancorp 19 21 NOTE F LONG-TERM DEBT Long-term debt (debt with original maturities of more than one year) consisted of the following:
March 31 December 31 (Dollars in Millions) 2000 1999 ---------------------------------------------------------------------------------------- Fixed-rate subordinated notes (5.70% to 8.35%) -- maturities to June 2026............................................... $ 2,850 $ 2,850 Step-up subordinated notes -- due August 15, 2005........... 100 100 Floating-rate notes -- due February 27, 2000................ -- 250 Federal Home Loan Bank advances (5.54% to 9.11%) -- maturities to October 2026....................... 1,997 1,998 Medium-term notes (5.98% to 7.50%) -- maturities to December 2004....................................................... 2,819 2,310 Bank notes (5.25% to 6.73%) -- maturities to November 2005....................................................... 8,909 8,459 Euro medium-term notes -- due April 13, 2004................ 400 400 Other....................................................... 192 196 ---------------------- Total.................................................... $ 17,267 $ 16,563 ----------------------------------------------------------------------------------------
NOTE G INCOME TAXES The components of income tax expense were:
Three Months Ended -------------------- March 31 March 31 (Dollars in Millions) 2000 1999 ------------------------------------------------------------------------------------ FEDERAL Current tax................................................. $ 167.4 $ 154.2 Deferred tax provision...................................... 7.1 17.9 ---------------- Federal income tax....................................... 174.5 172.1 STATE Current tax................................................. 30.1 30.6 Deferred tax provision...................................... 2.2 3.7 ---------------- State income tax......................................... 32.3 34.3 ---------------- Total income tax provision............................... $ 206.8 $ 206.4 ------------------------------------------------------------------------------------
The reconciliation between income tax expense and the amount computed by applying the statutory federal income tax rate was as follows:
Three Months Ended -------------------- March 31 March 31 (Dollars in Millions) 2000 1999 ------------------------------------------------------------------------------------ Tax at statutory rate (35%)................................. $ 205.0 $ 200.6 State income tax, at statutory rates, net of federal tax benefit.................................................... 21.0 22.3 Tax effect of Tax-exempt interest Loans................................................. (1.9) (2.3) Securities............................................ (6.0) (5.7) Amortization of nondeductible goodwill................... 14.9 9.6 Tax credits and other items.............................. (26.2) (18.1) ---------------- Applicable income taxes..................................... $ 206.8 $ 206.4 ------------------------------------------------------------------------------------
The Company's net deferred tax asset was $124.3 million at March 31, 2000, and $158.4 million at December 31, 1999. 20 U.S. Bancorp 22 NOTE H MERGER AND INTEGRATION CHARGES During the first quarter of 2000, the Company recorded $13.1 million of expense related to the integration of the Company's various acquisitions. The Company determines merger-related charges based on its integration strategy and formulated plans. These plans are established as of the acquisition date and regularly evaluated during the integration process. Severance charges include the cost of severance, other benefits and outplacement costs associated with the termination of employees primarily in branch offices and centralized corporate support and data processing functions. The severance amounts are determined based on the Company's existing severance pay programs and are paid out over a benefit period of up to two years from the time of termination. The total number of employees included in severance amounts were approximately 3,635 for U.S. Bancorp ("USBC"), 75 for Piper Jaffray Companies Inc. ("Piper"), 175 for Western Bancorp ("Western"), and 300 for other acquisitions. Premises and equipment writedowns represent lease termination costs and impairment of assets for redundant office space, equipment and branches that will be vacated and disposed of as part of the integration plan. 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. The following table presents a summary of activity with respect to the Company's significant acquisitions:
Other** (Dollars in Millions) USBC Piper Jaffray Western Acquisitions Total ---------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 $15.9 $17.5 $20.8 $17.7 $71.9 Provision charged to operating expense* -- 1.7 4.5 6.9 13.1 Additions related to purchase acquisitions -- -- 2.3 8.9 24.1 Cash outlays (5.4) (2.9) (10.7) (12.4) (31.4) Noncash writedowns and other -- -- (.1) (.5) (.6) ----- ----- ----- ----- ----- Balance at March 31,2000 $10.5 $16.3 $16.8 $20.6 $64.2 ===== ===== ===== ===== =====
*Merger-related charges in operating expenses for other acquisitions for the three months ending March 31, 2000, included $5.1 million for Mellon Network Services, $3.1 million for Peninsula Bank of San Diego, $2.1 million related to a division of John Nuveen Company and $5.3 million for other entities. The components of the merger and integration accrual were as follows:
March 31 December 31 (Dollars in Millions) 2000 1999 --------------------------------------------------------------- Severance $31.4 $34.6 Other employee related costs 14.5 16.6 Lease terminations and facility costs 8.3 9.5 Contracts and system writeoffs 7.0 6.4 Other 3.0 4.8 ----- ----- Total $64.2 $71.9
(Dollars in Millions) --------------------------------------------------------------- USBC* $10.5 $15.9 Piper Jaffray 16.3 17.5 Western Bancorp 16.8 20.8 Peninsula Bank 6.8 -- Bank of Commerce 6.6 7.5 Zappco, Inc. 4.0 4.1 Northwest Bancshares, Inc. 3.1 3.5 Other acquisitions .1 2.6 ----- ----- Total $64.2 $71.9 ===== =====
* The USBC accrual represented severance related amounts only. With respect to completed acquisitions, additional merger-related charges of approximately $45 million on a pre-tax basis are expected to be incurred in 2000. NOTE I SHAREHOLDERS' EQUITY The Company issued 4,326,950 shares of common stock with an aggregate value of $98.3 million in conjunction with acquisitions during the three months ended March 31, 2000. On February 16, 2000, the Company announced a share repurchase program of up to $2.5 billion of common stock over the period ending March 31, 2002. The new share repurchase program replaced a program that was scheduled to expire on March 31, 2000. The shares will be repurchased in the open market or through negotiated transactions. Under these programs, the Company has repurchased 51.3 million shares for $1.7 billion, including 10.0 million shares for $205.3 million in the first quarter of 2000. NOTE J EARNINGS PER SHARE The components of earnings per share were:
Three Months Ended -------------------------- March 31 March 31 (Dollars in Millions, Except Per Share Data) 2000 1999 ------------------------------------------------------------------------------------------ EARNINGS PER SHARE: Net income to common stockholders........................... $379.0 $366.8 ----------------------- Average shares outstanding.................................. 748,339,548 722,637,379 ----------------------- Earnings per share.......................................... $ .51 $ .51 ----------------------- DILUTED EARNINGS PER SHARE: Net income to common stockholders........................... $379.0 $366.8 ----------------------- Average shares outstanding.................................. 748,339,548 722,637,379 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.................. 1,803,414 5,664,720 ----------------------- Dilutive common shares outstanding.......................... 750,142,962 728,302,099 ----------------------- Diluted earnings per share.................................. $ .51 $ .50 ------------------------------------------------------------------------------------------
U.S. Bancorp 21 23 NOTE K COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS In the normal course of business, the Company uses various off-balance sheet financial instruments to manage its interest rate and market risk and to meet the needs of its customers. These instruments carry varying degrees of credit, interest rate and liquidity risk. The contract or notional amounts of these financial instruments were as follows:
March 31 December 31 (Dollars in Millions) 2000 1999 ---------------------------------------------------------------------------------------- Commitments to extend credit Commercial............................................... $27,224 $28,222 Corporate and purchasing cards........................... 18,515 18,503 Consumer credit cards.................................... 15,015 14,991 Other consumer........................................... 6,477 6,388 Letters of credit Standby.................................................. 3,340 3,222 Commercial............................................... 362 317 Interest rate swap contracts Hedges................................................... 7,432 7,743 Intermediated............................................ 506 556 Options contracts Hedge interest rate floors purchased..................... 500 500 Intermediated interest rate and foreign exchange caps and floors purchased........................................ 529 453 Intermediated interest rate and foreign exchange caps and floors written.......................................... 529 453 Futures and forward contracts............................... 28 34 Recourse on assets sold..................................... 109 117 Foreign currency commitments Commitments to purchase.................................. 1,400 1,137 Commitments to sell...................................... 1,420 1,141 Commitments from securities lending......................... 747 717 ----------------------------------------------------------------------------------------
The Company received fixed-rate interest and paid variable-rate interest on substantially all swaps in its hedging portfolio as of March 31, 2000. Activity for the three months ended March 31, 2000, with respect to interest rate swaps which the Company uses to hedge loans, deposits and long-term debt was as follows:
(Dollars in Millions) ---------------------------------------------------------------------- Notional amount outstanding at December 31, 1999............ $ 7,743 Additions................................................... 540 Terminations................................................ (674) Amortization................................................ (177) ----- Notional amount outstanding at March 31, 2000............... $ 7,432 ---------------------------------------------------------------------- Weighted average interest rate paid......................... 6.11% Weighted average interest rate received..................... 6.27 ----------------------------------------------------------------------
LIBOR-based interest rate floors totaling $500 million with an average remaining maturity of 1.5 years at March 31, 2000, and $500 million with an average remaining maturity of 1.7 years at December 31, 1999, hedged floating rate commercial loans. The strike rate on these LIBOR-based floors was 4.63 percent at March 31, 2000, and December 31, 1999. Net unamortized deferred losses relating to swaps, options and futures were $31.3 million at March 31, 2000. 22 U.S. Bancorp 24 NOTE L SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET Time certificates of deposit in denominations of $100,000 or more totaled $5,805 million and $5,809 million at March 31, 2000, and December 31, 1999, respectively. CONSOLIDATED STATEMENT OF CASH FLOWS Listed below are supplemental disclosures to the Consolidated Statement of Cash Flows.
Three Months Ended ----------------------- March 31 March 31 (Dollars in Millions) 2000 1999 --------------------------------------------------------------------------------------- Income taxes paid........................................... $ 27.2 $ 13.5 Interest paid............................................... 667.4 546.1 Net noncash transfers to foreclosed property................ 8.3 5.3 Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $13.0 in 2000 and $11.1 in 1999....................................................... (21.2) (18.1) ------------------- Cash acquisitions of businesses Fair value of noncash assets acquired.................... $ -- $ 21.8 Liabilities assumed...................................... -- -- ------------------- Net................................................... $ -- $ 21.8 ------------------- Stock acquisitions of businesses Fair value of noncash assets acquired.................... $ 499.2 $ 42.3 Net cash acquired........................................ 67.0 3.6 Liabilities assumed...................................... (467.9) (9.5) ------------------- Net value of common stock issued...................... $ 98.3 $ 36.4 ---------------------------------------------------------------------------------------
U.S. Bancorp 23 25 CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
For the Three Months Ended March 31 2000 1999 --------------------------------------------------------------------------------------------------------------------------------- Yields Yields % Change (Dollars in Millions) and and Average (Unaudited) Balance Interest Rates Balance Interest Rates Balance --------------------------------------------------------------------------------------------------------------------------------- ASSETS Available-for-sale securities U.S. Treasury.......................... $ 384 $ 5.4 5.66% $ 482 $ 6.8 5.72% (20.3)% U.S. agencies and other mortgage-backed...................... 2,916 49.3 6.80 3,240 53.4 6.68 (10.0) State and political.................... 1,117 21.0 7.56 1,177 22.2 7.65 (5.1) U.S. agencies and other................ 490 5.3 4.35 332 4.1 5.01 47.6 ----------------- ------------------- Total available-for-sale securities......................... 4,907 81.0 6.64 5,231 86.5 6.71 (6.2) Unrealized (loss) gain on available-for-sale securities...... (142) 106 ** ------ ------- Net available-for-sale securities.... 4,765 5,337 (10.7) Trading account securities.............. 699 15.3 8.80 558 9.2 6.69 25.3 Federal funds sold and resale agreements............................. 569 6.6 4.67 519 4.8 3.75 9.6 Loans Commercial Commercial........................... 29,564 603.2 8.21 26,018 479.9 7.48 13.6 Real estate Commercial mortgage................ 10,014 214.6 8.62 8,234 173.5 8.55 21.6 Construction....................... 4,367 100.0 9.21 3,252 71.0 8.85 34.3 ----------------- ------------------- Total commercial................... 43,945 917.8 8.40 37,504 724.4 7.83 17.2 Consumer Home equity and second mortgage...... 8,744 209.1 9.62 7,484 174.4 9.45 16.8 Credit card.......................... 4,094 142.1 13.96 4,013 123.3 12.46 2.0 Other................................ 4,293 109.5 10.26 7,055 161.7 9.30 (39.1) ----------------- ------------------- Subtotal........................... 17,131 460.7 10.82 18,552 459.4 10.04 (7.7) Residential mortgage................. 2,633 50.7 7.74 3,025 57.7 7.74 (13.0) ----------------- ------------------- Total consumer..................... 19,764 511.4 10.41 21,577 517.1 9.72 (8.4) ----------------- ------------------- Total loans........................ 63,709 1,429.2 9.02 59,081 1,241.5 8.52 7.8 Allowance for credit losses............ 1,029 998 3.1 ------ ------- Net loans............................ 62,680 58,083 7.9 Other earning assets.................... 2,260 48.4 8.61 1,349 20.7 6.22 67.5 ----------------- ------------------- Total earning assets*.............. 72,144 1,580.5 8.81 66,738 1,362.7 8.28 8.1 Other assets............................ 10,798 9,261 16.6 ------ ------- Total assets....................... $81,771 $75,107 8.9% ------ ------- LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits............ $14,094 $13,544 4.1% Interest-bearing deposits Interest checking...................... 6,210 32.3 2.09 6,026 25.5 1.72 3.1 Money market accounts.................. 12,588 124.8 3.99 12,180 105.8 3.52 3.3 Other savings accounts................. 2,096 9.4 1.80 2,281 10.0 1.78 (8.1) Savings certificates................... 9,251 125.8 5.47 10,123 125.3 5.02 (8.6) Certificates over $100,000............. 5,464 80.6 5.93 3,466 45.0 5.27 57.6 ----------------- ------------------- Total interest-bearing deposits.... 35,609 372.9 4.21 34,076 311.6 3.71 4.5 Short-term borrowings................... 3,593 57.4 6.43 4,104 52.3 5.17 (12.5) Long-term debt.......................... 17,082 268.6 6.32 13,967 186.1 5.40 22.3 Company-obligated mandatorily redeemable preferred securities................... 950 19.3 8.17 950 19.3 8.24 -- ----------------- ------------------- Total interest-bearing liabilities...................... 57,234 718.2 5.05 53,097 569.3 4.35 7.8 Other liabilities....................... 2,746 2,378 15.5 Common equity........................... 7,783 6,022 29.2 Accumulated other comprehensive income................................. (86) 66 ** ------ ------- Total liabilities and shareholders' equity........................... $81,771 $75,107 8.9% ------ ------- ---------- Net interest income..................... $ 862.3 $ 793.4 ------- ------- Gross interest margin................... 3.76% 3.93% ------ ------ Gross interest margin without taxable-equivalent increments.......... 3.67% 3.87% ------ ------ Net interest margin..................... 4.81% 4.82% ------ ------ Net interest margin without taxable-equivalent increments.......... 4.71% 4.76% -------------------------------------------------------------------------------------------------------------
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 (loss) gain on available-for-sale securities. **Not meaningful. 24 U.S. Bancorp 26 PART II -- OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES -- On April 7, 2000, the Company issued 2,642,708 shares of common stock with an aggregate value of $47.6 million as consideration in connection with a merger transaction. These common shares were issued in a private placement transaction exempt from registration under Section 4(2) of the Securities Act of 1933. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- The 2000 Annual Meeting of Shareholders of U.S. Bancorp was held Wednesday, April 19, 2000, at the Minneapolis Convention Center. John F. Grundhofer, Chairman and Chief Executive Officer, presided. The holders of 627,332,945 shares of common stock, 83.6 percent of the 750,624,900 outstanding shares entitled to vote as of the record date, were represented at the meeting in person or by proxy. The candidates for election as Class II Directors listed in the proxy statement were elected to serve three-year terms expiring at the 2003 annual shareholders' meeting. The proposal to approve the U.S. Bancorp Executive Incentive Plan was approved. The proposal to ratify the appointment of Ernst & Young LLP as the Company's independent auditors for the year ending December 31, 2000, was approved. The shareholder proposal for the annual election of all Directors and the elimination of the Company's classified Board of Directors, was not approved because it did not receive the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the matter (broker non-votes are not counted for purposes of calculating the vote and have no affect on the outcome). SUMMARY OF MATTERS VOTED UPON BY SHAREHOLDERS
Number of Shares ------------------------------------------------------ For Withheld ------------------------------------------------------------------------------------------ Election of Class II Directors: Harry L. Bettis.......................................... 613,431,859 13,901,086 Peter H. Coors........................................... 612,475,398 14,857,547 Joshua Green III......................................... 612,180,419 15,152,526 Paul A. Redmond.......................................... 612,847,790 14,485,155 S. Walter Richey......................................... 612,661,339 14,671,606 For Against Abstain Non-Vote ---------------------------------------------------------------------------------------------------------------------- Other Matters: Approval of Executive Incentive Plan........................ 546,167,238 71,570,066 9,595,641 0 Ratification of appointment of Ernst & Young LLP as independent auditors....................................... 618,622,695 4,041,574 4,668,676 0 Proposal for the annual election of all Directors........... 266,276,695 245,368,197 23,418,567 92,269,486 ----------------------------------------------------------------------------------------------------------------------
For a copy of the meeting minutes, please write to the Office of the Secretary, U.S. Bancorp, 601 Second Avenue South, Minneapolis, Minnesota 55402-4302. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 12 Computation of Ratio of Earnings to Fixed Charges. 27 Article 9 Financial Data Schedule.* * Copies of this exhibit will be furnished upon request and payment of the Company's reasonable expenses in furnishing the exhibit. (B) REPORTS ON FORM 8-K During the three months ended March 31, 2000, the Company filed no Current Reports on Form 8-K. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. U.S. BANCORP By: /s/ TERRANCE R. DOLAN ------------------------------------------ Terrance R. Dolan Senior Vice President and Controller (Chief Accounting Officer and Duly Authorized Officer) DATE: January 10, 2001 U.S. Bancorp 25 27 EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Three Months Ended March 31 -------- (Dollars in Millions) 2000 ------------------------------------------------------------------------ EARNINGS 1. Net income.............................................. $ 379.0 2. Applicable income taxes................................. 206.8 ------ 3. Net income before taxes (1 + 2)......................... $ 585.8 ------ 4. Fixed charges: a. Interest expense excluding interest on deposits...... $ 345.3 b. Portion of rents representative of interest and amortization of debt expense........................... 12.9 ------ c. Fixed charges excluding interest on deposits (4a + 4b).................................................... 358.2 d. Interest on deposits................................. 372.9 ------ e. Fixed charges including interest on deposits (4c + 4d).................................................... $ 731.1 ------ 5. Amortization of interest capitalized.................... $ -- 6. Earnings excluding interest on deposits (3 + 4c + 5).... 944.0 7. Earnings including interest on deposits (3 + 4e + 5).... 1,316.9 8. Fixed charges excluding interest on deposits (4c)....... 358.2 9. Fixed charges including interest on deposits (4e)....... 731.1 RATIO OF EARNINGS TO FIXED CHARGES 10. Excluding interest on deposits (line 6/line 8).......... 2.64 11. Including interest on deposits (line 7/line 9).......... 1.80 ------------------------------------------------------------------------
26 U.S. Bancorp 28 [US BANCORP LOGO(R)] U.S. Bank Place 601 Second Avenue South Minneapolis, Minnesota 55402-4302 www.usbank.com SHAREHOLDER INQUIRIES COMMON STOCK TRANSFER AGENT AND REGISTRAR First Chicago Trust Company of New York, a division of EquiServe, 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 Trust's Shareholder Services Center at (800) 446-2617. Representatives are available weekdays 8:30 a.m. to 7:00 p.m. Eastern time, and the interactive voice response system is available 24 hours a day, seven days a week. The TDD telephone number for the hearing impaired is (201) 222-4955. First Chicago Trust Company of New York c/o EquiServe Mailing address: P.O. Box 2500, Jersey City, New Jersey 07303-2500 Telephone: (201) 324-0498 Fax: (201) 222-4892 Internet address: www.equiserve.com E-mail address: fctc@em.fcnbd.com If you own shares in a book-entry or plan account maintained by First Chicago Trust, you can access your account information through First Chicago Trust's Web site. To obtain a password that provides you secured access to your account, please call First Chicago Trust toll free at (877) THE-WEB7 (outside North America call (201) 536-8071). 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 Trust at (800) 446-2617. DIVIDEND REINVESTMENT PLAN U.S. Bancorp shareholders can take advantage of a plan that provides automatic reinvestment of dividends and/or optional cash purchases of additional shares of U.S. Bancorp Common Stock up to $60,000 per calendar year. For more information, please contact First Chicago Trust Company of New York, c/o EquiServe P.O. Box 2598, Jersey City, New Jersey, 07303-2598, (800) 446-2617. INVESTMENT COMMUNITY CONTACTS John R. Danielson Senior Vice President, Investor Relations (612) 973-2261 john.danielson@usbank.com Judith T. Murphy Vice President, Investor Relations (612) 973-2264 judith.murphy@usbank.com FINANCIAL INFORMATION U.S. Bancorp news and financial results are available through the Company's Web site, fax, and mail. Web site. For information about U.S. Bancorp, including news and financial results, product information, and service locations, access our home page on the Internet at www.usbank.com. Fax. To access our fax-on-demand service, call (800) 758-5804. When asked, enter U.S. Bancorp's extension number, "312402." Enter "1" for the most current news release or "2" for a menu of news releases. Enter your fax and telephone numbers as directed. The information will be faxed to you promptly. Mail. At your request, we will mail to you our quarterly earnings news releases, quarterly financial report on Form 10-Q, and additional annual reports. To be added to U.S. Bancorp's mailing list for quarterly earnings news releases, or to request other information, please contact: Investor Relations U.S. Bancorp 601 Second Avenue South Minneapolis, Minnesota 55402-4302 (612) 973-2263 corprelations@usbank.com