-----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, Pv3LontkKgzw6YayK9hrczZIr+IWqPuF5qZ0Gpwau5TRZ236/MWn5XBJf/vITBoT QgiDVz2RXa22hNAKM6vh9w== 0000950124-01-001114.txt : 20010307 0000950124-01-001114.hdr.sgml : 20010307 ACCESSION NUMBER: 0000950124-01-001114 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010301 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-K405 SEC ACT: SEC FILE NUMBER: 001-06880 FILM NUMBER: 1558326 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-K405 1 c59511e10-k405.txt ANNUAL REPORT ENDED 12/31/00 1 2000 ANNUAL REPORT ON FORM 10-K [US BANCORP LOGO(R)] 2 FORWARD-LOOKING STATEMENTS This Form 10-K contains forward-looking statements. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including the following, in addition to those contained elsewhere in this Form 10-K and in the Company's other reports on file with the SEC: (i) the Company's investments in its 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. 3 ANNUAL REPORT ON FORM 10-K Securities and Exchange Commission Washington, D.C. 20549 Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2000 Commission File Number 1-6880 U.S. BANCORP Incorporated in the State of Delaware IRS Employer Identification #41-0255900 Address: 601 Second Avenue South Minneapolis, Minnesota 55402-4302 Telephone: (612) 973-1111 Securities registered pursuant to Section 12(b) of the Act (and listed on the New York Stock Exchange): Common Stock, Par Value $.01. Prior to the merger of U.S. Bancorp with Firstar Corporation, the par value of U.S. Bancorp common stock was $1.25. Securities registered pursuant to section 12(g) of the Act: None. As of January 31, 2001, U.S. Bancorp had 752,745,506 shares of common stock outstanding. The aggregate market value of common stock held by non-affiliates as of January 31, 2001, was approximately $21,450,000,000. U.S. Bancorp (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The financial information included within this Form 10-K does not reflect the merger of U.S. Bancorp with Firstar Corporation.
Index Page - ------------------------------------------------------------------- PART I ITEM 1 Business General..............................................66 Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential.................................8-9, 62-63 Investment Portfolio.........................14, 37, 59 Loan Portfolio.................11-13, 15-20, 32, 38, 65 Summary of Loan Loss Experience.....9, 15-20, 32, 38-39 Deposits..............................14, 41, 62-63, 65 Return on Equity and Assets..........................64 Short-Term Borrowings............................14, 65 ITEM 2 Properties...........................................66 ITEM 3 Legal Proceedings..................................none ITEM 4 Submission of Matters to a Vote of Security Holders...........................................none PART II ITEM 5 Market for the Registrant's Common Equity and Related Stockholder Matters.......................1, 23-24, 64 ITEM 6 Selected Financial Data...............................3 ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations...............2-26 ITEM 7A Quantitative and Qualitative Disclosures About Market Risk.................................................. ITEM 8 Financial Statements and Supplementary Data......61, 67 ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............none PART III ITEM 10 Directors and Executive Officers of the Registrant....* ITEM 11 Executive Compensation................................* ITEM 12 Security Ownership of Certain Beneficial Owners and Management...........................................* ITEM 13 Certain Relationships and Related Transactions........* PART IV ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K............................................67
*U.S. Bancorp's definitive proxy statement for the 2001 Annual Meeting of Shareholders is incorporated herein by reference, other than the sections entitled "Report of the Compensation and Human Resources Committee on Executive Compensation" and "Comparative Stock Performance." U.S. Bancorp 1 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OVERVIEW SUMMARY OF 2000 RESULTS U.S. Bancorp (the "Company") reported net income of $1.59 billion in 2000, or $2.13 per diluted share, compared with $1.51 billion, or $2.06 per diluted share, in 1999. Return on average assets and return on average common equity were 1.89 percent and 19.9 percent in 2000, compared with returns of 1.96 percent and 23.0 percent in 1999. The year-over-year increase in earnings per diluted share reflected a 12 percent growth in total revenue on a taxable-equivalent basis, partially offset by higher growth rates in noninterest expense and provision for credit losses. The reduction in the Company's return on average common equity reflects the impact of recent acquisitions, which were accounted for using purchase accounting. Net income reflects merger-related charges of $39.6 million ($61.3 million on a pre-tax basis) in 2000 and $39.2 million ($62.4 million on a pre-tax basis) in 1999. The efficiency ratio (the ratio of expenses to revenues) was 53.0 percent in 2000 compared with 51.6 percent in 1999. The Company had operating earnings (net income excluding merger-related charges) of $1.63 billion in 2000, up 6 percent from 1999 operating earnings of $1.55 billion. On a diluted share basis, operating earnings were $2.18 in 2000, compared with $2.11 in 1999. Operating earnings on a cash basis (calculated by adding amortization of goodwill and other intangible assets to operating earnings) were $2.50 per diluted share in 2000, compared with $2.33 per diluted share in 1999. Return on average assets and return on average common equity, excluding merger-related charges, were 1.93 percent and 20.4 percent in 2000, compared with returns of 2.01 percent and 23.6 percent in 1999. Excluding merger-related charges, the efficiency ratio was 52.1 percent in 2000, compared with 50.5 percent in 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 43.6 percent in 2000, compared with 43.2 percent in 1999. See page 10 for further discussion on merger-related charges. The Company analyzes its performance on a net income basis determined in accordance with accounting principles generally accepted in the United States, as well as on an operating basis before merger-related charges referred to in this analysis as "operating earnings." Operating earnings and related discussions are presented as supplementary information in this analysis to enhance the readers' understanding of, and highlight trends in, the Company's core financial results excluding the nonrecurring effects of discrete business acquisitions and restructuring activities. Operating earnings should not be viewed as a substitute for net income and earnings per share as determined in accordance with accounting principles generally accepted in the United States. Merger-related charges excluded from net income to derive operating earnings may be significant and may not be comparable to other companies. ACQUISITION AND DIVESTITURE ACTIVITY Operating results for 2000 reflect purchase and divestiture transactions from or to the date of completion. 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 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 had $1.3 billion in assets. 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 24, 1999, the Company completed the sale of 28 branches in Kansas and Iowa with aggregate deposits of $364 million. On September 23, 1999, the Company sold $1.8 billion of indirect automobile loans. 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 2 U.S. Bancorp 5 TABLE 1 SELECTED FINANCIAL DATA
(Dollars in Millions, Except Per Share Data) 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ CONDENSED INCOME STATEMENT Net interest income (taxable-equivalent basis).............. $3,540.8 $3,302.7 $3,111.9 $3,106.0 $3,034.7 Provision for credit losses................................. 670.0 531.0 379.0 460.3 271.2 -------------------------------------------------------- Net interest income after provision for credit losses.... 2,870.8 2,771.7 2,732.9 2,645.7 2,763.5 Available-for-sale securities gains (losses)................ 7.0 (1.3) 12.6 3.6 20.8 Merger-related gains........................................ -- -- -- -- 235.8 Other noninterest income.................................... 3,251.4 2,760.0 2,244.0 1,611.6 1,526.5 Merger-related charges...................................... 61.3 62.4 216.5 511.6 127.7 Other noninterest expense................................... 3,537.1 3,064.5 2,627.8 2,300.7 2,410.4 -------------------------------------------------------- Income before income taxes............................... 2,530.8 2,403.5 2,145.2 1,448.6 2,008.5 Taxable-equivalent adjustment............................... 69.5 42.0 51.3 57.9 64.1 Income taxes................................................ 869.3 855.0 766.5 552.2 725.7 -------------------------------------------------------- Net income............................................... $1,592.0 $1,506.5 $1,327.4 $ 838.5 $1,218.7 -------------------------------------------------------- FINANCIAL RATIOS Return on average assets.................................... 1.89% 1.96% 1.85% 1.22% 1.81% Return on average common equity............................. 19.9 23.0 21.9 14.6 21.1 Efficiency ratio............................................ 53.0 51.6 53.1 59.6 52.9 Net interest margin (taxable-equivalent basis).............. 4.73 4.83 4.87 5.04 5.04 PER COMMON SHARE Earnings per share.......................................... $ 2.14 $ 2.07 $ 1.81 $ 1.13 $ 1.60 Diluted earnings per share.................................. 2.13 2.06 1.78 1.11 1.57 Dividends paid*............................................. .86 .78 .70 .62 .55 SELECTED FINANCIAL RATIOS BEFORE MERGER-RELATED ITEMS Return on average assets.................................... 1.93% 2.01% 2.04% 1.84% 1.73% Return on average common equity............................. 20.4 23.6 24.2 22.1 20.2 Efficiency ratio............................................ 52.1 50.5 49.1 48.8 52.8 Banking efficiency ratio**.................................. 43.6 43.2 44.2 47.8 52.2 AVERAGE BALANCE SHEET DATA Loans....................................................... $ 66,439 $ 60,578 $ 55,979 $ 53,513 $ 50,855 Earning assets.............................................. 74,863 68,392 63,868 61,675 60,201 Assets...................................................... 84,438 76,947 71,791 68,771 67,402 Deposits.................................................... 50,681 48,099 47,327 47,336 47,252 Long-term debt.............................................. 18,571 15,077 11,481 7,527 4,908 Common equity............................................... 8,009 6,540 6,049 5,667 5,679 Total shareholders' equity.................................. 8,009 6,540 6,049 5,798 5,919 Average shares outstanding.................................. 745.1 727.5 733.9 733.6 749.2 Average diluted shares outstanding.......................... 747.9 733.0 744.2 742.9 766.2 YEAR-END BALANCE SHEET DATA Loans....................................................... $ 69,091 $ 62,885 $ 59,122 $ 54,708 $ 52,355 Assets...................................................... 87,336 81,530 76,438 71,295 69,749 Deposits.................................................... 53,257 51,530 50,034 49,027 49,356 Long-term debt.............................................. 18,566 16,563 13,781 10,247 5,369 Common equity............................................... 8,640 7,638 5,970 5,890 5,613 Total shareholders' equity.................................. 8,640 7,638 5,970 5,890 5,763 - ------------------------------------------------------------------------------------------------------------------------
*Dividends per share have not been restated for the Company's 1997 merger with the former U.S. Bancorp ("USBC"). USBC paid common dividends of $139.1 million through July of 1997 ($.62 per share) and $168.7 million in 1996 ($1.18 per share). **Without investment banking and brokerage activity. completed its acquisition of the San Diego-based Bank of Commerce, one of the nation's largest U.S. Small Business Administration ("SBA") lenders. On June 30, 1999, the Company completed its acquisition of Mellon Network Services' electronic funds transfer processing unit. On March 16, 1999, the Company completed its acquisition of Reliance Trust Company's corporate trust business, which operates offices in Georgia, Florida and Tennessee. On January 4, 1999, the Company acquired Libra Investments, Inc., an investment banking business that specializes in underwriting and trading high yield and mezzanine securities for middle-market companies. These transactions were all accounted for as purchase acquisitions. 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 received 1.265 shares of the combined company stock for every share of U.S. Bancorp stock. The transaction closed on February 27, 2001, and was accounted for as a pooling- of-interests. Refer to Note C and Note D of the Notes to Consolidated Financial Statements for additional information regarding acquisitions and divestitures. U.S. Bancorp 3 6 TABLE 2 LINE OF BUSINESS FINANCIAL PERFORMANCE
Wholesale Banking Consumer Banking ---------------------------------------------------------------------------------------------- 1999-2000 1999-2000 (Dollars in Millions) 2000 1999 1998 % Change 2000 1999 1998 % Change - --------------------------------------------------------------------------------------------------------------------------------- CONDENSED INCOME STATEMENT Net interest income (taxable-equivalent basis).... $1,675.0 $1,456.1 $1,369.0 15.0% $1,364.1 $1,315.1 $1,253.9 3.7% Provision for credit losses...... 126.9 105.4 93.8 20.4 210.1 207.5 136.5 1.3 Noninterest income............... 484.3 428.3 372.7 13.1 517.8 480.7 471.2 7.7 Noninterest expense.............. 861.0 754.9 689.9 14.1 881.0 837.2 851.0 5.2 Goodwill and other intangible assets expense................ 93.9 68.7 59.3 36.7 60.3 45.3 39.9 33.1 -------------------------------- -------------------------------- Income before taxes.............. 1,077.5 955.4 898.7 12.8 730.5 705.8 697.7 3.5 Income taxes and taxable-equivalent adjustment.................... 398.7 353.5 341.5 12.8 270.3 261.2 265.1 3.5 -------------------------------- -------------------------------- Income before merger-related charges....................... $ 678.8 $ 601.9 $ 557.2 12.8 $ 460.2 $ 444.6 $ 432.6 3.5 -------------------------------- -------------------------------- Net merger-related charges (after-tax)*.................. Net income....................... AVERAGE BALANCE SHEET DATA Loans............................ $ 41,482 $ 35,432 $ 31,672 17.1 $ 11,150 $ 12,357 $ 11,176 (9.8) Assets........................... 46,123 39,302 35,181 17.4 13,076 14,010 12,665 (6.7) Deposits......................... 11,841 10,990 10,767 7.7 31,218 30,163 31,668 3.5 Common equity.................... 4,452 3,664 3,034 21.5 1,037 1,109 1,004 (6.5) -------------------------------- -------------------------------- Return on average assets......... 1.47% 1.53% 1.58% 3.52% 3.17% 3.42% Return on average common equity........................ 15.2 16.4 18.4 44.4 40.1 43.1 Efficiency ratio................. 44.1 43.7 43.0 50.0 49.1 51.6 Efficiency ratio on a cash basis**....................... 39.8 40.0 39.6 46.8 46.6 49.3 - ---------------------------------------------------------------------------------------------------------------------------------
*Merger-related charges are not allocated to the business lines. All ratios are calculated without the effect of merger-related charges. **Calculated by excluding the amortization of goodwill and other intangibles. ***Not meaningful. LINE OF BUSINESS FINANCIAL REVIEW Operating segments are components of the Company about which financial information is available and is evaluated regularly in deciding how to allocate resources and assess performance. The Company's operating segments are Wholesale Banking, Consumer Banking, Payment Systems, and Wealth Management and Capital Markets. Units providing central support and other corporate activities are reported as part of Corporate Support and allocated as appropriate. BASIS OF FINANCIAL PRESENTATION Business line results are derived from the Company's business unit profitability reporting system by specifically attributing managed balance sheet assets, deposits and other liabilities and their related interest income or expense. Funds transfer pricing methodologies are utilized to allocate a cost for funds used or credit for funds provided to all business line assets and liabilities using a matched funding concept. The provision for credit losses recorded by each operating segment is primarily based on the net charge-offs of each line of business. Based on management's judgment, the provision may be adjusted to consider expected losses for certain products that have a longer business cycle and for economic conditions. The difference between the provision for credit losses determined in accordance with accounting principles generally accepted in the United States recognized by the Company on a consolidated basis and the provision recorded by the business lines is recorded in Corporate Support. Noninterest income and expenses directly related to each business line, including fees, service charges, salaries and benefits, and other direct expenses are accounted for within each segment's financial results in a manner similar to the consolidated financial statements. Also, the business unit is allocated the tax-equivalent benefit of tax-exempt products. Noninterest expenses incurred by centrally managed operations units that directly support business lines' operations are charged to the business lines based on standard unit costs and volume measurements. Income taxes are assessed to each line of business at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Corporate Support. Merger-related charges are not identified by or allocated to lines of business. Because the Company's decision-making process emphasizes the creation of shareholder value, capital is allocated to each line of business based on its inherent risks, including credit, operational and other business risks. On- and off-balance sheet assets subject to credit risk are assigned risk factors based upon expected loss experience and volatility taking into consideration changes in business practices that may introduce more 4 U.S. Bancorp 7
Wealth Management and Payment Systems Capital Markets - ------------------------------------------------------------------------------------------------------------------------- 1999-2000 1999-2000 2000 1999 1998 % Change 2000 1999 1998 % Change - ------------------------------------------------------------------------------------------------------------------------- CONDENSED INCOME STATEMENT Net interest income (taxable-equivalent basis)......... $365.4 $354.8 $285.3 3.0% $ 196.7 $ 165.4 $150.8 18.9% Provision for credit losses........... 327.5 300.1 261.7 9.1 5.6 4.5 3.8 24.4 Noninterest income.................... 776.9 617.7 603.6 25.8 1,401.8 1,187.5 784.0 18.0 Noninterest expense................... 406.1 333.1 319.6 21.9 1,218.4 1,020.3 667.9 19.4 Goodwill and other intangible assets expense..................... 56.0 35.2 31.3 59.1 25.3 16.4 13.2 54.3 ------------------------ ---------------------------- Income before taxes................... 352.7 304.1 276.3 16.0 349.2 311.7 249.9 12.0 Income taxes and taxable- equivalent adjustment.............. 130.5 112.5 105.0 16.0 129.2 115.3 95.0 12.1 ------------------------ ---------------------------- Income before merger-related charges............................ $222.2 $191.6 $171.3 16.0 $ 220.0 $ 196.4 $154.9 12.0 ------------------------ ---------------------------- Net merger-related charges (after-tax)*....................... Net income............................ AVERAGE BALANCE SHEET DATA Loans................................. $8,719 $7,968 $7,751 9.4 $ 3,008 $ 2,361 $1,996 27.4 Assets................................ 9,615 8,698 8,417 10.5 7,268 5,836 4,682 24.5 Deposits.............................. 120 100 87 20.0 3,815 3,304 2,551 15.5 Common equity......................... 951 742 719 28.2 1,295 1,162 951 11.4 ------------------------ ---------------------------- Return on average assets.............. 2.31% 2.20% 2.04% 3.03% 3.37% 3.31% Return on average common equity....... 23.4 25.8 23.8 17.0 16.9 16.3 Efficiency ratio...................... 40.5 37.9 39.5 77.8 76.6 72.9 Efficiency ratio on a cash basis**.... 35.6 34.3 36.0 76.2 75.4 71.4 - ------------------------------------------------------------------------------------------------------------------------- Corporate Support Consolidated Company - --------------------------------------------------------------------------------------------------------------- 1999-2000 2000 1999 1998 2000 1999 1998 % Change - --------------------------------------------------------------------------------------------------------------- CONDENSED INCOME STATEMENT Net interest income (taxable-equivalent basis)......... $(60.4) $ 11.3 $ 52.9 $3,540.8 $3,302.7 $3,111.9 7.2% Provision for credit losses........... (0.1) (86.5) (116.8) 670.0 531.0 379.0 26.2 Noninterest income.................... 77.6 44.5 25.1 3,258.4 2,758.7 2,256.6 18.1 Noninterest expense................... (64.9) (46.6) (44.3) 3,301.6 2,898.9 2,484.1 13.9 Goodwill and other intangible assets expense..................... -- -- -- 235.5 165.6 143.7 42.2 ------------------------- ------------------------------ Income before taxes................... 82.2 188.9 239.1 2,592.1 2,465.9 2,361.7 5.1 Income taxes and taxable- equivalent adjustment.............. 31.8 77.7 91.3 960.5 920.2 897.9 4.4 ------------------------- ------------------------------ Income before merger-related charges............................ $ 50.4 $111.2 $ 147.8 1,631.6 1,545.7 1,463.8 5.6 ------------------------- Net merger-related charges (after-tax)*....................... (39.6) (39.2) (136.4) 1.0 Net income............................ ------------------------------ $1,592.0 $1,506.5 $1,327.4 5.7 ------------------------------ AVERAGE BALANCE SHEET DATA Loans................................. $2,080 $2,460 $ 3,384 $ 66,439 $ 60,578 $ 55,979 9.7 Assets................................ 8,356 9,101 10,846 84,438 76,947 71,791 9.7 Deposits.............................. 3,687 3,542 2,254 50,681 48,099 47,327 5.4 Common equity......................... 274 (137) 341 8,009 6,540 6,049 22.5 ------------------------- ------------------------------ Return on average assets.............. 1.93% 2.01% 2.04% Return on average common equity....... 20.4 23.6 24.2 Efficiency ratio...................... 52.1 50.5 49.1 Efficiency ratio on a cash basis**.... 48.6 47.8 46.4 - ---------------------------------------------------------------------------------------------------------------
or less risk into the portfolio. Certain lines of business with fee-based activities, such as Wealth Management and Capital Markets, have no significant balance sheet components. For these business lines, capital is allocated taking into consideration fiduciary and operational risk, capital levels of independent organizations operating similar businesses, and regulatory minimum requirements. 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 and 1998 results are presented on a comparable basis. WHOLESALE BANKING Wholesale Banking includes lending, treasury management, corporate trust and other financial services to middle-market, large corporate and public sector clients. Operating earnings increased $76.9 million (13 percent) to $678.8 million in 2000, compared with $601.9 million in 1999 and $557.2 million in 1998. Return on average assets was 1.47 percent in 2000, compared with 1.53 percent in 1999 and 1.58 percent in 1998, and return on average common equity was 15.2 percent in 2000, compared with 16.4 and 18.4 percent in 1999 and 1998, respectively. Net interest income increased $218.9 million (15 percent) in 2000 to $1,675.0 million compared with $1,456.1 million in 1999 and $1,369.0 million in 1998. In 2000, the increase reflected core growth in average loan and deposit balances, the margin benefit of deposits in a rising rate environment and the impact of acquisitions. In 1999, the increase was also due to core growth in average loan and deposit balances, but was partially offset by margin compression in the commercial loan and deposit portfolios. During 2000, average loan balances increased by 17 percent compared with 12 percent in 1999, while average deposit balances increased 8 percent (2 percent in 1999), increasing net interest income and loan fees by $140.1 million in 2000 and $125.7 million in 1999. The incremental funding benefit of deposits contributed $51.8 million in 2000. The provision for credit losses increased $21.5 million (20 percent) to $126.9 million in 2000 compared with $105.4 million in 1999 and $93.8 million in 1998. The increase primarily reflects growth in the loan portfolio. Noninterest income increased $56.0 million (13 percent) in 2000 to $484.3 million, compared with $428.3 million in 1999 and $372.7 million in 1998. The increase in 2000 reflects higher noninterest income from leasing acquisitions of $21.6 million, revenue from sales of SBA loans of $13.8 million and other commercial banking fees of $11.8 million. The $55.6 million increase in noninterest income in 1999 as compared with 1998 primarily reflects core fee growth and $36.5 million of revenue from the acquisition of Libra Investments, Inc. in January 1999. U.S. Bancorp 5 8 Noninterest expense, excluding goodwill and other intangible assets expense, increased $106.1 million (14 percent) in 2000 to $861.0 million, as compared with $754.9 million in 1999 and $689.9 million in 1998. Goodwill and other intangible assets expense increased $25.2 million (37 percent) in 2000 to $93.9 million, as compared with $68.7 million in 1999 and $59.3 million in 1998. Acquisitions represent approximately $71.7 million of the $131.3 million increase in total non-interest expense. The efficiency ratio for Wholesale Banking, on a cash basis, was 39.8 percent in 2000 and 40.0 percent in 1999, as compared with 39.6 percent in 1998. CONSUMER BANKING Consumer Banking delivers products and services to the broad consumer market and small businesses through branch offices, telemarketing, online services, direct mail and automated teller machines ("ATMs"). Operating earnings were $460.2 million in 2000, compared with $444.6 million in 1999 and $432.6 million in 1998. Return on average assets increased to 3.52 percent from 3.17 percent in 1999 and 3.42 percent in 1998. Return on average common equity was 44.4 percent in 2000, compared with 40.1 percent in 1999 and 43.1 percent in 1998. Net interest income increased $49.0 million (4 percent) in 2000 as compared with 1999 primarily reflecting core growth in home equity loans, consumer deposits, bank acquisitions and the increased value of deposits in a rising rate environment partially offset by the expected reduction in the indirect automobile portfolio. The provision for credit losses increased a modest 1 percent in 2000 to $210.1 million, compared with $207.5 million in 1999 and $136.5 million in 1998. The slight increase in 2000 primarily reflects increasing charge-offs in the home equity loan portfolio due to growth, partially offset by declining consumer loan charge offs related to the divestiture of the indirect automobile portfolio and improved fraud management. Noninterest income increased $37.1 million (8 percent) in 2000 to $517.8 million, compared with $480.7 million in 1999 and $471.2 million in 1998, primarily reflecting growth in deposit charges and debit card fees of $46.2 million in 2000, partially offset by lower revenues of $13.0 million from the sale of student loans relative to 1999. Excluding acquisitions the growth rate of noninterest income in 2000 as compared with 1999 was approximately 6 percent. Noninterest expense, excluding goodwill and other intangible asset expense, increased $43.8 million (5 percent) to $881.0 million in 2000, compared with $837.2 million in 1999 and $851.0 million in 1998. Goodwill and other intangible asset expense increased $15.0 million (33 percent) in 2000 to $60.3 million, as compared with $45.3 million in 1999 and $39.9 million in 1998. The increase in total noninterest expenses of $58.8 million in 2000 includes the impact of acquisitions of approximately $37.2 million. Also during 2000, the Company invested in a number of customer service quality initiatives and technology enhancements 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 earning is subject to a number of uncertainties. The decrease in noninterest expense in 1999 as compared with 1998 reflects cost benefits from integration of banking acquisitions. The efficiency ratio, on a cash basis, remained relatively flat at 46.8 percent in 2000, compared with 46.6 percent in 1999 and declined from 49.3 percent in 1998. PAYMENT SYSTEMS Payment Systems includes consumer and business credit cards, corporate and purchasing card services, card-accessed secured and unsecured lines of credit, ATM processing and merchant processing. Operating earnings increased $30.6 million (16 percent) to $222.2 million in 2000, compared with $191.6 million in 1999 and $171.3 million in 1998. Return on average assets was 2.31 percent in 2000, compared with 2.20 percent in 1999 and 2.04 percent in 1998. Return on average common equity was 23.4 percent in 2000, compared with 25.8 percent in 1999 and 23.8 percent in 1998. Total revenue increased $169.8 million (17 percent) in 2000 and $83.6 million (9 percent) in 1999, reflecting strong growth in corporate and retail card product fees and data processing-related revenue. Credit card fees increased $97.9 million (17 percent) to $667.1 million in 2000 compared with $569.3 million in 1999 and $553.8 million in 1998. Data processing revenues increased $27.2 million in 2000, primarily attributed to the acquisition of Mellon Network Services' electronic funds transfer processing unit in June 1999. Growth in small business and retail credit card balances increased net interest income approximately $28.1 million in 2000 while growth in credit card loan fees added $14.0 million. In 1999, total revenue increased 9 percent from 1998 despite the loss of approximately one-half of the U.S. Government purchasing card business in late 1998. The provision for credit losses increased by $27.4 million (9 percent) in 2000 and by $38.4 million (15 percent) in 1999. The increases were primarily due 6 U.S. Bancorp 9 to increased net charge-offs in credit-scored small business loans and credit cards. Noninterest expense, excluding goodwill and other intangible asset expense, increased $73.0 million (22 percent) in 2000 and $13.5 million (4 percent) in 1999. The increase in 2000 was primarily due to continued growth in key strategic co-brand partnerships, new products and technology, as well as transaction volume. The lower growth rate of expenses in 1999 was impacted by the loss of the U.S. Government purchasing card business. Goodwill and other intangible asset expense increased $20.8 million (59 percent) in 2000 to $56.0 million from $35.2 million in 1999 and $31.3 million in 1998, primarily reflecting strategic portfolio acquisitions during 2000 and the acquisition of Mellon Network Services' electronic funds transfer processing unit in June 1999. The efficiency ratio, on a cash basis, increased to 35.6 percent in 2000, compared with 34.3 percent in 1999 and 36.0 percent in 1998. 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 $220.0 million in 2000, compared with $196.4 million in 1999 and $154.9 million in 1998. The return on average common equity improved slightly to 17.0 percent in 2000, compared with 16.9 percent and 16.3 percent in 1999 and 1998, respectively. During 2000, total revenue grew $245.6 million (18 percent) to $1.6 billion compared with $1.4 billion in 1999 and $934.8 million in 1998, primarily due to revenue growth in investment banking, trading account profits and commissions, and trust fees and growth in loans and deposits in private banking. Investment banking and brokerage revenues increased $197.7 million (25 percent) in 2000 compared with 1999 and $377.5 million (89 percent) in 1999 compared with 1998. The growth in 1999 reflected the acquisition of Piper Jaffray Companies, Inc. in May 1998. Trust and investment management fees increased $13.0 million (3 percent) in 2000 and $43.4 million (13 percent) in 1999. Slower growth in 2000 reflected the impact on assets under management of the volatility in the financial markets experienced in the latter part of the year. During 2000, average loan balances in private banking increased $567 million (25 percent) compared with $309 million (16 percent) in 1999, while average deposit balances increased $400 million (14 percent) in 2000 and $678 million (31 percent) in 1999. Offsetting the positive impact of revenue growth, noninterest expense (including goodwill and other intangible asset expense) increased $207.0 million (20 percent) in 2000 and $355.6 million (52 percent) in 1999. The increase in 2000 was primarily due to the increase in investment banking and brokerage activity, office expansion and other growth initiatives. The increase in 1999 is attributed to the acquisition of Piper Jaffray Companies Inc. effective in May 1998. CORPORATE SUPPORT Corporate Support includes the net effect of support units after internal revenue and expense allocations, treasury management and other corporate activities. Net interest income primarily relates to the Company's investment and residential mortgage portfolios, and the net effect of transfer pricing related to loan and deposit balances. The provision for credit losses represents the residual aggregate of the credit provision allocated to the reportable business units and the Company's recorded provision which is determined in accordance with accounting principles generally accepted in the United States. Refer to "Corporate Risk Profile" on pages 15 to 20 for further discussion on the allowance for credit losses and changes in the provision for credit losses. Noninterest income and noninterest expenses primarily reflect certain business activities managed on a corporate basis and the elimination of intersegment revenue and expense. Noninterest income included $55.0 million of gains on the disposition of office buildings in Portland, Boise and Minneapolis during 2000. Provisions for income taxes reflect the difference between the income tax expense or benefit allocated to the other business units (37 percent of pretax earnings in 2000, compared with 37 percent and 38 percent of pretax earnings in 1999 and 1998, respectively) and the effective tax rate on a consolidated basis. Refer to "Income Tax Expense" on page 10 for discussion of the effective tax rate on a consolidated basis. U.S. Bancorp 7 10 TABLE 3 ANALYSIS OF NET INTEREST INCOME
(Dollars in Millions) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------ Net interest income, as reported............................ $3,471.3 $3,260.7 $3,060.6 Taxable-equivalent adjustment............................ 69.5 42.0 51.3 -------------------------------------- Net interest income (taxable-equivalent basis).............. $3,540.8 $3,302.7 $3,111.9 -------------------------------------- Average yields and weighted average rates (taxable-equivalent basis) Earning assets yield..................................... 9.05% 8.36% 8.55% Rate paid on interest-bearing liabilities................ 5.45 4.45 4.70 -------------------------------------- Gross interest margin....................................... 3.60% 3.91% 3.85% -------------------------------------- Net interest margin......................................... 4.73% 4.83% 4.87% -------------------------------------- Net interest margin without taxable-equivalent increments... 4.64% 4.77% 4.79% - ------------------------------------------------------------------------------------------------------ Average Balances: Loans.................................................... $ 66,439 $ 60,578 $ 55,979 Earning assets........................................... 74,863 68,392 63,868 Deposits................................................. 50,681 48,099 47,327 - ------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME ANALYSIS NET INTEREST INCOME Net interest income on a taxable-equivalent basis was $3.54 billion in 2000, compared with $3.30 billion in 1999 and $3.11 billion in 1998. The 7 percent increase in 2000 as compared with 1999 was primarily due to growth in earning assets. The net interest margin declined from 4.83 percent in 1999 to 4.73 percent in 2000, as lagging deposit growth relative to the growth in total earning assets increased the Company's incremental cost of funding. Average earning assets increased $6.5 billion (9 percent) in 2000, primarily due to strong core loan growth and acquisitions partially offset by reductions in indirect automobile loans, securities and residential mortgages. Average loans were up $5.9 billion (10 percent) from 1999. Excluding indirect automobile and residential mortgage loans, average loans in 2000 were higher by $7.9 billion (14 percent) than 1999, reflecting growth in commercial loans, home equity and second mortgages and acquisitions (see Consolidated Daily Average Balance Sheet and Related Yields and Rates on pages 62 and 63). TABLE 4 NET INTEREST INCOME -- CHANGES DUE TO RATE AND VOLUME
2000 Compared with 1999 1999 Compared with 1998 ----------------------------------------------------------------------------------------- (Dollars in Millions) Volume Yield/Rate Total Volume Yield/Rate Total - --------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in Interest income Loans...................... $526.9 $ 425.5 $952.4 $398.3 $(115.8) $282.5 Taxable securities......... (27.8) 7.6 (20.2) (39.7) (13.3) (53.0) Nontaxable securities...... (3.8) (1.0) (4.8) (8.5) (2.8) (11.3) Federal funds sold and resale agreements....... 3.2 5.9 9.1 (6.3) (5.7) (12.0) Other...................... 79.1 42.3 121.4 52.6 1.2 53.8 ----------------------------------------------------------------------------------------- Total................... 577.6 480.3 1,057.9 396.4 (136.4) 260.0 Interest expense Savings deposits and time deposits less than $100,000................ 15.8 209.4 225.2 (28.8) (123.4) (152.2) Time deposits over $100,000.................. 102.8 48.7 151.5 68.2 (15.8) 52.4 Short-term borrowings...... (34.2) 53.7 19.5 8.6 (7.2) 1.4 Long-term debt............. 215.2 208.4 423.6 200.6 (39.9) 160.7 Mandatorily redeemable preferred securities.... -- -- -- 6.9 -- 6.9 ----------------------------------------------------------------------------------------- Total................... 299.6 520.2 819.8 255.5 (186.3) 69.2 ----------------------------------------------------------------------------------------- Increase (decrease) in net interest income......... $278.0 $ (39.9) $238.1 $140.9 $ 49.9 $190.8 - ---------------------------------------------------------------------------------------------------------------------------------
This table shows the components of the change in net interest income by volume and rate on a taxable-equivalent basis. The effect of changes in rates on volume changes is allocated based on the percentage relationship of changes in volume and changes in rate. This table does not take into account the level of noninterest-bearing funding, nor does it fully reflect changes in the mix of assets and liabilities. 8 U.S. Bancorp 11 Average available-for-sale securities were $487 million (9 percent) lower in 2000 compared with 1999, reflecting both maturities and sales of securities. Net interest income on a taxable-equivalent basis increased $190.8 million (6 percent) from 1998 to 1999. Net interest margin remained relatively flat from 4.87 percent in 1998 to 4.83 percent in 1999. Average earning assets increased $4.5 billion (7 percent) in 1999, primarily due to strong core loan growth and consumer loan portfolio purchases in late 1998, partially offset by reductions in securities, the sale of indirect automobile loans and continued runoff of residential mortgages. Average loans were up $4.6 billion (8 percent) from 1998 to 1999, reflecting the impact of acquisitions and core loan growth offset by declining residential mortgages and indirect automobile loan balances. PROVISION FOR CREDIT LOSSES The provision for credit losses was $670.0 million in 2000, compared with $531.0 million in 1999 and $379.0 million in 1998. The provision for credit losses is recorded to bring the allowance for credit losses to a level deemed appropriate by management based on factors discussed in "Analysis and Determination of Allowance for Credit Losses" on pages 19 and 20. Refer to "Corporate Risk Profile" for further information on the factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses. NONINTEREST INCOME Noninterest income in 2000 was $3.26 billion, compared with $2.76 billion in 1999 and $2.26 billion in 1998. The increase of $499.7 million (18 percent) in 2000 as compared with 1999 was primarily driven by a $147.5 million (32 percent) increase in investment banking and trading activity, credit card fee revenue growth of $120.1 million (20 percent), increased service charges on deposit accounts of $34.7 million (8 percent), gains of $55.0 million on the disposal of the Company's ownership in office buildings in Portland, Boise and Minneapolis, the impact of acquisitions, revenues associated with equity investments and other fees, partially offset by a $20.0 million gain-on-sale of branches in Kansas and Iowa completed in 1999. Excluding the impact of acquisitions and divestitures, noninterest income for 2000 would have been approximately 15 percent higher than 1999. Noninterest income in 1999 was $2.76 billion, compared with $2.26 billion in 1998, an increase of $502.1 million (22 percent). The increase was driven primarily by the full year impact and continued growth in fee income generated by U.S. Bancorp Piper Jaffray in its investment banking and brokerage activities. Revenue growth related to investment banking and brokerage activities for 1999 approximated $414.0 million. Trust and investment management fees, acquisitions and service charges on deposit accounts also contributed to the year-over-year growth in noninterest income. Credit card fee revenue increased by 5 percent from 1998 despite the loss of approximately one-half of the U.S. Government purchasing card business in late 1998. NONINTEREST EXPENSE Noninterest expense in 2000 was $3.60 billion compared with $3.13 billion in 1999 and $2.84 billion in 1998. Excluding merger-related charges, noninterest expense on an operating basis was $3.54 billion in 2000, compared with $3.06 billion in 1999 and $2.63 billion in 1998. The increase in noninterest expenses on an operating basis, of $472.6 million (15 percent) is primarily attributable to growth in expenses related to investment banking and brokerage activity of $228.6 million, the impact of acquisitions and divestitures of $175.9 million and the planned spending on service-quality technology and other customer initiatives. The full year 2000 also included approximately $33.0 million of Internet infrastructure-related expense. The efficiency ratio TABLE 5 NONINTEREST INCOME
(Dollars in Millions) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------ Credit card fee revenue..................................... $ 723.2 $ 603.1 $ 574.8 Trust and investment management fees........................ 473.9 459.7 413.0 Service charges on deposit accounts......................... 469.3 434.6 406.0 Investment products fees and commissions.................... 359.1 347.7 229.7 Investment banking revenue.................................. 356.3 245.4 100.4 Trading account profits and commissions..................... 252.5 215.9 118.1 Available-for-sale securities gains (losses)................ 7.0 (1.3) 12.6 Other....................................................... 617.1 453.6 402.0 -------------------------------------- Total noninterest income................................. $3,258.4 $2,758.7 $2,256.6 - ------------------------------------------------------------------------------------------------------
U.S. Bancorp 9 12 TABLE 6 NONINTEREST EXPENSE
(Dollars in Millions) 2000 1999 1998 - ------------------------------------------------------------------------------------------------ Salaries.................................................... $1,677.0 $1,460.9 $1,210.9 Employee benefits........................................... 279.0 248.4 222.3 Net occupancy............................................... 236.9 204.6 187.4 Furniture and equipment..................................... 167.4 160.1 153.4 Professional services....................................... 90.7 74.1 71.3 Telephone................................................... 88.4 75.4 69.7 Advertising and marketing................................... 73.0 64.3 67.2 Other personnel costs....................................... 61.5 63.2 53.0 Goodwill and other intangible assets........................ 235.5 165.6 143.7 Other....................................................... 627.7 547.9 448.9 -------------------------------- Total operating noninterest expense...................... 3,537.1 3,064.5 2,627.8 Merger-related charges...................................... 61.3 62.4 216.5 -------------------------------- Total noninterest expense................................ $3,598.4 $3,126.9 $2,844.3 -------------------------------- Efficiency ratio*........................................... 53.0% 51.6% 53.1% Efficiency ratio before merger-related charges.............. 52.1 50.5 49.1 Banking efficiency ratio before merger-related charges**.... 43.6 43.2 44.2 Average number of full-time equivalent employees............ 28,949 26,891 26,526 - ------------------------------------------------------------------------------------------------
*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. before merger-related charges increased slightly to 52.1 percent in 2000 compared with 50.5 percent in 1999 due to investments in Internet technology and other customer-related initiatives. Without the effect of investment banking and brokerage activities, noninterest expense, on an operating basis, increased by $244.0 million in 2000. The banking efficiency ratio before merger-related charges was 43.6 percent for 2000, essentially unchanged from 43.2 percent in 1999 and slightly improved from 44.2 percent in 1998. The improved banking efficiency ratio in 1999 compared with 1998 reflects the results of integrating acquired banking businesses. The Company has incurred merger-related charges in each of the last three years in conjunction with its acquisitions. Noninterest expense included merger- related charges of $61.3 million in 2000, compared with $62.4 million in 1999 and $216.5 million in 1998. Merger-related charges in 2000, primarily system conversions and integration costs associated with consolidating redundant operations, related to the Company's recent acquisitions. Merger-related charges in 1999 related to the integration of the Company's various acquisitions, including finalizing the integration of the former U.S. Bancorp ("USBC") after its 1997 merger with the Company, and ongoing activities related to Piper Jaffray and nine other acquired entities. During 1998, the Company incurred $203.8 million of merger-related charges to integrate USBC and $11.7 million related to the acquisition of Piper Jaffray. In 1998, employee benefit curtailment gains of $25.6 million were offset against merger-related charges. Refer to Note D of the Notes to Consolidated Financial Statements for further information on these acquired businesses and merger-related charges. INCOME TAX EXPENSE The provision for income taxes was $869.3 million in 2000, compared with $855.0 million in 1999 and $766.5 million in 1998. The Company's effective tax rate was 35.3 percent in 2000, compared with 36.2 percent in 1999 and 36.6 percent in 1998. The effective rate declined in 2000 as compared with 1999 and 1998, primarily due to an increase in tax-exempt income, incremental tax credits and a decrease in the effective rate for state income taxes resulting from changes in business mix during the year. At December 31, 2000, the Company's net deferred tax asset was $13.2 million, compared with $158.4 million at December 31, 1999. In determining that realization of the deferred tax asset was more likely than not, the Company gave consideration to a number of factors, including taxable income during carryback periods, recent earnings history, expectations for earnings in the future and, where applicable, the expiration dates associated with tax carrybacks and carryforwards. For further information on income taxes, refer to Note P of the Notes to Consolidated Financial Statements. 10 U.S. Bancorp 13 TABLE 7 LOAN PORTFOLIO DISTRIBUTION
2000 1999 1998 1997 ------------------------------------------------------------------------------------ Percent Percent Percent Percent At December 31 (Dollars in Millions) Amount of Total Amount of Total Amount of Total Amount of Total - -------------------------------------------------------------------------------------------------------------------------------- COMMERCIAL Commercial........................... $29,920 43.3% $26,491 42.1% $23,703 40.1% $21,393 39.1% Real estate Commercial mortgage............... 10,208 14.8 9,784 15.5 8,193 13.9 8,025 14.7 Construction...................... 4,443 6.4 4,322 6.9 3,069 5.2 2,359 4.3 Lease financing...................... 4,096 5.9 2,372 3.8 2,271 3.8 2,006 3.7 ------------------------------------------------------------------------------------ Total commercial............... 48,667 70.4 42,969 68.3 37,236 63.0 33,783 61.8 CONSUMER Home equity and second mortgage...... 9,438 13.7 8,681 13.8 7,409 12.5 5,815 10.6 Credit card.......................... 4,499 6.5 4,313 6.9 4,221 7.1 4,200 7.7 Revolving credit..................... 1,868 2.7 1,815 2.9 1,686 2.9 1,567 2.9 Installment.......................... 896 1.3 999 1.6 1,168 2.0 1,199 2.2 Automobile........................... 564 .8 884 1.4 3,413 5.8 3,227 5.9 Student *............................ 674 1.0 563 .9 829 1.4 686 1.2 ------------------------------------------------------------------------------------ Subtotal.......................... 17,939 26.0 17,255 27.5 18,726 31.7 16,694 30.5 Residential mortgage................. 2,485 3.6 2,661 4.2 3,160 5.3 4,231 7.7 ------------------------------------------------------------------------------------ Total consumer.................... 20,424 29.6 19,916 31.7 21,886 37.0 20,925 38.2 ------------------------------------------------------------------------------------ Total loans.................... $69,091 100.0% $62,885 100.0% $59,122 100.0% $54,708 100.0% - -------------------------------------------------------------------------------------------------------------------------------- 1996 ------------------ Percent At December 31 (Dollars in Millions) Amount of Total - ---------------------------------------- ------------------ COMMERCIAL Commercial........................... $19,545 37.3% Real estate Commercial mortgage............... 8,022 15.3 Construction...................... 2,125 4.1 Lease financing...................... 1,848 3.5 ------------------ Total commercial............... 31,540 60.2 CONSUMER Home equity and second mortgage...... 5,271 10.1 Credit card.......................... 3,632 6.9 Revolving credit..................... 1,581 3.0 Installment.......................... 1,463 2.8 Automobile........................... 3,388 6.5 Student *............................ 580 1.1 ------------------ Subtotal.......................... 15,915 30.4 Residential mortgage................. 4,900 9.4 ------------------ Total consumer.................... 20,815 39.8 ------------------ Total loans.................... $52,355 100.0% - -----------------------------------------------------------------------
*All or part of the student loan portfolio may be sold when the repayment period begins. BALANCE SHEET ANALYSIS LOANS The Company's loan portfolio increased $6.2 billion to $69.1 billion at December 31, 2000, from $62.9 billion at December 31, 1999. Average loans increased 10 percent to $66.4 billion in 2000 compared with $60.6 billion in 1999. Excluding indirect automobile and residential mortgages, average loans for 2000 were $7.9 billion (14 percent) higher than 1999, reflecting core loan growth of 10 percent and the impact of acquisitions. The Company's loan portfolio inherently has credit risk which may ultimately result in loan charge-offs. The Company manages this risk through stringent, centralized credit policies and review procedures, as well as diversification along geographic and customer lines. See "Corporate Risk Profile" for a more detailed discussion of the management of credit risk including the allowance for credit losses. COMMERCIAL Commercial loans, including lease financing, totaled $34.0 billion at December 31, 2000, up $5.2 billion (18 percent) from year-end 1999. The increase reflects core growth in commercial loans, the impact of bank acquisitions and approximately $1.4 billion of leases related to the acquisition of Lyon Financial Services, Inc. and Oliver-Allen Corporation during 2000. At December 31, 1999, commercial loans were $28.9 billion, up $2.9 billion (11 percent) from year-end 1998. The Company offers a broad array of traditional commercial lending products and specialized products such as asset-based lending, lease financing, agricultural credit, correspondent banking and energy lending. The Company monitors and manages the portfolio diversification by industry, customer and geography. The commercial portfolio reflects the Company's focus of serving small business customers, middle-market and larger corporate businesses throughout its 16 state banking region and national customers within certain niche industry groups. The Company also provides financing to enable customers to grow their businesses through acquisitions of existing businesses, buyouts or other recapitalizations. Such leveraged financings approximated $3.2 billion at December 31, 2000, compared with $2.4 billion at December 31, 1999. During a business cycle with slower economic growth, businesses with leveraged capital structures may experience insufficient cashflows to service their debt. The Company manages its exposure to leveraged financing loans by maintaining strong underwriting standards, portfolio diversification and effectively managing the relationship with the customer either directly or through a reputable financial intermediary. At December 31, 2000, approximately 96 percent of such loans outstanding were made to existing customers or were sponsored by financial intermediaries with an established relationship with the Company. These leveraged financings are diversified among industry groups with no significant industry concentrations as a percentage of these loans. The Company's underwriting standards require businesses to maintain acceptable capital levels and have demonstrated sufficient cash flows to support debt service of the loans. U.S. Bancorp 11 14 Table 8 provides a summary of the significant industry groups and geographic locations of commercial loans outstanding at December 31, 2000, and 1999. This diverse mix of industries and geographic locations is similar to 1998. Certain industry segments, including agricultural, paper and forestry and mortgage banking, continue to experience economic stress. At December 31, 2000, the Company's agricultural portfolio is diversified with 36 percent of agricultural loans to livestock producers, 27 percent to crop producers, 24 percent to food processors and 13 percent to wholesalers of agricultural products. Volatility in crop and livestock prices in 2000 continued to adversely affect this category of loans. Food processors and wholesalers have been less negatively affected by commodity pricing. The paper and forestry sector has been stressed due to excess capacity and softening domestic demand. This industry represents 2.7 percent of commercial loans at December 31, 2000. The mortgage banking sector represents approximately 2.7 percent of commercial loans at December 31, 2000, compared with 3.5 percent at December 31, 1999. Loans to mortgage banking customers are primarily warehouse lines which are collateralized with the underlying mortgages. The Company regularly monitors its collateral position to manage its risk exposure. COMMERCIAL REAL ESTATE The Company's portfolio of commercial real estate mortgages and construction loans grew to $14.7 billion at December 31, 2000, compared with $14.1 billion at December 31, 1999. Commercial mortgages outstanding increased to $10.2 billion at December 31, 2000, compared with $9.8 billion at December 31, 1999. Real estate construction loans at December 31, 2000, totaled $4.5 billion compared with $4.3 billion at year-end 1999. Table 9 provides a summary of real estate exposures by property type and geographic location. The Company maintains the real estate construction designation until the project is producing sufficient cash flow to service traditional mortgage financing, at which time, if retained, the loan is transferred to the commercial mortgage portfolio. Approximately $242.6 million of construction loans were transferred to the commercial mortgage portfolio in 2000. At year-end 2000, real estate secured $175 million of tax-exempt industrial development loans and $1.1 billion of standby letters of credit. At year-end 1999, these exposures totaled $161 million and $920 million, respectively. The Company's commercial real estate mortgages and construction loans had combined unfunded commitments of $3.27 billion at December 31, 2000, and $3.61 billion at December 31, 1999. The Company also finances the operations of real estate developers and other entities with operations related to real estate. These loans are not secured directly by real estate and are subject to terms and conditions similar to commercial loans. These loans are included in the commercial loan category and totaled $1.90 billion at December 31, 2000, and $1.85 billion at December 31, 1999. TABLE 8 COMMERCIAL LOAN EXPOSURE BY INDUSTRY GROUP AND GEOGRAPHY
Percentage of Total at December 31 --------------------- INDUSTRY TYPE 2000 1999 - --------------------------------------------------------------------------------------- Consumer cyclical products and services..................... 18.0% 17.5% Capital goods............................................... 11.9 12.6 Financials.................................................. 10.2 10.0 Consumer staples............................................ 9.7 10.1 Agricultural................................................ 8.6 8.8 Transportation.............................................. 4.5 4.8 Paper and forest products, mining and basic materials....... 4.4 4.8 Mortgage banking............................................ 2.7 3.5 Other....................................................... 30.0 27.9 --------------------- 100.0% 100.0% - --------------------------------------------------------------------------------------- GEOGRAPHY - --------------------------------------------------------------------------------------- Minnesota................................................... 22.1% 23.2% Washington.................................................. 14.2 16.2 California.................................................. 9.9 8.6 Oregon...................................................... 8.2 8.7 Other states within banking region.......................... 27.5 28.1 --------------------- Total banking region..................................... 81.9 84.8 Other regions............................................... 18.1 15.2 --------------------- 100.0% 100.0% - ---------------------------------------------------------------------------------------
12 U.S. Bancorp 15 TABLE 9 COMMERCIAL REAL ESTATE EXPOSURE BY PROPERTY TYPE AND GEOGRAPHY
Percentage of Total at December 31 ------------------- PROPERTY TYPE 2000 1999 - -------------------------------------------------------------------------------------- Business owner occupied..................................... 23.7% 25.0% Multi-family................................................ 14.1 13.2 Commercial property -- office............................... 12.2 12.3 Commercial property -- retail............................... 10.2 10.2 Homebuilders................................................ 8.2 9.3 Commercial property -- industrial........................... 8.2 6.6 Hotel/motel................................................. 8.1 7.7 Other....................................................... 15.3 15.7 ------------------- 100.0% 100.0% - -------------------------------------------------------------------------------------- GEOGRAPHY - -------------------------------------------------------------------------------------- California.................................................. 23.7% 22.1% Washington.................................................. 21.4 21.2 Oregon...................................................... 11.9 12.6 Minnesota................................................... 7.8 9.1 Other states within banking region.......................... 29.0 29.6 ------------------- Total banking region..................................... 93.8 94.6 Other regions............................................... 6.2 5.4 ------------------- 100.0% 100.0% - --------------------------------------------------------------------------------------
CONSUMER Total consumer loan outstandings increased $508 million to $20.4 billion at December 31, 2000, from $19.9 billion at December 31, 1999. Excluding indirect automobile loans and residential mortgage loans, consumer loans increased $993 million (6 percent). This increase reflected growth in home equity and second mortgage loans of $757 million (9 percent), credit card loans of $186 million (4 percent), revolving credit loans of $53 million (3 percent), and student loans of $111 million (20 percent) from December 31, 1999, offset by a decrease in installment loans from December 31, 1999. The decline in residential mortgages and indirect automobile loans reflects the Company's objective of exiting these businesses due to their lower returns. Of the total consumer loan balances outstanding, approximately 84 percent are to customers located in the Company's banking region. U.S. Bancorp 13 16 TABLE 10 AVAILABLE-FOR-SALE SECURITIES PORTFOLIO AVERAGE MATURITY
At December 31, 2000 Average Maturity - --------------------------------------------------------------------------------- U.S. Treasury............................................... 2 years, 1 month Mortgage-backed............................................. 6 years, 3 months Other U.S. agencies......................................... 3 years, 6 months State and political......................................... 5 years, 0 months Other*...................................................... 8 years, 0 months Total.................................................... 5 years, 6 months - ---------------------------------------------------------------------------------
* Excludes equity securities that have no stated maturity. The average maturity shown above is contractual maturity for all securities except for mortgage-backed securities. The average maturity for mortgage-backed securities includes expected prepayments reflecting current market conditions. SECURITIES At December 31, 2000, available-for-sale securities totaled $4.3 billion, compared with $4.9 billion at December 31, 1999, primarily reflecting maturities and prepayments of securities. The relative mix of the type of available-for-sale securities did not change significantly from the prior year. The primary objectives of the Company's investment portfolio are to meet business line collateral needs and reduce overall interest rate risk. DEPOSITS Total deposits were $53.3 billion at December 31, 2000, up $1.7 billion (3 percent) from year-end 1999. Noninterest-bearing deposits were $15.7 billion at December 31, 2000, compared with $16.1 billion at December 31, 1999. Interest-bearing deposits totaled $37.6 billion at December 31, 2000, compared with $35.5 billion at December 31, 1999. The increase in interest-bearing deposit balances is primarily due to acquisitions. BORROWINGS The Company utilized both short-term and long-term borrowings to fund core loan growth in excess of deposit growth. Short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings, were $2.8 billion at December 31, 2000, up from $2.3 billion at year-end 1999. The increase was primarily due to higher federal funds purchased balances partially offset by a decline in securities sold under agreements to repurchase. Long-term debt was $18.6 billion at December 31, 2000, up from $16.6 billion at December 31, 1999. During 2000, the Company issued $5.2 billion of debt with an average original maturity of 2.2 years under its medium term and bank note programs. The Company also borrowed $400 million of variable-rate advances from the Federal Home Loan Bank. These issuances were partially offset by maturities of $3.3 billion of medium-term and bank notes, $238 million of Federal Home Loan Bank advances and $250 million of putable asset trust securities. Due to lagging deposit growth, the Company continues to utilize long-term debt to fund core asset growth. TABLE 11 AVAILABLE-FOR-SALE SECURITIES PORTFOLIO AMORTIZED COST, FAIR VALUE AND YIELD BY MATURITY DATE
Maturing: Within 1 Year 1-5 Years 5-10 Years - ------------------------------------------------------------------------------------------------------------------ Amor- Amor- Amor- At December 31, 2000 tized Fair tized Fair tized Fair (Dollars in Millions) Cost Value Yield Cost Value Yield Cost Value Yield - ------------------------------------------------------------------------------------------------------------------ U.S. Treasury.................... $ 65 $ 65 5.48% $ 291 $ 294 5.68% $ 2 $ 2 6.41% Mortgage-backed*................. 357 357 6.84 1,013 1,013 6.78 596 594 6.78 Other U.S. agencies.............. 35 36 7.55 77 79 7.56 30 30 7.61 State and political**............ 151 152 7.34 405 412 7.39 384 393 7.41 Other............................ 2 2 8.92 7 7 3.89 5 5 3.42 ------------------------------------------------------------------------------- Total.......................... $610 $612 6.87% $1,793 $1,805 6.76% $1,017 $1,024 7.03% - ------------------------------------------------------------------------------------------------------------------ Maturing: Over 10 Years Total - --------------------------------- ---------------------------------------------------- Amor- Amor- At December 31, 2000 tized Fair tized Fair (Dollars in Millions) Cost Value Yield Cost Value Yield - --------------------------------- ---------------------------------------------------- U.S. Treasury.................... $ -- $ -- --% $ 358 $ 361 5.65% Mortgage-backed*................. 529 529 6.89 2,495 2,493 6.81 Other U.S. agencies.............. 7 7 7.62 149 152 7.57 State and political**............ 80 82 7.83 1,020 1,039 7.43 Other............................ 222 223 11.13*** 236 237 7.15*** ---------------------------------------------------- Total.......................... $838 $841 7.08%*** $4,258 $4,282 6.89%*** - ---------------------------------------------------------------------------------------
*Variable rate mortgage-backed securities represented 6% of the balance of mortgage-backed securities. **Yields on state and political obligations that are not subject to federal income tax have been adjusted to taxable-equivalent using a 35% tax rate. ***Average yield calculations exclude equity securities that have no stated yield. 14 U.S. Bancorp 17 CORPORATE RISK PROFILE OVERALL RISK PROFILE Managing risk is an essential part of successfully operating a financial services company. The most prominent risk exposures are credit quality, interest rate sensitivity, market and liquidity. Credit quality risk is the risk of not collecting interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates. Rate movements can affect the repricing of assets and liabilities differently, as well as their market value. Market risk arises from fluctuations in interest rates, foreign exchange rates and equity prices that may result in changes in the values of financial instruments, such as trading account securities that are accounted for on a mark-to-market basis. Liquidity risk is the possible inability to fund obligations to depositors, investors and borrowers. CREDIT RISK 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 intended to measure the credit quality of individual commercial loans. 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 has experienced slower growth in 2000. Corporate earnings growth rates have slowed and credit quality indicators among certain industry sectors have deteriorated slightly. Approximately 55 percent of the Company's loan portfolio consists of credit to businesses and consumers in Minnesota, Oregon, Washington and California. Although the financial markets have experienced more volatility in 2000, most economic indicators in the Company's operating regions are similar to or slightly favorable with national trends. According to federal and state government agencies, unemployment rates in Minnesota, Oregon, Washington and California were 3.1 percent, 4.2 percent, 4.9 percent and 4.6 percent, respectively, for the month of December 2000, compared with the national unemployment rate of 4.0 percent. At September 30, 2000, the national residential foreclosure rate was .84 percent, compared with .35 percent in Minnesota, .55 percent in Oregon, .61 percent in Washington and .62 percent in California. TABLE 12 NET CHARGE-OFFS AS A PERCENTAGE OF AVERAGE LOANS OUTSTANDING
2000 1999 1998 1997 1996 - ---------------------------------------------------------------------------------------------------- COMMERCIAL Commercial............................................... .74% .50% .33% .68% .15% Real estate: Commercial mortgage................................... (.01) .01 (.20) (.20) (.11) Construction.......................................... .14 .01 .11 .16 .08 Lease financing.......................................... .46 .26 .20 .28 .10 ------------------------------------ Total commercial...................................... .50 .34 .18 .41 .08 CONSUMER Credit card.............................................. 4.29 4.23 4.36 4.11 3.88 Other.................................................... 1.93 1.84 1.45 1.28 .85 ------------------------------------ Subtotal.............................................. 2.50 2.37 2.14 1.93 1.54 Residential mortgage..................................... .15 .10 .17 .12 .08 ------------------------------------ Total consumer........................................ 2.19 2.07 1.79 1.53 1.16 ------------------------------------ Total.................................................. 1.01% .94% .78% .84% .51% - ----------------------------------------------------------------------------------------------------
U.S. Bancorp 15 18 The Company also engages in nonlending activities that may give rise to credit risk, including interest rate swap contracts for balance sheet hedging purposes, foreign exchange transactions and interest rate swap contracts for customers, and the processing of credit card transactions for merchants. These activities are subject to the same credit review, analysis and approval processes as those applied to commercial loans. For additional information on interest rate swaps, see "Interest Rate Risk Management." ANALYSIS OF NET LOAN CHARGE-OFFS Net loan charge-offs increased $102.2 million to $669.9 million in 2000, compared with $567.7 million in 1999 and $434.2 million in 1998. The ratio of total net charge-offs to average loans was 1.01 percent in 2000, compared with .94 percent in 1999 and .78 percent in 1998. Commercial loan net charge-offs for 2000 were $233.0 million, compared with $133.5 million in 1999 and $65.2 million in 1998. The increase in commercial loan net charge-offs in 2000 included higher losses on a growing portfolio of small business products, growth in the corporate card portfolio, credit losses related to the acquired leasing businesses and lower levels of recoveries compared with 1999. Consumer loan net charge-offs in 2000 were $436.9 million, compared with $434.2 million in 1999 and $369.0 million in 1998. The ratio of consumer net charge-offs to average loans in 2000 was 2.19 percent, up from 2.07 percent in 1999 and 1.79 percent in 1998. The $2.7 million increase in consumer loan net charge-offs in 2000 reflects expected losses associated with consumer portfolio purchases during late 1998, offset by lower losses related to the indirect automobile portfolio. The increase in consumer loan net charge-offs of $168.8 million in 1999, relative to 1998, reflects higher overdraft fraud losses in addition to expected losses associated with consumer portfolio purchases. During 1999, the Company modified its charge-off policy to conform with regulatory guidelines for consumer loans. Without the change in policy, total consumer net charge-offs as a percent of average loans outstanding would have been 2.09 percent. ANALYSIS OF NONPERFORMING ASSETS Nonperforming assets include nonaccrual loans, restructured loans, other real estate and other nonperforming assets owned by the Company. Interest payments (currently received on approximately 30 percent of the Company's nonperforming loans) are typically applied against the principal balance and not recorded as income. TABLE 13 NONPERFORMING ASSETS*
At December 31 ---------------------------------------------- (Dollars in Millions) 2000 1999 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- COMMERCIAL Commercial............................................... $232.8 $142.5 $154.4 $170.4 $138.4 Real estate: Commercial mortgage................................... 61.3 78.9 35.5 45.4 44.4 Construction.......................................... 27.3 25.3 17.2 14.9 18.8 Lease financing.......................................... 38.1 18.7 11.3 8.7 5.3 ---------------------------------------------- Total commercial...................................... 359.5 265.4 218.4 239.4 206.9 CONSUMER Residential mortgage..................................... 30.3 36.0 46.6 52.1 57.6 Other.................................................... 7.5 8.6 13.9 5.6 4.8 ---------------------------------------------- Total consumer........................................ 37.8 44.6 60.5 57.7 62.4 ---------------------------------------------- Total nonperforming loans....................... 397.3 310.0 278.9 297.1 269.3 OTHER REAL ESTATE........................................... 40.1 20.7 14.3 30.1 43.2 OTHER NONPERFORMING ASSETS.................................. 17.5 16.8 11.1 12.3 7.5 ---------------------------------------------- Total nonperforming assets...................... $454.9 $347.5 $304.3 $339.5 $320.0 ---------------------------------------------- Accruing loans 90 days or more past due**................... $187.1 $125.8 $106.8 $ 93.8 $ 90.6 Nonperforming loans to total loans.......................... .58% .49% .47% .54% .51% Nonperforming assets to total loans plus other real estate..................................................... .66 .55 .51 .62 .61 Net interest lost on nonperforming loans.................... $ 30.9 $ 19.7 $ 14.9 $ 17.1 $ 24.8 - --------------------------------------------------------------------------------------------------------------
*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. 16 U.S. Bancorp 19 TABLE 14 DELINQUENT LOAN RATIOS*
At December 31 ------------------------------------ 90 days or more past due 2000 1999 1998 1997 1996 - ---------------------------------------------------------------------------------------------------- COMMERCIAL Commercial............................................... .88% .57% .66% .81% .74% Real estate: Commercial mortgage................................... .62 .84 .44 .57 .55 Construction.......................................... .61 .59 .56 .67 .91 Lease financing.......................................... .97 .80 .55 .44 .33 ------------------------------------ Total commercial...................................... .81 .65 .60 .72 .68 CONSUMER Credit card.............................................. 1.24 .96 .74 .69 .88 Other.................................................... .75 .57 .51 .41 .34 ------------------------------------ Subtotal.............................................. .87 .67 .56 .48 .46 Residential mortgage..................................... 1.44 1.57 1.86 1.58 1.48 ------------------------------------ Total consumer........................................ .94 .79 .75 .70 .70 ------------------------------------ Total.............................................. .85% .69% .65% .71% .69% - ----------------------------------------------------------------------------------------------------
*Ratios include nonperforming loans and are expressed as a percentage of ending loan balances. At December 31, 2000, nonperforming assets totaled $454.9 million, compared with $347.5 million at year-end 1999 and $304.3 million at year-end 1998. The ratio of nonperforming assets to loans plus other real estate was .66 percent at December 31, 2000, compared with .55 percent at year-end 1999 and .51 percent at year-end 1998. In 2000, nonperforming commercial loans increased $94.1 million, reflecting stress in agricultural and paper and forestry portfolios. Nonperforming consumer loans declined approximately $6.8 million, primarily related to lower levels of nonperforming residential mortgage loans at year-end. Other real estate increased $19.4 million, which included an agricultural-related credit that was transferred to other real estate in the fourth quarter of 2000. Accruing loans 90 days or more past due totaled $187.1 million, compared with $125.8 million at December 31, 1999, and $106.8 million at December 31, 1998. The increase reflected the impact of an acquired small-ticket leasing portfolio, higher consumer delinquencies and the economic business cycle in the commercial portfolio. 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 were 2.84 percent of the total consumer portfolio at December 31, 2000, compared with 2.65 percent and 2.39 percent of the total consumer portfolio at December 31, 1999, and 1998, respectively. Consumer loans 90 days or more past due (including non- performing loans) totaled .94 percent of the total consumer loan portfolio at December 31, 2000, compared with .79 percent of the total consumer loan portfolio at December 31, 1999, and .75 percent at December 31, 1998. U.S. Bancorp 17 20 TABLE 15 SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
(Dollars in Millions) 2000 1999 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- Balance at beginning of year................................ $ 995.4 $1,000.9 $1,008.7 $ 992.5 $908.0 CHARGE-OFFS Commercial Commercial............................................ 245.8 184.6 129.7 178.1 84.1 Real estate: Commercial mortgage................................ 5.6 10.4 7.5 14.3 17.0 Construction....................................... 8.3 1.1 4.6 4.3 2.3 Lease financing....................................... 18.5 8.0 4.5 6.3 2.3 ------------------------------------------------------ Total commercial................................... 278.2 204.1 146.3 203.0 105.7 Consumer Credit card........................................... 193.2 188.5 196.8 172.4 150.4 Other................................................. 309.8 331.5 241.7 194.3 134.3 ------------------------------------------------------ Subtotal........................................... 503.0 520.0 438.5 366.7 284.7 Residential mortgage.................................. 4.8 3.6 7.3 6.7 6.8 ------------------------------------------------------ Total consumer..................................... 507.8 523.6 445.8 373.4 291.5 ------------------------------------------------------ Total........................................... 786.0 727.7 592.1 576.4 397.2 RECOVERIES Commercial Commercial............................................ 30.9 58.2 55.1 37.7 55.4 Real estate: Commercial mortgage................................ 6.9 9.6 23.8 30.5 25.7 Construction....................................... 2.1 .6 1.7 .8 1.0 Lease financing....................................... 5.3 2.2 .5 1.1 .6 ------------------------------------------------------ Total commercial................................... 45.2 70.6 81.1 70.1 82.7 Consumer Credit card........................................... 14.0 18.2 21.4 20.2 16.6 Other................................................. 55.9 70.3 54.4 35.1 34.0 ------------------------------------------------------ Subtotal........................................... 69.9 88.5 75.8 55.3 50.6 Residential mortgage.................................. 1.0 .9 1.0 1.3 2.4 ------------------------------------------------------ Total consumer..................................... 70.9 89.4 76.8 56.6 53.0 ------------------------------------------------------ Total........................................... 116.1 160.0 157.9 126.7 135.7 NET CHARGE-OFFS Commercial Commercial............................................ 214.9 126.4 74.6 140.4 28.7 Real estate: Commercial mortgage................................ (1.3) .8 (16.3) (16.2) (8.7) Construction....................................... 6.2 .5 2.9 3.5 1.3 Lease financing....................................... 13.2 5.8 4.0 5.2 1.7 ------------------------------------------------------ Total commercial................................... 233.0 133.5 65.2 132.9 23.0 Consumer Credit card........................................... 179.2 170.3 175.4 152.2 133.8 Other................................................. 253.9 261.2 187.3 159.2 100.3 ------------------------------------------------------ Subtotal........................................... 433.1 431.5 362.7 311.4 234.1 Residential mortgage.................................. 3.8 2.7 6.3 5.4 4.4 ------------------------------------------------------ Total consumer..................................... 436.9 434.2 369.0 316.8 238.5 ------------------------------------------------------ Total........................................... 669.9 567.7 434.2 449.7 261.5 Provision charged to operating expense...................... 670.0 531.0 379.0 460.3 271.2 Acquisitions and other changes.............................. 71.3 31.2 47.4 5.6 74.8 ------------------------------------------------------ Balance at end of year...................................... $1,066.8 $ 995.4 $1,000.9 $1,008.7 $992.5 ------------------------------------------------------ Allowance as a percentage of: Period-end loans......................................... 1.54% 1.58% 1.69% 1.84% 1.90% Nonperforming loans...................................... 269 321 359 340 369 Nonperforming assets..................................... 235 286 329 297 310 Net charge-offs.......................................... 159 175 231 224 380 - ----------------------------------------------------------------------------------------------------------------------
18 U.S. Bancorp 21 ANALYSIS AND DETERMINATION OF ALLOWANCE FOR CREDIT LOSSES 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. Management has determined that the allowance for credit losses is adequate. At December 31, 2000, the allowance was $1.07 billion, or 1.54 percent of loans. This compares with an allowance of $995.4 million, or 1.58 percent of loans, at year-end 1999, and $1.00 billion, or 1.69 percent of loans, at December 31, 1998. The ratio of the allowance for credit losses to nonperforming loans was 269 percent at December 31, 2000, compared with 321 percent at year-end 1999 and 359 percent at year-end 1998. The ratio of the allowance for credit losses to net charge-offs was 159 percent at December 31, 2000, compared with 175 percent at year-end 1999 and 231 percent at year-end 1998. The Company considers historical charge-off levels in addition to existing conditions and other factors when establishing the allowance for credit losses. The recent trend of slower economic growth, financial market volatility and softening of corporate earnings may impact the required level of the allowance for credit losses. Management determines the amount of allowance required for certain loan categories based on relative risk characteristics of the loan portfolio. Table 16 shows the amount of the allowance for credit losses by loan category. The allowance recorded for commercial loans is based on a quarterly review of individual loans outstanding and binding commitments to lend, including standby letters of credit. The Company's regular risk rating process is an integral component of the methodology utilized in determining the allowance for credit losses. An analysis of the migration of commercial loans and actual loss experience throughout the business cycle is also conducted quarterly to assess reserves established for credits with similar risk characteristics. An allowance is established for pools of commercial loans based on the risk ratings assigned. The amount is supported by the results of the migration analysis that considers historical loss experience by risk rating, as well as current and historical economic conditions and industry risk factors. The Company separately analyzes the carrying value of impaired loans to determine whether the carrying value is less than or equal to the appraised collateral value or the present value of expected cash flows. Based on this analysis, an allowance for credit losses may be specifically established for impaired loans. The allowance established for commercial loan portfolios and impaired commercial loans increased $80.8 million to $431.6 million in 2000. The change reflected growth in the commercial portfolio during 2000, higher levels of non-performing commercial loans, increasing sector risk in the health care industry, continued stress in the paper and forest products sector due to excess capacity and softening domestic demand and the deterioration in credit risk ratings associated with participation in Shared National Credits that experienced stress during the year. The allowance recorded for consumer portfolios is based on an analysis of product mix, credit scoring and risk composition of the portfolio, fraud loss and bankruptcy experiences, economic conditions and historical and expected delinquency and charge-off statistics for each homogenous category or group of loans. Based on this information and analysis, an allowance is established approximating a rolling twelve-month estimate of net charge-offs. The allowance recorded for consumer loans declined $4.8 million to $442.2 million in 2000. The decline primarily reflects changes in the mix of consumer loans including an increase in home equity loans that experience lower charge-off ratios, the impact of product mix within co-branded credit card portfolios, lower levels of installment and automobile loans and the seasoning of consumer loan portfolios acquired in late 1998. Regardless of the extent of the Company's analysis of customer performance, portfolio evaluations, trends or risk management processes established, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining information regarding a customer's financial condition or changes in their unique business conditions; the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends; volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits; and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans among other factors. For each of these factors, the estimated inherent loss is recorded as unallocated allowance. The Company estimates a range of inherent losses related to the existence of these exposures and for the risk in concentrations to specific borrowers, financings of highly leveraged transactions, products or industries. The estimates are based upon the Company's U.S. Bancorp 19 22 TABLE 16 ELEMENTS OF ALLOWANCE FOR CREDIT LOSSES
Allocation Amount At December 31 ---------------------------------------------------- (Dollars in Millions) 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------- COMMERCIAL Commercial........................ $ 362.3 $284.4 $ 190.7 $ 215.1 $222.1 Real estate Commercial mortgage............ 35.9 43.3 25.8 29.7 42.4 Construction................... 17.3 10.9 10.9 15.9 12.5 Lease financing................... 16.1 12.2 15.2 11.1 10.8 ---------------------------------------------------- Total commercial............... 431.6 350.8 242.6 271.8 287.8 CONSUMER Credit card....................... 155.4 161.1 177.0 137.6 132.1 Other............................. 280.8 280.4 283.0 206.5 164.9 ---------------------------------------------------- Subtotal....................... 436.2 441.5 460.0 344.1 297.0 Residential mortgage.............. 6.0 5.5 10.0 8.9 9.9 ---------------------------------------------------- Total consumer................. 442.2 447.0 470.0 353.0 306.9 ---------------------------------------------------- Total allocated................ 873.8 797.8 712.6 624.8 594.7 Unallocated portion............ 193.0 197.6 288.3 383.9 397.8 ---------------------------------------------------- Total allowance................ $1,066.8 $995.4 $1,000.9 $1,008.7 $992.5 - --------------------------------------------------------------------------------------------- Allocation as a Percent of Loans Outstanding -------------------------------------------- (Dollars in Millions) 2000 1999 1998 1997 1996 - ----------------------------------------------------------------------------------- COMMERCIAL Commercial........................ 1.21% 1.07% .80% 1.01% 1.14% Real estate Commercial mortgage............ .35 .44 .31 .37 .53 Construction................... .39 .25 .36 .67 .59 Lease financing................... .39 .51 .67 .55 .58 -------------------------------------------- Total commercial............... .89 .82 .65 .80 .91 CONSUMER Credit card....................... 3.45 3.74 4.19 3.28 3.64 Other............................. 2.09 2.17 1.95 1.65 1.34 -------------------------------------------- Subtotal....................... 2.43 2.56 2.46 2.06 1.87 Residential mortgage.............. .24 .21 .32 .21 .20 -------------------------------------------- Total consumer................. 2.17 2.24 2.15 1.69 1.47 -------------------------------------------- Total allocated................ 1.26 1.27 1.21 1.14 1.14 Unallocated portion............ .28 .31 .49 .70 .76 -------------------------------------------- Total allowance................ 1.54% 1.58% 1.69% 1.84% 1.90% - -----------------------------------------------------------------------------------
evaluation of imprecision risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment on portfolio segments or concentrations. The unallocated allowance decreased slightly to $193.0 million at year-end 2000 from $197.6 million and $288.3 million at December 31, 1999, and 1998, respectively. Although the Company determines the amount of each element of the allowance separately and this process is an important credit management tool, the entire allowance for credit losses is available for the entire loan portfolio. The actual amount of losses incurred can vary significantly from the estimated amounts. The Company's methodology includes several factors intended to minimize the differences in estimated and actual losses. These factors allow the Company to adjust its estimate of losses based on the most recent information available. Refer to Note A of the Notes to Consolidated Financial Statements for accounting policies related to the allowance for credit losses. 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 December 31, 2000, forecasted net interest income for the next 12 months would decrease $12 million from an immediate 100 basis point upward parallel shift in rates and increase $7 million from a downward shift of the same magnitude. Forecasted net interest income for the second 12 months would increase $1 million from an immediate 100 basis point upward parallel shift in rates and decrease $25 million from a downward shift of the same magnitude. 20 U.S. Bancorp 23 MARKET VALUE SIMULATION MODELING: The net interest income simulation model is somewhat limited by its dependence upon accurate forecasts of future business activity and the resulting effect on balance sheet assets and liabilities. As a result, its usefulness is greatly diminished for periods beyond one or two years. To better measure all interest rate risk, both short-term and long-term, the Company uses a market value simulation model. This model estimates the effect of 1 percent, 2 percent and 3 percent rate shocks on the present value of substantially all future cash flows of the Company's outstanding assets, liabilities and off-balance sheet instruments. ALCO also calculates the sensitivity of the simulation results to changes in key assumptions, such as core deposit 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. Historically, the Company's market value risk position has been 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 2 to 3 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 TABLE 17 INTEREST RATE SENSITIVITY GAP ANALYSIS
Repricing Maturities --------------------------------------------------------------- At December 31, 2000 Less Than 3-6 6-12 1-5 More Than (dollars in millions) 3 Months Months Months Years 5 Years - ----------------------------------------------------------------------------------------------------- Assets Loans.......................... $38,948 $ 3,591 $ 4,105 $16,531 $ 5,894 Available-for-sale securities.................... 381 174 319 1,790 1,594 Other earning assets........... 2,249 38 75 535 695 Nonearning assets.............. 622 19 324 1,490 2,230 --------------------------------------------------------------- Total assets................ $42,200 $ 3,822 $ 4,823 $20,346 $10,413 --------------------------------------------------------------- Liabilities and Equity Deposits....................... $23,842 $ 3,095 $ 3,188 $12,917 $10,215 Other purchased funds.......... 2,800 -- 1 1 7 Long-term debt................. 13,479 239 571 2,475 1,802 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company..................... -- -- -- -- 950 Other liabilities.............. 39 -- 383 192 -- Equity......................... -- -- -- -- -- --------------------------------------------------------------- Total liabilities and equity..................... $40,160 $ 3,334 $ 4,143 $15,585 $12,974 --------------------------------------------------------------- Effect of off-balance sheet hedging instruments Receiving fixed................ $ 328 $ 348 $ 451 $ 4,116 $ 1,375 Receiving floating............. 1,500 -- -- -- -- Paying fixed................... -- -- (500) -- -- Paying floating................ (7,618) -- -- -- -- --------------------------------------------------------------- Total effect of off-balance sheet hedging instruments.............. $(5,790) $ 348 $ (49) $ 4,116 $ 1,375 --------------------------------------------------------------- Repricing gap..................... $(3,750) $ 836 $ 631 $ 8,877 $(1,186) Cumulative repricing gap.......... (3,750) (2,914) (2,283) 6,594 5,408 - ----------------------------------------------------------------------------------------------------- Repricing Maturities ---------------------- At December 31, 2000 Non-Rate (dollars in millions) Sensitive Total - ---------------------------------- Assets Loans.......................... $ 22 $69,091 Available-for-sale securities.................... 24 4,282 Other earning assets........... -- 3,592 Nonearning assets.............. 5,686 10,371 ---------------------- Total assets................ $ 5,732 $87,336 ---------------------- Liabilities and Equity Deposits....................... $ -- $53,257 Other purchased funds.......... -- 2,809 Long-term debt................. -- 18,566 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company..................... -- 950 Other liabilities.............. 2,500 3,114 Equity......................... 8,640 8,640 ---------------------- Total liabilities and equity..................... $11,140 $87,336 ---------------------- Effect of off-balance sheet hedging instruments Receiving fixed................ $ -- $ 6,618 Receiving floating............. -- 1,500 Paying fixed................... -- (500) Paying floating................ -- (7,618) ---------------------- Total effect of off-balance sheet hedging instruments.............. $ -- $ -- ---------------------- Repricing gap..................... $(5,408) $ -- Cumulative repricing gap.......... -- -- - ----------------------------------------------------------
This table estimates the repricing maturities of the Company's assets, liabilities and hedging instruments based upon the Company's assessment of the repricing characteristics of contractual and non-contractual instruments. Non-contractual deposit liabilities are allocated among the various maturity categories as follows: approximately 30 percent of regular savings, 20 percent of interest-bearing checking, 40 percent of non-indexed money market checking and 50 percent of money market savings balances are reflected in the Less Than 3 Months category, with 67 percent of the remainder placed in the 1-5 Years category and 33 percent in the More Than 5 Years category. Approximately 57 percent of demand deposits and related nonearning asset accounts is allocated in the More Than 5 Years category, 34 percent is allocated in the 1-5 Years category with the remaining allocated in the Less Than 3 Months category. U.S. Bancorp 21 24 TABLE 18 INTEREST RATE SWAP HEDGING PORTFOLIO NOTIONAL BALANCES AND YIELDS BY MATURITY DATE
At December 31, 2000 (Dollars in Millions) - ------------------------------------------------------------------------------------------------------------------- Weighted Weighted Average Average Notional Interest Rate Interest Rate Maturity Date Amount Received Paid - ------------------------------------------------------------------------------------------------------------------- 2001........................................................ $ 790 6.69% 6.88% 2002........................................................ 544 6.22 6.74 2003........................................................ 1,674 6.02 6.69 2004........................................................ 1,475 6.60 6.72 2005........................................................ 700 6.48 6.69 Thereafter.................................................. 1,935 6.41 6.73 ------ Total....................................................... $7,118 6.38% 6.73% - -------------------------------------------------------------------------------------------------------------------
*At December 31, 2000, the Company received fixed-rate interest and paid variable-rate interest on substantially all swaps in its hedging portfolio. In addition, the Company had $1.0 billion in basis swaps maturing in 2002. 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. In 2000, the Company executed $770.0 million of new interest rate swaps to reduce its interest rate risk. This was largely offset by $674.0 million of swap terminations and $55.0 million of interest rate swap maturities. Interest rate swaps 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 December 31, 2000, the Company received and made payments on $7.1 billion notional amount of interest rate swaps. These swaps had a weighted average interest rate received of 6.38 percent and a weighted average interest rate paid of 6.73 percent. The remaining maturity of these swaps ranges from 3 months to 14.6 years with an average remaining maturity of 4.3 years. In 2000, swaps decreased net interest income by $17.1 million, and in 1999 and 1998, swaps increased net income by $60.7 million and $37.9 million, respectively. The Company also purchases interest rate caps and floors and executes basis swaps to minimize the impact of fluctuating interest rates on earnings. To hedge against rising interest rates, the Company may use 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 December 31, 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 December 31, 2000, all of which were LIBOR-indexed, was $500 million. Basis swaps help the Company manage the monthly interest income at risk within each year. At December 31, 2000, the notional amount of the Company's basis swaps totaled $1.0 billion. The impact of basis swaps and interest rate caps and floors on net interest income was not significant in 2000, 1999 and 1998. See Note A of the Notes to Consolidated Financial Statements for the Company's accounting policy related to these types of transactions. 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 assumes 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 December 31, 2000. The estimate of market risk in its broker/dealer activities, including equities, fixed income, high yield securities and foreign exchange, as estimated by the VaR analysis, was $15 million at December 31, 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. LIQUIDITY RISK MANAGEMENT The objective of liquidity risk management is to ensure the continuous availability of funds to meet the demands of depositors, investors and borrowers. ALCO is responsible for structuring the balance sheet to meet these needs. It regularly reviews current and forecasted funding needs as well as market 22 U.S. Bancorp 25 conditions for issuing debt to wholesale investors. Based on this information, ALCO supervises wholesale funding activity as well as the maintenance of contingent funding sources. A majority of the Company's funding comes from customer deposits within its operating region. The Company's ability to raise negotiated funding at competitive prices is influenced by rating agencies' views of the Company's credit quality, liquidity, capital and earnings. As of December 31, 2000, Moody's Investors Services, Standard & Poors, Inc. and Fitch rated the Company's senior debt as "A1," "A" and "A+," respectively. The debt ratings reflect the agencies' recognition of the strong, consistent financial performance of the Company and quality of the balance sheet. At the parent company, funding primarily consists of long-term debt and equity. At December 31, 2000, parent company long-term debt outstanding was $5.1 billion, compared with $3.8 billion at December 31, 1999. The parent company issued $1.8 billion of medium-term notes during 2000, which was partially offset by $518.2 million of debt maturities and other repayments. Total parent company debt maturing in 2001 is $870.0 million. These debt obligations are expected to be met through medium-term note issuances, as well as from the approximately $1.4 billion of parent company cash and cash equivalents at December 31, 2000. It is the Company's practice to maintain liquid assets at the parent company sufficient to fund its operating cash needs and prefund debt maturities for the next twelve months. CAPITAL MANAGEMENT The Company is committed to managing capital for maximum shareholder benefit and maintaining strong protection for depositors and creditors. At December 31, 2000, tangible common equity (common equity less goodwill) was $5.9 billion, or 7.0 percent of assets, compared with 6.5 percent at year-end 1999 and 6.0 percent at year-end 1998. The tier 1 capital ratio was 7.1 percent at December 31, 2000, compared with 6.8 percent at December 31, 1999, and 6.4 percent at December 31, 1998. The total risk-based capital ratio was 10.9 percent at December 31, 2000, compared with 11.1 percent at December 31, 1999, and 10.9 percent at December 31, 1998. The leverage ratio was 7.6 percent at December 31, 2000, compared with 7.4 percent and 6.8 percent at December 31, 1999, and December 31, 1998, respectively. The measures used to assess capital include the capital ratios established by the bank regulatory agencies, including the specific ratios for the "well capitalized" designation. The Company manages various capital ratios to maintain appropriate capital levels in accordance with Board-approved capital guidelines, ascribing the most significance to the tangible common equity ratio. The Company intends to maintain sufficient capital in each of its bank subsidiaries to be "well capitalized" as defined by the regulatory agencies. On June 8, 1998, the Company's Board of Directors authorized the repurchase of up to $2.5 billion of the Company's common stock through March 31, 2000. On February 16, 2000, the Company's Board of Directors replaced the authorization with a new authorization to repurchase up to $2.5 billion of the Company's stock through March 31, 2002. The purpose of these share repurchase programs was 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. The shares were repurchased in the open market or through negotiated transactions. The Company repurchased 20.2 million shares for $432.2 million in 2000 and 16.6 million shares for $560.8 million in 1999. The share repurchase program was rescinded on January 17, 2001, in anticipation of the Company's merger with Firstar Corporation. TABLE 19 CAPITAL RATIOS
At December 31 (Dollars in Millions) 2000 1999 1998 - ---------------------------------------------------------------------------------------------- Tangible common equity*..................................... $5,887 $5,134 $4,465 As a percent of assets................................... 7.0% 6.5% 6.0% Tier 1 capital.............................................. $6,322 $5,631 $4,917 As a percent of risk-adjusted assets..................... 7.1% 6.8% 6.4% Total risk-based capital.................................... $9,772 $9,281 $8,343 As a percent of risk-adjusted assets..................... 10.9% 11.1% 10.9% Leverage ratio.............................................. 7.6 7.4 6.8 - ----------------------------------------------------------------------------------------------
*Defined as common equity less goodwill. U.S. Bancorp 23 26 TABLE 20 SUBSIDIARY CAPITAL RATIOS
At December 31, 2000 --------------------------------------------- Total Tier 1 Risk-based Total (Dollars in Millions) Capital Capital Leverage Assets - ------------------------------------------------------------------------------------------------------------- REGULATORY CAPITAL REQUIREMENTS Minimum..................................................... 4.0% 8.0% 3.0% Well-Capitalized............................................ 6.0 10.0 5.0 SIGNIFICANT BANK SUBSIDIARIES U.S. Bank National Association.............................. 7.3 11.2 7.9 $82,023 U.S. Bank National Association ND........................... 10.3 15.6 10.2 2,474 U.S. Bank National Association MT........................... 14.9 17.6 12.0 1,097 - -------------------------------------------------------------------------------------------------------------
Note: These balances and ratios were prepared in accordance with regulatory accounting principles as disclosed in the subsidiaries' regulatory reports. On April 22, 1998, the Company's shareholders authorized an increase in the Company's capital stock necessary to implement the three-for-one split of the Company's common stock announced February 18, 1998. The number of common and preferred shares that the Company has authority to issue was increased from 500 million shares and 10 million shares, respectively, to 1.5 billion shares and 50 million shares, respectively. The stock split was in the form of a 200 percent dividend payable May 18, 1998, to shareholders of record on May 4, 1998. The impact of the stock split has been reflected in the financial statements for all periods presented and all share and per share data included herein. DIVIDENDS During 2000, total dividends on common stock were $644.7 million compared with $573.1 million in 1999 and $516.4 million in 1998. The Company has raised its quarterly dividend rate in each of the past five years. On a per share basis, dividends paid to common shareholders totaled $.86 in 2000, $.78 in 1999 and $.70 in 1998. On February 27, 2001, the Board of Directors set the quarterly dividend rate for the common stock of the combined company resulting from the merger of U.S. Bancorp with Firstar Corporation at $.1875 per share. In the merger, holders of shares of U.S. Bancorp common stock received 1.265 shares of the combined company common stock for each share of U.S. Bancorp common stock they held. The Company's primary funding sources for common stock dividends are dividends received from its bank and nonbank subsidiaries. Payment of dividends to the Company by its depository subsidiaries is subject to ongoing review by banking regulators and to various statutory limitations. For further information, see Note U of the Notes to Consolidated Financial Statements. 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. SFAS 133 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 Company adopted SFAS 133 as of January 1, 2001. The balance sheet impact for the adoption of SFAS 133 included: a $37.5 million increase to other assets for the fair value of interest rate swaps designated as fair value hedges of fixed-rate debt and certificates of deposit with a corresponding increase to the related hedged liabilities, a $12.1 million increase to other assets and a $4.1 million increase in other liabilities for the fair value of interest rate swaps designated as cash flow hedges of floating rate commercial loans and debt with a corresponding net increase of $8.0 million to other comprehensive income and deferred tax liabilities. The cumulative-effect adjustment recorded on the income statement was not material. 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. Disclosures required for financial statements were effective for fiscal years ending after December 15, 2000. 24 U.S. Bancorp 27 TABLE 21 FOURTH QUARTER SUMMARY
Three Months Ended December 31 --------------------- (Dollars in Millions, Except Per Share Data) 2000 1999 - --------------------------------------------------------------------------------------- CONDENSED INCOME STATEMENT Net interest income (taxable-equivalent basis).............. $915.7 $841.0 Provision for credit losses................................. 180.0 146.0 --------------------- Net interest income after provision for credit losses.... 735.7 695.0 Available-for-sale securities gains......................... 6.0 2.1 Other noninterest income.................................... 828.3 761.8 Merger-related charges...................................... 17.5 27.7 Other noninterest expense................................... 888.2 843.4 --------------------- Income before income taxes............................... 664.3 587.8 Taxable-equivalent adjustment............................... 17.6 10.3 Income taxes................................................ 228.1 208.5 --------------------- Net income............................................... $418.6 $369.0 --------------------- FINANCIAL RATIOS Return on average assets.................................... 1.92% 1.86% Return on average common equity............................. 19.8 20.4 Net interest margin (taxable-equivalent basis).............. 4.73 4.80 Efficiency ratio............................................ 51.9 54.3 PER COMMON SHARE Earnings per share.......................................... $ .56 $ .50 Diluted earnings per share.................................. .56 .50 Dividends paid.............................................. .215 .195 SELECTED FINANCIAL RATIOS BEFORE MERGER-RELATED CHARGES Return on average assets.................................... 1.97% 1.94% Return on average common equity............................. 20.3 21.4 Efficiency ratio............................................ 50.9 52.6 Banking efficiency ratio*................................... 41.4 44.7 - ---------------------------------------------------------------------------------------
*Without investment banking and brokerage activity. IMPACT OF INFLATION The assets and liabilities of a financial institution are primarily monetary in nature. Therefore, future changes in prices do not affect the obligations to pay or receive fixed and determinable amounts of money. During periods of inflation, monetary assets lose value in terms of purchasing power while monetary liabilities have corresponding purchasing power gains. Since banks generally have an excess of monetary assets over monetary liabilities, inflation will, in theory, cause a loss of purchasing power in the value of shareholders' equity. However, the concept of purchasing power is not an adequate indicator of the effect of inflation on banks because it does not take into account changes in interest rates, which are a more important determinant of bank earnings. Other sections of the Management's Discussion and Analysis provide the information necessary for an understanding of the Company's ability to react to changing interest rates. FOURTH QUARTER SUMMARY In the fourth quarter of 2000, the Company had net income of $418.6 million ($.56 per diluted share), compared with $369.0 million ($.50 per diluted share) in the fourth quarter of 1999, including merger-related charges. The Company also reported operating earnings of $429.9 million ($.57 per diluted share) in the fourth quarter of 2000, compared with operating net income of $386.4 million ($.52 per diluted share) in the fourth quarter of 1999. Fourth quarter net interest income on a taxable-equivalent basis increased $74.7 million to $915.7 million, compared with fourth quarter of 1999, primarily reflecting increased earning assets driven by core commercial, home equity and second mortgage loan growth and bank acquisitions partially offset by a reduction in indirect auto and residential mortgage loans. The net interest margin on a taxable-equivalent basis decreased in the fourth quarter of 2000 to 4.73 percent, compared with 4.80 percent in the fourth quarter of 1999, as lagging deposit growth relative to the growth in total earning assets has increased the Company's incremental cost of funding. U.S. Bancorp 25 28 The provision for credit losses increased to $180.0 million in the fourth quarter of 2000, compared with $146.0 million in the fourth quarter of 1999. Noninterest income increased $70.4 million from the same quarter a year ago, to $834.3 million. Credit card fee revenue was higher quarter over quarter by $27.5 million, or 17 percent, reflecting continued growth in corporate and retail card product fees, merchant and ATM processing-related revenue. Investment banking revenue, investment products fees and commissions and trading account profits and commissions in the fourth quarter of 2000 grew in total by $9.6 million, or 4 percent, over the same period of 1999 due primarily to market-related activity at U.S. Bancorp Piper Jaffray. Other income increased by $34.7 million, or 28 percent, over the fourth quarter of 1999, primarily reflecting the impact of acquisitions, U.S. Bancorp Piper Jaffray managed account fees, the timing of loan sales, and a gain from the sale of an office building located in Minneapolis. Fourth quarter noninterest expense, before merger-related charges, totaled $888.2 million, an increase of $44.8 million, or 5 percent, from the fourth quarter of 1999. Excluding the impact of acquisitions and divestitures, noninterest expense, before merger-related charges, in the fourth quarter of 2000 would have been approximately 2 percent higher than the fourth quarter of 1999. The increase in expense over the fourth quarter of 1999 was primarily the result of acquisitions and investment banking and brokerage activity. In addition to ongoing investments in Internet-related products and services, the fourth quarter of 2000 included approximately $2.3 million of incremental spending on Internet infrastructure-related initiatives. 26 U.S. Bancorp 29 CONSOLIDATED BALANCE SHEET
At December 31 (Dollars in Millions) 2000 1999 - ------------------------------------------------------------------------------------- ASSETS Cash and due from banks..................................... $ 4,142 $ 4,036 Federal funds sold.......................................... 108 713 Securities purchased under agreements to resell............. 349 324 Trading account securities.................................. 753 617 Available-for-sale securities............................... 4,282 4,871 Loans....................................................... 69,091 62,885 Less allowance for credit losses......................... 1,067 995 --------------------- Net loans................................................ 68,024 61,890 Premises and equipment...................................... 857 862 Interest receivable......................................... 525 433 Customers' liability on acceptances......................... 163 152 Goodwill and other intangible assets........................ 3,296 3,066 Other assets................................................ 4,837 4,566 --------------------- Total assets.......................................... $87,336 $81,530 --------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing...................................... $15,653 $16,050 Interest-bearing......................................... 31,176 29,671 Time certificates of deposit greater than $100,000....... 6,428 5,809 --------------------- Total deposits........................................ 53,257 51,530 Federal funds purchased..................................... 978 297 Securities sold under agreements to repurchase.............. 965 1,235 Other short-term funds borrowed............................. 866 724 Long-term debt.............................................. 18,566 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..................................... 163 152 Other liabilities........................................... 2,951 2,441 --------------------- Total liabilities..................................... 78,696 73,892 Shareholders' equity Common stock, par value $1.25 a share -- authorized 1,500,000,000 shares; issued: 2000 -- 758,194,161 shares; 1999 -- 754,368,668 shares..................... 948 943 Capital surplus.......................................... 1,473 1,399 Retained earnings........................................ 6,336 5,389 Accumulated other comprehensive income................... 15 (62) Less cost of common stock in treasury: 2000 -- 6,134,300 shares; 1999 -- 1,038,456 shares........................ (132) (31) --------------------- Total shareholders' equity............................ 8,640 7,638 --------------------- Total liabilities and shareholders' equity............ $87,336 $81,530 - -------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. U.S. Bancorp 27 30 CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31 (Dollars in Millions, Except Per Share Data) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans.......................................................... $6,162.0 $5,208.6 $4,921.8 Securities Taxable..................................................... 230.3 250.6 303.6 Exempt from federal income taxes............................ 54.4 57.3 62.8 Other interest income.......................................... 260.4 160.2 119.2 -------------------------------- Total interest income.................................... 6,707.1 5,676.7 5,407.4 INTEREST EXPENSE Deposits....................................................... 1,667.9 1,291.2 1,391.0 Federal funds purchased and repurchase agreements.............. 177.4 164.2 153.6 Other short-term funds borrowed................................ 56.2 49.9 59.1 Long-term debt................................................. 1,257.0 833.4 672.7 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company.............................. 77.3 77.3 70.4 -------------------------------- Total interest expense................................... 3,235.8 2,416.0 2,346.8 -------------------------------- Net interest income............................................ 3,471.3 3,260.7 3,060.6 Provision for credit losses.................................... 670.0 531.0 379.0 -------------------------------- Net interest income after provision for credit losses.......... 2,801.3 2,729.7 2,681.6 NONINTEREST INCOME Credit card fee revenue........................................ 723.2 603.1 574.8 Trust and investment management fees........................... 473.9 459.7 413.0 Service charges on deposit accounts............................ 469.3 434.6 406.0 Investment products fees and commissions....................... 359.1 347.7 229.7 Investment banking revenue..................................... 356.3 245.4 100.4 Trading account profits and commissions........................ 252.5 215.9 118.1 Available-for-sale securities gains (losses)................... 7.0 (1.3) 12.6 Other.......................................................... 617.1 453.6 402.0 -------------------------------- Total noninterest income................................. 3,258.4 2,758.7 2,256.6 NONINTEREST EXPENSE Salaries....................................................... 1,677.0 1,460.9 1,210.9 Employee benefits.............................................. 279.0 248.4 222.3 Net occupancy.................................................. 236.9 204.6 187.4 Furniture and equipment........................................ 167.4 160.1 153.4 Goodwill and other intangible assets........................... 235.5 165.6 143.7 Merger-related charges......................................... 61.3 62.4 216.5 Other.......................................................... 941.3 824.9 710.1 -------------------------------- Total noninterest expense................................ 3,598.4 3,126.9 2,844.3 -------------------------------- Income before income taxes..................................... 2,461.3 2,361.5 2,093.9 Applicable income taxes........................................ 869.3 855.0 766.5 -------------------------------- Net income..................................................... $1,592.0 $1,506.5 $1,327.4 -------------------------------- Earnings per share............................................. $ 2.14 $ 2.07 $ 1.81 Diluted earnings per share..................................... $ 2.13 $ 2.06 $ 1.78 - -------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 28 U.S. Bancorp 31 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Accumulated Other Year Ended December 31 Common Shares Common Capital Retained Comprehensive Treasury (Dollars in Millions) Outstanding* Stock Surplus Earnings Income Stock** Total - ---------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1997....... 739,933,014 $924.9 $1,261.1 $3,644.8 $ 59.3 $ -- $5,890.1 Common dividends declared....... (516.4) (516.4) Purchase of treasury stock...... (24,658,162) (964.0) (964.0) Issuance of common stock Dividend reinvestment........ 574,168 .3 8.9 12.7 21.9 Stock option and stock purchase plans............ 9,912,698 5.8 (22.8) 215.5 198.5 ---------------------------------------------------------------------------------------- 725,761,718 931.0 1,247.2 3,128.4 59.3 (735.8) 4,630.1 Comprehensive income Net income...................... 1,327.4 1,327.4 Other comprehensive income Unrealized gains on securities of $23.6 (net of $14.0 tax expense) net of reclassification adjustment for gains included in net income of $11.1 (net of $6.4 tax expense).................. 12.5 12.5 -------- Total comprehensive income................ 1,339.9 ---------------------------------------------------------------------------------------- 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....... (573.1) (573.1) Purchase of treasury stock...... (16,644,892) (560.8) (560.8) Issuance of common stock Acquisitions................. 37,798,319 11.6 233.6 1,030.3 1,275.5 Dividend reinvestment........ 800,809 (5.6) 29.1 23.5 Stock option and stock purchase plans............ 5,614,258 .4 (76.4) 205.7 129.7 ---------------------------------------------------------------------------------------- 753,330,212 943.0 1,398.8 3,882.7 71.8 (31.5) 6,264.8 Comprehensive income Net income...................... 1,506.5 1,506.5 Other comprehensive income Unrealized losses on securities of $134.2 (net of $82.3 tax benefit) net of reclassification adjustment for losses included in net income of $.6 (net of $.3 tax benefit).................. (133.6) (133.6) -------- Total comprehensive income................ 1,372.9 ---------------------------------------------------------------------------------------- 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....... (644.7) (644.7) Purchase of treasury stock...... (20,248,002) (432.2) (432.2) Issuance of common stock Acquisitions................. 14,405,249 4.0 47.6 246.0 297.6 Dividend reinvestment........ 900,792 (.3) 19.2 18.9 Stock option and stock purchase plans............ 3,671,610 .7 27.0 66.1 93.8 ---------------------------------------------------------------------------------------- 752,059,861 947.7 1,473.1 4,744.5 (61.8) (132.4) 6,971.1 Comprehensive income Net income...................... 1,592.0 1,592.0 Other comprehensive income Unrealized gains on securities of $101.9 (net of $62.6 tax expense) net of reclassification adjustment for gains included in net income of $25.1 (net of $15.4 tax expense).................. 76.8 76.8 Foreign currency translation adjustments............... (.3) (.3) -------- Total comprehensive income................ 1,668.5 ---------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 2000....... 752,059,861 $947.7 $1,473.1 $6,336.5 $ 14.7 $ (132.4) $8,639.6 - ----------------------------------------------------------------------------------------------------------------------------
*Defined as total common shares less common stock held in treasury. **Ending treasury shares were 6,134,300 at December 31, 2000; 1,038,456 at December 31, 1999; and 19,036,139 at December 31, 1998. See Notes to Consolidated Financial Statements. U.S. Bancorp 29 32 CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31 (Dollars in Millions) 2000 1999 1998 - --------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income.................................................. $ 1,592.0 $ 1,506.5 $ 1,327.4 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses.............................. 670.0 531.0 379.0 Depreciation and amortization of premises and equipment............................................... 151.8 142.5 130.4 Provision for deferred income taxes...................... 44.6 55.7 25.9 Amortization of goodwill and other intangible assets..... 235.5 165.6 143.7 Changes in operating assets and liabilities, excluding the effects of purchase acquisitions: Increase in trading account securities................ (135.6) (64.8) (141.1) (Increase) decrease in loans held for sale............ (116.2) 294.8 13.4 Decrease (increase) in accrued receivables............ 2.9 (208.2) (160.7) Decrease (increase) in prepaid expenses............... 102.9 75.6 (59.7) Increase in accrued liabilities....................... 314.6 114.9 20.3 Other -- net............................................. (279.4) 72.7 (306.1) ----------------------------------- Net cash provided by operating activities.......... 2,583.1 2,686.3 1,372.5 INVESTING ACTIVITIES Net cash (used) provided by: Loans outstanding........................................ (4,957.1) (3,950.3) (3,021.1) Securities purchased under agreements to resell.......... (25.3) 136.6 224.2 Available-for-sale securities Sales.................................................... 624.2 1,000.7 226.4 Maturities............................................... 690.8 1,403.6 1,755.4 Purchases................................................ (324.9) (1,773.0) (603.5) Proceeds from sales of other real estate.................... 25.8 33.2 46.3 Proceeds from sales of premises and equipment............... 193.9 40.0 44.1 Purchases of premises and equipment......................... (221.0) (134.0) (155.8) Sales of loans.............................................. 616.9 1,720.9 4.9 Purchases of loans.......................................... (658.1) (254.6) (1,575.7) Divestitures of branches.................................... -- (352.0) -- Acquisitions, net of cash received.......................... (296.0) (220.5) (780.2) Cash and cash equivalents of acquired subsidiaries.......... 63.5 462.4 -- Other -- net................................................ (234.9) (834.5) (70.2) ----------------------------------- Net cash used by investing activities.............. (4,502.2) (2,721.5) (3,905.2) FINANCING ACTIVITIES Net cash provided (used) by: Deposits................................................. 656.4 (736.6) 668.4 Federal funds purchased and securities sold under agreements to repurchase................................ (157.5) (1,150.2) 321.8 Short-term borrowings.................................... 137.2 33.9 (909.1) Proceeds from long-term debt................................ 5,563.9 5,815.1 6,427.5 Principal payments on long-term debt........................ (3,815.5) (3,052.8) (3,011.6) Issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company.................................................. -- -- 350.0 Proceeds from dividend reinvestment, stock option and stock purchase plans............................................. 112.7 153.2 220.4 Repurchase of common stock.................................. (432.2) (560.8) (964.0) Cash dividends.............................................. (644.7) (573.1) (516.4) ----------------------------------- Net cash provided (used) by financing activities... 1,420.3 (71.3) 2,587.0 ----------------------------------- Change in cash and cash equivalents................ (498.8) (106.5) 54.3 Cash and cash equivalents at beginning of year.............. 4,748.8 4,855.3 4,801.0 ----------------------------------- Cash and cash equivalents at end of year........... $ 4,250.0 $ 4,748.8 $ 4,855.3 - ---------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 30 U.S. Bancorp 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A SIGNIFICANT ACCOUNTING POLICIES U.S. Bancorp (the "Company") is a financial services holding company offering a full range of financial services through banking offices in 16 states including Minnesota, Oregon, Washington, Colorado, California, Idaho, Nebraska, North Dakota, Nevada, South Dakota, Montana, Iowa, Illinois, Utah, Wisconsin and Wyoming. The Company also engages in credit card and merchant processing, insurance, trust and investment management, brokerage, leasing and investment banking activities principally in domestic markets. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its subsidiaries. The consolidation eliminates all significant intercompany accounts and transactions. Certain items in prior periods have been reclassified to conform to the current presentation. USES OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual experience could differ from those estimates. BUSINESS SEGMENTS Within the Company, financial performance is measured by major lines of business based on the products and services provided to customers through its distribution channels. The Company has four reportable operating segments: Wholesale Banking includes lending, treasury management, corporate trust, and other financial services to middle-market, large corporate and public sector clients. 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"). Payment Systems includes consumer and business credit cards, corporate and purchasing card services, consumer lines of credit, ATM processing and merchant processing. 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. SEGMENT RESULTS Accounting policies for the lines of business are the same as those used in preparation of the consolidated financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs and benefits, expenses and other financial elements to each line of business. For detail of these methodologies see "Basis for Financial Presentation" on page 4. Table 2 "Line of Business Financial Performance" on pages 4 through 7 provides details of segment results. This information is incorporated by reference into these Notes to the Consolidated Financial Statements. SECURITIES TRADING ACCOUNT SECURITIES Debt and equity securities held for resale are classified as trading account securities and reported at fair value. Realized and unrealized gains or losses are recorded in noninterest income. AVAILABLE-FOR-SALE SECURITIES These securities are not trading account securities but may be sold before maturity in response to changes in the Company's interest rate risk profile or demand for collateralized deposits by public entities. They are carried at fair value with unrealized net gains or losses reported within comprehensive income in shareholders' equity. When sold, the amortized cost of the specific securities is used to compute the gain or loss. U.S. Bancorp 31 34 LOANS Loans are reported net of unearned income. Interest income is accrued on the unpaid principal balances as earned. Loan and commitment fees are deferred and recognized over the life of the loan and/or commitment period as yield adjustments. ALLOWANCE FOR CREDIT LOSSES Management determines the adequacy of the allowance based on evaluations of the loan portfolio and related off-balance sheet commitments, recent loss experience, and other pertinent factors, including economic conditions. This evaluation is inherently subjective as it requires estimates, including amounts of future cash collections expected on nonaccrual loans that may be susceptible to significant change. The allowance for credit losses relating to impaired loans is based on the loans' observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loans' effective interest rate. The Company determines the amount of the allowance required for certain sectors based on relative risk characteristics of the loan portfolio and other financial instruments with credit exposure. The allowance recorded for commercial loans is based on quarterly reviews of individual loans outstanding and binding commitments to lend and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for consumer portfolios is based on an analysis of product mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogenous category or group of loans. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs. NONACCRUAL LOANS Generally commercial loans (including impaired loans) are placed on nonaccrual status when the collection of interest or principal has become 90 days past due or is otherwise considered doubtful. When a loan is placed on nonaccrual status, unpaid interest is reversed. Future interest payments are generally applied against principal. Revolving consumer lines and credit cards are charged-off by 180 days and closed-end consumer loans other than residential mortgages are charged-off at 120 days past due and are, therefore, not placed on non-accrual status. LEASES The Company engages in both direct and leveraged lease financing. The net investment in direct financing leases is the sum of all minimum lease payments and estimated residual values less unearned income. Unearned income is added to interest income over the terms of the leases to produce a level yield. The investment in leveraged leases is the sum of all lease payments (less nonrecourse debt payments) plus estimated residual values, less unearned income. Income from leveraged leases is recognized over the term of the leases based on the unrecovered equity investment. LOANS HELD FOR SALE These loans are carried at the lower of cost or market value as determined on an aggregate basis by type of loan. OTHER REAL ESTATE Other real estate ("ORE"), which is included in other assets, is property acquired through foreclosure or other proceedings. ORE is initially recorded at fair value and carried at the lower of cost or fair value, less estimated selling costs. The property is evaluated regularly and any decreases in the carrying amount are included in noninterest expense. DERIVATIVE FINANCIAL INSTRUMENTS INTEREST RATE SWAPS AND CONTRACTS The Company uses interest rate swaps and contracts (forwards, options, caps and floors) to manage its interest rate risk and as a financial intermediary. The Company does not enter into these contracts for speculative purposes. The Company utilizes simulation modeling and analysis of repricing mismatches to identify exposure to changes in interest rates and assess the effectiveness of interest rate swaps and contracts in reducing that risk. Interest rate swaps and contracts are designated as hedges of assets or liabilities and the Company evaluates hedge effectiveness of the derivative instruments relative to the underlying hedged item on a regular basis. Income or expense on swaps and contracts designated as hedges of assets or liabilities is recorded as an adjustment to interest income or expense. If the swap or contract is terminated, the gain or loss is deferred and amortized over the shorter of the remaining life of the swap or the underlying asset or liability. If the hedged instrument is disposed of, the swap or contract agreement is marked to market with any resulting gain or loss included with the gain or loss from the disposition. The initial bid/offer spread on intermediated swaps is deferred and recognized in trading account profits and commissions over the life of the agreement. Intermediated swaps and all other interest rate contracts are marked to market and resulting gains or losses are recorded in trading account profits and commissions. The Company's derivative trading activities are not material to the consolidated financial statements; the cash flows from these activities are included in operating activities. 32 U.S. Bancorp 35 OTHER SIGNIFICANT POLICIES PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation and amortized primarily on a straight-line method basis. Capital leases, less accumulated amortization, are included in premises and equipment. The lease obligations are included in long-term debt. Capitalized leases are amortized on a straight-line basis over the lease term and the amortization is included in depreciation expense. CAPITALIZED SOFTWARE Certain costs incurred in connection with developing or obtaining software for internal use are capitalized and amortized on a straight- line basis over the estimated life of the software. INTANGIBLE ASSETS Goodwill, the price paid over the net fair value of acquired businesses, is included in other assets and is amortized over periods ranging up to 25 years. Other intangible assets are amortized over their estimated useful lives, which range from seven to fifteen years, using straight-line and accelerated methods. The recoverability of goodwill and other intangible assets is evaluated if events or circumstances indicate a possible inability to realize the carrying amount. Such evaluation is based on various analyses, including undiscounted cash flow projections. INCOME TAXES Deferred taxes are recorded to reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and the financial reporting amounts at each year-end. STATEMENT OF CASH FLOWS For the purposes of reporting cash flows, cash equivalents include cash and due from banks and federal funds sold. STOCK-BASED COMPENSATION The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and accordingly recognizes no compensation expense for the stock option grants. PER SHARE CALCULATIONS Earnings per share is calculated by dividing net income (less preferred stock dividends) by the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated by adjusting income and outstanding shares, assuming conversion of all potentially dilutive securities, using the treasury stock method. 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. SFAS 133 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 Company adopted SFAS 133 as of January 1, 2001. The balance sheet impact for the adoption of SFAS 133 included: a $37.5 million increase to other assets for the fair value of interest rate swaps designated as fair value hedges of fixed rate debt and certificates of deposit with a corresponding increase to the related hedged liabilities, a $12.1 million increase to other assets and a $4.1 million increase in other liabilities for the fair value of interest rate swaps designated as cash flow hedges of floating rate commercial loans and debt with a corresponding net increase of $8.0 million to other comprehensive income and deferred tax liabilities. The cumulative-effect adjustment recorded on the income statement was not material. 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. Disclosures required for financial statements were effective for fiscal years ending after December 15, 2000. U.S. Bancorp 33 36 NOTE C BUSINESS COMBINATIONS AND DIVESTITURES 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. The transaction closed on February 27, 2001 and was accounted for as a pooling-of-interests. Separate results of operations for the periods prior to the merger as originally reported and on a combined proforma basis were as follows:
(Dollars in Millions) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------- NET INTEREST INCOME* Firstar Corporation...................................... $ 2,744.1 $ 2,697.4 $2,595.6 U.S. Bancorp............................................. 3,540.8 3,302.7 3,111.9 ---------------------------------------- Proforma combined..................................... $ 6,284.9 $ 6,000.1 $5,707.5 ---------------------------------------- TOTAL REVENUE* Firstar Corporation...................................... $ 4,250.3 $ 4,100.0 $3,960.9 U.S. Bancorp............................................. 6,799.2 6,061.4 5,368.5 ---------------------------------------- Proforma combined $11,049.5 $10,161.4 $9,329.4 ---------------------------------------- NET INCOME Firstar Corporation...................................... $ 1,283.6 $ 875.3 $ 805.5 U.S. Bancorp............................................. 1,592.0 1,506.5 1,327.4 ---------------------------------------- Proforma combined $ 2,875.6 $ 2,381.8 $2,132.9 ---------------------------------------- EARNINGS PER COMMON SHARE Firstar Corporation...................................... $ 1.33 $ .89 $ .83 U.S. Bancorp............................................. $ 2.14 $ 2.07 $ 1.81 Proforma combined..................................... $ 1.51 $ 1.25 $ 1.12 DILUTED EARNINGS PER COMMON SHARE Firstar Corporation...................................... $ 1.32 $ .87 $ .81 U.S. Bancorp............................................. $ 2.13 $ 2.06 $ 1.78 Proforma combined..................................... $ 1.50 $ 1.23 $ 1.10 - -----------------------------------------------------------------------------------------------------------
*Net interest income and total revenue were stated on a taxable-equivalent basis. ACQUISITIONS During the past three years, the Company has completed several strategic acquisitions to enhance its presence in certain growth markets and businesses. The acquisitions of Scripps Financial Corporation, Peninsula Bank of San Diego and Western Bancorp added 52 branches in southern California including Los Angeles, Orange and San Diego counties. The acquisitions of Bank of Commerce, Oliver-Allen Corporation and Lyon Financial Services, Inc., expanded the Company's SBA lending and leasing capabilities. Additionally, the Payment Systems business line completed strategic acquisitions of Voyager Fleet Systems Inc. and the Mellon Network Services' Electronic Fund Transfer Processing unit in 1999 intended to enhance its payment processing capabilities. The following table summarizes acquisitions by the Company completed during the past three 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 Northwest Bancshares, Inc........... 12/15/98 377 344 90 -- Purchase Piper Jaffray Companies, Inc........ 5/1/98 1,272 -- 555 -- Purchase - ---------------------------------------------------------------------------------------------------------------------------------
DIVESTITURES On September 24, 1999, the Company completed the sale of 28 branches in Kansas and Iowa representing $364 million of deposits. On September 23, 1999, the Company sold $1.8 billion of indirect automobile loans and is in the process of exiting this business. 34 U.S. Bancorp 37 NOTE D MERGER-RELATED CHARGES The Company recorded merger-related charges of $61.3 million, $62.4 million and $216.5 million in 2000, 1999 and 1998, respectively. Merger-related charges in 2000 and 1999 related to the Company's various acquisitions (see Note C) and included primarily system conversion costs and integration costs associated with consolidating redundant operations. Merger-related charges in 1998 were primarily due to conversion costs related to the U.S. Bancorp ("USBC") and Piper Jaffray Companies Inc. ("Piper") acquisitions. The components of the charges are shown below:
Western (Dollars in Millions) USBC Piper Jaffray Bancorp Other Total - --------------------------------------------------------------------------------------------------------------------- 2000 Severance................................................... $ -- $ -- $ -- $ -- $ -- Premises and equipment writedowns........................... -- -- -- -- -- Systems conversions......................................... -- 15.2 10.5 28.7 54.4 Benefit curtailment gains................................... -- -- -- -- -- Other merger-related charges................................ -- 1.9 -- 5.0 6.9 ----------------------------------------------------- Total 2000.................................................. $ -- $17.1 $10.5 $33.7 $ 61.3 1999 Severance................................................... $ 8.0 $ -- $ -- $ -- $ 8.0 Premises and equipment writedowns........................... 1.6 -- -- -- 1.6 Systems conversions......................................... 4.4 12.5 3.3 14.0 34.2 Benefit curtailment gains................................... -- -- -- -- -- Other merger-related charges*............................... 18.6 -- -- -- 18.6 ----------------------------------------------------- Total 1999.................................................. $ 32.6 $12.5 $ 3.3 $14.0 $ 62.4 1998 Severance................................................... $ -- $ -- $ -- $ -- $ -- Premises and equipment writedowns........................... -- -- -- -- -- Systems conversions......................................... 229.4 7.5 -- -- 236.9 Benefit curtailment gains................................... (25.6) -- -- -- (25.6) Other merger-related charges................................ -- 4.2 -- 1.0 5.2 ----------------------------------------------------- Total 1998.................................................. $203.8 $11.7 $ -- $ 1.0 $216.5 - ---------------------------------------------------------------------------------------------------------------------
*Other merger-related charges for USBC in 1999 included $11.3 million of consulting costs and $7.3 million of system contract and other asset writeoffs associated with conversion of ATM deposit processing systems. The Company determines merger-related charges and related accruals based on its integration strategy and formulated plans. These plans are established as of the acquisition date and regularly evaluated during the integration process. Severance charges include the cost of severance, other benefits and outplacement costs associated with the termination of employees primarily in branch offices and centralized corporate support and data processing functions. The severance amounts are determined based on the Company's existing severance pay programs and are paid out over a benefit period of up to two years from the time of termination. The total number of employees included in severance amounts were approximately 3,635 for USBC, 75 for Piper, 175 for Western Bancorp, and 270 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. In 1999, the Company recognized an $8.0 million charge to establish severance associated with the consolidation of redundant functions and other displaced employees not considered in the initial USBC integration plan but eligible for severance under the change-in-control provisions triggered by the merger. Other merger-related charges for USBC in 1999 included $11.3 million of consulting costs and $7.3 million of system contract and other asset writeoffs associated with Company's conversion of ATM processing systems. These actions completed the integration activities related to USBC. The merger-related severance accrual will be paid in accordance with the terms of the severance U.S. Bancorp 35 38 programs through 2001. The following table presents a summary of activity with respect to the Company's significant acquisitions:
Piper Western (Dollars in Millions) USBC Jaffray Bancorp Other Total - --------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997................................ $189.0 $ -- $ -- $15.6 $204.6 Provision charged to operating expense................... 203.8 11.7 -- 1.0 216.5 Additions related to purchase acquisitions............... -- 30.5 -- 24.8 55.3 Cash outlays............................................. (273.6) (19.4) -- (17.2) (310.2) Noncash writedowns and other............................. (37.9) (1.4) -- (.2) (39.5) ----------------------------------------------- Balance at December 31, 1998................................ $ 81.3 $ 21.4 $ -- $24.0 $126.7 Provision charged to operating expense................... 32.6 12.5 3.3 14.0 62.4 Additions related to purchase acquisitions............... -- 2.4 47.7 20.1 70.2 Cash outlays............................................. (36.0) (17.9) (16.3) (28.2) (98.4) Transfer to tax liability*............................... (33.8) -- -- -- (33.8) Noncash writedowns and other............................. (28.2) (.9) (13.9) (12.2) (55.2) ----------------------------------------------- Balance at December 31, 1999................................ $ 15.9 $ 17.5 $ 20.8 $17.7 $ 71.9 Provision charged to operating expense................... -- 17.1 10.5 33.7 61.3 Additions related to purchase acquisitions............... -- -- 7.6 38.5 46.1 Cash outlays............................................. (11.2) (18.8) (26.4) (50.7) (107.1) Noncash writedowns and other............................. (4.7) (.8) (7.4) (16.2) (29.1) ----------------------------------------------- Balance at December 31, 2000 $ -- $ 15.0 $ 5.1 $23.0 $ 43.1 - ---------------------------------------------------------------------------------------------------------------
*The liability relates to certain severance related items. The following table provides a rollforward of the merger-related accrual for USBC throughout the integration timeframe:
Severance By Programs --------------- Total Investment Lease Cancellations (Dollars in millions) 1997 1999 Severance Banker Fees and related Writeoffs Other Total - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997.......... $166.4 $ -- $ 166.4 $ 1.8 $ 20.6 $0.2 $189.0 Provision charged to operating expense.............................. -- -- -- (1.8) -- -- (1.8) Cash Outlays.......................... (85.1) -- (85.1) -- (10.6) -- (95.7) Noncash items......................... -- -- -- -- (10.0) (0.2) (10.2) --------------------------------------------------------------------------------------- Balance at December 31, 1998.......... 81.3 -- 81.3 -- -- -- 81.3 Provision charged to operating expense.............................. -- 8.0 8.0 -- -- -- 8.0 Cash Outlays.......................... (34.4) (5.2) (39.6) -- -- -- (39.6) Transfer to tax liability............. (33.8) -- (33.8) -- -- -- (33.8) --------------------------------------------------------------------------------------- Balance at December 31, 1999.......... 13.1 2.8 15.9 -- -- -- 15.9 Provision charged to operating expense.............................. -- -- -- -- -- -- -- Cash Outlays.......................... (8.4) (2.8) (11.2) -- -- -- (11.2) Noncash items......................... (4.7) -- (4.7) -- -- -- (4.7) --------------------------------------------------------------------------------------- Balance at December 31, 2000.......... $ -- $ -- $ -- $ -- $ -- $ -- $ -- - ---------------------------------------------------------------------------------------------------------------------------------
The components of the merger-related accrual were as follows:
Year Ended December 31 -------------- (Dollars in Millions) 2000 1999 - ------------------------------------------------------------------------------ Severance................................................... $13.8 $34.6 Other employee-related costs*............................... 6.8 16.6 Lease termination and facility costs........................ 8.4 9.5 Contracts and system writeoffs.............................. 7.4 6.4 Other....................................................... 6.7 4.8 -------------- Total.................................................... $43.1 $71.9 - ------------------------------------------------------------------------------
*Other employee-related costs in 1999 included $9.3 million for non-compete arrangements. 36 U.S. Bancorp 39 The merger-related accrual by significant acquisition was as follows:
Year Ended December 31 -------------- (Dollars in Millions) 2000 1999 - ------------------------------------------------------------------------------ Piper Jaffray............................................... $15.0 $17.5 Western Bancorp............................................. 5.1 20.8 Scripps Bank................................................ 4.6 -- Bank of Commerce............................................ 4.1 7.5 Zappco, Inc................................................. 3.3 4.1 Peninsula Bank.............................................. 3.0 -- Lyon Financial Services, Inc................................ 2.7 -- Northwest Bancshares, Inc................................... 2.3 3.5 USBC........................................................ -- 15.9 Other acquisitions.......................................... 3.0 2.6 -------------- Total.................................................... $43.1 $71.9 - ------------------------------------------------------------------------------
The Company expects to incur an additional $30.6 million, pretax, of merger-related expenses in 2001. This does not include estimated expense for the merger with Firstar Corporation. NOTE E AVAILABLE-FOR-SALE SECURITIES The detail of the amortized cost, gross unrealized holding gains and losses, and fair value of available-for-sale securities at December 31 was as follows:
2000 1999 ------------------------------------------------------------------------------------ Gross Gross Gross Unrealized Unrealized Unrealized Amortized Holding Holding Fair Amortized Holding (Dollars in Millions) Cost Gains Losses Value Cost Gains - ---------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury............................. $ 358 $ 3 $-- $ 361 $ 388 $-- Mortgage-backed........................... 2,495 14 (16) 2,493 2,971 9 Other U.S. agencies....................... 149 3 -- 152 195 3 State and political....................... 1,020 20 (1) 1,039 1,132 11 Other..................................... 236 15 (14) 237 288 3 ------------------------------------------------------------------------------------ Total.................................. $4,258 $55 $(31) $4,282 $4,974 $26 - ---------------------------------------------------------------------------------------------------------------------------------- 1999 ---------------------- Gross Unrealized Holding Fair (Dollars in Millions) Losses Value - ------------------------------------------------------------------ U.S. Treasury............................. $(7) $ 381 Mortgage-backed........................... (74) 2,906 Other U.S. agencies....................... (2) 196 State and political....................... (8) 1,135 Other..................................... (38) 253 ---------------------- Total.................................. ($129) $4,871 - ------------------------------------------------------------------
Securities carried at $3.7 billion at December 31, 2000, and $4.1 billion at December 31, 1999, were pledged to secure public, private and trust deposits and for other purposes required by law. Securities sold under agreements to repurchase, with an amortized cost of $1.0 billion and $1.2 billion at December 31, 2000, and 1999, respectively, were collateralized by securities and securities purchased under agreements to resell. Gross realized gains and losses on securities were as follows:
(Dollars in Millions) 2000 1999 1998 - --------------------------------------------------------------------------------------------- Gross realized gains........................................ $14.6 $14.7 $14.5 Gross realized losses....................................... (7.6) (16.0) (1.9) ----------------------------- Net realized gains (losses).............................. $ 7.0 $(1.3) $12.6 ----------------------------- Income taxes on realized gains (losses)..................... $ 2.5 $ (.5) $ 4.7 - ---------------------------------------------------------------------------------------------
For amortized cost, fair value and yield by maturity date of available-for-sale securities outstanding as of December 31, 2000, see Table 11 on page 14 from which such information is incorporated by reference into these Notes to Consolidated Financial Statements. U.S. Bancorp 37 40 NOTE F RESTRICTIONS ON CASH AND DUE FROM BANKS Bank subsidiaries are required to maintain minimum average reserve balances with the Federal Reserve Bank. The amount of those reserve balances was approximately $118 million at December 31, 2000, with an average balance of $158 million during the year ended December 31, 2000. NOTE G LOANS AND ALLOWANCE FOR CREDIT LOSSES The composition of the loan portfolio at December 31 was as follows:
(Dollars in Millions) 2000 1999 - ------------------------------------------------------------------------------------- COMMERCIAL Commercial............................................... $29,920 $26,491 Real estate Commercial mortgage................................... 10,208 9,784 Construction.......................................... 4,443 4,322 Lease financing.......................................... 4,096 2,372 --------------------- Total commercial................................... 48,667 42,969 CONSUMER Home equity and second mortgage.......................... 9,438 8,681 Credit card.............................................. 4,499 4,313 Revolving credit......................................... 1,868 1,815 Installment.............................................. 896 999 Automobile............................................... 564 884 Student *................................................ 674 563 --------------------- Subtotal.............................................. 17,939 17,255 Residential mortgage..................................... 2,485 2,661 --------------------- Total consumer..................................... 20,424 19,916 --------------------- Total loans..................................... $69,091 $62,885 - -------------------------------------------------------------------------------------
*All or part of the student loan portfolio may be sold when the repayment period begins. Loans held for sale were $724 at December 31, 2000, and $608 at December 31, 1999. Loans of $6.5 billion at December 31, 2000, and $6.3 billion at December 31, 1999, were pledged at the Federal Home Loan Bank and the Federal Reserve. Nonaccrual and renegotiated loans totaled $397 million, $310 million, and $279 million at December 31, 2000, 1999 and 1998, respectively. At December 31, 2000, and 1999, the Company had $359 million and $265 million, respectively, of 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 years ended December 31, 2000, 1999 and 1998, the average recorded investment in impaired loans was approximately $327 million, $255 million and $214 million, respectively. The effect of nonaccrual and renegotiated loans on interest income was as follows:
Year ended December 31 ----------------------------- (Dollars in Millions) 2000 1999 1998 - --------------------------------------------------------------------------------------------- Interest income that would have been accrued at original contractual rates........................................ $44.0 $32.7 $22.5 Amount recognized as interest income........................ 13.1 13.0 7.6 ----------------------------- Foregone revenue............................................ $30.9 $19.7 $14.9 - ---------------------------------------------------------------------------------------------
Commitments to lend additional funds to customers whose loans were classified as nonaccrual or renegotiated at December 31, 2000, totaled $22.3 million. During 2000, there were no loans that were restructured at market interest rates and returned to a fully performing status. 38 U.S. Bancorp 41 Activity in the allowance for credit losses was as follows:
(Dollars in Millions) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------ Balance at beginning of year................................ $ 995.4 $1,000.9 $1,008.7 Add: Provision charged to operating expense................... 670.0 531.0 379.0 Deduct: Loans charged off........................................ 786.0 727.7 592.1 Less recoveries of loans charged off..................... 116.1 160.0 157.9 -------------------------------------- Net loans charged off.................................... 669.9 567.7 434.2 Acquisitions and other changes.............................. 71.3 31.2 47.4 -------------------------------------- Balance at end of year...................................... $1,066.8 $ 995.4 $1,000.9 - ------------------------------------------------------------------------------------------------------
NOTE H TRANSFERS AND SERVICING OF FINANCIAL ASSETS When the Company sells selected financial assets, it may retain interest-only strips, servicing rights, assets and/or other retained interests in the receivables. The gain or loss on sale of the receivables depends in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair values at the date of transfer. Market prices are used to determine retained interest fair values when readily available. However, quotes are generally not available for retained interests, so the Company estimates fair value based on the present value of future expected cash flows using management's best estimates of certain key assumptions including credit losses, prepayment speeds, forward yield curves and discount rates commensurate with the risks involved. Retained interests recorded to date have been valued using a discounted cash flow methodology. At least quarterly, the Company revalues the retained interests by obtaining market prices if available or by calculating the present value of estimated remaining cash flows. When using a present value methodology, key assumptions from the most recent valuation, including asset specific characteristics, are reviewed for appropriateness and updated as necessary. During 2000, the Company sold $255.7 million of the U.S. government guaranteed portions of loans originated under Small Business Administration (SBA) programs, recognizing a pre-tax gain on sale of $10.6 million. The SBA covers losses occurring on these guaranteed portions. Although the Company has no credit recourse relating to these sales, it does continue to own a portion of the non-guaranteed elements of the loans. The Company continues to service the loans and is required under the SBA programs to retain specified yield amounts. A portion of the yield is recognized as servicing fee income as it occurs, the remainder is recorded as a servicing asset and is included in the gain on sale calculation. SERVICING ASSET POSITION
SBA (Dollars in Millions) Loans - ----------------------------------------------------------------- Servicing assets at December 31, 1999................... $ 4.3 Servicing assets recognized during the period........... 4.0 Amortization............................................ (1.4) ----- Servicing assets at December 31, 2000................... $ 6.9 - -----------------------------------------------------------------
No valuation allowances were required during 2000. Servicing assets are reported in aggregate but measured on a transaction-specific basis. Market values were determined using discounted cash flows, utilizing the assumptions noted in the table below. Key economic assumptions used in valuing servicing assets at the date of sale resulting from sales completed during 2000 were as follows:
2000 (Dollars in Millions) SBA Loans(1) - ------------------------------------------------------------------ Fair value of assets recognized................. $7.9 Prepayment speed(2)............................. 21 CPR Weighted average life (years)................... 3.9 Expected credit losses.......................... Not Applicable Discount rate................................... 12% Variable returns to transferees................. Not Applicable - ------------------------------------------------------------------
1. All loans were adjustable based on the Wall Street Journal Prime rate. 2. The Company used a prepayment vector based on loan seasoning for valuation. The given speed was the effective prepayment speed that yields the same weighted average life calculated using the prepayment vector. U.S. Bancorp 39 42 RESIDUAL ECONOMIC ASSUMPTIONS AND SENSITIVITY ANALYSIS The Company has retained interests on the following asset sales: $1.8 billion sale of indirect automobile loans on September 24, 1999, $420 million sale of corporate and purchasing card receivables on February 27, 1997, and sales of SBA loans since 1988. At December 31, 2000, key economic assumptions and the sensitivity of the value of the retained interest to immediate 10 percent and 20 percent adverse changes in those assumptions were as follows:
Indirect Corporate Automobile SBA Card At December 31, 2000 (Dollars in Millions) Loans Loans(1) Receivables(2) - -------------------------------------------------------------------------------------------------------- Carrying amount/fair value of retained interests............ $46.2 $4.2 $8.4 Weighted-average life (in years)............................ 1.0 3.9 .1 PREPAYMENT SPEED ASSUMPTION (ANNUAL RATE)(3,4).............. 1.5 ABS 21 CPR -- Impact on fair value of 10% adverse change............... $(.3) $(.3) -- Impact on fair value of 20% adverse change............... $(.7) $(.6) -- EXPECTED CREDIT LOSSES (CUMULATIVE)......................... 1.6% -- -- Impact on fair value of 10% adverse change............... $(1.2) -- -- Impact on fair value of 20% adverse change............... $(2.4) -- -- RESIDUAL CASH FLOWS DISCOUNT RATE (ANNUAL).................. 12.0% 12.0% -- Impact on fair value of 10% adverse change............... $(.6) $(.2) -- Impact on fair value of 20% adverse change............... $(1.2) $(.3) -- INTEREST RATES ON VARIABLE AND ADJUSTABLE CONTRACTS......... NA NA -- Impact on fair value of 10% adverse change............... NA NA -- Impact on fair value of 20% adverse change............... NA NA -- - --------------------------------------------------------------------------------------------------------
1. Credit losses are covered by the appropriate SBA loan program and are not included in retained interests. Principal reductions caused by defaults are included in the prepayment assumption. 2. Retained interest is effectively a single period receivable that is paid and renewed each month during the revolving period. Therefore, no assumptions are used in its estimate. Losses are recognized in the period they occur. 3. The Company uses prepayment vectors based on loan seasoning for valuation. The given speed is the effective prepayment speed that yields the same weighted average life calculated using the prepayment vector. 4. ABS is the absolute prepayment rate and is the auto industry's standard measure of prepayment speed. CPR is the constant prepayment rate. These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in the assumptions to the change in fair value may not be linear. Also, in this table the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; however, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities. OTHER INFORMATION The table below summarizes certain cash flows received from and paid to special purpose entities for the loan sales described above:
Year Ended December 31 (Dollars in Millions) 2000 - --------------------------------------------------------------------------- Proceeds from new sales..................................... $ 266.3 Proceeds from corporate card securitization(1).............. 7,433.4 Reinvestment in corporate card securitization receivables(2)............................................. (7,328.2) Servicing fees received..................................... 16.9 Other cash flows received on retained interests(2).......... 34.2 Purchases of delinquent or foreclosed assets................ -- - ---------------------------------------------------------------------------
1. The corporate card securitization is a revolving transaction where proceeds are reinvested until its legal termination. The indirect automobile and SBA loan sales are amortizing transactions where the cash flow is used to pay off amounts due to investors. 2. This amount represents total cash flows received from retained interests by the Company other than servicing fees. Other cash flows include, for example, all cash flows from interest-only strips and cash above the minimum required level in cash collateral accounts. 40 U.S. Bancorp 43 Quantitative information relating to loan sales and managed assets are given below:
December 31, 2000 --------------------------------------------------------------------- Period Ended Year Ended --------------------------------------------------------------------- Total Principal Average Net Credit Asset Type (Dollars in Millions) Balance Delinquent Balance* Balance Losses - --------------------------------------------------------------------------------------------------------------------------------- Indirect automobile loans............................... $1,242.4 $21.0 $1,638.4 $37.6 Guaranteed SBA loans.................................... 827.8 10.6 688.5 -- Corporate card receivables.............................. 815.4 27.3 958.2 8.6 --------------------------------------------------------------------- Total loans managed..................................... $2,885.6 $58.9 $3,285.1 $46.2 Less: Loans sold or securitized............................ 1,850.8 1,992.6 -------- -------- Loans held in portfolio.............................. $1,034.8 $1,292.5 - ---------------------------------------------------------------------------------------------------------------------------------
*Principal amount 60 days or more past due. NOTE I PREMISES AND EQUIPMENT Premises and equipment at December 31 consisted of the following:
(Dollars in Millions) 2000 1999 - -------------------------------------------------------------------------------- Land........................................................ $ 131 $ 133 Buildings and improvements.................................. 710 886 Furniture, fixtures and equipment........................... 957 824 Capitalized building and equipment leases................... 171 108 ---------------- 1,969 1,951 Less accumulated depreciation and amortization.............. 1,112 1,089 ---------------- Total....................................................... $ 857 $ 862 - --------------------------------------------------------------------------------
NOTE J DEPOSITS The following is a summary of the Company's total deposits as of December 31:
(Dollars in Millions) 2000 1999 - ---------------------------------------------------------------------------------- Noninterest-bearing deposits................................ $15,653 $16,050 Savings accounts............................................ 1,801 2,096 NOW accounts................................................ 7,022 6,160 Money market deposit accounts............................... 13,032 12,487 Time deposits $100,000 and over............................. 5,784 5,595 Foreign deposits $100,000 and over.......................... 644 214 All other time deposits..................................... 9,321 8,928 ------------------ Total interest-bearing deposits.......................... 37,604 35,480 ------------------ Total deposits........................................... $53,257 $51,530 - ----------------------------------------------------------------------------------
U.S. Bancorp 41 44 NOTE K LONG-TERM DEBT Long-term debt (debt with original maturities of more than one year) at December 31 consisted of the following:
(Dollars in Millions) 2000 1999 - ------------------------------------------------------------------------------- U.S. BANCORP (Parent Company) Fixed-rate subordinated notes 8.125% due May 15, 2002.................................. $ 150 $ 150 7.00% due March 15, 2003................................. 150 150 6.625% due May 15, 2003.................................. 100 100 8.00% due July 2, 2004................................... 125 125 7.625% due May 1, 2005................................... 150 150 6.75% due October 15, 2005............................... 300 300 6.875% due September 15, 2007............................ 250 250 7.50% due June 1, 2026................................... 200 200 Medium-term notes........................................... 3,577 2,310 Capitalized lease obligations, mortgage indebtedness and other...................................................... 126 70 ----------------- 5,128 3,805 SUBSIDIARIES Fixed-rate subordinated notes 6.00% due October 15, 2003............................... 100 100 7.55% due June 15, 2004.................................. 100 100 8.35% due November 1, 2004............................... 100 100 7.30% due August 15, 2005................................ 100 100 6.875% due April 1, 2006................................. 125 125 6.50% due February 1, 2008............................... 300 300 6.30% due July 15, 2008.................................. 300 300 5.70% due December 15, 2008.............................. 400 400 Federal Home Loan Bank advances............................. 2,156 1,998 Bank notes.................................................. 9,051 8,459 Euro medium-term notes due April 13, 2004................... 400 400 Floating-rate notes due February 27, 2000................... -- 250 Capitalized lease obligations, mortgage indebtedness and other...................................................... 306 126 ----------------- Total.................................................. $18,566 $16,563 - -------------------------------------------------------------------------------
Medium-term notes outstanding at December 31, 2000, mature from January 2001 through December 2004. The notes bear fixed or floating interest rates ranging from 6.00 percent to 7.50 percent. The weighted average interest rate at December 31, 2000, was 6.84 percent. Federal Home Loan Bank (FHLB) advances outstanding at December 31, 2000, mature from March 2001 through October 2026. The advances bear fixed or floating interest rates ranging from 5.54 percent to 8.25 percent. The Company has an arrangement with the FHLB whereby based on the collateral available (residential and commercial mortgages), the Company could have borrowed an additional $6.7 billion at December 31, 2000. The weighted average interest rate at December 31, 2000, was 6.64 percent. Bank notes outstanding at December 31, 2000, mature from January 2001 through November 2005. The notes bear fixed or floating interest rates ranging from 5.25 percent to 7.02 percent. The weighted average interest rate at December 31, 2000, was 6.73 percent. Euro medium-term notes outstanding at December 31, 2000, bear floating rate interest at three-month LIBOR plus .15 percent. The interest rate at December 31, 2000, was 6.95 percent. 42 U.S. Bancorp 45 Maturities of long-term debt outstanding at December 31, 2000, were:
Parent (Dollars in Millions) Consolidated Company - ------------------------------------------------------------------------------------ 2001........................................................ $ 6,977 $ 877 2002........................................................ 3,883 1,061 2003........................................................ 2,663 1,408 2004........................................................ 1,694 782 2005........................................................ 1,425 457 Thereafter.................................................. 1,924 543 ---------------------- Total....................................................... $18,566 $ 5,128 - ------------------------------------------------------------------------------------
NOTE L COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY THE JUNIOR SUBORDINATED DEBENTURES OF THE PARENT COMPANY The Company issued $950 million of preferred securities (the "Preferred Securities") through three separate issuances by three wholly-owned subsidiary grantor trusts, FBS Capital I, U.S. Bancorp Capital I and USB Capital II (the "Trusts"). The Preferred Securities accrue and pay distributions periodically at specified rates as provided in the indentures. The Trusts used the net proceeds from the offerings to purchase a like amount of Junior Subordinated Deferrable Interest Debentures (the "Debentures") of the Company. The Debentures are the sole assets of the Trusts and are eliminated, along with the related income statement effects, in the consolidated financial statements. The Company's obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the Trusts. The guarantee covers the distributions and payments on liquidation or redemption of the Preferred Securities, but only to the extent of funds held by the Trusts. The Preferred Securities are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures. The Company has the right to redeem the Debentures in whole, (but not in part), on or after specific dates, at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date. The Company used the proceeds from the sales of the Debentures for general corporate purposes. USB Capital II completed the sale of $350 million Preferred Securities in March 1998. The sole asset of USB Capital II is $361 million principal amount 7.20 percent Debentures that mature in April 2028, and are redeemable prior to maturity at the option of the Company on or after April 1, 2003. U.S. Bancorp Capital I completed the sale of $300 million Preferred Securities in December 1996. The sole asset of U.S. Bancorp Capital I is $309 million principal amount 8.27 percent Debentures which mature in December 2026, and are redeemable prior to maturity at the option of the Company on or after December 15, 2006. FBS Capital I completed the sale of $300 million Preferred Securities in November 1996. The sole asset of FBS Capital I is $309 million principal amount 8.09 percent Debentures which mature in November 2026, and are redeemable prior to maturity at the option of the Company on or after November 15, 2006. NOTE M SHAREHOLDERS' EQUITY COMMON STOCK At December 31, 2000, the Company had 95.6 million shares of common stock reserved for future issuances (see Note O). The Company issued 14.4 million and 37.8 million shares of common stock with an aggregate value of $.3 billion and $1.3 billion in connection with purchase acquisitions during 2000 and 1999, respectively (see Note C). On April 22, 1998, the Company's shareholders authorized an increase in the Company's capital stock necessary to implement the three-for-one split of the Company's common stock announced on February 18, 1998. The number of common and preferred shares which the Company has authority to issue was increased from 500 million shares and 10 million shares, respectively, to 1.5 billion shares and 50 million shares, respectively. The stock split was in the form of a 200 percent dividend payable May 18, 1998 to shareholders of record on May 4, 1998. The impact of the stock split has been reflected in the financial statements for all periods presented and all share and per share data included herein. On February 16, 2000, the Company's Board of Directors authorized the repurchase of up to $2.5 billion of the Company's common stock over a two-year period ending March 31, 2002. The new share U.S. Bancorp 43 46 repurchase program replaced a program which was scheduled to expire on March 31, 2000. The shares were repurchased in the open market or through negotiated transactions. The Company repurchased 20.2 million shares for $432.2 million in 2000; 16.6 million shares for $560.8 million in 1999 and 24.7 million shares for $964.0 million in 1998. On January 17, 2001, the stock repurchase program was rescinded in connection with the proposed merger with Firstar Corporation. The Company's Dividend Reinvestment Plan providing for automatic reinvestment of dividends and optional cash purchases was suspended on November 9, 2000, following the announcement of the definitive agreement to merge with Firstar Corporation. NOTE N EARNINGS PER SHARE The components of earnings per share were:
(Dollars in Millions, Except Per Share Data) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE Net income to common stockholders........................... $1,592.0 $1,506.5 $1,327.4 ----------------------------------------- Average shares outstanding.................................. 745,093,996 727,530,843 733,897,845 ----------------------------------------- Earnings per share.......................................... $ 2.14 $ 2.07 $ 1.81 ----------------------------------------- DILUTED EARNINGS PER SHARE Net income to common stockholders........................... $1,592.0 $1,506.5 $1,327.4 ----------------------------------------- Average shares outstanding.................................. 745,093,996 727,530,843 733,897,845 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.................. 2,761,628 5,459,968 10,280,298 ----------------------------------------- Dilutive common shares outstanding.......................... 747,855,624 732,990,811 744,178,143 ----------------------------------------- Diluted earnings per share.................................. $ 2.13 $ 2.06 $ 1.78 - ---------------------------------------------------------------------------------------------------------
NOTE O EMPLOYEE BENEFITS RETIREMENT PLANS Pension benefits are provided to substantially all employees based on years of service and employees' compensation while employed with the Company. Employees are fully vested after five years of service. The Company's funding policy is to contribute amounts to its plans sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Company determines to be appropriate. The actuarial cost method used to compute the pension liabilities and expense is the projected unit credit method. Prior to their acquisition dates, employees of certain acquired companies were covered by separate, noncontributory pension plans that provided benefits based on years of service and compensation. During 1998, the Company merged all the acquired companies' plans into its own plan with the exception of the FirsTier plan, which was merged in 1999. Prior to their merger into the Company's plan, the former USBC and West One Bancorp pension plans determined retirement benefits of participants based on their years of service and final average compensation. Under the new plan, participant's retirement benefits are based on a participant's average annual compensation over his or her career with the Company. These changes resulted in a reduction of the benefit obligation during 1998. The Company also maintains several unfunded, nonqualified, supplemental executive retirement programs that provide additional defined pension benefits for certain employees. The assumptions used in computing the present value of the accumulated benefit obligation, the projected benefit obligation and net pension expense are substantially consistent with those assumptions used for the funded qualified plans. OTHER POSTRETIREMENT PLANS In addition to providing pension benefits, the Company provides certain health care and death benefits to retired employees. Nearly all employees may become eligible for health care benefits at or after age 55 if they have completed at least five years of service and their age plus years of service is equal to or exceeds 65 while working for the Company. The Company subsidizes the cost of coverage for employees who retire before age 65 with at least 10 years of service. The amount of the subsidy is based on the employee's age and service at the time of retirement and remains fixed until the retiree reaches 44 U.S. Bancorp 47 age 65. After age 65 the retiree assumes responsibility for the full cost of the coverage. The plan also contains other cost-sharing features such as deductibles and coinsurance. The Company continues to subsidize the coverage for employees over age 65 who retired before a plan change eliminated the subsidy. The estimated cost of these retiree benefit payments is accrued during the employees' active service. Information presented in the tables below reflects a measurement date of September 30. The following table sets forth the components of net periodic benefit cost for the retirement plans.
Pension Plans Other Postretirement Benefits --------------------------------------------------------------------- (Dollars in Millions) 2000 1999 1998 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- Components of net periodic benefit cost Service cost $ 47.8 $ 46.3 $ 44.3 $ 1.8 $ 2.8 $ 2.2 Interest cost 66.5 61.0 61.8 10.4 10.7 10.7 Expected return on plan assets (102.9) (98.3) (90.7) (.6) (.5) (.4) Amortization of transition (asset) obligation (2.9) (3.9) (4.0) .7 .8 .8 Amortization of prior service cost (7.7) (8.2) (2.8) (.7) (.7) (.8) Recognized actuarial loss .7 1.9 1.9 (1.4) .2 -- --------------------------------------------------------------------- Net periodic benefit cost 1.5 (1.2) 10.5 10.2 13.3 12.5 Curtailment and settlement (gains) (11.1) (2.0) (22.6) -- -- (4.3) --------------------------------------------------------------------- Net periodic benefit cost after curtailment and settlement (gains) $ (9.6) $ (3.2) $(12.1) $10.2 $13.3 $ 8.2 - ---------------------------------------------------------------------------------------------------------------------------------
The following tables summarize benefit obligation and plan asset activity for the retirement plans.
--------------------------------------------------------- Pension Plans Other Postretirement Plans (Dollars in Millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of measurement period $ 903.8 $ 930.0 $ 149.2 $ 164.6 Service cost 47.8 46.3 1.8 2.8 Interest cost 66.5 61.0 10.4 10.7 Plan participants' contributions -- -- 6.8 3.1 Plan amendments -- (6.4) -- (.9) Actuarial (gain) loss 16.8 (49.2) 12.9 (17.2) Acquisitions and special termination benefits -- -- -- 2.9 Benefit payments (45.2) (43.0) (18.1) (16.8) Settlements (51.6) (34.9) -- -- --------------------------------------------------------- Benefit obligation at end of measurement period $ 938.1 $ 903.8 $ 163.0 $ 149.2 - ------------------------------------------------------------------------------------------------------------------------- CHANGE IN FAIR VALUE OF PLAN ASSETS Fair value at beginning of measurement period $1,152.5 $1,065.0 $ 13.4 $ 11.2 Actual return on plan assets 206.8 159.1 .9 .6 Employer contributions 10.4 6.3 18.8 15.3 Plan participants' contributions -- -- 6.8 3.1 Settlements (51.6) (34.9) -- -- Benefit payments (45.2) (43.0) (18.1) (16.8) --------------------------------------------------------- Fair value at end of measurement period $1,272.9 $1,152.5 $ 21.8 $ 13.4 - ------------------------------------------------------------------------------------------------------------------------- FUNDED STATUS Funded status at end of measurement period $ 334.8 $ 248.7 $(141.2) $(135.8) Unrecognized transition (asset) obligation -- (3.1) 8.8 9.5 Unrecognized prior service cost (76.1) (83.7) (7.8) (8.4) Unrecognized net (gain) (143.7) (68.6) (9.3) (23.4) Fourth quarter contribution 1.2 .7 14.2 11.4 --------------------------------------------------------- Net amount recognized $ 116.2 $ 94.0 $(135.3) $(146.7) - ------------------------------------------------------------------------------------------------------------------------- COMPONENTS OF STATEMENT OF FINANCIAL POSITION: Prepaid benefit cost $ 203.9 $ 171.2 $ -- $ -- Accrued benefit liability (87.7) (77.2) (135.3) (146.7) --------------------------------------------------------- Net amount recognized $ 116.2 $ 94.0 $(135.3) $(146.7) - -------------------------------------------------------------------------------------------------------------------------
U.S. Bancorp 45 48 The following table sets forth the weighted average plan assumptions:
2000 1999 1998 - ---------------------------------------------------------------------------------------------- Pension Plan Actuarial Computations Discount rate in determining benefit obligations............................ 7.8% 7.5% 6.5% Expected long-term return on plan assets................. 9.5 9.5 9.5 Rate of increase in future compensation.................. 5.6 5.6 5.6 Other Postretirement Plan Actuarial Computations Discount rate in determining benefit obligations......... 7.8% 7.5% 6.5% Expected long-term return on plan assets................. 5.0 5.0 5.0 Health care cost trend rate(1) Prior to age 65....................................... 7.7 7.0 7.0 After age 65.......................................... 7.7 5.5 6.4 Effect of One Percent Increase in Health Care Cost Trend Rate Service and interest costs............................... $ 1.0 $ 1.3 $ 1.2 Accumulated postretirement benefit obligation............ 13.1 12.4 13.1 Effect of One Percent Decrease in Health Care Cost Trend Rate Service and interest costs............................... $ (.9) $(1.0) $(1.0) Accumulated postretirement benefit obligation............ (11.6) (10.9) (11.8) - ----------------------------------------------------------------------------------------------
(1) Both rates are assumed to decrease gradually to 5.5% by 2008 and remain at that level thereafter. The following table provides information for pension plans with accumulated benefit obligations in excess of plan assets:
(Dollars in Millions) 2000 1999 - ----------------------------------------------------------------- Projected benefit obligation.................. $115.7 $95.5 Accumulated benefit obligation................ 94.3 72.8 Fair value of plan assets..................... -- -- - -----------------------------------------------------------------
EMPLOYEE INVESTMENT PLAN The Company provides a 401(k) Savings Plan formerly known as the Capital Accumulation Plan which allows qualified employees, at their option, to make contributions up to certain percentages of pre-tax base salary through salary deductions under Section 401(k) of the Internal Revenue Code. A portion of these contributions is matched by the Company. All of the Company's matching contributions are invested in USB common stock. Employee contributions are invested, at the employees' direction, among a variety of investment alternatives. Total expense was $39.4 million, $34.7 million and $16.6 million in 2000, 1999 and 1998, respectively. STOCK INCENTIVE AND PURCHASE PLANS The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") in accounting for its employee stock incentive and purchase plans. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. On the date exercised, if new shares are issued, the option proceeds equal to the par value of the shares are credited to common stock and additional proceeds are credited to capital surplus. If treasury shares are issued, the option proceeds equal to the average treasury share price are credited to treasury stock and additional proceeds are credited to capital surplus. The Employee Stock Purchase Plan ("ESPP") permits all eligible employees with at least one year of service and directors to purchase common stock. Plan participants can purchase stock for 85 percent to 100 percent of the fair market value, which is based on the price at the beginning or the end of the purchase period, whichever is lower. Any discount is determined by a committee of the Board of Directors. In 2000 and 1999, the purchase price was 85 percent of fair market value. The plan results in no compensation expense to the Company. Due to the merger with Firstar Corporation, the ESPP was terminated effective October 13, 2000. In April 1999, the shareholders approved the 1999 Stock Incentive Plan ("1999 Plan") whereby all former stock incentive plans of U.S. Bancorp and Piper Jaffray ("Prior Plans") were incorporated into the 1999 plan. All outstanding options, restricted stock and other awards subject to the terms of the Prior Plans will remain outstanding and subject to the terms and conditions of those plans, but are counted as part of the total number of common shares awarded under the 1999 Plan. An additional 45 million shares were approved for issuance by the shareholders under the 46 U.S. Bancorp 49 1999 Plan. The 1999 Plan allows for the granting of nonqualified stock options, incentive stock options, stock appreciation rights ("SARs"), restricted stock or stock units ("RSUs"), performance awards, and other stock-based awards at or above 100 percent of the market price at the date of grant. The 1999 Plan also provides automatic grants of stock options to nonemployee directors. The rights of restricted stock and RSU holders to transfer shares are generally limited during the restriction period. At December 31, 2000, there were 14.0 million shares (subject to adjustment for forfeitures) available for grant under the 1999 Plan. Options granted are generally exercisable up to 10 years from the date of grant and vest over three to five years. Restricted shares vest over three to seven years. The vesting of certain options and restricted shares accelerate based on growth in diluted operating earnings per share and on the performance of the Company in comparison to the performance of a predetermined group of regional banks. Compensation expense for restricted stock is based on the market price of the Company stock at the time of the grant and amortized on a straight-line basis over the vesting period. For the performance-based restricted shares, compensation expense is amortized using the estimated vesting period. Compensation expense related to the restricted stock was $39.4 million, $36.6 million and $27.8 million in 2000, 1999 and 1998, respectively. Stock incentive plans of acquired companies are terminated at the merger closing dates. Option holders under such plans receive the Company's common stock, or options to buy the Company's stock, based on the conversion terms of the various merger agreements. The historical option information presented below has been restated to reflect the options originally granted under acquired companies' plans.
Weighted Restricted Options Average Price Shares Outstanding Per Share Outstanding - -------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1997........................................... 40,866,960 $23.62 2,614,182 Granted: Stock options............................................ 8,844,793 40.37 -- Restricted stock......................................... -- 1,605,649 Piper Jaffray options converted............................. 1,155,054 16.28 -- Exercised................................................... (15,083,962) 21.88 -- Canceled/vested............................................. (1,315,908) 29.62 (984,907) ------------------------------------------------- DECEMBER 31, 1998........................................... 34,466,937 28.18 3,234,924 Granted: Stock options............................................ 46,614,828 35.86 -- Restricted stock......................................... -- 742,932 1999 Acquisitions converted................................. 957,105 20.97 -- Exercised................................................... (7,168,493) 21.42 -- Canceled/vested............................................. (3,334,629) 35.76 (978,931) ------------------------------------------------- DECEMBER 31, 1999........................................... 71,535,748 33.41 2,998,925 Granted: Stock options............................................ 7,800,805 21.46 Restricted stock......................................... -- 3,191,721 2000 Acquisitions converted................................. 353,629 8.67 Exercised................................................... (1,339,645) 15.05 Canceled/vested............................................. (5,464,350) 21.82 (1,289,565) ------------------------------------------------- DECEMBER 31, 2000........................................... 72,886,187 $32.29 4,901,081 - --------------------------------------------------------------------------------------------------------------------
Additional information regarding options outstanding as of December 31, 2000 is as follows:
Options Outstanding Exercisable Options --------------------------------------------- -------------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Range of Contractual Exercise Exercise Exercise Prices Shares Life (Years) Price Shares Price - --------------------------------------------------------------------------------------------------------------------------------- $1.82 -- $9.99.............................. 930,829 3.0 $ 7.73 917,022 $ 7.73 $10.00 -- $19.99............................ 4,458,787 6.7 16.15 2,276,553 13.59 $20.00 -- $29.99............................ 13,558,828 7.6 23.75 7,458,898 24.34 $30.00 -- $39.99............................ 49,942,857 8.0 35.64 13,580,941 33.84 $40.00 -- $47.06............................ 3,994,886 7.5 43.00 3,826,381 43.01 ------------------------------------------------------------------------------ 72,886,187 7.8 $32.29 28,059,795 $30.07 - ---------------------------------------------------------------------------------------------------------------------------------
Pro forma information regarding net income and earnings per share is required by SFAS 123, "Accounting and Disclosure of Stock-Based Compensation" and has been determined as if the U.S. Bancorp 47 50 Company had accounted for its employee stock option and stock purchase plans (options) under the fair value method of SFAS 123. The fair value of the options was estimated at the grant date using a Black-Scholes option pricing model. Option valuation models require the use of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The pro forma disclosures include options granted in 2000, 1999 and 1998 and are not likely to be representative of the pro forma disclosures for future years. The estimated fair value of the options is amortized to expense over the options' vesting period.
Year Ended December 31 -------------------------------- (Dollars in Millions, Except Per Share Data) 2000 1999 1998 - -------------------------------------------------------------------------------- Pro forma net income................. $1,521.7 $1,418.8 $1,254.0 Pro forma earnings per share: Earnings per share................ $ 2.04 $ 1.95 $ 1.71 Diluted earnings per share........ 2.03 1.94 1.69 - -------------------------------------------------------------------------------- Weighted average assumptions in option valuation Risk-free interest rates............. 6.1% 5.4% 5.4% Dividend yields...................... 3.0 3.5 2.3 Stock volatility factor.............. .37 .27 .25 Expected life of options (in years)... 4.7 6.1 2.3 - --------------------------------------------------------------------------------
NOTE P INCOME TAXES The components of income tax expense were:
(Dollars in Millions) 2000 1999 1998 - ------------------------------------------------------------------------------------------------ FEDERAL Current tax................................................. $701.1 $681.5 $612.9 Deferred tax provision...................................... 37.4 46.7 28.2 -------------------------------- Federal income tax....................................... 738.5 728.2 641.1 STATE Current tax................................................. 123.6 117.8 127.7 Deferred tax provision (credit)............................. 7.2 9.0 (2.3) -------------------------------- State income tax......................................... 130.8 126.8 125.4 -------------------------------- Total income tax provision............................... $869.3 $855.0 $766.5 - ------------------------------------------------------------------------------------------------
The reconciliation between income tax expense and the amount computed by applying the statutory federal income tax rate was as follows:
(Dollars in Millions) 2000 1999 1998 - ------------------------------------------------------------------------------------------------ Tax at statutory rate (35%)................................. $861.5 $826.5 $732.9 State income tax, at statutory rates, net of federal tax benefit.................................................... 85.0 82.4 81.5 Tax effect of: Tax-exempt interest: Loans................................................. (8.3) (8.7) (10.9) Securities............................................ (23.3) (22.7) (23.2) Amortization of nondeductible goodwill................... 61.1 43.9 32.5 Tax credits and other items.............................. (106.7) (66.4) (46.3) -------------------------------- Applicable income taxes..................................... $869.3 $855.0 $766.5 - ------------------------------------------------------------------------------------------------
At December 31, 2000, for income tax purposes, the Company had federal net operating loss carryforwards of $2.8 million available, which expire in years 2001 through 2009. Deferred income tax assets and liabilities reflect the tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for the same items for income tax reporting purposes. 48 U.S. Bancorp 51 Significant components of the Company's deferred tax assets and liabilities as of December 31 were as follows:
(Dollars in Millions) 2000 1999 - ---------------------------------------------------------------------------------- DEFERRED TAX ASSETS Loan loss reserves.......................................... $ 377.7 $ 382.8 Deferred fees............................................... 75.0 60.3 Postretirement liability.................................... 73.9 69.9 Real estate and other asset basis differences............... 31.9 29.0 Federal operating loss carryforward......................... 1.0 .9 Other deferred tax assets................................... 164.7 168.2 ------------------ Gross deferred tax assets................................ 724.2 711.1 DEFERRED TAX LIABILITIES Leasing activities.......................................... (525.7) (504.8) Accelerated depreciation.................................... (57.0) (32.5) Other investment basis differences.......................... (26.2) (16.8) Unrealized (gain) loss on available-for-sale securities..... (9.2) 38.0 Accrued severance, pension and retirement benefits.......... (5.9) 44.4 Other deferred tax liabilities.............................. (87.0) (81.0) ------------------ Gross deferred tax liabilities (711.0) (552.7) ------------------ NET DEFERRED TAX ASSETS..................................... $ 13.2 $ 158.4 - ----------------------------------------------------------------------------------
Realization of the deferred tax assets over time is dependent upon the existence of taxable income in carryback periods or the Company generating sufficient taxable earnings in future periods. In determining that realization of the deferred tax assets was more likely than not, the Company gave consideration to a number of factors, including its taxable income during carryback periods, its recent earnings history, its expectations for earnings in the future and, where applicable, the expiration dates associated with tax carrybacks and carryforwards. NOTE Q FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CREDIT CONCENTRATIONS In the normal course of business, the Company uses various off-balance sheet financial instruments to manage its interest rate and market risk and to meet the needs of its customers. These instruments carry varying degrees of credit, interest rate or liquidity risk. The contract or notional amounts of these financial instruments at December 31 were as follows:
(Dollars In Millions) 2000 1999 - ---------------------------------------------------------------------------------------- Commitments to extend credit Commercial............................................... $28,193 $28,222 Corporate and purchasing cards........................... 21,236 18,503 Consumer credit cards.................................... 14,622 14,991 Other consumer........................................... 6,049 6,388 Letters of credit Standby.................................................. 3,631 3,222 Commercial............................................... 379 317 Swap contracts Interest rate hedges..................................... 7,118 7,743 Basis swap hedges........................................ 1,000 -- Intermediated............................................ 2,412 556 Options contracts Hedge interest rate floors purchased..................... 500 500 Intermediated interest rate and foreign exchange caps and floors purchased........................................ 405 453 Intermediated interest rate and foreign exchange caps and floors written.......................................... 405 453 Futures and forward contracts............................... 25 34 Recourse on assets sold..................................... 76 117 Foreign currency commitments Commitments to purchase.................................. 1,412 1,137 Commitments to sell...................................... 1,407 1,141 Commitments from securities lending......................... 1,037 717 - ----------------------------------------------------------------------------------------
U.S. Bancorp 49 52 COMMITMENTS TO EXTEND CREDIT Commitments to extend credit are legally binding and generally have fixed expiration dates or other termination clauses. The contractual amount represents the Company's exposure to credit loss, in the event of default by the borrower. The Company manages this credit risk by using the same credit policies it applies to loans. Collateral is obtained to secure commitments based on management's credit assessment of the borrower. The collateral may include marketable securities, receivables, inventory, equipment and real estate. Since the Company expects many of the commitments to expire without being drawn, total commitment amounts do not necessarily represent the Company's future liquidity requirements. In addition, the commitments include consumer credit lines that are cancelable upon notification to the consumer. LETTERS OF CREDIT Standby letters of credit are conditional commitments the Company issues to guarantee the performance of a customer to a third party. The guarantees frequently support public and private borrowing arrangements, including commercial paper issuances, bond financings and other similar transactions. The Company issues commercial letters of credit on behalf of customers to ensure payment or collection in connection with trade transactions. In the event of a customer's nonperformance, the Company's credit loss exposure is the same as in any extension of credit, up to the letter's contractual amount. Management assesses the borrower's credit to determine the necessary collateral, which may include marketable securities, real estate, accounts receivable and inventory. Since the conditions requiring the Company to fund letters of credit may not occur, the Company expects its liquidity requirements to be less than the total outstanding commitments. INTEREST RATE SWAPS AND OPTIONS Interest rate swaps are contracts to exchange fixed- and variable-rate interest payment obligations based on a notional principal amount. The Company enters into swaps to hedge its balance sheet against fluctuations in interest rates and as an intermediary for customers. At December 31, 2000, and 1999, interest rate swaps totaling $7.1 billion and $7.7 billion, respectively, hedged loans, deposits and long-term debt. The Company received fixed-rate interest and paid floating-rate interest on substantially all swaps in its hedging portfolio as of December 31, 2000. Activity with respect to interest rate swap hedges was as follows:
(Dollars In Millions) 2000 1999 1998 - ------------------------------------------------------------------- Notional amount outstanding at beginning of year................. $7,743 $ 7,239 $ 5,315 Additions.......................... 770 4,382 3,140 Maturities......................... (55) (2,142) (1,213) Amortization....................... (666) (143) -- Terminations....................... (674) (1,593) (3) ---------------------------- Notional amount outstanding at end of year........................... $7,118 $ 7,743 $ 7,239 - ------------------------------------------------------------------- At December 31: Weighted average interest rate paid.............................. 6.73% 6.45% 5.53% Weighted average interest rate received.......................... 6.38 6.22 6.17 - -------------------------------------------------------------------
For the hedging portfolio's notional balances and yields by maturity date as of year-end 2000, see Table 18 on page 22. For a description of the Company's objectives for using derivative financial instruments, refer to Use of Derivatives to Manage Interest Rate Risk on pages 21 and 22. Such information is incorporated by reference into these Notes to Consolidated Financial Statements. At December 31, 2000, and 1999, LIBOR-based interest rate floors totaling $500 million with an average remaining maturity of .7 years and $500 million with an average remaining maturity of 1.7 years, respectively, hedged floating rate commercial loans. The strike rate on these LIBOR-based floors was 4.625 percent at December 31, 2000 and December 31, 1999. The premium on floors is amortized over the life of the contract. The impact of the floors on net interest income was not significant in 2000, 1999 and 1998. For swaps and options used as hedges, the Company recognizes interest income or expense as it is accrued over the terms of the hedge. The gain or loss on a terminated hedge is amortized over the remaining life of the original swap or remaining life of the hedged item, whichever is shorter. The impact of the amortization of deferred gains and losses on hedges on net interest income was not significant in 2000, 1999 and 1998. Net unamortized deferred losses were $22.7 million at December 31, 2000. In addition to utilizing swaps and options as part of its asset/liability management strategy, the Company acts as an intermediary for swap and option agreements on behalf of its customers. To reduce its market risk exposure, the Company generally enters into offsetting positions. The total notional amount of customer and trading swap agreements, including the offsetting positions, was $2.4 billion and $556 million at December 31, 2000, and 1999, respectively. The total notional amount of customer option agreements, 50 U.S. Bancorp 53 including the offsetting positions, was $810 million and $906 million at December 31, 2000, and 1999, respectively. Market value changes on intermediated swaps, options and futures contracts are recognized in income in the period of change. Realized gains or losses on intermediated transactions were not significant in 2000, 1999 and 1998. The credit risk related to interest rate swap and option agreements is that counterparties may be unable to meet the contractual terms. The Company estimates this risk by calculating the present value of the cost to replace all outstanding contracts in a gain position at current market rates, reported on a net basis by each counterparty. At December 31, 2000, and 1999, the gain position of these contracts, in the aggregate, was approximately $87 million and $19 million, respectively. The Company manages the credit risk of its interest rate swap and option contracts through bilateral collateral agreements, credit approvals, limits and monitoring procedures. Commercial lending officers perform credit analyses and establish counterparty limits. Senior Credit Administration periodically reviews positions to monitor compliance with the limits. In addition, the Company reduces the assumed counterparty credit risk through master netting agreements that permit the Company to settle multiple interest rate contracts with a given counterparty on a net basis. FUTURES AND FORWARD CONTRACTS Futures and forward contracts are agreements for the delayed delivery of securities or cash settlement money market instruments. The Company enters into futures contracts to hedge the market risk on its fixed income inventory positions. The Company enters into forward contracts to hedge the interest rate risk of its mortgage loans held for sale. At December 31, 2000, and 1999, futures contracts outstanding were $25 million and $15 million, respectively. There were no forward contracts outstanding at December 31, 2000. Forward contracts outstanding at December 31, 1999 were $19 million. At December 31, 2000, net unamortized deferred gains on the forward agreements were not significant. The Company manages its credit risk on forward contracts, which arises from nonperformance by counterparties, through credit approval and limit procedures. RECOURSE ON ASSETS SOLD The Company is obligated under recourse provisions related to the sale of certain loans. The contract amount of these loans was $1.4 billion at December 31, 2000, and $2.0 billion at December 31, 1999. The maximum contractual amount of recourse on these loans was $76 million at December 31, 2000, and $117 million at December 31, 1999. FOREIGN CURRENCY COMMITMENTS The Company uses foreign currency commitments to help customers reduce the risks associated with changes in foreign currency exchange rates. Through these contracts, the Company exchanges currencies at specified rates on specified dates with various counterparties. The Company minimizes the market and liquidity risks by taking offsetting positions. In addition, the Company controls the market risks by limiting the net exposure through policies, procedures, and monitoring. The Company manages its credit risk, or potential risk of loss from default by a counterparty, through credit limit approval and monitoring procedures. The aggregate replacement cost of contracts in a gain position at December 31, 2000, was not significant. COMMITMENTS FROM SECURITIES LENDING The Company participates in securities lending activities by acting as a customer's agent involving the loan or sale of securities. The Company indemnifies customers for the difference between the market value of the securities lent and the market value of the collateral received. These transactions are collateralized by cash. CREDIT CONCENTRATIONS The Company primarily lends to borrowers in the 16 states where it has banking offices. Approximately 85 percent of the Company's commercial loans were made to borrowers, representing a diverse range of industries, in this operating region. Collateral may include marketable securities, accounts receivable, inventory and equipment. For detail of the Company's commercial portfolio by industry type and geography as of December 31, 2000, and 1999, see Table 8 on page 12. For detail of the Company's real estate portfolio by property type and geography as of December 31, 2000, and 1999, see Table 9 on page 13. This information is incorporated by reference into these Notes to Consolidated Financial Statements. Such loans are collateralized by the related property. Approximately 84 percent of the total consumer portfolio consists of loans to customers in the Company's operating region. Residential mortgages, home equity and auto loans are secured, but other consumer loans are generally not secured. For detail of the Company's consumer loan portfolio referenced here, see Table 7 on page 11 under the category "Consumer" as of December 31, 2000, and 1999, which is incorporated by reference into these Notes to Consolidated Financial Statements. U.S. Bancorp 51 54 NOTE R FAIR VALUES OF FINANCIAL INSTRUMENTS Due to the nature of its business and its customers' needs, the Company offers a large number of financial instruments, most of which are not actively traded. When market quotes are unavailable, valuation techniques including discounted cash flow calculations and pricing models or services are used. The Company also uses various aggregation methods and assumptions, such as the discount rate and cash flow timing and amounts. As a result, the fair value estimates can neither be substantiated by independent market comparisons, nor realized by the immediate sale or settlement of the financial instrument. Also, the estimates reflect a point in time and could change significantly based on changes in economic factors such as interest rates. Furthermore, the disclosure of certain financial and nonfinancial assets and liabilities are not required. Finally, the fair value disclosure is not intended to estimate a market value of the Company as a whole. A summary of the Company's valuation techniques and assumptions follows. CASH AND CASH EQUIVALENTS The carrying value of cash, federal funds sold and securities purchased under resale agreements was assumed to approximate fair value. SECURITIES Generally, trading account securities and available-for-sale securities were valued using available market quotes. In some instances, such as for securities that are not widely traded, market quotes for comparable securities were used. LOANS The loan portfolio consists of both floating and fixed-rate loans, the fair value of which was estimated using discounted cash flow analyses and other valuation techniques. To calculate discounted cash flows, the loans were aggregated into pools of similar types and expected repayment terms. The expected cash flows were reduced for estimated historical prepayment experience. Projected cash flows on nonaccrual loans were further reduced by the amount of the estimated losses on the portfolio and discounted over an assumed average remaining life of less than one year. COMMERCIAL The fixed-rate loans in the commercial portfolio (excluding nonaccrual loans) had a weighted average interest rate of 8.1 percent in 2000 and 7.7 percent in 1999. The duration was 1.8 years in 2000 and 1.9 years in 1999. The floating-rate loans had a weighted average interest rate of 9.2 percent in 2000 and 8.5 percent in 1999. The high-grade corporate bond yield curve was used to arrive at the discount rates applied to these loans. COMMERCIAL REAL ESTATE AND CONSTRUCTION The fixed-rate portion of this portfolio (excluding nonaccrual loans) had a weighted average interest rate of 8.3 percent, with a duration of 3.4 years in 2000; and a weighted average interest rate of 8.2 percent, with a duration of 3.4 years in 1999. The floating-rate loans (excluding nonaccrual loans) had a weighted average interest rate of 9.1 percent in 2000 and 8.6 percent in 1999. The high-grade corporate bond yield curve was used to arrive at the discount rates applied to these loans. LEASE FINANCING The fixed-rate portion of this portfolio (excluding nonaccrual loans) had a weighted average interest rate of 9.1 percent, with a duration of 2.7 years in 2000; and a weighted average interest rate of 7.3 percent, with a duration of 3.1 years in 1999. The high-grade corporate bond yield curve was used to arrive at the discount rates applied to these loans. RESIDENTIAL FIRST MORTGAGES These loans were segregated into pools of similar coupons and maturities. The pools were matched to similar mortgage-backed securities, and market quotes were obtained. The fixed-rate portion of this portfolio had a weighted average interest rate of 7.6 percent in 2000 and 7.4 percent in 1999. The duration was 2.2 years in 2000 and 3.1 years in 1999. The floating rate loans (excluding nonaccrual loans) had a weighted average interest rate of 7.6 percent in 2000 and 7.1 percent in 1999. HOME EQUITY LINES AND LOANS, SECOND MORTGAGES AND CONSUMER LINES The home equity lines had a weighted average interest rate of 10.0 percent in 2000 and 9.3 percent in 1999. Fixed-rate home equity loans and second mortgages had a weighted average interest rate of 9.9 percent in 2000 and 10.0 percent in 1999. The duration was 1.1 years in 2000 and 1.4 years in 1999. Retail credit cards had a weighted average interest rate of 12.6 percent in 2000 and 1999, with a duration of 1.2 years in 2000 and 1.5 years in 1999. Other revolving lines had a weighted average interest rate of 13.7 percent in 2000 and 11.9 percent in 1999. Estimated cash flows net of funding and operational costs were discounted using an estimated cost of capital CONSUMER INSTALLMENT Prepayment assumptions ranging from 15 to 23 percent were applied to scheduled cash flows, based on the Company's experience. On the fixed-rate portion, the weighted average rate was 9.4 percent in 2000 and 1999. The duration was 1.5 years in 2000 and 1.4 years in 1999. The floating-rate portion of the consumer installment portfolio had a weighted average interest rate of 8.8 percent in 2000 and 7.5 percent in 1999. 52 U.S. Bancorp 55 CORE DEPOSIT INTANGIBLE Core deposits provide a stable, low-cost source of funds that can be invested to earn a return that exceeds their cost. The fair value of the Company's core deposit intangible was calculated using a discounted cash flow model that estimates the present value of net cash flows including the difference between the ongoing funding cost of the core deposits and alternative funds at current market rates. DEPOSIT LIABILITIES The fair value of demand deposits, savings accounts and certain money market deposits is equal to the amount payable on demand at year-end. The fair value of fixed-rate certificates of deposit was estimated by discounting the contractual cash flow using the discount rates implied by the high-grade corporate bond yield curve. SHORT-TERM BORROWINGS Federal funds purchased, securities sold under agreements to repurchase and other short-term funds borrowed are at floating rates or have short-term maturities. Their carrying value is assumed to approximate their fair value. LONG-TERM DEBT AND COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY THE JUNIOR SUBORDINATED DEBENTURES OF THE PARENT COMPANY Medium-term notes, Euro medium-term notes, bank notes, Federal Home Loan Bank Advances, capital lease obligations and mortgage note obligations totaled $15,251 million in 2000 and $13,237 million in 1999. Their estimated fair value was determined using a discounted cash flow analysis based on current market rates of similar maturity debt securities. Other long-term debt instruments and company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company were valued using available market quotes. INTEREST RATE SWAPS, BASIS SWAPS AND OPTIONS The interest rate options and swap cash flows were estimated using a third party pricing model and discounted based on appropriate LIBOR, Eurodollar futures, swap and Treasury Note yield curves. LOAN COMMITMENTS, LETTERS OF CREDIT AND GUARANTEES The Company's commitments have floating rates and do not expose the Company to interest rate risk. No premium or discount was ascribed to the loan commitments because virtually all funding would be at current market rates. U.S. Bancorp 53 56 The estimated fair values of the Company's financial instruments are shown in the table below.
2000 1999 ------------------------------------------ Carrying Fair Carrying Fair (Dollars in Millions) Amount Value Amount Value - ---------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS Cash and due from banks.................................. $ 4,142 $ 4,142 $ 4,036 $ 4,036 Federal funds sold and resale agreements................. 457 457 1,037 1,037 Trading account securities............................... 753 753 617 617 Available-for-sale securities............................ 4,282 4,282 4,871 4,871 Loans Commercial Commercial......................................... 29,920 31,072 26,491 27,286 Commercial real estate and construction............ 14,651 15,290 14,106 14,717 Lease financing.................................... 4,096 4,190 2,372 2,300 Consumer Residential mortgage............................... 2,485 2,566 2,661 2,672 Home equity and second mortgage.................... 9,438 9,886 8,681 8,918 Credit card and revolving credit................... 6,367 7,448 6,128 6,865 Other consumer installment......................... 2,134 2,240 2,446 2,484 Allowance for credit losses........................... (1,067) -- (995) -- ------------------------------------------ Net loans.......................................... 68,024 72,692 61,890 65,242 ------------------------------------------ Total financial assets............................. 77,658 82,326 72,451 75,803 NONFINANCIAL ASSETS Core deposit intangible.................................. 172 5,053 176 4,837 ------------------------------------------ Total.............................................. 77,830 $87,379 72,627 $80,640 ------- ------- Other assets............................................. 9,506 8,903 ------ -------- Total assets....................................... $87,336 $81,530 ------ -------- FINANCIAL LIABILITIES Deposits Noninterest-bearing................................... $15,653 $15,653 $16,050 $16,050 Interest-bearing checking and other savings........... 31,176 31,176 29,671 29,671 Time deposits . $100,000.............................. 6,428 6,495 5,809 5,869 ------------------------------------------ Total deposits..................................... 53,257 53,324 51,530 51,590 Federal funds purchased............................... 978 978 297 297 Securities sold under agreements to repurchase........ 965 965 1,235 1,235 Other short-term funds borrowed....................... 866 866 724 724 Long-term debt........................................ 18,566 18,658 16,563 16,602 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company............................................... 950 905 950 844 ------------------------------------------ Total financial liabilities........................ 75,582 $75,696 71,299 $71,292 ------- ------- NONFINANCIAL LIABILITIES.................................... 3,114 2,593 SHAREHOLDERS' EQUITY........................................ 8,640 7,638 ------ -------- Total liabilities and shareholders' equity......... $87,336 $81,530 ------ -------- Off-balance sheet financial instruments Unrecognized gain on interest rate swaps, basis swaps and options........................................... N/A $ 79 N/A $ 6 Unrecognized loss on interest rate swaps, basis swaps and options........................................... N/A 56 N/A 240 Loan commitments...................................... N/A -- N/A -- Letters of credit..................................... N/A -- N/A -- - ----------------------------------------------------------------------------------------------------------
54 U.S. Bancorp 57 NOTE S COMMITMENTS AND CONTINGENT LIABILITIES Rental expense for operating leases amounted to $130.4 million in 2000, $111.2 million in 1999, and $121.0 million in 1998. Future minimum payments, net of sublease rentals, under capitalized leases and noncancelable operating leases with initial or remaining terms of one year or more, consisted of the following at December 31, 2000:
Capitalized Operating (Dollars in Millions) Leases Leases - ---------------------------------------------------------------------------------------- 2001........................................................ $ 11.4 $ 149.5 2002........................................................ 10.3 137.1 2003........................................................ 8.7 117.3 2004........................................................ 7.9 90.9 2005........................................................ 6.6 77.5 Thereafter.................................................. 56.5 470.6 ------------------------ Total minimum lease payments................................ $101.4 $1,042.9 -------- Less amount representing interest........................... 42.3 ------ Present value of net minimum lease payments................. $ 59.1 - ----------------------------------------------------------------------------------------
Various legal proceedings are currently pending against the Company. Due to their complex nature, it may be years before some matters are resolved. In the opinion of management, the aggregate liability, if any, will not have a material adverse effect on the Company's financial position, liquidity or results of operations. NOTE T SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CASH FLOWS Listed below are supplemental disclosures to the Consolidated Statement of Cash Flows.
Year Ended December 31 (Dollars in Millions) 2000 1999 1998 - ------------------------------------------------------------------------------------------------- Income taxes paid........................................... $ 746.9 $ 701.7 $ 552.8 Interest paid............................................... 3,018.4 2,342.9 2,324.1 Net noncash transfers to foreclosed property................ 42.5 31.6 25.0 Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $47.2 in 2000, $82.0 in 1999 and $7.6 in 1998........................................... 76.8 (133.6) 12.5 --------------------------------- Cash acquisitions of businesses: Fair value of noncash assets acquired.................... $ 945.1 $ 250.3 $ 2,249.7 Liabilities assumed...................................... (649.1) (29.8) (1,469.5) --------------------------------- Net................................................... $ 296.0 $ 220.5 $ 780.2 --------------------------------- Stock acquisitions of businesses: Fair value of noncash assets acquired.................... $1,561.2 $3,521.2 $ -- Net cash acquired........................................ 63.5 462.4 -- Liabilities assumed...................................... (1,327.1) (2,708.1) -- --------------------------------- Net value of common stock issued...................... $ 297.6 $1,275.5 $ -- - -------------------------------------------------------------------------------------------------
REGULATORY CAPITAL The measures used to assess capital include the capital ratios established by bank regulatory agencies, including the specific ratios for the "well capitalized" designation. For a description of the regulatory capital requirements and the actual ratios as of December 31, 2000, for the Company and its significant bank subsidiaries, see Tables 19 and 20 from which such information is incorporated by reference into these Notes to Consolidated Financial Statements. U.S. Bancorp 55 58 NOTE U U.S. BANCORP (PARENT COMPANY) CONDENSED BALANCE SHEET
December 31 (Dollars in Millions) 2000 1999 - ------------------------------------------------------------------------------------- ASSETS Deposits with subsidiary banks, principally interest-bearing........................................... $ 1,408 $ 469 Available-for-sale securities............................... 288 309 Investments in: Bank affiliates.......................................... 9,120 8,128 Nonbank affiliates....................................... 880 669 Advances to: Bank affiliates.......................................... 1,071 1,016 Nonbank affiliates....................................... 1,361 1,357 Other assets................................................ 1,368 1,236 --------------------- Total assets.......................................... $15,496 $13,184 --------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Short-term funds borrowed................................... $ -- $ 31 Advances from subsidiaries.................................. 97 111 Long-term debt.............................................. 5,128 3,805 Junior subordinated debentures issued to subsidiary trusts..................................................... 979 979 Other liabilities........................................... 652 620 Shareholders' equity........................................ 8,640 7,638 --------------------- Total liabilities and shareholders' equity............ $15,496 $13,184 - -------------------------------------------------------------------------------------
CONDENSED STATEMENT OF INCOME
Year Ended December 31 (Dollars in Millions) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------ INCOME Dividends from subsidiaries (including $915.0, $995.0 and $1,290.0 from bank subsidiaries)......................... $ 923.5 $1,026.3 $1,387.1 Interest from subsidiaries.................................. 234.8 177.2 159.3 Service and management fees from subsidiaries............... 213.8 191.5 240.4 Other income................................................ 152.1 110.8 119.7 -------------------------------------- Total income.......................................... 1,524.2 1,505.8 1,906.5 EXPENSES Interest on short-term funds borrowed....................... 5.0 15.5 16.9 Interest on long-term debt.................................. 341.0 217.9 187.2 Interest on junior subordinated debentures issued to subsidiary trusts.......................................... 76.6 76.6 70.1 Operating expenses paid to subsidiaries..................... 15.5 9.6 78.9 Merger-related charges...................................... 20.8 13.9 25.6 Other expenses.............................................. 153.8 166.5 197.9 -------------------------------------- Total expenses........................................ 612.7 500.0 576.6 -------------------------------------- Income before income taxes and equity in undistributed income of subsidiaries................................... 911.5 1,005.8 1,329.9 Income tax credit........................................... (8.3) (17.1) (71.0) -------------------------------------- Income of parent company.................................... 919.8 1,022.9 1,400.9 Equity (deficiency) in undistributed income of subsidiaries: Bank affiliates.......................................... 640.1 438.1 (101.6) Nonbank affiliates....................................... 32.1 45.5 28.1 -------------------------------------- 672.2 483.6 (73.5) -------------------------------------- Net income............................................ $1,592.0 $1,506.5 $1,327.4 - ------------------------------------------------------------------------------------------------------
56 U.S. Bancorp 59 CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31 (Dollars in Millions) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income.................................................. $1,592.0 $1,506.5 $1,327.4 Adjustments to reconcile net income to net cash provided by operating activities: (Equity) deficiency in undistributed income of subsidiaries............................................ (672.2) (483.6) 73.5 Losses (gains) on available-for-sale securities.......... 4.1 (8.6) (12.5) Depreciation and amortization of premises and equipment............................................... 11.2 12.5 12.9 Provision for deferred income taxes...................... 36.3 17.0 4.4 Amortization of goodwill and other intangible assets..... 11.7 11.5 11.0 Decrease (increase) in accrued receivables............... 19.9 (19.4) (3.9) Increase (decrease) in accrued liabilities............... 41.7 86.7 (124.0) Other -- net............................................. (204.7) (30.8) (67.0) -------------------------------------- Net cash provided by operating activities............. 840.0 1,091.8 1,221.8 INVESTING ACTIVITIES Available-for-sale securities Sales and maturities..................................... 88.6 127.5 83.0 Purchases................................................ (49.4) (323.5) (59.9) Investments in subsidiaries................................. (4.6) (26.0) (1,114.6) Equity distributions from subsidiaries...................... -- 145.0 325.0 Net decrease (increase) in short-term advances to affiliates................................................. 97.2 (79.4) (496.5) Long-term advances made to affiliates....................... (200.0) (595.0) (330.0) Principal collected on long-term advances made to affiliates................................................. 40.0 285.0 295.0 Other -- net................................................ (127.0) (157.0) (6.8) -------------------------------------- Net cash used by investing activities................. (155.2) (623.4) (1,304.8) FINANCING ACTIVITIES Net (decrease) increase in short-term advances from subsidiaries............................................... (15.6) 62.6 21.4 Net (decrease) increase in short-term funds borrowed........ (31.0) (16.8) 47.7 Proceeds from long-term debt................................ 1,792.5 1,068.5 1,218.3 Principal payments on long-term debt........................ (526.9) (737.7) (190.5) Issuance of junior subordinated debentures to subsidiary trusts..................................................... -- -- 360.8 Proceeds from dividend reinvestment, stock option and stock purchase plans............................................. 112.7 153.2 220.4 Repurchase of common stock.................................. (432.2) (560.8) (964.0) Cash dividends.............................................. (644.7) (573.1) (516.4) -------------------------------------- Net cash provided (used) by financing activities...... 254.8 (604.1) 197.7 -------------------------------------- Change in cash and cash equivalents................... 939.6 (135.7) 114.7 Cash and cash equivalents at beginning of year.............. 468.5 604.2 489.5 -------------------------------------- Cash and cash equivalents at end of year.............. $1,408.1 $ 468.5 $ 604.2 - ------------------------------------------------------------------------------------------------------
Transfer of funds (dividends, loans or advances) from bank subsidiaries to the Company is restricted. Federal law prohibits loans unless they are secured and generally limits any loan to the Company or individual affiliate to 10 percent of the bank's equity. In aggregate, loans to the Company and all affiliates cannot exceed 20 percent of the bank's equity. Dividend payments to the Company by its subsidiary banks are subject to regulatory review and statutory limitations and, in some instances, regulatory approval. The approval of the Comptroller of the Currency is required if total dividends by a national bank in any calendar year exceed the bank's net income for that year combined with its retained net income for the preceding two calendar years or if the bank's retained earnings are less than zero. Furthermore, dividends are restricted by the Comptroller of the Currency's minimum capital constraints for all national banks. Within these guidelines, all bank subsidiaries have the ability to pay dividends without prior regulatory approval. U.S. Bancorp 57 60 REPORT OF MANAGEMENT The financial statements of U.S. Bancorp were prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with accounting principles generally accepted in the United States appropriate in the circumstances and include amounts that are based on management's best estimates and judgment. All financial information throughout the Annual Report on Form 10-K is consistent with that in the financial statements. The Company maintains accounting and internal control systems that are believed to provide reasonable assurance that assets are safeguarded and transactions are properly authorized and recorded. To test compliance, the Company carries out an extensive audit program. This program includes a review for compliance with written policies and procedures and a comprehensive review of the adequacy and effectiveness of internal control systems. However, there are limits inherent in all systems of internal accounting control and management recognizes that errors or irregularities may occur. Based on the recognition that the costs of such systems should not exceed the benefits to be derived, management believes the Company's system provides an appropriate cost/benefit balance. The Company's independent auditors, Ernst & Young LLP, have been engaged to render an opinion on the financial statements and to assist in carrying out the audit program described above. Their opinion on the financial statements is based on procedures performed in accordance with auditing standards generally accepted in the United States, including tests of the accounting records to the extent necessary to allow them to report on the fairness of the financial statements. Ernst & Young LLP has full access to the Audit Committee and the Board of Directors. The management of the Company is committed to and has always maintained and enforced a philosophy of high ethical standards in the conduct of its business. Written policies covering conflicts of interest and other subjects are formulated in a Code of Ethics which is uniformly applicable to all officers and employees of the Company. /s/ John F. Grundhofer /s/ Jerry A. Grundhofer JOHN F. GRUNDHOFER JERRY A. GRUNDHOFER Chairman President and Chief Executive Officer /s/ David M. Moffett /s/ Terrance R. Dolan DAVID M. MOFFETT TERRANCE R. DOLAN Vice Chairman and Senior Vice President and Chief Financial Officer Controller
REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders U.S. Bancorp We have audited the accompanying consolidated balance sheets of U.S. Bancorp and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of U.S. Bancorp and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG, LLP Minneapolis, Minnesota January 18, 2001, except for Note C, as to which the date is February 27, 2001 58 U.S. Bancorp 61 CONSOLIDATED BALANCE SHEET -- FIVE-YEAR SUMMARY
% Change December 31 (Dollars in Millions) 2000 1999 1998 1997 1996 1999-2000 - --------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks................................... $ 4,142 $ 4,036 $ 4,772 $ 4,739 $ 4,813 2.6% Federal funds sold and resale agreements.................. 457 1,037 544 692 898 (55.9) Trading account securities................................ 753 617 537 195 231 22.0 Held-to-maturity securities............................... -- -- -- -- 797 -- Available-for-sale securities U.S. Treasury.......................................... 361 381 500 628 1,028 (5.2) Mortgage-backed........................................ 2,493 2,906 3,438 4,366 4,104 (14.2) State and political.................................... 1,039 1,135 1,255 1,331 573 (8.5) U.S. agencies and other................................ 389 449 384 560 768 (13.4) --------------------------------------------------- Total available-for-sale securities................. 4,282 4,871 5,577 6,885 6,473 (12.1) Loans..................................................... 69,091 62,885 59,122 54,708 52,355 9.9 Less allowance for credit losses....................... 1,067 995 1,001 1,009 993 7.2 --------------------------------------------------- Net loans........................................... 68,024 61,890 58,121 53,699 51,362 9.9 Other assets.............................................. 9,678 9,079 6,887 5,085 5,175 6.6 --------------------------------------------------- Total assets........................................ $87,336 $81,530 $76,438 $71,295 $69,749 7.1% --------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing.................................... $15,653 $16,050 $16,377 $14,544 $14,344 (2.5)% Interest-bearing....................................... 37,604 35,480 33,657 34,483 35,012 6.0 --------------------------------------------------- Total deposits...................................... 53,257 51,530 50,034 49,027 49,356 3.4 Short-term borrowings..................................... 2,809 2,256 3,365 3,292 6,592 24.5 Long-term debt............................................ 18,566 16,563 13,781 10,247 5,369 12.1 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company... 950 950 950 600 600 -- Other liabilities......................................... 3,114 2,593 2,338 2,239 2,069 20.1 --------------------------------------------------- Total liabilities................................... 78,696 73,892 70,468 65,405 63,986 6.5 Shareholders' equity...................................... 8,640 7,638 5,970 5,890 5,763 13.1 --------------------------------------------------- Total liabilities and shareholders' equity.......... $87,336 $81,530 $76,438 $71,295 $69,749 7.1% - ---------------------------------------------------------------------------------------------------------------------------------
U.S. Bancorp 59 62 CONSOLIDATED STATEMENT OF INCOME -- FIVE-YEAR SUMMARY
% Change Year Ended December 31 (Dollars in Millions) 2000 1999 1998 1997 1996 1999-2000 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans................................................ $6,162.0 $5,208.6 $4,921.8 $4,784.5 $4,537.7 18.3% Securities Taxable........................................... 230.3 250.6 303.6 371.5 420.5 (8.1) Exempt from federal income taxes.................. 54.4 57.3 62.8 68.1 71.0 (5.1) Other interest income................................ 260.4 160.2 119.2 69.5 85.2 62.5 -------------------------------------------------------- Total interest income.......................... 6,707.1 5,676.7 5,407.4 5,293.6 5,114.4 18.2 INTEREST EXPENSE Deposits............................................. 1,667.9 1,291.2 1,391.0 1,436.8 1,441.3 29.2 Federal funds purchased and repurchase agreements.... 177.4 164.2 153.6 183.0 197.9 8.0 Other short-term funds borrowed...................... 56.2 49.9 59.1 117.6 198.0 12.6 Long-term debt....................................... 1,257.0 833.4 672.7 459.0 303.8 50.8 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company........................................... 77.3 77.3 70.4 49.1 2.8 -- -------------------------------------------------------- Total interest expense......................... 3,235.8 2,416.0 2,346.8 2,245.5 2,143.8 33.9 -------------------------------------------------------- Net interest income.................................. 3,471.3 3,260.7 3,060.6 3,048.1 2,970.6 6.5 Provision for credit losses.......................... 670.0 531.0 379.0 460.3 271.2 26.2 -------------------------------------------------------- Net interest income after provision for credit losses............................................ 2,801.3 2,729.7 2,681.6 2,587.8 2,699.4 2.6 NONINTEREST INCOME Credit card fee revenue.............................. 723.2 603.1 574.8 418.8 351.5 19.9 Trust and investment management fees................. 473.9 459.7 413.0 348.0 302.3 3.1 Service charges on deposit accounts.................. 469.3 434.6 406.0 396.2 377.2 8.0 Investment products fees and commissions............. 359.1 347.7 229.7 65.7 59.7 3.3 Investment banking revenue........................... 356.3 245.4 100.4 -- -- 45.2 Trading account profits and commissions.............. 252.5 215.9 118.1 30.9 29.0 17.0 Available-for-sale securities gains (losses)......... 7.0 (1.3) 12.6 3.6 20.8 * Gain on sale of mortgage banking operations.......... -- -- -- -- 45.8 -- Termination fee...................................... -- -- -- -- 190.0 -- Other................................................ 617.1 453.6 402.0 352.0 406.8 36.0 -------------------------------------------------------- Total noninterest income....................... 3,258.4 2,758.7 2,256.6 1,615.2 1,783.1 18.1 NONINTEREST EXPENSE Salaries............................................. 1,677.0 1,460.9 1,210.9 969.3 964.5 14.8 Employee benefits.................................... 279.0 248.4 222.3 217.4 220.3 12.3 Net occupancy........................................ 236.9 204.6 187.4 182.0 179.4 15.8 Furniture and equipment.............................. 167.4 160.1 153.4 165.4 175.2 4.6 Goodwill and other intangible assets................. 235.5 165.6 143.7 113.3 130.1 42.2 Merger-related charges............................... 61.3 62.4 216.5 511.6 88.1 (1.8) Other................................................ 941.3 824.9 710.1 653.3 780.5 14.1 -------------------------------------------------------- Total noninterest expense...................... 3,598.4 3,126.9 2,844.3 2,812.3 2,538.1 15.1 -------------------------------------------------------- Income before income taxes........................... 2,461.3 2,361.5 2,093.9 1,390.7 1,944.4 4.2 Applicable income taxes.............................. 869.3 855.0 766.5 552.2 725.7 1.7 -------------------------------------------------------- Net income........................................... $1,592.0 $1,506.5 $1,327.4 $ 838.5 $1,218.7 5.7 -------------------------------------------------------- Net income applicable to common equity............... $1,592.0 $1,506.5 $1,327.4 $ 827.9 $1,200.3 5.7% - ---------------------------------------------------------------------------------------------------------------------------------
* Not meaningful 60 U.S. Bancorp 63 QUARTERLY CONSOLIDATED FINANCIAL DATA
2000 1999 ---------------------------------------------------------------------------------------------- (Dollars in Millions, Except Fourth Third Second First Fourth Third Second First Per Share Data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans.......................... $1,634.7 $1,582.9 $1,517.5 $1,426.9 $1,364.6 $1,333.3 $1,272.2 $1,238.5 Securities Taxable..................... 54.8 56.7 58.5 60.3 62.0 64.2 59.8 64.6 Exempt from federal income taxes...................... 13.1 13.5 13.8 14.0 14.1 14.2 14.3 14.7 Other interest income.......... 65.9 67.2 64.9 62.4 47.3 40.1 38.6 34.2 ---------------------------------------------------------------------------------------------- Total interest income.... 1,768.5 1,720.3 1,654.7 1,563.6 1,488.0 1,451.8 1,384.9 1,352.0 INTEREST EXPENSE Deposits....................... 450.8 442.0 402.2 372.9 352.1 318.7 308.8 311.6 Federal funds purchased and repurchase agreements....... 50.9 37.0 45.7 43.8 32.8 48.4 43.6 39.4 Other short-term funds borrowed...................... 14.7 12.9 15.0 13.6 12.0 12.9 12.1 12.9 Long-term debt................. 334.7 343.5 310.2 268.6 241.1 217.8 188.4 186.1 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company..................... 19.3 19.4 19.3 19.3 19.3 19.3 19.4 19.3 ---------------------------------------------------------------------------------------------- Total interest expense... 870.4 854.8 792.4 718.2 657.3 617.1 572.3 569.3 ---------------------------------------------------------------------------------------------- Net interest income............ 898.1 865.5 862.3 845.4 830.7 834.7 812.6 782.7 Provision for credit losses.... 180.0 173.0 163.0 154.0 146.0 142.0 126.0 117.0 ---------------------------------------------------------------------------------------------- Net interest income after provision for credit losses... 718.1 692.5 699.3 691.4 684.7 692.7 686.6 665.7 NONINTEREST INCOME Credit card fee revenue........ 193.8 192.8 177.1 159.5 166.3 161.3 148.7 126.8 Trust and investment management fees.......................... 119.9 119.9 117.0 117.1 116.5 113.8 112.2 117.2 Service charges on deposit accounts...................... 122.0 120.8 117.5 109.0 111.5 112.2 107.5 103.4 Investment products fees and commissions................... 79.8 81.3 81.8 116.2 88.0 79.5 91.6 88.6 Investment banking revenue..... 92.2 97.3 72.8 94.0 88.8 60.1 60.3 36.2 Trading account profits and commissions................... 60.7 50.0 58.2 83.6 65.5 48.4 50.5 51.5 Available-for-sale securities gains (losses)................ 6.0 1.0 .3 (.3) 2.1 (3.4) -- -- Other.......................... 159.9 163.9 177.0 116.3 125.2 140.7 85.1 102.6 ---------------------------------------------------------------------------------------------- Total noninterest income.................. 834.3 827.0 801.7 795.4 763.9 712.6 655.9 626.3 NONINTEREST EXPENSE Salaries....................... 413.3 417.5 414.1 432.1 397.7 352.4 356.7 354.1 Employee benefits.............. 70.6 63.0 69.3 76.1 65.0 59.8 53.6 70.0 Net occupancy.................. 65.1 59.5 55.2 57.1 52.8 51.9 49.9 50.0 Furniture and equipment........ 42.1 43.7 40.5 41.1 42.1 40.9 39.0 38.1 Goodwill and other intangible assets........................ 61.6 58.9 58.4 56.6 49.6 41.6 36.6 37.8 Merger-related charges......... 17.5 15.7 15.0 13.1 27.7 16.8 15.0 2.9 Other.......................... 235.5 241.8 239.1 224.9 236.2 220.8 202.0 165.9 ---------------------------------------------------------------------------------------------- Total noninterest expense................. 905.7 900.1 891.6 901.0 871.1 784.2 752.8 718.8 ---------------------------------------------------------------------------------------------- Income before income taxes..... 646.7 619.4 609.4 585.8 577.5 621.1 589.7 573.2 Applicable income taxes........ 228.1 218.1 216.3 206.8 208.5 224.7 215.4 206.4 ---------------------------------------------------------------------------------------------- Net income..................... $ 418.6 $ 401.3 $ 393.1 $ 379.0 $ 369.0 $ 396.4 $ 374.3 $ 366.8 ---------------------------------------------------------------------------------------------- Earnings per share............. $ .56 $ .54 $ .53 $ .51 $ .50 $ .55 $ .52 $ .51 Diluted earnings per share..... $ .56 $ .54 $ .52 $ .51 $ .50 $ .54 $ .51 $ .50 SELECTED AVERAGE BALANCES Loans.......................... $ 68,782 $ 67,233 $ 65,998 $ 63,709 $ 61,523 $ 61,349 $ 60,321 $ 59,081 Earning assets................. 77,015 75,713 74,545 72,144 69,540 69,271 67,979 66,738 Total assets................... 86,755 85,108 84,085 81,771 78,859 77,700 76,072 75,107 Deposits....................... 51,696 50,912 50,399 49,703 49,071 47,716 47,979 47,620 Long-term debt................. 18,967 19,592 18,627 17,082 16,161 15,733 14,416 13,967 Common equity.................. 8,417 8,032 7,884 7,697 7,159 6,588 6,312 6,088 - ---------------------------------------------------------------------------------------------------------------------------------
U.S. Bancorp 61 64 CONSOLIDATED DAILY AVERAGE BALANCE Year Ended December 31 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Yields Yields (Dollars in Millions) Balance Interest and Rates Balance Interest and Rates - ------------------------------------------------------------------------------------------------------------------- ASSETS Available-for-sale securities U.S. Treasury................. $ 378 $ 21.4 5.66% $ 425 $ 24.1 5.67% Mortgage-backed............... 2,755 186.8 6.78 3,138 206.9 6.59 State and political........... 1,088 81.4 7.48 1,140 86.2 7.56 U.S. agencies and other....... 445 21.1 4.74 450 18.5 4.11 ----------------- ------------------- Total available-for-sale securities.............. 4,666 310.7 6.66 5,153 335.7 6.51 Unrealized (loss) gain on available-for-sale securities.............. (99) 18 ------ ------- Net available-for-sale securities.............. 4,567 5,171 Held-to-maturity securities...... -- -- -- -- -- -- Trading account securities....... 779 57.6 7.39 630 41.3 6.56 Federal funds sold and resale agreements.................... 604 32.1 5.31 535 23.0 4.30 Loans Commercial Commercial................. 29,074 2,518.1 8.66 25,030 1,920.1 7.67 Real estate Commercial mortgage..... 10,123 894.9 8.84 8,645 730.9 8.45 Construction............ 4,440 427.1 9.62 3,661 324.9 8.87 Lease financing............ 2,890 227.8 7.88 2,251 160.8 7.14 ----------------- ------------------- Total commercial........ 46,527 4,067.9 8.74 39,587 3,136.7 7.92 Consumer Home equity and second mortgage................ 9,051 876.1 9.68 8,039 758.4 9.43 Credit card................ 4,173 580.0 13.90 4,029 528.7 13.12 Other...................... 4,114 446.9 10.86 6,134 581.4 9.48 ----------------- ------------------- Subtotal................ 17,338 1,903.0 10.98 18,202 1,868.5 10.27 Residential mortgage....... 2,574 201.5 7.83 2,789 214.8 7.70 ----------------- ------------------- Total consumer.......... 19,912 2,104.5 10.57 20,991 2,083.3 9.92 ----------------- ------------------- Total loans............. 66,439 6,172.4 9.29 60,578 5,220.0 8.62 Allowance for credit losses... 1,062 998 ------ ------- Net loans............... 65,377 59,580 Other earning assets............. 2,375 203.8 8.58 1,496 98.7 6.60 ----------------- ------------------- Total earning assets*... 74,863 6,776.6 9.05 68,392 5,718.7 8.36 Other assets..................... 10,736 9,535 ------ ------- Total assets............ $84,438 $76,947 ------ ------- LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits..... $14,196 $13,760 Interest-bearing deposits Interest checking............. 6,427 150.0 2.33 6,044 110.3 1.82 Money market accounts......... 12,679 547.6 4.32 12,141 428.5 3.53 Other savings accounts........ 1,941 33.5 1.73 2,223 40.1 1.80 Savings certificates.......... 9,378 552.0 5.89 9,575 479.0 5.00 Certificates over $100,000.... 6,060 384.8 6.35 4,356 233.3 5.36 ----------------- ------------------- Total interest-bearing deposits............... 36,485 1,667.9 4.57 34,339 1,291.2 3.76 Short-term borrowings............ 3,321 233.6 7.03 3,887 214.1 5.51 Long-term debt................... 18,571 1,257.0 6.77 15,077 833.4 5.53 Company-obligated mandatorily redeemable preferred securities.................... 950 77.3 8.14 950 77.3 8.14 ----------------- ------------------- Total interest-bearing liabilities............ 59,327 3,235.8 5.45 54,253 2,416.0 4.45 Other liabilities................ 2,906 2,394 Preferred equity................. -- -- Common equity.................... 8,067 6,528 Accumulated other comprehensive income........................ (58) 12 ------ ------- Total liabilities and shareholders' equity... $84,438 $76,947 ------ ------- Net interest income.............. $3,540.8 $3,302.7 ------- ------- Gross interest margin............ 3.60% 3.91% -------- -------- Gross interest margin without taxable-equivalent increments.................... 3.51% 3.85% -------- -------- PERCENT OF EARNING ASSETS Interest income.................. 9.05% 8.36% Interest expense................. 4.32 3.53 -------- -------- Net interest margin.............. 4.73 4.83 -------- -------- Net interest margin without taxable-equivalent increments.................... 4.64% 4.77% - -------------------------------------------------------------------------------------------------------------------
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. 62 U.S. Bancorp 65 SHEET AND RELATED YIELDS AND RATES 1998 1997 1996 1999-2000 - ------------------------------------------------------------------------------------------------------------------------ % Change Yields Yields Yields Average Balance Interest and Rates Balance Interest and Rates Balance Interest and Rates Balance - ------------------------------------------------------------------------------------------------------------------------ $ 565 $ 32.8 5.81% $ 734 $ 42.7 5.82% $ 1,255 $ 74.3 5.92% (11.1)% 3,667 247.1 6.74 4,239 290.5 6.85 4,158 279.7 6.73 (12.2) 1,260 98.2 7.79 889 69.8 7.85 555 47.0 8.47 (4.6) 403 21.9 5.43 595 36.1 6.07 978 65.7 6.72 (1.1) - -------------------- ------------------ ------------------ 5,895 400.0 6.79 6,457 439.1 6.80 6,946 466.7 6.72 (9.5) 97 3 (21) ** - --------- ------- ------- 5,992 6,460 6,925 (11.7) -- -- -- 449 35.5 7.91 834 64.0 7.67 -- 290 18.7 6.45 168 9.7 5.77 233 13.2 5.67 23.7 667 35.0 5.25 577 31.6 5.48 872 46.5 5.33 12.9 22,608 1,794.6 7.94 20,578 1,690.0 8.21 19,211 1,583.0 8.24 16.2 8,129 712.8 8.77 8,037 728.5 9.06 7,630 687.5 9.01 17.1 2,652 240.1 9.05 2,255 216.9 9.62 1,707 165.4 9.69 21.3 2,000 151.1 7.56 1,888 139.8 7.40 1,699 125.0 7.36 28.4 - -------------------- ------------------ ------------------ 35,389 2,898.6 8.19 32,758 2,775.2 8.47 30,247 2,560.9 8.47 17.5 6,130 585.0 9.54 5,555 532.6 9.59 4,708 441.4 9.38 12.6 4,021 508.3 12.64 3,702 462.9 12.50 3,452 444.0 12.86 3.6 6,803 656.0 9.64 6,894 673.2 9.77 7,037 680.6 9.67 (32.9) - -------------------- ------------------ ------------------ 16,954 1,749.3 10.32 16,151 1,668.7 10.33 15,197 1,566.0 10.30 (4.7) 3,636 289.6 7.96 4,604 363.3 7.89 5,411 435.7 8.05 (7.7) - -------------------- ------------------ ------------------ 20,590 2,038.9 9.90 20,755 2,032.0 9.79 20,608 2,001.7 9.71 (5.1) - -------------------- ------------------ ------------------ 55,979 4,937.5 8.82 53,513 4,807.2 8.98 50,855 4,562.6 8.97 9.7 997 998 973 6.4 - --------- ------------------ ------- 54,982 52,515 49,882 9.7 1,037 67.5 6.51 511 28.4 5.56 461 25.5 5.53 58.8 - -------------------- ------------------ ------------------ 63,868 5,458.7 8.55 61,675 5,351.5 8.68 60,201 5,178.5 8.60 9.5 8,823 8,091 8,195 12.6 - --------- ------- ------- $71,791 $68,771 $67,402 9.7% - --------- ------- ------- $13,497 $12,680 $11,970 3.2% 5,754 104.2 1.81 5,561 92.2 1.66 5,678 90.1 1.59 6.3 11,201 437.9 3.91 10,440 401.9 3.85 10,068 379.4 3.77 4.4 2,465 51.2 2.08 2,799 61.2 2.19 3,157 70.7 2.24 (12.7) 11,309 616.8 5.45 12,278 668.9 5.45 12,985 703.2 5.42 (2.1) 3,101 180.9 5.83 3,578 212.6 5.94 3,394 197.9 5.83 39.1 - -------------------- ------------------ ------------------ 33,830 1,391.0 4.11 34,656 1,436.8 4.15 35,282 1,441.3 4.09 6.2 3,733 212.7 5.70 5,314 300.6 5.66 7,187 395.9 5.51 (14.6) 11,481 672.7 5.86 7,527 459.0 6.10 4,908 303.8 6.19 23.2 864 70.4 8.15 600 49.1 8.18 36 2.8 8.18 -- - -------------------- ------------------ ------------------ 49,908 2,346.8 4.70 48,097 2,245.5 4.67 47,413 2,143.8 4.52 9.4 2,337 2,196 2,100 21.4 -- 131 240 -- 5,989 5,665 5,693 23.6 60 2 (14) ** - --------- ------- ------- $71,791 $68,771 $67,402 9.7% - --------- ------- ------- ----- $3,111.9 $3,106.0 $3,034.7 -------- -------- -------- 3.85% 4.01% 4.08% -------- -------- -------- 3.77% 3.91% 3.98% -------- -------- -------- 8.55% 8.68% 8.60% 3.68 3.64 3.56 -------- -------- -------- 4.87 5.04 5.04 -------- -------- -------- 4.79% 4.94% 4.93% - ----------------------------------------------------------------------------------------------------------
U.S. Bancorp 63 66 SUPPLEMENTAL FINANCIAL DATA
EARNINGS PER SHARE SUMMARY 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- Earnings per share.................................... $2.14 $2.07 $1.81 $1.13 $1.60 Diluted earnings per share............................ 2.13 2.06 1.78 1.11 1.57 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS - --------------------------------------------------------------------------------------------------------------------------------- Return on average assets.............................. 1.89% 1.96% 1.85% 1.22% 1.81% Return on average common equity....................... 19.9 23.0 21.9 14.6 21.1 Average total equity to average assets................ 9.5 8.5 8.4 8.4 8.8 Dividends per share to net income per share........... 40.2 37.7 38.7 54.9 34.4 - --------------------------------------------------------------------------------------------------------------------------------- OTHER STATISTICS - --------------------------------------------------------------------------------------------------------------------------------- Common shares outstanding -- year-end *............... 752,059,861 753,330,212 725,761,718 739,933,014 738,017,970 Average common shares outstanding and common stock equivalents Earnings per share.............................. 745,093,996 727,530,843 733,897,845 733,550,892 749,178,474 Diluted earnings per share...................... 747,855,624 732,990,811 744,178,143 742,913,736 766,172,004 Number of shareholders -- year-end**.................. 47,094 38,104 38,069 41,657 43,353 Average number of employees (full-time equivalents)... 28,949 26,891 26,526 25,858 27,157 Common dividends paid (millions)...................... $644.7 $573.1 $516.4 $445.7 $406.9 - ---------------------------------------------------------------------------------------------------------------------------------
*Defined as total common shares less common stock held in treasury. **Based on number of common stock shareholders of record. STOCK PRICE RANGE AND DIVIDENDS
2000 1999 ------------------------------------------------------------------------------------------- Sales Price Sales Price -------------------------- Dividends -------------------------- Dividends High Low Paid High Low Paid - --------------------------------------------------------------------------------------------------------------------------------- First quarter..................... $24.00 $16.88 $ .215 $37.94 $30.13 $ .195 Second quarter.................... 27.38 19.13 .215 37.81 30.50 .195 Third quarter..................... 23.25 18.00 .215 34.81 28.06 .195 Fourth quarter.................... 30.44 19.38 .215 38.06 21.88 .195 Closing price -- December 31...... 29.19 23.81 - ---------------------------------------------------------------------------------------------------------------------------------
The common stock of U.S. Bancorp is traded on the New York Stock Exchange, under the ticker symbol "USB." 64 U.S. Bancorp 67 COMMERCIAL LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
December 31, 2000 --------------------------------------------- In 1 Year After 1 Year (Dollars in Millions) or Less Through 5 Years After 5 Years - ------------------------------------------------------------------------------------------------------------- Commercial.................................................. $26,200 $ 3,387 $ 333 Real estate Commercial mortgage...................................... 4,788 3,818 1,602 Construction............................................. 4,114 245 84 Lease financing............................................. 956 2,403 737 --------------------------------------------- Total................................................. $36,058 $ 9,853 $ 2,756 - ------------------------------------------------------------------------------------------------------------- Due in Due After One Year One Year Total - ------------------------------------------------------------------------------------------------------------- Loans at fixed interest rates............................... $ 4,384 $ 9,453 $13,837 Loans at variable interest rates............................ 31,674 3,156 34,830 --------------------------------------------- Total................................................. $36,058 $12,609 $48,667 - -------------------------------------------------------------------------------------------------------------
TIME CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS IN DENOMINATIONS OF $100,000 OR MORE AT DECEMBER 31
Maturing ------------------------------------------------------------------ Under Three Six to Over Three to Six Twelve Twelve (Dollars in Millions) Months Months Months Months Total - --------------------------------------------------------------------------------------------------------------------------------- 2000.................................................... $3,615 $ 929 $1,038 $846 $6,428 1999.................................................... 3,474 1,193 566 576 5,809 1998.................................................... 1,541 365 439 478 2,823 - ---------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM FUNDS BORROWED
Average Maximum Average Weighted Daily Outstanding Interest Rate Average Outstanding Amount Month End Paid During Interest Rate (Dollars in Millions) at Year End Outstanding Balance the Year at Year End - --------------------------------------------------------------------------------------------------------------------------------- 2000 Federal funds purchased and securities sold under agreements to repurchase................... $ 1,943 $ 2,386 $ 3,748 7.44% 5.93% Other.............................. 866 935 1,109 6.01 5.63 -------------------------- Total..................... $ 2,809 $ 3,321 4,857 7.03 5.83 -------------------------- 1999 Federal funds purchased and securities sold under agreements to repurchase................... $ 1,532 $ 2,877 $ 3,701 5.71% 4.74% Other.............................. 724 1,010 1,254 4.94 4.95 -------------------------- Total..................... $ 2,256 $ 3,887 4,752 5.51 4.80 -------------------------- 1998 Federal funds purchased and securities sold under agreements to repurchase................... $ 2,682 $ 2,582 $ 2,775 5.95% 4.60% Other.............................. 683 1,151 1,500 5.13 4.54 -------------------------- Total..................... $ 3,365 $ 3,733 3,909 5.70 4.59 - ---------------------------------------------------------------------------------------------------------------------------------
U.S. Bancorp 65 68 BUSINESS GENERAL U.S. Bancorp (the "Company") is a multi-state bank holding company headquartered in Minneapolis, Minnesota. The Company was incorporated in Delaware in 1929. In February 2001, the Company completed a merger with Firstar Corporation of Milwaukee, Wisconsin. Following the merger, the Company owns 100 percent of the capital stock of each of seven banks and eleven trust companies having approximately 2,200 banking offices in 24 Midwestern and Western states. The Company offers full-service brokerage services at approximately 100 offices through a wholly owned subsidiary. The Company also has various nonbank subsidiaries engaged in financial services. The banks are engaged in general commercial banking business, principally in domestic markets. They range in size from less than $1.0 million to $53.5 billion in deposits and provide a wide variety of services to individuals, businesses, industry, institutional organizations, governmental entities and other financial institutions. Depository services include checking accounts, savings accounts and time certificate contracts. Ancillary services such as treasury management and receivable lockbox collection are provided for corporate customers. The Company's bank and trust subsidiaries provide a full range of fiduciary activities for individuals, estates, foundations, business corporations and charitable organizations. The Company provides banking services through its subsidiary banks to both domestic and foreign customers and correspondent banks. These services include consumer banking, commercial lending, financing of import/export trade, foreign exchange and investment services. The Company, through its subsidiaries, also provides services in trust, commercial and agricultural finance, data processing, leasing and brokerage services. On a full-time equivalent basis during 2000, employment of the Company prior to the merger with Firstar Corporation averaged a total of 28,949 employees. COMPETITION The commercial banking business is highly competitive. Subsidiary banks compete with other commercial banks and with other financial institutions, including savings and loan associations, mutual savings banks, finance companies, mortgage banking companies, credit unions and investment companies. In recent years, competition has increased from institutions not subject to the same regulatory restrictions as domestic banks and bank holding companies. GOVERNMENT POLICIES The operations of the Company's various operating units are affected by state and federal legislative changes and by policies of various regulatory authorities, including those of the several states in which they operate, the United States and foreign governments. These policies include, for example, statutory maximum legal lending rates, domestic monetary policies of the Board of Governors of the Federal Reserve System, United States fiscal policy, international currency regulations and monetary policies, and capital adequacy and liquidity constraints imposed by bank regulatory agencies. SUPERVISION AND REGULATION The Company is a registered bank holding company under the Bank Holding Company Act of 1956 (the "Act") and is subject to the supervision of, and regulation by, the Board of Governors of the Federal Reserve System (the "Board"). Under the Act, a bank holding company may engage in banking, managing or controlling banks, furnishing or performing services for banks it controls, and conducting activities that the Board has determined to be closely related to banking. The Company must obtain the prior approval of the Board before acquiring more than five percent of the outstanding shares of another bank or bank holding company, and must provide notice to, and in some situations obtain the prior approval of, the Board in connection with the acquisition of more than five percent of the outstanding shares of a company engaged in a "bank-related" business. Under the Act, as amended by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act"), the Company may acquire banks throughout the United States, subject only to state or federal deposit caps and state minimum-age requirements. The Interstate Act authorized interstate branching by acquisition and consolidation in those states that had not opted out of interstate branching. The Gramm-Leach-Bliley Act of 1999 eliminates many of the restrictions placed on the activities of certain qualified bank holding companies. Effective March 11, 2000, a bank holding company can qualify as a "financial holding company" and expand into a wide variety of financial services, including securities activities, insurance and merchant banking without the prior approval of the Board. The Company qualified as a financial holding company on March 13, 2000. National banks are subject to the supervision of, and are examined by, the Comptroller of the Currency. All subsidiary banks of the Company are members of the Federal Deposit Insurance Corporation ("FDIC") and are subject to examination by the FDIC. In practice, the primary federal regulator makes regular examinations of each subsidiary bank subject to its regulatory review or participates in joint examinations with other federal regulators. Areas subject to regulation by federal authorities include the allowance for credit losses, investments, loans, mergers, issuance of securities, payment of dividends, establishment of branches and other aspects of operations. PROPERTIES The Company and its significant subsidiaries occupy their headquarter offices through both ownership and under long-term leases. The Company leases seven freestanding operations centers in St. Paul, Milwaukee, Nashville and Denver, and owns operations centers in Cincinnati, Kansas City, St. Louis, Fargo and Portland. At December 31, 2000, the subsidiaries of the Company prior to the merger with Firstar Corporation owned and operated a total of 599 facilities and leased an additional 780 facilities, all of which are well maintained. Additional information with respect to premises and equipment is presented in Notes I and S to Consolidated Financial Statements. 66 U.S. Bancorp 69 EXHIBITS
FINANCIAL STATEMENTS FILED Page - ---------------------------------------------------------------- U.S. Bancorp and Subsidiaries Consolidated Financial Statements 27 Notes to Consolidated Financial Statements 31 Report of Independent Auditors 58
Schedules to the consolidated financial statements required by Article 9 of Regulation S-X are omitted since the required information is included in the footnotes or is not applicable. During the three months ended December 31, 2000, the Company filed the following Current Reports on Form 8-K: Form 8-K filed October 4, 2000 announcing entry into an Agreement and Plan of Merger with Firstar Corporation; and Form 8-K filed October 12, 2000 attaching copy of Agreement and Plan of Merger with Firstar Corporation. The following Exhibit Index lists the Exhibits to the Annual Report on Form 10-K. (1)2.1 Agreement and Plan of Merger, dated as of October 3, 2000, as amended, between U.S. Bancorp and Firstar Corporation. Filed as Exhibits 2.1, 2.2 and 2.3 to Registration Statement on Form S-4, File No. 333-48532. (1)2.2 Stock Option Agreement, dated October 3, 2000, between Firstar Corporation and U.S. Bancorp. Filed as Exhibit 2.4 to Registration Statement on Form S-4, File No. 333-48532. (1)2.3 Stock Option Agreement, dated October 3, 2000, between U.S. Bancorp and Firstar Corporation. Filed as Exhibit 2.5 to Registration Statement on Form S-4, File No. 333-48532. 3.1 Restated Certificate of Incorporation, as amended. 3.2 Restated Bylaws. 4.1 [Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, copies of instruments defining the rights of holders of long-term debt are not filed. U.S. Bancorp agrees to furnish a copy thereof to the Securities and Exchange Commission upon request.] (1)4.2 Warrant Agreement, dated as of October 2, 1995, between U.S. Bancorp and First Chicago Trust Company of New York, as Warrant Agent and Form of Warrant. Filed as Exhibits 4.18 and 4.19 to Registration Statement on Form S-3, File No. 33-61667. (1)4.3 Certificate of Designation and Terms of Term Participating Preferred Stock of U.S. Bancorp. Filed as Exhibit 4.1 to Registration Statement on Form S-4, File No. 333-75603. (1)4.4 Forms of Warrant Agreements, dated as of November 5, 1996, between Monarch Bancorp (predecessor of Western Bancorp) and certain Warrantholders, and accompanying Forms of Warrants, assumed by U.S. Bancorp upon its acquisition of Western Bancorp on November 15, 1999. Filed as Exhibit 4.5 to report on Form 10-K for the year ended December 31, 1999. (1)(2)10.1 U.S. Bancorp 1999 Stock Incentive Plan, as amended. Filed as Exhibit 10.2 to report on Form 10-K for the year ended December 31, 1999. (1)(2)10.2 Description of U.S. Bancorp Stock Option Loan Policy. Filed as Exhibit 10M to report on Form 10-K for the year ended December 31, 1996. (1)(2)10.3 U.S. Bancorp 1995 Executive Incentive Plan, as amended. Filed as Exhibit 10A to report on Form 10-Q for the quarter ended March 31, 1997. (1)(2)10.4 U.S. Bancorp Annual Incentive Plan, as amended. Filed as Exhibit 10E to report on Form 10-K for the year ended December 31, 1996. (1)(2)10.5 U.S. Bancorp Executive Deferral Plan, as amended. Filed as Exhibit 10.7 to report on Form 10-K for the year ended December 31, 1999. (1)(2)10.6 U.S. Bancorp Nonqualified Supplemental Executive Retirement Plan, as amended. Filed as Exhibit 10.8 to report on Form 10-K for the year ended December 31, 1999. (1)(2)10.7 U.S. Bancorp Special Executive Deferral Plan, as amended. Filed as Exhibit 10.9 to report on Form 10-K for the year ended December 31, 1999. (1)(2)10.8 Amended and Restated Supplemental Benefits Plan of the former U.S. Bancorp. Filed as Exhibit 10.10 to report on Form 10-K for the year ended December 31, 1997. (1)(2)10.9 1991 Executive Deferred Compensation Plan, as amended, of the former U.S. Bancorp. Filed as Exhibit 10.11 to report on Form 10-K for the year ended December 31, 1997. (1)(2)10.10 Deferred Compensation Trust Agreement of the former U.S. Bancorp. Filed as Exhibit 10.12 to report on Form 10-K for the year ended December 31, 1997. (1)(2)10.11 1991 Performance and Equity Incentive Plan of the former U.S. Bancorp. Filed as Exhibit 10.13 to report on Form 10-K for the year ended December 31, 1997. (1)(2)10.12 Description of Retirement Benefits of Joshua Green III. Filed as Exhibit 10.14 to report on Form 10-K for the year ended December 31, 1997. (1)(2)10.13 Form of Director Indemnification Agreement entered into with former Directors of the former U.S. Bancorp. Filed as Exhibit 10.15 to report on Form 10-K for the year ended December 31, 1997. (1)(2)10.14 Description of health insurance premium reimbursement plan for former Directors of West One Bancorp. Filed as Exhibit 10.16 to report on Form 10-K for the year ended December 31, 1997. (1)(2)10.15 U.S. Bancorp Independent Director Retirement and Death Benefit Plan, as amended. Filed as Exhibit 10.17 to report on Form 10-K for the year ended December 31, 1999. (1)(2)10.16 U.S. Bancorp Deferred Compensation Plan for Directors, as amended. Filed as Exhibit 10.18 to report on Form 10-K for the year ended December 31, 1999. (1)(2)10.17 Form of Change-in-Control Agreement between U.S. Bancorp and certain officers of the Company. Filed as Exhibit 10.19 to report on Form 10-K for the year ended December 31, 1999. (1)(2)10.18 Amended and Restated Employment Agreement with John F. Grundhofer. Filed as Exhibit 10.1 to report on Form 10-Q for the quarter ended June 30, 2000. (1)(2)10.19 Employment Agreement with Andrew S. Duff. Filed as Exhibit 10.24 to report on Form 10-K for the year ended December 31, 1999. (2)10.20 Separation Agreement and General Release with Philip G. Heasley. 12 Statement re: Computation of Ratio of Earnings to Fixed Charges. 21 Subsidiaries of the Registrant. 23 Consent of Ernst & Young LLP.
(1) Exhibit has heretofore been filed with the Securities and Exchange Commission and is incorporated herein as an exhibit by reference. (2) Items that are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 14(c) of this Form 10-K. U.S. Bancorp 67 70 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on February 27, 2001, on its behalf by the undersigned thereunto duly authorized. U.S. Bancorp By: John F. Grundhofer Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 27, 2001, by the following persons on behalf of the registrant and in the capacities indicated. JERRY A. GRUNDHOFER President, Chief Executive Officer and Director (principal executive officer) DAVID M. MOFFETT Vice Chairman and Chief Financial Officer (principal financial officer) TERRANCE R. DOLAN Senior Vice President and Controller (principal accounting officer) JOHN F. GRUNDHOFER Chairman and Director LINDA L. AHLERS Director ARTHUR D. COLLINS, JR. Director PETER H. COORS Director JOHN C. DANNEMILLER Director VICTORIA BUYNISKI GLUCKMAN Director JOSHUA GREEN III Director J.P. HAYDEN, JR. Director ROGER L. HOWE Director THOMAS H. JACOBSEN Director DELBERT W. JOHNSON Director JOEL W. JOHNSON Director JERRY W. LEVIN Director SHELDON B. LUBAR Director FRANK LYON, JR. Director DANIEL F. MCKEITHAN, JR. Director DAVID B. O'MALEY Director O'DELL M. OWENS, M.D., M.P.H. Director THOMAS E. PETRY Director RICHARD G. REITEN Director S. WALTER RICHEY Director WARREN R. STALEY Director JOHN J. STOLLENWERK Director PATRICK T. STOKES Director 68 U.S. Bancorp EX-3.1 2 c59511ex3-1.txt RESTATED CERTIFICATE OF INCORPORATION 1 COMPOSITE COPY (As filed 8/1/97 and amended through 2/27/01) RESTATED CERTIFICATE OF INCORPORATION OF U.S. BANCORP FIRST: The name of this corporation is U.S. Bancorp. SECOND: The registered office of the corporation in the State of Delaware is to be located at 1209 Orange Street in the City of Wilmington, County of New Castle. The name of the registered agent at such address is The Corporation Trust Company. THIRD: The purpose of the corporation is to engage in any part of the world in any capacity in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware, and the corporation shall be authorized to exercise and enjoy all powers, rights and privileges which corporations organized under the General Corporation Law of Delaware may have under the laws of the State of Delaware as in force from time to time, including without limitation all powers, rights and privileges necessary or convenient to carry out all those acts and activities in which it may lawfully engage. FOURTH: The total number of shares of all classes of stock which the corporation shall have the authority to issue is 4,050,000,000, consisting of 50,000,000 shares of Preferred Stock of the par value of $1.00 each and 4,000,000,000 shares of Common Stock of the par value of $.01 each. The designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, of each class of stock are as follows: The Board of Directors is expressly authorized at any time, and from time to time, to provide for the issuance of shares of preferred stock in one or more series, with such voting powers, full or limited, or without voting powers and with such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issue thereof adopted by the board of directors, subject to the limitations prescribed by law and in accordance with the provisions hereof, including (but without limiting the generality thereof) the following: 2 (a) The designation of the series and the number of shares to constitute the series. (b) The dividend rate of the series, the conditions and dates upon which such dividends shall be payable, the relation which such dividends shall bear to the dividends payable on any other class or classes of stock, and whether such dividends shall be cumulative or noncumulative. (c) Whether the shares of the series shall be subject to redemption by the corporation and, if made subject to such redemption, the times, prices and other terms and conditions of such redemption. (d) The terms and amount of any sinking fund provided for the purchase or redemption of the shares of the series. (e) Whether or not the shares of the series shall be convertible into or exchangeable for shares of any other class or classes or of any other series of any class or classes of stock of the corporation, and, if provision be made for conversion or exchange, the times, prices, rates, adjustments and other terms and conditions of such conversion or exchange. (f) The extent, if any, to which the holders of the shares of the series shall be entitled to vote with respect to the election of directors or otherwise. (g) The restrictions, if any on the issue or reissue of any additional preferred stock. (h) The rights of the holders of the shares of the series upon the dissolution, liquidation, or winding up of the corporation. Subject to the prior or equal rights, if any, of the preferred stock of any and all series stated and expressed by the board of directors in the resolution or resolutions providing for the issuance of such preferred stock, the holders of common stock shall be entitled (i) to receive dividends when and as declared by the board of directors out of any funds legally available therefore, (ii) in the event of any dissolution, liquidation or winding up of the corporation, to receive the remaining assets of the corporation, ratably according to the number of shares of common stock held, and (iii) to one vote for each share of common stock held. No holder of common stock shall have any preemptive right to purchase or subscribe for any part of any issue of stock or of securities of the corporation convertible into stock of any class whatsoever, whether now or hereafter authorized. 2 3 Pursuant to the authority conferred by this Article FOURTH, the following series of Preferred Stock have been designated, each such series consisting of such number of shares, with such voting powers and with such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof as are stated and expressed in the exhibit with respect to such series attached hereto as specified below and incorporated herein by reference: Exhibit A Adjustable Rate Cumulative Preferred Stock, Series 1990A Exhibit B 8 1/8% Cumulative Preferred Stock, Series A FIFTH: In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized: (a) To fix, determine and vary from time to time the amount to be maintained as surplus and the amount or amounts to be set apart as working capital. (b) To adopt, amend, alter or repeal by-laws of the corporation, without any action on the part of the shareholders. The by-laws adopted by the directors may be amended, altered, changed, added to or repealed by the shareholders. (c) To authorize and cause to be executed mortgages and liens, without limit as to amount, upon the real and personal property of this corporation. (d) To sell, assign, convey or otherwise dispose of a part of the property, assets and effects of this corporation, less than the whole, or less than substantially the whole thereof, on such terms and conditions as they shall deem advisable, without the assent of the shareholders; and also to sell, assign, transfer, convey and otherwise dispose of the whole or substantially the whole of the property, assets, effects, franchises and good will of this corporation on such terms and conditions as they shall deem advisable, but only pursuant to the affirmative vote of the holders of a majority in amount of the stock then having voting power and at the time issued and outstanding, but in any event not less than the amount required by law. (e) All of the powers of this corporation, insofar as the same lawfully may be vested by this certificate in the board of directors, are hereby conferred upon the board of directors of this corporation. 3 4 SIXTH: The affairs of the Corporation shall be conducted by a Board of Directors. Except as otherwise provided by this Article Sixth, the number of directors, not less than twelve (12) nor more than thirty (30), shall be fixed from time to time by the Bylaws. Commencing with the annual election of directors by the stockholders in 1986, the directors shall be divided into three classes: Class I, Class II and Class III, each such class, as nearly as possible, to have the same number of directors. Such classified directors may be removed by vote of the stockholders only for cause. The term of office of the initial Class I directors shall expire at the annual election of directors by the stockholders in 1987, the term of office of the initial Class II directors shall expire at the annual election of directors by the stockholders in 1988, and the term of office of the initial Class III directors shall expire at the annual election of directors by the stockholders in 1989. At each annual election of directors by the stockholders held after 1985, the directors chosen to succeed those whose terms have then expired shall be identified as being of the same class as the directors they succeed and shall be elected by the stockholders for a term expiring at the third succeeding annual election of directors. In all cases, directors shall hold office until their respective successors are elected by the stockholders and have qualified. In the event that the holders of any class or series of stock of the Corporation having a preference as to dividends or upon liquidation of the Corporation shall be entitled, by a separate class vote, to elect directors as may be specified pursuant to Article Fourth, then the provisions of such class or series of stock with respect to their rights shall apply. The number of directors that may be elected by the holders of any such class or series of stock shall be in addition to the number fixed pursuant to the preceding paragraph of this Article Sixth. Except as otherwise expressly provided pursuant to Article Fourth, the number of directors that may be so elected by the holders of any such class or series of stock shall be elected for terms expiring at the next annual meeting of stockholders and without regard to the classification of the remaining members of the Board of Directors and vacancies among directors so elected by the separate class vote of any such class or series of stock shall be filled by the remaining directors elected by such class or series, or, if there are no such remaining directors, by the holders of such class or series in the same manner in which such class or series initially elected a director. If at any meeting for the election of directors, more than one class of stock, voting separately as classes, shall be entitled to elect one or more directors and there shall be a quorum of only one such class of stock, that class of stock shall be entitled to elect its quota of directors notwithstanding the absence of a quorum of the other class or classes of stock. 4 5 Vacancies and newly created directorships resulting from an increase in the number of directors, subject to the provision of Article Fourth, shall be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and such directors so chosen shall hold office until the next election of the class for which such directors shall have been chosen, and until their successors shall be elected and shall have qualified. Notwithstanding any other provisions of this Amended Certificate of Incorporation or the Bylaws of the Corporation (and notwithstanding that a lesser percentage may be specified by law), the provisions of this Article Sixth may not be amended or repealed (except an amendment hereto to reduce the maximum number of directors of the Corporation to not less than the greater of (A) the number of directors then in office and (B) twenty-four (24)) unless such action is approved by the affirmative vote of the holders of not less than eighty percent (80%) of the voting power of all of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, considered for purposes of this Article Sixth as a single class. SEVENTH: No action required to be taken or which may be taken at any annual meeting or special meeting of stockholders may be taken without a meeting, and the power of stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. EIGHTH: (a) In addition to the requirements of the provision of any series of preferred stock which may be outstanding, and whether or not a vote of the stockholders is otherwise required, the affirmative vote of the holders of not less than eighty percent (80%) of the voting power of the Voting Stock shall be required for the approval or authorization of any Business Transaction with a Related Person, or any Business Transaction in which a Related Person has an interest (other than only a proportionate interest as a stockholder of the Corporation); provided, however, that the eighty percent (80%) voting requirement shall not be applicable if (i) the Business Transaction is Duly Approved by the Continuing Directors, or (ii) all of the following conditions are satisfied: (A) the Business Transaction is a merger or consolidation or sale of substantially all of the assets of the corporation, and the aggregate amount of cash and the fair market value of the property, securities or other consideration to be received per share (on the date of effectiveness of such merger or consolidation or on the date of distribution to stockholders of the Corporation of the proceeds from such sale of assets) by holders of common stock of the corporation (other than such Related Person) in connection with such Business 5 6 Transaction is at least equal in value to such Related Person's Highest Common Stock Purchase Price; (B) after such Related Person has become the Beneficial Owner of not less than ten percent (10%) of the voting power of the Voting Stock and prior to the consummation of such Business Transaction, such Related Person shall not have become the Beneficial Owner of any additional shares of Voting Stock or securities convertible into Voting Stock, except (i) as a part of the transaction which resulted in such Related Person becoming the Beneficial Owner of not less than ten percent (10%) of the voting power of the Voting Stock, or (ii) as a result of a pro rata stock dividend or stock split; and (C) prior to the consummation of such Business Transaction, such Related Person shall not have, directly or indirectly, (i) received the benefit (other than only a proportionate benefit as a stockholder of the Corporation) of any loans, advances, guarantees, pledges or other financial assistance or tax credits provided by the corporation or any of its subsidiaries, (ii) caused any material change in the corporation's business or equity capital structure, including, without limitation, the issuance of shares of capital stock of the corporation or (iii) except as Duly Approved by the Continuing Directors, caused the corporation to fail to declare and pay quarterly cash dividends on the outstanding common stock on a per share basis at least equal to the cash dividends being paid thereon by the corporation immediately prior to the date on which the Related Person became a Related Person. (b) For the purpose of this Article Eighth: (i) The term "Business Transaction" shall mean (a) any merger or consolidation involving the corporation or a subsidiary of the corporation, (b) any sale, lease, exchange, transfer or other disposition (in one transaction or a series of related transactions), including, without limitation, a mortgage or any other security device, of all or any Substantial Part of the assets either of the corporation or of a subsidiary of the corporation, (c) any sale, lease, exchange, transfer or other disposition (in one transaction or a series of related transactions) of all or any Substantial Part of the assets of an entity to the corporation or a subsidiary of the corporation, (d) the issuance, sale, exchange, transfer or other disposition (in one transaction or a series of related transactions) by the corporation or a subsidiary of the corporation of any securities of the corporation or any subsidiary of the corporation having an aggregate fair market value of $100 million or more, (e) any recapitalization or reclassification of the securities of the Corporation (including, without limitation, any reverse stock split) or other transaction that would have the effect of increasing the voting power of a Related Person or reducing the number of shares of each class of Voting 6 7 Securities outstanding, (f) any liquidation, spinoff, splitoff, splitup or dissolution of the corporation, and (g) any agreement, contract or other arrangement providing for any of the transactions described in this definition of Business Transaction. (ii) The term "Related Persons" shall mean and include (a) any individual, corporation, partnership, group, association or other person or entity which, together with its Affiliates and Associates, is the Beneficial Owner of not less than ten percent (10%) of the voting power of the Voting Stock or was the Beneficial Owner of not less than ten percent (10%) of the voting power of the Voting Stock (x) at the time the definitive agreement providing for the Business Transaction (including any amendment thereof) was entered into, (y) at the time a resolution approving the Business Transaction was adopted by the Board of Directors of the Corporation or (z) as of the record date for the determination of stockholders entitled to notice of and vote on, or consent to, the Business Transaction, and (b) any Affiliate or Associate of any such individual, corporation, partnership, group, association or other person or entity; provided, however, and notwithstanding anything in the foregoing to the contrary, the term "Related Person" shall not include the corporation, a wholly-owned subsidiary of the corporation, any employee stock ownership or other employee benefit plan of the corporation or any wholly-owned subsidiary of the corporation, or any trustee of, or fiduciary with respect to, any such plan when acting in such capacity. (iii) The term "Beneficial Owner" shall be defined by reference to Rule 13d-3 under the Securities Exchange Act of 1934, as in effect on January 16, 1986; provided, however, that any individual, corporation, partnership, group, association or other person or entity which has the right to acquire any Voting Stock at any time in the future, whether such right is contingent or absolute, pursuant to any agreement, arrangement or understanding or upon exercise of conversion rights, warrants or options, or otherwise, shall be deemed the Beneficial Owner of Voting Stock. (iv) The term "Highest Common Stock Purchase Price" shall mean the highest amount of consideration paid by such Related Person for a share of Common Stock of the Corporation (including any brokerage commissions, transfer taxes and soliciting dealers' fees) in the transaction which resulted in such Related Person becoming a Related Person or within one year prior to the date such Related Person became a Related Person, whichever is higher; provided, however, that the Highest Common Stock Purchase Price shall be appropriately adjusted to reflect the occurrence of any reclassification, recapitalization, stock split, reverse stock split or other similar corporate readjustment in the number of outstanding shares of common stock of the 7 8 corporation between the last date upon which such Related Person paid the Highest Common Stock Purchase Price to the effective date of the merger or consolidation or the date of distribution to stockholders of the corporation of the proceeds from the sale of substantially all of the assets of the corporation referred to in subparagraph (A) of Section 1 of this Article Eighth. (v) The term "Substantial Part" shall mean more than twenty percent (20%) of the fair market value of the total assets of the entity in question, as reflected on the most recent consolidated balance sheet of such entity existing at the time the stockholders of the corporation would be required to approve or authorize the Business Transaction involving the assets constituting any such Substantial Part. (vi) In the event of a merger in which the corporation is the surviving corporation, for the purpose of subparagraph (A) of Section 1 of this Article Eighth, the phrase "property, securities or other consideration to be received" shall include, without limitation, Common Stock of the Corporation retained by its stockholders (other than such Related Person). (vii) The term "Voting Stock" shall mean all outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors, considered for the purpose of this Article Eighth as one class. (viii) The term "Preferred Stock" shall mean each class or series of capital stock which may from time to time be authorized in or by Article Fourth of the Amended and Restated Certificate of Incorporation which is not designated as "Common Stock". (ix) The term "Continuing Director" shall mean a director who either was a member of the Board of Directors of the corporation on April 24, 1986 or who became a director of the corporation subsequent to such date and whose election, or nomination for election by the corporation's stockholders, was Duly Approved by the Continuing Directors then on the Board either by a specific vote or by approval of the proxy statement issued by the corporation on behalf of the Board of Directors in which such person is named as nominee for director, without due objection to such nomination; provided, however, that in no event shall a director be considered a "Continuing Director" if such director is a Related Person and the Business Transaction to be voted upon is with such Related Person or is one in which such Related Person has an interest (other than only a proportionate interest as a stockholder of the corporation). (x) The term "Duly Approved by the Continuing Directors" shall mean an action approved by the vote of at least a majority of the Continuing Directors 8 9 then on the Board, except, if the votes of such Continuing Directors in favor of such action would be insufficient to constitute an act of the Board of Directors (if a vote by the entire Board of Directors were to have been taken), then such term shall mean an action approved by the unanimous vote of the Continuing Directors so long as there are at least three Continuing Directors on the Board at the time of such unanimous vote. (xi) The term "Affiliate", used to indicate a relationship to a specified person, shall mean a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such specified person. (xii) The term "Associate", used to indicate a relationship with a specified person, shall mean (A) any Corporation, partnership or other organization of which such specified person is an officer or partner (B) any trust or other estate in which such specified person has a substantial beneficial interest or as to which such specified person serves as trustee or in a similar fiduciary capacity, (C) any relative or spouse of such specified person, or any relative of such spouse, who has the same home as such specified person or who is a director or officer of the Corporation or any of its subsidiaries, and (D) any person who is a director, officer or partner of such specified person or of any corporation (other than the corporation or any wholly-owned subsidiary of the corporation), partnership or other entity which is an Affiliate of such specified person. (c) For the purpose of this Article Eighth, so long as Continuing Directors constitute at least two-thirds of the entire Board of Directors, the Board of Directors shall have the power to make a good faith determination, on the basis of information known to them, of: (i) the number of shares of Voting Stock of which any person is the Beneficial Owner, (ii) whether a person is a Related Person or is an Affiliate or Associate of another, (iii) whether a person has an agreement, arrangement or understanding with another as to the matters referred to in the definition of Beneficial Owner herein, (iv) whether the assets subject to any Business Transaction constitute a Substantial Part, (v) whether any Business Transaction is with a Related Person or is one in which a Related Person has an interest (other than only a proportionate interest as a stockholder of the corporation), (vi) whether a Related Person has, directly or indirectly, received the benefits or caused any of the changes referred to in subparagraph (C) of Section 1 of this Article Eighth, and (vii) such other matters with respect to which a determination is required under this Article Eighth; and such determination by the Board of Directors shall be conclusive and binding for all purposes of this Article Eighth. 9 10 (d) Nothing contained in this Article Eighth shall be construed to relieve any Related Person of any fiduciary obligation imposed by law. (e) The fact that any Business Transaction complies with the provisions of Section 1 of this Article Eighth shall not be construed to impose any fiduciary duty, obligation or responsibility on the Board of Directors, or any member thereof, to approve such Business Transaction or recommend its adoption or approval to the stockholders of the corporation. (f) Notwithstanding any other provisions of this Amended and Restated Certificate of Incorporation or the Bylaws of the Corporation (and notwithstanding that a lesser percentage may be specified by law), the provisions of this Article Eighth may not be repealed or amended in any respect, unless such action is approved by the affirmative vote of the holders of not less than eighty percent (80%) of the Voting Stock. NINTH: No director of the corporation shall be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty by such director as a director; provided, however, that this Article Ninth shall not eliminate or limit the liability of a director to the extent provided by applicable law (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article Ninth shall apply to or have any effect on the liability or alleged liability of any director of the corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. 10 11 Exhibit A U.S. Bancorp Adjustable Rate Cumulative Preferred Stock, Series 1990A (a) Designation. The designation of the series of Preferred Stock created by this resolution shall be "Adjustable Rate Cumulative Preferred Stock, Series 1990A" (hereinafter referred to as this "Series") and the number of shares constituting this Series shall be twelve thousand seven hundred fifty (12,750). The number of authorized shares of this Series may be increased or reduced by further resolution duly adopted by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation and by the filing of a certificate pursuant to the provisions of the General Corporation Law of the State of Delaware stating that such reduction or increase, as the case may be, has been so authorized. (b) Dividends. (1) Dividend periods ("Dividend Periods") shall commence on January 1, April 1, July 1, and October 1 in each year and shall end on and include the day next preceding the first day of the next Dividend Period. Such dividends shall be cumulative from the date of original issue of shares of this Series and shall be payable, when and as declared by the Board of Directors or by any duly authorized committee of the Board of Directors of the Corporation, on March 31, June 30, September 30 and December 31 of each year, commencing [insert first dividend payment date]. Each such dividend shall be paid to the holders of record of shares of this Series as they appear on the stock register of the Corporation on such record date, not exceeding 30 days preceding the payment date thereof, as shall be fixed by the Board of Directors of the Corporation or by any duly authorized committee of the Board of Directors of the Corporation. Dividends on account of arrears for any past Dividend Periods may be declared and paid at any time, without reference to any regular dividend payment date, to holders of record on such date, not exceeding 45 days preceding the payment date thereof, as may be fixed by the Board of Directors of the Corporation or by any duly authorized committee of the Board of Directors of the Corporation. (2) No full dividends shall be declared or paid or set apart for payment on the Preferred Stock of any series ranking, as to dividends, on a parity with or junior to this Series for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the shares of this Series for all dividend payment periods terminating on or prior to the date of payment of such full cumulative dividends. When dividends are not paid in full, as aforesaid, upon the shares of this Series and any other Preferred 11 12 Stock ranking on a parity as to dividends with this Series, all dividends declared upon shares of this Series and any other Preferred Stock ranking on a parity as to dividends with this Series shall be declared pro rata so that the amount of dividends declared per share on this Series and such other Preferred Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the shares of this Series and such other Preferred Stock bear to each other. Except as provided in the preceding sentence, unless full cumulative dividends on all outstanding shares of this Series shall have been paid or declared and set aside for payment for the then-current dividend payment period and all past dividend payment periods, no dividends (other than a dividend in the Common Stock, par value $1.25 per share, of the Corporation (the "Common Stock"), or another stock ranking junior to this Series as to dividends and upon liquidation) shall be declared or paid or set aside for payment or other distribution declared or made upon the Common Stock or upon any other stock of the Corporation ranking junior to or on a parity with this Series as to dividends or upon liquidation, nor shall any Common Stock or any other stock of the Corporation ranking junior to or on a parity with this Series as to dividends or upon liquidation be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Corporation (except by conversion into or exchange for stock of the Corporation ranking junior to this Series as to dividends and upon liquidation). Holders of shares of this Series shall not be entitled to any dividend, whether payable in cash, property or stock, in excess of full cumulative dividends, as herein provided, on this Series. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments which may be in arrears. (3) Dividends payable on this Series for each full Dividend Period shall be computed by dividing the dividend rate for such Dividend Period (stated on an annualized basis) by four (4) and applying such rate against the liquidation preference per share of this Series. Dividends payable on this Series for any period less than a full Dividend Period, including the Initial Dividend Period (as defined in Section (c) below), shall be computed on the basis of 30-day months, a 360-day year, and the actual number of days elapsed in the period. (c) Dividend Rate. (1) The dividend rate on the shares of this Series shall be: (i) for the period (the "Initial Dividend Period") from the date of original issue thereof to and including [insert first dividend payment date], [insert rate for Initial Dividend Period]% per annum of the liquidation preference thereof (excluding any accrued but unpaid dividends) and (ii) for each Dividend Period thereafter a rate per annum of the liquidation preference thereof (excluding any accrued but unpaid dividends) equal to the Applicable Rate (as 12 13 defined in paragraph (2) of this Section (c)) in respect of such Dividend Period, in each case, as adjusted as described under paragraph 9 of this Section (c). (2) Except as provided below in this paragraph, the "Applicable Rate" for any Dividend Period shall be (a) [insert amount]% greater than (b) the highest of the Treasury Bill Rate, the Ten Year Constant Maturity Rate or the Thirty Year Constant Maturity Rate (each as hereinafter defined) for such Dividend Period. If the Corporation determines in good faith that for any reason one or more of such rates cannot be determined for any Dividend Period, then the Applicable Rate for such Dividend Period shall be [insert amount]% greater than the higher of whichever of such rates can be so determined. If the Corporation determines in good faith that for any reason none of such rates can be determined for any Dividend Period, then the Applicable Rate in effect for the preceding Dividend Period shall be continued for such Dividend Period. Anything herein to the contrary notwithstanding, the Applicable Rate for any Dividend Period shall in no event be less than [insert minimum rate]% per annum. (3) Except as provided below in this paragraph, the "Treasury Bill Rate" for each Dividend Period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period (as defined below)) for three-month U.S. Treasury bills, as published weekly by the Federal Reserve Board during the Calendar Period immediately prior to the last ten calendar days immediately preceding the first day of the Dividend Period for which the dividend rate on this Series is being determined. In the event that the Federal Reserve Board does not publish such a weekly per annum market discount rate during such Calendar Period, then the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period) for three-month U.S. Treasury bills, as published weekly during such Calendar Period by any Federal Reserve Bank or any U.S. Government department or agency selected by the Corporation. In the event that a per annum market discount rate for three-month U.S. Treasury bills shall not be published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period) for all of the U.S. Treasury bills then having maturities of not less than 80 nor more than 100 days, as published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board shall not publish during such rates, by any Federal Reserve Bank 13 14 or by any U.S. Government department or agency selected by the Corporation. In the event that the Corporation determines in good faith that for any reason no such U.S. Treasury bill rates are published as provided above during such Calendar Period, then the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the per annum market discount rates based upon the closing bids during such Calendar Period for each of the issues of marketable noninterest bearing U.S. Treasury securities with a maturity of not less than 80 nor more than 100 days from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the Corporation by at least three recognized dealers in U.S. Government securities selected by the Corporation. In the event that the Corporation determines in good faith that for any reason the Corporation cannot determine the Treasury Bill Rate for any Dividend Period as provided above in this paragraph, the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the per annum market discount rates based upon the closing bids during such Calendar Period for each of the issues of marketable interest-bearing U.S. Treasury securities with a maturity of not less than 80 nor more than 100 days, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the Corporation by at least three recognized dealers in U.S. Government securities selected by the Corporation. (4) Except as provided below in this paragraph, the "Ten Year Constant Maturity Rate" for each Dividend Period shall be the arithmetic average of the two most recent weekly per annum Ten Year Average Yields (as defined below) (or the one weekly per annum Ten Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period), as published weekly by the Federal Reserve Board during the Calendar Period immediately prior to the last ten calendar days immediately preceding the first day of the Dividend Period for which the dividend rate on this Series is being determined. In the event that the Federal Reserve Board does not publish such weekly per annum Ten Year Average Yield during such Calendar Period, then the Ten Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum Ten Year Average Yields (or the one weekly per annum Ten Year Average Yield, if only such Yield shall be published during the relevant Calendar Period), as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. In the event that a per annum Ten Year Average Yield shall not be published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Ten Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum average yields to maturity (or the one weekly per annum average yield to maturity, if only one such yield shall be 14 15 published during the relevant Calendar Period) for all of the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities (as defined below)) then having maturities of not less than eight nor more than twelve years, as published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board shall not publish such yields, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. In the event that the Corporation determines in good faith that for any reason the Corporation cannot determine the Ten Year Constant Maturity Rate for any Dividend Period as provided above in this paragraph, then the Ten Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the per annum average yields to maturity based upon the closing bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than eight nor more than twelve years from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the Corporation by at least three recognized dealers in U.S. Government securities selected by the Corporation. (5) Except as provided below in this paragraph, the "Thirty Year Constant Maturity Rate" for each Dividend Period shall be the arithmetic average of the two most recent weekly per annum Thirty Year Average Yields (as defined below) (or the one weekly per annum Thirty Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period), as published weekly by the Federal Reserve Board during the Calendar Period immediately prior to the last ten calendar days immediately preceding the first day of the Dividend Period for which the dividend rate on this Series is being determined. In the event that the Federal Reserve Board does not publish such a weekly per annum Thirty Year Average Yield during such Calendar Period, then the Thirty Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum Thirty Year Average Yields (or the one weekly per annum Thirty Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period), as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. In the event that a per annum Thirty Year Average Yield shall not be published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Thirty Year Constant Maturity Rate for such Dividend Period will be the arithmetic average of the two most recent weekly per annum average yields to maturity (or the one weekly per annum average yield to maturity, if only one such yield shall be published during the relevant Calendar Period) for all of the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special 15 16 Securities) then having maturities of not less than twenty-eight nor more than thirty years, as published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board shall not publish such yields, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. In the event that the Corporation determines in good faith that for any reason the Corporation cannot determine the Thirty Year Constant Maturity Rate for any Dividend Period as provided above in this paragraph, then the Thirty Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the per annum average yields to maturity based upon the closing bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than twenty-eight nor more than thirty years from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the Corporation by at least three recognized dealers in U.S. Government securities selected by the Corporation. (6) The Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Thirty Year Constant Maturity Rate shall each be rounded to the nearest five one-hundredths of a percentage point. (7) For purposes of paragraphs (3) through (6) of this Section (c), the term (i) "Calendar Period" means 14 calendar days; (ii) "Special Securities" means securities which can, at the option of the holder, be surrendered at face value in payment of any Federal estate tax or which provide tax benefits to the holder and are priced to reflect such tax benefits or which were originally issued at a deep or substantial discount; (iii) "Ten Year Average Yield" means the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of ten years); and (iv) "Thirty Year Average Yield" means the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of thirty years). (8) The Corporation will calculate the Applicable Rate with respect to each Dividend Period as promptly as practicable prior to the commencement thereof according to the appropriate method described herein. The Corporation will cause notice of such Applicable Rate to be enclosed with the dividend payment checks next mailed to the holders of shares of this Series. 16 17 (9) If, after the day on which shares of this Series are first issued, one or more amendments to the Internal Revenue Code of 1986, as amended (the "Code"), are enacted that change the percentage specified in Section 243(a)(1) of the Code or any successor provision (the "Dividends Received Percentage"), the amount of each dividend payable per share of this Series after the effective date of any such change shall be adjusted by multiplying the amount of dividends determined as described under Section (c)(1) (before adjustment) by a factor, which shall be the number determined in accordance with the following formula, and rounding the result to the nearest cent: 1 - FTR (1 - OLD) ----------------- 1 - FTR (1 - DRP) For the purposes of the above formula, "FTR" means the federal income tax rate applicable to corporations under the Code as in effect on the date shares of this Series are first issued, "OLD" means the Dividend Received Percentage as in effect on such date and "DRP" means the Dividends Received Percentage applicable to the dividend in question. Notwithstanding the foregoing provisions, in the event that, with respect to any such amendment, the Corporation shall receive either an unqualified opinion of independent recognized tax counsel or a private letter ruling or similar form of authorization from the Internal Revenue Service to the effect that such an amendment would not apply to dividends payable on this Series, then any such amendment shall not result in the adjustment provided for pursuant to this Section (c)(9). For purposes of these Resolutions, all references to dividends shall mean dividends as adjusted pursuant to the provisions of this Section (c)(9). The Corporation's calculations of the dividends payable as so adjusted and as certified accurate as to calculation and reasonable as to method by the independent certified public accountants then regularly engaged by the Corporation, shall be final and not subject to review. In the event that the amount of dividends payable per share of this Series shall be adjusted pursuant to the provisions of the foregoing paragraph, the Corporation shall cause notice of each such adjustment, together with the Applicable Rate with respect to such dividend, to be included with the dividend payment checks next mailed to the holders of this Series, each as provided in Section (c)(8) of these Resolutions. (d) Redemption. (1) Except as set forth in Section (d)(2), the shares of this Series shall not be redeemable prior to the date that is the tenth anniversary of the day on which shares of this Series are first issued. The Corporation, at its option, may redeem shares of this Series, as a whole or in part, at any time or from time to time on or after such date, at a redemption price equal to the aggregate 17 18 liquidation value of the shares so redeemed, plus, in each case, accrued and unpaid dividends thereon to the date fixed for redemption. (2) Notwithstanding the provisions of Section (d)(1), in the event that an amendment to the Code is enacted that would effect a change in the Dividends Received Percentage so as to result in the amount of dividend payable being adjusted upward pursuant to Section (c)(9), the Corporation, at its option, may redeem the issued and outstanding shares of this Series as a whole, at any time after the effective date of any such change in the Dividends Received Percentage, at a redemption price of $100,000 per share, plus, in each case, an amount equal to accrued and unpaid dividends (whether or not declared) to the date fixed for redemption. (3) In the event that fewer than all the outstanding shares of this Series are to be redeemed, the number of shares to be redeemed shall be determined by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation and the shares to be redeemed shall be determined by lot or pro rata as may be determined by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation or by any other method as may be determined by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation in its sole discretion to be equitable, provided that such method satisfies any applicable requirements of any securities exchange on which this Series is listed. (4) In the event the Corporation shall redeem shares of this Series, notice of such redemption shall be given by first class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed, at such holder's address as the same appears on the stock register of the Corporation. Each such notice shall state: (i) the redemption date; (ii) the number of shares of this Series to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be redeemed will cease to accrue on the redemption date. (5) Notice having been mailed as aforesaid, from and after the redemption date (unless default shall be made by the Corporation in providing money for the payment of the applicable redemption price) dividends on the shares of this Series so called for redemption shall cease to accrue, and said shares shall no longer be deemed to be outstanding, and all rights of the holders thereof as stockholders of the Corporation (except the right to receive from the Corporation the applicable redemption price) shall cease. Upon surrender in 18 19 accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation shall so require and the notice shall so state), such shares shall be redeemed by the Corporation at the applicable redemption price. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. (6) Any shares of this Series which shall at any time have been redeemed shall, after such redemption, have the status of authorized but unissued shares of Preferred Stock, without designation as to series until such shares are once more designated as part of a particular series by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation. (7) Notwithstanding the foregoing provisions of this Section (d), in the event that full cumulative dividends on the shares of this Series have not been paid, no shares of this Series shall be redeemed unless all outstanding shares of this Series are simultaneously redeemed, and the Corporation shall not purchase or acquire any shares of this Series otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of outstanding shares of this Series. (e) Conversion or Exchange. The holders of shares of this Series shall not have any rights to convert such shares into or exchange such shares for shares of any other class or classes or of any other series of any class or classes of capital stock of the Corporation. (f) Voting Rights. The shares of this Series shall not have any voting powers either general or special, except as expressly required by applicable law and except that: (1) Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the affirmative vote or consent of the holders of at least 66-2/3% of all of the shares of this Series at the time outstanding, voting separately as a class, shall be required to authorize any amendment of the Certificate of Incorporation or of any certificate amendatory thereof or supplemental thereto (including any certificate of designation or any similar document relating to any series of Preferred Stock) which will adversely affect the powers, preferences, privileges or rights of this Series; (2) Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the affirmative vote or consent of the holders of at least 66-2/3% of all of the shares of this Series and all other series of 19 20 shares of Preferred Stock ranking on a parity with the shares of this Series, either as to dividends or upon liquidation, at the time outstanding, voting as a single class without regard to series, shall be required to issue, authorize or increase the authorized amount of, or to issue or authorize any obligation or security convertible into or evidencing the right to purchase, any additional class or series of stock ranking prior to the shares of this Series as to dividends or upon liquidation; and (3) If at the time of any annual meeting of stockholders for the election of directors a default in preference dividends on the shares of this Series shall exist, the number of directors constituting the Board of Directors of the Corporation shall be increased by one, and the holders of the shares of this Series shall have the right at such meeting, voting together as a single class, to the exclusion of the holders of Common Stock, to elect one director of the Corporation to fill such newly created directorship. Such right shall continue until there are no dividends in arrears upon the shares of this Series. Each director elected by the holders of shares of this Series (herein called a "Preferred Director") shall continue to serve as such director for the full term for which he shall have been elected, notwithstanding that prior to the end of such term a default in preference dividends shall cease to exist. Any Preferred Director may be removed by, and shall not be removed except by, the vote of the holders of record of the outstanding shares of this Series, voting together as a single class, at a meeting of the stockholders, or of the holders of shares of this Series, called for the purpose. So long as a default in any preference dividends on the shares of this Series shall exist any vacancy in the office of a Preferred Director may be filled by the vote of the holders of the outstanding shares of this Series voting together as a single class, at a meeting of the stockholders or of the holders of shares of this Series called for the purpose. Whenever the term of office of the Preferred Director shall end and a default in preference dividends shall no longer exist, the number of directors constituting the Board of Directors of the Corporation shall be reduced by one. For the purposes hereof, a "default in preference dividends" on the shares of this Series shall be deemed to have occurred whenever the amount of accrued but unpaid dividends on such shares shall be equivalent to six full quarter-yearly dividends or more, and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all accrued dividends on all such shares then outstanding shall have been paid to the end of the last preceding dividend period. Notwithstanding anything contained in this Certificate of Designation or any other Certificate of Designation, whether currently in effect or adopted hereafter, or the Certificate of Incorporation, as amended from time to time, to the contrary, the holders of shares of this Series shall not be entitled to vote for the election of directors except as set forth in this Section (f)(3). 20 21 (g) Liquidation Rights. (1) Upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of this Series shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, before any payment or distribution of assets shall be made on the Common Stock or on any other class of stock of the Corporation ranking junior to this Series upon liquidation, the amount of $100,000 per share, plus a sum equal to all dividends (whether or not earned or declared) on such shares accrued and unpaid thereon to the date of final distribution. (2) For the purposes of this Section (g), a voluntary or involuntary liquidation, dissolution or winding up of the Corporation shall not include the consolidation or merger of the Corporation with or into any other corporation, or any sale, lease or conveyance of all or any part of the property or business of the Corporation. (3) After the payment to the holders of the shares of this Series of the full preferential amounts provided for in this Section (g), the holders of this Series as such shall not be entitled to any further participation in any distribution of assets of the Corporation. (4) If upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the assets of the Corporation available for distribution to the holders of shares of this Series and of any other shares of stock of the Corporation ranking on a parity with this Series upon liquidation shall not be sufficient to pay in full all amounts to which such holders are entitled pursuant to paragraph (1) of this Section (g), the holders of shares of this Series and of such other shares shall share ratably in any such distribution of assets of the Corporation in proportion to the full respective preferential amounts to which they are entitled. (h) Relative Rank. For purposes of this resolution, any stock of any class or classes of the Corporation shall be deemed to rank: (1) Prior to the shares of this Series, either as to dividends or upon liquidation, if the holders of such class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in preference or priority to the holders of shares of this Series; (2) On a parity with shares of this Series, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share or sinking fund provisions, if any, be different from those of this Series, if the holders of such stock shall be entitled 21 22 to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of shares of this Series; and (3) Junior to shares of this Series, either as to dividends or upon liquidation, if such class shall be Common Stock or if the holders of shares of this Series shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in preference or priority to the holders of shares of such class or classes. The outstanding shares of the Corporation's Adjustable Rate Cumulative Preferred Stock, Series 1983A, the Corporation's Adjustable Rate Cumulative Preferred Stock, Series 1989A, the Corporation's Adjustable Rate Cumulative Preferred Stock, Series 1989B and the Corporation's Adjustable Rate Cumulative Preferred Stock, Series 1990B shall be deemed to rank on a parity with the outstanding shares of this Series with respect to the payment of dividends and upon liquidation. The Series A Junior Participating Preferred Stock shall be deemed to rank junior to this Series with respect to the payment of dividends and upon liquidation. 22 23 Exhibit B U.S. Bancorp 8 1/8% Cumulative Preferred Stock, Series A Section 1. Designation and Amount. The shares of the series shall be designated as the 8 1/8% Cumulative Preferred Stock, Series A (the "Series"), and the number of shares constituting the Series shall be 6,000,000. The number of shares constituting the Series may be decreased from time to time by action of the Board, but not below the number of shares of the Series then outstanding. The Series shall rank senior to the common stock, par value $1.25 per share ("Common Stock"), of the Corporation and on a parity with the Adjustable Rate Cumulative Preferred Stock, Series 1990A, par value $1.00 per share, of the Corporation, as to dividends and upon liquidation. Section 2. Dividends. (a) Right to Receive Cash Dividends. The holders of shares of the Series shall be entitled to receive when, as and if declared by the Board out of assets legally available therefor, cumulative cash dividends, payable quarterly in arrears on the fifteenth day of February, May, August and November of each year (each quarterly period ending on any such date being hereinafter referred to as a "dividend period") commencing on the First Payment Date (as defined below) at the rate per annum set forth in Section 2(b). Each such dividend shall be paid to the holders of record of shares of the Series as they appear on the stock books of the Corporation on such record dates, not exceeding 45 days preceding the dividend payment dates therefor, as shall be fixed by the Board. Dividends on shares of the Series shall be cumulative from the date of original issuance of the shares of 8 1/8% Cumulative Preferred Stock, Series A (the "Old Shares"), of U. S. Bancorp, an Oregon corporation ("Old USB") from which the Series shares are converted in the merger (the "Merger") of Old USB and the Corporation and shall include any arrearage on the Old Shares whether or not there shall be assets legally available for the payment of such dividends; provided, that if Old USB shall have set a record date with respect to the Old Shares which record date is prior to the effective date of the Merger for a dividend payment date after the effective date of the Merger, dividends in respect of the Old Shares shall be deemed to accrue to such dividend payment date notwithstanding the intervening occurrence of the Merger, and no dividends shall accrue on the shares of the Series until the first date following such dividend payment date. The "First Payment Date" shall be (i) if Old USB shall have set a record date with respect to the Old Shares which record date is prior to the effective date of the Merger for a dividend payment date after the effective date of the Merger, the next succeeding dividend payment date following such 23 24 dividend payment date; provided, that the Corporation shall pay the dividend declared on the Old Shares to the holders of record of Old Shares as of such record date or (ii) if no such record date shall have been set by Old USB, the first dividend payment date after the effective date of the Merger (it being the intention that no dividend shall be payable with respect to both the Old Shares and the shares of the Series with respect to the same period of time or that any loss of dividends result from the conversion of Old Shares into shares of the Series). (b) Rate. The dividend rate per annum on the shares of the Series shall be 8 1/8% of the liquidating preference of $25 per share. (c) Restrictions. No full dividends shall be declared or paid or set aside for payment on any stock of the Corporation ranking, as to dividends, on a parity with or junior to the Series for any period unless full cumulative dividends on the Series have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set aside for such payment on the Series for all dividend periods terminating on or prior to the date of payment of such dividends. When dividends are not paid in full on the Series and any other preferred stock of the Corporation ranking on a parity as to dividends with the Series, all dividends declared or paid upon shares of the Series and such other preferred stock shall be declared and paid pro rata so that the amount of dividends declared and paid per share on the Series and such other preferred stock shall in all cases bear to each other the same ratio that accrued dividends per share (which in the case of noncumulative preferred stock shall not include any accumulation in respect of unpaid dividends for prior dividend periods) on shares of the Series and such other preferred stock bear to each other. Except as provided in the preceding sentence, unless full cumulative dividends on the Series have been paid or declared and set aside for payment, no dividends (other than dividends or distributions paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Common Stock or any other stock of the Corporation ranking junior to the Series as to dividends and upon liquidation) shall be declared or paid or set aside for payment or any other distribution declared or made upon the Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Series as to dividends or upon liquidation. No Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Series as to dividends or upon liquidation shall be redeemed, purchased or otherwise acquired for any consideration (and no moneys shall be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Corporation (except by conversion into or exchange for stock of the Corporation ranking junior to the Series as to dividends and upon liquidation) unless, in each case, the full cumulative dividends on the Series shall have been paid or declared and set aside for payment. Holders of shares of the Series shall not be entitled to any 24 25 dividend, whether payable in cash, property or stock, in excess of the full dividends on such shares. No interest shall be payable in respect of any dividend payment which may be in arrears on the Series. (d) Computation. Dividends payable on shares of the Series (i) for any period other than a full dividend period, shall be computed on the basis of a 360-day year consisting of twelve 30-day months and (ii) for each full dividend period, shall be computed by dividing the annual dividend rate by four. Any dividend payment made on shares of the Series shall first be credited against the earliest accumulated but unpaid dividend due with respect to shares of the Series. Section 3. Redemption. (a) Redemption Prices and Dates. The Corporation at its option may redeem shares of the Series, at any time or from time to time, on or after July 23, 1997, at a cash redemption price of $25 per share plus an amount equal to any accrued and unpaid dividends (including any accumulated dividends) thereon to and including the date fixed for redemption (the "Redemption Price"). Notwithstanding the foregoing, if at the time the Corporation proposes to give a notice of redemption pursuant to Section 3(d), the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), or a successor Federal agency responsible for supervision of bank holding companies under the Bank Holding Company Act of 1956, as amended, requires that, in order to be counted as "Tier 1" or "core" capital for capital adequacy purposes, bank holding company preferred stock may not be redeemed without the prior approval of the Federal Reserve Board or such successor agency, then the Corporation may not redeem any shares of the Series or give a notice of redemption unless the Federal Reserve Board or such successor agency shall have consented to such redemption. (b) Pro Rata Redemption. If fewer than all the outstanding shares of the Series are to be redeemed, the shares to be redeemed shall be selected pro rata as nearly as practicable or by lot as may be determined by the Board or by any other method as the Board may determine to be fair and appropriate. (c) Restrictions on Redemption. Notwithstanding the foregoing, if any quarterly dividend payable on shares of the Series shall be in arrears and until all such dividends in arrears shall have been paid or declared and a sum sufficient for the payment thereof set aside for payment, the Corporation shall not redeem any shares of the Series unless all outstanding shares of the Series are simultaneously redeemed and shall not purchase or 25 26 otherwise acquire any shares of the Series except pursuant to a purchase or exchange offer made on the same terms to all holders of shares of the Series for the purchase of all outstanding shares thereof. (d) Notice. Notice of any redemption shall be given by first class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the redemption date to each record holder of the shares to be redeemed at the address of such holder appearing in the stock books of the Corporation. Each such notice shall state: (1) the redemption date, (2) the number of shares of the Series to be redeemed, (3) the Redemption Price, (4) that dividends on the shares to be redeemed shall cease to accrue on such redemption date and (5) the place or places where certificates for such shares are to be surrendered for payment of the Redemption Price. If fewer than all the shares of the Series held by any holder are to be redeemed, the notice mailed to such holder shall also specify the number of shares to be redeemed from such holder. (e) Cessation of Dividends. If notice of redemption has been given, from and after the redemption date for the shares of the Series called for redemption (unless default shall be made by the Corporation in providing for the payment of the Redemption Price of the shares so called for redemption), dividends on the shares of the Series so called for redemption shall cease to accrue and such shares shall no longer be deemed to be outstanding, and all rights of the holders thereof (except the right to receive the Redemption Price) shall cease. Upon surrender in accordance with such notice of the certificates representing any shares of the Series so redeemed (properly endorsed or assigned for transfer, if the Board shall so require and the notice shall so state), the applicable Redemption Price shall be paid out of funds provided by the Corporation. If fewer than all of the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. (f) Status of Redeemed and Reacquired Shares. Shares of the Series which have been redeemed or otherwise acquired by the Corporation shall be retired and canceled and shall be restored to the status of authorized but unissued shares of preferred stock, par value $1.00 per share, without designation as to series, and may thereafter be issued, but not as shares of the Series. Section 4. Liquidation Rights. (a) Payment on Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of the Series shall be entitled to receive out of the assets of the Corporation available for distribution to shareholders, before any distribution of 26 27 assets is made to holders of the Common Stock or any other class or series of stock of the Corporation ranking junior to the Series upon liquidation, a liquidating distribution in an amount equal to $25 per share plus an amount equal to any accrued and unpaid dividends (including any accumulated dividends) thereon to and including the date of such distribution. If, upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the assets of the Corporation available for distribution to the holders of shares of the Series and any other preferred stock of the Corporation ranking as to any such distribution on a parity with the Series shall be insufficient to pay in full all amounts to which such holders are entitled, the holders of shares of the Series and other preferred stock shall share ratably in such distribution of assets of the Corporation in proportion to the sums that would be payable to such holders if all sums were paid in full. After payment of the full amount of the liquidation distribution plus accrued and unpaid dividends to which they are entitled, the holders of shares of the Series shall have no right or claim to any of the remaining assets of the Corporation. (b) Definition. None of the consolidation or merger of the Corporation into or with another corporation or corporations, or the sale, lease or exchange of all or substantially all of the Corporation's assets, shall be deemed a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 4. Section 5. Voting Rights. (a) Generally. Except as hereinafter provided or as expressly required by applicable law, the holders of shares of the Series will not be entitled to vote. When holders of shares of the Series are entitled to vote, each holder shall be entitled to one vote per share. (b) Arrearages. If at any time the equivalent of six quarterly dividends, whether or not consecutive, payable on the Series are unpaid or not declared and set aside for payment, the number of directors of the Corporation shall be increased by two and the holders of shares of the Series outstanding at the time (voting separately as a single class with the holders of shares of any one or more series of preferred stock of the Corporation ranking on a parity with the Series as to dividends or upon liquidation and upon which like voting rights have been conferred and are exercisable) shall have the right to elect two directors to serve as such until all arrearages of dividends on the Series have been paid or declared and set aside for payment at which time the terms of office of the two directors so elected shall terminate and the number of directors of the Corporation shall be reduced by two (subject to any additional rights as to the election of directors provided for the holders of shares of other preferred stock of the Corporation). Any director so elected may be removed by, and shall not be 27 28 removed except by, the vote of the holders of shares of the Series outstanding at the time (voting separately as a single class with the holders of shares of any one or more series of preferred stock of the Corporation ranking on a parity with the Series as to dividends or upon liquidation and upon which like voting rights have been conferred and are exercisable). (c) Certain Corporate Actions. So long as any shares of the Series remain outstanding, the Corporation shall not, without the affirmative vote or consent of the holders of at least two-thirds of the shares of the Series and of any other similarly affected series of preferred stock of the Corporation ranking on a parity with the Series as to dividends or upon liquidation and upon which like voting rights have been conferred and are exercisable outstanding at the time (voting separately as a single class without regard to series), given in person or by proxy, either in writing or at a meeting, (i) authorize, create or issue, or increase the authorized or issued amount of, any class or series of stock ranking prior to the Series as to dividends or upon liquidation or (ii) amend, alter or repeal, whether by merger or otherwise, the provisions of the Certificate so as to materially and adversely affect any of the preferences, limitations, and relative rights of the Series; provided, however, that any increase in the amount of the authorized preferred stock of the Corporation or the creation and issuance of other series of preferred stock of the Corporation, in each case ranking on a parity with or junior to the Series as to dividends or upon liquidation, will not be deemed to materially and adversely affect such preferences, limitations and relative rights. Without limiting the foregoing, under any circumstances in which the Series would have additional rights under Oregon law if the Corporation were incorporated under the Oregon Business Corporation Act (rather than the Delaware General Corporation Law), holders of shares of the Series shall be entitled to such rights, including, without limitation, voting rights under Section 60.441, voting and notice rights under Section 60.487 and dissenters' rights under Sections 60.551-60.594 of the Oregon Business Corporation Act (as such Sections may be amended from time to time). Section 6. No Sinking Fund. Shares of the Series are not subject to a sinking fund or other obligation of the Corporation to redeem or retire the Series. 28 EX-3.2 3 c59511ex3-2.txt RESTATED BYLAWS 1 RESTATED BYLAWS OF U.S. BANCORP ARTICLE I. OFFICES Section 1. Offices. The registered office of the Corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle, State of Delaware. The Corporation shall have offices at such other places as the Board of Directors may from time to time determine. ARTICLE II. STOCKHOLDERS Section 1. Annual Meeting. The annual meeting of the stockholders for the election of Directors and for the transaction of such other business as may properly come before the meeting shall be held on such date as the Board of Directors shall each year fix. Each such annual meeting shall be held at such place, within or without the State of Delaware, and hour as shall be determined by the Board of Directors. The day, place and hour of such annual meeting shall be specified in the notice of annual meeting. The meeting may be adjourned from time to time and place to place until its business is completed. Section 2. Special Meeting. Special meetings of stockholders may be called by the Board of Directors or the Chief Executive Officer. The notice of such meeting shall state the purpose of such meeting and no business shall be transacted thereat except as stated in the notice thereof. Any such meeting may be held at such place within or without the State of Delaware as may be fixed by the Board of Directors or the Chief Executive Officer, and as may be stated in the notice of such meeting. Section 3. Notice of Meeting. Notice of every meeting of the stockholders shall be given in the manner prescribed by law. 2 Section 4. Quorum. Except as otherwise required by law, the Certificate of Incorporation or these Bylaws, the holders of not less than one-third of the shares entitled to vote at any meeting of the stockholders, present in person or by proxy, shall constitute a quorum and the act of the majority of such quorum shall be deemed the act of the stockholders. If a quorum shall fail to attend any meeting, the chairman of the meeting may adjourn the meeting to another place, date, or time. Section 5. Qualification of Voters. The Board of Directors may fix a day and hour not more than sixty nor less than ten days prior to the day of holding any meeting of the stockholders as the time as of which the stockholders entitled to notice of and to vote at such meeting shall be determined. Only those persons who were holders of record of voting stock at such time shall be entitled to notice of and to vote at such meeting. Section 6. Procedure. The presiding officer at each meeting of stockholders shall conclusively determine the order of business, all matters of procedure and whether or not a proposal is proper business to be transacted at the meeting and has been properly brought before the meeting. The Board shall appoint two or more inspectors of election to serve at every meeting of the stockholders at which Directors are to be elected. Section 7. Nomination of Directors. Only persons nominated in accordance with the following procedures shall be eligible for election by stockholders as Directors. Nominations of persons for election as Directors at a meeting of stockholders called for the purpose of electing Directors may be made (a) by or at the direction of the Board of Directors or (b) by any stockholder in the manner herein provided. For a nomination to be properly made by a stockholder, the stockholder must give written notice to the Secretary of the Corporation so as to be received at the principal executive offices of the Corporation not less than (i) with respect to an annual meeting of stockholders, 120 days in advance of the date of the Corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 days from the date contemplated at the time of the previous year's proxy statement, such notice must be so received a reasonable time before the solicitation is made, and (ii) with respect to a special meeting of stockholders for the election of Directors, the close of business on the seventh day following the date on which the notice of such meeting is first given to stockholders. Each such notice shall set forth (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings -2- 3 between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other Information regarding each nominee proposed by such stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board; and (e) the consent of each nominee to serve as a Director of the Corporation if so elected. Section 8. Business at Annual Meeting. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors; (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors; (c) in the case of a nomination for Director, properly brought in accordance with the procedures set forth in Section 7 of Article II hereof; or (d) otherwise properly brought before the meeting by a stockholder entitled to vote at such meeting. For business other than a nomination for Director to be properly brought before an annual meeting by a stockholder, the stockholder must have given written notice to the Secretary of the Corporation so as to be received at the principal executive offices of the Corporation not less than 120 days in advance of the date of the Corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 days from the date contemplated at the time of the previous year's proxy statement, such notice must be so received a reasonable time before the solicitation is made. Each such notice shall set forth as to each matter the stockholder proposes to bring before the annual meeting (v) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (w) the name and address of the stockholder proposing such business; (x) the class and number of shares of the Corporation which are beneficially owned by the stockholder; (y) any material interest of the stockholder in such business; and (z) such other information regarding such business as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the matter been proposed by the Board of Directors. Notwithstanding anything in these Bylaws to the contrary, no business shall be considered properly brought before an annual meeting by a stockholder unless it is brought in accordance with the procedures set forth in this Section 8 of Article II. ARTICLE III. DIRECTORS Section 1. Number and Election. The Board of Directors of the Corporation shall consist of such number of Directors as are fixed from time to time by resolution of the Board and within the requirements set forth in the Certificate of Incorporation. Commencing with the annual election of Directors by the stockholders in 1986, the Directors shall be divided into three classes: Class I, Class II -3- 4 and Class III, each such class, as nearly as possible, to have the same number of Directors. The term of office of the initial Class I Directors shall expire at the annual election of Directors by the stockholders in 1987, the term of office of the initial Class II Directors shall expire at the annual election of Directors by the stockholders in 1988, and the term of office of the initial Class III Directors shall expire at the annual election of Directors by the stockholders in 1989. At each annual election of Directors by the stockholders held after 1985, the Directors chosen to succeed those whose terms have then expired shall be identified as being of the same class as the Directors they succeed and shall be elected by the stockholders for a term expiring at the third succeeding annual election of Directors. In all cases, Directors shall hold office until their respective successors are elected by the stockholders and have qualified. In the event that the holders of any class or series of stock of the Corporation having a preference as to dividends or upon liquidation of the Corporation shall be entitled, by a separate class vote, to elect Directors as may be specified pursuant to Article Fourth of the Corporation's Restated Certificate of Incorporation, then the provisions of such class or series of stock with respect to their rights shall apply. The number of Directors that may be elected by the holders of any such class or series of stock shall be in addition to the number fixed pursuant to the preceding paragraph. Except as otherwise expressly provided pursuant to Article Fourth of the Corporation's Restated Certificate of Incorporation, the number of Directors that may be so elected by the holders of any such class or series of stock shall be elected for terms expiring at the next annual meeting of stockholders and without regard to the classification of the remaining members of the Board of Directors and vacancies among Directors so elected by the separate class vote of any such class or series of stock shall be filled by the remaining Directors elected by such class or series, or, if there are no such remaining Directors, by the holders of such class or series in the same manner in which such class or series initially elected a Director. If at any meeting for the election of Directors, more than one class of stock, voting separately as classes, shall be entitled to elect one or more Directors and there shall be a quorum of only one such class of stock, that class of stock shall be entitled to elect its quota of Directors notwithstanding the absence of a quorum of the other class or classes of stock. Section 2. Vacancies. Vacancies and newly created directorships resulting from an increase in the number of Directors shall be filled by a majority of the Directors then in office, although less than a quorum, or by a sole remaining Director, and such Directors so chosen shall hold office until the next election of the class for which such Directors shall have been chosen, and until their successors are elected and qualified. Section 3. Regular Meetings. Regular meetings of the Board shall be held at such times and places as the Board may from time to time determine. -4- 5 Section 4. Special Meetings. Special meetings of the Board may be called at any time, at any place and for any purpose by the Chairman of the Board, or the President, or by any officer of the Corporation upon the request of a majority of the entire Board. Section 5. Notice of Meetings. Notice of regular meetings of the Board need not be given. Notice of every special meeting of the Board shall be given to the Directors at their usual places of business, or at such other addresses as shall have been furnished by them for the purpose. Such notice shall be given at least twelve hours (three hours if meeting is to be conducted by conference telephone) before the meeting by telephone or by being personally delivered, mailed, or telegraphed. Such notice need not include a statement of the business to be transacted at, or the purpose of, any such meeting. Section 6. Quorum. Except as may be otherwise provided by law or in these Bylaws, the presence of one-third of the entire Board shall be necessary and sufficient to constitute a quorum for the transaction of business at any meeting of the Board, and the act of a majority of such quorum shall be deemed the act of the Board. Less than a quorum may adjourn any meeting of the Board from time to time without notice. Section 7. Participation in Meetings by Conference Telephone. Members of the Board, or of any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. Section 8. Powers. The business, property, and affairs of the Corporation shall be managed by or under the direction of its Board of Directors, which shall have and may exercise all the powers of the Corporation to do all such lawful acts and things as are not by law, or by the Certificate of Incorporation, or by these Bylaws, directed or required to be exercised or done by the stockholders. Section 9. Compensation of Directors. Directors shall receive such compensation for their services as shall be determined by a majority of the entire Board provided that Directors who are serving the Corporation as officers or employees and who receive compensation for their services as such -5- 6 officers or employees shall not receive any salary or other compensation for their services as Directors. Section 10. Committees of the Board. A majority of the entire Board of Directors may designate one or more standing or temporary committees consisting of one or more Directors. The Board may invest such committees with such powers and authority, subject to the limitations of law and such conditions as it may see fit. ARTICLE IV. EXECUTIVE COMMITTEE Section 1. Election. At any meeting of the Board, an Executive Committee, composed of the Chairman of the Board, the President, and not less than three other members, may be elected by a majority vote of the entire Board to serve until the Board shall otherwise determine. Either the Chairman of the Board or the President, whichever is the Chief Executive Officer, shall be the Chairman of the Executive Committee, and the other shall be the Vice Chairman thereof, unless the Board shall otherwise determine. Members of the Executive Committee shall be members of the Board. Section 2. Powers. The Executive Committee shall have and may exercise all of the powers of the Board of Directors when the Board is not in session, except that, unless specifically authorized by the Board of Directors, it shall have no power to (a) elect directors or officers; (b) alter, amend, or repeal these Bylaws or any resolution of the Board of Directors relating to the Executive Committee; (c) declare any dividend or make any other distribution to the stockholders of the Corporation; (d) appoint any member of the Executive Committee; or (e) take any other action which legally may be taken only by the Board. Section 3. Rules. The Executive Committee shall adopt such rules as it may see fit with respect to the calling of its meetings, the procedure to be followed thereat, and its functioning generally. Any action taken with the written consent of all members of the Executive Committee shall be as valid and effectual as though formally taken at a meeting of said Executive Committee. Section 4. Vacancies. Vacancies in the Executive Committee may be filled at any time by a majority vote of the entire board. -6- 7 ARTICLE V. OFFICERS Section 1. Number. The officers of the Corporation shall be appointed or elected by the Board of Directors. The officers shall be a Chairman of the Board, a President, one or more Vice Chairmen, such number of Vice Presidents or other officers as the Board may from time to time determine, a Secretary, a Treasurer, and a Controller. The President shall be Chief Executive Officer unless the Board shall determine otherwise. The Chairman of the Board shall preside at all meetings of the Board and shall perform such other duties as may be assigned from time to time by the Board. In the absence of the Chairman or if such office shall be vacant, the President shall preside at all meetings of the Board. In the absence of the Chairman of the Board and the President, any other Board member designated by the Board may preside at all meetings of the stockholders and of the Board. The Board of Directors may appoint or elect a person as a Vice Chairman without regard to whether such person is a member of the Board of Directors. Section 2. Staff and Divisional Officers. The Chief Executive Officer may appoint at his discretion such persons to hold the title of staff vice president, divisional chairman, divisional president, divisional vice president or other similar designation. Such persons shall not be officers of the Corporation and shall retain such title at the sole discretion of the Chief Executive Officer who may at his will and from time to time make or revoke such designation. Section 3. Terms of Office. All officers, agents, and employees of the Corporation shall hold their respective offices or positions at the pleasure of the Board of Directors or the appropriate appointing authority and may be removed at any time by such authority with or without cause. Section 4. Duties. The officers, agents, and employees shall perform the duties and exercise the powers usually incident to the offices or positions held by them respectively, and/or such other duties and powers as may be assigned to them from time to time by the Board of Directors or the Chief Executive Officer. ARTICLE VI. INDEMNIFICATION OF DIRECTORS, OFFICERS, AND EMPLOYEES Section 1. General. The Corporation shall indemnify to the full extent permitted by and in the manner permissible under the Delaware General Corporation Law, as amended from time to time (but, in -7- 8 the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), any person made, or threatened to be made, a party to any action, suit, or proceeding, whether criminal, civil, administrative, or investigative, by reason of the fact that such person (i) is or was a director, advisory director, or officer of the Corporation or any predecessor of the Corporation, or (ii) is or was a director, advisory director or officer of the Corporation or any predecessor of the Corporation and served any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, advisory director, officer, partner, trustee, employee or agent at the request of the Corporation or any predecessor of the Corporation; provided, however, that except as provided in Section 4 of this Article VI, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors. Section 2. Advancement of Expenses. The right to indemnification conferred in this Article VI shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition, such advances to be paid by the Corporation within 20 days after the receipt by the Corporation of a statement or statements from the claimant requesting such advance or advances from time to time; provided, however, that if the General Corporation Law of the State of Delaware requires, the payment of such expenses incurred by a director, advisory director or officer in his or her capacity as a director, advisory director or officer (and not in any other capacity in which service was or is rendered by such person while a director, advisory director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking by or on behalf of such director, advisory director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director, advisory director or officer is not entitled to be indemnified under this Article VI or otherwise. Section 3. Procedure for Indemnification. To obtain indemnification under this Article VI, a claimant shall submit to the Corporation a written request, including therein or therewith such documentation and information as is reasonably available to the claimant and is reasonably necessary to determine whether and to what extent the claimant is entitled to indemnification. Upon written request by a claimant for indemnification pursuant to the first sentence of this Section 3, a determination, if required by applicable law, with respect to the claimant's entitlement thereto shall be made as follows: (1) if requested by the claimant, by Independent Counsel (as hereinafter defined), or (2) if no request is made by the claimant for a determination by Independent Counsel, (i) by a majority vote of the Disinterested Directors (as hereinafter defined), even though less than a quorum, or by a majority vote of a committee of Disinterested Directors designated by a majority vote of Disinterested Directors, even though less than a quorum, or (ii) if there are no Disinterested Directors or if the Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to the claimant, or (iii) if the Disinterested Directors so direct, by the stockholders of the Corporation. In the event -8- 9 the determination of entitlement to indemnification is to be made by Independent Counsel at the request of the claimant, the Independent Counsel shall be selected by the Board of Directors unless there shall have occurred within two years prior to the date of the commencement to the action, suit or proceeding for which indemnification is claimed a "Change of Control of the Corporation" as defined in the Firstar Corporation 1998 Executive Stock Incentive Plan, in which case the Independent Counsel shall be selected by the claimant unless the claimant shall request that such selection be made by the Board of Directors. If it is so determined that the claimant is entitled to indemnification, payment to the claimant shall be made within 10 days after such determination. Section 4. Certain Remedies. If a claim under Section 1 of this Article VI is not paid in full by the Corporation within thirty days after a written claim pursuant to Section 3 of this Article VI has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standard of conduct which makes it permissible under the General Corporation Law of the State of Delaware for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, Independent Counsel or stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the Corporation (including its Board of Directors, Independent Counsel or stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 5. Binding Effect. If a determination shall have been made pursuant to Section 3 of this Article VI that the claimant is entitled to indemnification, the Corporation shall be bound by such determination in any judicial proceeding commenced pursuant to Section 4 of this Article VI. Section 6. Validity of this Article VI. The Corporation shall be precluded from asserting in any judicial proceeding commenced pursuant to Section 4 of this Article VI that the procedures and presumptions of this Article VI are not valid, binding and enforceable and shall stipulate in such proceeding that the Corporation is bound by all the provisions of this Article VI. Section 7. Nonexclusivity, etc. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article VI shall not be exclusive -9- 10 of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, By-Laws, agreement, vote of stockholders or Disinterested Directors or otherwise. No repeal or modification of this Article VI shall in any way diminish or adversely affect the rights of any present or former director, advisory director, officer, employee or agent of the Corporation or any predecessor thereof hereunder in respect of any occurrence or matter arising prior to any such repeal or modification. Section 8. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware. To the extent that the Corporation maintains any policy or policies providing such insurance, each such director or officer, and each such agent or employee to whom rights to indemnification have been granted as provided in Section 9 of this Article VI, shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage thereunder for any such director, officer, employee or agent. Section 9. Indemnification of Other Persons. The Corporation may grant rights to indemnification, and rights to be paid by the Corporation the expenses incurred in defending any proceeding in advance of its final disposition, to any present or former employee or agent of the Corporation or any predecessor of the Corporation to the fullest extent of the provisions of this Article VI with respect to the indemnification and advancement of expenses of directors, advisory directors and officers of the Corporation. Section 10. Severability. If any provision or provisions of this Article VI shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (1) the validity, legality and enforceability of the remaining provisions of this Article VI (including, without limitation, each portion of any paragraph of this Article VI containing any such provision held to be invalid, illegal or unenforceable, that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (2) to the fullest extent possible, the provisions of this Article VI (including, without limitation, each such portion of any paragraph of this Article VI containing any such provision held to be invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. Section 11. Certain Definitions. For purposes of this Article VI: (1) "Disinterested Director" means a director of the Corporation who is not and was not a party to the matter in respect of which indemnification is sought by the claimant. -10- 11 (2) "Independent Counsel" means a law firm, a member of a law firm, or an independent practitioner that is experienced in matters of corporation law and shall include any such person who, under the applicable standards of professional conduct then prevailing, would not have a conflict of interest in representing either the Corporation or the claimant in an action to determine the claimant's rights under this Article VI. Section 12. Notices. Any notice, request or other communication required or permitted to be given to the Corporation under this Article VI shall be in writing and either delivered in person or sent by telecopy, telex, telegram, overnight mail or courier service, or certified or registered mail, postage prepaid, return receipt requested, to the Secretary of the Corporation and shall be effective only upon receipt by the Secretary. ARTICLE VII. STOCK Section 1. Certificated or Uncertificated Shares. The Board of Directors may authorize the issuance of stock either in certificated or in uncertificated form. If shares are issued in uncertificated form, each stockholder shall be entitled upon written request to a stock certificate or certificates, representing and certifying the number and kind of full shares held, signed as provided in Section 2 of this Article VII. Certificates for shares of stock shall be in such form as the Board of Directors may from time to time prescribe. The shares of the stock of the Corporation shall be transferable on the books of the Corporation by the holder thereof in a person or by his or her attorney upon surrender for cancellation of a certificate or certificates for the same number of shares, or other evidence of ownership if no certificates shall have been issued, with an assignment and power of transfer endorsed thereon or attached thereto, duly executed, and with such proof of the validity of the signature as the Corporation or its agents may reasonably require. Section 2. Signatures. The certificates of stock shall be signed by the Chairman, President, or a Vice President and by the Secretary or an Assistant Secretary, provided that if such certificates are signed by a transfer agent or transfer clerk and by a registrar, the signatures of such Chairman, President, Vice President, Secretary, or Assistant Secretary may be facsimiles, engraved, or printed. Section 3. Replacement. No certificate for shares of stock in the Corporation shall be issued in place of any certificate alleged to have been lost, stolen, or destroyed except upon production of such evidence of such loss, theft, or destruction and upon delivery to the Corporation of a bond of -11- 12 indemnity in such amount, and upon such terms and secured by such surety as the Board of Directors or the Executive Committee in its discretion may require. ARTICLE VIII. MISCELLANEOUS Section 1. Seal. The Corporation seal shall bear the name of the Corporation, the date 1929 and the words "Corporate Seal, Delaware". Section 2. Fiscal Year. The fiscal year of the Corporation shall begin on the first day of January in each year and shall end on the thirty-first day of December following. ARTICLE IX. AMENDMENTS Section 1. These Bylaws, or any of them, may from time to time be supplemented, amended, or repealed (a) by a majority vote of the entire Board of Directors or (b) at any annual or special meeting of the stockholders. ARTICLE X. EMERGENCY BYLAW Section 1. Operative Event. The Emergency Bylaw provided in this Article X shall be operative during any emergency resulting from an attack on the United States, any nuclear or atomic incident, or other event which creates a state of disaster of sufficient severity to prevent the normal conduct and management of the affairs and business of the Corporation, notwithstanding any different provision in the preceding articles of the Bylaws or in the Certificate of Incorporation of the Corporation or in the General Corporation Law of Delaware. To the extent not inconsistent with this Emergency Bylaw, the Bylaws provided in the preceding Articles shall remain in effect during such emergency and upon the termination of such emergency the Emergency Bylaw shall cease to be operative unless and until another such emergency shall occur. Section 2. Notice of Meeting. During any such emergency, any meeting of the Board of Directors may be called by any officer of the Corporation or by any Director. Notice shall be given by such person or by -12- 13 any officer of the Corporation. The notice shall specify the place of the meeting, which shall be the head office of the Corporation at the time if feasible and otherwise any other place specified in the notice. The notice shall also specify the time of the meeting. Notice may be given only to such of the Directors as it may be feasible to reach at the time and by such means as may be feasible at the time, including publication or radio. If given by mail, messenger, telephone, or telegram, the notice shall be addressed to the Directors at their residences or business addresses, or such other places as the person giving the notice shall deem most suitable. Notice shall be similarly given, to the extent feasible, to the other persons serving as Directors referred to in Section 3 below. Notice shall be given at least two days before the meeting if feasible in the judgment of the person giving the notice and otherwise on any shorter time he may deem necessary. Section 3. Quorum. During any such emergency, at any meeting of the Board of Directors, a quorum shall consist of one-third of the number of Directors fixed at the time pursuant to Article III of the Bylaws. If the Directors present at any particular meeting shall be fewer than the number required for such quorum, other persons present, to the number necessary to make up such quorum, shall be deemed Directors for such particular meeting as determined by the following Provisions and in the following order of priority: (a) All Executive Vice Presidents of the Corporation in order of their seniority of first election to such office, or if two or more shall have been first elected to such office on the same day, in the order of their seniority in age; and (b) All Senior Vice Presidents of the Corporation in order of their seniority of first election to such office, or if two or more shall have been first elected to such office on the same day, in the order of their seniority in age; and (c) All Vice Presidents of the Corporation in order of their seniority of first election to such office, or if two or more shall have been first elected to such office on the same day, in the order of their seniority in age; and (d) Any other persons that are designated on a list that shall have been approved by the Board of Directors before the emergency, such persons to be taken in such order of priority and subject to such conditions as may be provided in the resolution approving the list. Section 4. Lines of Management Succession. The Board of Directors, during as well as before any such emergency, may provide and from time to time modify lines of succession in the event that during such an emergency any or all officers or agents of the Corporation shall for any reason be rendered incapable of discharging their duties. -13- 14 Section 5. Office Relocation. The Board of Directors, during as well as before any such emergency, may, effective in the emergency, change the head office or designate several alternative head offices or regional offices, or authorize the officers to do so. Section 6. Liability. No officer, director, or employee acting in accordance with this Emergency Bylaw shall be liable except for willful misconduct. Section 7. Repeal or Amendment. This Emergency Bylaw shall be subject to repeal or change by further action of the Board of Directors or by action of the stockholders, except that no such repeal or change shall modify the provisions of the next preceding paragraph with regard to action or inaction prior to the time of such repeal or change. Any such amendment of this Emergency Bylaw may make any further or different provision that may be practical and necessary for the circumstances of the emergency deems it to be in the best interest of the Corporation to do so. -14- EX-10.20 4 c59511ex10-20.txt SEPARATION AGREEMENT & GENERAL RULES 1 SEPARATION AGREEMENT AND GENERAL RELEASE This Separation Agreement and General Release ("Agreement") is between Philip G. Heasley ("you") and U.S. Bancorp. The following facts are important to the creation of this Agreement: A. You are an employee of U.S. Bancorp. B. Your employment with U.S. Bancorp or its affiliates is terminating. C. You agree to provide U.S. Bancorp with a release of all claims you may have against U.S. Bancorp or its affiliates, and U.S. Bancorp agrees to provide you with consideration in return for your release and other commitments in this Agreement. You and U.S. Bancorp agree to the following: 1. Your active employment with U.S. Bancorp and its affiliates is terminating effective April 30, 2001 or upon your earlier commencement of any new employment prior to April 30, 2001 ("Termination Date"). You agree to inform Rob Sayre immediately upon accepting any new employment prior to April 30, 2001. You acknowledge that you have relinquished your titles of President and Chief Operating Officer. You agree to return all property of U.S. Bancorp and its affiliates to U.S. Bancorp on your Termination Date. 2. From the date of execution of this Agreement until November 30, 2000 or until your Termination Date, whichever occurs first, you will remain employed by U.S. Bancorp at your current annual salary. During this period, you agree to use your best efforts to be available at U.S Bancorp's request to consult with and assist other employees of U.S. Bancorp in the transition of your previous assignments and responsibilities as well as to consult on such other matters as U.S. Bancorp should reasonably request. You also agree to serve as Chairman of the Board of VISA U.S.A. as the U.S. Bank representative. U.S. Bancorp will provide you the use of your office and secretarial support until November 30, 2000, contingent on a continuing amicable relationship and the observance of your obligations under this Agreement, including the confidentiality and non-disparagement provisions set forth below in paragraph 4. 3. If you have not accepted any new employment prior to November 30, 2000, you will remain employed by U.S. Bancorp until your Termination Date at a monthly salary of $10,000, less applicable tax withholding. During this period, you agree to continue to serve as Chairman of the Board of VISA U.S.A. as the U.S. Bank representative. 4. You agree to keep confidential all secret or confidential information concerning U.S. Bancorp or its affiliates obtained during your employment with U.S. Bancorp unless U.S. Bancorp consents to disclosure in writing. You agree that you will not use such information for your own benefit or for the benefit of any other person or entity, and that you will not disclose such information to any person or entity for any reason. You agree that you will not do or say anything at any time to disparage the character, integrity or business of U.S. Bancorp or any of its affiliates or their respective directors, officers and employees. U.S. Bancorp agrees that it will 1 2 make a good faith effort to ensure that its employees having personal knowledge of the circumstances surrounding your employment separation do not do or say anything to disparage your character, integrity, or business reputation. This paragraph does not apply to any statements or disclosures made during the course of legal proceedings or by U.S. Bancorp to its outside auditors, or in response to a court order, subpoena, inquiry by a government agency or otherwise as required by laws or regulations. 5. You release the following persons and entities from any and all legal claims, known or unknown, that you may have against them as of the date you sign this Agreement: o U.S. Bancorp; o All affiliates of U.S. Bancorp; o All officers, directors, employees, agents, assigns, insurers, representatives, counsel, administrators, successors and shareholders of U.S. Bancorp; and o All employee benefit plans sponsored by U.S. Bancorp (including all severance pay programs), and the trusts, trustees, officers and agents of such plans. You understand that by releasing all of your legal claims against the persons and entities listed above, you are releasing all of your rights to bring any legal claims against them, including any claims based upon any of the following: o Federal, state or local employment, employee benefits, or discrimination laws, regulations or requirements, including Title VII of the Civil Rights Act of 1964, 42 U.S.C. Section 2000e et seq., the Minnesota Human Rights Act, Minn. Stat. Section 363.01 et seq., the Older Workers Benefit Protection Act and the Age Discrimination in Employment Act, 29 U.S.C. Section 621 et seq., the Americans with Disabilities Act, 42 U.S.C. Section 12101 et seq., and the Employee Retirement Income Security Act of 1974, 29 U.S.C. Section 1001 et seq.; o Any other statute, ordinance, or regulation; o Any contract or quasi-contract; o Any tort; or o Any other legal theory. You understand that your release of all legal claims includes all claims related to your employment or employee benefits with U.S. Bancorp or its affiliates, including your hiring, the conditions and terms of your employment and the termination of your employment. In connection with such release, you acknowledge and agree that the terms of this Agreement constitute a complete waiver and/or constitute satisfaction of any and all obligations of U.S. Bancorp or its affiliates in connection with any of such terms of employment including, without limitation, any obligations of U.S. Bancorp pursuant to your Employment Agreement, dated July 24, 1997, and your letter agreement, dated February 8, 2000 (providing for certain severance benefits in the event your employment is terminated subsequent to a change in control), or any other severance arrangements or employment termination benefit arrangements. 2 3 Your release does not affect any rights you may have under the U.S. Bancorp 401(k) Savings Plan, the U.S. Bancorp Cash Balance Pension Plan, or any other tax-qualified or non-qualified retirement plan in which you may have a vested, unpaid, accrued benefit. In addition, your release does not affect any rights you may have under the terms of U.S. Bancorp's Health Care Plan, Dental Care Plan, Life Insurance Plan, AD&D Plan and Employee Stock Purchase Plan or other employee benefit plans with regard to benefits in the ordinary course (excluding all severance and change in control plans, programs and agreements and other plans specifically dealt with in this Agreement) to the extent you are a participant in such plans. Further, your release does not affect any obligation of U.S. Bancorp or its affiliates to provide indemnification to you as an employee, officer and director of U.S. Bancorp or its affiliates pursuant to the terms of the respective charter documents of such entities or other written indemnification agreements. 6. In return for your release and other commitments in this Agreement, you will be provided with the pay and benefits provided for in this Agreement and you agree that such pay and benefits shall consist solely of the following: (a) Cash Payments. You will receive a lump sum payment in the amount of $5,019,235, less applicable tax withholding, on November 30, 2000. Additionally, within sixty days following your Termination Date, you will receive a lump sum payment in the amount of $3,522,084, less applicable tax withholding, in full satisfaction of any benefits relating to U.S. Bancorp's Nonqualified Supplemental Executive Retirement Plan and U.S. Bancorp's Defined Benefit Excess Plan; such amount, however, will be reduced by any amount payable from the U.S. Bancorp Cash Balance Pension Plan. You will be paid for unused, accrued vacation within two (2) pay periods following your Termination Date. If U.S. Bancorp does not make any payment referred to in this paragraph on or before the due date, U.S. Bancorp will pay interest on the unpaid amount from the date due at the applicable federal rate provided for in Section 7872(f)(2)(A) of the IRS Code. (b) Health and Dental Insurance Benefits For Thirty-Six Months. Following your Termination Date, pursuant to COBRA, you may elect to continue your current health and dental insurance benefits (COBRA rights are more fully described in the U-Select Benefits Handbook). If you elect to continue any such benefit(s), you will be entitled to continue such benefit(s) at the active employee rate for eighteen months following your Termination Date. If you are not eligible to receive other health and dental insurance benefit(s) from another employer at the conclusion of the eighteen-month period, you will be entitled to continue such benefit(s) at the active employee rate for an additional eighteen months or until you become eligible for such benefit(s) through your new employer. (c) Health Insurance Benefits After Thirty-Six Months. You agree to make a good faith effort to negotiate to receive lifetime health benefits from your new employer and, if necessary, any subsequent employer(s). If your new employer or any subsequent employer(s) are Fortune 1000 companies or their affiliates, any eligibility to receive health insurance benefits from U.S. Bancorp under this paragraph will cease immediately upon commencement of any such employment. If your new employer and any subsequent employer(s) are not Fortune 1000 companies or their affiliates, and you are unable in good 3 4 faith to negotiate to receive lifetime health benefits, U.S. Bancorp will provide lifetime health insurance benefits to you and your current spouse pursuant to U.S. Bancorp's Retiree Health Care Program as that program may be amended from time to time; such benefits will be secondary to any benefits you could elect to receive from your future employer(s). You will not be eligible for any future stock awards (except for reload stock options prior to your Termination Date) or any bonus or incentive payments except as set forth in this Agreement. Following your Termination Date, you will not be entitled to vacation accrual or group disability insurance, and you will not be permitted to contribute to the U.S. Bancorp 401(k) Savings Plan. In addition, you will receive no additional pay or service credits under the U.S. Bancorp Cash Balance Pension Plan for payments made after your Termination Date (investment credits will be posted to your account in accordance with the terms of the Plan). Your executive disability insurance will end on your Termination Date, although you may continue coverage (limited to $200,000) with the vendor at your own expense after your Termination Date. Your stock options and restricted stock will be governed by the terms of the applicable agreements. Pursuant to the applicable agreements, your stock options and restricted stock will continue to vest while you remain on U.S. Bancorp's payroll, and any exercise of vested stock options must be completed no later than 90 days after your Termination Date. 7. U.S. Bancorp agrees to provide you the opportunity to sell shares of U.S. Bancorp stock back to U.S. Bancorp under its stock repurchase program then in effect, subject to the timing requirements and normal pricing practices of U.S. Bancorp's Treasury group and all applicable legal requirements. 8. U.S. Bancorp agrees to waive the non-competition provision set forth in paragraph 9(b) of your Employment Agreement, dated July 24, 1997, and any other similar provision under any other agreement. 9. U.S. Bancorp releases any and all legal claims it may have against you as of the date it signs this Agreement. This release includes all claims related to your employment and employee benefits with U.S. Bancorp or its affiliates or subsidiaries, including your hiring, the conditions and terms of your employment and your termination, under any federal, state or local employment, employee benefits and discrimination laws, regulations and requirements, or any contract, quasi-contract or tort. 10. You acknowledge that U.S. Bancorp will disclose the compensation paid to you in connection with your termination of employment as required under the federal proxy rules and will file a copy of this Agreement as a material contract exhibit to a periodic financial report as required under the Securities Exchange Act of 1934. 11. You agree to repay your stock option loans in full no later than 90 days after your Termination Date. 4 5 12. Prior to your Termination Date, you agree that you will not directly or indirectly solicit, hire or induce (or attempt to solicit, hire or induce) any employees of U.S. Bancorp or any of its affiliates to leave their employment. 13. You agree to keep the terms of this Agreement strictly confidential until such time that the Agreement is required to be disclosed in accordance with SEC requirements, except that you may tell your present or future attorneys, accountants, tax advisors, financial advisors, and immediate family, who must be advised to hold the information strictly confidential. 14. You have read this Agreement and voluntarily agree to the terms of this Agreement. You are hereby advised to consult with an attorney before you sign this Agreement. You have been given at least twenty-one (21) days to consider this Agreement and decide whether to sign it. You agree that if you asked that this Agreement be changed in some way, both the time before and the time after you requested the change count as parts of the 21-day period. You may revoke this Agreement up to fifteen (15) days after you sign it by either hand-delivering written notice to U.S. Bancorp or by sending written notice postmarked within the 15-day period and addressed as follows: Robert H. Sayre Executive Vice President of Human Resources U.S. Bancorp 601 Second Avenue South Minneapolis, MN 55402 If you revoke this Agreement, this Agreement will be null and void. 15. In the event that you die before receipt of the pay and benefits described in paragraphs 6(a), 6(b) and 6(c), your designated beneficiaries as provided for in your Last Will and Testament will receive any remaining amounts due pursuant to paragraph 6(a), your dependents will be eligible for continued coverage of the benefits described in 6(b), and your current spouse will be eligible for continued coverage of the benefits described in 6(c); provided, that all of the terms and conditions of this Agreement shall be deemed to apply to such beneficiaries to the same extent that such terms and conditions apply to you. 16. You may not without U.S. Bancorp's written consent assign to anyone any of your rights or obligations under this Agreement. 17. This Agreement does not mean and cannot be interpreted to mean that U.S. Bancorp or any of its affiliates acted wrongfully toward you or anyone else. 18. This Agreement contains the entire agreement between you and U.S. Bancorp pertaining to your employment with U.S. Bancorp or any of its affiliates and the termination of your employment with U.S. Bancorp. Any modification or addition to this Agreement must be in writing and signed by both you and U.S. Bancorp. 5 6 19. If a court decides that any part of this Agreement is invalid or cannot be enforced, such part will be deleted or, if possible, modified so that it is enforceable, and the other parts of this Agreement will remain in effect. 20. This Agreement will be governed by the laws of the State of Minnesota. 21. U.S. Bancorp agrees to pay your reasonable attorney's fees incurred in connection with the negotiation of this Agreement. 22. U.S. Bancorp will maintain a directors' and officers' liability insurance policy or policies covering you for a six-year period following your Termination Date for activities you were involved in through your Termination Date to the same extent that such policy or policies remain in effect and cover officers of U.S. Bancorp or its affiliates in their capacities as officers. You agree to utilize any other coverage that may be applicable through your role as Chairman of the Board of VISA U.S.A. 23. U.S. Bancorp will pay to you any legal fees and expenses incurred by you as a result of successful litigation against U.S. Bancorp for nonpayment of any benefit set forth in paragraph 6 of this Agreement. By signing below, you and U.S. Bancorp agree to be bound by the terms of this Agreement. Oct. 6, 2000 /s/ PHILIP G. HEASLEY - ------------------------------ -------------------------------------------- Date Philip G. Heasley U.S. BANCORP Sept. 26, 2000 By /s/ ROBERT H. SAYRE - ----------------------------- ----------------------------------------- Date Robert H. Sayre Executive Vice President, Human Resources 6 EX-12 5 c59511ex12.txt STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS 1 EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31 (Dollars in Millions) 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ EARNINGS 1. Net income.............................................. $1,592.0 $1,506.5 $1,327.4 $ 838.5 $1,218.7 2. Applicable income taxes................................. 869.3 855.0 766.5 552.2 725.7 -------------------------------------------------------- 3. Income before taxes (1 + 2)............................. $2,461.3 $2,361.5 $2,093.9 $1,390.7 $1,944.4 -------------------------------------------------------- 4. Fixed charges: a. Interest expense excluding interest on deposits...... $1,567.9 $1,124.8 $ 955.8 $ 808.7 $ 702.5 b. Portion of rents representative of interest and amortization of debt expense......................... 57.1 51.4 47.7 41.2 45.4 -------------------------------------------------------- c. Fixed charges excluding interest on deposits (4a + 4b).................................................. 1,625.0 1,176.2 1,003.5 849.9 747.9 d. Interest on deposits................................. 1,667.9 1,291.2 1,391.0 1,436.8 1,441.3 -------------------------------------------------------- e. Fixed charges including interest on deposits (4c + 4d).................................................. $3,292.9 $2,467.4 $2,394.5 $2,286.7 $2,189.2 -------------------------------------------------------- 5. Amortization of interest capitalized.................... $ -- $ -- $ -- $ -- $ -- 6. Earnings excluding interest on deposits (3 + 4c + 5).... 4,086.3 3,537.7 3,097.4 2,240.6 2,692.3 7. Earnings including interest on deposits (3 + 4e + 5).... 5,754.2 4,828.9 4,488.4 3,677.4 4,133.6 8. Fixed charges excluding interest on deposits (4c)....... 1,625.0 1,176.2 1,003.5 849.9 747.9 9. Fixed charges including interest on deposits (4e)....... 3,292.9 2,467.4 2,394.5 2,286.7 2,189.2 RATIO OF EARNINGS TO FIXED CHARGES 10. Excluding interest on deposits (line 6/line 8).......... 2.51 3.01 3.09 2.64 3.60 11. Including interest on deposits (line 7/line 9).......... 1.75 1.96 1.87 1.61 1.89 - ------------------------------------------------------------------------------------------------------------------------
EX-21 6 c59511ex21.txt SUBSIDARIES OF THE REGISTRANT 1 EXHIBIT 21 U.S. BANCORP BANKING AND NON-BANKING SUBSIDIARIES BANK AND TRUST OPERATIONS MINNESOTA............................ U.S. Bank National Association -- Has branches in Minnesota, Oregon, Washington, Colorado, California, Idaho, Nebraska, North Dakota, Nevada, South Dakota, Iowa, Illinois, Utah, Wisconsin and Wyoming. U.S. Bank Trust National Association ARIZONA.............................. U.S. Bank Trust National Association CALIFORNIA........................... U.S. Bank Trust National Association DELAWARE............................. U.S. Bank Trust National Association GEORGIA.............................. U.S. Bank Trust National Association ILLINOIS............................. U.S. Bank Trust National Association MONTANA.............................. U.S. Bank National Association MT U.S. Bank Trust National Association MT NEW YORK............................. U.S. Bank Trust National Association NORTH DAKOTA......................... U.S. Bank National Association ND OREGON............................... U.S. Bank National Association OR U.S. Bank Trust Company, National Association SOUTH DAKOTA......................... U.S. Bank Trust National Association SD WASHINGTON........................... U.S. Bank Trust National Association
2 NON-BANKING SUBSIDIARIES
STATE OF SUBSIDIARY INCORPORATION ---------- ------------- FBS Capital I............................................... Delaware First Building Corporation.................................. Minnesota First Group Royalties, Inc.................................. Minnesota First System Services, Inc.................................. Minnesota P.I.B., Inc................................................. Minnesota U.S. Bancorp Capital I...................................... Delaware U.S. Bancorp Card Services, Inc............................. Minnesota U.S. Bancorp Community Development Corporation.............. Minnesota U.S. Bancorp Equity Capital, Inc............................ Minnesota U.S. Bancorp Information Services, Inc...................... Minnesota U.S. Bancorp Insurance Services, Inc........................ Delaware U.S. Bancorp Investments, Inc............................... Minnesota U.S. Bancorp Piper Jaffray Companies Inc.................... Delaware U.S. Bancorp Venture Capital Corporation.................... Minnesota USB Capital II.............................................. Delaware USB Trade Services Limited.................................. Hong Kong
EX-23 7 c59511ex23.txt CONSENT OF ERNST & YOUNG LLP 1 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the following Registration Statements and related Prospectuses of U.S. Bancorp of our report dated January 18, 2001, except for Note C, as to which the date is February 27, 2001, with respect to the consolidated financial statements of U.S. Bancorp included in this Annual Report (Form 10-K) for the year ended December 31, 2000.
Registration Form Statement No. Purpose - ----------------------------------------------------------------------------------------------------------- S-8 33-16242 1987 Stock Option Plan S-8 33-52835 1988 Equity Participation Plan S-8 333-01099 FirsTier Financial, Inc. Omnibus Equity Plan (as assumed by U.S. Bancorp) S-8 333-01421 1994 & 1991 Stock Incentive Plan S-8 333-02623 1996 Stock Incentive Plan S-8 333-02621 Amended & Restated Employee Stock Purchase Plan S-8 333-21291 Capital Accumulation Plan S-8 333-32653 Employee Investment Plan S-8 333-32635 1997 Stock Incentive Plan S-8 333-51627 Piper Jaffray Companies, Inc. 1993 Omnibus Stock Plan (as assumed by U.S. Bancorp) S-8 333-51635 1997 Stock Incentive Plan S-8 333-51641 Capital Accumulation Plan S-8 333-76887 1999 Stock Incentive Plan S-8 333-82691 Bank of Commerce 1989 Stock Option Plan and 1998 Stock Plan (as assumed by U.S. Bancorp) S-8 333-38846 1999 Stock Incentive Plan S-8 333-47968 Scripps Bank 1992 and 1995 Stock Option Plans and 1998 Outside Directors Stock Option Plan S-3 33-61667 Warrants for settlement of Edina Realty litigation S-3 333-02983 Automatic Dividend Reinvestment and Common Stock Purchase Plan S-3 333-32701 Automatic Dividend Reinvestment and Common Stock Purchase Plan (1997 DRIP) S-3 333-45211 Universal Shelf Registration S-3 333-67465 Libra Investments, Inc. S-3 333-83643 Universal Shelf Registration S-3 333-32572 Oliver-Allen Corporation, Inc. S-4 333-48532 Firstar Corporation
Minneapolis, Minnesota February 27, 2001 -----END PRIVACY-ENHANCED MESSAGE-----