10-Q/A 1 c59328ae10-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 JUNE 30, 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 July 31, 2000 Common Stock, $1.25 Par Value 745,804,608 shares
-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 FINANCIAL SUMMARY
Three Months Ended Six Months Ended --------------------------------------------- June 30 June 30 June 30 June 30 (Dollars in Millions, Except Per Share Data) 2000 1999 2000 1999 ----------------------------------------------------------------------------------------------------------------------------------- Income before merger-related charges and available-for-sale securities transactions $ 402.6 $ 383.8 $ 790.2 $ 752.4 Merger-related charges and available-for-sale securities transactions (9.5) (9.5) (18.1) (11.3) --------- --------- --------- --------- Net income $ 393.1 $ 374.3 $ 772.1 $ 741.1 ========= ========= ========= ========= PER COMMON SHARE Earnings per share $ .53 $ .52 $ 1.03 $ 1.03 Diluted earnings per share .52 .51 1.03 1.02 Dividends paid .215 .195 .43 .39 Common shareholders' equity 10.62 8.70 FINANCIAL RATIOS Return on average assets 1.88% 1.97% 1.87% 1.98% Return on average common equity 20.1 23.8 19.9 24.1 Efficiency ratio 53.0 50.9 53.7 50.8 Net interest margin (taxable-equivalent basis) 4.75 4.86 4.78 4.84 ========= ========= ========= ========= SELECTED FINANCIAL RATIOS BEFORE MERGER-RELATED CHARGES AND AVAILABLE-FOR-SALE SECURITIES TRANSACTIONS Return on average assets 1.93% 2.02% 1.92% 2.01% Return on average common equity 20.5 24.4 20.4 24.5 Efficiency ratio 52.1 49.9 52.8 50.1 Banking efficiency ratio* 44.7 42.4 45.0 42.9 --------- --------- --------- ---------
June 30 December 31 2000 1999 ------------------------ PERIOD END Loans $ 67,384 $ 62,885 Allowance for credit losses 1,039 995 Assets 86,174 81,530 Total shareholders' equity 7,931 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 10.7 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)................................................... 14 Financial Statements (Item 1)............................... 17 PART II -- OTHER INFORMATION Exhibits and Reports on Form 8-K (Item 6)................... 29 Signature................................................... 29 Exhibit 12 -- Computation of Ratio of Earnings to Fixed Charges.................................................... 30
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. These forward-looking statements cover, among other things, anticipated future expenses and revenues, the future prospects of U.S. Bancorp's (the "Company's") consumer banking business and estimated spending on growth initiatives. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including the following, in addition to those contained elsewhere in this Form 10-Q/A and in the Company's other reports on file with the SEC: (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, a change in the allowance for credit losses, 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 and could increase credit losses; (iv) the conditions of the securities markets could change, adversely affecting revenues from capital markets businesses, the value or credit quality of the Company's on-balance sheet and off-balance sheet assets, or the availability and terms of funding necessary to meet the Company's liquidity needs; (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 $393.1 million in the second quarter of 2000, or $.52 per diluted share, compared with $374.3 million, or $.51 per diluted share, in the second quarter of 1999. Return on average assets and return on average common equity were 1.88 percent and 20.1 percent, respectively, in the second quarter of 2000, compared with returns of 1.97 percent and 23.8 percent in the second quarter of 1999. Net income reflects merger-related charges and available-for-sale securities transactions of $9.5 million ($14.7 million on a pre-tax basis) in the second quarter of 2000 compared with $9.5 million ($15.0 million on a pre-tax basis) in the second quarter of 1999. The Company reported second quarter of 2000 operating earnings (net income excluding merger-related charges and available-for-sale securities transactions) of $402.6 million, compared with $383.8 million for the second quarter of 1999. On a diluted share basis, operating earnings were $.54 in the second quarter of 2000, compared with $.53 in the second quarter of 1999, an increase of 2 percent. Operating earnings on a cash basis were $.62 per diluted share in the second quarter of 2000, compared with $.58 per diluted share in the second quarter of 1999, an increase of 7 percent. Return on average assets and return on average common equity, excluding merger-related charges and available-for-sale securities transactions, were 1.93 percent and 20.5 percent, respectively, in the second quarter of 2000, compared with returns of 2.02 percent and 24.4 percent, respectively, in the second quarter of 1999. The reduction in the Company's return on average common equity from the second quarter of 1999 reflects the impact of recent acquisitions, which were accounted for using the purchase method of accounting. Excluding merger-related charges, the efficiency ratio (the ratio of expenses to revenues) was 52.1 percent in the second quarter of 2000, compared with 49.9 percent in the second quarter of 1999. The change in the efficiency ratio was related to continuing investments in sales, service quality and technology. The banking efficiency ratio (the ratio of expenses to revenues without the impact of investment banking and brokerage activity) before merger-related charges was 44.7 percent in the second quarter of 2000, compared with 42.4 percent in the second quarter of 1999. Total revenue on a taxable-equivalent basis, before available-for-sale securities transactions, grew by $202.0 million, or 14 percent, over the second quarter of 1999. The increase in total revenue was driven by core loan growth, credit card fee revenue and acquisitions. Excluding the impact of acquisitions and divestitures, total revenue on a taxable-equivalent basis, before available-for-sale securities transactions, in the second quarter of 2000 would have been approximately 9 percent higher than the second quarter of 1999. Offsetting the growth in total revenue were increases in noninterest expense of $138.8 million and provision for credit losses of $37.0 million over the second quarter of 1999. The growth in expense was primarily due to an increase in expense related to acquisitions, investment banking and brokerage activity and additional investments in sales, service quality and technology. In addition to the growth in the Company's ongoing technology investment in Internet-related products and services, the second quarter of 2000 included approximately $11.2 million of Internet infrastructure-related expense. As anticipated, the Internet infrastructure-related expense was more than offset in the second quarter by a $35 million gain on the disposal of the Company's ownership interest in a Portland office building. The provision for credit losses of $163 million was an increase of $37 million from $126 million in the same quarter of 1999. Nonperforming assets increased from $366.6 million at March 31, 2000, to $404.4 million at June 30, 2000, principally due to one commercial credit. The ratio of allowance for credit losses to nonperforming loans was 285 percent at June 30, 2000, compared with 310 percent at March 31, 2000 and 321 percent at December 31, 1999. Net income in the first six months of 2000 was $772.1 million or $1.03 per diluted share, compared with $741.1 million, or $1.02 per diluted share, in the first six months of 1999. Return on average assets and return on average common equity were 1.87 percent and 19.9 percent, respectively, in the first six months of 2000, compared with returns of 1.98 percent and 24.1 percent, respectively, in the same period of 1999. Net income reflects merger-related charges of $18.1 million ($28.1 million on a pre-tax basis) in the first half of 2000, compared with $11.3 million ($17.9 million on a pre-tax basis) in the first half of 1999. 2 U.S. Bancorp 4 TABLE 1 SUMMARY OF CONSOLIDATED INCOME
Three Months Ended Six Months Ended ---------------------------------------------- (Taxable-equivalent Basis; June 30 June 30 June 30 June 30 Dollars In Millions, Except Per Share Data) 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------- CONDENSED INCOME STATEMENT Interest income............................................. $1,672.2 $1,395.6 $3,252.7 $2,758.3 Interest expense............................................ 792.4 572.3 1,510.6 1,141.6 ---------------------------------------------- Net interest income...................................... 879.8 823.3 1,742.1 1,616.7 Provision for credit losses................................. 163.0 126.0 317.0 243.0 ---------------------------------------------- Net interest income after provision for credit losses.... 716.8 697.3 1,425.1 1,373.7 Available-for-sale securities gains......................... .3 -- -- -- Other noninterest income.................................... 801.4 655.9 1,597.1 1,282.2 Merger-related charges...................................... 15.0 15.0 28.1 17.9 Other noninterest expense................................... 876.6 737.8 1,764.5 1,453.7 ---------------------------------------------- Income before income taxes............................... 626.9 600.4 1,229.6 1,184.3 Taxable-equivalent adjustment............................... 17.5 10.7 34.4 21.4 Income taxes................................................ 216.3 215.4 423.1 421.8 ---------------------------------------------- Net income............................................... $ 393.1 $ 374.3 $ 772.1 $ 741.1 ---------------------------------------------- ---------------------------------------------- FINANCIAL RATIOS Return on average assets.................................... 1.88% 1.97% 1.87% 1.98% Return on average common equity............................. 20.1 23.8 19.9 24.1 Net interest margin (taxable-equivalent basis).............. 4.75 4.86 4.78 4.84 Efficiency ratio............................................ 53.0 50.9 53.7 50.8 Efficiency ratio before merger-related charges.............. 52.1 49.9 52.8 50.1 Banking efficiency ratio before merger-related charges*..... 44.7 42.4 45.0 42.9 ---------------------------------------------- ---------------------------------------------- PER COMMON SHARE Earnings per share.......................................... $ .53 $ .52 $ 1.03 $ 1.03 Diluted earnings per share.................................. .52 .51 1.03 1.02 Dividends paid.............................................. .215 .195 .43 .39 -------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------
*Without investment banking and brokerage activity. Operating earnings in the first six months of 2000 were $790.2 million compared with $752.4 million in the first six months of 1999. On a diluted per share basis, operating earnings were $1.05 in the first half of 2000, compared with $1.03 in the first half of 1999, an increase of 2 percent. On a diluted per share basis, cash operating earnings were $1.21 in the first six months of 2000, compared with $1.13 in the first six months of 1999, an increase of 7 percent. Year-to-date return on average assets and return on average common equity, excluding merger-related charges, were 1.92 percent and 20.4 percent, respectively, compared with returns of 2.01 percent and 24.5 percent, respectively, in the first half of 1999. Excluding merger-related charges, the efficiency ratio was 52.8 percent in the first six months of 2000, compared with 50.1 percent in the first six months of 1999. On a similar basis, the banking efficiency ratio was 45.0 percent in the first six months of 2000, compared with 42.9 percent in the first six months of 1999. 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 nonrecurring 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 performances 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 in the first six months of 2000 reflect purchase and divestiture transactions from or to the date of completion. On April 7, 2000, the Company acquired Oliver-Allen Corporation, Inc., a privately held information technology leasing company. 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 U.S. Bancorp 3 5 TABLE 2 LINE OF BUSINESS FINANCIAL PERFORMANCE
Wholesale Consumer Banking Banking --------------------------------------------------------------------------- For the Three Months Ended June 30 Percent Percent (Dollars in Millions) 2000 1999 Change 2000 1999 Change --------------------------------------------------------------------------------------------------------------------------------- CONDENSED INCOME STATEMENT Net interest income (taxable-equivalent basis).... $ 414.5 $ 353.7 17.2% $ 338.6 $ 329.3 2.8% Provision for credit losses....................... 30.9 26.1 18.4 45.7 50.1 (8.8) Noninterest income................................ 135.1 104.6 29.2 131.5 114.7 14.6 Noninterest expense............................... 212.4 184.5 15.1 223.2 206.8 7.9 Goodwill and other intangible assets expense...... 26.8 15.6 71.8 13.8 9.7 42.3 Income taxes and taxable-equivalent adjustment.... 104.1 87.3 19.2 69.8 66.8 4.5 ---------------------- --------------------- Income before merger-related charges and available-for-sale securities transactions..... $ 175.4 $ 144.8 21.1 $ 117.6 $ 110.6 6.3 ---------------------- --------------------- ---------------------- --------------------- Net merger-related charges and available-for-sale securities transactions (after-tax)*........... Net income........................................ AVERAGE BALANCE SHEET DATA Loans............................................. $ 41,264 $ 34,896 18.2 $11,158 $ 12,850 (13.2) Assets............................................ 45,536 38,238 19.1 12,688 13,955 (9.1) Deposits.......................................... 11,664 10,627 9.8 31,069 30,524 1.8 Common equity..................................... 4,865 3,574 36.1 1,256 1,121 12.0 ---------------------- --------------------- Return on average assets.......................... 1.55% 1.52% 3.73% 3.18% Return on average common equity ("ROCE").......... 14.5 16.3 37.7 39.6 Efficiency ratio.................................. 43.5 43.7 50.4 48.8 Efficiency ratio on a cash basis**................ 38.6 40.3 47.5 46.6 --------------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------------
Wholesale Consumer Banking Banking --------------------------------------------------------------------------- For the Six Months Ended June 30 Percent Percent (Dollars in Millions) 2000 1999 Change 2000 1999 Change ------------------------------------------------------------------------------------------------------------------------------- CONDENSED INCOME STATEMENT Net interest income (taxable-equivalent basis)......................................... $ 814.7 $ 700.6 16.3% $ 672.3 $ 652.3 3.1% Provision for credit losses..................... 60.6 51.6 17.4 98.4 98.2 .2 Noninterest income.............................. 237.5 208.3 14.0 249.5 218.4 14.2 Noninterest expense............................. 419.4 365.3 14.8 444.7 420.6 5.7 Goodwill and other intangible assets expense.... 52.5 31.4 67.2 27.3 19.3 41.5 Income taxes and taxable-equivalent adjustment................................... 193.2 172.3 12.1 130.6 124.5 4.9 ---------------------- --------------------- Income before merger-related charges and available-for-sale securities transactions..... $ 326.5 $ 288.3 13.3 $ 220.8 $ 208.1 6.1 ---------------------- --------------------- ---------------------- --------------------- Net merger-related charges and available-for-sale securities transactions (after-tax)*................................... Net income...................................... AVERAGE BALANCE SHEET DATA Loans........................................... $ 40,422 $ 34,409 17.5 $11,129 $ 12,832 (13.3) Assets.......................................... 44,652 37,737 18.3 12,654 13,974 (9.4) Deposits........................................ 11,606 10,790 7.6 30,921 30,745 .6 Common equity................................... 4,779 3,560 34.2 1,254 1,143 9.7 ---------------------- --------------------- Return on average assets........................ 1.47% 1.54% 3.51% 3.00% Return on average common equity ("ROCE")........ 13.7 16.3 35.4 36.7 Efficiency ratio................................ 44.8 43.6 51.2 50.5 Efficiency ratio on a cash basis**.............. 39.9 40.2 48.2 48.3 ------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------
*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 the amortization of goodwill and other intangibles. ***Not meaningful. 4 U.S. Bancorp 6
Payment Wealth Management and Corporate Consolidated Systems Capital Markets Support Company ----------------------------------------------------------------------------------------------------------------------------- Percent Percent Percent 2000 1999 Change 2000 1999 Change 2000 1999 2000 1999 Change ----------------------------------------------------------------------------------------------------------------------------- $ 86.2 $ 87.4 (1.4)% $ 48.1 $ 41.7 15.3% $ (7.6) $ 11.2 $ 879.8 $ 823.3 6.9% 81.7 73.0 11.9 1.4 1.1 27.3 3.3 (24.3) 163.0 126.0 29.4 205.9 158.6 29.8 321.6 294.2 9.3 7.3 (16.2) 801.4 655.9 22.2 113.7 94.6 20.2 289.3 250.7 15.4 (20.4) (35.4) 818.2 701.2 16.7 11.0 5.9 86.4 6.8 5.4 25.9 -- -- 58.4 36.6 59.6 31.9 27.3 16.8 26.9 29.6 (9.1) 6.3 20.6 239.0 231.6 3.2 ------------------- ------------------- ------------------- ------------------- $ 53.8 $ 45.2 19.0 $ 45.3 $ 49.1 (7.7) $ 10.5 $ 34.1 402.6 383.8 4.9 ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- (9.5) (9.5) *** ------------------- $ 393.1 $ 374.3 5.0 ------------------- ------------------- $ 8,554 $ 7,895 8.3 $ 2,945 $ 2,287 28.8 $ 2,077 $ 2,393 $ 65,998 $ 60,321 9.4 9,220 8,341 10.5 6,965 5,419 28.5 9,676 10,119 84,085 76,072 10.5 88 88 -- 3,788 3,319 14.1 3,790 3,421 50,399 47,979 5.0 947 674 40.5 1,325 1,145 15.7 (509) (202) 7,884 6,312 24.9 ------------------- ------------------- ------------------- ------------------- 2.35% 2.17% 2.62% 3.63% 1.93% 2.02% 22.8 26.9 13.8 17.2 20.5 24.4 42.7 40.9 80.1 76.2 52.1 49.9 38.9 38.5 78.3 74.6 48.7 47.4 ----------------------------------------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------------------------------------
Payment Wealth Management and Corporate Consolidated Systems Capital Markets Support Company ----------------------------------------------------------------------------------------------------------------------------- Percent Percent Percent 2000 1999 Change 2000 1999 Change 2000 1999 2000 1999 Change ----------------------------------------------------------------------------------------------------------------------------- $ 181.1 $ 169.5 6.8% $ 95.1 $ 82.8 14.9% $ (21.1) $ 11.5 $1,742.1 $1,616.7 7.8% 156.4 149.2 4.8 2.7 2.1 28.6 (1.1) (58.1) 317.0 243.0 30.5 383.2 298.4 28.4 721.4 567.3 27.2 5.5 (10.2) 1,597.1 1,282.2 24.6 224.5 186.0 20.7 617.3 478.4 29.0 (56.4) (71.0) 1,649.5 1,379.3 19.6 20.6 11.5 79.1 14.6 12.2 19.7 -- -- 115.0 74.4 54.6 60.5 45.4 33.3 67.6 58.9 14.8 15.6 48.7 467.5 449.8 3.9 ------------------- ------------------- ------------------- ------------------- $ 102.3 $ 75.8 35.0 $ 114.3 $ 98.5 16.0 $ 26.3 $ 81.7 790.2 752.4 5.0 ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- (18.1) (11.3) *** ------------------- $ 772.1 $ 741.1 4.2 ------------------- ------------------- $ 8,365 $ 7,782 7.5 $ 2,863 $ 2,201 30.1 $ 2,074 $ 2,481 $ 64,853 $ 59,705 8.6 8,976 8,224 9.1 6,824 5,313 28.4 9,821 10,345 82,927 75,593 9.7 85 75 13.3 3,677 3,200 14.9 3,762 2,991 50,051 47,801 4.7 896 665 34.7 1,302 1,132 15.0 (441) (300) 7,790 6,200 25.6 ------------------- ------------------- ------------------- ------------------- 2.29% 1.86% 3.37% 3.74% 1.92% 2.01% 23.0 23.0 17.7 17.5 20.4 24.5 43.4 42.2 77.4 75.5 52.8 50.1 39.8 39.8 75.6 73.6 49.4 47.6 ----------------------------------------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------------------------------------
U.S. Bancorp 5 7 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 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. 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 the business. On June 27, 2000, the Company announced an agreement to acquire Scripps Financial Corporation which has nine branches in San Diego county and total assets of $650 million. Pending approvals from regulators and Scripps' shareholders, the acquisition is expected to close in the fourth quarter of 2000. 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 public sector clients. The business line contributed operating earnings of $175.4 million in the second quarter of 2000, an increase of 21 percent over the second quarter of 1999, and $326.5 million in the first six months of 2000, a 13 percent increase over the same period of 1999. Return on average assets was 1.55 percent in the second quarter of 2000 and 1.47 percent in the first six months of 2000, compared with 1.52 percent and 1.54 percent for the same periods of 1999. Return on average common equity was 14.5 percent in the second quarter of 2000 and 13.7 in the first six months of 2000, compared with 16.3 percent for both of the same periods of 1999. Net interest income increased 17 percent in the second quarter and 16 percent in the first six months of 2000, compared with the same periods of 1999. Strong growth in net interest income was primarily due to core commercial loan growth and bank acquisitions. Average loan balances increased 18 percent in the second quarter and 18 percent in the first six months of 2000, compared with the same periods of 1999. Excluding acquisitions, average loan balances increased 11.0 percent and 10.6 percent for the same periods. The increase in the provision for credit losses of 18 percent for the second quarter of 2000 and 17 percent for the first six months also reflects growth in the loan portfolio. Noninterest income increased 29 percent in the second quarter and 14 percent in the first six months of 2000, compared with the same periods of the prior year. The increase in noninterest income is primarily due to bank and leasing acquisitions, the timing of ongoing sales of SBA loans, and earnings from relationship-based equity investments. Acquisitions provided incremental noninterest income of $9.1 million and $11.0 million for the second quarter and first six months of 2000, respectively. Noninterest expense (excluding amortization of intangible assets) increased 15 percent in the second quarter and 15 percent in the first six months of 2000, compared with the same periods of 1999. The increase in noninterest expense was primarily due to acquisitions. Acquisitions added incremental noninterest expense of $14.3 million and $26.3 million in the second quarter and first six months of 2000, respectively. Goodwill and other intangible asset expense increased 72 percent for the second quarter of 2000, compared with the second quarter of 1999 primarily due to the acquisitions of Bank of Commerce in July 1999, Western Bancorp in November 1999, Peninsula Bank of San Diego in January 2000, and Oliver Allen in April 2000. The efficiency ratio on a cash basis improved to 38.6 percent in the second quarter and 39.9 percent in the first six months of 2000, compared with 40.3 percent and 40.2 percent in the same periods of 1999. 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"). The business line contributed operating earnings of $117.6 million during the second quarter of 2000 and $220.8 million for the first six months of 2000, increases of 6 percent over the same periods of 1999. Second quarter and year-to-date return on average assets improved to 3.73 percent and 3.51 percent, respectively, compared with 3.18 percent and 3.00 percent in the same periods of the prior year. Return on average common equity was 37.7 percent in the second quarter and 35.4 percent in the first half of 2000, compared with 39.6 percent and 36.7 percent in the same periods of 1999. Total revenue grew 6 percent in both the second quarter and first six months of 2000 compared with the same periods in 1999. The increased value of deposits in a rising interest rate environment and growth in fee income and home equity lending more than offset the 6 U.S. Bancorp 8 reduction in the indirect automobile loan portfolio. Deposit service charges and debit card fees increased $9.4 million or 10 percent over the second quarter 1999 and $16 million or 9 percent over the first six months of 1999. Average home equity loan and line balances increased 14 percent in the second quarter and 15 percent in the first six months of 2000, compared with the same period in 1999. Average balances for the indirect automobile loan portfolio decreased 75 percent and 74 percent for the same periods, due to the September 1999 sale of $1.8 billion of indirect automobile loans and the continued run off of the remaining portfolio. Total revenue from the indirect automobile portfolio decreased $14.8 million or 56 percent in the second quarter and $30.2 million or 55 percent in the first six months of 2000, compared with the same periods in 1999. A reduction in the business line's provision for credit losses, primarily due to improved deposit fraud management and the divestiture of the indirect automobile portfolio, also contributed to the increase in operating earnings over the second quarter and first six months of 1999. Noninterest expense (excluding amortization of intangible assets) for the second quarter of 2000 increased 8 percent over the second quarter of 1999, and 6 percent for the first six months of 2000 compared with the same period of 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 4.1 million or 43 percent for the second quarter and $8.0 million or 42 percent for the first six months of 2000, compared with the same periods of the prior year 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. PAYMENT SYSTEMS Payment Systems includes consumer and business credit cards, corporate and purchasing card services, consumer lines of credit, ATM processing and merchant processing. The business line contributed operating earnings of $53.8 million in the second quarter of 2000, an increase of 19 percent over the second quarter of 1999, and $102.3 million for the first six months of 2000, representing a 35 percent increase over the same period of 1999. Second quarter and year-to-date return on average assets improved to 2.35 percent and 2.29 percent, respectively, compared with 2.17 percent and 1.86 percent in the same periods of the prior year. Return on average common equity was 22.8 percent and 23.0 percent in the second quarter and first half of 2000, respectively, compared with 26.9 percent and 23.0 percent in the same periods of 1999. Total revenue grew 19 percent and 21 percent over the second quarter and first six months of 1999, respectively. Strong growth in corporate and retail card product fees and ATM processing-related revenue was partially offset by a slight reduction in net interest income, reflecting the growth in the business line's noninterest-bearing corporate card loans. Corporate and retail card product fees increased $20.8 million or 15 percent and $52.4 million or 21 percent over the second quarter and first six months of 1999, respectively. ATM processing-related revenue increase $17.2 million or 115 percent and $30.6 million or 100 percent over the second quarter and first six months of 1999, respectively. This increase is due to the Mellon Network Services acquisition in June 1999. Average noninterest-bearing corporate-card loan balances increased $231 million or 16 percent and $178 million or 13 percent over the second quarter and first six months of 1999, respectively. Payment Systems' revenue growth was partially offset by increases in the provision for credit losses and noninterest expense, reflecting continued growth in transaction volume, marketing and investments in new products and technology. The Mellon Network Services' electronic funds transfer processing unit acquired in June 1999 added incremental direct noninterest expense of $6.6 million and $16.1 million in the second quarter and first six months of 2000, respectively. Marketing expenses increased $4.0 million or 115 percent in the second quarter and $1.0 million or 11 percent in the first six months of 2000, compared to the same period in 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. The business line contributed operating earnings of $45.3 million in the second quarter of 2000, a decrease of 7.7 percent compared with the second quarter of 1999, and $114.3 million for the first six months of 2000, a 16.0 percent increase over the first six months of 1999. Return on average common equity decreased to 13.8 percent, compared with 17.2 percent in the second quarter of the prior year. The return on average common equity improved slightly to 17.7 percent from 17.5 percent in the first six months of 2000, compared with the same period of 1999. During the second quarter of 2000, total revenue grew by 10 percent over the second quarter of 1999 and 26 percent over the first six months of 1999 due to increases in investment banking, trading account profits and commissions, and growth in loans and deposits in Private Financial Services. Investment banking, trading account profits and commissions increased $23.7 million or 12 percent over the second quarter of 1999 and $148.8 million or 40 percent over the first six months of 1999. Average loan balances in Private Financial Services increased $387.2 million or 17 percent over second quarter 1999 and $434.4 million or 20 percent over the first six months of 1999, while average deposit balances increased $235.7 million or 8 percent over second quarter 1999 and $208.7 million or 7 percent over the first six months of 1999. Offsetting the positive impact of revenue growth, noninterest expense (excluding amortization of intangible assets) increased 15 percent in the second quarter and 29 percent in the first six months of 2000, compared with the same periods of 1999. The increases are primarily due to the increase in investment banking and brokerage revenue, incremental office expansion and other growth initiatives. 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 second quarter and first six months of 2000, compared with these periods 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 and the effect of a rising rate environment. U.S. Bancorp 7 9 TABLE 3 ANALYSIS OF NET INTEREST INCOME
Three Months Ended Six Months Ended ---------------------------------------------- June 30 June 30 June 30 June 30 (Dollars In Millions) 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------- Net interest income, as reported............................ $862.3 $812.6 $1,707.7 $1,595.3 Taxable-equivalent adjustment............................ 17.5 10.7 34.4 21.4 ---------------------------------------------- Net interest income (taxable-equivalent basis).............. $879.8 $823.3 $1,742.1 $1,616.7 ---------------------------------------------- ---------------------------------------------- Average yields and weighted average rates (taxable-equivalent basis) Earning assets yield..................................... 9.02% 8.23% 8.92% 8.26% Rate paid on interest-bearing liabilities................ 5.38 4.25 5.22 4.30 ---------------------------------------------- Gross interest margin....................................... 3.64% 3.98% 3.70% 3.96% ---------------------------------------------- ---------------------------------------------- Net interest margin......................................... 4.75% 4.86% 4.78% 4.84% ---------------------------------------------- ---------------------------------------------- Net interest margin without taxable-equivalent increments... 4.65% 4.79% 4.68% 4.78% -------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME ANALYSIS NET INTEREST INCOME Second quarter net interest income on a taxable-equivalent basis was $879.8 million compared with $823.3 million in the second quarter of 1999. Year-to-date net interest income on a taxable-equivalent basis was $1.7 billion, compared with $1.6 billion in the first six months of 1999. The second quarter and year-to-date average earning assets increased 10 percent and 9 percent, respectively, compared with the same periods of 1999. The increase was 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. The net interest margin decreased from 4.86 percent and 4.84 percent in the second quarter and first six months of 1999 to 4.75 percent and 4.78 percent in the second quarter and first six months of 2000. The decrease reflects margin compression on consumer asset products and lagging deposit growth relative to the growth in earning assets. Average loans for both the second quarter and first six months of 2000 increased 9 percent compared with the same periods of the prior year. Excluding indirect automobile and residential mortgage loans, average loans for the second quarter and first six months of 2000 were higher by approximately $8.2 billion (15 percent) and $7.8 billion (15 percent), respectively, than the second quarter and first half of 1999. The decline in indirect automobile 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. Without the bank acquisitions, average loans, excluding indirect automobile and residential mortgage loans, were higher than the second quarter and first six months of 1999 by 10 percent for both periods. Average available-for-sale securities for the second quarter and first six months of 2000 decreased by $378 million and $351 million, respectively, from the second quarter and first half of 1999, reflecting both maturities and sales of securities. TABLE 4 NONINTEREST INCOME
Three Months Ended Six Months Ended ---------------------------------------------- June 30 June 30 June 30 June 30 (Dollars in Millions) 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------- Credit card fee revenue..................................... $177.1 $148.7 $ 336.6 $ 275.5 Trust and investment management fees........................ 117.0 112.2 234.1 229.4 Service charges on deposit accounts......................... 117.5 107.5 226.5 210.9 Investment products fees and commissions.................... 81.8 91.6 198.0 180.2 Investment banking revenue.................................. 72.8 60.3 166.8 96.5 Trading account profits and commissions..................... 58.2 50.5 141.8 102.0 Other....................................................... 177.0 85.1 293.3 187.7 ---------------------------------------------- Total operating noninterest income....................... 801.4 655.9 1,597.1 1,282.2 Available-for-sale securities gains......................... .3 -- -- -- ---------------------------------------------- Total noninterest income................................. $801.7 $655.9 $1,597.1 $1,282.2 -------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------
8 U.S. Bancorp 10 TABLE 5 NONINTEREST EXPENSE
Three Months Ended Six Months Ended ---------------------------------------------- June 30 June 30 June 30 June 30 (Dollars in Millions) 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------- Salaries.................................................... $414.1 $356.7 $ 846.2 $ 710.8 Employee benefits........................................... 69.3 53.6 145.4 123.6 Net occupancy............................................... 55.2 49.9 112.3 99.9 Furniture and equipment..................................... 40.5 39.0 81.6 77.1 Professional services....................................... 24.4 16.6 43.5 30.6 Telephone................................................... 21.8 17.4 43.1 35.4 Advertising and marketing................................... 22.0 12.7 37.8 27.7 Other personnel costs....................................... 19.2 19.8 31.5 32.5 Goodwill and other intangible assets........................ 58.4 36.6 115.0 74.4 Other....................................................... 151.7 135.5 308.1 241.7 ---------------------------------------------- Total operating noninterest expense...................... 876.6 737.8 1,764.5 1,453.7 Merger-related charges...................................... 15.0 15.0 28.1 17.9 ---------------------------------------------- Total noninterest expense................................ $891.6 $752.8 $1,792.6 $1,471.6 ---------------------------------------------- ---------------------------------------------- Efficiency ratio*........................................... 53.0% 50.9% 53.7% 50.8% Efficiency ratio before merger-related charges.............. 52.1 49.9 52.8 50.1 Banking efficiency ratio before merger-related charges**.... 44.7 42.4 45.0 42.9 Average number of full-time equivalent employees............ 28,675 26,667 28,681 26,854 -------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------
*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. PROVISION FOR CREDIT LOSSES In the second quarter of 2000, the provision for credit losses was $163.0 million, an increase of $37 million (29 percent) from $126.0 million in the same quarter of 1999. The provision for credit losses in the first six months of 2000 was $317.0 million, an increase of $74 million (30 percent) from $243 million in the same period 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 Second quarter 2000 noninterest income was $801.7 million, an increase of $145.8 million (22 percent) from the second quarter of 1999. Noninterest income in the first six months of 2000 was $1.60 billion, an increase of $314.9 million (25 percent) from $1.28 billion in the first six months of 1999. Noninterest income in the second quarter of 2000 included net gains from available-for-sale securities transactions of $.3 million. Excluding the impact of acquisitions and divestitures, noninterest income, before available-for-sale securities transactions, in the second quarter and first six months of 2000 would have been approximately 17 percent higher than the second quarter of 1999 and 20 percent higher than the first half of 1999. Investment banking revenue, trading account profits and commissions and investment products fees and commissions were higher in the first six months of 2000 compared with the same period of 1999, due to growth in Wealth Management and Capital Markets. Credit card fee revenue was higher for the second quarter and first six months of 2000, reflecting continued growth in corporate and retail card product fees and ATM processing-related revenue. Service charges on deposit accounts increased $10.0 million (9 percent) in the second quarter of 2000 compared with the second quarter of 1999, and $15.6 million (7 percent) in the first six months of 2000 compared with the same period of a year ago. The increase in other income in 2000 included a $35.0 million second quarter gain on the disposal of the Company's ownership interest in a Portland office building and a $10.8 million first quarter gain on the sale of a Boise building, in addition to growth due to acquisitions and on-going business line initiatives. NONINTEREST EXPENSE Second quarter 2000 noninterest expense, before merger-related charges, totaled $876.6 million, an increase of $138.8 million (19 percent) from $737.8 million in the second quarter of 1999. Year-to-date noninterest expense, before merger-related charges, was $1.76 billion, an increase of U.S. Bancorp 9 11 $310.8 million (21 percent) from $1.45 billion in the first half of 1999. The increase in noninterest expense over the second quarter and first half of 1999 was primarily the result of growth in investment banking, acquisitions and the Company's continuing investment in sales, service quality and technology. In addition to on-going investments in Internet-related products and services, the second quarter and first six months of 2000 included approximately $11.2 million and $20.2 million, respectively, of incremental spending on Internet infrastructure-related initiatives. The banking efficiency ratio, excluding merger-related charges, was 44.7 percent and 45.0 percent for the second quarter and first six months of 2000, respectively, compared with 42.4 percent and 42.9 percent for the same periods 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 its products and services over the Internet. Second quarter of 2000 noninterest expense was $891.6 million, an increase of $138.8 million (18 percent) from $752.8 million in the second quarter of 1999. Year-to-date noninterest expense was $1.79 billion, an increase of $321.0 million (22 percent) from $1.47 billion in the first half of 1999. Noninterest expense in the second quarter and first half of 2000 included nonrecurring merger-related charges of $15.0 million and $28.1 million, compared with merger-related charges of $15.0 million and $17.9 million in the second quarter and first half of 1999. The merger-related charges incurred in 2000 were related to the integration of the Company's various acquisitions, including Western Bancorp and Peninsula Bank of San Diego. INCOME TAX EXPENSE The provision for income taxes was $216.3 million (an effective rate of 35.5 percent) in the second quarter and $423.1 million (an effective rate of 35.4 percent) in the first six months of 2000, compared with $215.4 million (an effective rate of 36.5 percent) and $421.8 million (an effective rate of 36.3 percent) in the same periods of 1999. BALANCE SHEET ANALYSIS LOANS The Company's loan portfolio was $67.4 billion at June 30, 2000, compared with $62.9 billion at December 31, 1999. Commercial loans totaled $47.6 billion at June 30, 2000, up $4.6 billion (11 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 outstandings were $19.8 billion at June 30, 2000, compared with $19.9 billion at December 31, 1999. Excluding indirect automobile loans and residential mortgage loans, consumer loans were $16.7 billion at June 30, 2000, and $16.6 billion at December 31, 1999. SECURITIES At June 30, 2000, available-for-sale securities totaled $4.5 billion, compared with $4.9 billion at December 31, 1999, reflecting both maturities and sales of securities. DEPOSITS Noninterest-bearing deposits were $16.2 billion at June 30, 2000, compared with $16.1 billion at December 31, 1999. Interest-bearing deposits totaled $36.3 billion at June 30, 2000, compared with $35.5 billion at December 31, 1999. BORROWINGS Short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings, decreased to $2.0 billion at June 30, 2000, compared with $2.3 billion at December 31, 1999. Long-term debt was $19.8 billion at June 30, 2000, up from $16.6 billion at December 31, 1999. To fund core asset growth and replace wholesale funding maturities during 2000, the Company issued $4.1 billion of debt with an average original maturity of 2.3 years under its medium-term and bank note programs. In addition, Federal Home Loan Bank advances increased by $400 million during 2000. 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 10 U.S. Bancorp 12 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 $163.2 million and $317.2 million in the second quarter and first six months of 2000, respectively, compared with $140.3 million and $279.9 million in the same periods of 1999. The ratio of total net charge-offs to average loans was .99 percent and .98 percent in the second quarter and first half of 2000, respectively, compared with .93 and .95 percent in the same periods in 1999. Net charge-offs in the first quarter of 2000 were $154.0 million. Nearly one-half of the increase in net charge-offs from the first quarter of 2000 and second quarter of 1999 was due to an expected increase in losses on the growing credit-scored small business lending portfolio. Commercial loan net charge-offs were $57.5 million and $102.3 million in the second quarter and first half of 2000, respectively, compared with $29.9 million and $53.8 million in the same periods of 1999. Commercial loan net charge-offs, excluding net charge-offs of credit-scored small business and commercial payment systems products, were $34.5 million, or .32 percent of average loans outstanding for the second quarter of 2000, and $58.6 million, or .28 percent of average loans outstanding in the first half of 2000. Consumer loan net charge-offs for the quarter and year-to-date were $105.7 million and $214.9 million, respectively, compared with $110.4 million and $226.1 million for the same periods of 1999. Consumer loan net charge-offs as a percent of average loans outstanding were 2.13 and 2.18 in the second quarter and first half of 2000, respectively, compared with 2.06 and 2.12 for the same periods of 1999. The allowance for credit losses provides coverage for probable losses inherent in the Company's loan portfolio. Management evaluates the allowance each quarter to determine that it is adequate to cover inherent losses. The evaluation of each element and the overall allowance is based on a continuing assessment of problem loans and related off-balance sheet items, recent loss experience, and other factors, including regulatory guidance and economic conditions. The allowance for credit losses increased to $1,039.4 million at June 30, 2000, from $995.4 million at December 31, 1999, due to additions related to bank acquisitions and portfolio purchases. As a percentage of nonperforming loans, the allowance was 285 percent at June 30, 2000, compared with 310 percent at March 31, 2000 and 321 percent at December 31, 1999. Management has determined that the allowance for credit losses is adequate. TABLE 6 NET CHARGE-OFFS AS A PERCENTAGE OF AVERAGE LOANS OUTSTANDING
Three Months Ended Six Months Ended --------------------------------------------------- June 30 June 30 June 30 June 30 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------------------------- COMMERCIAL Commercial............................................... .80% .52% .73% .47% Real estate Commercial mortgage................................... (.14) (.11) (.08) (.09) Construction.......................................... (.12) .01 (.07) .02 Lease financing.......................................... .69 .07 .48 .10 --------------------------------------------------- Total commercial...................................... .50 .31 .46 .28 CONSUMER Credit card.............................................. 4.59 4.69 4.22 4.88 Other.................................................... 1.75 1.73 1.92 1.76 --------------------------------------------------- Subtotal.............................................. 2.44 2.36 2.47 2.43 Residential mortgage..................................... .12 .09 .24 .10 --------------------------------------------------- Total consumer........................................ 2.13 2.06 2.18 2.12 --------------------------------------------------- Total.............................................. .99% .93% .98% .95% --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------
U.S. Bancorp 11 13 TABLE 7 SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
Three Months Ended Six Months Ended ----------------------------------------------- June 30 June 30 June 30 June 30 (Dollars in Millions) 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------------------- Balance at beginning of period.............................. $1,011.1 $982.5 $ 995.4 $1,000.9 CHARGE-OFFS Commercial Commercial............................................ 62.7 49.0 117.1 90.8 Real estate Commercial mortgage................................ .7 .3 1.7 .6 Construction....................................... .1 .2 .1 .4 Lease financing....................................... 4.8 .9 6.7 2.6 ----------------------------------------------- Total commercial................................... 68.3 50.4 125.6 94.4 Consumer Credit card........................................... 51.6 51.3 93.7 106.4 Other................................................. 71.8 80.9 155.7 162.1 ----------------------------------------------- Subtotal........................................... 123.4 132.2 249.4 268.5 Residential mortgage.................................. 1.0 .8 3.5 1.8 ----------------------------------------------- Total consumer..................................... 124.4 133.0 252.9 270.3 ----------------------------------------------- Total........................................... 192.7 183.4 378.5 364.7 RECOVERIES Commercial Commercial............................................ 4.9 17.2 15.1 34.6 Real estate Commercial mortgage................................ 4.2 2.7 5.7 4.4 Construction....................................... 1.4 .1 1.7 .1 Lease financing....................................... .3 .5 .8 1.5 ----------------------------------------------- Total commercial................................... 10.8 20.5 23.3 40.6 Consumer Credit card........................................... 3.8 4.7 6.8 9.5 Other................................................. 14.7 17.7 30.8 34.3 ----------------------------------------------- Subtotal........................................... 18.5 22.4 37.6 43.8 Residential mortgage.................................. .2 .2 .4 .4 ----------------------------------------------- Total consumer..................................... 18.7 22.6 38.0 44.2 ----------------------------------------------- Total........................................... 29.5 43.1 61.3 84.8 NET CHARGE-OFFS Commercial Commercial............................................ 57.8 31.8 102.0 56.2 Real estate Commercial mortgage................................ (3.5) (2.4) (4.0) (3.8) Construction....................................... (1.3) .1 (1.6) .3 Lease financing....................................... 4.5 .4 5.9 1.1 ----------------------------------------------- Total commercial................................... 57.5 29.9 102.3 53.8 Consumer Credit card........................................... 47.8 46.6 86.9 96.9 Other................................................. 57.1 63.2 124.9 127.8 ----------------------------------------------- Subtotal........................................... 104.9 109.8 211.8 224.7 Residential mortgage.................................. .8 .6 3.1 1.4 ----------------------------------------------- Total consumer..................................... 105.7 110.4 214.9 226.1 ----------------------------------------------- Total........................................... 163.2 140.3 317.2 279.9 Provision charged to operating expense...................... 163.0 126.0 317.0 243.0 Acquisitions and other changes.............................. 28.5 -- 44.2 4.2 ----------------------------------------------- Balance at end of period.................................... $1,039.4 $968.2 $1,039.4 $ 968.2 ----------------------------------------------- ----------------------------------------------- Allowance as a percentage of: Period-end loans......................................... 1.54% 1.59% Nonperforming loans...................................... 285 327 Nonperforming assets..................................... 257 302 Annualized net charge-offs............................... 158 172 --------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------
12 U.S. Bancorp 14 TABLE 8 DELINQUENT LOAN RATIOS*
June 30 December 31 90 days or more past due 2000 1999 --------------------------------------------------------------------------------------- COMMERCIAL Commercial............................................... .74% .57% Real estate Commercial mortgage................................... .61 .84 Construction.......................................... .72 .59 Lease financing.......................................... 1.50 .81 ----------------------- Total commercial...................................... .76 .65 CONSUMER Credit card.............................................. 1.06 .96 Other.................................................... .56 .57 ----------------------- Subtotal.............................................. .69 .67 Residential mortgage..................................... 1.53 1.57 ----------------------- Total consumer........................................ .80 .79 ----------------------- Total.............................................. .77% .69% --------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------
*Ratios include nonperforming loans and are expressed as a percent of ending loan balances. NONPERFORMING ASSETS Nonperforming assets include nonaccrual loans, restructured loans, other real estate and other nonperforming assets owned by the Company. Nonperforming assets at June 30, 2000, totaled $404.4 million, compared with $347.5 million at December 31, 1999. The ratio of nonperforming assets to loans and other real estate was .60 percent at June 30, 2000, compared with .55 percent at December 31, 1999. Accruing loans 90 days or more past due at June 30, 2000, totaled $153.4 million, compared with $125.8 million at December 31, 1999. These loans are not included in nonperforming assets and continue to accrue interest because they are secured by collateral TABLE 9 NONPERFORMING ASSETS*
June 30 December 31 (Dollars in Millions) 2000 1999 --------------------------------------------------------------------------------------- COMMERCIAL Commercial............................................... $ 204.2 $ 142.4 Real estate Commercial mortgage................................... 58.9 78.9 Construction.......................................... 19.8 25.3 Lease financing.......................................... 39.4 18.8 ----------------------- Total commercial...................................... 322.3 265.4 CONSUMER Residential mortgage..................................... 35.3 36.0 Other.................................................... 7.6 8.6 ----------------------- Total consumer........................................ 42.9 44.6 ----------------------- Total nonperforming loans....................... 365.2 310.0 OTHER REAL ESTATE........................................... 22.7 20.7 OTHER NONPERFORMING ASSETS.................................. 16.5 16.8 ----------------------- Total nonperforming assets...................... $ 404.4 $ 347.5 ----------------------- ----------------------- Accruing loans 90 days or more past due**................... $ 153.4 $ 125.8 Nonperforming loans to total loans.......................... .54% .49% Nonperforming assets to total loans plus other real estate..................................................... .60 .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. U.S. Bancorp 13 15 and/or are in the process of collection and are reasonably expected to result in repayment or restoration to current status. Consumer loans 30 days or more past due decreased to 2.58 percent of the portfolio at June 30, 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 was .80 percent at June 30, 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 interest income over the second 12 months given a 1 percent change in interest rates. At June 30, 2000, forecasted net interest income for the next 12 months would not be affected from an immediate 100 basis point upward parallel shift in rates and would decrease $4 million from a downward shift of similar magnitude. Forecasted net interest income for the second 12 months would decrease $2 million from an immediate 100 basis point upward parallel shift in rates and would decrease $7 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, TABLE 10 INTEREST RATE SWAP HEDGING PORTFOLIO NOTIONAL BALANCES AND YIELDS BY MATURITY DATE
At June 30, 2000 (Dollars in Millions) ------------------------------------------------------------------------------------------------------------------- Weighted Weighted Average Average Notional Interest Rate Interest Rate Maturity Date Amount Received Paid ------------------------------------------------------------------------------------------------------------------- 2000........................................................ $ 135 5.99% 6.70% 2001........................................................ 290 6.56 6.65 2002........................................................ 545 6.22 6.66 2003........................................................ 2,481 6.13 6.74 2004........................................................ 1,475 6.60 6.64 Thereafter.................................................. 2,450 6.37 6.65 ------ Total....................................................... $7,376 6.32% 6.68% ------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------
*At June 30, 2000, the Company received fixed-rate interest and paid variable-rate interest on substantially all swaps in its hedging portfolio. 14 U.S. Bancorp 16 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. During the second quarter of 2000, the Company added $145 million of receive fixed interest rate swaps. In the first six months of 2000, the Company added $185 million of receive fixed interest rate swaps and $500 million of pay fixed interest rate swaps and terminated $674 million of receive fixed interest rate swaps to reduce interest income at 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 June 30, 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 6.32 percent and a weighted average interest rate paid of 6.68 percent. The remaining maturity of these agreements ranges from 1 month to 15 years with an average remaining maturity of 4.6 years. For the quarter and six months ended June 30, 2000, interest rate swap agreements decreased net interest income by $3.5 million and $1.8 million, respectively, and for the quarter and six months ended June 30, 1999, interest rate swap agreements increased net interest income by $19.7 million and $37.1 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 June 30, 2000. To hedge against 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 June 30, 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 six months ended June 30, 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 for a 10-day holding period 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 U.S. Bancorp 15 17 TABLE 11 CAPITAL RATIOS
June 30 December 31 (Dollars in Millions) 2000 1999 -------------------------------------------------------------------------------------- Tangible common equity*..................................... $5,306 $5,134 As a percent of assets................................... 6.4% 6.5% Tier 1 capital.............................................. $5,822 $5,631 As a percent of risk-adjusted assets..................... 6.6% 6.8% Total risk-based capital.................................... $9,386 $9,281 As a percent of risk-adjusted assets..................... 10.7% 11.1% Leverage ratio.............................................. 7.2 7.4 -------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------
*Defined as common equity less goodwill. at June 30, 2000. The market valuation risk inherent in its broker/dealer activities, including equities, fixed income, high yield securities and foreign exchange, as estimated by the VaR analysis, was $15.1 million at June 30, 2000. In addition to the VaR analysis, the Company imposes stop loss limits and position limits. A stress-test model is used to provide management with perspective on market events that a VaR model does not capture. In each case, the historical worst performance of each asset class is observed and applied to current trading positions. CAPITAL MANAGEMENT At June 30, 2000, tangible common equity (common equity less goodwill) was $5.3 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 10.7 percent at June 30, 2000, compared with 6.8 percent and 11.1 percent at December 31, 1999. The June 30, 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 on 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 six months of 2000, the Company repurchased 16.2 million shares under these programs for a total dollar value of $348.7 million. During the same period, the Company issued 6.6 million shares related to acquisitions. ACCOUNTING CHANGES ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Statement of Financial Accounting Standards No. ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment to FASB Statement No. 133," establish 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. 16 U.S. Bancorp 18 CONSOLIDATED BALANCE SHEET
June 30 December 31 (Dollars in Millions) 2000 1999 --------------------------------------------------------------------------------------- (Unaudited) ASSETS Cash and due from banks..................................... $ 3,775 $ 4,036 Federal funds sold.......................................... 653 713 Securities purchased under agreements to resell............. 384 324 Trading account securities.................................. 765 617 Available-for-sale securities............................... 4,526 4,871 Loans....................................................... 67,384 62,885 Less allowance for credit losses......................... 1,039 995 ----------------------- Net loans................................................ 66,345 61,890 Premises and equipment...................................... 855 862 Interest receivable......................................... 493 433 Customers' liability on acceptances......................... 166 152 Goodwill and other intangible assets........................ 3,188 3,066 Other assets................................................ 5,024 4,566 ----------------------- Total assets.......................................... $ 86,174 $ 81,530 ----------------------- ----------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing...................................... $ 16,223 $ 16,050 Interest-bearing......................................... 29,842 29,671 Time certificates of deposit greater than $100,000....... 6,480 5,809 ----------------------- Total deposits........................................ 52,545 51,530 Federal funds purchased..................................... 209 297 Securities sold under agreements to repurchase.............. 998 1,235 Other short-term funds borrowed............................. 827 724 Long-term debt.............................................. 19,762 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..................................... 166 152 Other liabilities........................................... 2,786 2,441 ----------------------- Total liabilities..................................... 78,243 73,892 Shareholders' equity Common stock, par value $1.25 a share -- authorized 1,500,000,000 shares; issued: 6/30/00 -- 758,194,161 shares; 12/31/99 -- 754,368,668 shares................. 948 943 Capital surplus.......................................... 1,457 1,399 Retained earnings........................................ 5,839 5,389 Accumulated other comprehensive income................... (71) (62) Less cost of common stock in treasury: 6/30/00 -- 11,137,222 shares; 12/31/99 -- 1,038,456 shares.................................................. (242) (31) ----------------------- Total shareholders' equity............................ 7,931 7,638 ----------------------- Total liabilities and shareholders' equity............ $ 86,174 $ 81,530 --------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------
U.S. Bancorp 17 19 CONSOLIDATED STATEMENT OF INCOME
Three Months Ended Six Months Ended ----------------------------------------- (Dollars in Millions, Except Per Share Data) June 30 June 30 June 30 June 30 (Unaudited) 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans....................................................... $1,517.5 $1,272.2 $2,944.4 $2,510.7 Securities Taxable.................................................. 58.5 59.8 118.8 124.4 Exempt from federal income taxes......................... 13.8 14.3 27.8 29.0 Other interest income....................................... 64.9 38.6 127.3 72.8 -------------------------------------- Total interest income................................. 1,654.7 1,384.9 3,218.3 2,736.9 INTEREST EXPENSE Deposits.................................................... 402.2 308.8 775.1 620.4 Federal funds purchased and repurchase agreements........... 45.7 43.6 89.5 83.0 Other short-term funds borrowed............................. 15.0 12.1 28.6 25.0 Long-term debt.............................................. 310.2 188.4 578.8 374.5 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company.............. 19.3 19.4 38.6 38.7 -------------------------------------- Total interest expense................................ 792.4 572.3 1,510.6 1,141.6 -------------------------------------- Net interest income......................................... 862.3 812.6 1,707.7 1,595.3 Provision for credit losses................................. 163.0 126.0 317.0 243.0 -------------------------------------- Net interest income after provision for credit losses....... 699.3 686.6 1,390.7 1,352.3 NONINTEREST INCOME Credit card fee revenue..................................... 177.1 148.7 336.6 275.5 Trust and investment management fees........................ 117.0 112.2 234.1 229.4 Service charges on deposit accounts......................... 117.5 107.5 226.5 210.9 Investment products fees and commissions.................... 81.8 91.6 198.0 180.2 Investment banking revenue.................................. 72.8 60.3 166.8 96.5 Trading account profits and commissions..................... 58.2 50.5 141.8 102.0 Available-for-sale securities gains......................... .3 -- -- -- Other....................................................... 177.0 85.1 293.3 187.7 -------------------------------------- Total noninterest income.............................. 801.7 655.9 1,597.1 1,282.2 NONINTEREST EXPENSE Salaries.................................................... 414.1 356.7 846.2 710.8 Employee benefits........................................... 69.3 53.6 145.4 123.6 Net occupancy............................................... 55.2 49.9 112.3 99.9 Furniture and equipment..................................... 40.5 39.0 81.6 77.1 Goodwill and other intangible assets........................ 58.4 36.6 115.0 74.4 Merger-related charges...................................... 15.0 15.0 28.1 17.9 Other....................................................... 239.1 202.0 464.0 367.9 -------------------------------------- Total noninterest expense............................. 891.6 752.8 1,792.6 1,471.6 -------------------------------------- Income before income taxes.................................. 609.4 589.7 1,195.2 1,162.9 Applicable income taxes..................................... 216.3 215.4 423.1 421.8 -------------------------------------- Net income.................................................. $ 393.1 $ 374.3 $ 772.1 $ 741.1 -------------------------------------- -------------------------------------- Earnings per share.......................................... $ .53 $ .52 $ 1.03 $ 1.03 Diluted earnings per share.................................. $ .52 $ .51 $ 1.03 $ 1.02 ------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------
18 U.S. Bancorp 20 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............ (283.6) (283.6) Purchase of treasury stock........... (4,417,940) (147.7) (147.7) Issuance of common stock Acquisitions...................... 1,027,276 (3.6) 40.0 36.4 Dividend reinvestment............. 351,915 (1.5) 13.4 11.9 Stock option and stock purchase plans.......................... 2,299,875 (39.3) 92.6 53.3 --------------------------------------------------------------------------------------- 725,022,844 931.0 1,202.8 4,172.2 71.8 (737.5) 5,640.3 Comprehensive income Net income........................... 741.1 741.1 Other comprehensive income Change in net unrealized losses on securities of $118.7 (net of $45.1 tax benefit)...................... (73.6) (73.6) ------- Total comprehensive income..... 667.5 --------------------------------------------------------------------------------------- BALANCE JUNE 30, 1999................ 725,022,844 $931.0 $1,202.8 $4,913.3 $ (1.8) $(737.5) $6,307.8 --------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------- 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............ (322.8) (322.8) Purchase of treasury stock........... (16,233,000) (348.7) (348.7) Issuance of common stock Acquisitions...................... 6,969,658 4.0 55.7 86.3 146.0 Dividend reinvestment............. 611,389 (.6) 13.0 12.4 Stock option and stock purchase plans............................ 2,378,680 .7 3.7 38.9 43.3 --------------------------------------------------------------------------------------- 747,056,939 947.7 1,457.6 5,066.4 (61.8) (242.0) 7,167.9 Comprehensive income Net income........................... 772.1 772.1 Other comprehensive income Foreign currency translation adjustments...................... .7 .7 Change in net unrealized losses on securities of $15.8 (net of $5.9 tax benefit)...................... (9.9) (9.9) ------- Total comprehensive income..... 762.9 --------------------------------------------------------------------------------------- BALANCE JUNE 30, 2000................ 747,056,939 $947.7 $1,457.6 $5,838.5 $(71.0) $(242.0) $7,930.8 --------------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------------
*Defined as total common shares less common stock held in treasury. **Ending treasury shares were 11,137,222 at June 30, 2000; 1,038,456 at December 31, 1999; 19,775,013 at June 30, 1999; and 19,036,139 at December 31, 1998. U.S. Bancorp 19 21 CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended ---------------------- (Dollars in Millions) June 30 June 30 (Unaudited) 2000 1999 -------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net cash provided by operating activities................ $ 1,150.7 $ 1,233.2 ---------------------- INVESTING ACTIVITIES Net cash (used) provided by: Loans outstanding........................................ (3,845.9) (1,960.4) Securities purchased under agreements to resell.......... (60.2) 79.6 Available-for-sale securities Sales.................................................... 146.9 93.9 Maturities............................................... 344.2 868.3 Purchases................................................ (87.9) (830.1) Proceeds from sales of other real estate.................... 13.1 18.2 Net sales (purchases) of bank premises and equipment........ 37.3 (45.0) Sales of loans.............................................. 197.0 -- Purchases of loans.......................................... (592.9) (127.7) Acquisitions, net of cash received.......................... -- (156.4) Cash and cash equivalents of acquired subsidiaries.......... 24.0 3.6 Other - net................................................. (321.1) (323.1) ---------------------- Net cash used by investing activities.................... (4,145.5) (2,379.1) ---------------------- FINANCING ACTIVITIES Net cash provided (used) by: Deposits................................................. 562.3 (730.9) Federal funds purchased and securities sold under agreements to repurchase................................ (324.7) (634.4) Short-term borrowings.................................... 103.0 463.7 Proceeds from long-term debt................................ 4,516.9 2,613.0 Principal payments on long-term debt........................ (1,567.9) (1,167.3) Proceeds from dividend reinvestment, stock option and stock purchase plans............................................. 55.7 65.2 Repurchase of common stock.................................. (348.7) (147.7) Cash dividends.............................................. (322.8) (283.6) ---------------------- Net cash provided by financing activities................ 2,673.8 178.0 ---------------------- Change in cash and cash equivalents...................... (321.0) (967.9) Cash and cash equivalents at beginning of period............ 4,748.8 4,855.3 ---------------------- Cash and cash equivalents at end of period............... $ 4,427.8 $ 3,887.4 -------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------
20 U.S. Bancorp 22 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 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 4 through 7 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," and SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment to FASB Statement No. 133," establish 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. NOTE C BUSINESS COMBINATIONS SCRIPPS FINANCIAL CORPORATION On June 27, 2000, the Company announced an agreement to acquire Scripps Financial Corporation. With $650 million in assets, Scripps Financial Corporation operates nine branches in San Diego county, California. The acquisition, which is pending regulatory and shareholder approval, will be accounted for as a purchase and is expected to close in the fourth quarter of 2000. 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
U.S. Bancorp 21 23 NOTE D AVAILABLE-FOR-SALE SECURITIES The detail of the amortized cost and fair value of available-for-sale securities consisted of the following:
June 30, 2000 December 31, 1999 --------------------------------------------------- Amortized Fair Amortized Fair (Dollars in Millions) Cost Value Cost Value ------------------------------------------------------------------------------------------------------------------- U.S. Treasury............................................... $ 377 $ 371 $ 388 $ 381 U.S. agencies and other mortgage-backed..................... 2,749 2,663 2,971 2,906 Other U.S. agencies......................................... 175 180 195 196 State and political......................................... 1,097 1,097 1,132 1,135 Other....................................................... 248 215 288 253 -------------------------------------------------- Total...................................................... $4,646 $4,526 $4,974 $4,871 ------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------
NOTE E LOANS The composition of the loan portfolio was as follows:
June 30 December 31 (Dollars in Millions) 2000 1999 ----------------------------------------------------------------------------------------- COMMERCIAL: Commercial............................................... $30,333 $26,491 Real estate Commercial mortgage................................... 10,041 9,784 Construction.......................................... 4,461 4,322 Lease financing.......................................... 2,770 2,372 -------------------------- Total commercial................................... 47,605 42,969 -------------------------- CONSUMER: Home equity and second mortgage.......................... 9,027 8,681 Credit card.............................................. 4,190 4,313 Revolving credit......................................... 1,760 1,815 Installment.............................................. 1,139 1,245 Student.................................................. 601 563 -------------------------- Subtotal........................................... 16,717 16,617 Indirect automobile...................................... 459 638 Residential mortgage..................................... 2,603 2,661 -------------------------- Total consumer*.................................... 19,779 19,916 -------------------------- Total loans..................................... $67,384 $62,885 ----------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------
*Loans held for sale were $685 at June 30, 2000, and $608 at December 31, 1999. This included residential mortgages held for sale and the student loan portfolio that may be sold when the repayment periods begin. At June 30, 2000, the Company had $322 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 June 30, 2000, the average recorded investment in impaired loans was approximately $301 million. No interest income was recognized on impaired loans during the quarter. 22 U.S. Bancorp 24 NOTE F LONG-TERM DEBT Long-term debt (debt with original maturities of more than one year) consisted of the following:
June 30 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 8.25%) -- maturities to October 2026....................... 2,385 1,998 Medium-term notes (6.00% to 7.50%) -- maturities to December 2004....................................................... 3,577 2,310 Bank notes (5.25% to 7.16%) -- maturities to November 2005....................................................... 10,004 8,459 Euro medium-term notes -- due April 13, 2004................ 400 400 Other....................................................... 446 196 -------------------------- Total.................................................... $ 19,762 $ 16,563 ---------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------
NOTE G INCOME TAXES The components of income tax expense were:
Three Months Ended Six Months Ended ---------------------------------------------- June 30 June 30 June 30 June 30 (Dollars in Millions) 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------- FEDERAL Current tax................................................. $ 170.5 $ 160.3 $ 337.9 $ 314.5 Deferred tax provision...................................... 11.3 20.3 18.4 38.2 -------------------------------------------- Federal income tax....................................... 181.8 180.6 356.3 352.7 STATE Current tax................................................. 32.2 30.9 62.3 61.5 Deferred tax provision...................................... 2.3 3.9 4.5 7.6 -------------------------------------------- State income tax......................................... 34.5 34.8 66.8 69.1 -------------------------------------------- Total income tax provision............................... $ 216.3 $ 215.4 $ 423.1 $ 421.8 -------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------
The reconciliation between income tax expense and the amount computed by applying the statutory federal income tax rate was as follows:
Three Months Ended Six Months Ended ---------------------------------------------- June 30 June 30 June 30 June 30 (Dollars in Millions) 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------- Tax at statutory rate (35%)................................. $ 213.3 $ 206.4 $ 418.3 $ 407.0 State income tax, at statutory rates, net of federal tax benefit.................................................... 22.4 22.6 43.4 44.9 Tax effect of Tax-exempt interest Loans................................................. (1.9) (2.3) (3.8) (4.6) Securities............................................ (6.0) (5.7) (12.0) (11.4) Amortization of nondeductible goodwill................... 15.0 9.2 29.9 18.8 Tax credits and other items.............................. (26.5) (14.8) (52.7) (32.9) -------------------------------------------- Applicable income taxes..................................... $ 216.3 $ 215.4 $ 423.1 $ 421.8 -------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------
The Company's net deferred tax asset was $104.5 million at June 30, 2000, and $158.4 million at December 31, 1999. U.S. Bancorp 23 25 NOTE H MERGER AND INTEGRATION CHARGES During 2000, the Company recorded $28.1 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* -- 4.6 7.9 15.6 28.1 Additions related to purchase acquisitions -- -- 2.3 15.9 18.2 Cash outlays (7.5) (6.8) (17.3) (27.2) (58.8) Noncash writedowns and other -- (.1) (.2) (1.8) (2.1) ---------- ---------- ---------- ---------- ---------- Balance at June 30, 2000 $ 8.4 $ 15.2 $ 13.5 $ 20.2 $ 57.3 ========== ========== ========== ========== ==========
*Merger-related charges in operating expenses for other acquisitions for the six months ending June 30, 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:
June 30 December 31 (Dollars in Millions) 2000 1999 ------------------------------------------------------------------- Severance $ 26.7 $ 34.6 Other employee related costs 12.8 16.6 Lease terminations and facility costs 8.5 9.5 Contracts and system writeoffs 6.4 6.4 Other 2.9 4.8 ---------- ---------- Total $ 57.3 $ 71.9 (Dollars in Millions) ------------------------------------------------------------------ USBC* $ 8.4 $ 15.9 Piper Jaffray 15.2 17.5 Western Bancorp 13.5 20.8 Peninsula Bank 5.3 -- Bank of Commerce 5.3 7.5 Zappco, Inc. 4.0 4.1 Northwest Bancshares, Inc. 3.0 3.5 Other acquisitions 2.6 2.6 ---------- ---------- Total $ 57.3 $ 71.9 ========== ==========
* The USBC accrual represented severance related amounts only. With respect to completed acquisitions, additional merger-related charges of approximately $34.1 million on a pre-tax basis are expected to be incurred in 2000. NOTE I SHAREHOLDERS' EQUITY The Company issued 6,969,658 shares of common stock with an aggregate value of $146.0 million in conjunction with acquisitions during the six months ended June 30, 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 16.2 million shares for $348.7 million for the six months ended June 30, 2000. NOTE J EARNINGS PER SHARE The components of earnings per share were:
Three Months Ended Six Months Ended -------------------------------------------------------- June 30 June 30 June 30 June 30 (Dollars in Millions, Except Per Share Data) 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------ EARNINGS PER SHARE: Net income to common stockholders........................... $393.1 $374.3 $772.1 $741.1 -------------------------------------------------------- -------------------------------------------------------- Average shares outstanding.................................. 746,011,809 723,239,415 747,175,679 722,940,060 -------------------------------------------------------- -------------------------------------------------------- Earnings per share.......................................... $ .53 $ .52 $ 1.03 $ 1.03 -------------------------------------------------------- -------------------------------------------------------- DILUTED EARNINGS PER SHARE: Net income to common stockholders........................... $393.1 $374.3 $772.1 $741.1 -------------------------------------------------------- -------------------------------------------------------- Average shares outstanding.................................. 746,011,809 723,239,415 747,175,679 722,940,060 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.................. 2,883,021 6,024,282 2,706,218 5,892,992 -------------------------------------------------------- Dilutive common shares outstanding.......................... 748,894,830 729,263,697 749,881,897 728,833,052 -------------------------------------------------------- -------------------------------------------------------- Diluted earnings per share.................................. $ .52 $ .51 $ 1.03 $ 1.02 ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------
24 U.S. Bancorp 26 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 or liquidity risk. The contract or notional amounts of these financial instruments were as follows:
June 30 December 31 (Dollars in Millions) 2000 1999 --------------------------------------------------------------------------------------- Commitments to extend credit Commercial............................................... $26,886 $28,222 Corporate and purchasing cards........................... 19,778 18,503 Consumer credit cards.................................... 15,540 14,991 Other consumer........................................... 6,359 6,388 Letters of credit Standby.................................................. 3,410 3,222 Commercial............................................... 480 317 Swap contracts Interest rate hedges..................................... 7,376 7,743 Equity hedges............................................ 43 -- Intermediated............................................ 485 556 Options contracts Hedge interest rate floors purchased..................... 500 500 Intermediated interest rate and foreign exchange caps and floors purchased........................................ 394 453 Intermediated interest rate and foreign exchange caps and floors written.......................................... 394 453 Futures and forward contracts............................... 15 34 Recourse on assets sold..................................... 94 117 Foreign currency commitments Commitments to purchase.................................. 1,373 1,137 Commitments to sell...................................... 1,370 1,141 Commitments from securities lending......................... 790 717 --------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------
The Company received fixed-rate interest and paid variable-rate interest on substantially all swaps in its hedging portfolio as of June 30, 2000. Activity for the six months ended June 30, 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................................................... 685 Terminations................................................ (674) Amortization................................................ (358) Maturities.................................................. (20) ----- Notional amount outstanding at June 30, 2000................ $ 7,376 ---------------------------------------------------------------------- ---------------------------------------------------------------------- Weighted average interest rate paid......................... 6.68% Weighted average interest rate received..................... 6.32 ---------------------------------------------------------------------- ----------------------------------------------------------------------
LIBOR-based interest rate floors totaling $500 million with an average remaining maturity of 1.2 years and 1.7 years at June 30, 2000 and December 31, 1999, respectively, hedged floating rate commercial loans. The strike rate on these LIBOR-based floors was 4.63 percent both at June 30, 2000, and December 31, 1999. Net unamortized deferred losses relating to swaps, options and futures were $27.9 million at June 30, 2000. U.S. Bancorp 25 27 NOTE L SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CASH FLOWS Listed below are supplemental disclosures to the Consolidated Statement of Cash Flows.
Six Months Ended ----------------------- June 30 June 30 (Dollars in Millions) 2000 1999 --------------------------------------------------------------------------------------- Income taxes paid........................................... $ 264.3 $ 218.4 Interest paid............................................... 1,431.0 1,118.7 Net noncash transfers to foreclosed property................ 13.8 16.2 Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $5.9 in 2000 and $45.1 in 1999....................................................... (9.9) (73.6) ----------------------- ----------------------- Cash acquisitions of businesses Fair value of noncash assets acquired.................... $ -- $ 156.4 Liabilities assumed...................................... -- -- ----------------------- Net................................................... $ -- $ 156.4 ----------------------- ----------------------- Stock acquisitions of businesses Fair value of noncash assets acquired.................... $ 810.7 $ 42.3 Net cash acquired........................................ 24.0 3.6 Liabilities assumed...................................... (688.7) (9.5) ----------------------- Net value of common stock issued...................... $ 146.0 $ 36.4 --------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------
26 U.S. Bancorp 28 CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
For the Three Months Ended June 30 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.......................... $ 378 $ 5.3 5.64% $ 434 $ 6.2 5.73% (12.9)% U.S. agencies and other mortgage-backed...................... 2,808 47.5 6.80 3,129 49.6 6.36 (10.3) State and political.................... 1,098 20.6 7.55 1,146 21.5 7.52 (4.2) U.S. agencies and other................ 464 5.4 4.68 417 3.8 3.66 11.3 --------------------- ------------------- Total available-for-sale securities......................... 4,748 78.8 6.68 5,126 81.1 6.35 (7.4) Unrealized (loss) gain on available-for-sale securities...... (139) 67 ** ------ ------- Net available-for-sale securities.... 4,609 5,193 (11.2) Trading account securities.............. 755 13.7 7.30 582 9.8 6.75 29.7 Federal funds sold and resale agreements............................. 659 8.8 5.37 525 5.7 4.35 25.5 Loans Commercial Commercial........................... 28,952 621.8 8.64 24,629 458.4 7.47 17.6 Real estate Commercial mortgage................ 10,055 220.8 8.83 8,387 174.8 8.36 19.9 Construction....................... 4,429 107.5 9.76 3,595 77.9 8.69 23.2 Lease financing...................... 2,629 49.6 7.59 2,245 40.3 7.20 17.1 --------------------- ------------------- Total commercial................... 46,065 999.7 8.73 38,856 751.4 7.76 18.6 Consumer Home equity and second mortgage...... 8,934 214.4 9.65 7,804 182.3 9.37 14.5 Credit card.......................... 4,184 144.0 13.84 3,988 127.6 12.83 4.9 Other................................ 4,200 111.0 10.63 6,873 159.1 9.28 (38.9) --------------------- ------------------- Subtotal........................... 17,318 469.4 10.90 18,665 469.0 10.08 (7.2) Residential mortgage................. 2,615 50.8 7.81 2,800 54.8 7.85 (6.6) --------------------- ------------------- Total consumer..................... 19,933 520.2 10.50 21,465 523.8 9.79 (7.1) --------------------- ------------------- Total loans........................ 65,998 1,519.9 9.26 60,321 1,275.2 8.48 9.4 Allowance for credit losses............ 1,047 993 5.4 ------ ------- Net loans............................ 64,951 59,328 9.5 Other earning assets.................... 2,385 51.0 8.60 1,425 23.8 6.70 67.4 --------------------- ------------------- Total earning assets*.............. 74,545 1,672.2 9.02 67,979 1,395.6 8.23 9.7 Other assets............................ 10,726 9,019 18.9 ------ ------- Total assets....................... $84,085 $76,072 10.5% ------ ------- ------ ------- LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits............ $14,254 $13,553 5.2% Interest-bearing deposits Interest checking...................... 6,478 36.3 2.25 6,098 26.6 1.75 6.2 Money market accounts.................. 12,421 130.3 4.22 12,132 100.9 3.34 2.4 Other savings accounts................. 1,970 8.6 1.76 2,211 9.5 1.72 (10.9) Savings certificates................... 9,359 134.9 5.80 9,652 116.6 4.85 (3.0) Certificates over $100,000............. 5,917 92.1 6.26 4,333 55.2 5.11 36.6 --------------------- ------------------- Total interest-bearing deposits.... 36,145 402.2 4.48 34,426 308.8 3.60 5.0 Short-term borrowings................... 3,515 60.7 6.95 4,257 55.7 5.25 (17.4) Long-term debt.......................... 18,627 310.2 6.70 14,416 188.4 5.24 29.2 Company-obligated mandatorily redeemable preferred. securities 950 19.3 8.17 950 19.4 8.19 -- --------------------- ------------------- Total interest-bearing liabilities...................... 59,237 792.4 5.38 54,049 572.3 4.25 9.6 Other liabilities....................... 2,710 2,158 25.6 Common equity........................... 7,965 6,271 27.0 Accumulated other comprehensive income................................. (81) 41 ** ------ ------- Total liabilities and shareholders' equity........................... $84,085 $76,072 10.5% ------ ------- ---------- ------ ------- ---------- Net interest income..................... $ 879.8 $ 823.3 ------- ------- ------- ------- Gross interest margin................... 3.64% 3.98% ------ ------ ------ ------ Gross interest margin without taxable-equivalent increments.......... 3.55% 3.92% ------ ------ ------ ------ Net interest margin..................... 4.75% 4.86% ------ ------ ------ ------ Net interest margin without taxable-equivalent increments.......... 4.65% 4.79% ------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------
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. U.S. Bancorp 27 29 CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
For the Six Months Ended June 30 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.......................... $ 381 $ 10.7 5.65% $ 458 $ 13.0 5.72% (16.8)% U.S. agencies and other mortgage-backed...................... 2,862 96.8 6.80 3,184 103.0 6.52 (10.1) State and political.................... 1,107 41.6 7.56 1,161 43.7 7.59 (4.7) U.S. agencies and other................ 477 10.7 4.51 375 7.9 4.25 27.2 ------------------- ------------------- Total available-for-sale securities......................... 4,827 159.8 6.66 5,178 167.6 6.53 (6.8) Unrealized (loss) gain on available-for-sale securities...... (140) 86 ** ------ ------- Net available-for-sale securities.... 4,687 5,264 (11.0) Trading account securities.............. 728 29.0 8.01 570 19.0 6.72 27.7 Federal funds sold and resale agreements............................. 614 15.4 5.04 522 10.5 4.06 17.6 Loans Commercial Commercial........................... 28,094 1,184.0 8.48 24,212 898.5 7.48 16.0 Real estate Commercial mortgage................ 10,034 435.4 8.73 8,311 348.3 8.45 20.7 Construction....................... 4,398 207.5 9.49 3,424 148.9 8.77 28.4 Lease financing...................... 2,478 90.6 7.35 2,237 80.1 7.22 10.8 ------------------- ------------------- Total commercial................... 45,004 1,917.5 8.57 38,184 1,475.8 7.79 17.9 Consumer Home equity and second mortgage...... 8,839 423.5 9.64 7,645 356.7 9.41 15.6 Credit card.......................... 4,139 286.1 13.90 4,001 250.9 12.65 3.4 Other................................ 4,246 220.5 10.44 6,963 320.8 9.29 (39.0) ------------------- ------------------- Subtotal........................... 17,224 930.1 10.86 18,609 928.4 10.06 (7.4) Residential mortgage................. 2,625 101.5 7.78 2,912 112.5 7.79 (9.9) ------------------- ------------------- Total consumer..................... 19,849 1,031.6 10.45 21,521 1,040.9 9.75 (7.8) ------------------- ------------------- Total loans........................ 64,853 2,949.1 9.14 59,705 2,516.7 8.50 8.6 Allowance for credit losses............ 1,038 995 4.3 ------ ------- Net loans............................ 63,815 58,710 8.7 Other earning assets.................... 2,322 99.4 8.61 1,387 44.5 6.47 67.4 ------------------- ------------------- Total earning assets*.............. 73,344 3,252.7 8.92 67,362 2,758.3 8.26 8.9 Other assets............................ 10,761 9,140 17.7 ------ ------- Total assets....................... $82,927 $75,593 9.7% ------ ------- ------ ------- LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits............ $14,174 $13,549 4.6% Interest-bearing deposits Interest checking...................... 6,344 68.6 2.17 6,062 52.1 1.73 4.7 Money market accounts.................. 12,504 255.1 4.10 12,156 206.7 3.43 2.9 Other savings accounts................. 2,033 18.0 1.78 2,246 19.5 1.75 (9.5) Savings certificates................... 9,305 260.7 5.63 9,886 241.9 4.93 (5.9) Certificates over $100,000............. 5,691 172.7 6.10 3,902 100.2 5.18 45.8 ----------------- ------------------- Total interest-bearing deposits.... 35,877 775.1 4.34 34,252 620.4 3.65 4.7 Short-term borrowings................... 3,554 118.1 6.68 4,181 108.0 5.21 (15.0) Long-term debt.......................... 17,855 578.8 6.52 14,193 374.5 5.32 25.8 Company-obligated mandatorily redeemable preferred. securities 950 38.6 8.17 950 38.7 8.21 -- ----------------- ------------------- Total interest-bearing liabilities...................... 58,236 1,510.6 5.22 53,576 1,141.6 4.30 8.7 Other liabilities....................... 2,727 2,268 20.2 Common equity........................... 7,874 6,147 28.1 Accumulated other comprehensive income................................. (84) 53 ** ------ ------- Total liabilities and shareholders' equity........................... $82,927 $75,593 9.7% ------ ------- ---------- ------ ------- ---------- Net interest income..................... $1,742.1 $1,616.7 ------- ------- ------- ------- Gross interest margin................... 3.70% 3.96% ------ ------ ------ ------ Gross interest margin without taxable-equivalent increments.......... 3.60% 3.89% ------ ------ ------ ------ Net interest margin..................... 4.78% 4.84% ------ ------ ------ ------ Net interest margin without taxable-equivalent increments.......... 4.68% 4.78% ------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------
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. 28 U.S. Bancorp 30 PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 10.1 Amended and Restated Employment Agreement with John F. Grundhofer. 12 Computation of Ratio of Earnings to Fixed Charges. 27 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 June 30, 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 29 31 EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Three Six Months Months Ended Ended June 30 June 30 -------------------- (Dollars in Millions) 2000 2000 ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ EARNINGS 1. Net income.............................................. $ 393.1 $ 772.1 2. Applicable income taxes................................. 216.3 423.1 ------------------ 3. Net income before taxes (1 + 2)......................... $ 609.4 $1,195.2 ------------------ ------------------ 4. Fixed charges: a. Interest expense excluding interest on deposits...... $ 390.2 $ 735.5 b. Portion of rents representative of interest and amortization of debt expense........................... 14.9 27.8 ------------------ c. Fixed charges excluding interest on deposits (4a + 4b).................................................... 405.1 763.3 d. Interest on deposits................................. 402.2 775.1 ------------------ e. Fixed charges including interest on deposits (4c + 4d).................................................... $ 807.3 $1,538.4 ------------------ ------------------ 5. Amortization of interest capitalized.................... $ -- $ -- 6. Earnings excluding interest on deposits (3 + 4c + 5).... 1,014.5 1,958.5 7. Earnings including interest on deposits (3 + 4e + 5).... 1,416.7 2,733.6 8. Fixed charges excluding interest on deposits (4c)....... 405.1 763.3 9. Fixed charges including interest on deposits (4e)....... 807.3 1,538.4 RATIO OF EARNINGS TO FIXED CHARGES 10. Excluding interest on deposits (line 6/line 8).......... 2.50 2.57 11. Including interest on deposits (line 7/line 9).......... 1.75 1.78 ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------
30 U.S. Bancorp 32 ---------------- [US BANCORP LOGO(R)] First Class U.S. Bank Place U.S. Postage 601 Second Avenue South PAID Minneapolis, Minnesota Permit No. 2440 55402-4302 Minneapolis, MN 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 on the Internet 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 new release or "2" for a menu of news releases. Enter your fax and telephone numbers as directed. The information will be faxed to you promptly. Mail. At your request, we will mail to you our quarterly earnings news releases, quarterly financial data on Form 10-Q and additional annual reports. To be added to U.S. Bancorp's mailing list for quarterly earnings news releases, or to request other information, please contact: Investor Relations U.S. Bancorp 601 Second Avenue South Minneapolis, Minnesota 55402-4302 (612) 973-2263 corprelations@usbank.com