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
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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