-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mf410EY9JuJjPIwXFNxF1wIPSP8p8nKavyvgMa4OGVlPwOBADUlojWamaH3LEZ5c jvBwSuBPwIzLTxC0KOc2pg== 0000950124-01-000127.txt : 20010123 0000950124-01-000127.hdr.sgml : 20010123 ACCESSION NUMBER: 0000950124-01-000127 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20010110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: US BANCORP \DE\ CENTRAL INDEX KEY: 0000036104 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 410255900 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-06880 FILM NUMBER: 1506334 BUSINESS ADDRESS: STREET 1: FIRST BANK PL STREET 2: 601 SECOND AVE S CITY: MINNEAPOLIS STATE: MN ZIP: 55402-4302 BUSINESS PHONE: 6129731111 MAIL ADDRESS: STREET 1: 601 2ND AVENUE SOUTH-FIRST BANK PLACE STREET 2: 601 2ND AVENUE SOUTH-FIRST BANK PLACE CITY: MINNEAPOLIS STATE: MN ZIP: 55402-4302 FORMER COMPANY: FORMER CONFORMED NAME: FIRST BANK SYSTEM INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FIRST BANK STOCK CORP DATE OF NAME CHANGE: 19720317 10-Q/A 1 c59244e10-qa.txt AMENDMENT TO FORM 10-Q 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 SEPTEMBER 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 October 31, 2000 Common Stock, $1.25 Par Value 751,560,810 shares
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 FINANCIAL SUMMARY
Three Months Ended Nine Months Ended --------------------------------------------------------------- September 30 September 30 September 30 September 30 (Dollars in Millions, Except Per Share Data) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- Income before merger-related charges and available-for-sale securities transactions.................................. $ 410.9 $ 409.0 $1,201.1 $1,161.4 Merger-related charges and available-for-sale securities transactions............................................. (9.6) (12.6) (27.7) (23.9) --------------------------------------------------------------- Net income.................................................. $ 401.3 $ 396.4 $1,173.4 $1,137.5 --------------------------------------------------------------- PER COMMON SHARE Earnings per share.......................................... $ .54 $ .55 $ 1.58 $ 1.57 Diluted earnings per share.................................. .54 .54 1.57 1.56 Dividends paid.............................................. .215 .195 .645 .585 Common shareholders' equity................................. 10.95 9.20 FINANCIAL RATIOS Return on average assets.................................... 1.88% 2.02% 1.87% 1.99% Return on average common equity............................. 19.9 23.9 19.9 24.0 Efficiency ratio............................................ 52.7 50.2 53.3 50.6 Net interest margin (taxable-equivalent basis).............. 4.64 4.84 4.73 4.84 SELECTED FINANCIAL RATIOS BEFORE MERGER-RELATED CHARGES AND AVAILABLE-FOR-SALE SECURITIES TRANSACTIONS Return on average assets.................................... 1.92% 2.09% 1.92% 2.04% Return on average common equity............................. 20.4 24.6 20.4 24.5 Efficiency ratio............................................ 51.7 49.2 52.5 49.8 Banking efficiency ratio*................................... 43.1 42.3 44.3 42.7 ---------------------------------------------------------------
September 30 December 31 2000 1999 ------------------------- PERIOD END Loans....................................................... $ 68,266 $ 62,885 Allowance for credit losses................................. 1,059 995 Assets...................................................... 86,349 81,530 Total shareholders' equity.................................. 8,142 7,638 Tangible common equity to total assets**.................... 6.5% 6.5% Tier 1 capital ratio........................................ 6.7 6.8 Total risk-based capital ratio.............................. 10.7 11.1 Leverage ratio.............................................. 7.3 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)................... 30 Signature................................................... 30 Exhibit 12 -- Computation of Ratio of Earnings to Fixed Charges.................................................. 31
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 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 $401.3 million in the third quarter of 2000, or $.54 per diluted share, compared with $396.4 million, or $.54 per diluted share, in the third quarter of 1999. The increase in earnings reflects total revenue growth of $145.2 million or 9 percent primarily offset by an increase in provision for credit losses of $31.0 million or 22 percent, and an increase in noninterest expense of $115.9 million, or 15 percent, from the third quarter of 1999. Return on average assets and return on average common equity were 1.88 percent and 19.9 percent, respectively, in the third quarter of 2000, compared with returns of 2.02 percent and 23.9 percent in the third quarter of 1999. Net income reflects merger-related charges and available-for-sale securities transactions of $9.6 million ($14.7 million on a pre-tax basis) in the third quarter of 2000 and $12.6 million ($20.2 million on a pre-tax basis) in the third quarter of 1999. The efficiency ratio was 52.7 percent in the third quarter of 2000 compared with 50.2 percent in the third quarter of 1999. The increase in the efficiency ratio reflects additional investments in sales, service quality and technology. The Company reported third quarter of 2000 operating earnings (net income excluding merger-related charges and available-for-sale securities transactions) of $410.9 million, compared with $409.0 million for the third quarter of 1999. On a diluted share basis, operating earnings were $.55 in the third quarter of 2000, compared with $.56 in the third quarter of 1999, a decrease of 2 percent. Operating earnings on a cash basis increased to $.63 per diluted share in the third quarter of 2000, compared with $.62 per diluted share in the third quarter of 1999, an increase of 2 percent. Return on average assets and return on average common equity, excluding merger-related charges and available-for-sale securities transactions, were 1.92 percent and 20.4 percent, respectively, in the third quarter of 2000, compared with returns of 2.09 percent and 24.6 percent, respectively, in the third quarter of 1999. The reduction in the Company's return on average common equity from the third 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 51.7 percent in the third quarter of 2000, compared with 49.2 percent in the third quarter of 1999. The banking efficiency ratio (the ratio of expenses to revenues without the impact of investment banking and brokerage activity), before merger-related charges, was 43.1 percent in the third quarter of 2000, compared with 42.3 percent in the third quarter of 1999. Total revenue on a taxable-equivalent basis, before available-for-sale securities transactions, grew by $148.0 million, or 9 percent, over the third quarter of 1999. The increase in total revenue was driven by core loan growth, credit card fee revenue, investment banking and brokerage activity and acquisitions. Excluding the impact of acquisitions and divestitures, total revenue on a taxable-equivalent basis, before available-for-sale securities transactions, in the third quarter of 2000 would have been approximately 7 percent higher than the third quarter of 1999. Offsetting the growth in total revenue were increases in noninterest expense, before merger-related charges, of $117.0 million and provision for credit losses of $31.0 million over the third quarter of 1999. The growth in noninterest expense was primarily due 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 third quarter of 2000 included approximately $10.8 million of Internet infrastructure-related expense. Relative to the second quarter of 2000, total revenue growth was 2 percent (7 percent on an annualized basis). On the same basis, noninterest expense increased 1 percent (approximately 4 percent annualized). The provision for credit losses of $173.0 million in the third quarter of 2000 was an increase of $31.0 million from $142.0 million in the same quarter of 1999. Nonperforming assets increased from $404.4 million at June 30, 2000, to $425.3 million at September 30, 2000, due to one commercial credit. The ratio of allowance for credit losses to nonperforming loans was 272 percent at September 30, 2000, compared with 285 percent at June 30, 2000, and 321 percent at December 31, 1999. Net income in the first nine months of 2000 was $1.17 billion, or $1.57 per diluted share, compared with $1.14 billion, or $1.56 per diluted share, in the first nine 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 nine months of 2000, compared with returns of 1.99 percent and 24.0 percent, respectively, in the same period of 1999. Net income reflects merger-related charges and available-for-sale securities transactions of 27.7 million ($42.8 million on a pre-tax basis) in the first nine months of 2000, compared with $23.9 million ($38.1 million on a pre-tax basis) in the first nine months of 1999. Operating earnings in the first nine months of 2000 were $1.20 billion compared with $1.16 billion in the 2 U.S. Bancorp 4 TABLE 1 SUMMARY OF CONSOLIDATED INCOME
Three Months Ended Nine Months Ended --------------------------------------------------------------- (Taxable-equivalent Basis; September 30 September 30 September 30 September 30 Dollars In Millions, Except Per Share Data) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- CONDENSED INCOME STATEMENT Interest income............................................. $1,737.8 $1,462.1 $4,990.5 $4,220.4 Interest expense............................................ 854.8 617.1 2,365.4 1,758.7 --------------------------------------------------------------- Net interest income...................................... 883.0 845.0 2,625.1 2,461.7 Provision for credit losses................................. 173.0 142.0 490.0 385.0 --------------------------------------------------------------- Net interest income after provision for credit losses.... 710.0 703.0 2,135.1 2,076.7 Available-for-sale securities gains (losses)................ 1.0 (3.4) 1.0 (3.4) Other noninterest income.................................... 826.0 716.0 2,423.1 1,998.2 Merger-related charges...................................... 15.7 16.8 43.8 34.7 Other noninterest expense................................... 884.4 767.4 2,648.9 2,221.1 --------------------------------------------------------------- Income before income taxes............................... 636.9 631.4 1,866.5 1,815.7 Taxable-equivalent adjustment............................... 17.5 10.3 51.9 31.7 Income taxes................................................ 218.1 224.7 641.2 646.5 --------------------------------------------------------------- Net income............................................... $ 401.3 $ 396.4 $1,173.4 $1,137.5 --------------------------------------------------------------- FINANCIAL RATIOS Return on average assets.................................... 1.88% 2.02% 1.87% 1.99% Return on average common equity............................. 19.9 23.9 19.9 24.0 Net interest margin (taxable-equivalent basis).............. 4.64 4.84 4.73 4.84 Efficiency ratio............................................ 52.7 50.2 53.3 50.6 Efficiency ratio before merger-related charges.............. 51.7 49.2 52.5 49.8 Banking efficiency ratio before merger-related charges*..... 43.1 42.3 44.3 42.7 --------------------------------------------------------------- PER COMMON SHARE Earnings per share.......................................... $ .54 $ .55 $ 1.58 $ 1.57 Diluted earnings per share.................................. .54 .54 1.57 1.56 Dividends paid.............................................. .215 .195 .645 .585 - -------------------------------------------------------------------------------------------------------------------------------
*Without investment banking and brokerage activity. first nine months of 1999. On a diluted per share basis, operating earnings were $1.61 in the first nine months of 2000, compared with $1.59 in the first nine months of 1999, an increase of 1 percent. On a diluted per share basis, cash operating earnings were $1.84 in the first nine months of 2000, compared with $1.75 in the first nine months of 1999, an increase of 5 percent. Year-to-date return on average assets and return on average common equity, excluding merger-related charges and available-for-sale securities transactions, were 1.92 percent and 20.4 percent, respectively, compared with returns of 2.04 percent and 24.5 percent, respectively, in the first nine months of 1999. Excluding merger-related charges, the efficiency ratio was 52.5 percent in the first nine months of 2000, compared with 49.8 percent in the first nine months of 1999. On a similar basis, the banking efficiency ratio was 44.3 percent in the first nine months of 2000, compared with 42.7 percent in the first nine 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 non-recurring effects of discreet business acquisitions and other transactions. The Company has included these additional disclosures of operations before merger-related charges to meet the requests of analysts, investors and other readers that require additional information relating to the comparability of the Company's performance without the effect of these items. Operating earnings and related per share information should not be viewed as a substitute for net income and earnings per share as determined in accordance with generally accepted accounting principles. Merger-related charges and other items excluded from net income to derive operating earnings may be significant, and may not be comparable to other companies. ACQUISITION AND DIVESTITURE ACTIVITY Operating results in the first nine months of 2000 reflect purchase and divestiture transactions from or to the date of completion. On September 28, 2000, the Company acquired Lyon Financial Services, Inc., a wholly owned subsidiary of the privately held Schwan's Sales Enterprises Inc. in Marshall, Minnesota. Lyon Financial specializes in small-ticket lease transactions and has $1.3 billion in assets. U.S. Bancorp 3 5 TABLE 2 LINE OF BUSINESS FINANCIAL PERFORMANCE
Wholesale Consumer Banking Banking ---------------------------------------------------------------------------- For the Three Months Ended September 30 Percent Percent (Dollars in Millions) 2000 1999 Change 2000 1999 Change - -------------------------------------------------------------------------------------------------------------------------------- CONDENSED INCOME STATEMENT Net interest income (taxable-equivalent basis)................... $ 416.3 $ 366.2 13.7% $ 341.8 $ 335.3 1.9% Provision for credit losses..................... 31.5 26.8 17.5 52.2 58.9 (11.4) Noninterest income.............................. 116.8 99.5 17.4 131.3 137.9 (4.8) Noninterest expense............................. 221.8 187.6 18.2 224.0 208.4 7.5 Goodwill and other intangible assets expense.... 23.1 16.4 40.9 15.1 11.0 37.3 Income taxes and taxable-equivalent adjustment................................... 95.0 86.9 9.3 67.3 72.1 (6.7) ---------------------- ---------------------- Income before merger-related charges and available-for-sale securities transactions... $ 161.7 $ 148.0 9.3 $ 114.5 $ 122.8 (6.8) ---------------------- ---------------------- Net merger-related charges and available-for-sale securities transactions (after-tax)*......... Net income...................................... AVERAGE BALANCE SHEET DATA Loans........................................... $ 41,981 $ 35,768 17.4 $ 11,200 $ 12,873 (13.0) Assets.......................................... 46,193 39,194 17.9 12,735 14,023 (9.2) Deposits........................................ 11,803 10,845 8.8 31,289 29,902 4.6 Common equity................................... 4,877 3,764 29.6 1,246 1,141 9.2 ---------------------- ---------------------- Return on average assets........................ 1.39% 1.50% 3.58% 3.47% Return on average common equity ("ROCE")........ 13.2 15.6 36.6 42.7 Efficiency ratio................................ 45.9 43.8 50.5 46.4 Efficiency ratio on a cash basis**.............. 41.6 40.3 47.3 44.0 - --------------------------------------------------------------------------------------------------------------------------------
Wholesale Consumer Banking Banking ---------------------------------------------------------------------------- For the Nine Months Ended September 30 Percent Percent (Dollars in Millions) 2000 1999 Change 2000 1999 Change - ------------------------------------------------------------------------------------------------------------------------------- CONDENSED INCOME STATEMENT Net interest income (taxable-equivalent basis).................. $1,232.4 $1,071.8 15.0% $1,014.3 $ 987.7 2.7% Provision for credit losses.................... 92.8 78.3 18.5 151.1 156.8 (3.6) Noninterest income............................. 353.3 309.8 14.0 378.2 353.5 7.0 Noninterest expense............................ 641.9 562.2 14.2 663.8 623.0 6.5 Goodwill and other intangible assets expense... 69.1 47.6 45.2 45.5 32.2 41.3 Income taxes and taxable-equivalent adjustment.................................. 289.3 256.6 12.7 196.9 195.8 .6 ---------------------- ---------------------- Income before merger-related charges and available-for-sale securities transactions................................ $ 492.6 $ 436.9 12.7 $ 335.2 $ 333.4 .5 ---------------------- ---------------------- Net merger-related charges and available-for-sale securities transactions (after-tax)*................................ Net income..................................... AVERAGE BALANCE SHEET DATA Loans.......................................... $ 41,241 $ 34,862 18.3 $ 10,858 $ 12,846 (15.5) Assets......................................... 45,363 38,148 18.9 12,408 13,989 (11.3) Deposits....................................... 11,640 10,808 7.7 31,080 30,461 2.0 Common equity.................................. 4,797 3,590 33.6 1,227 1,142 7.4 ---------------------- ---------------------- Return on average assets....................... 1.45% 1.53% 3.61% 3.19% Return on average common equity ("ROCE")....... 13.7 16.3 36.5 39.0 Efficiency ratio............................... 44.8 44.1 50.9 48.9 Efficiency ratio on a cash basis**............. 40.5 40.7 47.7 46.5 - -------------------------------------------------------------------------------------------------------------------------------
*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 - ----------------------------------------------------------------------------------------------------------------------------- $ 91.7 $ 94.3 (2.8%) $ 49.4 $ 42.9 15.2% ($ 16.2) $ 6.3 $ 883.0 $ 845.0 4.5% 83.9 73.9 13.5 1.5 1.2 25.0 3.9 (18.8) 173.0 142.0 21.8 208.5 168.7 23.6 335.9 278.9 20.4 33.5 31.0 826.0 716.0 15.4 110.7 91.7 20.7 302.8 244.7 23.7 (33.8) (6.6) 825.5 725.8 13.7 14.6 10.0 46.0 6.1 4.2 45.2 -- -- 58.9 41.6 41.6 33.7 32.3 4.3 27.7 26.5 4.5 17.0 24.8 240.7 242.6 (.8) ------------------- ------------------- -------------------- --------------------- $ 57.3 $ 55.1 4.0 $ 47.2 $ 45.2 4.4 $ 30.2 $ 37.9 410.9 409.0 .5 ------------------- ------------------- -------------------- (9.6) (12.6) *** --------------------- $ 401.3 $ 396.4 1.2 --------------------- $ 9,001 $8,011 12.4 $ 3,061 $2,422 26.4 $ 1,990 $ 2,275 $ 67,233 $ 61,349 9.6 9,644 8,647 11.5 7,083 5,793 22.3 9,453 10,043 85,108 77,700 9.5 165 141 17.0 3,821 3,326 14.9 3,834 3,502 50,912 47,716 6.7 1,024 802 27.7 1,317 1,176 12.0 (432) (295) 8,032 6,588 21.9 ------------------- ------------------- -------------------- --------------------- 2.36% 2.53% 2.65% 3.10% 1.92% 2.09% 22.3 27.3 14.3 15.2 20.4 24.6 41.7 38.7 80.2 77.3 51.7 49.2 36.9 34.9 78.6 76.0 48.3 46.5 - -----------------------------------------------------------------------------------------------------------------------------
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 - ----------------------------------------------------------------------------------------------------------------------------- $ 273.8 $264.1 3.7% $ 144.9 $122.1 18.7% ($ 40.3) $ 16.0 $ 2,625.1 $2,461.7 6.6% 240.5 227.9 5.5 4.2 3.3 27.3 1.4 (81.3) 490.0 385.0 27.3 572.8 446.4 28.3 1,057.6 845.7 25.1 61.2 42.8 2,423.1 1,998.2 21.3 308.4 248.1 24.3 918.1 723.9 26.8 (57.2) (52.1) 2,475.0 2,105.1 17.6 41.0 24.2 69.4 18.3 12.0 52.5 -- -- 173.9 116.0 49.9 95.0 77.8 22.1 96.9 84.6 14.5 30.1 77.6 708.2 692.4 2.3 ------------------- ------------------- -------------------- --------------------- $ 161.7 $132.5 22.0 $ 165.0 $144.0 14.6 $ 46.6 $ 114.6 1,201.1 1,161.4 3.4 ------------------- ------------------- -------------------- (27.7) (23.9) *** --------------------- $ 1,173.4 $1,137.5 3.2 --------------------- $ 8,566 $7,859 9.0 $ 2,933 $2,276 28.9 $ 2,054 $ 2,416 $ 65,652 $ 60,259 8.9 9,175 8,357 9.8 6,915 5,475 26.3 9,799 10,334 83,660 76,303 9.6 125 97 28.9 3,729 3,244 15.0 3,766 3,162 50,340 47,772 5.4 934 709 31.7 1,307 1,147 13.9 (393) (257) 7,872 6,331 24.3 ------------------- ------------------- -------------------- --------------------- 2.35% 2.12% 3.19% 3.52% 1.92% 2.04% 23.1 25.0 16.9 16.8 20.4 24.5 41.3 38.3 77.9 76.0 52.5 49.8 36.4 34.9 76.3 74.8 49.0 47.2 - -----------------------------------------------------------------------------------------------------------------------------
U.S. Bancorp 5 7 On April 7, 2000, the Company acquired Oliver-Allen Corporation, Inc., a privately held information technology leasing company with total assets of $280 million. On January 14, 2000, the Company acquired Peninsula Bank of San Diego, which had 11 branches in San Diego county and total assets of $491 million. On November 15, 1999, the Company completed the acquisition of Western Bancorp. Western Bancorp had $2.5 billion in total assets with 31 branches in southern California in Los Angeles, Orange and San Diego counties. The purchase price of approximately $932 million was allocated to assets acquired and liabilities assumed based on their fair market values at 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 this business. On October 13, 2000, the Company acquired Scripps Financial Corporation of San Diego, which has ten branches in San Diego county and total assets of $650 million. On October 4, 2000, the Company announced that it had signed a definitive agreement to be acquired by Firstar Corporation of Milwaukee, Wisconsin in a tax-free exchange of shares. U.S. Bancorp shareholders will receive 1.265 shares of the combined company stock for every share of U.S. Bancorp stock. Pending all regulatory and shareholder approvals, the transaction is expected to close in the first quarter of 2001 and be accounted for as a pooling-of-interests. 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 $161.7 million in the third quarter of 2000, an increase of 9 percent over the third quarter of 1999, and $492.6 million in the first nine months of 2000, a 13 percent increase over the same period of 1999. Strong revenue growth, primarily due to core loan growth and bank acquisitions, was partially offset by an increase in provision for credit losses and higher noninterest expense. Return on average assets was 1.39 percent in the third quarter of 2000 and 1.45 percent in the first nine months of 2000, compared with 1.50 percent and 1.53 percent for the same periods of 1999. Return on average common equity was 13.2 percent in the third quarter of 2000 and 13.7 percent in the first nine months of 2000, compared with 15.6 percent and 16.3 percent for the same periods of 1999. Net interest income increased 14 percent in the third quarter and 15 percent in the first nine 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 17 percent in the third quarter and 18 percent in the first nine months of 2000, compared with the same periods of 1999. Excluding acquisitions, average loan balances increased approximately 12 percent for the same periods. The increase in the provision for credit losses of 18 percent for the third quarter and 19 percent for the first nine months of 2000 reflected the growth in the loan portfolio. Noninterest income increased 17 percent in the third quarter and 14 percent in the first nine months of 2000, compared with the same periods of the prior year. The increase in noninterest income was primarily related to leasing activities, the timing of ongoing sales of SBA loans, growth in collection and other commercial banking fees and acquisitions. Noninterest income from leasing activities increased $5.4 million in the third quarter and $6.5 million for the first nine months of 2000 primarily due to the acquisition of Oliver-Allen in April 2000. Ongoing sales of SBA loans generated noninterest income of $7.6 million and $15.4 million in the third quarter and first nine months of 2000, respectively, as compared to nominal gains in the third quarter and the first nine months of 1999. The Company sells SBA loans on a recurring basis based on market conditions. Commercial banking fees increased $2.7 million or 12 percent in the third quarter of 2000 and $16.1 million or 23 percent in the first nine months of 2000, compared with the same periods of 1999. Bank acquisitions provided incremental noninterest income of $1.4 million and $5.6 million in the third quarter and first nine months of 2000, respectively. Noninterest expense (excluding amortization of intangible assets) increased 18 percent in the third quarter and 14 percent in the first nine months of 2000, compared with the same periods of 1999. The increase in noninterest expense was primarily due to acquisitions and growth in Wholesale Banking's business activities. Acquisitions added incremental noninterest expense of $8.4 million and $35.5 million in the third quarter and first nine months of 2000, respectively. Goodwill and other intangible asset expense increased $6.7 million or 41 percent in the third quarter and $21.5 million or 45 percent in the first nine months of 2000, compared with the same period in 1999 primarily due to the acquisitions of Bank of Commerce in July 1999, Western Bancorp in November 1999 and Peninsula Bank of San Diego in January 2000. The efficiency ratio on a cash basis was 41.6 percent in the third quarter and 40.5 percent in the first nine months of 2000, compared with 40.3 percent and 40.7 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 $114.5 million during the third quarter of 2000, a 7 percent decrease from the third quarter of 1999, and $335.2 million for the first nine months of 2000, a slight increase compared with the same period of 1999. Third quarter 6 U.S. Bancorp 8 and year-to-date return on average assets improved to 3.58 percent and 3.61 percent, respectively, compared with 3.47 percent and 3.19 percent in the same periods of the prior year. Return on average common equity was 36.6 percent for the third quarter and 36.5 percent for the first nine months of 2000, compared with 42.7 percent and 39.0 percent in the same periods of 1999. Total revenue in the third quarter of 2000 was essentially equal to total revenue in the third quarter of 1999, primarily due to growth in consumer loans, deposits and related fees offset by the expected reduction in the indirect automobile portfolio, a gain from the sale of student loans in the third quarter of 1999 and a third quarter of 2000 loss on the Company's equity investment in New Century Financial Corporation accounted for under the equity method based on New Century's reported earnings. Average consumer loan balances (excluding the indirect automobile portfolio) increased $557 million or 6 percent in the third quarter of 2000, as compared with the same period in 1999, while average consumer deposit balances increased $1.4 million or 5 percent for the same period resulting in incremental net interest income of approximately $15.7 million. Deposit services charges and debit card fees increased $12.8 million or 13 percent in the third quarter of 2000, as compared with the same period in 1999. Total revenue from the indirect automobile portfolio decreased $15.5 million or 61 percent in the third quarter of 2000, as compared with the same period in 1999. After consideration of the timing of revenues derived from student loan sales and the loss associated with New Century, the growth in revenue would have approximated prior quarters' revenue growth. For the first nine months of 2000 total revenue improved 4 percent over the same period 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, was more than offset by an increase in noninterest expense. Noninterest expense (excluding amortization of intangible expense) increased 8 percent for the third quarter of 2000 and 7 percent in the first nine months of 2000 compared with the same periods of 1999. The Company is currently investing in a number of customer service quality initiatives and enhanced technology designed to improve the earnings growth of the Consumer Banking business line. 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. Technology-related expenses increased $5.4 million in the third quarter of 2000 and $6.0 million for the first nine months of 2000, as compared with the same periods in 1999. Goodwill and other intangible asset expense increased 37 percent for the third quarter of 2000 and 41 percent for the first nine months of 2000, compared with the same periods of 1999, primarily due to the acquisitions of Bank of Commerce in July 1999, Western Bancorp in November 1999 and Peninsula Bank of San Diego in January 2000. 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 $57.3 million in the third quarter of 2000, an increase of 4 percent over the third quarter of 1999, and $161.7 million for the first nine months of 2000, representing a 22 percent increase over the same period of 1999. Third quarter and year-to-date return on average assets were 2.36 percent and 2.35 percent, respectively, compared with 2.53 percent and 2.12 percent in the same periods of the prior year. Return on average common equity was 22.3 percent and 23.1 percent in the third quarter and first nine months of 2000, respectively, compared with 27.3 percent and 25.0 percent in the same periods of 1999. Total revenue increased 14 percent and 19 percent over the third quarter and first nine 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, in the third quarter, reflecting the growth in the business line's noninterest-bearing corporate-card loans. Corporate and retail card product fees increased $16.7 million or 11 percent and $69.1 million or 17 percent over the third quarter and first nine months of 2000, respectively, as compared with the same periods in 1999. ATM processing-related revenue increased $4.7 million or 26 percent and $37.1 million or 133 percent over the third quarter and first nine months of 2000, as compared with the same periods in 1999. Average noninterest-bearing corporate-card loan balances increased $346 million or 32 percent and $234 million or 23 percent over the third quarter and first nine months of 2000, as compared with the same periods in 1999. Payment Systems' revenue growth was partially offset by increases in provision for credit losses and noninterest expense over the third quarter and first nine months of 1999, reflecting continued growth in investments in key strategic co-brand partnerships, new products and technology, as well as transaction volume. 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 $47.2 million in the third quarter of 2000, an increase of 4 percent compared with the third quarter of 1999, and $165.0 million for the first nine months of 2000, a 15 percent increase over the first nine months of 1999. Return on average common equity for the third quarter of 2000 decreased to 14.3 percent, compared with 15.2 percent in the third quarter of the prior year. The return on average common equity improved slightly to 16.9 percent from 16.8 percent in the first nine months of 2000 compared with the same period of 1999. During the third quarter of 2000, total revenue grew by 20 percent over the third quarter of 1999 and 24 percent over the first nine months of 1999 primarily due to increases in investment banking, trading account profits and commissions, trust fees and growth in loans and deposits in private banking. Investment banking, trading account profits and commissions increased $50.5 million or 27 percent in the third quarter of 2000, as compared with the same period in 1999, and $199.3 million or 36 percent over the first nine months of 2000, as compared with the same period in 1999. Trust and investment management fees increased $6.2 million or 7 percent in the third quarter of 2000, as compared with the same period in 1999, and $10.2 million or 4 percent over the first nine months of 2000, as compared with the same period in 1999. Average loan balances in private banking increased $552.7 million or 24 percent in the third quarter of 2000, as compared with the same period in 1999, and $537.8 million or 25 percent over the first nine months of 2000, as compared with the same period in 1999, while average deposit balances increased $387.2 million or 13 percent in the third quarter of 2000, as compared with the same period in 1999, and $324.4 million or 12 percent over the first nine months of 2000, as compared with the same period in 1999. U.S. Bancorp 7 9 TABLE 3 ANALYSIS OF NET INTEREST INCOME
Three Months Ended Nine Months Ended --------------------------------------------------------------- September 30 September 30 September 30 September 30 (Dollars In Millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- Net interest income, as reported............................ $865.5 $834.7 $2,573.2 $2,430.0 Taxable-equivalent adjustment............................ 17.5 10.3 51.9 31.7 --------------------------------------------------------------- Net interest income (taxable-equivalent basis).............. $883.0 $845.0 $2,625.1 $2,461.7 --------------------------------------------------------------- Average yields and weighted average rates (taxable-equivalent basis) Earning assets yield..................................... 9.13% 8.37% 8.99% 8.30% Rate paid on interest-bearing liabilities................ 5.67 4.45 5.37 4.35 --------------------------------------------------------------- Gross interest margin....................................... 3.46% 3.92% 3.62% 3.95% --------------------------------------------------------------- Net interest margin......................................... 4.64% 4.84% 4.73% 4.84% --------------------------------------------------------------- Net interest margin without taxable-equivalent increments... 4.55% 4.78% 4.64% 4.78% - -------------------------------------------------------------------------------------------------------------------------------
Offsetting the positive impact of revenue growth, noninterest expense (including amortization of intangible assets) increased 24 percent in the third quarter and 27 percent in the first nine months of 2000, compared with the same periods of 1999. The increases were primarily due to the increase in investment banking and brokerage activity, office expansion and other growth initiatives. CORPORATE SUPPORT Corporate Support includes the net effect of support units after internal revenue and expense allocations, treasury and other corporate activities. Operating earnings in the third quarter declined $7.7 million and $68 million during the first nine months of 2000 as compared with the same periods of 1999. The reductions primarily reflect the change in the residual allocations associated with provision for credit losses, planned declines in the residential real estate portfolio, noninterest expenses from operational activities and the effect of a rising rate environment. STATEMENT OF INCOME ANALYSIS NET INTEREST INCOME Third quarter net interest income on a taxable-equivalent basis was $883.0 million compared with $845.0 million in the third quarter of 1999. Year-to-date net interest income on a taxable-equivalent basis was $2.63 billion, compared with $2.46 billion in the first nine months of 1999. For the third quarter and on a year-to-date basis, average earning assets increased 9 percent compared with the same periods of 1999. The increase was primarily driven by core commercial and home equity and second mortgage loan growth and acquisitions, partially offset by reductions in securities, indirect automobile loans and residential mortgage loans. The net interest margin decreased from 4.84 percent in both the third quarter and first nine months of 1999 to 4.64 percent and 4.73 percent in the third quarter and first nine months of 2000. The decrease reflects lagging core deposit growth relative to the growth in total earning assets which has increased the Company's incremental cost of funding. Average loans for the third quarter and first nine months of 2000 increased 10 percent and 9 percent, respectively, compared with the same periods of the prior year. Excluding indirect automobile and residential mortgage loans, average loans for both the third quarter and first nine months of 2000 were higher by approximately $8.05 billion (14 percent) and $7.91 billion (14 percent), respectively, than the third quarter and first nine months 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 acquisitions, average loans, excluding indirect automobile and residential mortgage loans, were higher than the third quarter and first nine months of 1999 by 10 percent for both periods. Average available-for-sale securities for the third quarter and first nine months of 2000 decreased by $659 million and $454 million, respectively, from the third quarter and first nine months of 1999, reflecting both maturities and sales of securities. PROVISION FOR CREDIT LOSSES In the third quarter of 2000, the provision for credit losses was $173.0 million, an increase of $31 million (22 percent) from $142.0 million in the same quarter of 1999. The provision for credit losses in the first nine months of 2000 was $490.0 million, an increase of $105 million (27 percent) from $385.0 million in the same period of 1999. The provision for 8 U.S. Bancorp 10 TABLE 4 NONINTEREST INCOME
Three Months Ended Nine Months Ended --------------------------------------------------------------- September 30 September 30 September 30 September 30 (Dollars in Millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- Credit card fee revenue..................................... $ 192.8 $ 161.3 $ 529.4 $ 436.8 Trust and investment management fees........................ 119.9 113.8 354.0 343.2 Service charges on deposit accounts......................... 120.8 112.2 347.3 323.1 Investment products fees and commissions.................... 81.3 79.5 279.3 259.7 Investment banking revenue.................................. 97.3 60.1 264.1 156.6 Trading account profits and commissions..................... 50.0 48.4 191.8 150.4 Other....................................................... 163.9 140.7 457.2 328.4 --------------------------------------------------------------- Total operating noninterest income....................... 826.0 716.0 2,423.1 1,998.2 Available-for-sale securities gains (losses)................ 1.0 (3.4) 1.0 (3.4) --------------------------------------------------------------- Total noninterest income................................. $ 827.0 $ 712.6 $2,424.1 $1,994.8 - -------------------------------------------------------------------------------------------------------------------------------
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 Third quarter 2000 noninterest income was $827.0 million, an increase of $114.4 million (16 percent) from the third quarter of 1999. Noninterest income in the first nine months of 2000 was $2.42 billion, an increase of $429.3 million (22 percent) from $1.99 billion in the first nine months of 1999. Noninterest income in the third quarter of 2000 included net gains from available-for-sale securities transactions of $1.0 million as compared with net losses of $3.4 million in the same period of 1999. Excluding the impact of acquisitions and divestitures, noninterest income, before available-for-sale securities transactions, in the third quarter and first nine months of 2000 would have been approximately 14 percent higher than the third quarter of 1999 and 19 percent higher than the first nine months of 1999. Credit card fee revenue was higher for the third quarter and first nine months of 2000 by $31.5 million (20 percent) and $92.6 million (21 percent), respectively, reflecting continued growth in corporate and retail card product fees, ATM processing-related revenue and acquisitions. Investment banking revenue was higher in the third quarter and first nine months of 2000 compared with the same periods of 1999 by $37.2 million (62 percent) and $107.5 million (69 percent), respectively, due to strong equity capital markets activity at U.S. Bancorp Piper Jaffray. Other income increased by $23.2 million, or 16 percent, over the third quarter of 1999 and $128.8 million, or 39 percent, over the first nine months of 1999. The increases reflect the impact of acquisitions, U.S. Bancorp Piper Jaffray managed account fees, revenues associated with equity investments, and the timing of sales of SBA loans, partially offset by the third quarter of 1999 gain-on-sale of branches in Kansas and Iowa. Year-to-date results also reflect the second quarter $35 million gain on the disposal of the Company's ownership interests in a Portland office building, and a $10.8 million first quarter gain on the sale of a Boise building. NONINTEREST EXPENSE Third quarter 2000 noninterest expense, before merger-related charges, totaled $884.4 million, an increase of $117.0 million (15 percent) from $767.4 million in the third quarter of 1999. Year-to-date noninterest expense, before merger-related charges, was $2.65 billion, an increase of $427.8 million (19 percent) from $2.22 billion in the first nine months of 1999. The increase in noninterest expense over the third quarter and first nine months of 1999 was primarily the result of acquisitions, the increase in investment banking and brokerage activity and the Company's continuing investment in sales, service quality and technology. In addition to ongoing investments in Internet-related products and services, the third quarter and first nine months of 2000 included approximately $10.8 million and $31.0 million, respectively, of incremental spending on Internet infrastructure-related initiatives. As with any such investment, the anticipated benefits are subject to a number of uncertainties. The banking efficiency ratio, excluding merger-related charges, was 43.1 percent and 44.3 percent for the third quarter and first nine months of 2000, respectively, compared with 42.3 percent and 42.7 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. Third quarter of 2000 noninterest expense was $900.1 million, compared with $784.2 million in the third quarter of 1999. Year-to-date noninterest expense U.S. Bancorp 9 11 TABLE 5 NONINTEREST EXPENSE
Three Months Ended Nine Months Ended --------------------------------------------------------------- September 30 September 30 September 30 September 30 (Dollars in Millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- Salaries.................................................... $ 417.5 $ 352.4 $1,263.7 $1,063.2 Employee benefits........................................... 63.0 59.8 208.4 183.4 Net occupancy............................................... 59.5 51.9 171.8 151.8 Furniture and equipment..................................... 43.7 40.9 125.3 118.0 Professional services....................................... 23.3 17.0 66.8 47.6 Telephone................................................... 22.9 20.3 66.0 55.7 Advertising and marketing................................... 20.5 18.5 58.3 46.2 Other personnel costs....................................... 20.8 16.7 52.3 49.2 Goodwill and other intangible assets........................ 58.9 41.6 173.9 116.0 Other....................................................... 154.3 148.3 462.4 390.0 --------------------------------------------------------------- Total operating noninterest expense...................... 884.4 767.4 2,648.9 2,221.1 Merger-related charges...................................... 15.7 16.8 43.8 34.7 --------------------------------------------------------------- Total noninterest expense................................ $ 900.1 $ 784.2 $2,692.7 $2,255.8 --------------------------------------------------------------- Efficiency ratio*........................................... 52.7% 50.2% 53.3% 50.6% Efficiency ratio before merger-related charges.............. 51.7 49.2 52.5 49.8 Banking efficiency ratio before merger-related charges**.... 43.1 42.3 44.3 42.7 Average number of full-time equivalent employees............ 29,047 26,907 28,803 26,871 - -------------------------------------------------------------------------------------------------------------------------------
*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. was $2.69 billion, compared with $2.26 billion in the first nine months of 1999. Noninterest expense in the third quarter and first nine months of 2000 included nonrecurring merger-related charges of $15.7 million and $43.8 million, compared with merger-related charges of $16.8 million and $34.7 million in the third quarter and first nine months of 1999. Merger-related charges of $43.8 million incurred in 2000 were related to the integration of the Company's various acquisitions, including $9.6 million for Western Bancorp, $8.5 million for Piper Jaffray, and $25.7 million for other acquisitions completed in the past two years. Approximately $39 million represents system conversion costs which are recorded as incurred and are associated with the preparation and mailing of customer communications, conversion of customer accounts, printing and distribution of training materials and policy and procedure manuals to new employees, outside consulting fees and similar expenses related to the conversion and integration of acquired branches and operations. INCOME TAX EXPENSE The provision for income taxes was $218.1 million (an effective rate of 35.2 percent) in the third quarter and $641.2 million (an effective rate of 35.3 percent) in the first nine months of 2000, compared with $224.7 million (an effective rate of 36.2 percent) and $646.5 million (an effective rate of 36.2 percent) in the same periods of 1999. BALANCE SHEET ANALYSIS LOANS The Company's loan portfolio was $68.3 billion at September 30, 2000, compared with $62.9 billion at December 31, 1999. Commercial loans totaled $48.4 billion at September 30, 2000, up $5.4 billion (13 percent) from December 31, 1999. The increase was primarily attributable to continued growth in core commercial loans and acquisitions. Total consumer outstandings were $19.9 billion both at September 30, 2000 and at December 31, 1999. Excluding indirect automobile loans and residential mortgage loans, consumer loans were $17.0 billion at September 30, 2000, and $16.6 billion at December 31, 1999. SECURITIES At September 30, 2000, available-for-sale securities totaled $4.4 billion, compared with $4.9 billion at December 31, 1999, reflecting both maturities and sales of securities. DEPOSITS Noninterest-bearing deposits were $14.5 billion at September 30, 2000, compared with $16.1 billion at December 31, 1999. The decrease was primarily due to seasonality of business deposits. The decline was offset by an increase in interest-bearing deposits which totaled $36.8 billion at September 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, increased to $3.4 billion at September 30, 2000, compared with $2.3 billion at December 31, 1999, primarily due to increased federal funds purchased. Long-term debt was $19.4 billion at September 30, 2000, up from $16.6 billion at December 31, 1999. The Company issued $4.8 billion of debt with an average original maturity of 1.9 years under its medium-term and bank note programs to fund core asset growth and replace wholesale funding maturities during 2000. In 10 U.S. Bancorp 12 TABLE 6 NET CHARGE-OFFS AS A PERCENTAGE OF AVERAGE LOANS OUTSTANDING
Three Months Ended Nine Months Ended --------------------------------------------------------------- September 30 September 30 September 30 September 30 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- COMMERCIAL Commercial............................................... .74% .37% .73% .44% Real estate Commercial mortgage................................... -- .25 (.05) .03 Construction.......................................... .44 .02 .10 .02 Lease financing.......................................... .49 .55 .48 .25 --------------------------------------------------------------- Total commercial...................................... .54 .32 .48 .30 CONSUMER Credit card.............................................. 4.48 3.50 4.31 4.42 Other.................................................... 1.86 1.97 1.90 1.83 --------------------------------------------------------------- Subtotal.............................................. 2.50 2.30 2.48 2.39 Residential mortgage..................................... .03 .12 .17 .10 --------------------------------------------------------------- Total consumer........................................ 2.18 2.03 2.18 2.09 --------------------------------------------------------------- Total.............................................. 1.02% .92% 1.00% .94% - -------------------------------------------------------------------------------------------------------------------------------
addition, Federal Home Loan Bank advances, net of maturities, increased by $309 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 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 55 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 $172.9 million and $490.1 million in the third quarter and first nine months of 2000, respectively, compared with $141.8 million and $421.7 million in the same periods of 1999. Net charge-offs in the second quarter of 2000 were $163.2 million. A portion of the increase in net charge-offs over the third quarter of 1999 was due to an expected increase in losses on the growing credit-scored small business lending portfolio. Relative to the second quarter of 2000, the increase in net charge-offs partially reflects higher losses on the credit-scored small business lending portfolio, as well as an increase in consumer fraud losses. On a year-to-date basis, the increase in net charge-offs was primarily due to commercial loan charge-offs including the growing credit-scored small business lending portfolio, partially offset by lower consumer loan charge-offs. The ratio of total net charge-offs to average loans was 1.02 percent and 1.00 percent in the third quarter and first nine months of 2000, respectively, compared with .92 and .94 percent in the same periods in 1999. Commercial loan net charge-offs were $63.9 million and $166.2 million in the third quarter and first nine months of 2000, respectively, compared with $32.7 million and $86.5 million in the same periods of 1999. The increase reflects the impact of acquisitions, the current economic conditions and growth in small business and corporate payment systems portfolios. Excluding net charge-offs of credit-scored small business and corporate payment systems products, commercial loan net charge-offs were $36.4 million, or .33 percent of the associated average loans outstanding, compared with $34.4 million, or .32 percent on the same basis, in the second quarter of 2000. Consumer loan net charge-offs for the quarter and year-to-date were $109.0 million and $323.9 million, respectively, compared with $109.1 million and $335.2 million for the same periods of 1999. Consumer loan net charge-offs as a percent of average loans U.S. Bancorp 11 13 TABLE 7 SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
Three Months Ended Nine Months Ended --------------------------------------------------------------- September 30 September 30 September 30 September 30 (Dollars in Millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- Balance at beginning of period.............................. $1,039.4 $ 968.2 $ 995.4 $1,000.9 CHARGE-OFFS Commercial Commercial............................................ 62.2 35.4 179.3 126.2 Real estate Commercial mortgage................................ .4 6.5 2.1 7.1 Construction....................................... 5.1 .2 5.2 .6 Lease financing....................................... 3.6 3.4 10.3 6.0 --------------------------------------------------------------- Total commercial................................... 71.3 45.5 196.9 139.9 Consumer Credit card........................................... 50.7 40.5 144.4 146.9 Other................................................. 74.2 88.6 229.9 250.7 --------------------------------------------------------------- Subtotal........................................... 124.9 129.1 374.3 397.6 Residential mortgage.................................. .8 .9 4.3 2.7 --------------------------------------------------------------- Total consumer..................................... 125.7 130.0 378.6 400.3 --------------------------------------------------------------- Total........................................... 197.0 175.5 575.5 540.2 RECOVERIES Commercial Commercial............................................ 6.7 11.5 21.8 46.1 Real estate Commercial mortgage................................ .3 1.0 6.0 5.4 Construction....................................... .2 -- 1.9 .1 Lease financing....................................... .2 .3 1.0 1.8 --------------------------------------------------------------- Total commercial................................... 7.4 12.8 30.7 53.4 Consumer Credit card........................................... 3.2 5.1 10.0 14.6 Other................................................. 12.9 15.7 43.7 50.0 --------------------------------------------------------------- Subtotal........................................... 16.1 20.8 53.7 64.6 Residential mortgage.................................. .6 .1 1.0 .5 --------------------------------------------------------------- Total consumer..................................... 16.7 20.9 54.7 65.1 --------------------------------------------------------------- Total........................................... 24.1 33.7 85.4 118.5 NET CHARGE-OFFS Commercial Commercial............................................ 55.5 23.9 157.5 80.1 Real estate Commercial mortgage................................ .1 5.5 (3.9) 1.7 Construction....................................... 4.9 .2 3.3 .5 Lease financing....................................... 3.4 3.1 9.3 4.2 --------------------------------------------------------------- Total commercial................................... 63.9 32.7 166.2 86.5 Consumer Credit card........................................... 47.5 35.4 134.4 132.3 Other................................................. 61.3 72.9 186.2 200.7 --------------------------------------------------------------- Subtotal........................................... 108.8 108.3 320.6 333.0 Residential mortgage.................................. .2 .8 3.3 2.2 --------------------------------------------------------------- Total consumer..................................... 109.0 109.1 323.9 335.2 --------------------------------------------------------------- Total........................................... 172.9 141.8 490.1 421.7 Provision charged to operating expense...................... 173.0 142.0 490.0 385.0 Acquisitions and other changes.............................. 19.5 (2.1) 63.7 2.1 --------------------------------------------------------------- Balance at end of period.................................... $1,059.0 $ 966.3 $1,059.0 $ 966.3 --------------------------------------------------------------- Allowance as a percentage of: Period-end loans......................................... 1.55% 1.60% Nonperforming loans...................................... 272 327 Nonperforming assets..................................... 249 297 Annualized net charge-offs............................... 154 172 - -------------------------------------------------------------------------------------------------------------------------------
12 U.S. Bancorp 14 TABLE 8 DELINQUENT LOAN RATIOS*
September 30 December 31 90 days or more past due 2000 1999 - ------------------------------------------------------------------------------------------- COMMERCIAL Commercial............................................... .79% .57% Real estate Commercial mortgage................................... .70 .84 Construction.......................................... .68 .59 Lease financing.......................................... 1.07 .81 --------------------------- Total commercial...................................... .78 .65 CONSUMER Credit card.............................................. 1.16 .96 Other.................................................... .60 .57 --------------------------- Subtotal.............................................. .74 .67 Residential mortgage..................................... 1.56 1.57 --------------------------- Total consumer........................................ .84 .79 --------------------------- Total........................................... .80% .69% - -------------------------------------------------------------------------------------------
*Ratios include nonperforming loans and are expressed as a percent of ending loan balances. TABLE 9 NONPERFORMING ASSETS*
September 30 December 31 (Dollars in Millions) 2000 1999 - ------------------------------------------------------------------------------------------- COMMERCIAL Commercial............................................... $ 216.2 $ 142.4 Real estate Commercial mortgage................................... 63.4 78.9 Construction.......................................... 28.5 25.3 Lease financing.......................................... 39.4 18.8 --------------------------- Total commercial...................................... 347.5 265.4 CONSUMER Residential mortgage..................................... 33.7 36.0 Other.................................................... 8.0 8.6 --------------------------- Total consumer........................................ 41.7 44.6 --------------------------- Total nonperforming loans.......................... 389.2 310.0 OTHER REAL ESTATE........................................... 22.8 20.7 OTHER NONPERFORMING ASSETS.................................. 13.3 16.8 --------------------------- Total nonperforming assets...................... $ 425.3 $ 347.5 --------------------------- Accruing loans 90 days or more past due**................... $ 155.8 $ 125.8 Nonperforming loans to total loans.......................... .57% .49% Nonperforming assets to total loans plus other real estate..................................................... .62 .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. outstanding were 2.18 in both the third quarter and first nine months of 2000, compared with 2.03 and 2.09 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 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 $1,059.0 million at September 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 272 percent at September 30, 2000, compared with 285 percent at June 30, 2000 and 321 percent at December 31, 1999. Management has determined that the allowance for credit losses is adequate. NONPERFORMING ASSETS Nonperforming assets include nonaccrual loans, restructured loans, other real estate and other nonperforming assets owned by the Company. Nonperforming assets at September 30, 2000, totaled $425.3 million, compared with $347.5 million at December 31, 1999. The ratio of nonperforming assets to loans and other real estate was U.S. Bancorp 13 15 TABLE 10 INTEREST RATE SWAP HEDGING PORTFOLIO NOTIONAL BALANCES AND YIELDS BY MATURITY DATE
At September 30, 2000 (Dollars in Millions) - ------------------------------------------------------------------------------------------------------------------- Weighted Weighted Average Average Notional Interest Rate Interest Rate Maturity Date Amount Received Paid - ------------------------------------------------------------------------------------------------------------------- 2000........................................................ $ 10 6.23% 6.62% 2001........................................................ 290 6.56 6.62 2002........................................................ 545 6.22 6.62 2003........................................................ 2,318 6.20 6.71 2004........................................................ 1,475 6.60 6.63 Thereafter.................................................. 2,610 6.42 6.62 ------ Total....................................................... $7,248 6.38% 6.65% - -------------------------------------------------------------------------------------------------------------------
*At September 30, 2000, the Company received fixed-rate interest and paid variable-rate interest on substantially all swaps in its hedging portfolio. .62 percent at September 30, 2000, compared with .60 percent at June 30, 2000 and .55 percent at December 31, 1999. Accruing loans 90 days or more past due at September 30, 2000, totaled $155.8 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 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 increased to 2.72 percent of the portfolio at September 30, 2000, compared with 2.58 percent at June 30, 2000, and 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 .84 percent at September 30, 2000, compared with .80 percent at June 30, 2000, and .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 September 30, 2000, forecasted net interest income for the next 12 months would decrease $16 million from an immediate 100 basis point upward parallel shift in rates and would increase $20 million from a downward shift of similar magnitude. Forecasted net interest income for the second 12 months would decrease $15 million from an immediate 100 basis point upward parallel shift in rates and would increase $6 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 14 U.S. Bancorp 16 instruments. ALCO also calculates the sensitivity of the simulation results to changes in key assumptions, such as core deposit repricing and core deposit life. The amount of market value risk is subject to a limit, approved by the Company's Board of Directors, of .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 receive fixed interest rate swaps and, to a lesser degree, basis swaps and interest rate caps and floors. During the third quarter of 2000, the Company added $60 million of receive fixed interest rate swaps. In the first nine months of 2000, the Company added $245 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 September 30, 2000, the Company received and made payments on $7.2 billion notional amount of interest rate swap agreements. These swaps had a weighted average interest rate received of 6.38 percent and a weighted average interest rate paid of 6.65 percent. The remaining maturity of these agreements ranges from 1 month to 14.8 years with an average remaining maturity of 4.4 years. For the quarter and nine months ended September 30, 2000, interest rate swap agreements decreased net interest income by $7.8 million and $9.6 million, respectively, and for the quarter and nine months ended September 30, 1999, interest rate swap agreements increased net interest income by $15.2 million and $52.3 million, respectively. The Company also purchases interest rate caps, floors and basis swaps 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 September 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 September 30, 2000, all of which were LIBOR-indexed, was $500 million. Basis swaps help the Company reduce the monthly interest income at risk related to mismatches in underlying repricing indices of financial instruments. During the third quarter of 2000, the Company entered into $1.0 billion of basis swaps where the Company receives 3 month LIBOR and pays 1 month LIBOR. The impact of basis swaps, caps and floors on net interest income was not significant for the nine months ended September 30, 2000, and 1999. MARKET RISK MANAGEMENT Market risk is subject to regular monitoring by management. The Company uses a value-at-risk ("VaR") model to measure and manage market risk in its broker/dealer activities. The VaR model uses an estimate of volatility appropriate to each instrument and a ninety-ninth percentile adverse move in the underlying markets. Market risk limits are established subject to approval by the Company's Board of Directors. The Company's VaR limit was $40 million at September 30, 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 $15.5 million at September 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. U.S. Bancorp 15 17 TABLE 11 CAPITAL RATIOS
September 30 December 31 (Dollars in Millions) 2000 1999 - ------------------------------------------------------------------------------------------- Tangible common equity*..................................... $ 5,434 $ 5,134 As a percent of assets................................... 6.5% 6.5% Tier 1 capital.............................................. $ 5,937 $ 5,631 As a percent of risk-adjusted assets..................... 6.7% 6.8% Total risk-based capital.................................... $ 9,476 $ 9,281 As a percent of risk-adjusted assets..................... 10.7% 11.1% Leverage ratio.............................................. 7.3 7.4 - -------------------------------------------------------------------------------------------
*Defined as common equity less goodwill. CAPITAL MANAGEMENT At September 30, 2000, tangible common equity (common equity less goodwill) was $5.4 billion, or 6.5 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 6.7 percent and 10.7 percent at September 30, 2000, compared with 6.8 percent and 11.1 percent at December 31, 1999. The September 30, 2000, leverage ratio was 7.3 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 nine months of 2000, the Company repurchased 20.2 million shares under these programs for a total dollar value of $432.2 million. 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. We have evaluated the impact of the adoption of SFAS 133 and have determined, based on current market information, that it will not have a material impact on the Company. ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", established accounting and reporting standards for sales and servicing of financial assets, securitization transactions and the extinguishment of liabilities. The statement replaced SFAS 125 and provided clarification of issues related to qualified special purpose entities and additional disclosures about securitizations and the residual interests retained. SFAS 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The additional disclosures are required in financial statements for fiscal years ending after December 15, 2000. The adoption of SFAS 140 is not expected to have a material impact on the Company. 16 U.S. Bancorp 18 CONSOLIDATED BALANCE SHEET
September 30 December 31 (Dollars in Millions) 2000 1999 - ------------------------------------------------------------------------------------------- (Unaudited) ASSETS Cash and due from banks..................................... $ 3,666 $ 4,036 Federal funds sold.......................................... 110 713 Securities purchased under agreements to resell............. 449 324 Trading account securities.................................. 693 617 Available-for-sale securities............................... 4,446 4,871 Loans....................................................... 68,266 62,885 Less allowance for credit losses......................... 1,059 995 --------------------------- Net loans................................................ 67,207 61,890 Premises and equipment...................................... 860 862 Interest receivable......................................... 540 433 Customers' liability on acceptances......................... 214 152 Goodwill and other intangible assets........................ 3,254 3,066 Other assets................................................ 4,910 4,566 --------------------------- Total assets.......................................... $ 86,349 $ 81,530 --------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing...................................... $ 14,544 $ 16,050 Interest-bearing......................................... 30,351 29,671 Time certificates of deposit greater than $100,000....... 6,497 5,809 --------------------------- Total deposits........................................ 51,392 51,530 Federal funds purchased..................................... 1,324 297 Securities sold under agreements to repurchase.............. 1,084 1,235 Other short-term funds borrowed............................. 944 724 Long-term debt.............................................. 19,400 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..................................... 214 152 Other liabilities........................................... 2,899 2,441 --------------------------- Total liabilities..................................... 78,207 73,892 Shareholders' equity Common stock, par value $1.25 a share -- authorized 1,500,000,000 shares; issued: 9/30/00 -- 758,194,161 shares; 12/31/99 -- 754,368,668 shares................. 948 943 Capital surplus.......................................... 1,465 1,399 Retained earnings........................................ 6,080 5,389 Accumulated other comprehensive income................... (33) (62) Less cost of common stock in treasury: 9/30/00 -- 14,799,833 shares; 12/31/99 -- 1,038,456 shares................................................. (318) (31) --------------------------- Total shareholders' equity............................ 8,142 7,638 --------------------------- Total liabilities and shareholders' equity............ $ 86,349 $ 81,530 - -------------------------------------------------------------------------------------------
U.S. Bancorp 17 19 CONSOLIDATED STATEMENT OF INCOME
Three Months Ended Nine Months Ended --------------------------------------------------------------- (Dollars in Millions, Except Per Share Data) September 30 September 30 September 30 September 30 (Unaudited) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans....................................................... $1,582.9 $1,333.3 $4,527.3 $3,844.0 Securities Taxable.................................................. 56.7 64.2 175.5 188.6 Exempt from federal income taxes......................... 13.5 14.2 41.3 43.2 Other interest income....................................... 67.2 40.1 194.5 112.9 --------------------------------------------------------------- Total interest income................................. 1,720.3 1,451.8 4,938.6 4,188.7 INTEREST EXPENSE Deposits.................................................... 442.0 318.7 1,217.1 939.1 Federal funds purchased and repurchase agreements........... 37.0 48.4 126.5 131.4 Other short-term funds borrowed............................. 12.9 12.9 41.5 37.9 Long-term debt.............................................. 343.5 217.8 922.3 592.3 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company............ 19.4 19.3 58.0 58.0 --------------------------------------------------------------- Total interest expense................................ 854.8 617.1 2,365.4 1,758.7 --------------------------------------------------------------- Net interest income......................................... 865.5 834.7 2,573.2 2,430.0 Provision for credit losses................................. 173.0 142.0 490.0 385.0 --------------------------------------------------------------- Net interest income after provision for credit losses....... 692.5 692.7 2,083.2 2,045.0 NONINTEREST INCOME Credit card fee revenue..................................... 192.8 161.3 529.4 436.8 Trust and investment management fees........................ 119.9 113.8 354.0 343.2 Service charges on deposit accounts......................... 120.8 112.2 347.3 323.1 Investment products fees and commissions.................... 81.3 79.5 279.3 259.7 Investment banking revenue.................................. 97.3 60.1 264.1 156.6 Trading account profits and commissions..................... 50.0 48.4 191.8 150.4 Available-for-sale securities gains (losses)................ 1.0 (3.4) 1.0 (3.4) Other....................................................... 163.9 140.7 457.2 328.4 --------------------------------------------------------------- Total noninterest income.............................. 827.0 712.6 2,424.1 1,994.8 NONINTEREST EXPENSE Salaries.................................................... 417.5 352.4 1,263.7 1,063.2 Employee benefits........................................... 63.0 59.8 208.4 183.4 Net occupancy............................................... 59.5 51.9 171.8 151.8 Furniture and equipment..................................... 43.7 40.9 125.3 118.0 Goodwill and other intangible assets........................ 58.9 41.6 173.9 116.0 Merger-related charges...................................... 15.7 16.8 43.8 34.7 Other....................................................... 241.8 220.8 705.8 588.7 --------------------------------------------------------------- Total noninterest expense............................. 900.1 784.2 2,692.7 2,255.8 --------------------------------------------------------------- Income before income taxes.................................. 619.4 621.1 1,814.6 1,784.0 Applicable income taxes..................................... 218.1 224.7 641.2 646.5 --------------------------------------------------------------- Net income.................................................. $ 401.3 $ 396.4 $1,173.4 $1,137.5 --------------------------------------------------------------- Earnings per share.......................................... $ .54 $ .55 $ 1.58 $ 1.57 Diluted earnings per share.................................. $ .54 $ .54 $ 1.57 $ 1.56 - -------------------------------------------------------------------------------------------------------------------------------
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............ (426.0) (426.0) Purchase of treasury stock........... (9,418,262) (310.6) (310.6) Issuance of common stock Acquisitions...................... 10,315,236 (33.0) 386.3 353.3 Dividend reinvestment............. 551,169 (2.9) 20.5 17.6 Stock option and stock purchase plans.......................... 3,174,870 (49.7) 126.4 76.7 ---------------------------------------------------------------------------------------- 730,384,731 931.0 1,161.6 4,029.8 71.8 (513.2) 5,681.0 Comprehensive income Net income........................... 1,137.5 1,137.5 Other comprehensive income Change in net unrealized losses on securities of $100.3 (net of $61.5 tax benefit) net of reclassification adjustment for losses included in net income of $.6 (net of $.3 tax benefit)...... (99.7) (99.7) -------- Total comprehensive income................... 1,037.8 ---------------------------------------------------------------------------------------- BALANCE SEPTEMBER 30, 1999........... 730,384,731 $931.0 $1,161.6 $5,167.3 $(27.9) $(513.2) $6,718.8 - --------------------------------------------------------------------------------------------------------------------------------- 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............ (482.9) (482.9) Purchase of treasury stock........... (20,248,002) (432.2) (432.2) Issuance of common stock Acquisitions...................... 6,969,658 4.0 55.7 86.3 146.0 Dividend reinvestment............. 894,599 (.4) 19.1 18.7 Stock option and stock purchase plans.......................... 2,447,861 .7 10.7 40.5 51.9 ---------------------------------------------------------------------------------------- 743,394,328 947.7 1,464.8 4,906.3 (61.8) (317.8) 6,939.2 Comprehensive income Net income........................... 1,173.4 1,173.4 Other comprehensive income Change in net unrealized losses on securities of $30.1 (net of $18.6 tax expense) net of reclassification adjustment for gains included in net income of $.3 (net of $.2 tax expense)...... 29.8 29.8 Foreign currency translation adjustments.................... (.8) (.8) -------- Total comprehensive income................... 1,202.4 ---------------------------------------------------------------------------------------- BALANCE SEPTEMBER 30, 2000........... 743,394,328 $947.7 $1,464.8 $6,079.7 $(32.8) $(317.8) $8,141.6 - ---------------------------------------------------------------------------------------------------------------------------------
*Defined as total common shares less common stock held in treasury. **Ending treasury shares were 14,799,833 at September 30, 2000; 1,038,456 at December 31, 1999; 14,413,126 at September 30, 1999; and 19,036,139 at December 31, 1998. U.S. Bancorp 19 21 CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended ---------------------------- (Dollars in Millions) September 30 September 30 (Unaudited) 2000 1999 - -------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net cash provided by operating activities................ $1,922.6 $1,900.5 ---------------------------- INVESTING ACTIVITIES Net cash (used) provided by: Loans outstanding........................................ (4,323.4) (3,060.5) Securities purchased under agreements to resell.......... (125.6) 128.7 Available-for-sale securities Sales.................................................... 157.0 146.0 Maturities............................................... 503.3 1,154.5 Purchases................................................ (108.8) (916.6) Proceeds from sales of other real estate.................... 19.2 25.9 Net purchases of bank premises and equipment................ (5.8) (69.3) Sales of loans.............................................. 475.6 1,720.0 Purchases of loans.......................................... (592.9) (254.6) Divestitures of branches.................................... -- (352.0) Acquisitions, net of cash received.......................... (296.0) (220.5) Cash and cash equivalents of acquired subsidiaries.......... 24.0 107.4 Other -- net................................................ (301.8) (339.9) ---------------------------- Net cash used by investing activities.................... (4,575.2) (1,930.9) ---------------------------- FINANCING ACTIVITIES Net cash (used) provided by: Deposits................................................. (591.1) (2,183.5) Federal funds purchased and securities sold under agreements to repurchase................................ 312.1 (1,026.0) Short-term borrowings.................................... 219.8 246.9 Proceeds from long-term debt................................ 5,241.9 4,465.1 Principal payments on long-term debt........................ (2,658.6) (2,091.7) Proceeds from dividend reinvestment, stock option and stock purchase plans............................................. 70.6 94.3 Repurchase of common stock.................................. (432.2) (310.6) Cash dividends.............................................. (482.9) (426.0) ---------------------------- Net cash provided (used) by financing activities......... 1,679.6 (1,231.5) ---------------------------- Change in cash and cash equivalents...................... (973.0) (1,261.9) Cash and cash equivalents at beginning of period............ 4,748.8 4,855.3 ---------------------------- Cash and cash equivalents at end of period............... $3,775.8 $3,593.4 - --------------------------------------------------------------------------------------------
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 generally the same as those used in preparation of the consolidated financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs and benefits, expenses and other financial elements to each line of business. Table 2 "Line of Business Financial Performance" on pages 4 through 8 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. We have evaluated the impact of the adoption of SFAS 133 and have determined, based on current market information, that it will not have a material impact on the Company. ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", established accounting and reporting standards for sales and servicing of financial assets, securitization transactions and the extinguishment of liabilities. The statement replaced SFAS 125 and provided clarification of issues related to qualified special purpose entities and additional disclosures about securitizations and the residual interests retained. SFAS 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The additional disclosures are required in financial statements for fiscal years ending after December 15, 2000. The adoption of SFAS 140 is not expected to have a material impact on the Company. U.S. Bancorp 21 23 NOTE C BUSINESS COMBINATIONS FIRSTAR CORPORATION On October 4, 2000, the Company announced that it had signed a definitive agreement to be acquired by Firstar Corporation of Milwaukee, Wisconsin in a tax-free exchange of shares. U.S. Bancorp shareholders will receive 1.265 shares of the combined company stock for every share of U.S. Bancorp stock. On a proforma basis, the Firstar / U.S. Bancorp combination would create the 8th largest bank holding company in the United States, with assets of more than $160 billion, deposits of $107 billion, assets under management of $145 billion and a market capitalization of approximately $40 billion. The franchise will span 24 midwestern and western states with 2,200 branches. Pending all regulatory and shareholder approvals, the transaction is expected to close in the first quarter of 2001 and be accounted for as a pooling-of-interests. 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 - --------------------------------------------------------------------------------------------------------------------------------- Scripps Financial Corporation.................... 10/13/00 $ 650 $ 618 $113 7,435,591 Purchase Lyon Financial Services, Inc..................... 9/28/00 1,289 -- 124 -- Purchase 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 Funds Transfer Processing Unit........................ 6/30/99 -- -- 78 -- Purchase Libra Investments, Inc........................... 1/4/99 33 -- 4 1,027,276 Purchase - ---------------------------------------------------------------------------------------------------------------------------------
NOTE D AVAILABLE-FOR-SALE SECURITIES The detail of the amortized cost and fair value of available-for-sale securities consisted of the following:
September 30, 2000 December 31, 1999 --------------------------------------------------- Amortized Fair Amortized Fair (Dollars in Millions) Cost Value Cost Value - ------------------------------------------------------------------------------------------------------------------- U.S. Treasury............................................... $ 370 $ 368 $ 388 $ 381 U.S. agencies and other mortgage-backed..................... 2,642 2,598 2,971 2,906 Other U.S. agencies......................................... 167 171 195 196 State and political......................................... 1,078 1,084 1,132 1,135 Other....................................................... 239 225 288 253 --------------------------------------------------- Total.................................................... $4,496 $4,446 $4,974 $4,871 - -------------------------------------------------------------------------------------------------------------------
22 U.S. Bancorp 24 NOTE E LOANS The composition of the loan portfolio was as follows:
September 30 December 31 (Dollars in Millions) 2000 1999 - ---------------------------------------------------------------------------------------------- COMMERCIAL Commercial............................................... $30,014 $26,491 Real estate Commercial mortgage................................... 10,119 9,784 Construction.......................................... 4,426 4,322 Lease financing.......................................... 3,817 2,372 ------------------------------ Total commercial................................... 48,376 42,969 ------------------------------ CONSUMER Home equity and second mortgage.......................... 9,262 8,681 Credit card.............................................. 4,172 4,313 Revolving credit......................................... 1,776 1,815 Installment.............................................. 1,108 1,245 Student.................................................. 676 563 ------------------------------ Subtotal........................................... 16,994 16,617 Indirect automobile...................................... 388 638 Residential mortgage..................................... 2,508 2,661 ------------------------------ Total consumer *................................... 19,890 19,916 ------------------------------ Total loans..................................... $68,266 $62,885 - ----------------------------------------------------------------------------------------------
*Loans held for sale were $698 at September 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 September 30, 2000, the Company had $348 million in loans considered impaired under SFAS 114 included in its nonaccrual loans. The carrying value of the impaired loans was less than or equal to the appraised collateral value or the present value of expected future cash flows and, accordingly, no allowance for credit losses was specifically allocated to impaired loans. For the quarter ended September 30, 2000, the average recorded investment in impaired loans was approximately $335 million. No interest income was recognized on impaired loans during the quarter. NOTE F LONG-TERM DEBT Long-term debt (debt with original maturities of more than one year) consisted of the following:
September 30 December 31 (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....................... 2,307 1,998 Medium-term notes (6.00% to 7.50%) -- maturities to December 2004....................................................... 3,642 2,310 Bank notes (5.25% to 6.98%) -- maturities to November 2005....................................................... 9,662 8,459 Euro medium-term notes -- due April 13, 2004................ 400 400 Other....................................................... 439 196 ------------------------------ Total.................................................... $ 19,400 $ 16,563 - ----------------------------------------------------------------------------------------------
U.S. Bancorp 23 25 NOTE G INCOME TAXES The components of income tax expense were:
Three Months Ended Nine Months Ended --------------------------------------------------------------- September 30 September 30 September 30 September 30 (Dollars in Millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- FEDERAL Current tax................................................. $ 203.4 $ 177.9 $ 541.3 $ 492.4 Deferred tax (credit) provision............................. (21.0) 18.5 (2.6) 56.7 --------------------------------------------------------------- Federal income tax....................................... 182.4 196.4 538.7 549.1 STATE Current tax................................................. 37.1 23.8 99.4 85.3 Deferred tax (credit) provision............................. (1.4) 4.5 3.1 12.1 --------------------------------------------------------------- State income tax......................................... 35.7 28.3 102.5 97.4 --------------------------------------------------------------- Total income tax provision............................... $ 218.1 $ 224.7 $ 641.2 $ 646.5 - -------------------------------------------------------------------------------------------------------------------------------
The reconciliation between income tax expense and the amount computed by applying the statutory federal income tax rate was as follows:
Three Months Ended Nine Months Ended --------------------------------------------------------------- September 30 September 30 September 30 September 30 (Dollars in Millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- Tax at statutory rate (35%)................................. $ 216.8 $ 217.4 $ 635.1 $ 624.4 State income tax, at statutory rates, net of federal tax benefit.................................................... 23.2 18.4 66.6 63.3 Tax effect of Tax-exempt interest Loans................................................. (1.9) (2.2) (5.7) (6.8) Securities............................................ (6.0) (5.5) (18.0) (16.9) Amortization of nondeductible goodwill................... 15.6 10.3 45.5 29.1 Tax credits and other items.............................. (29.6) (13.7) (82.3) (46.6) --------------------------------------------------------------- Applicable income taxes..................................... $ 218.1 $ 224.7 $ 641.2 $ 646.5 - -------------------------------------------------------------------------------------------------------------------------------
The Company's net deferred tax asset was $88.0 million at September 30, 2000, and $158.4 million at December 31, 1999. NOTE H MERGER AND INTEGRATION CHARGES During 2000, the Company recorded $43.8 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 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:
Piper Other (Dollars in Millions) USBC Jaffray Western Acquisitions** Total - --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 $15.9 $17.5 $20.8 $17.7 $71.9 Provision charged to operating expense* --- 8.5 9.6 25.7 43.8 Additions related to purchase acquisitions --- --- 2.3 19.2 21.5 Cash outlays (8.4) (11.9) (20.4) (33.9) (74.6) Noncash writedowns and other (.1) (.1) (2.0) (2.1) (4.3) ---------------------------------------------------------------- Balance at September 30, 2000 $7.4 $14.0 $10.3 $26.6 $58.3 - ---------------------------------------------------------------------------------------------------------------------
*Merger-related charges in operating expenses for other acquisitions for the nine months ending September 30, 2000, included $7.2 million for Mellon Network Services, $4.5 million for Peninsula Bank of San Diego, $2.1 million related to a division of John Nuveen Company and $11.9 million for other entities. The components of the merger and integration accrual were as follows:
September 30 December 31 (Dollars in Millions) 2000 1999 - ---------------------------------------------------------------------------------------------- Severance $20.6 $34.6 Other employee related costs 12.1 16.6 Lease terminations and facility costs 8.5 9.5 Contracts and system writeoffs 7.6 6.4 Other 9.5 4.8 ------------------------------------------------ Total $58.3 $71.9 (Dollars in Millions) - ---------------------------------------------------------------------------------------------- USBC* $ 7.4 $15.9 Piper Jaffray 14.0 17.5 Western Bancorp 10.3 20.8 Peninsula Bank 4.4 -- Bank of Commerce 5.2 7.5 Zappco, Inc. 3.8 4.1 Northwest Bancshares, Inc. 2.8 3.5 Lyon Financial Services, Inc. 3.3 -- Other Acquisitions 7.1 2.6 ------------------------------------------------ Total $58.3 $71.9 - ----------------------------------------------------------------------------------------------
* The USBC accrual represented severance related amounts only. With respect to completed acquisitions, additional merger-related charges of approximately $20.0 million on a pre-tax basis, are expected to be incurred in 2000. 24 U.S. Bancorp 26 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 nine months ended September 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 20.2 million shares for $432.2 million during the nine months ended September 30, 2000. NOTE J EARNINGS PER SHARE The components of earnings per share were:
Three Months Ended Nine Months Ended --------------------------------------------------------------- September 30 September 30 September 30 September 30 (Dollars in Millions, Except Per Share Data) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE: Net income to common stockholders........................... $401.3 $396.4 $1,173.4 $1,137.5 --------------------------------------------------------------- Average shares outstanding.................................. 740,484,419 726,506,673 744,724,042 724,141,996 --------------------------------------------------------------- Earnings per share.......................................... $ .54 $ .55 $ 1.58 $ 1.57 --------------------------------------------------------------- DILUTED EARNINGS PER SHARE: Net income to common stockholders........................... $401.3 $396.4 $1,173.4 $1,137.5 --------------------------------------------------------------- Average shares outstanding.................................. 740,484,419 726,506,673 744,724,042 724,141,996 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.................. 2,123,548 5,088,017 2,250,249 5,534,580 --------------------------------------------------------------- Dilutive common shares outstanding.......................... 742,607,967 731,594,690 746,974,291 729,676,576 --------------------------------------------------------------- Diluted earnings per share.................................. $ .54 $ .54 $ 1.57 $ 1.56 - -------------------------------------------------------------------------------------------------------------------------------
U.S. Bancorp 25 27 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 meet the needs of its customers and to manage its interest rate and market risk. These instruments carry varying degrees of credit, interest rate or liquidity risk. The contract or notional amounts of these financial instruments were as follows:
September 30 December 31 (Dollars in Millions) 2000 1999 - ---------------------------------------------------------------------------------------------- Commitments to extend credit Commercial............................................... $27,553 $28,222 Corporate and purchasing cards........................... 20,561 18,503 Consumer credit cards.................................... 15,182 14,991 Other consumer........................................... 5,911 6,388 Letters of credit Standby.................................................. 3,489 3,222 Commercial............................................... 417 317 Swap contracts Interest rate hedges..................................... 7,248 7,743 Equity hedges............................................ 80 -- Basis swaps.............................................. 1,000 -- Intermediated............................................ 484 556 Options contracts Hedge interest rate floors purchased..................... 500 500 Intermediated interest rate and foreign exchange caps and floors purchased........................................ 358 453 Intermediated interest rate and foreign exchange caps and floors written.......................................... 358 453 Futures and forward contracts............................... 71 34 Recourse on assets sold..................................... 82 117 Foreign currency commitments Commitments to purchase.................................. 1,767 1,137 Commitments to sell...................................... 1,758 1,141 Commitments from securities lending......................... 730 717 - ----------------------------------------------------------------------------------------------
The Company received fixed-rate interest and paid variable-rate interest on substantially all swaps in its hedging portfolio as of September 30, 2000. Activity for the nine months ended September 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................................................... 745 Terminations................................................ (674) Amortization................................................ (521) Maturities.................................................. (45) -------- Notional amount outstanding at September 30, 2000........... $ 7,248 - ------------------------------------------------------------------------ Weighted average interest rate paid......................... 6.65% Weighted average interest rate received..................... 6.38 - ------------------------------------------------------------------------
LIBOR-based interest rate floors totaling $500 million with an average remaining maturity of 1.0 years and 1.7 years at September 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 September 30, 2000, and December 31, 1999. Net unamortized deferred losses relating to swaps, options and futures were $24.4 million at September 30, 2000. 26 U.S. Bancorp 28 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.
Nine Months Ended ------------------------------- September 30 September 30 (Dollars in Millions) 2000 1999 - ----------------------------------------------------------------------------------------------- Income taxes paid........................................... $ 530.3 $ 429.5 Interest paid............................................... 2,169.4 1,708.8 Net noncash transfers to foreclosed property................ 19.5 26.7 Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $18.4 in 2000 and $61.2 in 1999....................................................... 29.8 (99.7) ------------------------------- Cash acquisitions of businesses Fair value of noncash assets acquired.................... $ 945.1 $ 250.3 Liabilities assumed...................................... (649.1) (29.8) ------------------------------- Net................................................... $ 296.0 $ 220.5 ------------------------------- Stock acquisitions of businesses Fair value of noncash assets acquired.................... $ 810.7 $ 798.2 Net cash acquired........................................ 24.0 107.4 Liabilities assumed...................................... (688.7) (552.3) ------------------------------- Net value of common stock issued...................... $ 146.0 $ 353.3 - -----------------------------------------------------------------------------------------------
U.S. Bancorp 27 29 CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
For the Three Months Ended September 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........................ $ 374 $ 5.3 5.64% $ 397 $ 5.6 5.60% (5.8)% U.S. agencies and other mortgage-backed................... 2,696 45.8 6.76 3,173 53.1 6.64 (15.0) State and political.................. 1,081 20.2 7.43 1,118 21.4 7.59 (3.3) U.S. agencies and other.............. 415 5.5 5.27 537 5.1 3.77 (22.7) ----------------- ------------------- Total available-for-sale securities..................... 4,566 76.8 6.69 5,225 85.2 6.47 (12.6) Unrealized loss on available-for-sale securities..................... (82) (36) ** ------ ------- Net available-for-sale securities..................... 4,484 5,189 (13.6) Trading account securities.............. 866 13.9 6.39 659 10.5 6.32 31.4 Federal funds sold and resale agreements........................... 614 9.5 6.16 501 5.6 4.43 22.6 Loans Commercial Commercial........................ 29,996 664.7 8.82 25,360 491.3 7.69 18.3 Real estate Commercial mortgage............ 10,180 227.3 8.88 8,654 183.7 8.42 17.6 Construction................... 4,434 108.2 9.71 3,734 83.3 8.85 18.7 Lease financing................... 2,749 52.3 7.57 2,254 40.2 7.08 22.0 ----------------- ------------------- Total commercial............... 47,359 1,052.5 8.84 40,002 798.5 7.92 18.4 Consumer Home equity and second mortgage... 9,155 223.7 9.72 8,258 197.5 9.49 10.9 Credit card....................... 4,214 148.8 14.05 4,009 136.9 13.55 5.1 Other............................. 3,945 109.7 11.06 6,398 152.2 9.44 (38.3) ----------------- ------------------- Subtotal....................... 17,314 482.2 11.08 18,665 486.6 10.34 (7.2) Residential mortgage.............. 2,560 50.6 7.86 2,682 51.1 7.56 (4.5) ----------------- ------------------- Total consumer................. 19,874 532.8 10.67 21,347 537.7 9.99 (6.9) ----------------- ------------------- Total loans.................... 67,233 1,585.3 9.38 61,349 1,336.2 8.64 9.6 Allowance for credit losses.......... 1,071 993 7.9 ------ ------- Net loans......................... 66,162 60,356 9.6 Other earning assets.................... 2,434 52.3 8.55 1,537 24.6 6.35 58.4 ----------------- ------------------- Total earning assets*.......... 75,713 1,737.8 9.13 69,271 1,462.1 8.37 9.3 Other assets............................ 10,548 9,458 11.5 ------ ------- Total assets................... $85,108 $77,700 9.5% ------ ------- LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits............ $14,158 $13,655 3.7% Interest-bearing deposits Interest checking.................... 6,382 39.6 2.47 6,028 28.2 1.86 5.9 Money market accounts................ 12,638 144.5 4.55 11,990 104.0 3.44 5.4 Other savings accounts............... 1,873 8.1 1.72 2,241 10.5 1.86 (16.4) Savings certificates................. 9,454 144.0 6.06 9,432 117.8 4.96 .2 Certificates over $100,000........... 6,407 105.8 6.57 4,370 58.2 5.28 46.6 ----------------- ------------------- Total interest-bearing deposits...................... 36,754 442.0 4.78 34,061 318.7 3.71 7.9 Short-term borrowings................... 2,646 49.9 7.50 4,309 61.3 5.64 (38.6) Long-term debt.......................... 19,592 343.5 6.97 15,733 217.8 5.49 24.5 Company-obligated mandatorily redeemable preferred securities................. 950 19.4 8.12 950 19.3 8.06 -- ----------------- ------------------- Total interest-bearing liabilities................... 59,942 854.8 5.67 55,053 617.1 4.45 8.9 Other liabilities....................... 2,976 2,404 23.8 Common equity........................... 8,080 6,611 22.2 Accumulated other comprehensive income............................... (48) (23) ** ------ ------- Total liabilities and shareholders' equity.......... $85,108 $77,700 9.5% ------ ------- ---------- Net interest income..................... $ 883.0 $ 845.0 ------- ------- Gross interest margin................... 3.46% 3.92% ------ ------ Gross interest margin without taxable-equivalent increments........ 3.37% 3.86% ------ ------ Net interest margin..................... 4.64% 4.84% ------ ------ Net interest margin without taxable-equivalent increments........ 4.55% 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 on available-for-sale securities. **Not meaningful. 28 U.S. Bancorp 30 CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
For the Nine Months Ended September 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........................ $ 379 $ 16.0 5.64% $ 438 $ 18.6 5.68% (13.5)% U.S. agencies and other mortgage-backed................... 2,806 142.6 6.79 3,180 156.1 6.56 (11.8) State and political.................. 1,099 61.8 7.51 1,146 65.1 7.59 (4.1) U.S. agencies and other.............. 456 16.2 4.75 430 13.0 4.04 6.0 ----------------- ------------------- Total available-for-sale securities..................... 4,740 236.6 6.67 5,194 252.8 6.51 (8.7) Unrealized (loss) gain on available-for-sale securities.. (121) 45 ** ------ ------- Net available-for-sale securities..................... 4,619 5,239 (11.8) Trading account securities.............. 774 42.9 7.40 600 29.5 6.57 29.0 Federal funds sold and resale agreements........................... 614 24.9 5.42 515 16.1 4.18 19.2 Loans Commercial Commercial........................ 28,733 1,848.7 8.59 24,598 1,389.8 7.55 16.8 Real estate Commercial mortgage............ 10,086 662.7 8.78 8,427 532.0 8.44 19.7 Construction................... 4,407 315.7 9.57 3,529 232.2 8.80 24.9 Lease financing................... 2,569 142.9 7.43 2,243 120.3 7.17 14.5 ----------------- ------------------- Total commercial............... 45,795 2,970.0 8.66 38,797 2,274.3 7.84 18.0 Consumer Home equity and second mortgage... 8,945 647.2 9.66 7,852 554.2 9.44 13.9 Credit card....................... 4,164 434.9 13.95 4,003 387.8 12.95 4.0 Other............................. 4,145 330.2 10.64 6,773 473.0 9.34 (38.8) ----------------- ------------------- Subtotal....................... 17,254 1,412.3 10.93 18,628 1,415.0 10.16 (7.4) Residential mortgage.............. 2,603 152.1 7.81 2,834 163.6 7.72 (8.2) ----------------- ------------------- Total consumer................. 19,857 1,564.4 10.52 21,462 1,578.6 9.83 (7.5) ----------------- ------------------- Total loans.................... 65,652 4,534.4 9.23 60,259 3,852.9 8.55 8.9 Allowance for credit losses.......... 1,049 994 5.5 ------ ------- Net loans......................... 64,603 59,265 9.0 Other earning assets.................... 2,360 151.7 8.59 1,437 69.1 6.43 64.2 ----------------- ------------------- Total earning assets*.......... 74,140 4,990.5 8.99 68,005 4,220.4 8.30 9.0 Other assets............................ 10,690 9,247 15.6 ------ ------- Total assets................... $83,660 $76,303 9.6% ------ ------- LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits............ $14,168 $13,585 4.3% Interest-bearing deposits Interest checking.................... 6,357 108.2 2.27 6,051 80.3 1.77 5.1 Money market accounts................ 12,550 399.6 4.25 12,100 310.7 3.43 3.7 Other savings accounts............... 1,979 26.1 1.76 2,244 30.0 1.79 (11.8) Savings certificates................. 9,355 404.7 5.78 9,733 359.7 4.94 (3.9) Certificates over $100,000........... 5,931 278.5 6.27 4,059 158.4 5.22 46.1 ----------------- ------------------- Total interest-bearing deposits.................... 36,172 1,217.1 4.49 34,187 939.1 3.67 5.8 Short-term borrowings................... 3,249 168.0 6.91 4,224 169.3 5.36 (23.1) Long-term debt.......................... 18,438 922.3 6.68 14,712 592.3 5.38 25.3 Company-obligated mandatorily redeemable preferred securities................. 950 58.0 8.16 950 58.0 8.16 -- ----------------- ------------------- Total interest-bearing liabilities................. 58,809 2,365.4 5.37 54,073 1,758.7 4.35 8.8 Other liabilities....................... 2,811 2,314 21.5 Common equity........................... 7,944 6,303 26.0 Accumulated other comprehensive income............................... (72) 28 ** ------ ------- Total liabilities and shareholders' equity........ $83,660 $76,303 9.6% ------ ------- ---------- Net interest income..................... $2,625.1 $2,461.7 ------- ------- Gross interest margin................... 3.62% 3.95% ------ ------ Gross interest margin without taxable-equivalent increments........ 3.53% 3.89% ------ ------ Net interest margin..................... 4.73% 4.84% ------ ------ Net interest margin without taxable-equivalent increments........ 4.64% 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. U.S. Bancorp 29 31 PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 2 Agreement and Plan of Merger, dated October 3, 2000, by and between Firstar Corporation and U.S. Bancorp; Amendment No. 1 to Agreement and Plan of Merger, dated October 23, 2000, by and between Firstar Corporation and U.S. Bancorp; and Stock Option Agreements, dated October 3, 2000, by and between Firstar Corporation and U.S. Bancorp. Filed as Exhibits 2.1, 2.2, 2.3 and 2.4 to Registration Statement on Form S-4, File No. 333-48532, and incorporated herein by reference. 12 Computation of Ratio of Earnings to Fixed Charges. 27 Article 9 Financial Data Schedule.*. * Copies of this exhibit will be furnished upon request and payment of the Company's reasonable expenses in furnishing the exhibit. (B) REPORTS ON FORM 8-K During the three months ended September 30, 2000, the Company filed the following Current Reports on Form 8-K: - Form 8-K dated July 20, 2000, relating to the announcement of the Company's second quarter and anticipated full year 2000 earnings. - Form 8-K dated August 22, 2000, relating to the announcement of changes in the Company's management. 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 DATE: January 10, 2001 Authorized Officer) 30 U.S. Bancorp 32 EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Three Nine Months Months Ended Ended September 30 September 30 ---------------------------- (Dollars in Millions) 2000 2000 - -------------------------------------------------------------------------------------------- EARNINGS 1. Net income.............................................. $ 401.3 $1,173.4 2. Applicable income taxes................................. 218.1 641.2 ---------------------------- 3. Net income before taxes (1 + 2)......................... $ 619.4 $1,814.6 ---------------------------- 4. Fixed charges: a. Interest expense excluding interest on deposits...... $ 412.8 $1,148.3 b. Portion of rents representative of interest and amortization of debt expense......................... 13.4 41.2 ---------------------------- c. Fixed charges excluding interest on deposits (4a + 4b).................................................. 426.2 1,189.5 d. Interest on deposits................................. 442.0 1,217.1 ---------------------------- e. Fixed charges including interest on deposits (4c + 4d).................................................. $ 868.2 $2,406.6 ---------------------------- 5. Amortization of interest capitalized.................... $ -- $ -- 6. Earnings excluding interest on deposits (3 + 4c + 5).... 1,045.6 3,004.1 7. Earnings including interest on deposits (3 + 4e + 5).... 1,487.6 4,221.2 8. Fixed charges excluding interest on deposits (4c)....... 426.2 1,189.5 9. Fixed charges including interest on deposits (4e)....... 868.2 2,406.6 RATIO OF EARNINGS TO FIXED CHARGES 10. Excluding interest on deposits (line 6/line 8).......... 2.45 2.53 11. Including interest on deposits (line 7/line 9).......... 1.71 1.75 - --------------------------------------------------------------------------------------------
U.S. Bancorp 31 33 (This page has been left blank intentionally.) 34 [US BANCORP LOGO(R)] U.S. Bank Place 601 Second Avenue South Minneapolis, Minnesota 55402-4302 www.usbank.com -------------------- First Class U.S. Postage PAID Permit No. 2440 Minneapolis, MN -------------------- 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 and dividend paying 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. 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 -----END PRIVACY-ENHANCED MESSAGE-----