-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JjUVDbBAfCq/TZMxPBEJ5j+50hhvVMEISffqy0iYvcGF59FwY9O9O8tSiheV3QUk 2mDH4m/tcI7wZV+HVbIr7g== 0001047469-98-008045.txt : 20030406 0001047469-98-008045.hdr.sgml : 20030406 19980227155419 ACCESSION NUMBER: 0001047469-98-008045 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980227 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: US BANCORP \DE\ CENTRAL INDEX KEY: 0000036104 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 410255900 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-06880 FILM NUMBER: 98552669 BUSINESS ADDRESS: STREET 1: FIRST BANK PL STREET 2: 601 SECOND AVE S CITY: MINNEAPOLIS STATE: MN ZIP: 55402-4302 BUSINESS PHONE: 6129731111 MAIL ADDRESS: STREET 1: 601 2ND AVENUE SOUTH-FIRST BANK PLACE STREET 2: 601 2ND AVENUE SOUTH-FIRST BANK PLACE CITY: MINNEAPOLIS STATE: MN ZIP: 55402-4302 FORMER COMPANY: FORMER CONFORMED NAME: FIRST BANK SYSTEM INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FIRST BANK STOCK CORP DATE OF NAME CHANGE: 19720317 10-K405 1 FORM 10-K405 1997 1997 ANNUAL REPORT AND FORM 10-K [LOGO]-Registered Trademark- U.S. BANCORP CONTENTS -------- 2 LETTER TO SHAREHOLDERS 6 BUSINESS LINE REVIEWS 6 Commercial & Business Banking and Private Financial Services 9 Retail Banking 12 Payment Systems 15 Corporate Trust & Institutional Financial Services 18 MANAGEMENT'S DISCUSSION & ANALYSIS 41 CONSOLIDATED FINANCIAL STATEMENTS 69 FIVE-YEAR CONSOLIDATED FINANCIAL STATEMENTS 71 QUARTERLY CONSOLIDATED FINANCIAL DATA 74 SUPPLEMENTAL FINANCIAL DATA 76 FORM 10-K 80 EXECUTIVE OFFICERS 81 DIRECTORS 82 CORPORATE DATA WHERE TO FIND U.S. BANCORP Map of the United States. The 17 states (California, Colorado, Idaho, Illinois, Iowa, Kansas, Minnesota, Montana, Nebraska, Nevada, North Dakota, Oregon, South Dakota, Utah, Washington, Wisconsin, Wyoming) in which U.S. Bancorp has retail banking offices are shaded. Also plotted are locations of 37 metro areas in 30 states with leasing offices (Birmingham, Alabama; Mesa, Arizona; Fremont and Woodland Hills, California; Denver, Colorado; Monroe, Connecticut; Niceville and Winter Park, Florida; Atlanta, Georgia; Boise, Idaho; St. Charles and Willow Springs, Illinois; Overland Park, Kansas; Louisville, Kentucky; Metairie, Louisiana; Mount Airy, Maryland; Newton, Massachusetts; Farmington Hills, Michigan; Minneapolis, Minnesota; Billings, Montana; Oak Ridge, New Jersey; Poughkeepsie, New York; Charlotte, North Carolina; Fargo, North Dakota; Cincinnati, Cleveland and Columbus, Ohio; Portland, Oregon; Yardley, Pennsylvania; Sioux Falls, South Dakota; Mount Juliet, Tennessee; Houston and Irving, Texas; Sandy, Utah; Seattle and Spokane, Washington; and Milwaukee, Wisconsin) and 15 corporate trust offices in 13 states (Phoenix, Arizona; Los Angeles and San Francisco, California; Denver, Colorado; Boise, Idaho; Chicago, Illinois; Detroit and Lansing, Michigan; St. Paul, Minnesota; Billings, Montana; New York, New York; Portland, Oregon; Sioux Falls, South Dakota; Salt Lake City, Utah; and Seattle, Washington). - - - BANKING REGION - - - CORPORATION TRUST OFFICES - - - LEASING OFFICES ABOUT THE COMPANY U.S. Bancorp is a multistate bank holding company with headquarters in Minneapolis, Minnesota. Through our bank and other subsidiaries, we offer businesses, institutions, governments and individuals a comprehensive array of solutions to meet their financial needs. On August 1, 1997, First Bank System, Inc. (FBS) of Minneapolis acquired U.S. Bancorp of Portland, Oregon, and assumed the U.S. Bancorp name. The combined organization is the 15th largest U.S. commercial bank holding company, with assets of $71.3 billion as of December 31, 1997. Our market capitalization of more than $27.6 billion at year-end 1997 places us 9th among U.S. bank holding companies. U.S. Bancorp* also ranks among the top-performing U.S. bank holding companies in terms of profitability and efficiency. We posted 1997 return on average assets of 1.83 percent, return on average common equity of 22.0 percent, and an efficiency ratio of 48.9 percent, all on a combined basis and before nonrecurring items. U.S. Bancorp is a market leader serving millions of customers principally in 17 states from the Midwest to the Rocky Mountains to the Pacific Northwest. U.S. Bancorp focuses on providing anytime, anywhere access to high-quality products and services to our retail customers, and customized solutions to businesses and affluent clients with more complex needs. Through our bank and other subsidiaries, we also offer specialized expertise and leadership in corporate trust services, electronic credit card payment systems, and investments. U.S. Bancorp is committed to satisfying customers and creating shareholder value. Our four business lines--Commercial & Business Banking and Private Financial Services, Retail Banking, Payment Systems, and Corporate Trust & Institutional Financial Services--are focused on fulfilling these commitments to customers and shareholders. U.S. Bancorp is listed on the New York Stock Exchange under the ticker symbol USB. *The August 1, 1997 acquisition of U.S. Bancorp by First Bank System, Inc. was accounted for as a pooling-of-interests. Accordingly, this report provides financial information reflecting the results of the operations of the two companies on a combined basis for all periods presented. FINANCIAL SUMMARY
Percent Change (Dollars in Millions, Except Per Share Data) 1997 1996 1996-1997 - - ------------------------------------------------------------------------------------------------------ Income before nonrecurring items $1,255.2 $1,142.1 9.9% Nonrecurring items (416.7) 76.6 * ----------------------- Net income $ 838.5 $1,218.7 (31.2) ----------------------- PER COMMON SHARE Net income $ 3.39 $ 4.81 (29.5) Diluted net income 3.34 4.72 (29.2) Earnings on a cash basis (diluted)** 3.80 5.23 (27.3) Dividends paid 1.86 1.65 12.7 Common shareholders' equity 23.88 22.82 4.6 PER COMMON SHARE BEFORE NONRECURRING ITEMS Income 5.09 4.50 13.1 Diluted income 5.03 4.42 13.8 Earnings on a cash basis (diluted)** 5.48 4.82 13.7 ----------------------- FINANCIAL RATIOS Return on average assets 1.22% 1.81% Return on average common equity 14.6 21.1 Efficiency ratio 59.6 52.9 Net interest margin (taxable-equivalent basis) 5.04 5.04 SELECTED FINANCIAL RATIOS BEFORE NONRECURRING ITEMS Return on average assets 1.83 1.69 Return on average common equity 22.0 19.8 Efficiency ratio 48.9 52.2 ----------------------- AT YEAR END Loans $ 54,708 $ 52,355 4.5% Allowance for credit losses 1,009 993 1.6 Assets 71,295 69,749 2.2 Total shareholders' equity 5,890 5,763 2.2 Tangible common equity to total assets*** 7.0% 6.7% Tier 1 capital ratio 7.4 7.6 Total risk-based capital ratio 11.6 11.9 Leverage ratio 7.3 7.5 - - ------------------------------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------------------------------
* Not meaningful. ** Calculated by adding amortization of goodwill and other intangible assets to net income. *** Defined as common equity less goodwill as a percentage of total assets less goodwill. FORWARD-LOOKING STATEMENTS This annual report and Form 10-K includes forward-looking statements that involve inherent risks and uncertainties. U.S. Bancorp cautions readers that a number of important factors could cause actual results to differ materially from those in the forward-looking statements. These factors include economic conditions and competition in the geographic and business areas in which the Company operates, inflation, fluctuations in interest rates, legislation and governmental regulation, and the progress of integrating the former U.S. Bancorp. Graphs illustrate the following information: Return on average common equity* (percent) 1993: 14.9 1994: 15.3 1995: 18.3 1996: 19.8 1997: 22.0 Return on average assets* (percent) 1993: 1.18 1994: 1.23 1995: 1.51 1996: 1.69 1997: 1.83 Diluted earnings per share* (dollars) 1993: 2.68 1994: 2.93 1995: 3.70 1996: 4.42 1997: 5.03 Efficiency ratio* (percent) 1993: 63.7 1994: 62.1 1995: 56.3 1996: 52.2 1997: 48.9 Shareholders' equity to assets ratio (percent) 1993: 8.3 1994: 7.9 1995: 8.1 1996: 8.3 1997: 8.3 *Before nonrecurring items. U.S. Bancorp 1 TO OUR SHAREHOLDERS The year 1997 was transformative for U.S. Bancorp. We seized the opportunity to create significant value for our shareholders by leveraging our high-performance operating model across a larger customer base. On August 1, First Bank System, Inc. (FBS) acquired U.S. Bancorp of Portland, Oregon. We assumed the U.S. Bancorp name, which better reflects our expanded 17-state banking region extending from the Midwest to the Rocky Mountains to the Pacific Northwest. The new U.S. Bancorp offers a broad array of high-quality products and expert services to meet a wide range of customer needs. The management strategies that made FBS one of the country's top-performing bank holding companies remain in place at the new U.S. Bancorp. We focus on providing financial solutions for customers and creating value for you, the shareholder. Shareholder value continues to drive our management priorities and direct virtually every decision we make. STRONG FINANCIAL RESULTS The new U.S. Bancorp of 1997 is much larger than the First Bank System of 1996. However, we manage for performance, not size. With fewer than two quarters under our belt together, the new U.S. Bancorp continues to be among the leaders in our peer group in terms of profitability and efficiency. Photo of Gerry B. Cameron, Chairman of the Board (left) John F. Grundhofer, President and Chief Executive Officer U.S. Bancorp stock has continued to outperform key market indices in the 1990s. One hundred dollars invested in U.S. Bancorp (formerly FBS) common stock on December 31, 1989, would have been worth $886 at year-end 1997. That compares with $480 for the KBW 50 Bank Index and $342 for the S&P 500 Stock Index. The KBW 50 Bank Index is a market-capitalization-weighted total return index of the 50 largest U.S. banks published by Keefe, Bruyette & Woods, Inc. On a combined basis, before nonrecurring items, diluted earnings per common share increased 13.8 percent to $5.03 in 1997 compared with the previous year. Our goal is to sustain earnings per share growth of 12 to 15 percent over the next several years. In terms of key financial ratios, U.S. Bancorp continues to excel. Excluding nonrecurring items, our return on average assets of 1.83 percent in 1997 placed us second in our peer group of 21 regional bank holding companies, and our return on average common equity of 22.0 percent for the year placed us second among our peers. Stringent cost containment practices and cost takeouts resulting from the U.S. Bancorp and other mergers 2 U.S. Bancorp combined to make U.S. Bancorp more productive. Our efficiency ratio (noninterest expenses divided by total revenue) dropped to 48.9 percent in 1997, compared with 52.2 percent in 1996. We anticipate that completion of the U.S. Bancorp integration, which is enabling us to leverage management, products and systems across a larger customer base, will drive our efficiency ratio down even further. Such performance is necessary to compete with financial services providers outside the banking industry that have lower cost structures. In addition to cost-takeouts, our efficient organization is driven by technology investment, revenue growth and a corporate culture that disdains waste and embraces productivity. The six western states added to our banking region in the merger--California, Idaho, Nevada, Oregon, Utah and Washington--complement our traditional midwestern base in terms of economic strength and stability, which contributes to strong credit quality. Throughout our 17-state region, we maintain a high level of credit quality through centralized underwriting policies, and by identifying potential problem loans early, taking any necessary charge-offs promptly, and maintaining strong reserve levels. "SHAREHOLDER VALUE CONTINUES TO DRIVE OUR MANAGEMENT PRIORITIES AND DIRECT VIRTUALLY EVERY DECISION WE MAKE." Strong past performance has set high expectations for U.S. Bancorp among our managers, employees, and you, our shareholders. We're excited by our opportunity to meet and exceed those expectations as a larger, regionally based, nationally competitive player. STRATEGIC ACQUISITION First Bank System and U.S. Bancorp have proven to be a great fit since we first announced the merger on March 20, 1997. Our regions were contiguous, compatible and in attractive growth markets. Our banks both had strong market presence. Our business strategies were virtually identical. Our business lines and products complemented each other. And, as we continue to learn, we each had special skills and resources to offer the other. We understand that complications can arise when two large banking organizations merge. We're committed to providing a seamless transition for our customers. Using experience from 24 previous acquisitions since 1990, we are pursuing a disciplined, staged integration that will continue through mid-1998. We're pleased to report that the integration is proceeding successfully on schedule. Pie chart illustrating what business lines contribute to U.S. Bancorp operating earnings: Commercial & Business Banking and Private Financial Services: 51 percent Retail Banking: 28 percent Payment Systems: 13 percent Corporate Trust & Institutional Financial Services: 8 percent Teams from both organizations began working cooperatively to combine our organizations even before close. At close, we successfully integrated our financial systems. In late October, we successfully completed the credit card conversion. In January, we converted our trust systems uneventfully. We will complete the staged conversion of our other major systems by the third quarter of 1998, with special sensitivity to maintaining control, training employees, and mitigating customer disruption. In keeping with our aggressive integration timeline, we already have converted item processing to a common platform, which will facilitate the bank conversions in the spring. Key to our successful integration has been the retention of customer contact and management employees, systemwide adoption of the U.S. Bank identity, and the lack of overlapping territory between the two organizations. For the most part, it's been business as usual for customers of the "old" U.S. Bank. Through advertising, direct mail and contact from relationship managers, we've kept our customers informed of integration issues every step of the way. In early 1998, we began introducing the new U.S. Bank identity across our First Bank, Colorado National Bank and U.S. Bank markets. Throughout the year we will be busy building leverage for our one, strong brand identity across our entire 17-state region. When customers see the updated U.S. Bank logo, they know they can depend on a solutions-oriented, progressive organization that is focused on meeting their needs. For our retail customers, U.S. Bank offers anytime, anywhere access to high-quality products and services. U.S. Bancorp 3 Individuals and small businesses can access the bank however they choose: through our 1,000 offices, 24-hour telephone banking services, more than 2,700 ATMs, or online banking. More affluent individuals and middle-market and larger businesses can tap into these or more customized solutions to meet their more complex needs. Relationship managers, supported by advanced technology, provide the expertise these clients demand. We also offer industry-leading solutions in corporate trust services, electronic credit card payment systems, and investment products and services. [LOGO] PRUDENT CAPITAL ALLOCATION As we have written in past annual reports, allocating capital is management's most important task. Effective capital allocation plays a central role in creating and preserving shareholder value. In December we announced an agreement to acquire Piper Jaffray Companies Inc., a highly regarded Minneapolis-based securities firm that serves a geographic territory virtually identical to ours. The transaction (subject to approval by Piper Jaffray shareholders and regulators) will form a new subsidiary, U.S. Bancorp Piper Jaffray Inc., that will enable us to offer a broader array of products and services to our middle-market business and private financial services clients. In particular, the acquisition will fill a strategic gap in satisfying our business customers' financial needs in corporate advisory services, securities underwriting, research, sales, trading, and mergers and acquisitions. It also will solidify our position as the largest provider of private financial services in our territory. Our retail customers will have the added benefit of 89 full-service brokerage offices with 1,235 investment executives. We had begun to build our investment banking and securities business internally. However, an internal build strategy is too slow given the current competitive environment. By acquiring Piper Jaffray Companies, we will become a full-service player with instant credibility. The Piper Jaffray transaction is expected to close in second quarter 1998. Also in December, we closed on our acquisition of St. Cloud, Minnesota-based Zappco, Inc., a bank holding company with three banks, six branches and $360 million in assets. Zappco gives us a leading market position in the growing central Minnesota region. In January, we solidified our position as one of the nation's largest providers of corporate trust services by closing our acquisition of the bond indenture and paying agency business of Comerica, Inc. This acquisition gave us offices in Detroit and Lansing, and instant number-one market position in Michigan. We successfully completed integration of this acquisition, our fifth corporate trust acquisition since 1992. In all our acquisitions, we recognize that people are critical to ongoing success. In the U.S. Bancorp acquisition, Gary Duim and Robert Sznewajs remain with the company as vice chairmen. We also successfully retained most key relationship managers from the former U.S. Bank. Likewise, Piper Jaffray Companies Chairman and CEO Addison L. Piper will lead the new U.S. Bancorp Piper Jaffray subsidiary. Graph illustrates the following information: USB* Cumulative Total Shareholder Return** Index: 12/31/89=$100 U.S. Bancorp (formerly FBS) Common Stock Keefe, Bruyette & Woods 50 Bank Index Standard and Poor's Index of 500 Stocks 1989: USB/100, KBW 50/100, S&P 500/100 1990: USB/83, KBW 50/72, S&P 500/97 1991: USB/159, KBW 50/114, S&P 500/126 1992: USB/193, KBW 50/145, S&P 500/136 1993: USB/217, KBW 50/153, S&P 500/150 1994: USB/243, KBW 50/145, S&P 500/152 1995: USB/375, KBW 50/232, S&P 500/209 1996: USB/529, KBW 50/329, S&P 500/257 1997: USB/886, KBW 50/480, S&P 500/342 * Formerly FBS ** Capital appreciation plus dividends $100 invested in U.S. Bancorp (formerly FBS) common stock on December 31, 1989 would have been worth $886 at year-end 1997. That compares with $480 for the KBW 50 Bank Index and $342 for the S&P 500 stock index. As with any investment, past performance is no guarantee of future results. 4 U.S. Bancorp Acquisitions are just one way U.S. Bancorp allocates capital for maximum shareholder benefit. We also are pursuing these key strategies: - INVESTMENT IN CORE BUSINESSES--U.S. Bancorp invests in people, technology and other resources to support only those businesses that hold potential for strong, sustainable profitability. We manage our company along four business lines: Commercial & Business Banking and Private Financial Services, Retail Banking, Payment Systems, and Corporate Trust & Institutional Financial Services. While our business lines focused on the U.S. Bancorp integration in 1997, they also continued many initiatives to serve customers better, improve profitability and increase revenues. Reviews of 1997 business line highlights begin on page 6. - DIVIDEND INCREASES--On February 18, 1998, the U.S. Bancorp Board of Directors increased the quarterly dividend to 52.50 cents from 46.50 cents per common share, an increase of 12.9 percent. It was our seventh consecutive annual increase. On February 18, 1998, the Board of Directors also announced its intention to declare a three-for-one split of U.S. Bancorp common stock, pending shareholder approval at the annual meeting of shareholders on April 22, 1998. FOCUS ON SHAREHOLDER INTERESTS U.S. Bancorp's commitment to creating shareholder value provides the underpinning for everything we do. Our financial strength gives us the resources to provide better solutions for our customers, more challenging career opportunities for our employees, and more meaningful support to our communities. We ended 1997 a stronger sum than our parts, a factor that will enable us to continue to serve these constituencies better over the long term. As we have emphasized time and again, strong employee ownership is the best way to align employee and shareholder interests. A majority of U.S. Bancorp employees own U.S. Bancorp stock through our Capital Accumulation Plan (a 401(k) program), as well as through our Employee Stock Purchase Plan, which enables our people to purchase company stock at a discount. Among senior managers, more than 340 have targets to own the equivalent of 80 percent to 550 percent of their annual salaries in U.S. Bancorp stock. At year-end 1997, senior managers owned more than 3 million shares of company stock worth more than $344 million. Once again, the people of U.S. Bancorp proved they understand the rapid consolidation and other changes sweeping the financial services industry. They endured tremendous changes and worked diligently on your behalf in 1997 to adapt to these changes. We also thank our directors for recognizing a wonderful opportunity to create a dynamic new organization. The FBS and U.S. Bancorp boards joined cooperatively to ensure a smooth integration and guide the new U.S. Bancorp in the right direction. "WE ENDED 1997 A STRONGER SUM THAN OUR PARTS, A FACTOR THAT WILL ENABLE US TO CONTINUE TO SERVE THESE CONSTITUENCIES BETTER OVER THE LONG TERM." Thanks, too, to our customers and the communities we serve for their patience in adapting to our changes. We promise to provide them with increasingly better solutions to meet their needs, and to continue supporting affordable housing and small business development. Finally, thank you, our shareholders, for your confidence. When the dust settles over the shifting financial services landscape, we hope you find U.S. Bancorp to be a wise investment. /s/ Gerry B. Cameron Gerry B. Cameron CHAIRMAN OF THE BOARD /s/ John F. Grundhofer John F. Grundhofer PRESIDENT AND CHIEF EXECUTIVE OFFICER February 18, 1998 U.S. Bancorp 5 COMMERCIAL & BUSINESS BANKING AND PFS Pie chart illustrating that Commercial & Business Banking and Private Financial Services accounts for 51 percent of U.S. Bancorp operating earnings. PERCENT OF U.S. BANCORP OPERATING EARNINGS BUSINESS DESCRIPTION Commercial & Business Banking and Private Financial Services (PFS)provide customized financial solutions for middle-market and larger businesses, as well as government entities and affluent individuals. In addition, we serve corporations in selected national markets and niche specialties such as asset-backed lending, agricultural credit, leasing, real estate and energy. This business line is relationship-driven. A relationship manager, supported by a team of professionals, is matched with each client, working in partnership to meet unique client needs. The relationship manager also is supported by centralized systems and product management. (CONTINUED NEXT PAGE) PERSPECTIVES PEOPLE PROVIDE FOUNDATION FOR RELATIONSHIPS In Commercial & Business Banking and Private Financial Services (PFS), the relationship between clients and our employees is key to our success. Clients tell us through surveys that they are loyal not only to the bank, but also to their relationship manager. Having knowledgeable people working with a client over time is critical to being able to understand client situations and provide meaningful recommendations. That's why retaining key relationship personnel ranks as a top priority for the U.S. Bancorp integration. By communicating the opportunities resulting from the merger, as well as providing incentives, U.S. Bancorp has retained virtually all Commercial & Business Banking and PFS relationship managers in our newly acquired territories. Relationship managers continue to serve the same client base, and credit decisions continue to be made locally. Retaining relationship managers is helping fulfill our goal of providing a smooth transition for our clients. It's one thing to articulate a strategy of employing talented people with whom our clients want to work, but a much more challenging task to implement. Successful execution requires that our people's attitudes and behaviors be aligned as a team. It requires that we continue to expand our relationship managers' skills and knowledge, so that they keep moving from product focus and order-taking to client focus and financial advising. Also, it requires that we continue to segment our clients so that we can match the expertise of our relationship managers with clients they can serve best. Client surveys tell us we're doing well and improving on all these counts. RESULTS A WILLING PARTNER IN GROWTH IN 1989 NORM AND LINDA SATHER PURCHASED TWO SMALL OIL DISTRIBUTION COMPANIES IN WASHINGTON TO FORM PACIFIC OIL PRODUCTS COMPANY. SALES MORE THAN DOUBLED IN SIX YEARS, AND THE SATHERS OUTGREW THEIR SMALL COMMUNITY BANK. THEY TURNED TO A LARGER REGIONAL BANK, BUT IT PROVED UNWILLING TO FINANCE THE COMPANY'S EXPANSION. THE SATHERS NEEDED A STRONG FINANCIAL PARTNER TO HELP IMPROVE THEIR COMPANY'S GROWTH AND PROFITABILITY. IN 1995 U.S. BANK EARNED THE SATHERS' BUSINESS BY ASSEMBLING A COMPREHENSIVE FINANCIAL PACKAGE THAT INCLUDED TERM FINANCING, OPERATING LINES, LETTERS OF CREDIT, AND CASH MANAGEMENT SERVICES. IN 1996, WHEN THE COMPANY REORGANIZED BY SHEDDING UNPROMISING ASSETS AND ACQUIRING BUSINESS LINES WITH MORE POTENTIAL, THE BANK FINANCED THE ACQUISITIONS WITH TERM LOANS, INCREASED LINES, AND LEASES. PACIFIC OIL PRODUCTS' REVENUES SOARED. U.S. BANK EVEN PROVIDED COVER IN 1997 WHEN SEVERE WEATHER TIGHTENED THE COMPANY'S CASH FLOW. A BULGE LINE ENABLED THE SATHERS TO MEET THEIR NORMAL TERMS WITH SUPPLIERS AND CUSTOMERS, AND THE COMPANY ONCE AGAIN IS POISED TO EXPAND. IN ADDITION TO RELYING ON U.S. BANK FOR THEIR BUSINESS BANKING NEEDS, THE SATHERS ALSO WORK WITH U.S. BANK'S PRIVATE BANKING GROUP. THROUGH INNOVATIVE FINANCING PROVIDED BY U.S. BANK, THE SATHERS HAVE ACQUIRED A PROPERTY FOR THE DREAM HOME WHERE THEY WILL ENJOY THE FRUITS OF THEIR LABOR. 6 U.S. Bancorp CUSTOMIZED SOLUTION FOR A UNIQUE CLIENT A MINNEAPOLIS-BASED COMPANY ACQUIRES SMALL COMPANIES IN THE LEGAL PUBLISHING AND DATA BASE INDUSTRIES. ITS GOAL IS TO BUILD VALUE THROUGH ECONOMIES OF SCALE AND ULTIMATELY GO PUBLIC. RATHER THAN RAISE EQUITY FOR EACH ACQUISITION, THE COMPANY HAS RAISED EQUITY CAPITAL THAT HAS BEEN SUFFICIENT, WHEN COMBINED WITH A LEVEL OF DEBT, TO MAKE MULTIPLE ACQUISITIONS. USING THIS "LEVERAGED BUILD-UP" STRATEGY, THE COMPANY HAS REDUCED ITS ISSUANCE COSTS BY NOT HAVING TO RAISE ADDITIONAL DEBT AND EQUITY FOR EACH ACQUISITION. IN 1997 THE COMPANY NEEDED ADDITIONAL CAPITAL TO PURSUE SEVERAL ACQUISITION OPPORTUNITIES. ALSO, THE STRENGTH OF THE STOCK MARKET HEIGHTENED THE COMPANY'S INTEREST IN CONDUCTING AN INITIAL PUBLIC OFFERING (IPO). THE COMPANY APPROACHED U.S. BANK'S COMMERCIAL BANKING GROUP FOR A SOLUTION. WE KNEW OUR CLIENT'S BUSINESS AND GROWTH STRATEGY, AS WELL AS THE PUBLISHING INDUSTRY, DUE TO OUR FIVE-YEAR RELATIONSHIP. THIS KNOWLEDGE, COMBINED WITH OUR UNDERSTANDING AND EXPERIENCE WITH MARKET TIMING, LEVERAGED COMPANIES, AND DEBT CAPACITY, ENABLED US TO PROVIDE INCREMENTAL FINANCING TO THE COMPANY SO THAT IT DIDN'T HAVE TO RAISE EQUITY CAPITAL PREMATURELY. WE STRUCTURED A CREDIT FACILITY THAT WORKS WITH MULTIPLE LAYERS OF CAPITAL AND WHICH ALLOWS FLEXIBILITY FOR CERTAIN ADDITIONAL ACQUISITIONS UNDER AGREED-UPON FINANCIAL PARAMETERS. WITH THIS CUSTOMIZED SOLUTION TO A UNIQUE NEED, OUR CLIENT HAS SIGNIFICANTLY INCREASED ITS SIZE, MAKING IT A MUCH MORE ATTRACTIVE CANDIDATE FOR THE IPO MARKET. PARTNERSHIPS DRIVE CLIENT SATISFACTION Commercial & Business Banking clients give U.S. Bank overall high marks for a strong banking relationship. The overall driver behind client satisfaction is our ability to understand our clients' business issues and to provide solutions that go beyond providing loans, treasury management, or other products and services. This sophisticated level of service requires that we pair clients with relationship teams that have the expertise to deliver the level of service appropriate for each client's revenue stream, while managing expenses. To be successful with this strategy, we must continue to recruit and retain talented professionals with the intellectual abilities to connect with our clients. We then provide our people with effective tools and training. We are continuously improving client management tools that leverage the expertise of our relationship managers. These tools include information for monitoring client relationships. By understanding our clients' needs even better, we can provide them with more effective recommendations. We expect client relationships to grow stronger as we leverage the capabilities of our combined organization across our entire 17-state banking region. We are combining the best of our products and services and offering them across our larger territory. For example, we are investing in new capabilities, such as Windows-SM--based treasury management products and services, which we plan to offer throughout our entire territory. We will continue to monitor client satisfaction through surveys and focus groups to ensure we are improving our ability to maintain meaningful client relationships. BEYOND TRADITIONAL PRODUCTS AND SERVICES Traditional credit products lie at the heart of many of our Commercial & Business Banking relationships. However, we continue to offer these clients an expanded array of noncredit services, as well as specialized credit including asset-based lending, agricultural credit, correspondent banking, energy lending, international CONTINUED BUSINESS DESCRIPTION (CONTINUED) COMMERCIAL & BUSINESS BANKING serves middle-market and larger businesses from 157 offices throughout U.S. Bancorp's 17-state banking region. Bankers located in regional offices build relationships with businesses in their communities and make credit decisions locally, controlling the terms and pricing of business loans. We compete effectively with local community banks thanks to our knowledgeable, responsive relationship managers, who can offer businesses the full spectrum of U.S. Bancorp's credit, trust, investment, and treasury management products and services. PRIVATE FINANCIAL SERVICES (PFS) serves the affluent market with one-stop access to private banking, investment management, personal trusts, brokerage services, insurance, and financial planning. We focus on meeting the needs of professionals and professional services firms, foundations, wealthy families, and individuals with high levels of income and net worth who have complex financial needs. PFS clients include executives of our Commercial and Business Banking clients. Our representatives provide expert, individualized service through 57 offices located in larger metropolitan markets throughout our banking region. U.S. Bancorp 7 1997 HIGHLIGHTS - - - IMPROVED EFFICIENCY RATIO ON A CASH BASIS TO 34.7 PERCENT FROM 36.5 PERCENT. - - - IMPROVED NET TANGIBLE RETURN ON EQUITY TO 26.4 PERCENT FROM 24.4 PERCENT. COMMERCIAL & BUSINESS BANKING - - - INCREASED AVERAGE LOANS BY NEARLY 9.4 PERCENT TO $28.8 BILLION. - - - SERVED AS AGENT ON TRANSACTIONS TOTALING $2.9 BILLION AND CO-AGENT ON TRANSACTIONS TOTALING NEARLY $17.6 BILLION. - - - MAINTAINED STRONG CREDIT QUALITY, WITH NONPERFORMING ASSETS OF $225 MILLION, OR .79 PERCENT OF LOANS PLUS OTHER REAL ESTATE OWNED. PRIVATE FINANCIAL SERVICES - - - ADDED PRIVATE BANKING SERVICES IN FARGO, NORTH DAKOTA, KETCHUM, IDAHO, LAS VEGAS, NEVADA, AND SIOUX FALLS, SOUTH DAKOTA. - - - GREW ASSETS UNDER ADMINISTRATION IN PFS 13.1 PERCENT TO $30.1 BILLION. CONTINUED--COMMERCIAL & BUSINESS BANKING AND PRIVATE FINANCIAL SERVICES banking, and real estate lending. These and other areas continue to distinguish U.S. Bank in the marketplace. Our leasing subsidiary, U.S. Bancorp Leasing & Financial, serves the nation from offices in 30 states. The subsidiary recorded average annual growth in outstanding loans and leases of 5 percent to end the year with more than $2.7 billion in outstandings. Our asset-based lending divisions achieved average annual loan growth of 22.7 percent to end the year with approximately $412 million in outstandings. As one of the region's largest treasury management services providers, we help companies achieve effective treasury operations by providing a full range of depository, disbursement, collection, risk management and information services. U.S. Bancorp's pending acquisition of Piper Jaffray Companies Inc., a highly regarded Minneapolis-based securities firm, will further enhance the range of solutions we can provide our more than 40,000 middle-market commercial clients. The acquisition will strengthen our ability to offer a full array of investment banking and brokerage services through a new subsidiary, U.S. Bancorp Piper Jaffray Inc. Piper Jaffray will add depth in equity and debt underwriting, trading, sales and research, as well as corporate finance advisory and merger and acquisition services. In turn, Piper Jaffray clients will have access to U.S. Bank's commercial banking offerings. Both companies will benefit from our combined asset management experience and expertise in providing private financial services. PFS: FINANCIAL PLANNING ENHANCES SERVICE Private Financial Services (PFS) encompasses financial planning, private banking, tailored investment management, insurance, brokerage services, and personal trust services under one umbrella. Clients are served by a relationship manager or by our Trust Service Center and, depending on the client's need, they are served by other experts in areas such as financial planning, estate planning and investments. Additional expert services are available in areas such as foundations, real estate, mineral interests, mortgage, tax, and special needs. Through PFS's Financial Consulting Division, we recently enhanced the financial planning services we offer to clients in selected markets. For financial planning we employ a team of experts using state-of-the-art software to deliver clients a customized analysis of all their financial needs, including cashflow analysis, asset allocation recommendation, retirement planning, and estate planning. Each plan is prepared for each client by our financial planning specialists, empowering clients to make informed decisions. A relationship team then helps each client implement the plan. We will continue rolling out these new financial planning capabilities to other markets during 1998. 8 U.S. Bancorp RETAIL BANKING PERSPECTIVES Pie chart illustrating that Retail Banking accounts for 28 percent of U.S. Bancorp operating earnings. PERCENT OF U.S. BANCORP OPERATING EARNINGS BUSINESS DESCRIPTION Retail Banking provides anytime, anywhere access to a comprehensive set of banking and other financial solutions to consumers, and small and lower middle-market businesses in our 17-state banking region. These products include standard consumer and small business deposit and credit products, investment offerings, insurance products, and debit and credit cards. We follow an operational excellence operating model--with a goal of providing high-quality products with superior value at the greatest convenience to customers. Our Small Business Division serves small companies that do not require a dedicated relationship manager. Bankers throughout our branch system analyze small business customer needs and recommend solutions. For credit needs, bankers assist with application and rely on a centralized underwriting center for credit approval. We offer competitive pricing and 48-hour decision-making on standard small business credit products, including real estate loans, working capital loans, and lines of credit. DIRECT CHANNELS OFFER CHOICE, CONVENIENCE Retail customers increasingly prefer and demand greater convenience, high reliability, and an increasingly broad range of options. One of the keys to our growth and productivity is to offer them convenient choices for conducting business with us. These choices include telephone banking, ATMs, online banking, direct payroll deposits, and automated bill-paying services. Advanced telephone technology makes our centralized telephone service centers the most cost-effective distribution channel for U.S. Bank. Our service centers in Minneapolis-St. Paul, Fargo, Denver and Portland fielded more than 91 million calls in 1997. About 77 percent of these calls were handled by interactive voice response units, with the remainder handled by customer service representatives. The telephone, in combination with advertising and direct mail, also provides a convenient way for consumer and business customers to buy products and services. In 1997 our telemarketing units handled approximately 1.7 million inbound and outbound calls. Approximately 29 percent of these calls were converted to new product sales. Our investment call center handled nearly 245,000 calls in 1997. For cobranded credit cards, such as our Northwest Airlines WorldPerks-Registered Trademark- Visa-Registered Trademark- Card, we are bringing our telemarketing efforts for new accounts in-house to provide a higher level of service more cost-effectively. "OUR SERVICE CENTERS FIELDED MORE THAN 91 MILLION CALLS, 77 PERCENT HANDLED BY INTERACTIVE VOICE RESPONSE UNITS." We continued to expand our ATM network, providing greater convenience to customers. Our total ATM network grew more than 7 percent in 1997 to more than 4,800 terminals. These include more than 2,700 ATMs that are located throughout our 17-state banking region and which are available to our banking customers without an ATM transaction fee. We continued to add online banking capabilities for our consumer and small business customers. At year-end, more than 70,000 U.S. Bank customers were enrolled in online banking. We introduced a home-banking option using Meca Software's Managing your Money-Registered Trademark- and Quickbooks for Small Business-Registered Trademark- in select markets. We already offered three online banking options in some of our markets: BankNOW-TM- from America Online-Registered Trademark-, Microsoft Money-Registered Trademark-, and Quicken-Registered Trademark-. These options will be available to customers in all our markets by mid-1998. CONTINUED U.S. Bancorp 9 CONTINUED--RETAIL BANKING Customers now have access to transaction capabilities via the U.S. Bank web site, including most functions available through telephone banking. Customers can apply for the Northwest Airlines WorldPerks Visa card and education loans via the Web. Additional capabilities, including more functions for deposit, credit and investment products, will be added during 1998. BRANCH NETWORK FOLLOWS CUSTOMERS While one of U.S. Bank's key strategies is to migrate customer transactions toward alternative channels, our branch network remains key to maintaining and building our strong market presence throughout our region. The U.S. Bank branch network includes approximately 1,000 branches in 17 states. We continually analyze the composition of this network to determine the optimal number, location and size of branches, as well as the most appropriate range of products and services, to serve customers in each market. This has resulted in new branch openings, as well as consolidations, relocations, and remodelings to adjust branch size. "...OUR BRANCH NETWORK REMAINS KEY TO MAINTAINING AND BUILDING OUR STRONG MARKET PRESENCE THROUGHOUT OUR REGION." Our challenge is to be close to where our customers live and work, and increase sales revenue per square foot and per employee. In the future, U.S. Bank likely will have more branches, but they will be smaller and located more strategically. For example, in 1997 we opened 29 in-store locations for a total of 115. As branch locations change, we will provide standard, consistent branch environments that facilitate sales and project the U.S. Bank brand. Within two months of closing the U.S. Bancorp acquisition, we extended our unique branch paradigm throughout our expanded 17-state region. Branch employees focus on sales or service, leveraging their strengths and maximizing our ability to meet customer needs. The sales focus is combined with a new compensation plan to encourage strong sales results, enabling us to maximize revenue. SMALL BUSINESS FOCUS ESTABLISHED U.S. Bank reaffirmed its commitment to serving small businesses by establishing a Small Business Division in 1997. Our small business experts are well-positioned to meet the needs of the 1.2 million small businesses located near our branches. From our research, we know that proximity to a branch is a key consideration for small businesses that highly value low 10 U.S. Bancorp travel and wait times for conducting transactions at branches. With more than 350,000 small business customers, we have an opportunity to gain market share--as well as deepen existing relationships. In 1998 we will introduce our U.S. Bank Simply Business-Registered Trademark- set of products across our entire 17-state region. We believe these products, primarily easy-to-use loans and checking accounts, will have broad appeal. We also will improve telephone customer service for small business customers by forming a dedicated customer service unit. RESULTS BANKING WITH EASE JOANN BAILIN IS A STAY-AT-HOME MOTHER WITH TWO ACTIVE CHILDREN UNDER AGE 4. SHE STRUGGLES TO FIND TIME TO MAINTAIN HER CONSULTING WORK, NOT TO MENTION RUNNING HOUSEHOLD AFFAIRS. THAT'S WHY SHE ENJOYS BANKING AT U.S. BANK. MS. BAILIN SHOPS AT HER NEIGHBORHOOD BYERLY'S GROCERY STORE IN ST. LOUIS PARK, MINNESOTA EACH WEEK, MAKING STOPS AT THE IN-STORE U.S. BANK BRANCH VERY CONVENIENT. THE HASSLE-FREE LOCATION ELIMINATES ANOTHER STOP SHE'D HAVE TO MAKE WITH HER CHILDREN IN TOW. EVEN WHEN MS. BAILIN VISITS THE IN-STORE BANK, SHE RARELY USES A TELLER. SHE CAN CONDUCT MOST OF HER TRANSACTIONS AT THE BRANCH'S ATMS OR TELEPHONES. IN FACT, SHE OFTEN CONDUCTS HER BANKING BUSINESS AT HOME BY TELEPHONE LATE AT NIGHT, AFTER THE CHILDREN ARE ASLEEP. MS. BAILIN ALSO ENJOYS THE CONVENIENCE OF HER U.S. BANK DEBIT CARD TO PURCHASE GROCERIES AND OTHER GOODS AND SERVICES. PERHAPS THE BEST BENEFIT IS THAT SHE CAN FILL HER CAR WITH GASOLINE AND PAY AT THE PUMP WITHOUT HAVING TO LEAVE THE CHILDREN TO GO TO THE REGISTER. TO MAKE MANAGING THE HOUSEHOLD FINANCES EVEN MORE EFFICIENT, MS. BAILIN AND HER HUSBAND HAVE DIRECT DEPOSIT AND AUTOMATIC BILL PAY SERVICES. THEY'VE SIGNED UP FOR ONLINE BANKING TO MAKE MANAGING THEIR FINANCES WITH U.S. BANK EVEN EASIER. PURSUING A CUSTOMER-FOCUSED STRATEGY A key to providing meaningful solutions to customers is understanding their needs. Our Relationship Management System (RMS) enables Retail Banking to do just that for our consumer customers. RMS is an analytical software engine that uses customer behavioral data and predictive modeling to make better relationship-based decisions. RMS became fully operational in March 1997 and will be extended to our new territories as systems are converted during 1998. First-year results indicate that RMS is increasing customer profitability and value, improving sales effectiveness, lowering costs, and enhancing customer satisfaction. In the handling of overdraft and nonsufficient funds (NSF) checks, for example, RMS increases overdraft line amounts for our most profitable customers. The bank paid 34 percent more overdraft checks using RMS, while cutting fee waivers by 32 percent. As a result, the bank benefits from increased fees--up 13 percent since implementation of the strategy. Meanwhile, fewer customers must pay fees to retailers for returned checks. RMS also has produced other significant benefits. The effectiveness of marketing to current customers has improved, as evidenced by a 51 percent increase in sales results with RMS-inspired marketing. Credit approval rates were up 16 percent. Overall, RMS is helping anticipate and meet customer needs while increasing the average value of customers to the bank for the benefit of shareholders. 1997 HIGHLIGHTS - - - OPENED 21 BRANCHES IN ALBERTSON'S SUPERMARKETS, AND EIGHT IN OTHER STORES, FOR A TOTAL OF 115 IN-STORE BRANCHES. - - - INCREASED U.S. BANK DEPOSIT TRANSACTIONS AT ATMS 14 PERCENT. - - - INCREASED TRANSACTIONS BY U.S. BANK CUSTOMERS USING U.S. BANK-OWNED ATMS BY 11 PERCENT LAST YEAR. - - - GREW POINT-OF-SALE TRANSACTION VOLUME 50 PERCENT. - - - DEPLOYED MORE THAN 400 ATMS IN 11 STATES AS PART OF FIVE-YEAR AGREEMENT WITH CHEVRON PRODUCTS COMPANY TO PROVIDE ATM PROGRAM COORDINATION AND SWITCH PROCESSING SERVICES. - - - RECEIVED "BEST OF THE WEB" DESIGNATION BY "SNAP!", AN ONLINE RATING SERVICE FOR INVESTMENT SERVICES WEB SITES. - - - GREW BALANCES FOR NONMORTGAGE CONSUMER LOANS AND LINES AT 5 PERCENT, LED BY HOME-EQUITY LOANS AND LINES AT 12 PERCENT. - - - AS A RESULT OF NEW EVERYDAY PRICING STRATEGY IN SELECTED MARKETS, MONTHLY AUTOMATIC RENEWAL RATES FOR SAVINGS CERTIFICATES IN THOSE MARKETS INCREASED BY 24 PERCENT, AND AVERAGE TERM LENGTH OF NEW AND RENEWED SAVINGS CERTIFICATES INCREASED BY 21 PERCENT. U.S. Bancorp 11 PAYMENT SYSTEMS PERSPECTIVES Pie chart illustrating that Payment Systems accounts for 13 percent of U.S. Bancorp operating earnings. PERCENT OF U.S. BANCORP OPERATING EARNINGS BUSINESS DESCRIPTION Payment Systems provides electronic transaction services for both corporate and retail customers, creating value through information, access and cost-effective services. CORPORATE PAYMENT SYSTEMS offers programs that help business and government reduce expenses by processing purchases efficiently and cost-effectively. Employees of Fortune 1000 companies use the U.S. Bank Visa-Registered Trademark- Corporate Card, a non-revolving charge card that enables companies to monitor and control travel and entertainment expenses. Employees of large businesses use the U.S. Bank Visa Purchasing Card to place orders directly with vendors--eliminating requisitions, purchase orders, and check requests. Our specialized purchasing card for government agencies is called I.M.P.A.C.-Registered Trademark- Other programs include cards for payment of costs associated with employee relocation, fleet services, and small business travel and entertainment. (CONTINUED NEXT PAGE) TECHNOLOGY ENHANCES CORPORATE PAYMENT SYSTEMS Business clients continue to re-engineer their expense reporting processes, demanding increased automation to improve efficiency and accuracy. In 1997 we created an Interactive Commerce Group to address electronic commerce opportunities and continue our tradition of product innovation as new payment models emerge. As an example of our continuing efforts to provide innovative product and service features, in 1997 we introduced FirstView 3.0, a Windows 95-SM- and NT-SM-version of our popular desktop reporting system. Our U.S. Bank Visa-Registered Trademark- Corporate and Purchasing Card clients use FirstView 3.0 in a client/server environment or as a standalone system. The enhanced software enables our clients' card program administrators to mine Corporate and Purchasing Card transaction data to make quick and well-informed decisions regarding expense and vendor management, generate valuable tax and spending analysis reports, expedite general ledger postings, and electronically distribute cardholder statements and other data. Among the new features is improved capability to distribute data and cardholder statements via electronic mail on a variety of systems. At year-end, we had executed more than 900 license agreements for use of the updated FirstView. Corporate and Purchasing Cards were among the First products we leveraged across our newly acquired client base in six western states. Under a special agreement, we began marketing Corporate and Purchasing Cards in that region even before the U.S. Bancorp acquisition closed. Sales volume for our Corporate and Purchasing Cards increased more than 40 percent in 1997. RESULTS LOCKHEED MARTIN EXPANDS CORPORATE CARD PARTNERSHIP LOCKHEED MARTIN CORPORATION IS ONE OF THE WORLD'S LEADING DIVERSIFIED TECHNOLOGY COMPANIES PROVIDING SPACE AND MISSILE SYSTEMS, ELECTRONICS, MILITARY AIRCRAFT INFORMATION SYSTEMS, SYSTEMS INTEGRATION AND A BROAD RANGE OF SERVICES TO U.S. AND INTERNATIONAL GOVERNMENTS AND COMMERCIAL CUSTOMERS. THE BETHESDA, MARYLAND-BASED COMPANY USES THE VISA-Registered Trademark- CORPORATE CARD TO EFFICIENTLY PROCESS TRAVEL AND ENTERTAINMENT (T&E) EXPENSES FOR ITS EMPLOYEES WORLDWIDE. AFTER A SERIES OF MAJOR MERGERS, THE COMPANY INHERITED MULTIPLE CORPORATE CARD RELATIONSHIPS. CONSOLIDATING THESE RELATIONSHIPS WOULD SAVE THE COMPANY APPROXIMATELY $10 MILLION IN ADMINISTRATIVE COSTS OVER THE LIFE OF THE CONTRACT. IN 1997, AFTER A COMPETITIVE BIDDING PROCESS, LOCKHEED MARTIN SELECTED U.S. BANK AS ITS EXCLUSIVE PROVIDER OF CORPORATE CARDS--ONE OF THE WORLD'S LARGEST CORPORATE T&E CARD CONTRACTS. U.S. BANK HAD BEEN PROVIDING A CORPORATE CARD PROGRAM THAT SERVED THE NEEDS OF MORE THAN 25,000 EMPLOYEES. NOW U.S. BANK WILL HELP LOCKHEED MARTIN EXPAND THIS PROGRAM THROUGHOUT ITS ENTIRE ORGANIZATION. THE PROGRAM IS EXPECTED TO INCREASE BY TENS OF THOUSANDS OF ADDITIONAL VISA CORPORATE CARDS WITH ANTICIPATED SPENDING OF SEVERAL BILLION DOLLARS OVER THE LENGTH OF THE CONTRACT. WHY DID LOCKHEED MARTIN CHOOSE U.S. BANK? BECAUSE OF OUR EXPERIENCE, TECHNOLOGY, AND PROVEN CAPABILITIES TO CARRY OUT AN INITIATIVE OF THIS MAGNITUDE FOR A COMPANY AS DIVERSE AS LOCKHEED MARTIN. 12 U.S. Bancorp COBRANDING: A CUSTOMER FOCUSED STRATEGY Many credit card issuers depend on mail and other direct marketing strategies to pursue the mass market. At U.S. Bank, we focus on developing strategic cobranding partnerships to build a client base around existing loyalty programs. We seek partners that appeal to the same type of customer base as our banking business. The 1997 launch of the King Soopers Visa Card for Colorado residents illustrates our successful cobranding strategy. King Soopers is the number-one supermarket chain in Colorado with a 37 percent market share, and our partnership has tremendous potential to gain new credit card customers and also bring new customers to our Colorado banking offices. For every dollar customers spend at King Soopers and elsewhere, they earn points toward a wide variety of grocery, travel, and other rewards. "AT U.S. BANK, WE FOCUS ON DEVELOPING STRATEGIC COBRANDING PARTNERSHIPS TO BUILD A CLIENT BASE AROUND EXISTING LOYALTY PROGRAMS." In addition to in-store promotions, direct-mail solicitations were sent to select Colorado bank customers who were preapproved for the card using our Relationship Management System. An impressive 10 percent of customers who received a mailing and a follow-up call from a personal banker applied for the new card. Approximately 35,000 King Soopers Visa cards were issued in eight months. The King Soopers Visa further strengthens U.S. Bank's relationship with this supermarket leader. Other new and existing cobranded programs also had a successful 1997. We extended our partnership with Northwest Airlines to offer WorldPerks-Registered Trademark- Visa consumer and small business credit cards. Our new corporate travel program in partnership with the airline features a Visa corporate charge card program and air travel management system that will help business travelers and travel managers better track expenses. We also introduced the Conoco Visa Card, a rewards-based, no-annual fee credit card that offers consumers rebates on purchases at more than 5,200 Conoco gas and convenience stores nationwide. CUSTOMER RETENTION A PRIORITY Consumers increasingly are inundated with credit card offers featuring attractive rates, fees, and other services. To combat this threat to existing cardholders, in 1997 U.S. Bank launched a Customer Retention Unit, an investment made with the understanding that retaining existing accounts costs less than acquiring new ones. CONTINUED BUSINESS DESCRIPTION (CONTINUED) CONSUMER PAYMENT SYSTEMS focuses on being the dominant card issuer in our 17-state banking region and building valuable cobranding relationships. This strategy leverages the distribution power of our branch system and cobranded partners, and is less dependent on direct mail compared to many competitors. U.S. Bank also offers card-accessible secured lines of credit and a prepaid international travel card. MERCHANT PAYMENT SERVICES provides an in-house, single-source solution for electronic transaction processing. Our merchant clients can electronically authorize and capture transactions from bankcards, other credit cards, and debit cards, as well as authorize checks at the point of sale. U.S. Bancorp 13 1997 HIGHLIGHTS - - - INCREASED NONINTEREST INCOME 19.9 PERCENT. CORPORATE PAYMENT SYSTEMS CONTINUED TO BE THE LARGEST ISSUER OF PURCHASING CARDS AND VISA-REGISTERED TRADEMARK- CORPORATE CARDS IN TERMS OF NUMBER OF CARDS ISSUED AND SALES VOLUME, AND THE LEADING ISSUER OF PURCHASING CARDS TO THE FEDERAL GOVERNMENT. - - - INCREASED CORPORATE AND PURCHASING CARD RELATIONSHIPS TO 156 OF THE FORTUNE 500 AND 252 OF THE FORTUNE 1000. - - - APPROVED AS PROVIDER OF PURCHASING CARD, TRAVEL AND ENTERTAINMENT, AND FLEET CARD SERVICES BY THE U.S. GENERAL SERVICES ADMINISTRATION. CONSUMER PAYMENT SYSTEMS - - - CONTINUED TO BE AMONG THE NATION'S LARGEST ISSUERS OF VISA CREDIT CARDS. - - - RANKED FIRST WITHIN THE VISA NETWORK IN SALES VOLUME FOR SMALL BUSINESS CARDS. - - - INCREASED SALES VOLUME ON OUR CO-BRANDED CREDIT CARDS BY MORE THAN 20 PERCENT. MERCHANT PAYMENT SERVICES - - - REMAINED AMONG THE TOP 10 PROCESSORS OF VISA AND MASTERCARD-REGISTERED TRADEMARK- TRANSACTIONS, SERVING MORE THAN 75,000 MERCHANT LOCATIONS WITH MORE THAN $20 BILLION IN CHARGE VOLUME. - - - INCREASED DIRECT SALES REPRESENTATIVES BY APPROXIMATELY 25 PERCENT. CONTINUED--PAYMENT SYSTEMS At our U.S. Bancorp Service Center in Fargo, North Dakota, dedicated retention representatives began fielding inbound calls from cardholders wanting to terminate their accounts. They also began making outbound calls to cardholders who write to close their accounts. Using Relationship Management System data, the representatives are authorized to provide customized incentives in order to retain the cardholders. The unit retained more than 50 percent of the accounts targeted during 1997. MERCHANT SERVICES: INVESTING IN TECHNOLOGY In merchant processing, the competitive advantage goes to providers with efficient technology to handle large volume and personal service to meet client needs. At U.S. Bank, we are enhancing in-house capacity by investing in new systems and expanding our sales and service personnel. Expanded capacity will help us leverage our banking and credit card relationships. Improved technology will feature automated tools, on-line access to detailed account information, and integration with other banking products, thereby leveraging cross-selling opportunities. "BUSINESSES TELL US THEY PREFER THE ENHANCED INFORMATION, TIMELINESS OF DEPOSITS, AND IMPROVED QUALITY AFFORDED BY A SINGLE, INTEGRATED OFFERING FROM THEIR BANK." While laying a foundation for expanded volume, we are focusing on small and middle-market businesses in our expanded 17-state banking region. By concentrating on our growing base of banking and credit card clients, we can build stronger relationships with them. We believe our growth potential is greater by building long-term, deep banking and service relationships, rather than by acquiring other merchant processing portfolios. Our strategy of delivering an integrated product and service offering drove our decision to end a joint merchant processing venture entered into by the former U.S. Bank. Businesses tell us they prefer the enhanced information, timeliness of deposits, and improved quality afforded by a single, integrated offering from their bank. 14 U.S. Bancorp CORPORATE TRUST & INSTITUTIONAL FINANCIAL SERVICES PERSPECTIVES Pie chart illustrating that Corporate Trust & Institutional Financial Services accounts for 8 percent of U.S. Bancorp operating earnings. PERCENT OF U.S. BANCORP OPERATING EARNINGS BUSINESS DESCRIPTION CORPORATE TRUST SERVICES is one of the largest service providers in its industry. We provide trustee services for municipal, corporate, asset-backed and international bonds, as well as paying agent, escrow agent, and document custodial services. INSTITUTIONAL FINANCIAL SERVICES focuses on investment and employee benefit clients and products. The business is organized into two groups: First American Asset Management (FAAM) and Investment Services. FAAM provides centralized investment management, delivery, 401(k) administration, securities lending and business support services for all U.S. Bancorp individual and institutional investment products. These products include First American Funds (a mutual fund family advised by FAAM), proprietary 401(k) products, and trustee and administrative services for employee benefit programs. Investment Services includes foreign exchange and U.S. Bancorp Investments, a full-service broker/ dealer and registered investment advisor providing a wide array of investment products to individual investors, and underwriting, distribution and portfolio services to institutional clients. CORPORATE TRUST: ACQUISITION AND DEVELOPMENT Corporate trust customers value expert service, leading-edge technology, and quality delivery. As one of the nation's largest providers in this industry, U.S. Bank Corporate Trust Services is well-positioned to meet these customer needs. We have the size and strength to invest in critical infrastructure, and we leverage our capabilities over an increasingly large customer base. Our growth has resulted from acquisitions and development of existing business. In January 1997 we gained the leading market position in Michigan by closing on our acquisition of the bond indenture and paying agent business of Detroit-based Comerica, Inc. We maintained Comerica's offices in Detroit and Lansing, reflecting our strategy of serving customers through local offices. Our network of 15 offices spanning the United States from Los Angeles to New York is supported by centralized systems and operations and gives us a competitive edge in retaining and expanding our client base. Our offices throughout the west, including Los Angeles, Portland, San Francisco and Seattle, have new opportunities to leverage our expanded banking presence in that region. U.S. Bank Corporate Trust Services is committed to making technological and other investments that will enable integration of future acquisitions and growth of existing business. In 1997 we completed enhancements to our bondholder accounting and integrated customer response systems, which improve customer service, and contribute to our efficiency and productivity. Key initiatives under way CONTINUED RESULTS LEVERAGING OUR BANK REFERRALS IN JUNE 1996 CHEVY CHASE BANK OF BETHESDA, MARYLAND, SET OUT TO INCREASE LIQUIDITY AND RESTRUCTURE ITS BALANCE SHEET. TO ACHIEVE THIS GOAL, CHEVY CHASE BANK CHOSE TO ISSUE ASSET-BACKED SECURITIES, SECURITIZED BY AUTO RECEIVABLES. IT SELECTED U.S. BANK TO ADMINISTER THE TRUST FUNCTIONS FOR THIS COMPLEX FINANCING TECHNIQUE. BY YEAR-END 1997, U.S. BANK HAD BEEN APPOINTED TRUSTEE, PAYING AGENT, REGISTRAR AND CUSTODIAN FOR NINE CHEVY CHASE ASSET-BACKED TRANSACTIONS. MEANWHILE, IN EARLY 1997 B. F. SAUL REAL ESTATE INVESTMENT TRUST, AN AFFILIATE OF CHEVY CHASE BANK, FACED AN IMPORTANT DECISION. ITS LONGSTANDING TRUSTEE WAS EXITING THE CORPORATE TRUST BUSINESS, AND A NEW TRUSTEE WAS NEEDED TO HANDLE B. F. SAUL'S UNIQUE, CONTINUOUSLY OFFERED NOTE PROGRAM. BASED ON THE SUCCESS OF THE CHEVY CHASE AND U.S. BANK RELATIONSHIP, B.F. SAUL APPOINTED THE NEW YORK OFFICE OF U.S. BANK CORPORATE TRUST SERVICES TO STEP IN AS THE SUCCESSOR TRUSTEE. OF SPECIAL INTEREST TO B.F. SAUL: OUR STATE-OF-THE-ART, ON-LINE NOTE ISSUANCE SYSTEM. WORKING WITH U.S. BANK CORPORATE TRUST SERVICES, B. F. SAUL HAS BEEN ABLE TO STREAMLINE PROCESSING AND AUTOMATE PROCEDURES. THE COMBINATION OF ADVANCED TECHNOLOGY AND FOCUS ON CUSTOMER NEEDS TURNED A CHALLENGE INTO AN OPPORTUNITY AND RESULTED IN A PARTNERSHIP BETWEEN AN IMPORTANT CLIENT OF U.S. BANK AND U.S. BANK CORPORATE TRUST SERVICES. U.S. Bancorp 15 CONTINUED--CORPORATE TRUST & INSTITUTIONAL FINANCIAL SERVICES include expansion of our capacity for document custody services and a redesigned fee billing system. 1997 HIGHLIGHTS CORPORATE TRUST SERVICES - - - GREW PRINCIPAL OUTSTANDING MORE THAN 10 PERCENT TO NEARLY $595 BILLION. - - - INCREASED BOND ISSUES TO 36,000. - - - SERVED MORE THAN 975,000 BONDHOLDERS. - - - RANKED AS THE LARGEST MUNICIPAL CORPORATE TRUST PROVIDER IN 1997 WITH $14.8 BILLION PRINCIPAL AMOUNT IN 587 NEW BOND ISSUES. - - - RANKED AS THE THIRD-LARGEST TRUSTEE IN THE PUBLIC ASSET-BACKED ARENA. - - - COMPLETED ACQUISITION OF BOND INDENTURE AND PAYING AGENT BUSINESS OF COMERICA, INC. (Continued Next Page) ASSET MANAGEMENT: STRONG PERFORMANCE Institutional Financial Services offers investors a broad range of products and services with historically strong performance. By meeting the needs of a wide range of investors, we are achieving our objective of gathering assets and, in turn, growing noninterest income. In 1997 assets under management increased 25 percent to more than $62 billion. First American Funds, the mutual fund family advised by First American Asset Management, grew to $21 billion in assets under management in 1997, a 64 percent increase. This growth includes Qualivest Funds, a $2.5 billion portfolio acquired in the U.S. Bancorp acquisition and merged into First American Funds in November 1997. The First American family includes 32 offerings available to both individual and institutional investors. We're a multi-style manager with numerous options, including unique sector funds specializing in industries such as health care, real estate investment trusts, and technology. First American Strategy Funds, "funds of funds" that invest primarily in shares of other First American funds, reached more than $365 million in assets under management. Introduced in October 1996, these no-load funds provide a one-stop option for investors seeking portfolios with asset allocation for income, growth and income, growth, or aggressive growth. TRUSTED RELATIONSHIP YIELDS MORE 401(k) BUSINESS C.H. ROBINSON, A MINNEAPOLIS-BASED TRANSPORTATION LOGISTICS COMPANY WITH MORE THAN 100 OFFICES IN 10 COUNTRIES, PROVIDED ITS EMPLOYEES A STAND-ALONE PROFIT-SHARING PLAN AND LATER ADDED A 401(k) RETIREMENT PLAN. HOWEVER, DIFFERENT PEOPLE AND COMPANIES MANAGED THE TWO PLANS, AND THE COMPANY DECIDED TO EVALUATE OUTSOURCING OPTIONS FOR ITS ENTIRE RETIREMENT PROGRAM. THE ADVANTAGES OF A SINGLE-SOURCE PROGRAM WERE CLEAR. IT WOULD OFFER BETTER COORDINATION AND DEMAND LESS INTERNAL MANAGEMENT TIME. ENHANCED PLAN FEATURES WOULD INCREASE ENROLLMENT OPTIONS, EMPLOYEE EDUCATION, AND DISTRIBUTION CHOICES, AS WELL AS ENABLE EMPLOYEES TO CHANGE THEIR INVESTMENTS, OBTAIN PLAN LOANS, AND EASILY ACCESS THEIR ACCOUNT INFORMATION. C.H. ROBINSON REVIEWED PROPOSALS FROM SEVERAL COMPANIES INCLUDING U.S. BANCORP, WHOSE AFFILIATES WERE AMONG THE PROVIDERS OF TRUST AND INVESTMENT MANAGEMENT SERVICES FOR THE COMPANY'S EXISTING RETIREMENT PROGRAMS. THE CRITERIA: INVESTMENT PERFORMANCE, DIVERSITY IN INVESTMENT OFFERINGS, FREQUENCY OF PLAN VALUATIONS, USE OF TECHNOLOGY, EASE OF ACCESS TO TIMELY PARTICIPANT INFORMATION, AND SERVICE. WE EARNED THE BUSINESS ON THE STRENGTH OF OUR FIRST SELECT 401(k) PRODUCT. C.H. ROBINSON'S DEEP, DECADE-LONG RELATIONSHIP WITH U.S. BANCORP WAS A KEY FACTOR IN ITS DECISION. BASED ON THIS EXPERIENCE, C.H. ROBINSON FELT CONFIDENT THAT U.S. BANCORP WOULD PROVIDE INNOVATIVE SOLUTIONS AND THE NECESSARY COMMITMENT TO MEET ITS RETIREMENT PROGRAM NEEDS. 16 U.S. Bancorp Once again strong, long-term performance is contributing to our growth in assets under management. In February 1997 Barron's ranked First American Funds the 11th-best mutual fund family, and in December Mutual Funds magazine rated First American Funds as a five-star fund family. "BY MEETING THE NEEDS OF A WIDE RANGE OF INVESTORS, WE ARE ACHIEVING OUR OBJECTIVE OF GATHERING ASSETS AND, IN TURN, GROWING NONINTEREST INCOME." The success of our 401(k) products also is due largely to the track record of the underlying investments, First American Funds. First Select, our 401(k) program introduced in 1996, is proving to be a successful vehicle for converting assets from larger traditional plans. First Select offers call center capabilities for participants, employee education, and the opportunity to invest in First American and other mutual funds including AIM, Fidelity and Janus. Referrals from U.S. Bank retail, private, and business bankers have fueled sales growth for investment products. We have just begun to tap the potential of our expanded 17-state territory through outbound calls, direct mail and other efforts. In addition, in 1997 we expanded our sales channels by making First American Funds available through Charles Schwab's Institutional OneSource program, Fidelity Investments' Institutional FundsNetwork, and Jack White & Co.'s Institutional NoFee Network. U.S. Bancorp's pending acquisition of Piper Jaffray Companies Inc., a Minneapolis securities firm, will add more than $12 billion to our assets under management. The Piper Jaffray acquisition also will contribute 89 brokerage offices and 1,235 investment executives who will distribute our products and services. It also will accelerate our efforts to meet a wider range of our customers' investment banking needs, including underwriting commercial paper, asset-backed securities, and a broader range of municipal bonds. 1997 HIGHLIGHTS (CONTINUED) INSTITUTIONAL FINANCIAL SERVICES FIRST AMERICAN ASSET MANAGEMENT - - - INCREASED ASSETS UNDER MANAGEMENT 25 PERCENT TO MORE THAN $62 BILLION, INCLUDING $21 BILLION IN FIRST AMERICAN FUNDS. - - - INCREASED SALES OF FIRST AMERICAN FUNDS TO 52 PERCENT FROM 32 PERCENT OF ALL MUTUAL FUND SALES BY OUR RETAIL BROKERS. INVESTMENT SERVICES - - - INCREASED BROKERAGE INVESTMENT SALES REVENUE BY 50 PERCENT. - - - SUCCESSFULLY COMPLETED THE FIRST PHASE OF A CONVERSION TO A NEW BACK-OFFICE SYSTEM FOR SECURITIES PROCESSING, ALLOWING GREATER EFFICIENCIES, ENHANCED POINT-OF-SALE INFORMATION, AND BETTER OVERALL CUSTOMER SERVICE. - - - RECEIVED SECTION 20 REGULATORY APPROVAL TO UNDERWRITE COMMERCIAL PAPER, ASSET-BACKED SECURITIES, AND A BROADER RANGE OF MUNICIPAL BONDS. U.S. Bancorp 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OVERVIEW U.S. Bancorp, formerly known as First Bank System, Inc. (the "Company"), is the organization created by the acquisition by First Bank System, Inc. ("FBS") of U. S. Bancorp ("USBC") of Portland, Oregon. The merger was completed on August 1, 1997 as a pooling-of-interests, and prior period financial statements have been restated to reflect the merger. SUMMARY OF 1997 RESULTS The Company had record operating earnings (net income excluding nonrecurring items) of $1.26 billion in 1997, up 10 percent from 1996 operating earnings of $1.14 billion. On a diluted share basis, operating earnings were $5.03 in 1997, compared with $4.42 in 1996. Return on average assets and return on average common equity, excluding nonrecurring items, were 1.83 percent and 22.0 percent, compared with returns of 1.69 percent and 19.8 percent in 1996. Excluding nonrecurring items, the efficiency ratio (the ratio of expenses to revenues) improved to 48.9 percent in 1997 from 52.2 percent in 1996. The strong 1997 results reflect growth in fee income and lower noninterest expense. Noninterest income (before nonrecurring items) increased $171 million (12 percent), compared with 1996. The increase was the result of growth in all categories of fee income. Excluding the reduction in fees related to the 1997 corporate card securitization, noninterest income (before nonrecurring items) increased by $187 million (13 percent), compared with 1996. Noninterest expense (before nonrecurring items) decreased $31 million from 1996 reflecting benefits of the merger. Net income was $838.5 million in 1997, or $3.34 per diluted share, compared with $1.22 billion, or $4.72 per diluted share, in 1996. Return on average assets and return on average common equity were 1.22 percent and 14.6 percent, compared with returns of 1.81 percent and 21.1 percent in 1996. Net income in 1997 reflects nonrecurring items, primarily merger-related, of $416.7 million ($593.6 million on a pre-tax basis). These 1997 nonrecurring items include a $95.0 million merger-related provision for credit losses. Additional merger-related charges of approximately $125.0 million are expected to be incurred over the next three quarters. Net nonrecurring gains increased 1996 net income by $76.6 million ($145.1 million on a pre-tax basis). See pages 23 through 25 for further discussion on nonrecurring items. ACQUISITION AND DIVESTITURE ACTIVITY On December 15, 1997, the Company announced the acquisition of Piper Jaffray Companies Inc. ("Piper Jaffray"), a full-service investment banking and securities brokerage firm, in a cash transaction for $730 million or $37.25 per Piper Jaffray common share. The acquisition will allow the Company to offer investment banking and institutional and retail brokerage services through a new subsidiary which will be known as U.S. Bancorp Piper Jaffray Inc. The acquisition, which will be accounted for as a purchase, is subject to approval by Piper Jaffray shareholders and regulators and is expected to close in the second quarter of 1998. During 1997, the Company completed three purchase acquisitions of banks in its operating region: $360 million Zappco, Inc., a bank holding company headquartered in St. Cloud, Minnesota, in December; $214 million Business and Professional Bank of Sacramento, California in April; and, $70 million Sun Capital Bancorp of St. George, Utah in January. The Company also acquired the bond indenture and paying agency business of Comerica Incorporated and securitized and sold $420 million of corporate charge card receivables during 1997. During 1996, the Company completed two purchase acquisitions of banks in its operating region: $1.6 billion California Bancshares, Inc., a holding company for a multi-bank commercial banking operation serving the East San Francisco Bay Area and the Central Valley of Northern California, in June; and, $3.7 billion FirsTier Financial, Inc. of Omaha, Nebraska in February. As part of the regulatory approval process for the 1995 West One Bancorp acquisition, the Company divested 31 branches during 1996, and recognized a pre-tax gain of $28.8 million. Also during 1996, the Company recognized a $45.8 million net gain on the sale of FBS' residential mortgage servicing and loan production business. Refer to Note C for additional information regarding acquisitions and divestitures. 18 U.S. Bancorp TABLE 1 SELECTED FINANCIAL DATA
(Dollars in Millions, Except Per Share Data) 1997 1996 1995 1994 1993 - - ---------------------------------------------------------------------------------------------------------------------------------- CONDENSED INCOME STATEMENT: Net interest income (taxable-equivalent basis) . . . . . . . $3,106.0 $ 3,034.7 $2,886.6 $2,809.6 $2,658.2 Provision for credit losses. . . . . . . . . . . . . . . . . 460.3 271.2 239.1 243.7 239.3 -------------------------------------------------------------------- Net interest income after provision for credit losses. . . 2,645.7 2,763.5 2,647.5 2,565.9 2,418.9 Securities gains (losses). . . . . . . . . . . . . . . . . . 3.6 20.8 3.0 (124.2) .8 Other nonrecurring gains . . . . . . . . . . . . . . . . . . 9.4 330.6 44.8 52.6 65.1 Other noninterest income . . . . . . . . . . . . . . . . . . 1,602.2 1,431.7 1,265.5 1,186.5 1,177.9 Restructuring and merger-related charges . . . . . . . . . . 511.6 88.1 98.9 225.3 72.2 Other nonrecurring charges . . . . . . . . . . . . . . . . . -- 118.2 38.2 27.2 -- Other noninterest expense. . . . . . . . . . . . . . . . . . 2,300.7 2,331.8 2,338.8 2,479.6 2,442.7 -------------------------------------------------------------------- Income from continuing operations before income taxes. . . 1,448.6 2,008.5 1,484.9 948.7 1,147.8 Taxable-equivalent adjustment. . . . . . . . . . . . . . . . 57.9 64.1 63.9 69.0 71.1 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . 552.2 725.7 523.9 311.5 374.9 -------------------------------------------------------------------- Income from continuing operations. . . . . . . . . . . . . 838.5 1,218.7 897.1 568.2 701.8 Income (loss) from discontinued operations . . . . . . . . . -- -- -- (8.5) 2.5 -------------------------------------------------------------------- Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 838.5 $ 1,218.7 $ 897.1 $ 559.7 $ 704.3 -------------------------------------------------------------------- -------------------------------------------------------------------- FINANCIAL RATIOS Return on average assets.................................... 1.22% 1.81% 1.42% .89% 1.17% Return on average common equity. . . . . . . . . . . . . . . 14.6 21.1 17.2 10.9 14.7 Efficiency ratio . . . . . . . . . . . . . . . . . . . . . . 59.6 52.9 59.0 67.5 64.5 Net interest margin. . . . . . . . . . . . . . . . . . . . . 5.04 5.04 5.10 4.99 4.95 SELECTED FINANCIAL RATIOS BEFORE RESTRUCTURING AND MERGER-RELATED CHARGES AND OTHER NONRECURRING ITEMS Return on average assets . . . . . . . . . . . . . . . . . . 1.83 1.69 1.51 1.23 1.18 Return on average common equity. . . . . . . . . . . . . . . 22.0 19.8 18.3 15.3 14.9 Efficiency ratio . . . . . . . . . . . . . . . . . . . . . . 48.9 52.2 56.3 62.1 63.7 PER COMMON SHARE: Income from continuing operations. . . . . . . . . . . . . . $ 3.39 $ 4.81 $ 3.56 $ 2.19 $ 2.71 Income (loss) from discontinued operations . . . . . . . . -- -- -- (.03) .01 -------------------------------------------------------------------- -------------------------------------------------------------------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.39 $ 4.81 $ 3.56 $ 2.16 $ 2.72 -------------------------------------------------------------------- Diluted income from continuing operations. . . . . . . . . . $ 3.34 $ 4.72 $ 3.48 $ 2.14 $ 2.64 Income (loss) from discontinued operations . . . . . . . . -- -- -- (.03) .01 -------------------------------------------------------------------- Diluted net income . . . . . . . . . . . . . . . . . . . . . $ 3.34 $ 4.72 $ 3.48 $ 2.11 $ 2.65 -------------------------------------------------------------------- -------------------------------------------------------------------- Dividends paid*. . . . . . . . . . . . . . . . . . . . . . . $ 1.86 $ 1.65 $ 1.45 $ 1.16 $ 1.00 AVERAGE BALANCE SHEET DATA: Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53,513 $ 50,855 $ 47,703 $ 44,584 $ 41,092 Earning assets . . . . . . . . . . . . . . . . . . . . . . . 61,675 60,201 56,556 56,233 53,726 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,771 67,402 63,084 62,708 60,187 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 47,336 47,252 44,726 46,146 46,616 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . 7,527 4,908 4,162 3,796 2,916 Common equity. . . . . . . . . . . . . . . . . . . . . . . . 5,667 5,679 5,090 4,887 4,502 Total shareholders' equity . . . . . . . . . . . . . . . . . 5,798 5,919 5,345 5,180 5,012 YEAR-END BALANCE SHEET DATA: Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,708 $ 52,355 $ 49,345 $ 46,375 $ 43,870 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,295 69,749 65,668 64,737 62,457 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 49,027 49,356 45,779 46,115 47,834 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . 10,247 5,369 4,583 4,225 3,231 Common equity. . . . . . . . . . . . . . . . . . . . . . . . 5,890 5,613 5,089 4,837 4,758 Total shareholders' equity . . . . . . . . . . . . . . . . . 5,890 5,763 5,342 5,105 5,186 - - ---------------------------------------------------------------------------------------------------------------------------------- - - ----------------------------------------------------------------------------------------------------------------------------------
*DIVIDENDS PER SHARE HAVE NOT BEEN RESTATED FOR THE U.S. BANCORP ("USBC") OR METROPOLITAN FINANCIAL CORPORATION ("MFC") MERGERS. USBC PAID COMMON DIVIDENDS OF $139.1 MILLION THROUGH JULY OF 1997 ($.62 PER SHARE), $168.7 MILLION IN 1996 ($1.18 PER SHARE), $133.1 MILLION IN 1995 ($1.06 PER SHARE), $116.0 MILLION IN 1994 ($.94 PER SHARE) AND $100.8 MILLION IN 1993 ($.85 PER SHARE). MFC PAID COMMON DIVIDENDS OF $25.1 MILLION IN 1994 ($.80 PER SHARE) AND $12.1 MILLION IN 1993 ($.39 PER SHARE). U.S. Bancorp 19 TABLE 2 LINE OF BUSINESS FINANCIAL PERFORMANCE
Commercial & Business Banking and Private Financial Services Retail Banking ------------------------------------------------------------- Percent Percent (Dollars in Millions) 1997 1996 Change 1997 1996 Change - - ----------------------------------------------------------------------------------------------------------- CONDENSED INCOME STATEMENT: Net interest income (taxable-equivalent basis)................ $1,341.4 $1,246.3 7.6% $1,483.4 $1,526.7 (2.8)% Provision for credit losses. . . . . . . . . 44.0 29.3 50.2 167.6 106.8 56.9 Noninterest income . . . . . . . . . . . . . 362.6 335.0 8.2 470.0 431.1 9.0 Noninterest expense. . . . . . . . . . . . . 614.8 597.7 2.9 1,218.6 1,313.2 (7.2) Income taxes and taxable-equivalent adjustment . . . . . . 402.8 369.4 218.5 208.2 ------------------ ----------------- Income before nonrecurring items . . . . . . $ 642.4 $ 584.9 9.8 $ 348.7 $ 329.6 5.8 ------------------ ----------------- ------------------ ----------------- Net nonrecurring items (after-tax) . . . . . Net income . . . . . . . . . . . . . . . . . AVERAGE BALANCE SHEET DATA: Commercial loans . . . . . . . . . . . . . . $29,752 $27,130 9.7 $ 2,001 $ 1,937 3.3 Consumer loans, excluding residential mortgage. . . . . . 555 540 2.8 10,898 10,290 5.9 Residential mortgage loans . . . . . . . . . 316 331 (4.5) 4,728 5,403 (12.5) Assets . . . . . . . . . . . . . . . . . . . 38,035 36,068 5.5 22,508 23,448 (4.0) Deposits . . . . . . . . . . . . . . . . . . 9,657 8,348 15.7 36,106 37,537 (3.8) Common equity. . . . . . . . . . . . . . . . 3,064 2,981 2.8 1,720 1,891 (9.0) ------------------ ----------------- Return on average assets..................... 1.69% 1.62% 1.55% 1.41% Return on average common equity ("ROCE")..... 21.0 19.6 20.3 17.4 Net tangible ROCE**. . . . . . . . . . . . . 26.4 24.4 35.5 27.9 Efficiency ratio . . . . . . . . . . . . . . 36.1 37.8 62.4 67.1 Efficiency ratio on a cash basis** . . . . . 34.7 36.5 59.7 64.8 - - --------------------------------------------------------------------------------------------------------- - - ---------------------------------------------------------------------------------------------------------
* NOT MEANINGFUL. **CALCULATED BY EXCLUDING GOODWILL AND OTHER INTANGIBLES AND THE RELATED AMORTIZATION. NOTE:PREFERRED DIVIDENDS AND NONRECURRING ITEMS ARE NOT ALLOCATED TO THE BUSINESS LINES. ALL RATIOS ARE CALCULATED WITHOUT THE EFFECT OF NONRECURRING ITEMS. LINE OF BUSINESS FINANCIAL REVIEW Financial performance is measured by major lines of business, which include: Commercial & Business Banking and Private Financial Services, Retail Banking, Payment Systems, and Corporate Trust and Institutional Financial Services. Business line results are derived from the Company's business unit profitability reporting system. Designations, assignments, and allocations may change from time to time as management accounting systems are enhanced or product lines change. During 1997 certain organization and methodology changes were made and 1996 results are presented on a comparable basis. COMMERCIAL & BUSINESS BANKING AND PRIVATE FINANCIAL SERVICES Commercial & Business Banking and Private Financial Services includes lending, treasury management, and other financial services to middle-market, large corporate and mortgage banking companies and private banking and personal trust clients. Operating earnings increased 10 percent to $642.4 million in 1997, compared with $584.9 million in 1996. Return on average assets was 1.69 percent in 1997 compared with 1.62 percent in 1996, and net tangible return on average common equity was 26.4 percent in 1997 compared with 24.4 percent in 1996. Net interest income increased 8 percent, reflecting growth in average loan balances. Noninterest income 20 U.S. Bancorp
Corporate Trust and Institutional Financial Consolidated Payment Systems Services Company -------------------------------------------------------------------------------------- Percent Percent Percent (Dollars in Millions) 1997 1996 Change 1997 1996 Change 1997 1996 Change - - ----------------------------------------------------------------------------------------------------------------------------------- CONDENSED INCOME STATEMENT: Net interest income (taxable-equivalent basis)................ $216.9 $218.8 (.9)% $ 64.3 $ 42.9 49.9% $3,106.0 $3,034.7 2.3% Provision for credit losses. . . . . . . . . 153.7 135.1 13.8 -- -- -- 365.3 271.2 34.7 Noninterest income . . . . . . . . . . . . . 482.2 402.2 19.9 287.4 263.4 9.1 1,602.2 1,431.7 11.9 Noninterest expense. . . . . . . . . . . . . 273.8 242.8 12.8 193.5 178.1 8.6 2,300.7 2,331.8 (1.3) Income taxes and taxable-equivalent adjustment . . . . . . 104.7 94.1 61.0 49.6 787.0 721.3 ---------------- ---------------- ------------------ Income before nonrecurring items . . . . . . $166.9 $149.0 12.0 $ 97.2 $ 78.6 23.7 1,255.2 1,142.1 9.9 ---------------- ---------------- ---------------- ---------------- Net nonrecurring items (after-tax) . . . . . (416.7) 76.6 * ------------------ Net income . . . . . . . . . . . . . . . . . $ 838.5 $1,218.7 (31.2) ------------------ ------------------ AVERAGE BALANCE SHEET DATA: Commercial loans . . . . . . . . . . . . . . $1,005 $1,180 (14.8) $ -- $ -- -- $ 32,758 $ 30,247 8.3 Consumer loans, excluding residential mortgage . . . . . . 4,258 4,044 5.3 -- -- -- 15,711 14,874 5.6 Residential mortgage loans . . . . . . . . . -- -- -- -- -- -- 5,044 5,734 (12.0) Assets . . . . . . . . . . . . . . . . . . . 6,611 6,451 2.5 1,617 1,435 12.7 68,771 67,402 2.0 Deposits . . . . . . . . . . . . . . . . . . 46 43 7.0 1,527 1,324 15.3 47,336 47,252 .2 Common equity. . . . . . . . . . . . . . . . 500 478 4.6 383 329 16.4 5,667 5,679 (.2) ---------------- ---------------- ------------------ Return on average assets..................... 2.52% 2.31% * * 1.83% 1.69% Return on average common equity ("ROCE")..... 33.4 31.2 25.4% 23.9% 22.0 19.8 Net tangible ROCE**. . . . . . . . . . . . . 54.1 51.0 42.6 42.0 31.8 27.9 Efficiency ratio . . . . . . . . . . . . . . 39.2 39.1 55.0 58.1 48.9 52.2 Efficiency ratio on a cash basis** . . . . . 36.7 36.3 49.2 52.1 46.5 50.0 - - ----------------------------------------------------------------------------------------------------------------------------------- - - -----------------------------------------------------------------------------------------------------------------------------------
increased $27.6 million (8 percent) in 1997 compared with 1996. Noninterest expense increased slightly over 1996. The efficiency ratio on a cash basis improved to 34.7 percent in 1997, compared with 36.5 percent in 1996. RETAIL BANKING Retail Banking delivers products and services to the broad consumer market and small-business through branch offices, telemarketing, direct mail, and automated teller machines ("ATM's"). Operating earnings were $348.7 million in 1997 compared with $329.6 million in 1996. Return on average assets increased to 1.55 percent from 1.41 percent in 1996. Net tangible return on average common equity increased to 35.5 percent in 1997 from 27.9 percent in the previous year. Net interest income declined 3 percent from the prior year, due primarily to the planned runoff of the residential mortgage loan portfolio offset by the growth in home equity loans. Noninterest income increased 9 percent due primarily to increased service charges on deposits and investment products and fees. Noninterest expense decreased, reflecting the benefits of continued streamlining of branch operations, as well as the integration of recent business combinations. The efficiency ratio on a cash basis improved to 59.7 percent in 1997 from 64.8 percent a year ago. PAYMENT SYSTEMS Payment Systems includes consumer and business credit cards, corporate and purchasing card services, U.S. Bancorp 21 card-accessed secured and unsecured lines of credit, ATM processing, and merchant processing. Operating earnings increased 12 percent in 1997 to $166.9 million, compared with $149.0 million in 1996. Return on average assets was 2.52 percent compared with 2.31 percent in 1996, and net tangible return on average common equity was 54.1 percent compared with 51.0 percent in 1996. Fee-based noninterest income increased 20 percent in 1997 compared with 1996. Excluding the reduction in fees related to the first quarter 1997 Corporate Card securitization, fee-based noninterest income increased 24 percent. The increase was due to growth in the sales volume of the Corporate Card, the Purchasing Card, and the Northwest Airlines WorldPerks-Registered Trademark- credit card. Net interest income decreased due to a higher proportion of customers who choose to pay off their credit card balance in full each month and lower retail late fees. Noninterest expense increased due to increased technology spending and costs related to increased sales volume. CORPORATE TRUST AND INSTITUTIONAL FINANCIAL SERVICES Corporate Trust and Institutional Financial Services includes institutional and corporate trust services, investment management services, and a full-service brokerage company. Operating earnings increased 24 percent to $97.2 million, compared with $78.6 million in the prior year. The net tangible return on average common equity was 42.6 percent in 1997, compared with 42.0 percent in 1996. Net interest income increased 50 percent over 1996, reflecting the acquisitions of the corporate trust businesses of BankAmerica and Comerica Incorporated. Noninterest income increased 9 percent from 1996 due primarily to increases in mutual fund advisory fees and corporate trust fees. The efficiency ratio on a cash basis improved to 49.2 percent from 52.1 percent in 1996, reflecting the effective integration of acquisitions, process re-engineering efforts, and revenue growth. STATEMENT OF INCOME ANALYSIS NET INTEREST INCOME Net interest income on a taxable-equivalent basis was $3.11 billion in 1997 compared with $3.03 billion in 1996 and $2.89 billion in 1995. The 1997 increase was primarily attributable to growth in earning assets, driven by core commercial and consumer loan production, partially offset by reductions in investment securities and residential mortgages. The Company expects its balances of securities and residential mortgage loans to continue to decline, as these assets generally have insufficient returns. Average loans were up $2.7 billion (5 percent) from 1996. See Table 7 for detail of the Company's loan portfolio distribution. Excluding residential mortgage loan balances and the effect of the $420 million first quarter corporate card securitization, 1997 average loans were TABLE 3 ANALYSIS OF NET INTEREST INCOME
(Dollars in Millions) 1997 1996 1995 - - -------------------------------------------------------------------------------------------------------------- Net interest income (taxable-equivalent basis) . . . . . . . . . . . . $3,106.0 $3,034.7 $2,886.6 -------------------------------------- -------------------------------------- Average balances of earning assets supported by: Interest-bearing liabilities. . . . . . . . . . . . . . . . . . . . $ 48,097 $ 47,413 $ 45,211 Noninterest-bearing liabilities . . . . . . . . . . . . . . . . . . 13,578 12,788 11,345 -------------------------------------- Total earning assets . . . . . . . . . . . . . . . . . . . . . . $ 61,675 $ 60,201 $ 56,556 -------------------------------------- -------------------------------------- Average yields and weighted average rates (taxable-equivalent basis): Earning assets yield. . . . . . . . . . . . . . . . . . . . . . . . 8.68% 8.60% 8.81% Rate paid on interest-bearing liabilities . . . . . . . . . . . . . 4.67 4.52 4.64 -------------------------------------- Gross interest margin. . . . . . . . . . . . . . . . . . . . . . . . . 4.01% 4.08% 4.17% -------------------------------------- -------------------------------------- Net interest margin. . . . . . . . . . . . . . . . . . . . . . . . . . 5.04% 5.04% 5.10% -------------------------------------- -------------------------------------- Net interest margin without taxable-equivalent increments. . . . . . . 4.94% 4.93% 4.99% - - -------------------------------------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------------------------------------
22 U.S. Bancorp TABLE 4 CHANGES IN RATE AND VOLUME
1997 Compared with 1996 1996 Compared with 1995 --------------------------------------------------------------------------------- (Dollars in Millions) Volume Yield/Rate Total Volume Yield/Rate Total - - ---------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in: Interest income: Loans. . . . . . . . . . . . . . . $238.8 $ 5.8 $244.6 $285.3 $(127.1) $158.2 Taxable securities . . . . . . . . (56.5) (18.0) (74.5) (12.4) 11.2 (1.2) Nontaxable securities. . . . . . . (1.9) 20.3 18.4 16.1 2.7 18.8 Federal funds sold and resale agreements . . . . . . . (16.1) 1.2 (14.9) 18.4 (2.7) 15.7 Other. . . . . . . . . . . . . . . (.8) .2 (.6) 4.7 (2.4) 2.3 --------------------------------------------------------------------------------- Total . . . . . . . . . . . . . 163.5 9.5 173.0 312.1 (118.3) 193.8 Interest expense: Savings deposits and time deposits less than $100,000 . . (31.8) 12.5 (19.3) 26.5 (20.8) 5.7 Time deposits over $100,000. . . . 10.9 3.8 14.7 31.4 (12.5) 18.9 Short-term borrowings. . . . . . . (105.7) 10.4 (95.3) 12.5 (24.6) (12.1) Long-term debt . . . . . . . . . . 159.8 (4.6) 155.2 46.9 (16.5) 30.4 Mandatorily redeemable preferred securities. . . . . . 46.4 -- 46.4 2.8 -- 2.8 --------------------------------------------------------------------------------- Total . . . . . . . . . . . . . 79.6 22.1 101.7 120.1 (74.4) 45.7 --------------------------------------------------------------------------------- Increase (decrease) in net interest income . . . . . . . . $ 83.9 $(12.6) $ 71.3 $192.0 $ (43.9) $148.1 - - ---------------------------------------------------------------------------------------------------------------------------------- - - ----------------------------------------------------------------------------------------------------------------------------------
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. higher by approximately $3.7 billion (8 percent) than 1996, reflecting growth in the commercial, home equity and second mortgages, and credit card portfolios. Other consumer loans were lower on average than 1996, primarily due to reductions in installment loans in the northwest region. Average securities were $850 million lower in 1997 compared with 1996, reflecting both maturities and sales of securities, partially offset by purchases of mortgage-backed and other securities added as a result of bank acquisitions. The increase in net interest income from 1995 to 1996 was attributable to a $3.2 billion increase in average loans, reflecting growth in core commercial and consumer loans, as well as acquisitions. The net interest margin, on a taxable-equivalent basis, was 5.04 percent in 1997 and 1996, and 5.10 percent in 1995. PROVISION FOR CREDIT LOSSES The provision for credit losses, before the $95.0 million merger-related provision, was $365.3 million in 1997, up $94.1 million from $271.2 million in 1996 and up $126.2 million from $239.1 million in 1995. Net charge-offs, before merger-related net charge-offs of $62.3 million, totaled $387.4 million in 1997, up from $261.5 million in 1996 and $195.1 million in 1995. The higher provision results from increased loan volumes discussed above and higher commercial net charge-offs. The $95.0 million merger-related provision and $62.3 million of charge-offs were taken as a result of an alignment of the classification and charge-off practices of former USBC with those of the Company. Refer to "Corporate Risk Profile" for further information on credit quality. NONINTEREST INCOME Noninterest income was $1.62 billion in 1997, compared with $1.78 billion in 1996, and $1.31 billion in 1995. A number of nonrecurring gains affected noninterest income each year as summarized in Table 5. Nonrecurring gains in 1997 included a $9.4 million gain on the sale of USBC's $45 million affinity credit card portfolio and $3.6 million in net securities gains. Nonrecurring gains for 1996 included: $190.0 million, net of expenses, received for the termination of the First Interstate Bancorp merger agreement (see Note C); a $65.0 million state tax U.S. Bancorp 23 TABLE 5 NONINTEREST INCOME
(Dollars in Millions). . . . . . . . . . . . . . 1997 1996 1995 - - ------------------------------------------------------------------------------- S> Credit card fee revenue. . . . . . . . . . . . . $ 418.8 $ 351.5 $ 303.9 Service charges on deposit accounts. . . . . . . 396.2 377.2 345.0 Trust and investment management fees . . . . . . 348.0 302.3 241.1 Investment products fees and commissions . . . . 65.7 59.7 49.8 Trading account profits and commissions. . . . . 30.9 29.0 28.5 Other. . . . . . . . . . . . . . . . . . . . . . 342.6 312.0 297.2 ---------------------------- Subtotal. . . . . . . . . . . . . . . . . . . 1,602.2 1,431.7 1,265.5 Gain on sale of mortgage banking operations, branches and other assets . . . . . . . . . . 9.4 71.4 39.9 Securities gains . . . . . . . . . . . . . . . . 3.6 20.8 3.0 Termination fee, net . . . . . . . . . . . . . . -- 190.0 -- State income tax refund. . . . . . . . . . . . . -- 65.0 -- Other. . . . . . . . . . . . . . . . . . . . . . -- 4.2 4.9 ---------------------------- Nonrecurring gains . . . . . . . . . . . . . 13.0 351.4 47.8 ---------------------------- Total noninterest income . . . . . . . . . $1,615.2 $1,783.1 $1,313.3 - - ------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------
refund, including interest; a $45.8 million gain on the sale of the Company's mortgage banking operations; a $25.6 million gain on branch and credit card portfolio sales; a $4.2 million gain on the sale of premises; and, $20.8 million in net securities gains. Nonrecurring gains recorded in 1995 included a $31.0 million gain on the sale of 63 branches; a $5.5 million gain on the sale of affinity card portfolios, a $3.0 million gain on sales of adjustable-rate mortgage loans and student loans; a $5.2 million gain on the sale of facilities; a $1.7 million gain on the sale of mortgage loan servicing rights; $2.0 million of losses related to the Company's import/export financing subsidiary that was closed in 1995; and, $3.0 million in net securities gains. Excluding nonrecurring items, noninterest income in 1997 was $1.60 billion, a $170.5 million (12 percent) increase from $1.43 billion in 1996 and a $336.7 million (27 percent) increase from $1.27 billion in 1995. The increases resulted from continued growth in all categories of fee revenue. Credit card fee revenue increased as a result of higher sales volumes for Corporate and Purchasing Cards and the Northwest Airlines WorldPerks credit card. Excluding the effect of the $420 million corporate card securitization in the first quarter of 1997, credit card fee income would have increased by $83.8 million (24 percent) over 1996. Trust and investment management fees increased each year due to growth in corporate, institutional and personal trust businesses and the Company's corporate trust acquisition strategy. Service charges on deposit accounts increased primarily as a result of increased demand deposits and acquisitions. Investment product fees and commissions increased each year due to higher sales volumes of mutual funds and annuities. NONINTEREST EXPENSE Noninterest expense was $2.81 billion in 1997, compared with $2.54 billion in 1996, an increase of $274.2 million, and $2.48 billion in 1995. Total noninterest expense increased each year as a result of nonrecurring items summarized in Table 6. Nonrecurring items in 1997 consisted of merger-related charges of $511.6 million incurred in connection with the USBC transaction, including: $232.3 million of severance costs; $77.2 million of occupancy/equipment writedowns; $43.4 million of capitalized software and other asset write-offs; $35.0 million of investment banking and other transaction costs; $72.7 million of conversion expenses incurred; and, $51.0 million of other merger-related expenses. Nonrecurring charges in 1996 included: merger and integration charges of $49.5 million for the acquisitions of FirsTier Financial, Inc., the BankAmerica corporate trust business and West One Bancorp; $38.6 million in branch distribution resizing expenses; a $29.5 million valuation adjustment to reduce the carrying value of credit card and core deposit intangibles to estimated fair value; $10.1 million for a one-time $750 per-employee bonus; $17.3 million to acquire credit card and revolving credit software and to write-off other miscellaneous assets; and, a $61.3 million one-time special assessment by the FDIC on SAIF deposits. 24 U.S. Bancorp TABLE 6 NONINTEREST EXPENSE
(Dollars in Millions, Except Per Employee Data). 1997 1996 1995 - - -------------------------------------------------------------------------------- Salaries** . . . . . . . . . . . . . . . . . . . $ 969.3 $ 955.3 $ 927.5 Employee benefits**. . . . . . . . . . . . . . . 217.4 219.4 209.9 ---------------------------- Total personnel expense . . . . . . . . . . . 1,186.7 1,174.7 1,137.4 Net occupancy. . . . . . . . . . . . . . . . . . 182.0 179.4 183.4 Furniture and equipment. . . . . . . . . . . . . 165.4 175.2 184.5 Goodwill and other intangible assets** . . . . . 113.3 100.6 76.0 Professional services**. . . . . . . . . . . . . 70.3 58.0 59.2 Other personnel costs. . . . . . . . . . . . . . 66.6 83.4 62.4 Telephone. . . . . . . . . . . . . . . . . . . . 59.7 60.2 58.4 Advertising and marketing. . . . . . . . . . . . 56.6 61.2 59.2 Postage . . . . . . . . . . . . . . . . . . . . 44.7 42.8 45.5 Third party data processing. . . . . . . . . . . 39.2 35.6 38.4 Printing, stationery and supplies. . . . . . . . 37.4 44.3 43.5 FDIC insurance . . . . . . . . . . . . . . . . . 9.0 11.9 64.5 Other**. . . . . . . . . . . . . . . . . . . . . 269.8 304.5 326.4 ---------------------------- Subtotal. . . . . . . . . . . . . . . . . . . 2,300.7 2,331.8 2,338.8 Merger-related . . . . . . . . . . . . . . . . . 511.6 49.5 98.9 SAIF special assessment. . . . . . . . . . . . . -- 61.3 -- Branch distribution resizing . . . . . . . . . . -- 38.6 -- Goodwill and other intangible assets valuation adjustment. . . . . . . . . . . . . -- 29.5 -- Special employee bonus . . . . . . . . . . . . . -- 10.1 -- Other . . . . . . . . . . . . . . . . . . . . . -- 17.3 38.2 ---------------------------- Nonrecurring charges. . . . . . . . . . . . . 511.6 206.3 137.1 ---------------------------- Total noninterest expense. . . . . . . . . $2,812.3 $2,538.1 $2,475.9 ---------------------------- ---------------------------- Efficiency ratio*. . . . . . . . . . . . . . . . 59.6% 52.9% 59.0% Efficiency ratio before merger-related items and nonrecurring items. . . . . . . . . 48.9 52.2 56.3 Average number of full-time equivalent employees . . . . . . . . . . . . . . . . . . 25,858 27,157 27,795 Personnel expense per employee** . . . . . . . . $ 45,893 $ 43,256 $ 40,921 - - ------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------
*COMPUTED AS NONINTEREST EXPENSE DIVIDED BY THE SUM OF NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS AND NONINTEREST INCOME NET OF SECURITIES GAINS AND LOSSES. **BEFORE EFFECT OF NONRECURRING ITEMS IN 1996. Nonrecurring charges in 1995 included: merger and integration charges of $98.9 million for the acquisition of West One Bancorp; the write-off of $23.0 million of unamortized software costs related to a change in the Company's policy to expense software costs; a $3.2 million write-down of premises vacated by the Company's affinity card banking subsidiary; $4.0 million of business consolidation expenses; and, an $8.0 million write-off of other miscellaneous assets. Refer to Note M for further information on merger, integration and resizing charges. Excluding nonrecurring items, 1997 noninterest expense was $2.30 billion, compared with $2.33 billion in 1996 and $2.34 billion in 1995. Total salaries and benefits (excluding nonrecurring charges) were $1.19 billion in 1997 compared with $1.17 billion in 1996 and $1.14 billion in 1995. Average full-time equivalent employees decreased 5 percent to 25,858 in 1997 from 27,157 in 1996. Amortization of goodwill and other intangible assets, excluding the valuation adjustment discussed above, was $113.3 million in 1997, $100.6 million in 1996, and $76.0 million in 1995. The increases were primarily attributable to the additional goodwill and intangible assets resulting from acquisitions and portfolio purchases. The reduction in other personnel in 1997 reflects lower contract labor expense associated with 1996 technology projects now complete. Offsetting the favorable variance in contract labor was an increase in professional services related to several 1997 technology initiatives which involve third party con- U.S. Bancorp 25 TABLE 7 LOAN PORTFOLIO DISTRIBUTION
1997 1996 1995 1994 1993 -------------------------------------------------------------------------------------------------- At December 31 Percent Percent Percent Percent Percent Dollars in Millions) Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total - - ----------------------------------------------------------------------------------------------------------------------------------- COMMERCIAL: Commercial. . . . . . . . $23,399 42.8% $21,393 40.9% $19,821 40.1% $17,736 38.2% $17,176 39.1% Real estate: Commercial mortgage . 8,025 14.7 8,022 15.3 6,864 13.9 6,189 13.4 5,550 12.7 Construction . . . . . 2,359 4.3 2,125 4.0 1,516 3.2 1,314 2.8 1,191 2.7 -------------------------------------------------------------------------------------------------- Total commercial . 33,783 61.8 31,540 60.2 28,201 57.2 25,239 54.4 23,917 54.5 CONSUMER: Residential mortgage . . 4,480 8.2 5,225 10.0 6,722 13.6 7,177 15.5 6,775 15.4 Residential mortgage held for sale . . . . . 193 .3 148 .3 343 .7 257 .6 1,929 4.4 Home equity and second mortgage. . . . . . . . 5,373 9.8 4,798 9.2 4,011 8.1 3,500 7.5 2,790 6.4 Credit card . . . . . . . 4,200 7.7 3,632 6.9 3,391 6.9 3,465 7.5 2,795 6.4 Automobile . . . . . . . 3,227 5.9 3,388 6.5 3,243 6.6 3,256 7.0 2,541 5.8 Revolving credit. . . . . 1,567 2.9 1,581 3.0 1,517 3.1 1,406 3.0 1,280 2.9 Installment . . . . . . . 1,199 2.2 1,463 2.8 1,449 2.9 1,625 3.5 1,435 3.3 Student*. . . . . . . . . 686 1.2 580 1.1 468 .9 450 1.0 408 .9 -------------------------------------------------------------------------------------------------- Total consumer. . . 20,925 38.2 20,815 39.8 21,144 42.8 21,136 45.6 19,953 45.5 Total loans . . . . $54,708 100.0% $52,355 100.0% $49,345 100.0% $46,375 100.0% $43,870 100.0% -------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------
*ALL OR PART OF THE STUDENT LOAN PORTFOLIO MAY BE SOLD WHEN THE REPAYMENT PERIOD BEGINS. sulting arrangements. Excluding nonrecurring items, the Company's efficiency ratio improved to 48.9 percent for 1997, compared with 52.2 percent and 56.3 percent in 1996 and 1995, respectively. The keys to this high productivity are a tight cost control culture throughout the organization and the successful integration of acquisitions. The Company's efforts to address issues related to the turn of the century ("Year 2000") began with technology changes initiated in the early 1990's. Many of the Company's principal data processing applications were replaced with licensed software packages. In addition, a Year 2000 project was initiated to ensure that appropriate modifications are made to systems and applications to resolve Year 2000 issues. Programming changes and testing of systems and software packages are expected to be substantially completed by December 31, 1998. In addition, the Company's credit risk assessment includes the consideration of incremental risk which may be posed by customers' inability, if any, to address Year 2000 issues. The cost of the project is not significant to the Company. INCOME TAX EXPENSE The provision for income taxes was $552.2 million in 1997 compared with $725.7 million in 1996 and $523.9 million in 1995. The decrease in 1997 from 1996 was primarily the result of a lower level of taxable income due to the nonrecurring items discussed above. At December 31, 1997, the Company's net deferred tax asset was $108.2 million, compared with $174.0 million at December 31, 1996. In determining that realization of the deferred tax asset was more likely than not, the Company gave consideration to a number of factors, including its recent earnings history, its expectations for earnings in the future and, where applicable, the expiration dates associated with tax carryforwards. For further information on income taxes, refer to Note N. BALANCE SHEET ANALYSIS LOANS The Company's loan portfolio increased $2.3 billion to $54.7 billion at December 31, 1997, from $52.4 billion at December 31, 1996. Excluding residential mortgages and the $420 million corporate card securitization, average loans for 1997 were higher by $3.7 billion than 1996, reflecting growth in the commercial, home equity and second mortgages and credit card portfolios. The Company's loan portfolio carries 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. 26 U.S. Bancorp TABLE 8 COMMERCIAL REAL ESTATE EXPOSURE BY PROPERTY TYPE AND GEOGRAPHY
Percentage of Total at December 31 ------------------- PROPERTY TYPE 1997 1996 - - ---------------------------------------------------------------------------- Retail . . . . . . . . . . . . . . . . . . . . . . . . 15.1% 15.9% Mixed-use office . . . . . . . . . . . . . . . . . . . 13.1 12.6 Office building. . . . . . . . . . . . . . . . . . . . 12.8 12.5 Multi-family . . . . . . . . . . . . . . . . . . . . . 10.2 10.6 Hotel/motel. . . . . . . . . . . . . . . . . . . . . . 8.9 9.8 Single-family residential. . . . . . . . . . . . . . . 7.8 6.2 Land . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 8.1 Other, primarily owner-occupied. . . . . . . . . . . . 25.8 24.3 ------------------- 100.0% 100.0% - - ---------------------------------------------------------------------------- - - ---------------------------------------------------------------------------- GEOGRAPHY - - ---------------------------------------------------------------------------- Washington . . . . . . . . . . . . . . . . . . . . . . 24.3% 24.8% Oregon . . . . . . . . . . . . . . . . . . . . . . . . 16.0 16.9 California . . . . . . . . . . . . . . . . . . . . . . 13.0 12.0 Minnesota. . . . . . . . . . . . . . . . . . . . . . . 8.9 10.4 Other States within USB Region . . . . . . . . . . . . 32.3 30.3 ------------------- Total USB Region. . . . . . . . . . . . . . . . . . 94.5 94.4 Southeast. . . . . . . . . . . . . . . . . . . . . . . 2.1 2.6 Mid-Atlantic . . . . . . . . . . . . . . . . . . . . . 1.0 .8 Other Southwest. . . . . . . . . . . . . . . . . . . . 1.0 .9 Other Midwest. . . . . . . . . . . . . . . . . . . . . .7 .5 Other West . . . . . . . . . . . . . . . . . . . . . . .7 .8 ------------------- 100.0% 100.0% - - ---------------------------------------------------------------------------- - - ----------------------------------------------------------------------------
COMMERCIAL Commercial loans totaled $23.4 billion at year-end 1997, up $2.0 billion (9 percent) from year-end 1996. Year-end 1996 commercial loans were $21.4 billion, up $1.6 billion (8 percent) from year-end 1995. The increase was primarily attributable to growth in core commercial loans. At December 31, 1997, the significant industry groups based on commercial loans outstanding were consumer cyclical products and services, consumer staple products and services, and capital goods. This diverse mix of industries is similar to 1996 and 1995. The Company's Asian exposure at February 18, 1998 consisted primarily of bankers acceptances and trade letters of credit totaling approximately $170 million, including approximately $140 million of Korean exposure and $6 million of Indonesian exposure. The geographical distribution of the commercial portfolio is concentrated in the Company's banking region, with approximately 50 percent of amounts outstanding to borrowers in Washington, Minnesota, and Oregon. COMMERCIAL REAL ESTATE The Company's portfolio of commercial real estate mortgages and construction loans grew to $10.4 billion at December 31, 1997, compared with $10.1 billion at December 31, 1996, primarily due to an increase in construction loans of $234 million related to successful marketing promotions. Commercial mortgages outstanding were $8.0 billion at December 31, 1997, and December 31, 1996. Real estate construction loans at December 31, 1997, totaled $2.4 billion compared with $2.1 billion from year-end 1996. Table 8 shows the detail 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 $65.8 million of construction loans were transferred to the commercial mortgage portfolio in 1997. At year-end 1997, real estate secured $170 million of tax-exempt industrial development loans and $1.02 billion of standby letters of credit. At year-end 1996, these exposures totaled $152 million and $748 million, respectively. The Company's commercial real estate mortgages and construction loans had combined unfunded commitments of $2.38 billion at December 31, 1997, and $2.10 billion at December 31, 1996. 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 $1.08 billion at December 31, 1997, and $722 million at December 31, 1996. CONSUMER Total consumer loan outstandings increased $110 million to $20.9 billion at December 31, 1997, from $20.8 billion at December 31, 1996. Excluding a U.S. Bancorp 27 $700 million (13 percent) decrease in residential mortgage loans, consumer loans increased $810 million (5 percent), reflecting growth in credit card, student, and home equity and second mortgage loans. The decrease in residential mortgages reflects the Company's continuing emphasis on other consumer loan products. Credit card loans increased $568 million (16 percent) reflecting increased volumes in the Northwest Airlines WorldPerks credit card and portfolio purchases during 1997. Home equity and second mortgages increased $575 million (12 percent) primarily due to successful marketing promotions. Of total consumer balances outstanding, approximately 50 percent are to customers located in Minnesota, Washington, Colorado and Oregon. See "Corporate Risk Profile" for a discussion of the general economic conditions within the Company's banking region. SECURITIES At December 31, 1997, available-for-sale securities totaled $6.9 billion compared with total available-for-sale and held-to-maturity securities of $7.3 billion at December 31, 1996, reflecting both maturities and sales of securities, partially offset by purchases of mortgage-backed and other securities added as a result of bank acquisitions. Mortgage-backed and state and political securities, as a percentage of the total securities portfolio, have increased, reflecting the fourth quarter 1997 purchases and acquisitions. The relative mix of the remainder of the securities portfolio has not changed significantly from prior years. The objectives of the Company's investment portfolio are to meet business line collateral needs, offset interest rate risk positions, provide liquidity and interest income, and generally act as a balance sheet management tool. TABLE 9 AVAILABLE-FOR-SALE SECURITIES PORTFOLIO AVERAGE MATURITY
At December 31, 1997 Average Contractual Maturity - - ------------------------------------------------------------------------------ U.S. Treasury. . . . . . . . . . . . . . . . . . . . . . . .2 years, 10 months Other U.S. agencies. . . . . . . . . . . . . . . . . . . . ..3 years, 6 months State and political. . . . . . . . . . . . . . . . . . . . ..6 years, 5 months Other* . . . . . . . . . . . . . . . . . . . . . . . . . . ..5 years, 4 months Total . . . . . . . . . . . . . . . . . . . . . . . . . ..5 years, 2 months - - ------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------
*EXCLUDES EQUITY SECURITIES THAT HAVE NO STATED MATURITY. THE AVERAGE EFFECTIVE LIFE OF THE HOLDINGS IS EXPECTED TO BE LESS THAN THE AVERAGE CONTRACTUAL MATURITIES SHOWN IN THE TABLE BECAUSE BORROWERS MAY HAVE THE RIGHT TO CALL OR PREPAY OBLIGATIONS WITH OR WITHOUT CALL OR PREPAYMENT PENALTIES. THE TABLE ABOVE DOES NOT INCLUDE MORTGAGE-BACKED SECURITIES. 28 U.S. Bancorp TABLE 10 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, 1997 tized Fair tized Fair tized Fair (Dollars in Millions) Cost Value Yield Cost Value Yield Cost Value Yield - - -------------------------------------------------------------------------------------------------------------- U.S. Treasury.......... $183.6 $184.0 5.94% $ 222.4 $ 223.6 5.95% $ 222.0 $ 220.4 5.56% Mortgage-backed*....... -- -- -- -- -- -- -- -- -- Other U.S. agencies.... 5.9 5.9 6.29 28.6 28.8 6.58 10.3 10.6 7.27 State and political**.. 95.4 96.5 8.18 502.4 514.2 7.76 426.9 439.1 7.70 Other.................. 4.3 4.3 6.56 5.2 5.3 7.24 3.4 3.4 6.38 - - -------------------------------------------------------------------------------------------------------------- $289.2 $290.7 6.70% $ 758.6 $ 771.9 7.18% $ 662.6 $ 673.5 6.97% - - -------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------- Mortgage-Backed and Maturing: Over 10 Years Asset-Backed Securities Total - - -------------------------------------------------------------------------------------------------------------- Amor- Amor- Amor- At December 31, 1997 tized Fair tized Fair tized Fair (Dollars in Millions) Cost Value Yield Cost Value Yield Cost Value Yield - - -------------------------------------------------------------------------------------------------------------- U.S. Treasury.......... $ -- $ -- --% $ -- $ -- --% $ 628.0 $ 628.0 5.81% Mortgage-backed*....... -- -- -- 4,325.8 4,366.3 6.93 4,325.8 4,366.3 6.93 Other U.S. agencies.... .1 .1 10.25 315.0 324.3 7.61 359.9 369.7 7.49 State and political**.. 275.2 281.5 8.00 -- -- -- 1,299.9 1,331.3 7.82 Other.................. 138.9 152.7 7.49*** 23.9 24.0 6.54 175.7 189.7 6.68*** - - -------------------------------------------------------------------------------------------------------------- $414.2 $434.3 8.00%*** $4,664.7 $4,714.6 6.97% $6,789.3 $6,885.0 7.03%*** - - -------------------------------------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------------------------------------
*VARIABLE RATE MORTGAGE-BACKED SECURITIES REPRESENTED 16% 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. DEPOSITS Noninterest-bearing deposits were $14.5 billion at December 31, 1997, compared with $14.3 billion at December 31, 1996. Interest-bearing deposits totaled $34.5 billion at December 31, 1997, compared with $35.0 billion at December 31, 1996. The decrease in interest-bearing deposit balances reflects customers moving funds into alternative investment vehicles and a reduction in time certificates greater than $100,000 of $118 million. BORROWINGS Short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings, were $3.3 billion at December 31, 1997, down from $6.6 billion at year-end 1996. The decrease was primarily due to the net maturity of $1.7 billion of short-term bank notes and a $1.1 billion reduction in federal funds purchased and securities sold under agreements to repurchase. Long-term debt was $10.2 billion at December 31, 1997, up from $5.4 billion at December 31, 1996. The Company issued $5.7 billion of debt, with an average original maturity of 2.2 years, under its medium term and bank note programs during 1997, as short-term borrowings were replaced with variable rate long-term debt as part of the Company's liquidity management strategy. These issuances were partially offset by $932 million of medium-term and bank note maturities and net maturities of $151 million of Federal Home Loan Bank Advances. 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, 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 the result of changes in interest rates. Rate movements can affect the repricing of assets and liabilities differently, as well as their market value. Liquidity risk is the possible inability to fund obligations to depositors, investors and borrowers. U.S. Bancorp 29 CREDIT MANAGEMENT In 1997 the Company maintained its high level of credit quality. The ratio of nonperforming assets to loans plus other real estate was ..62 percent at year-end, compared with .61 percent and .65 percent at year-end 1996 and 1995, respectively. The Company's strategy for credit risk management includes stringent, centralized credit policies, and standard underwriting criteria for 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-off 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. In the Company's retail banking operations, a standard credit scoring system is used to assess consumer credit risks and to price consumer products accordingly. In evaluating its credit risk, the Company considers the loan portfolio composition, the level of allowance coverage, and macroeconomic factors. Most economic indicators in the Company's operating regions compare favorably with national trends. Approximately 45 percent of the Company's loan portfolio consists of credit to businesses and consumers in Minnesota, Oregon and Washington. According to federal and state government agencies, unemployment rates in Minnesota, Oregon and Washington were 2.8 percent, 5.3 percent and 4.4 percent, respectively, for the month of December 1997, compared with the national unemployment rate of 4.7 percent. Through September 30, 1997, the national foreclosure rate was 1.09 percent, compared with .57 percent in Minnesota, .29 percent in Oregon, and .54 percent in Washington. The Company engages in non-lending 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 AND ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES: The allowance for credit losses provides coverage for 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 is based on continuing assessment of problem loans and related off-balance sheet items, recent loss experience, and other factors, including current and anticipated economic conditions. Management has determined that the allowance for credit losses is adequate. At December 31, 1997, the allowance was $1.01 billion, or 1.84 percent of loans. This compares with an allowance of $992.5 million, or 1.90 percent of loans, at year-end 1996, and $908.0 million, or 1.84 percent of loans, at December 31, 1995. The ratio of the allowance for credit losses to nonperforming loans was 340 percent at December 31, 1997, compared with 369 percent at year-end 1996 and 367 percent at year-end 1995. Although the recent trend of steady economic growth may contribute to the continued improvement in the credit portfolio, economic stagnation or reversals could increase the required level of the allowance for credit losses. Management allocates part of the allowance to certain sectors based on relative risk characteristics of the loan portfolio. Table 12 shows the allocation of the allowance for credit losses by loan category. Commercial allocations are based on a quarterly review of individual loans outstanding and binding commitments to lend, including standby letters of credit. Consumer allocations are based on an analysis of historical and expected delinquency and charge-off statistics. 30 U.S. Bancorp TABLE 11 SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
(Dollars in Millions) 1997 1996 1995 1994 1993 - - ---------------------------------------------------------------------------------------------------- Balance at beginning of year. . . . . . . . . . . $ 992.5 $908.0 $862.3 $811.3 $811.2 CHARGE-OFFS: Commercial: Commercial . . . . . . . . . . . . . . . . 184.4 86.4 51.3 86.7 100.7 Real estate: Commercial mortgage. . . . . . . . . . . 14.3 17.0 22.1 49.8 73.6 Construction . . . . . . . . . . . . . . 4.3 2.3 .4 12.2 6.2 ------------------------------------------------ Total commercial . . . . . . . . . . . . 203.0 105.7 73.8 148.7 180.5 Consumer: Residential mortgage. . . . . . . . . . . . 6.7 6.8 6.9 5.9 5.1 Credit card . . . . . . . . . . . . . . . . 172.4 150.4 123.7 115.0 109.2 Other . . . . . . . . . . . . . . . . . . . 194.3 134.3 121.6 82.2 75.4 ------------------------------------------------ Total consumer . . . . . . . . . . . . . 373.4 291.5 252.2 203.1 189.7 ------------------------------------------------ Total . . . . . . . . . . . . . . . . 576.4 397.2 326.0 351.8 370.2 RECOVERIES: Commercial: Commercial . . . . . . . . . . . . . . . . 38.8 56.0 56.6 61.6 56.6 Real estate: Commercial mortgage. . . . . . . . . . . 30.5 25.7 18.7 22.6 17.4 Construction . . . . . . . . . . . . . . .8 1.0 2.5 2.9 3.4 ------------------------------------------------ Total commercial . . . . . . . . . . . . 70.1 82.7 77.8 87.1 77.4 Consumer: Residential mortgage. . . . . . . . . . . . 1.3 2.4 1.8 1.9 2.7 Credit card . . . . . . . . . . . . . . . . 20.2 16.6 17.1 15.7 14.6 Other . . . . . . . . . . . . . . . . . . . 35.1 34.0 34.2 26.5 24.0 ------------------------------------------------ Total consumer . . . . . . . . . . . . . 56.6 53.0 53.1 44.1 41.3 ------------------------------------------------ Total . . . . . . . . . . . . . . . . 126.7 135.7 130.9 131.2 118.7 NET CHARGE-OFFS: Commercial: Commercial . . . . . . . . . . . . . . . . 145.6 30.4 (5.3) 25.1 44.1 Real estate: Commercial mortgage. . . . . . . . . . . (16.2) (8.7) 3.4 27.2 56.2 Construction . . . . . . . . . . . . . . 3.5 1.3 (2.1) 9.3 2.8 ------------------------------------------------ Total commercial . . . . . . . . . . . . 132.9 23.0 (4.0) 61.6 103.1 Consumer: Residential mortgage. . . . . . . . . . . . 5.4 4.4 5.1 4.0 2.4 Credit card . . . . . . . . . . . . . . . . 152.2 133.8 106.6 99.3 94.6 Other . . . . . . . . . . . . . . . . . . . 159.2 100.3 87.4 55.7 51.4 ------------------------------------------------ Total consumer . . . . . . . . . . . . . 316.8 238.5 199.1 159.0 148.4 ------------------------------------------------ Total . . . . . . . . . . . . . . . . 449.7 261.5 195.1 220.6 251.5 Provision charged to operating expense. . . . . . 460.3 271.2 239.1 243.7 239.3 Additions related to acquisitions and other . . . 5.6 74.8 1.7 27.9 12.3 ------------------------------------------------ Balance at end of year. . . . . . . . . . . . . . $1,008.7 $992.5 $908.0 $862.3 $811.3 ------------------------------------------------ ------------------------------------------------ Allowance as a percentage of: Period-end loans . . . . . . . . . . . . . . . 1.84% 1.90% 1.84% 1.86% 1.85% Nonperforming loans. . . . . . . . . . . . . . 340 369 367 233 175 Nonperforming assets . . . . . . . . . . . . . 297 310 283 186 130 Net charge-offs as a percentage of average loans outstanding: Commercial . . . . . . . . . . . . . . . . . . .41% .08% (.01)% .25% .46% Consumer . . . . . . . . . . . . . . . . . . . 1.53 1.16 .96 .80 .80 Total . . . . . . . . . . . . . . . . . . . . 84 .51 .41 .49 .61 - - ---------------------------------------------------------------------------------------------------- - - ----------------------------------------------------------------------------------------------------
U.S. Bancorp 31 TABLE 12 ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
Allocation Amount at December 31 Allocation as a Percent of Loans Outstanding -------------------------------------------------------------------------------------------------- (Dollars in Millions) 1997 1996 1995 1994 1993 1997 1996 1995 1994 1993 - - ---------------------------------------------------------------------------------------------------------------------------------- COMMERCIAL: Commercial . . . . . . . . . $ 226.2 $218.5 $179.3 $169.8 $212.2 .97% 1.02% .90% .96% 1.24% Real estate: Commercial mortgage. . . . 29.7 41.2 38.4 59.2 91.0 .37 .51 .56 .96 1.64 Construction . . . . . . . 15.9 12.6 7.2 8.9 9.9 .67 .59 .47 .68 .83 -------------------------------------------------------------------------------------------------- Total commercial . . . . . 271.8 272.3 224.9 237.9 313.1 .80 .86 .80 .94 1.31 CONSUMER: Residential mortgage . . . . 7.5 8.3 8.8 11.6 14.9 .16 .15 .12 .16 .17 Credit card. . . . . . . . . 62.9 62.3 43.8 45.1 37.0 1.50 1.72 1.29 1.30 1.32 Other. . . . . . . . . . . . 73.1 59.5 56.7 51.0 39.7 .61 .50 .53 .50 .47 -------------------------------------------------------------------------------------------------- Total consumer . . . . . . 143.5 130.1 109.3 107.7 91.6 .69 .63 .52 .51 .46 -------------------------------------------------------------------------------------------------- Total allocated. . . . . . . 415.3 402.4 334.2 345.6 404.7 .76 .77 .68 .75 .92 Unallocated portion. . . . . 593.4 590.1 573.8 516.7 406.6 1.08 1.13 1.16 1.11 .93 -------------------------------------------------------------------------------------------------- Total allowance . . . . $1,008.7 $992.5 $908.0 $862.3 $811.3 1.84% 1.90% 1.84% 1.86% 1.85% - - ---------------------------------------------------------------------------------------------------------------------------------- - - ----------------------------------------------------------------------------------------------------------------------------------
The unallocated portion of the allowance increased to $593.4 million at year-end 1997 from $590.1 million and $573.8 million at December 31, 1996, and 1995. Although the allocation of the allowance is an important credit management tool, the entire allowance for credit losses is available for the entire loan portfolio. ANALYSIS OF NET LOAN CHARGE-OFFS: Net loan charge-offs increased $188.2 million to $449.7 million, compared with $261.5 million in 1996. Included in 1997 net charge-offs was $62.3 million of merger-related charge-offs, taken to align the classification and charge-off practices of the former USBC with those of the Company. Commercial loan net charge-offs for 1997, excluding merger-related charge-offs of $55.3 million, were $77.6 million, compared with $23.0 million in 1996. Approximately one-half of the increase was attributable to one large credit. Consumer loan net charge-offs in 1997, excluding merger-related charge-offs of $7.0 million, were $309.8 million compared with $238.5 million in 1996. A portion of the increase was due to higher charge-offs in the northwest region's portfolio of installment loans originated in 1995 and 1996. Credit standards on this portfolio's new originations were tightened in 1997. The higher level of charge-offs also reflected an increase in bankruptcies and growth in the credit card loan portfolio. The ratio of consumer net charge-offs to average loans in 1997 was 1.53 percent, up from 1.16 percent in 1996. The ratio of total net charge-offs to average loans was .84 percent in 1997, compared with .51 percent in 1996. TABLE 13 NET CHARGE-OFFS AS A PERCENTAGE OF AVERAGE LOANS OUTSTANDING
1997 1996 - - ---------------------------------------------------------------------- COMMERCIAL: Commercial. . . . . . . . . . . . . . . . . . . .65% .15% Real estate: Commercial mortgage. . . . . . . . . . . . . (.20) (.11) Construction . . . . . . . . . . . . . . . . .16 .08 -------------- Total commercial . . . . . . . . . . . . . . .41 .08 CONSUMER: Residential mortgage. . . . . . . . . . . . . . .11 .08 Credit card . . . . . . . . . . . . . . . . . . 4.11 3.88 Other . . . . . . . . . . . . . . . . . . . . . 1.33 .88 -------------- Total consumer . . . . . . . . . . . . . . . 1.53 1.16 -------------- Total . . . . . . . . . . . . . . . . . . .84% .51% - - ---------------------------------------------------------------------- - - ----------------------------------------------------------------------
32 U.S. Bancorp TABLE 14 DELINQUENT LOAN RATIOS*
At December 31 -------------------------------------------- 90 days or more past due 1997 1996 1995 1994 1993 - - ------------------------------------------------------------------------------- COMMERCIAL: Commercial . . . . . . . . . . .78% .70% .49% .54% .89% Real estate: Commercial mortgage. . . . . .57 .55 1.17 2.52 2.98 Construction . . . . . . . . .67 .91 .92 3.52 5.18 -------------------------------------------- Total commercial . . . . . . .72 .68 .68 1.18 1.59 CONSUMER: Residential mortgage . . . . . 1.43 1.35 .99 .97 .97 Credit card. . . . . . . . . . .69 .88 .88 .74 .98 Other. . . . . . . . . . . . . .42 .35 .24 .15 .24 -------------------------------------------- Total consumer . . . . . . . .70 .70 .59 .53 .66 -------------------------------------------- Total. . . . . . . . . . . .71% .69% .64% .88% 1.17% -------------------------------------------- --------------------------------------------
*RATIOS INCLUDE NONPERFORMING LOANS AND ARE EXPRESSED AS A PERCENT OF ENDING LOAN BALANCES. ANALYSIS OF NONPERFORMING ASSETS: Nonperforming assets include nonaccrual loans, restructured loans, other real estate and other nonperforming assets owned by the Company. At December 31, 1997, nonperforming assets totaled $339.5 million, compared with $320.0 million at year-end 1996 and $320.3 million at year-end 1995. The ratio of nonperforming assets to loans plus other real estate was .62 percent at December 31, 1997, compared with .61 percent at year-end 1996 and .65 percent at year-end 1995. In 1997, nonperforming residential mortgages decreased $5.5 million (10 percent), and other real estate decreased $13.1 million (30 percent). Interest payments are currently received on approximately 75 percent of the Company's nonperforming loans. The payments are typically applied against the principal balance and not recorded as income. Accruing loans 90 days or more past due totaled $93.8 million, compared with $90.6 million at December 31, 1996, and $68.8 million at December 31, 1995. 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 TABLE 15 NONPERFORMING ASSETS*
At December 31 ---------------------------------------- (Dollars in Millions) 1997 1996 1995 1994 1993 - - ------------------------------------------------------------------------------- COMMERCIAL: Commercial . . . . . . . . . . . $179.1 $143.7 $ 91.6 $ 92.4 $148.5 Real estate: Commercial mortgage. . . . . . 45.4 44.4 76.5 154.0 163.7 Construction . . . . . . . . . 14.9 18.8 13.3 46.0 61.3 ---------------------------------------- Total commercial . . . . . . . 239.4 206.9 181.4 292.4 373.5 CONSUMER: Residential mortgage . . . . . . 52.1 57.6 54.2 60.9 75.3 Credit card. . . . . . . . . . . -- -- 5.7 7.5 7.6 Other. . . . . . . . . . . . . . 5.6 4.8 6.3 9.0 8.4 ---------------------------------------- Total consumer . . . . . . . . 57.7 62.4 66.2 77.4 91.3 ---------------------------------------- Total nonperforming loans. . 297.1 269.3 247.6 369.8 464.8 OTHER REAL ESTATE. . . . . . . . . 30.1 43.2 66.5 87.5 151.5 OTHER NONPERFORMING ASSETS . . . . 12.3 7.5 6.2 5.6 5.6 ---------------------------------------- Total nonperforming assets . $339.5 $320.0 $320.3 $462.9 $621.9 ---------------------------------------- ---------------------------------------- Accruing loans 90 days or more past due**. . . . . . . . . $ 93.8 $ 90.6 $ 68.8 $ 40.2 $ 47.0 Nonperforming loans to total loans. . . . . . . . . . . .54% .51% .50% .80% 1.06% Nonperforming assets to total loans plus other real estate. . . . . . . . . . . .62 .61 .65 1.00 1.41 Net interest lost on nonperforming loans. . . . . . . $ 17.1 $ 24.8 $ 23.2 $ 24.8 $ 29.2 - - ------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------
*THROUGHOUT THIS DOCUMENT, NONPERFORMING ASSETS AND RELATED RATIOS DO NOT INCLUDE LOANS MORE THAN 90 DAYS PAST DUE AND STILL ACCRUING. **THESE LOANS ARE NOT INCLUDED IN NONPERFORMING ASSETS AND CONTINUE TO ACCRUE INTEREST BECAUSE THEY ARE SECURED BY COLLATERAL AND/OR ARE IN THE PROCESS OF COLLECTION AND ARE REASONABLY EXPECTED TO RESULT IN REPAYMENT OR RESTORATION TO CURRENT STATUS. U.S. Bancorp 33 expected to result in repayment or restoration to current status. Consumer loans 30 days or more past due were 2.76 percent of the total consumer portfolio at December 31, 1997, compared with 2.55 percent of the total consumer portfolio at December 31, 1996. Consumer loans 90 days or more past due totaled .70 percent of the consumer loan portfolio at December 31, 1997, unchanged from year-end 1996. 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 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 12 months) risk due to changes in interest rates. The model, which is updated monthly, incorporates substantially all 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. Balance sheet changes are based on expected prepayments of loans and securities and forecasted loan and deposit growth. 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 pricing. 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, over the succeeding 12 months to 2 percent of forecasted net interest income given a 1 percent change in interest rates. At December 31, 1997, the estimated effect of an immediate 100 basis point parallel change in rates was an increase in forecasted net interest income for twelve months of .4 percent (up 100 basis points) and a decrease of .6 percent (down 100 basis points). 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 one, two and three percent rate shocks on the present value of all future cash flows of the Company's current assets, liabilities and off-balance sheet instruments. The amount of market value risk is subject to limits, approved by the Company's Board of Directors, of one 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. The Company believes the market risk in its trading portfolio is immaterial. TABLE 16 INTEREST RATE SWAP HEDGING PORTFOLIO NOTIONAL BALANCES AND YIELDS BY MATURITY DATE
At December 31, 1997 (Dollars in Millions) - - -------------------------------------------------------------------------------- Weighted Weighted Average Average Receive Fixed Swaps* Notional Interest Rate Interest Rate Maturity Date Amount Received Paid - - -------------------------------------------------------------------------------- 1998. . . . . . . . . . . . . . . . . . $1,213 5.96% 5.95% 1999. . . . . . . . . . . . . . . . . . 1,467 6.24 5.96 2000. . . . . . . . . . . . . . . . . . 388 6.57 5.95 2001. . . . . . . . . . . . . . . . . . 357 6.52 5.98 2002. . . . . . . . . . . . . . . . . . 335 6.35 5.96 After 2002. . . . . . . . . . . . . . . 1,555 6.78 5.94 ------ Total . . . . . . . . . . . . . . . . . $5,315 6.39% 5.95% - - -------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------
*AT DECEMBER 31, 1997, THE COMPANY HAD NO SWAPS IN ITS HEDGING PORTFOLIO THAT REQUIRED IT TO PAY FIXED-RATE INTEREST. 34 U.S. Bancorp TABLE 17 INTEREST RATE SENSITIVITY GAP ANALYSIS
Repricing Maturities ------------------------------------------------------------------------- Less Than 3-6 6-12 1-5 More Than Non-Rate At December 31, 1997 (Dollars in Millions) 3 Months Months Months Years 5 Years Sensitive Total - - --------------------------------------------------------------------------------------------------------------------------- Assets: Loans . . . . . . . . . . . . . . . . . . . . . $32,142 $2,628 $3,527 $11,730 $ 4,681 $ -- $54,708 Available-for-sale securities . . . . . . . . . 947 461 843 2,504 2,029 101 6,885 Other earning assets. . . . . . . . . . . . . . 1,138 8 17 153 66 -- 1,382 Nonearning assets . . . . . . . . . . . . . . . 1,082 28 294 1,038 3,120 2,758 8,320 ------------------------------------------------------------------------- Total assets . . . . . . . . . . . . . . . . $35,309 $3,125 $4,681 $15,425 $ 9,896 $ 2,859 $71,295 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and Equity: Deposits. . . . . . . . . . . . . . . . . . . . $19,698 $2,657 $3,267 $13,866 $ 9,539 $ -- $49,027 Other purchased funds . . . . . . . . . . . . . 3,219 54 -- 7 12 -- 3,292 Long-term debt. . . . . . . . . . . . . . . . . 7,493 101 289 581 1,783 -- 10,247 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company. . . . . . . -- -- -- -- 600 -- 600 Other liabilities . . . . . . . . . . . . . . . 69 -- 162 81 -- 1,927 2,239 Equity. . . . . . . . . . . . . . . . . . . . . -- -- -- -- -- 5,890 5,890 ------------------------------------------------------------------------- Total liabilities and equity . . . . . . . . $30,479 $2,812 $3,718 $14,535 $11,934 $ 7,817 $71,295 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Effect of off-balance sheet hedging instruments: Receiving fixed . . . . . . . . . . . . . . . . $ 156 $ 135 $ 922 $ 2,602 $ 1,500 $ -- $ 5,315 Paying floating . . . . . . . . . . . . . . . . (5,315) -- -- -- -- -- (5,315) ------------------------------------------------------------------------- Total effect of off-balance sheet hedging instruments . . . . . . . . . . . $(5,159) $ 135 $ 922 $ 2,602 $ 1,500 $ -- $ -- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Repricing gap. . . . . . . . . . . . . . . . . . . $ (329) $ 448 $1,885 $ 3,492 $ (538) $ (4,958) $ -- Cumulative repricing gap . . . . . . . . . . . . . (329) 119 2,004 5,496 4,958 -- -- - - --------------------------------------------------------------------------------------------------------------------------- - - ---------------------------------------------------------------------------------------------------------------------------
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 40 PERCENT OF REGULAR SAVINGS, 30 PERCENT OF INTEREST-BEARING CHECKING, 50 PERCENT OF MONEY MARKET CHECKING, AND 60 PERCENT OF MONEY MARKET SAVINGS BALANCES ARE REFLECTED IN THE LESS THAN 3 MONTHS CATEGORY, WITH THE REMAINDER PLACED IN THE 1-5 YEARS CATEGORY. APPROXIMATELY 71 PERCENT OF DEMAND DEPOSITS AND RELATED NONEARNING ASSET ACCOUNTS IS ALLOCATED IN THE MORE THAN 5 YEARS CATEGORY, 14 PERCENT IS ALLOCATED IN THE 1-5 YEARS CATEGORY WITH THE REMAINING ALLOCATED IN THE LESS THAN 3 MONTHS CATEGORY. REPRICING MISMATCH ANALYSIS: A traditional gap analysis provides a point-in-time 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 gap positions in the one- to three-year time periods of five percent of assets. USE OF DERIVATIVES TO MANAGE INTEREST RATE RISK: While each of the interest rate risk measurements has limitations, taken together they represent a comprehensive view of the magnitude of the Company's interest rate risk over various time intervals. The Company manages its interest rate risk by entering into off-balance sheet transactions (primarily interest rate swaps), investing in fixed rate assets or issuing variable rate liabilities. To a lesser degree, the Company also uses interest rate caps and floors to hedge this risk. The Company does not enter into derivative contracts for speculative purposes. In 1997, the Company added $2.9 billion of interest rate swaps to reduce its interest rate risk. Interest rate swap agreements involve the exchange of fixed and floating rate payments without the exchange of the underlying notional amount on which the interest payments are calculated. As of December 31, 1997, the Company received payments on $5.3 billion notional amount of interest rate swap agreements based on fixed interest rates, and made payments based on variable interest rates. These swaps had a weighted average fixed rate received of 6.39 percent and a weighted average variable rate paid of 5.95 percent. The remaining maturity of these agreements ranges from 2 months to 10 years with an average remaining maturity of 3.4 years. Swaps increased net interest income for the years ended December 31, 1997, 1996, and 1995 by $25.1 million, $32.2 million, and $16.8 million, respectively. The Company also purchases interest rate caps and floors to minimize the impact of fluctuating interest rates on earnings. Purchased caps can mitigate the effects of U.S. Bancorp 35 rising interest rates. Counterparties to these agreements pay the Company when certain short-term rates rise above a specified point or strike level. The payment is based on the difference in current rates and strike rates and the contract's notional amount. There were no caps outstanding at December 31, 1997. To hedge against falling interest rates, the Company uses interest rate floors. Floor counterparties pay the Company when specified rates fall below the strike level. Like caps, the payment is based on the difference in current rates and strike rates and the notional amount. The total notional amount of floor agreements purchased as of December 31, 1997, was $750 million. LIBOR-based floors totaled $550 million and Constant Maturity Treasury floors totaled $200 million. The impact of caps and floors on net interest income was not material for the years ended December 31, 1997, 1996 and 1995. See Notes A and O for the Company's accounting policy related to these types of transactions. LIQUIDITY MANAGEMENT The objective of liquidity 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 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. While the Company has funded incremental balance sheet growth with negotiated funds, its short-term purchased funds index remained relatively low at 9.7 percent at December 31, 1997, compared with a peer group median of 20.4 percent at September 30, 1997. The index is calculated as negotiated funding under one year (which includes Federal Home Loan Bank ("FHLB") borrowings, foreign branch time deposits, federal funds purchased, bank notes, medium-term notes and repurchase agreements), net of federal funds sold and resale agreements, divided by loans and securities. 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, 1997, Moody's Investors Services, Standard & Poors, and Thomson BankWatch 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, 1997, and 1996, long-term debt outstanding was $2.4 billion. The parent company issued $399 million of medium-term notes during 1997. Total parent company debt maturing in 1998 is $190 million. These debt obligations are expected to be met through medium-term note or subordinated debt issuances, as well as from the approximately $489 million of parent company cash and cash equivalents at December 31, 1997. It is the Company's practice to maintain liquid assets at the parent company sufficient to fund its operating cash needs and near-term debt maturities. During 1996, the Company issued $600 million of Company-obligated mandatorily redeemable preferred securities (the "preferred securities") through two wholly-owned subsidiary grantor trusts. The preferred securities qualify as Tier 1 capital for bank holding companies and pay distributions periodically at an average annual rate of 8.18 percent. 36 U.S. Bancorp TABLE 18 CAPITAL RATIOS
At December 31 (Dollars in Millions) 1997 1996 1995 - - ------------------------------------------------------------------------------ Tangible common equity*. . . . . . . . . . . . . $4,897 $4,625 $4,498 As a percent of assets. . . . . . . . . . . . 7.0% 6.7% 6.9% Tier 1 capital . . . . . . . . . . . . . . . . . $5,028 $4,983 $4,408 As a percent of risk-adjusted assets. . . . . 7.4% 7.6% 7.4% Total risk-based capital . . . . . . . . . . . . $7,859 $7,777 $6,745 As a percent of risk-adjusted assets. . . . . 11.6% 11.9% 11.4% Leverage ratio . . . . . . . . . . . . . . . . . 7.3 7.5 7.0 - - ------------------------------------------------------------------------------
*DEFINED AS COMMON EQUITY LESS GOODWILL. In 1997, the Company's bank subsidiaries established a $12 billion bank note program. Notes issued under this program may mature within 30 days to 15 years and bear fixed or floating interest rates. Proceeds from note sales are used for general corporate purposes. At December 31, 1997, there was $6.1 billion outstanding under this program and a previous bank note program. The Company's lead bank also had $1.4 billion in long-term advances from the FHLB at December 31, 1997. CAPITAL MANAGEMENT The Company is committed to managing capital for maximum shareholder benefit and maintaining strong protection for depositors and creditors. At December 31, 1997, tangible common equity (common equity less goodwill) was $4.9 billion, or 7.0 percent of assets, compared with 6.7 percent at year-end 1996 and 6.9 percent at year-end 1995. The Tier 1 capital ratio was 7.4 percent at December 31, 1997, compared with 7.6 percent at December 31, 1996. This ratio was 7.4 percent at December 31, 1995. The total risk-based capital ratio was 11.6 percent at December 31, 1997, compared with 11.9 percent at December 31, 1996, and 11.4 percent at December 31, 1995. The leverage ratio was 7.3 percent at December 31, 1997, compared with 7.5 percent and 7.0 percent at December 31, 1996, and December 31, 1995, respectively. On August 1, 1997, the Company issued 109.9 million shares to acquire USBC. The Company exchanged .755 shares of its common stock for each share of USBC common stock. USBC's outstanding stock options were also converted into stock options for the Company's common stock. In addition, each outstanding share of USBC cumulative preferred stock was converted into one share of preferred stock of the combined company, having substantially identical terms. Approximately 31.0 million common shares have been repurchased under 1996 Board authorizations, including 4.9 million during 1997. All authorizations were either completed or rescinded prior to the USBC acquisition. Under previous authorizations, the Company repurchased 16.9 million shares in 1995. On November 14, 1997, the Company redeemed all outstanding shares of its preferred stock at a redemption price of $25 per share, together with accrued and unpaid dividends. On November 29, 1996, the Company called all remaining shares of its Series 1991A Convertible Preferred Stock. 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. While the Company intends to maintain sufficient capital in each of its bank subsidiaries to be "well capitalized" as defined by the regulatory agencies, management ascribes the most significance to the tangible common equity ratio. TABLE 19 SUBSIDIARY CAPITAL RATIOS
At December 31, 1997 ------------------------------------------ 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 . . 7.7 11.5 7.6 $67,597 First Bank of South Dakota (National Association). . . . . . 10.8 15.0 10.9 1,332 First Bank Montana, National Association. . . . . . . 8.2 11.8 9.3 1,213 - - --------------------------------------------------------------------------------
NOTE: THESE BALANCES AND RATIOS WERE PREPARED IN ACCORDANCE WITH REGULATORY ACCOUNTING PRINCIPLES AS DISCLOSED IN THE SUBSIDIARIES' REGULATORY REPORTS. U.S. Bancorp 37 DIVIDENDS During 1997, total dividends on common stock were $445.7 million compared with $406.9 million in 1996 and $327.4 million in 1995. 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 $1.86 in 1997, $1.65 in 1996 and $1.45 in 1995. On February 18, 1998, the Board of Directors increased the quarterly common dividend rate to $.525 from $.465 and announced its intention to declare a three-for-one split of the Company's common stock and to increase the number of common and preferred shares which the Company has authority to issue from 500 million shares and 10 million shares, respectively, to 1.5 billion shares and 50 million shares, respectively. The increase in the number of authorized shares is subject to shareholder approval. The stock split would be in the form of a dividend payable May 18, 1998 to shareholders of record on May 4, 1998. The impact of the stock split has not been reflected in the financial statements or any share or per share data. 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 S. ACCOUNTING CHANGES ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES Effective January 1, 1997, the Company adopted Statement of Financial Accounting Standards No. ("SFAS") 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The Statement uses a "financial components" approach which focuses on control to determine whether assets have been sold. If the entity has surrendered control over the transferred assets, the transaction is considered a sale. Control is considered surrendered only if the seller has no legal right to the assets, even in bankruptcy; the buyer has the right to pledge or exchange the assets; and the seller does not maintain effective control over the assets through an agreement to repurchase or redeem them. If control is retained, the transaction is then considered a financing. The adoption of SFAS 125 did not have a material effect on the Company. SFAS 125 has been amended (SFAS 127), deferring until January 1, 1998, its adoption in the accounting for securities lending, repurchase agreements and other secured financing transactions. The adoption of SFAS 125 relating to these transaction types is not expected to have a material effect on the Company. EARNINGS PER SHARE SFAS 128, "Earnings per Share," replaces primary and fully diluted earnings per share with basic and diluted earnings per share. Under the new requirements, the dilutive effect of stock options is excluded from the calculation of basic earnings per share. Diluted earnings per share is calculated similarly to fully diluted earnings per share. SFAS 128 became effective for the Company's 1997 year-end financial statements. All prior period earnings per share data presented have been restated to conform to the provisions of this statement. 38 U.S. Bancorp COMPREHENSIVE INCOME SFAS 130, "Reporting Comprehensive Income," establishes standards for the reporting and display of comprehensive income and its components in a full set of financial statements. The Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed as prominently as other financial statements. The Statement also requires the classification of items of other comprehensive income by their nature in a financial statement and the display of other comprehensive income separately from retained earnings and capital surplus in the equity section of the balance sheet. SFAS 130 is effective January 1, 1998, with all prior periods presented restated to conform to the provisions of this Statement. SEGMENT DISCLOSURE SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," requires the disclosure of financial and descriptive information about reportable operating segments. Operating segments are components of an enterprise about which financial information is available and is evaluated regularly in deciding how to allocate resources and assess performance. The Statement requires the disclosure of profit or loss, certain specific revenue and expense items, and assets of all operating segments, with reconciliations of amounts presented in the financial statements. The Statement also requires the disclosure of how the operating segments were determined, the products and services provided by the segments, differences between measurements used in reporting segment information and those used in the financial statements, and changes in the measurement of segment amounts from period to period. SFAS 131 is effective with the 1998 year-end financial statements, with comparative information for prior periods required. 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 1997, the Company reported operating earnings of $335.5 million ($1.34 per diluted share) compared with $291.8 million ($1.15 per diluted share) in the fourth quarter of 1996. The strong results for the fourth quarter of 1997 reflected growth in both net interest income and noninterest income and a decrease in noninterest expense from the fourth quarter of 1996. Including nonrecurring items related to the USBC acquisition, the Company had net income for the fourth quarter of 1997 of $288.9 million ($1.16 per diluted share), compared with net income of $292.1 million ($1.15 per diluted share) in the fourth quarter of 1996. U.S. Bancorp 39 TABLE 20 FOURTH QUARTER SUMMARY
Three Months Ended December 31 --------------------- (Dollars in Millions, Except Per Share Data) 1997 1996 - - ----------------------------------------------------------------------------- CONDENSED INCOME STATEMENT: Net interest income (taxable-equivalent basis) . . . . $784.7 $778.1 Provision for credit losses . . . . . . . . . . . . . 90.0 75.5 --------------------- Net interest income after provision for credit losses . . . . . . . . . . . . . . . 694.7 702.6 Securities gains . . . . . . . . . . . . . . . . . . . -- .5 Other noninterest income . . . . . . . . . . . . . . . 420.5 360.3 Merger, integration, and resizing. . . . . . . . . . . 71.4 -- Other noninterest expense. . . . . . . . . . . . . . . 572.8 586.9 --------------------- Income before income taxes . . . . . . . . . . . 471.0 476.5 Taxable-equivalent adjustment. . . . . . . . . . . . . 13.7 15.9 Income taxes . . . . . . . . . . . . . . . . . . . . . 168.4 168.5 --------------------- Net income . . . . . . . . . . . . . . . . . . . $288.9 $292.1 --------------------- --------------------- FINANCIAL RATIOS Return on average assets . . . . . . . . . . . . . . . 1.64% 1.71% Return on average common equity. . . . . . . . . . . . 20.0 20.1 Net interest margin (taxable-equivalent basis) . . . . 4.99 5.09 Efficiency ratio . . . . . . . . . . . . . . . . . . . 53.5 51.6 SELECTED FINANCIAL RATIOS BEFORE NONRECURRING ITEMS: Return on average assets . . . . . . . . . . . . . . . 1.91 1.70 Return on average common equity. . . . . . . . . . . . 23.3 20.1 Efficiency ratio . . . . . . . . . . . . . . . . . . . 47.5 51.6 PER SHARE DATA: Net income . . . . . . . . . . . . . . . . . . . . . . $ 1.17 $ 1.17 Net income (diluted) . . . . . . . . . . . . . . . . . 1.16 1.15 Common dividends paid. . . . . . . . . . . . . . . . . .4650 .4125 - - ----------------------------------------------------------------------------- - - -----------------------------------------------------------------------------
Fourth quarter net interest income on a taxable- equivalent basis increased $6.6 million to $784.7 million, compared with the fourth quarter of 1996. The increase was primarily the result of an increase in earning assets of $1.5 billion over the fourth quarter of 1996, driven by core commercial and consumer loan production, partially offset by reductions in investment securities and residential mortgages. The net interest margin on a taxable-equivalent basis was 4.99 percent compared with 5.09 percent a year ago, reflecting growth in Payment Systems' noninterest-bearing assets, including corporate and purchasing card loan balances. The provision for credit losses increased to $90.0 million in the fourth quarter of 1997, compared with $75.5 million in the fourth quarter of 1996. Noninterest income, before nonrecurring items, increased $60.2 million from the same quarter a year ago, to $420.5 million. The improvement resulted from growth in all categories of fee revenue. Credit card fee revenue increased as a result of higher sales volumes for purchasing and corporate cards and the Northwest Airlines WorldPerks credit card, partially offset by the effect of the first quarter corporate card securitization. Fourth quarter 1997 credit card fees were also enhanced by the renewal of the Northwest Airlines WorldPerks credit card program, which extended the program for five years. Trust and investment management fees were up due to growth in the corporate, institutional and personal trust businesses. Fourth quarter noninterest expense, before nonrecurring items, totaled $572.8 million, a decrease of $14.1 million from the fourth quarter of 1996. Expense reductions in a number of categories reflected the benefits of the merger, partially offset by incremental expense related to revenue increases. Other personnel expense decreased, reflecting lower contract labor expense associated with 1996 technology projects that are now complete. Offsetting the favorable variance in contract labor was an increase in professional services, related to several 1997 technology initiatives which involve third party consulting arrangements. Goodwill and other intangible expense increased as a result of several small bank and portfolio purchases during 1997. The efficiency ratio, before nonrecurring items, for the fourth quarter of 1997 improved to 47.5 percent from 51.6 percent for the same quarter last year. 40 U.S. Bancorp CONSOLIDATED BALANCE SHEET
At December 31 (In Millions, Except Shares) 1997 1996 - - ----------------------------------------------------------------------------- ASSETS Cash and due from banks. . . . . . . . . . . . . . . $ 4,739 $ 4,813 Federal funds sold . . . . . . . . . . . . . . . . . 62 95 Securities purchased under agreements to resell. . . 630 803 Trading account securities . . . . . . . . . . . . . 195 231 Available-for-sale securities . . . . . . . . . . . 6,885 6,473 Held-to-maturity securities (fair value: 1996 - $811) -- 797 Loans. . . . . . . . . . . . . . . . . . . . . . . . 54,708 52,355 Less allowance for credit losses. . . . . . . . 1,009 993 ---------------------- Net loans . . . . . . . . . . . . . . . . . . . 53,699 51,362 Bank premises and equipment. . . . . . . . . . . . . 860 1,018 Interest receivable. . . . . . . . . . . . . . . . . 405 377 Customers' liability on acceptances. . . . . . . . . 535 497 Other assets . . . . . . . . . . . . . . . . . . . . 3,285 3,283 ---------------------- Total assets. . . . . . . . . . . . . . . . $71,295 $69,749 ---------------------- ---------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing . . . . . . . . . . . . . . $14,544 $14,344 Interest-bearing. . . . . . . . . . . . . . . . 34,483 35,012 ---------------------- Total deposits . . . . . . . . . . . . . . . 49,027 49,356 Federal funds purchased. . . . . . . . . . . . . . . 800 1,672 Securities sold under agreements to repurchase . . . 1,518 1,729 Other short-term funds borrowed. . . . . . . . . . . 974 3,191 Long-term debt . . . . . . . . . . . . . . . . . . . 10,247 5,369 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company . . . . . . . . . . . . . . . . . . . . 600 600 Acceptances outstanding. . . . . . . . . . . . . . . 535 497 Other liabilities. . . . . . . . . . . . . . . . . . 1,704 1,572 ---------------------- Total liabilities. . . . . . . . . . . . . . 65,405 63,986 Shareholders' equity: Preferred stock . . . . . . . . . . . . . . . . -- 150 Common stock, par value $1.25 a share-authorized 500,000,000 shares; issued: 1997 - 246,644,338 shares; 1996 - 252,883,487 shares . . . . . . . . . . . . . . . . . . . 308 316 Capital surplus . . . . . . . . . . . . . . . . 1,878 1,929 Retained earnings . . . . . . . . . . . . . . . 3,645 3,809 Unrealized gain on securities, net of tax . . . 59 5 Less cost of common stock in treasury: 1996 - 6,877,497 shares. . . . . . . . . . . . . . . -- (446) ---------------------- Total shareholders' equity . . . . . . . . . 5,890 5,763 ---------------------- Total liabilities and shareholders' equity . $71,295 $69,749 - - ----------------------------------------------------------------------------- - - -----------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. U.S. Bancorp 41 CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31 (In Millions, Except Per Share Data) 1997 1996 1995 - - --------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,784.5 $4,537.7 $4,373.4 Securities: Taxable . . . . . . . . . . . . . . . . . . . . . . . . 371.5 420.5 420.3 Exempt from federal income taxes. . . . . . . . . . . . 68.1 71.0 59.8 Other interest income. . . . . . . . . . . . . . . . . . . . 69.5 85.2 67.3 -------------------------------------- Total interest income. . . . . . . . . . . . . . . 5,293.6 5,114.4 4,920.8 INTEREST EXPENSE Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 1,436.8 1,441.3 1,416.7 Federal funds purchased and repurchase agreements. . . . . . 183.0 197.9 218.2 Other short-term funds borrowed. . . . . . . . . . . . . . . 117.6 198.0 189.8 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . 459.0 303.8 273.4 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company. . 49.1 2.8 -- -------------------------------------- Total interest expense . . . . . . . . . . . . . . 2,245.5 2,143.8 2,098.1 -------------------------------------- Net interest income. . . . . . . . . . . . . . . . . . . . . 3,048.1 2,970.6 2,822.7 Provision for credit losses. . . . . . . . . . . . . . . . . 460.3 271.2 239.1 -------------------------------------- Net interest income after provision for credit losses. . . . 2,587.8 2,699.4 2,583.6 NONINTEREST INCOME Credit card fee revenue. . . . . . . . . . . . . . . . . . . 418.8 351.5 303.9 Service charges on deposit accounts. . . . . . . . . . . . . 396.2 377.2 345.0 Trust and investment management fees . . . . . . . . . . . . 348.0 302.3 241.1 Gain on sale of mortgage banking operations, branches and other assets. . . . . . . . . . . . . . . . . . . . . . 9.4 71.4 39.9 Securities gains . . . . . . . . . . . . . . . . . . . . . . 3.6 20.8 3.0 Termination fee. . . . . . . . . . . . . . . . . . . . . . . -- 190.0 -- State income tax refund. . . . . . . . . . . . . . . . . . . -- 65.0 -- Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 439.2 404.9 380.4 -------------------------------------- Total noninterest income . . . . . . . . . . . . . 1,615.2 1,783.1 1,313.3 NONINTEREST EXPENSE Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . 969.3 964.5 927.5 Employee benefits. . . . . . . . . . . . . . . . . . . . . . 217.4 220.3 209.9 Net occupancy. . . . . . . . . . . . . . . . . . . . . . . . 182.0 179.4 183.4 Furniture and equipment. . . . . . . . . . . . . . . . . . . 165.4 175.2 184.5 Goodwill and other intangible assets . . . . . . . . . . . . 113.3 130.1 76.0 Professional services. . . . . . . . . . . . . . . . . . . . 70.3 58.0 59.2 Other personnel costs. . . . . . . . . . . . . . . . . . . . 66.6 83.4 62.4 FDIC insurance . . . . . . . . . . . . . . . . . . . . . . . 9.0 11.9 64.5 Merger, integration, and resizing. . . . . . . . . . . . . . 511.6 88.1 98.9 SAIF special assessment. . . . . . . . . . . . . . . . . . . -- 61.3 -- Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 507.4 565.9 609.6 -------------------------------------- Total noninterest expense. . . . . . . . . . . . . 2,812.3 2,538.1 2,475.9 -------------------------------------- Income before income taxes . . . . . . . . . . . . . . . . . 1,390.7 1,944.4 1,421.0 Applicable income taxes. . . . . . . . . . . . . . . . . . . 552.2 725.7 523.9 -------------------------------------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 838.5 $1,218.7 $ 897.1 -------------------------------------- -------------------------------------- Net income applicable to common equity . . . . . . . . . . . $ 827.9 $1,200.3 $ 877.4 -------------------------------------- -------------------------------------- Net income per common share. . . . . . . . . . . . . . . . . $ 3.39 $ 4.81 $ 3.56 Diluted net income per common share. . . . . . . . . . . . . $ 3.34 $ 4.72 $ 3.48 - - --------------------------------------------------------------------------------------------------------- - - ---------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 42 U.S. Bancorp CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common Shares Preferred Common Capital (In Millions, Except Shares) Outstanding* Stock Stock Surplus - - --------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1994. . . . . . . . . . 248,686,447 $ 268.1 $311.9 $1,928.1 Net income . . . . . . . . . . . . . . . . . Dividends declared: Preferred. . . . . . . . . . . . . . . . . Common . . . . . . . . . . . . . . . . . . Purchase and retirement of treasury stock. . (16,888,542) (6.2) (169.6) Issuance of common stock: Acquisitions . . . . . . . . . . . . . . . 2,788,619 .3 4.3 Dividend reinvestment. . . . . . . . . . . 505,138 .3 8.0 Stock option and stock purchase plans. . . 2,845,176 1.6 51.1 Stock warrants exercised . . . . . . . . . 42,039 Redemption/conversion of preferred stock . . 92,479 (14.9) Common stock issued to redeem subordinated debt. . . . . . . . . . . . . 2,960,525 3.7 46.0 Change in unrealized gains/(losses). . . . . --------------------------------------------------------- BALANCE DECEMBER 31, 1995. . . . . . . . . . 241,031,881 253.2 311.6 1,867.9 Net income . . . . . . . . . . . . . . . . . Dividends declared: Preferred. . . . . . . . . . . . . . . . . Common . . . . . . . . . . . . . . . . . . Purchase and retirement of treasury stock. . (26,146,456) (17.0) (688.2) Issuance of common stock: Acquisitions . . . . . . . . . . . . . . . 23,751,183 19.8 677.2 Dividend reinvestment. . . . . . . . . . . 312,878 .2 6.1 Stock option and stock purchase plans. . . 3,494,810 1.5 66.1 Redemption/conversion of preferred stock . . 3,561,694 (103.2) Change in unrealized gains/(losses) . . . . --------------------------------------------------------- BALANCE DECEMBER 31, 1996. . . . . . . . . . 246,005,990 150.0 316.1 1,929.1 Net income . . . . . . . . . . . . . . . . . Dividends declared: Preferred. . . . . . . . . . . . . . . . . Common . . . . . . . . . . . . . . . . . . Purchase and retirement of treasury stock. . (4,890,355) (13.7) (293.9) Issuance of common stock: Acquisitions . . . . . . . . . . . . . . . 949,295 1.2 86.2 Dividend reinvestment. . . . . . . . . . . 200,546 .3 10.1 Stock option and stock purchase plans. . . 4,378,862 4.4 146.2 Redemption of preferred stock. . . . . . . . (150.0) Change in unrealized gains/(losses). . . . . --------------------------------------------------------- BALANCE DECEMBER 31, 1997. . . . . . . . . . 246,644,338 $ -- $308.3 $1,877.7 - - --------------------------------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------------------------------- Unrealized Gains/(Losses) Retained on Securities, Treasury (In Millions, Except Shares) Earnings Net of Tax Stock** Total - - --------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1994. . . . . . . . . . $2,768.6 $(145.1) $ (26.7) $ 5,104.9 Net income . . . . . . . . . . . . . . . . . 897.1 897.1 Dividends declared: Preferred. . . . . . . . . . . . . . . . . (19.7) (19.7) Common . . . . . . . . . . . . . . . . . . (327.4) (327.4) Purchase and retirement of treasury stock. . (545.2) (721.0) Issuance of common stock: Acquisitions . . . . . . . . . . . . . . . (3.7) 104.7 105.6 Dividend reinvestment. . . . . . . . . . . 9.3 17.6 Stock option and stock purchase plans. . . (36.3) 54.6 71.0 Stock warrants exercised . . . . . . . . . (1.3) 1.6 .3 Redemption/conversion of preferred stock . . (2.2) 3.9 (13.2) Common stock issued to redeem subordinated debt. . . . . . . . . . . . . 49.7 Change in unrealized gains/(losses). . . . . 177.0 177.0 --------------------------------------------------------- BALANCE DECEMBER 31, 1995. . . . . . . . . . 3,275.1 31.9 (397.8) 5,341.9 Net income . . . . . . . . . . . . . . . . . 1,218.7 1,218.7 Dividends declared: Preferred. . . . . . . . . . . . . . . . . (18.4) (18.4) Common . . . . . . . . . . . . . . . . . . (406.9) (406.9) Purchase and retirement of treasury stock. . (784.9) (1,490.1) Issuance of common stock: Acquisitions . . . . . . . . . . . . . . . (44.4) 384.2 1,036.8 Dividend reinvestment. . . . . . . . . . . 11.5 17.8 Stock option and stock purchase plans. . . (96.5) 119.7 90.8 Redemption/conversion of preferred stock . . (118.2) 221.4 -- Change in unrealized gains/(losses) . . . . (27.2) (27.2) --------------------------------------------------------- BALANCE DECEMBER 31, 1996. . . . . . . . . . 3,809.4 4.7 (445.9) 5,763.4 Net income . . . . . . . . . . . . . . . . . 838.5 838.5 Dividends declared: Preferred. . . . . . . . . . . . . . . . . (10.6) (10.6) Common . . . . . . . . . . . . . . . . . . (445.7) (445.7) Purchase and retirement of treasury stock. . (514.6) 391.2 (431.0) Issuance of common stock: Acquisitions . . . . . . . . . . . . . . . 87.4 Dividend reinvestment. . . . . . . . . . . 8.3 18.7 Stock option and stock purchase plans. . . (32.2) 46.4 164.8 Redemption of preferred stock. . . . . . . . (150.0) Change in unrealized gains/(losses). . . . . 54.6 54.6 --------------------------------------------------------- BALANCE DECEMBER 31, 1997. . . . . . . . . . $3,644.8 $ 59.3 $ -- $ 5,890.1 - - --------------------------------------------------------------------------------------------------------- - - ---------------------------------------------------------------------------------------------------------
*DEFINED AS TOTAL COMMON SHARES LESS COMMON STOCK HELD IN TREASURY. **ENDING TREASURY SHARES WERE 6,877,497 AT DECEMBER 31, 1996 AND 8,297,756 AT DECEMBER 31, 1995. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. U.S. Bancorp 43 CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31 (In Millions) 1997 1996 1995 - - -------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 838.5 $ 1,218.7 $ 897.1 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses . . . . . . . . . . . . . . . . . 460.3 271.2 239.1 Gains on available-for-sale securities. . . . . . . . . . . . (3.6) (20.8) (3.0) Depreciation and amortization of bank premises and equipment 133.8 150.2 158.9 Provision for deferred income taxes . . . . . . . . . . . . . 37.6 51.0 23.5 Amortization of goodwill and other intangible assets. . . . . 113.3 130.1 76.0 Noncash portion of merger, integration, and resizing charges. 294.5 40.4 87.6 Gains on sales of mortgage banking operations, branches and other assets . . . . . . . . . . . . . . . . . . . . . . (9.4) (71.4) (39.9) Changes in operating assets and liabilities, excluding the effects of purchase acquisitions: Decrease (increase) in trading account securities. . . . 36.0 135.0 (129.7) (Increase) decrease in loans held for sale . . . . . . . (151.0) 87.9 129.2 Decrease (increase) in accrued receivables . . . . . . . 348.3 (157.9) (28.3) Increase in prepaid expenses . . . . . . . . . . . . . . (388.2) (38.5) (4.0) Increase in accrued liabilities. . . . . . . . . . . . . 59.6 126.7 106.7 Other - net . . . . . . . . . . . . . . . . . . . . . . . . . (278.3) (77.3) (62.5) ------------------------------------- Net cash provided by operating activities . . . . . . 1,491.4 1,845.3 1,450.7 ------------------------------------- INVESTING ACTIVITIES Net cash provided (used) by: Interest-bearing deposits with banks. . . . . . . . . . . . . 14.9 (4.1) 30.2 Loans outstanding . . . . . . . . . . . . . . . . . . . . . . (2,283.4) (2,019.1) (3,376.9) Securities purchased under agreements to resell . . . . . . . 173.4 (247.5) 226.6 Available-for-sale securities: Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,046.7 1,694.8 3,052.8 Maturities. . . . . . . . . . . . . . . . . . . . . . . . . . 1,569.0 2,120.9 1,138.3 Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . (2,082.9) (1,419.1) (1,842.8) Investment securities: Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 3.9 Maturities. . . . . . . . . . . . . . . . . . . . . . . . . . 37.4 114.2 367.2 Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- (53.2) Proceeds from sales of other real estate . . . . . . . . . . . . 62.9 127.9 120.2 Proceeds from sales of bank premises and equipment . . . . . . . 97.0 44.5 90.3 Purchases of bank premises and equipment . . . . . . . . . . . . (142.4) (165.4) (137.5) Sales of loans . . . . . . . . . . . . . . . . . . . . . . . . . 58.4 147.9 507.1 Purchases of loans . . . . . . . . . . . . . . . . . . . . . . . (361.2) (19.5) (4.6) Securitization of corporate charge card balances . . . . . . . . 418.1 -- -- Cash and cash equivalents of acquired subsidiaries . . . . . . . 43.2 245.8 55.4 Acquisitions, net of cash received . . . . . . . . . . . . . . . (23.6) (38.3) (113.2) Sales of subsidiary operations . . . . . . . . . . . . . . . . . -- (70.3) 23.1 Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . (40.0) (40.3) (26.6) ------------------------------------- Net cash (used) provided by investing activities. . . (1,412.5) 472.4 60.3 ------------------------------------- FINANCING ACTIVITIES Net cash (used) provided by: Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . (882.8) 78.4 (118.7) Federal funds purchased and securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . (1,091.1) (697.6) (1,791.9) Short-term borrowings . . . . . . . . . . . . . . . . . . . . (2,217.3) (868.3) 2,115.9 Sales of deposits. . . . . . . . . . . . . . . . . . . . . . . . -- -- (858.0) Long-term debt transactions: Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,577.5 2,004.0 1,726.6 Principal payments. . . . . . . . . . . . . . . . . . . . . . (1,718.5) (1,238.1) (1,184.6) Issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company . . . . . . . . -- 600.0 -- Redemption of preferred stock. . . . . . . . . . . . . . . . . . (150.0) -- (13.2) Proceeds from dividend reinvestment, stock option, and stock purchase plans. . . . . . . . . . . . . . . . . . . . . . . . 183.5 108.6 88.9 Repurchase of common stock . . . . . . . . . . . . . . . . . . . (431.0) (1,490.1) (721.0) Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . (456.3) (414.8) (344.5) ------------------------------------- Net cash used by financing activities . . . . . . . . (186.0) (1,917.9) (1,100.5) ------------------------------------- Change in cash and cash equivalents . . . . . . . . . (107.1) 399.8 410.5 Cash and cash equivalents at beginning of year . . . . . . . . . 4,908.1 4,508.3 4,097.8 ------------------------------------- Cash and cash equivalents at end of year. . . . . . . $ 4,801.0 $4,908.1 $4,508.3 - - -------------------------------------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 44 U.S. Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A SIGNIFICANT ACCOUNTING POLICIES U.S. Bancorp, formerly known as First Bank System, Inc., (the "Company") or ("USB") is the organization created by the acquisition by First Bank System, Inc. of U.S. Bancorp. The Company is a regional multibank holding company that provides banking and other financial services principally to domestic markets. See Note C for information regarding the merger. The Company has four primary businesses that operate principally in the 17 states of Minnesota, Oregon, Washington, Colorado, California, Idaho, Nebraska, North Dakota, Nevada, South Dakota, Montana, Iowa, Illinois, Utah, Wisconsin, Kansas, and Wyoming. Retail Banking delivers products and services to the broad consumer market and small-businesses through branch offices, telemarketing, direct mail, and automated teller machines ("ATMs"). 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. Commercial & Business Banking and PFS provides lending, treasury management, and other financial services to middle-market, large corporate, and mortgage banking companies. It also provides private banking and personal trust services. Corporate Trust and Institutional Financial Services include institutional and corporate trust services, investment management services, and a full-service brokerage company. 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. The preparation of financial statements in conformity with generally accepted accounting principles 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. 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 interest rates, prepayment risk, and funding sources or terms, or to meet liquidity needs. They are carried at fair value with unrealized net gains or losses reported in shareholders' equity. When sold, the amortized cost of the specific securities is used to compute the gain or loss. HELD-TO-MATURITY SECURITIES Included in held-to-maturity securities are those securities which management has the positive intent and ability to hold to maturity. These securities are stated at cost, as adjusted for accretion of discounts or amortization of premiums, computed by the interest method. The adjusted cost of the specific security sold is used to compute the gains or losses on the sale. LOANS Loans are reported net of unearned income. Interest income is accrued on the unpaid principal balances. Loan and commitment fees are deferred and recognized over 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 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. However, consumer loans other than residential mortgages are generally charged-off at 120 days past due and are, therefore, not placed on non-accrual status. LEASES Certain subsidiaries engage 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. U.S. Bancorp 45 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 AND MORTGAGES 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. 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 remaining life of 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. OTHER SIGNIFICANT POLICIES BANK PREMISES AND EQUIPMENT Bank 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 bank 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. INTANGIBLE ASSETS Goodwill, the price paid over the book value of acquired businesses, is included in other assets and is amortized over periods 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. 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 Basic 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 TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES Effective January 1, 1997, the Company adopted Statement of Financial Accounting Standards No. ("SFAS") 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The Statement uses a "financial components" approach which focuses on control to determine whether assets have been sold. If the entity has surrendered control over the transferred assets, the transaction is considered a sale. Control is considered surrendered only if the seller has no legal right to the assets, even in bankruptcy; the buyer has the right to pledge or exchange the assets; and the seller does not maintain effective control over the assets through an agreement to repurchase or redeem them. If control is retained, the transaction is then considered a financing. The adoption of SFAS 125 did not have a material effect on the Company. SFAS 125 has been amended (SFAS 127), deferring for one year its adoption in the accounting for securities lending, repurchase agreements and other secured financing transactions. The adoption of SFAS 125 relating to these transaction types is not expected to have a material effect on the Company. 46 U.S. Bancorp EARNINGS PER SHARE SFAS 128, "Earnings per Share," replaces primary and fully diluted earnings per share with basic and diluted earnings per share. Under the new requirements, the dilutive effect of stock options is excluded from the calculation of basic earnings per share. Diluted earnings per share is calculated similarly to the fully diluted earnings per share. SFAS 128 became effective for the Company's 1997 year-end financial statements. All prior period earnings per share data presented have been restated to conform to the provisions of this statement. COMPREHENSIVE INCOME SFAS 130, "Reporting Comprehensive Income," establishes standards for the reporting and display of comprehensive income and its components in a full set of financial statements. The Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed as prominently as other financial statements. The Statement also requires the classification of items of other comprehensive income by their nature in a financial statement and the display of other comprehensive income separately from retained earnings and capital surplus in the equity section of the balance sheet. SFAS 130 is effective January 1, 1998, with all prior periods presented restated to conform to the provisions of this Statement. SEGMENT DISCLOSURE SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," requires the disclosure of financial and descriptive information about reportable operating segments. Operating segments are components of an enterprise about which financial information is available and is evaluated regularly in deciding how to allocate resources and assess performance. The Statement requires the disclosure of profit or loss, certain specific revenue and expense items, and assets of all operating segments, with reconciliations of amounts presented in the financial statements. The Statement also requires the disclosure of how the operating segments were determined, the products and services provided by the segments, differences between measurements used in reporting segment information and those used in the financial statements, and changes in the measurement of segment amounts from period to period. SFAS 131 is effective with the 1998 year-end financial statements, with comparative information for prior periods required. NOTE C BUSINESS COMBINATIONS AND DIVESTITURES U.S. BANCORP On August 1, 1997, First Bank System, Inc. ("FBS") issued 109.9 million common shares to acquire U.S. Bancorp ("USBC"). As of the acquisition date, the combined institution, now known as U.S. Bancorp, had approximately $70 billion in assets, $49 billion in deposits and served nearly four million households and 475,000 businesses in 17 contiguous states from Illinois to Washington. The Company exchanged .755 shares of its common stock for each share of USBC common stock. USBC's outstanding stock options also were converted into stock options for the Company's common stock. In addition, each outstanding share of USBC cumulative preferred stock was converted into one share of preferred stock of the combined company having substantially identical terms. The transaction was accounted for as a pooling-of-interests. Accordingly, the Company's financial statements have been restated for all periods prior to the acquisition to include the accounts and operations of USBC. Operating results of FBS and USBC individually, as previously reported, and the combined company, reflecting certain reclassifications to conform to the current presentation, for the six months ended June 30, 1997, and the years ended December 31, 1996 and 1995 were:
Six Months Ended Year Ended December 31 June 30 ---------------------- (In Millions, Except Per-Share Amounts) 1997 1996 1995 - - ----------------------------------------------------------------------------- FBS (Unaudited) Net interest income . . . . . $ 765.0 $1,533.0 $1,440.2 Net income. . . . . . . . . . 350.1 739.8 568.1 USBC Net interest income . . . . . 770.1 1,466.6 1,399.4 Net income. . . . . . . . . . 247.1 478.9 329.0 Combined Net interest income . . . . . 1,511.8 2,970.6 2,822.7 Net income. . . . . . . . . . 597.2 1,218.7 897.1 - - ----------------------------------------------------------------------------- - - -----------------------------------------------------------------------------
U.S. Bancorp 47 PIPER JAFFRAY COMPANIES INC. On December 15, 1997, the Company announced the acquisition of Piper Jaffray Companies Inc. ("Piper Jaffray"), a full-service investment banking and securities brokerage firm, in a cash transaction for $730 million or $37.25 per Piper Jaffray common share. The acquisition will allow the Company to offer investment banking and institutional and retail brokerage services through a new subsidiary which will be known as U.S. Bancorp Piper Jaffray Inc. The acquisition, which will be accounted for as a purchase, is subject to approval by Piper Jaffray shareholders and regulators and is expected to close in the second quarter of 1998. OTHER ACQUISITIONS Effective December 12, 1997, the Company completed its acquisition of the $360 million Zappco, Inc., a bank holding company headquartered in St. Cloud, Minnesota. Effective April 30, 1997, USBC completed its acquisition of the $214 million Business and Professional Bank of Sacramento, California. On January 31, 1997, the Company completed its acquisition of the bond indenture services and paying agency business of Comerica Incorporated. This business serves approximately 860 municipal and corporate clients with about 2,400 bond issues. Effective January 1, 1997, USBC completed its acquisition of the $70 million Sun Capital Bancorp of St. George, Utah. These transactions were accounted for as purchase acquisitions. On June 6, 1996, USBC acquired California Bancshares, Inc. ("CBI"), a holding company for a multi-bank commercial banking operation serving the East San Francisco Bay Area and the Central Valley of Northern California. CBI had $1.6 billion in assets and $1.4 billion in deposits. The total value of the transaction, accounted for as a purchase, was approximately $325 million. On February 16, 1996, the Company completed its acquisition of Omaha-based FirsTier Financial, Inc. ("FirsTier"). FirsTier had $3.7 billion in assets, $2.9 billion in deposits, and 63 offices in Nebraska and Iowa. The total value of the transaction, accounted for as a purchase, was approximately $717 million. SALE OF MORTGAGE BANKING OPERATIONS, BRANCHES AND OTHER ASSETS During 1996, FBS sold its servicing and loan production business to three parties. Bank of America, fsb, a subsidiary of BankAmerica Corporation, purchased approximately $14 billion in mortgage servicing rights. Columbia National, Inc. of Maryland, and Knutson Mortgage Co., of Minnesota, agreed to purchase the Company's loan production business. The Company now delivers mortgage loan products through bank branches and telemarketing. These transactions resulted in a net gain of $45.8 million. In addition, the Company recognized $3.0 million of net losses on credit card portfolio sales during 1996. As part of the regulatory approval process for the West One Bancorp acquisition by USBC in December 1995, USBC divested 31 branches during 1996, primarily in Oregon, with deposits of approximately $700 million and loans of approximately $400 million. USBC recognized a pre-tax gain of $28.8 million related to this transaction. FIRST INTERSTATE BANCORP On November 6, 1995, the Company and First Interstate Bancorp ("First Interstate") announced that they had entered into a definitive agreement whereby the Company would exchange 2.6 shares of its common stock for each share of First Interstate common stock. On January 24, 1996, First Interstate announced that it had terminated the merger agreement with the Company and had entered into a definitive agreement with Wells Fargo & Company ("Wells Fargo"). Under terms of a settlement agreement, the Company received $125 million on January 24, 1996. The Company received an additional $75 million on April 1, 1996, upon consummation of the merger of First Interstate and Wells Fargo. In addition, all litigation among the parties related to the acquisition of First Interstate has been settled. The Company incurred transaction costs of approximately $10 million in connection with the proposed merger. NOTE D 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 $42 million at December 31, 1997. 48 U.S. Bancorp NOTE E 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:
1997 1996 ------------------------------------------------------------------------------------------------ Gross Gross Gross Gross Unrealized Unrealized Unrealized Unrealized Amortized Holding Holding Fair Amortized Holding Holding Fair (In Millions) Cost Gains Losses Value Cost Gains Losses Value - - ------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury. . . . . . . . . $ 628 $ 2 $ (2) $ 628 $1,035 $ 2 $ (9) $1,028 Mortgage-backed. . . . . . . . 4,326 56 (16) 4,366 4,097 41 (34) 4,104 Other U.S. agencies. . . . . . 360 10 -- 370 589 9 (3) 595 State and political. . . . . . 1,300 32 (1) 1,331 574 4 (5) 573 Other. . . . . . . . . . . . . 175 23 (8) 190 167 7 (1) 173 ------------------------------------------------------------------------------------------------ Total. . . . . . . . . . $6,789 $123 $(27) $6,885 $6,462 $63 $(52) $6,473 - - ------------------------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------------------------
The detail of the amortized cost, gross unrealized holding gains and losses, and fair value of held-to-maturity securities at December 31, 1996, was as follows:
Gross Gross Unrealized Unrealized Amortized Holding Holding Fair (In Millions) Cost Gains Losses Value - - ----------------------------------------------------------------------------- State and political. . . . . . $787 $17 $(3) $801 Other. . . . . . . . . . . . . 10 -- -- 10 ---------------------------------------------- Total. . . . . . . . . . . $797 $17 $(3) $811 - - ----------------------------------------------------------------------------- - - -----------------------------------------------------------------------------
Securities with an amortized cost of $752.0 million and net unrealized holding gains of $18.2 million were transferred from held-to-maturity to available-for-sale on August 1, 1997, in connection with the acquisition of USBC. Securities carried at $4.4 billion at December 31, 1997, and $4.5 billion at December 31, 1996, were pledged to secure public, private and trust deposits and for other purposes required by law. Securities sold under agreements to repurchase were collateralized by securities and securities purchased under agreements to resell with an amortized cost of $1.5 billion and $1.7 billion at December 31, 1997, and 1996, respectively. Securities carried at $197.5 million at December 31, 1996, were pledged to secure Federal Home Loan Bank advances. Gross realized gains and losses on securities were as follows:
(In Millions) 1997 1996 1995 - - ----------------------------------------------------------------------------- Gross realized gains . . . . . . . . . . $ 5.0 $ 39.7 $ 8.0 Gross realized losses. . . . . . . . . . (1.4) (18.9) (5.0) ------------------------------ Net realized gains . . . . . . . . . $ 3.6 $ 20.8 $ 3.0 ------------------------------ Income taxes on realized gains . . . . . $ 1.4 $ 8.0 $ 1.2 - - ----------------------------------------------------------------------------- - - -----------------------------------------------------------------------------
For amortized cost, fair value and yield by maturity date of available-for-sale securities outstanding as of December 31, 1997, see Table 10 on page 29 from which such information is incorporated by reference into these Notes to Consolidated Financial Statements. U.S. Bancorp 49 NOTE F LOANS AND ALLOWANCE FOR CREDIT LOSSES The composition of the loan portfolio at December 31 was as follows:
(In Millions) 1997 1996 - - ----------------------------------------------------------------------------- COMMERCIAL: Commercial. . . . . . . . . . . . . . . . . . $23,399 $21,393 Real estate: Commercial mortgage . . . . . . . . . . . . 8,025 8,022 Construction. . . . . . . . . . . . . . . . 2,359 2,125 ---------------------- Total commercial . . . . . . . . . . . . 33,783 31,540 ---------------------- CONSUMER: Residential mortgage. . . . . . . . . . . . . 4,480 5,225 Residential mortgage held for sale. . . . . . 193 148 Home equity and second mortgage . . . . . . . 5,373 4,798 Credit card . . . . . . . . . . . . . . . . . 4,200 3,632 Automobile. . . . . . . . . . . . . . . . . . 3,227 3,388 Revolving credit. . . . . . . . . . . . . . . 1,567 1,581 Installment . . . . . . . . . . . . . . . . . 1,199 1,463 Student*. . . . . . . . . . . . . . . . . . . 686 580 ---------------------- Total consumer . . . . . . . . . . . . . 20,925 20,815 ---------------------- Total loans. . . . . . . . . . . . . . . $54,708 $52,355 - - ----------------------------------------------------------------------------- - - -----------------------------------------------------------------------------
*ALL OR PART OF THE STUDENT LOAN PORTFOLIO MAY BE SOLD WHEN THE REPAYMENT PERIOD BEGINS. Loans carried at $2.7 billion at December 31, 1997, and $3.5 billion at December 31, 1996, were pledged at the Federal Home Loan Bank and the Federal Reserve. Nonaccrual and renegotiated loans totaled $297 million, $269 million, and $248 million at December 31, 1997, 1996, and 1995, respectively. At December 31, 1997, and 1996, the Company had $239 million and $201 million, respectively, in loans considered impaired under SFAS 114 classified 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, 1997, 1996, and 1995, the average recorded investment in impaired loans was approximately $249 million, $176 million, and $220 million, respectively. The effect of nonaccrual and renegotiated loans on interest income was as follows:
Year ended December 31 ------------------------------ (In Millions) 1997 1996 1995 - - ----------------------------------------------------------------------------- Interest income that would have been accrued at original contractual rates . . . . $26.6 $32.3 $29.5 Amount recognized as interest income . . 9.5 7.5 6.3 ------------------------------ Foregone revenue . . . . . . . . . . . . $17.1 $24.8 $23.2 - - ----------------------------------------------------------------------------- - - -----------------------------------------------------------------------------
Commitments to lend additional funds to customers whose loans were classified as nonaccrual or renegotiated at December 31, 1997, totaled $17.3 million. During 1997, there were no loans that were restructured at market interest rates and returned to a fully performing status. Activity in the allowance for credit losses was as follows:
(In Millions) 1997 1996 1995 - - ------------------------------------------------------------------------------- Balance at beginning of year . . . . . . . . $ 992.5 $908.0 $862.3 Add: Provision charged to operating expense. . 460.3 271.2 239.1 Deduct: Loans charged off . . . . . . . . . . . . 576.4 397.2 326.0 Less recoveries of loans charged off. . . 126.7 135.7 130.9 --------------------------------- Net loans charged off . . . . . . . . . . 449.7 261.5 195.1 Additions from acquisitions and other. . . . 5.6 74.8 1.7 --------------------------------- Balance at end of year . . . . . . . . . . . $1,008.7 $992.5 $908.0 - - ------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------
50 U.S. Bancorp NOTE G BANK PREMISES AND EQUIPMENT Bank premises and equipment at December 31 consisted of the following:
(In Millions) 1997 1996 - - ----------------------------------------------------------------------------- Land . . . . . . . . . . . . . . . . . . . . . . . $ 141 $ 158 Buildings and improvements . . . . . . . . . . . . 881 977 Furniture, fixtures and equipment. . . . . . . . . 614 957 Capitalized building and equipment leases. . . . . 103 97 -------------------- 1,739 2,189 Less accumulated depreciation and amortization . . 879 1,171 -------------------- Total . . . . . . . . . . . . . . . . . . . . . $ 860 $1,018 - - ----------------------------------------------------------------------------- - - -----------------------------------------------------------------------------
NOTE H LONG-TERM DEBT Long-term debt (debt with original maturities of more than one year) at December 31 consisted of the following:
(In Millions) 1997 1996 - - ----------------------------------------------------------------------------- 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 Floating-rate notes - due November 15, 1999. . . . 200 200 Floating-rate subordinated notes - due November 30, 2010 . . . . . . . . . . . . . . . 107 107 Medium-term notes. . . . . . . . . . . . . . . . . 652 671 Capitalized lease obligations, mortgage indebtedness and other. . . . . . . . . . . . . 26 27 --------------------- 2,410 2,430 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 6.875% due April 1, 2006. . . . . . . . . . . . 125 125 Step-up subordinated notes - due August 15, 2005 . 100 100 Floating-rate notes - due February 27, 2000. . . . 250 -- Federal Home Loan Bank advances. . . . . . . . . . 1,392 1,543 Bank notes . . . . . . . . . . . . . . . . . . . . 5,602 814 Capitalized lease obligations, mortgage indebtedness and other. . . . . . . . . . . . . 68 57 --------------------- Total . . . . . . . . . . . . . . . . . . . . . $10,247 $5,369 - - ----------------------------------------------------------------------------- - - -----------------------------------------------------------------------------
Floating-rate notes due November 15, 1999, are the only assets of the U.S. Bancorp Putable Asset Trust 1996-1 (the "Trust"). The Trust entered into a call option, pursuant to which the call holder has the right to purchase the notes from the Trust at par on November 15, 1999. If the call is exercised, the notes would become fixed rate obligations due in 2006. If the call holder does not exercise the call option, the Company is required to redeem the notes immediately thereafter. The interest rate adjusts quarterly at .15 percent over the London Interbank Offered Rate ("LIBOR") for three month United States dollar deposits. At December 31, 1997, the interest rate was 6.15 percent. Floating-rate subordinated notes due November 30, 2010, may be redeemed at par at the Company's option. The annual interest rate for each quarterly period is one-eighth of 1 percent above LIBOR for three-month Euro-dollar deposits, subject to a minimum of 5.25 percent. At December 31, 1997, the interest rate was 6.19 percent. Step-up subordinated notes due August 15, 2005, are issued by the Company's subsidiary bank, U.S. Bank National Association (the "Bank"). The interest rate on these notes is 6.25 percent through August 14, 2000, and 7.30 percent thereafter. The notes have a one-time call feature at the option of the Bank on August 15, 2000. U.S. Bancorp 51 Floating-rate notes due February 27, 2000, are issued by the Bank and are the only assets of the U.S. Oregon Pass-Through Asset Trust 1997-1 (the "Trust"). The Trust entered into a call option, pursuant to which the call holder has the right to purchase the notes from the Trust at par on February 27, 2000. If the call is exercised, the notes would become fixed rate obligations due in 2007. If the call holder does not exercise the call option, the Bank is required to redeem the notes immediately thereafter. The interest rate adjusts quarterly at .10 percent over LIBOR for three month United States dollar deposits. At December 31, 1997, the interest rate was 5.98 percent. Medium-term notes outstanding at December 31, 1997, mature from April 1998 through August 2001. The notes bear floating interest rates ranging from 5.53 percent to 6.93 percent. The weighted average interest rate at December 31, 1997, was 6.15 percent. Federal Home Loan Bank advances outstanding at December 31, 1997, mature from January 1998 through October 2026. The advances bear fixed or floating interest rates ranging from 5.05 percent to 9.11 percent. The weighted average interest rate at December 31, 1997, was 5.94 percent. Bank notes outstanding at December 31, 1997, mature from February 1998 through December 2002. The notes bear fixed or floating interest rates ranging from 5.66 percent to 6.38 percent. The weighted average interest rate at December 31, 1997, was 5.95 percent. Maturities of long-term debt outstanding at December 31, 1997 were:
Parent (In Millions) Consolidated Company - - ----------------------------------------------------------------------------- 1998 . . . . . . . . . . . . . . . . . . . . . . . $ 2,997 $ 190 1999 . . . . . . . . . . . . . . . . . . . . . . . 1,946 373 2000 . . . . . . . . . . . . . . . . . . . . . . . 1,401 164 2001 . . . . . . . . . . . . . . . . . . . . . . . 791 131 2002 . . . . . . . . . . . . . . . . . . . . . . . 859 151 Thereafter . . . . . . . . . . . . . . . . . . . . 2,253 1,401 -------------------------- Total. . . . . . . . . . . . . . . . . . . . . $10,247 $2,410 - - ----------------------------------------------------------------------------- - - -----------------------------------------------------------------------------
NOTE I COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY THE JUNIOR SUBORDINATED DEBENTURES OF THE PARENT COMPANY During 1996, the Company issued $600 million of preferred securities (the "Preferred Securities") through two wholly-owned subsidiary grantor trusts, FBS Capital I and U.S. Bancorp Capital I (the "Trusts"). The Preferred Securities accrue and pay distributions periodically at specified annual 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. FBS Capital I completed the sale of $300 million Preferred Securities in November 1996. The sole assets of FBS Capital I are $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. U.S. Bancorp Capital I completed the sale of $300 million Preferred Securities in December 1996. The sole assets of U.S. Bancorp Capital I are $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. 52 U.S. Bancorp NOTE J SHAREHOLDERS' EQUITY COMMON STOCK At December 31, 1997, the Company had 23.5 million shares of common stock reserved for future issuances under the Dividend Reinvestment Plan, Employee Stock Purchase Plan, and the 1997 Stock Incentive Plan (see Note L). In connection with the acquisition of USBC, the number of authorized common shares for the Company was increased from 200 million shares to 500 million shares. The Company completed several acquisitions since 1995 with common shares issued in exchange for the stock of the acquired banks (see Note C). Approximately 31.0 million common shares have been repurchased under 1996 Board authorizations, including 4.9 million during 1997. All authorizations were either completed or rescinded prior to the USBC acquisition. Under previous authorizations, the Company repurchased 16.9 million shares in 1995. The Company's Dividend Reinvestment Plan provides for automatic reinvestment of dividends and optional cash purchases of up to $60,000 worth of additional shares per calendar year at market price. PREFERRED STOCK The Company has issued seven classes of cumulative preferred stock, with 10 million shares authorized. Since 1992, the Company has redeemed or called the four classes of $1.00 par value cumulative preferred stock, redeemed both classes of $.01 par value cumulative preferred stock, and redeemed the $1.00 par value, 8 1/8 percent cumulative preferred stock. At December 31, 1997, the Company had no preferred stock outstanding. On November 14, 1997, the Company redeemed all outstanding shares of its 8 1/8 percent Cumulative Preferred Stock, Series A at a redemption price of $25 per share, together with accrued and unpaid dividends. On November 29, 1996, the Company called the remaining 1,543,025 shares of its Series 1991A Cumulative Convertible Preferred Stock. As a result, at December 31, 1996, the redemption date, all remaining shares had been redeemed or converted into common stock. Prior to conversion, dividends on the Series 1991A shares, which had a $1.00 par value, were 7.125 percent per year. In January 1995, the Company redeemed for $27.00 per share in cash, plus accumulated and unpaid dividends, 488,750 shares of Series B, $2.875 Cumulative Perpetual Preferred Stock. Dividends on the Series B shares, which had a $.01 par value, were $2.875 per share prior to redemption. The preferred dividend requirement used in the calculation of earnings per common share was $10.6 million, $18.4 million, and $19.7 million, for the years 1997, 1996, and 1995, respectively. NOTE K EARNINGS PER SHARE The components of earnings per share were:
(Dollars In Millions, Except Per Share Data) 1997 1996 1995 - - ---------------------------------------------------------------------------------------------------- EARNINGS PER SHARE: Net income . . . . . . . . . . . . . . . . . . . . . . $838.5 $1,218.7 $897.1 Preferred dividends. . . . . . . . . . . . . . . . . . (10.6) (18.4) (19.7) ------------------------------------------ Net income to common stockholders. . . . . . . . . . . $827.9 $1,200.3 $877.4 ------------------------------------------ ------------------------------------------ Average shares outstanding . . . . . . . . . . . . . . 244,516,964 249,726,158 246,217,723 ------------------------------------------ ------------------------------------------ Earnings per share . . . . . . . . . . . . . . . . . . $ 3.39 $ 4.81 $ 3.56 ------------------------------------------ ------------------------------------------ DILUTED EARNINGS PER SHARE: Net income . . . . . . . . . . . . . . . . . . . . . . $838.5 $1,218.7 $897.1 Preferred dividends, excluding 1991A Preferred Stock . (10.6) (12.2) (12.2) Interest expense on convertible securities, net. . . . -- -- 1.3 ------------------------------------------ Net income to common stockholders. . . . . . . . . . . $827.9 $1,206.5 $886.2 ------------------------------------------ ------------------------------------------ Average shares outstanding . . . . . . . . . . . . . . 244,516,964 249,726,158 246,217,723 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 . . . . . . . . . . . . . . . . . . . . . . . 3,120,948 2,599,500 3,403,576 Conversion of Series 1991A Preferred Stock . . . . . . -- 3,065,010 3,563,191 Other convertible securities . . . . . . . . . . . . . -- -- 1,702,559 ------------------------------------------ Dilutive common shares outstanding . . . . . . . . . . 247,637,912 255,390,668 254,887,049 ------------------------------------------ ------------------------------------------ Diluted earnings per share . . . . . . . . . . . . . . $ 3.34 $ 4.72 $ 3.48 - - ---------------------------------------------------------------------------------------------------- - - ----------------------------------------------------------------------------------------------------
U.S. Bancorp 53 NOTE L EMPLOYEE BENEFITS RETIREMENT PLANS Pension benefits (Pension Plans) 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 contribution is the projected unit credit method. Prior to their acquisition dates, employees of acquired companies were covered by separate, noncontributory pension plans that provided benefits based on years of service and compensation. As of December 31, 1997, the Company has merged the acquired companies' plans into its own plan with the exception of the FirsTier, USBC and West One plans, which are expected to be merged in 1999. The Company also maintains several unfunded, nonqualified, supplemental executive retirement programs (Supplemental Plans) that provide additional defined pension benefits for certain officers. 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 Pension Plans. The following table sets forth the funded status and income statement effects for the retirement plans.
December 31 (In Millions) 1997 1996 1995 - - ------------------------------------------------------------------------------------------------------------------------------- Pension Supplemental Pension Supplemental Pension Supplemental Plans Plans Plans Plans Plans Plans ----------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation . . . . . . . . . . . . $ (718.8) $(60.2) $(651.1) $(36.3) $(630.2) $(30.9) ----------------------------------------------------------------------- ----------------------------------------------------------------------- Accumulated benefit obligation. . . . . . . . . . $ (753.7) $(61.7) $(681.7) $(37.9) $(662.8) $(31.8) ----------------------------------------------------------------------- ----------------------------------------------------------------------- Projected benefit obligation for service rendered to date . . . . . . . . . . . . . . . . . . . . . $ (851.4) $(75.8) $(775.9) $(52.6) $(756.4) $(43.9) Plan assets at fair value, primarily listed stocks, U.S. bonds and mutual funds . . . . . . . . . . . 1,069.4 -- 935.3 -- 780.4 -- ----------------------------------------------------------------------- Excess (deficiency) of plan assets over projected benefit obligation. . . . . . . . . . . . . . . . 218.0 (75.8) 159.4 (52.6) 24.0 (43.9) Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions. . . . . . . . . . . . . . (116.7) 21.1 (73.0) 9.4 27.1 12.5 Unrecognized net (asset) obligation at end of year (amortized over 15 years) . . . . . . . . . . . . (10.0) (6.4) (13.7) .4 (19.3) .4 ----------------------------------------------------------------------- Prepaid (accrued) pension cost included in other assets and other liabilities . . . . . . . . . . . . . . $ 91.3 $(61.1) $ 72.7 $(42.8) $ 31.8 $(31.0) - - ------------------------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------------------------
Net pension cost for all funded and unfunded plans is as follows:
Year Ended December 31 (In Millions) 1997 1996 1995 - - ------------------------------------------------------------------------------------------------------------------- Service cost-benefits earned during the period. . . . . . . . . . $ 38.3 $ 40.8 $ 33.6 Interest cost on projected benefit obligation . . . . . . . . . . 64.5 60.7 58.1 Actual return on plan assets. . . . . . . . . . . . . . . . . . . (172.2) (134.1) (157.2) Net amortization and deferral . . . . . . . . . . . . . . . . . . 90.5 61.6 87.8 ------------------------------------- Net periodic pension benefit cost. . . . . . . . . . . . . . . . . . . $ 21.1 $ 29.0 $ 22.3 - - ------------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------------
The aggregate disclosures reflect the following weighted average assumptions as each company's plans were valued separately for the years prior to acquisition and each plan independently determined its assumptions:
The Company USBC ---------------------------------- 1997 1996 1995 1996 1995 - - ------------------------------------------------------------------------------------------------------------------------ Weighted average discount rate in determining expense. . . . . . . . . . . . . . . 7.5% 7.0% 8.0% 7.8% 7.3% Weighted average discount rate in determining benefit obligations at year end. . . 7.0 7.5 7.0 7.8 7.3 Expected long-term rate of return. . . . . . . . . . . . . . . . . . . . . . . . . 9.5 9.5 9.5 9.0 9.0 Rate of increase in future compensation. . . . . . . . . . . . . . . . . . . . . . 5.6 5.6 5.6 5.5 4.8 - - ------------------------------------------------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------------------------------------------------
54 U.S. Bancorp 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 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 retiree benefit payments, other than pensions, are accrued during the employees' active service. Beginning in 1996, the Company funded the tax deductible portion of its outstanding liability. Prior to 1996, the Company funded the postretirement benefit costs as incurred. USBC also had a post-retirement health care plan with substantially similar benefits and funded the postretirement benefit costs as incurred. The funded status and income statement effects of the USBC plan have been aggregated with the Company's plan as of December 31, in the following table:
Year Ended December 31 (In Millions) 1997 1996 1995 - - ---------------------------------------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(140.4) $(136.0) $(141.3) Fully eligible active plan participants . . . . . . . . . . . . . . . . . . . . . . . . (4.1) (3.7) (3.3) Other active plan participants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23.0) (20.6) (20.6) -------------------------------- Total accumulated postretirement benefit obligation. . . . . . . . . . . . . . . . . (167.5) (160.3) (165.2) Plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.5 7.1 -- -------------------------------- Total unfunded accumulated postretirement benefit obligation. . . . . . . . . . . . . . (158.0) (153.2) (165.2) Unrecognized net loss (gain) from past experience different from that assumed and from changes in assumptions . . . . . . . . . . . . . . . . . . . . . . . . .7 (5.8) 4.2 Unrecognized implementation asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.1) (1.4) (1.7) -------------------------------- Accrued postretirement benefit cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . $(158.4) $(160.4) $(162.7) -------------------------------- -------------------------------- Net periodic postretirement benefit cost includes the following components: Service cost-benefits attributed to service during the period . . . . . . . . . . . . . $ 2.0 $ 2.2 $ 1.9 Interest cost on accumulated postretirement benefit obligation. . . . . . . . . . . . . 11.2 11.6 12.0 Net amortization and deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.2) (.2) (.6) -------------------------------- Total postretirement benefit cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13.0 $ 13.6 $ 13.3 - - ---------------------------------------------------------------------------------------------------------------------------------- - - ----------------------------------------------------------------------------------------------------------------------------------
In 1997, the assumed annual rates of increase in the cost of health care benefits for participants under 65 and 65 and older, were 8.1 percent and 6.5 percent. For 1998 the annual rate of increase assumptions are 7.6 percent and 6.3 percent, respectively. Both rates were assumed to decrease gradually to 5.2 percent by 2003 and remain at that level thereafter. Trends in health care costs have a significant effect on the amounts reported. For example, increasing the health care cost trend rate assumptions by 1 percent each year increases the accumulated postretirement benefit obligation as of December 31, 1997, by $13.9 million. In addition, the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended would increase by $1.2 million. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.0 percent and 7.5 percent at December 31, 1997 and 1996. The long-term expected rate of return on plan assets was 5.0 percent as of December 31, 1997. EMPLOYEE INVESTMENT PLAN The Company provides a Capital Accumulation Plan (CAP) 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 $22.5 million, $25.6 million, and $20.8 million in 1997, 1996, and 1995. 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, the option proceeds equal to the par value of the shares are credited to common stock and additional proceeds are credited to capital surplus. U.S. Bancorp 55 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 1997, the purchase price was 85 percent of fair market value. The plan results in no compensation expense to the Company. In July 1997, the shareholders approved the 1997 Stock Incentive Plan (1997 Plan) whereby all former stock incentive plans of FBS and USBC were incorporated into the 1997 Plan. All outstanding options, restricted stock and other awards subject to the terms of the former FBS and USBC stock incentive 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 1997 Plan, subject, in the case of the former USBC plans, to adjustment reflecting the conversion of USBC common stock into common stock of the Company. An additional 6 million shares were approved for issuance by the shareholders under the 1997 Plan to meet the needs of the Company over approximately the next two years. The 1997 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 1997 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, 1997, there were 5.4 million shares (subject to adjustment for forfeitures) available for grant under the Plans. Options granted are generally exercisable up to 10 years from the date of grant and vest over three to five years. Restricted shares generally vest over three to seven years. The vesting of certain options and restricted shares accelerate based 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 $8.4 million, $4.9 million and $3.4 million in 1997, 1996, and 1995. 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, 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,046,617 $25.35 427,944 Granted: Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,852,748 41.52 -- Restricted stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 149,806 Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,161,443) 25.80 -- Canceled/vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,129,138) 17.69 (22,882) ---------------------------------------- DECEMBER 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,608,784 $30.70 554,868 Granted: Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,481,251 65.37 -- Restricted stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 176,408 USBC acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409,525 19.97 -- FirsTier options converted . . . . . . . . . . . . . . . . . . . . . . . . . . . 270,164 29.42 -- Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,416,229) 33.20 -- Canceled/vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (179,070) 47.37 (246,917) ---------------------------------------- DECEMBER 31, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,174,425 $52.47 484,359 Granted: Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,839,948 90.40 -- Restricted stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 560,392 Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,952,369) 46.92 -- Canceled/vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (439,684) 67.08 (173,357) ---------------------------------------- DECEMBER 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,622,320 $70.86 871,394 - - ----------------------------------------------------------------------------------------------------------------------------- - - -----------------------------------------------------------------------------------------------------------------------------
56 U.S. Bancorp Additional information regarding options outstanding as of December 31, 1997 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 - - ------------------------------------------------------------------------------------------------------------------- $7.28 - $29.99 . . . . . . . . . . . . . 1,024,780 4.8 $24.04 1,024,780 $24.04 $30.00 - $59.99. . . . . . . . . . . . . 1,887,080 7.4 41.69 1,691,377 41.05 $60.00 - $89.99. . . . . . . . . . . . . 7,361,618 9.1 72.65 2,497,969 71.32 $90.00 - $115.00 . . . . . . . . . . . . 3,348,842 9.8 97.71 953 94.99 ---------------------------------------------------------------------- 13,622,320 8.7 $70.86 5,215,079 $52.22 - - ------------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------------
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 Company had accounted for its employee stock option and stock purchase plans (options) under the fair value method of that Statement. The fair value of the options was estimated at the grant date using a Black-Scholes option pricing model. Option valuation models require the input 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 following weighted average assumptions were used in the valuation model: risk-free interest rates of 6.0 percent, 6.2 percent and 6.1 percent in 1997, 1996 and 1995; dividend yields of 2.5 percent in 1997 and 3.2 percent in both 1996 and 1995; stock price volatility factors of .22, .20 and ..18 in 1997, 1996 and 1995; and, expected life of options of 3.9 years, 4.3 years and 3.2 years in 1997, 1996 and 1995, respectively. The pro forma disclosures include options granted in 1997, 1996 and 1995 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 ------------------------------------ (In Millions, Except Per Share Data) 1997 1996 1995 - - ------------------------------------------------------------------------------------- Pro forma net income . . . . . . . . . . $783.8 $1,183.5 $870.1 Pro forma net income (diluted) . . . . . 783.8 1,189.7 878.9 Pro forma earnings per share: Earnings per share. . . . . . . . . . $3.21 $4.74 $3.53 Diluted earnings per share. . . . . . 3.17 4.66 3.45 - - ------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------
NOTE M MERGER, INTEGRATION AND RESIZING CHARGES The Company recorded merger, integration and resizing charges of $511.6 million, $88.1 million and $98.9 million in 1997, 1996 and 1995, respectively. Merger and integration charges in 1997 were associated with the acquisition of USBC and included: $232.3 million in severance costs; $77.2 million of occupancy and equipment writedowns; $43.4 million of capitalized software and other asset writeoffs; $35.0 million of investment banking and other transaction costs; $72.7 million of conversion costs incurred; and, $51.0 million of other merger-related expenses. Merger and integration charges of $49.5 million recorded in 1996 were associated with the acquisitions of FirsTier, the BankAmerica corporate trust business, and West One Bancorp. Resizing charges in 1996 of $38.6 million were associated with the Company's streamlining of the branch distribution network and trust operations as the Company expands its alternative distribution channels, including telemarketing, automated teller machines and in-store branches. Merger and integration charges recorded in 1995 were associated with the acquisition of West One Bancorp. The components of the charges are shown below:
Year Ended December 31 ------------------------------------ (In Millions) 1997 1996 1995 - - ------------------------------------------------------------------------------------- Severance. . . . . . . . . . . . . . . . $232.3 $27.4 $29.4 Premises writedowns. . . . . . . . . . . 77.2 27.4 22.3 Systems conversions. . . . . . . . . . . 72.7 11.0 19.7 Other merger-related charges . . . . . . 129.4 22.3 27.5 - - ------------------------------------------------------------------------------------- Total merger, integration and resizing charges. . . . . . . . . . . $511.6 $88.1 $98.9 - - ------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------
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. U.S. Bancorp 57 Premise writedowns represent write-offs for redundant office space, equipment and branches. Systems conversions and other merger-related expenses are recorded as incurred and are associated with the preparation and mailing of numerous customer communications for the acquisitions and conversion of customer accounts, printing and distribution of training materials and policy and procedure manuals, outside consulting fees, and similar expenses relating to the conversions and integration of acquired branches and operations. The following table presents a summary of activity with respect to the Company's merger, integration and resizing accrual:
Year Ended December 31 (In Millions) 1997 - - --------------------------------------------------------------------------- Balance at December 31, 1996 . . . . . . . . . . . . . . . . $ 33.6 Provision charged to operating expense . . . . . . . . . . . 511.6 Cash outlays . . . . . . . . . . . . . . . . . . . . . . . . (217.1) Noncash writedowns . . . . . . . . . . . . . . . . . . . . . (123.5) - - --------------------------------------------------------------------------- Balance at December 31, 1997 . . . . . . . . . . . . . . . . $ 204.6 - - --------------------------------------------------------------------------- - - ---------------------------------------------------------------------------
The Company expects to incur an additional $125.0 million of merger-related expenses through the third quarter of 1998 related to the USBC acquisition. NOTE N INCOME TAXES The components of income tax expense were:
(In Millions) 1997 1996 1995 - - ------------------------------------------------------------------------------------------------------------------- FEDERAL: Current tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $435.0 $586.5 $436.6 Deferred tax provision . . . . . . . . . . . . . . . . . . . . . . . . 34.9 47.9 23.6 ------------------------------------ Federal income tax. . . . . . . . . . . . . . . . . . . . . . . . . 469.9 634.4 460.2 ------------------------------------ STATE: Current tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79.6 88.2 63.8 Deferred tax provision (credit). . . . . . . . . . . . . . . . . . . . 2.7 3.1 (.1) ------------------------------------ State income tax. . . . . . . . . . . . . . . . . . . . . . . . . . 82.3 91.3 63.7 ------------------------------------ Total income tax provision. . . . . . . . . . . . . . . . . . . . . $552.2 $725.7 $523.9 - - ------------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------------
The reconciliation between income tax expense and the amount computed by applying the statutory federal income tax rate was as follows:
(In Millions) 1997 1996 1995 - - ------------------------------------------------------------------------------------------------------------------- Tax at statutory rate (35%). . . . . . . . . . . . . . . . . . . . . . $486.7 $680.5 $497.3 State income tax, at statutory rates, net of federal tax benefit . . . 53.5 59.4 41.5 Tax effect of: Tax-exempt interest: Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13.0) (4.5) (5.1) Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . (24.0) (33.5) (33.3) Amortization of nondeductible goodwill. . . . . . . . . . . . . . . 25.7 39.9 26.7 Nondeductible merger and integration charges. . . . . . . . . . . . 39.1 -- -- Tax credits and other items . . . . . . . . . . . . . . . . . . . . (15.8) (16.1) (3.2) ------------------------------------ Applicable income taxes. . . . . . . . . . . . . . . . . . . . . . . . $552.2 $725.7 $523.9 - - ------------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------------
At December 31, 1997, for income tax purposes, the Company had federal net operating loss carryforwards of $4.9 million available, which expire in years 1999 through 2007. In addition, the Company had aggregate state net operating loss carryforwards of $178.1 million available, which expire in years 1998 through 2007. During 1996, the Company received a tax refund of $65 million, including interest, from the State of Minnesota relating to the exemption of interest income received on investments in U.S. government securities for the period 1979 to 1983. 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. 58 U.S. Bancorp Significant components of the Company's deferred tax assets and liabilities as of December 31 were as follows:
(In Millions) 1997 1996 - - ---------------------------------------------------------------------------------------------------- DEFERRED TAX ASSETS: Loan loss reserves . . . . . . . . . . . . . . . . . . . . . . . . . . $ 385.1 $ 356.3 Postretirement liability . . . . . . . . . . . . . . . . . . . . . . . 65.0 69.3 Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . 39.9 36.1 Real estate and other asset basis differences. . . . . . . . . . . . . 35.7 87.5 Federal operating loss carryforward. . . . . . . . . . . . . . . . . . 1.9 10.3 Alternative minimum tax credit carryforward. . . . . . . . . . . . . . -- 11.4 Other miscellaneous accruals and reserves. . . . . . . . . . . . . . . 166.7 109.9 ---------------------- Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . 694.3 680.8 DEFERRED TAX LIABILITIES: Leasing activities . . . . . . . . . . . . . . . . . . . . . . . . . . (399.8) (344.1) Accelerated depreciation . . . . . . . . . . . . . . . . . . . . . . . (42.6) (39.3) Adjustment of available-for-sale securities to market value. . . . . . (36.4) (3.5) Other investment basis differences . . . . . . . . . . . . . . . . . . (8.3) (27.3) Accrued severance, pension and retirement benefits . . . . . . . . . . (2.8) (12.5) Other deferred liabilities . . . . . . . . . . . . . . . . . . . . . . (96.2) (77.9) ---------------------- Gross deferred tax liabilities. . . . . . . . . . . . . . . . . . . (586.1) (504.6) Deferred tax assets valuation reserve. . . . . . . . . . . . . . . . . -- (2.2) ---------------------- NET DEFERRED TAX ASSETS. . . . . . . . . . . . . . . . . . . . . . . . $ 108.2 $ 174.0 - - ---------------------------------------------------------------------------------------------------- - - ----------------------------------------------------------------------------------------------------
Realization of the deferred tax asset over time is dependent upon the Company generating sufficient taxable earnings in future periods. In determining that realization of the deferred tax asset was more likely than not, the Company gave consideration to a number of factors, including its recent earnings history, its expectations for earnings in the future and, where applicable, the expiration dates associated with tax carryforwards. The Company's valuation allowance decreased $2.2 million in 1997 due to utilization of net operating losses. NOTE O 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 meet the needs of its customers and to manage its interest rate risk. 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:
(In Millions) 1997 1996 - - ---------------------------------------------------------------------------------------------------- Commitments to extend credit: Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,170 $24,482 Corporate and purchasing cards. . . . . . . . . . . . . . . . . . . 23,502 13,820 Consumer credit cards . . . . . . . . . . . . . . . . . . . . . . . 14,236 14,140 Other consumer. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,661 4,665 Letters of credit: Standby . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,773 2,634 Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 406 355 Interest rate swap contracts: Hedges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,315 3,651 Intermediated . . . . . . . . . . . . . . . . . . . . . . . . . . . 855 590 Options contracts: Hedge interest rate floors purchased. . . . . . . . . . . . . . . . 750 1,250 Hedge interest rate caps purchased. . . . . . . . . . . . . . . . . -- 100 Intermediated interest rate and foreign exchange caps and floors purchased. . . . . . . . . . . . . . . . . . . . . . . . . 258 134 Intermediated interest rate and foreign exchange caps and floors written. . . . . . . . . . . . . . . . . . . . . . . . . . 258 169 Futures contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . -- 98 Liquidity support guarantees . . . . . . . . . . . . . . . . . . . . . -- 81 Forward contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . 175 197 Commitments to sell loans. . . . . . . . . . . . . . . . . . . . . . . -- 3 Mortgages sold with recourse . . . . . . . . . . . . . . . . . . . . . 74 114 Foreign currency commitments: Commitments to purchase . . . . . . . . . . . . . . . . . . . . . . 716 952 Commitments to sell . . . . . . . . . . . . . . . . . . . . . . . . 735 953 - - ---------------------------------------------------------------------------------------------------- - - ----------------------------------------------------------------------------------------------------
U.S. Bancorp 59 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 OPTIONS AND SWAPS Interest rate swaps are contracts to exchange fixed and floating 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, 1997, and 1996, interest rate swaps totaling $5.3 billion and $3.7 billion, respectively, hedged loans, deposits and long-term debt. The Company receives fixed rate interest and pays floating rate interest on all hedges as of December 31, 1997. Activity with respect to interest rate swap hedges was as follows:
(In Millions) 1997 1996 1995 - - ------------------------------------------------------------------------------------- Notional amount outstanding at beginning of year . . . . . . . . . . $3,651 $ 4,306 $3,894 Additions. . . . . . . . . . . . . . . . 2,926 890 1,209 Maturities . . . . . . . . . . . . . . . (436) (1,208) (797) Amortization . . . . . . . . . . . . . . -- (1) -- Terminations . . . . . . . . . . . . . . (826) (336) -- ------------------------------------ Notional amount outstanding at end of year. . . . . . . . . . . . $5,315 $ 3,651 $4,306 - - ------------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------------- At December 31: Weighted average interest rates paid. . . . . . . . . . . . . . 5.95% 5.58% 5.73% Weighted average interest rates received. . . . . . . . . . . . 6.39 6.35 6.51 - - ------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------
For the hedging portfolio's notional balances and yields by maturity date as of year-end 1997, see Table 16 on page 34. 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 35 and 36. Such information is incorporated by reference into these Notes to Consolidated Financial Statements. Interest rate caps are also used to minimize the impact of fluctuating interest rates on earnings. There were no interest rate cap hedges outstanding at December 31, 1997. The total notional amount of cap agreements purchased at December 31, 1996, was $100 million with a 3-month LIBOR strike rate of 6.00 percent. The premium on caps is amortized over the life of the contract. The impact of the caps on net interest income was not material for the years ended December 31, 1997, 1996 and 1995. At December 31, 1997, and 1996, purchased LIBOR based interest rate floors totaling $550 million with an average remaining maturity of 5 months and $950 million with an average remaining maturity of 12 months, respectively, hedged floating rate commercial loans. The strike rate on these LIBOR based floors ranged from 3.25 percent to 4.00 percent at December 31, 1997, and December 31, 1996. At December 31, 1997, and 1996, purchased Constant Maturity Treasury (CMT) interest rate floors totaling $200 million with an average remaining maturity of 12 months and $300 million with an average remaining maturity 18 months, respectively, hedged the prepayment risk of fixed rate residential mortgage loans. The strike rate on these CMT floors was 5.60 percent at December 31, 1997, and ranged from 5.60 percent to 5.70 percent at December 31, 1996. The premium on floors is amortized over the life of the contract. The impact of the floors on net 60 U.S. Bancorp interest income was not material for the years ended December 31, 1997, 1996 and 1995. 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 material for the years ended December 31, 1997, 1996 and 1995. Net unamortized deferred gains were immaterial at December 31, 1997. 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 swap agreements, including the offsetting positions, was $855 million and $590 million at December 31, 1997, and 1996, respectively. The total dollar amount of futures used to offset customer swap agreements was $98.4 million at December 31, 1996. The total notional amount of customer option agreements, including the offsetting positions, was $516 million and $303 million at December 31, 1997, and 1996, respectively. Market value changes on intermediated swaps, options and futures contracts are recognized in income in the period of change. Realized losses on intermediated transactions were not material for the years ended December 31, 1997, 1996, and 1995. 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 counterparty. At December 31, 1997, and 1996, the gain position of these contracts, in the aggregate, was approximately $91 million and $51 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 interest rate contracts with the same counterparty on a net basis. LIQUIDITY SUPPORT GUARANTEES Through liquidity support guarantees, the Company agrees to provide market support for its customers' commercial paper or tax-exempt bonds. These contracts are secured by notes receivable, bonds or private insurance, guaranteeing payment of principal and interest on any unreimbursed funds advanced. Since the conditions that require the Company to fund the guarantees may not occur, total guarantee amounts do not necessarily represent the Company's future funding obligation. FORWARD CONTRACTS AND COMMITMENTS TO SELL MORTGAGE LOANS Forward contracts are agreements for the delayed delivery of securities or cash settlement money market instruments. The Company enters into these contracts to hedge the interest rate risk of its mortgage loans held for sale. At December 31, 1997, and 1996, forward contracts outstanding were $175 million and $197 million, respectively. At December 31, 1997, net unamortized deferred gains on the forward agreements were not material. The Company manages its credit risk on forward contracts, which arises from nonperformance by counterparties, through credit approval and limit procedures. At December 31, 1996, the Company was committed under agreements to sell mortgage loans pursuant to master delivery commitments. The remaining balance on those commitments at December 31, 1996 was $3 million. MORTGAGES SOLD WITH RECOURSE The Company is obligated under recourse provisions related to the sale of certain residential mortgages. The contract amount of these mortgages, excluding the Government National Mortgage Association ("GNMA") agreements, was $74 million at December 31, 1997, and $114 million at December 31, 1996. Mortgages sold with recourse under sale/servicing agreements with GNMA totaled $13 million at December 31, 1997, and $6 million at December 31, 1996. The Company has secondary recourse obligations under these agreements, but the liability is not material. 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 U.S. Bancorp 61 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, 1997, was not significant. CREDIT CONCENTRATIONS The Company primarily lends to borrowers in the 17 states where it has banking offices. Approximately 90 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 real estate portfolio by property type and geography as of December 31, 1997, and 1996, see Table 8 on page 27. This information is incorporated by reference into these Notes to Consolidated Financial Statements. Such loans are collateralized by the related property. Approximately 90 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 26 under the category "Consumer" as of December 31, 1997, and 1996, which is incorporated by reference into these Notes to Consolidated Financial Statements. NOTE P FAIR VALUES OF FINANCIAL INSTRUMENTS Financial instruments, both on and off balance sheet, are generally defined as cash, equity instruments or investments, and contractual obligations to pay or receive cash or another financial instrument. The estimated fair value of financial instruments is based on quoted market prices. When market quotes are unavailable, valuation techniques including discounted cash flow calculations and pricing models or services are used. 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. Accordingly, the Company uses several valuation techniques and aggregation methods for valuing various products. The Company also uses various 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 required disclosures exclude the estimated values of certain financial instruments and all nonfinancial instrument cash flows. 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 under resale agreements was assumed to approximate fair value. SECURITIES: Generally, trading securities, held-to-maturity securities and available-for-sale securities were valued using available market quotes. In some instances, for securities that are not widely traded, market quotes for comparable securities were used. LOANS: The loan portfolio consists of both variable 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 one to two years. COMMERCIAL: The fixed rate loans in the commercial portfolio (excluding nonaccrual loans) had a weighted average interest rate of 8.2 percent in 1997 and 8.4 percent in 1996. The duration was 1.4 years in 1997 and 1.6 years in 1996. The floating rate loans had a weighted average interest rate of 8.4 percent in 1997 and 8.2 percent in 1996. The high-grade corporate bond yield curve was used to arrive at the discount rates applied to these loans. 62 U.S. Bancorp COMMERCIAL REAL ESTATE AND CONSTRUCTION: The fixed rate portion of this portfolio (excluding nonaccrual loans) had a weighted average interest rate of 8.9 percent, with a duration of 3.1 years, in 1997 and 1996. The floating rate loans (excluding nonaccrual loans) had a weighted average interest rate of 8.8 percent in 1997 and 8.6 percent in 1996. 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 estimated value also reflects the related fair value of mortgage servicing rights, which was calculated using a discounted cash flow analysis. The fixed rate portion of this portfolio had a weighted average interest rate of 7.7 percent in 1997 and 1996. The duration was 2.1 years in 1997 and 2.4 years in 1996. CONSUMER INSTALLMENT: The fair value of the consumer installment portfolio was based on an approach the Company uses in evaluating potential acquisitions. Prepayment assumptions ranging from 25 to 30 percent were applied to scheduled cash flows, based on the Company's experience. On the fixed rate portion, the weighted average rate was 9.3 percent in 1997 and 1996. The duration was 2.0 years in 1997 and 1.7 years in 1996. The floating rate portion of the consumer installment portfolio had a weighted average interest rate of 7.9 percent in 1997 and 8.2 percent in 1996. REVOLVING HOME EQUITY LINES, SECOND MORTGAGES AND CONSUMER LINES: The fair value of revolving home equity lines, second mortgages, and consumer lines was based on the approach the Company uses in evaluating potential acquisitions of similar portfolios. In 1997, estimated net income adjusted for account attrition was discounted using an estimated cost of capital of 9.9 percent for secured lines and loans and 13.1 percent for unsecured. In 1996, the estimated cost of capital was 11.3 percent for secured and 14.0 percent for unsecured. The home equity lines had a weighted average interest rate of 9.8 percent in 1997 and 9.7 percent in 1996. Fixed rate second mortgages had a weighted average interest rate of 9.7 percent in 1997 and 9.4 percent in 1996. The duration was 2.7 years in 1997 and 1996. Retail credit cards had a weighted average interest rate of 11.8 percent in 1997 and 12.2 percent in 1996, with a duration of 2.0 years in 1997 and 1.8 years in 1996. Other revolving lines had a weighted average interest rate of 12.0 percent in 1997 and 11.4 percent in 1996. 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 the difference between the ongoing cost of the core deposits and alternative funds at current market rates. This is the same method that the Company uses in calculating the value of the core deposit intangible of an acquired financial institution. 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. Fair values for fixed rate certificates of deposit were estimated using a discounted cash flow analysis based on the discount rates implied by the high-grade corporate bond yield curve. SHORT-TERM BORROWINGS: Federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings are at variable rates or have short-term maturities. Their carrying value is assumed to approximate their fair value. LONG-TERM DEBT: Medium-term notes, bank notes, Federal Home Loan Bank Advances, capital lease obligations, and mortgage note obligations totaled $7,725 million in 1997 and $3,094 million in 1996. Their estimated fair value was determined using a discounted cash flow analysis based on current market rates of similar maturity debt securities to discount cash flows. Other long-term debt instruments were valued using available market quotes. INTEREST RATE SWAPS, OPTIONS, FLOORS, AND CAPS: The interest rate options and swap cash flows were estimated using a third party pricing model and discounted based on appropriate LIBOR, Eurodollar future, and Treasury Note yield curves. LOAN COMMITMENTS, LETTERS OF CREDIT AND GUARANTEES: The Company's commitments have variable 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 63 The estimated fair values of the Company's financial instruments are shown in the table below.
1997 1996 ------------------------------------------------- Carrying Fair Carrying Fair (In Millions) Amount Value Amount Value - - ------------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and due from banks. . . . $ 4,739 $ 4,739 $ 4,813 $ 4,813 Federal funds sold and resale agreements . . . . . . . . . 692 692 898 898 Trading account securities . . 195 195 231 231 Held-to-maturity securities. . -- -- 797 811 Available-for-sale securities. 6,885 6,885 6,473 6,473 Loans: Commercial: Commercial. . . . . . . . 23,399 24,286 21,393 21,761 Commercial real estate and construction. . . . 10,384 11,349 10,147 10,955 Consumer: Residential mortgage. . . 4,480 4,647 5,225 5,237 Residential mortgage held for sale. . . . . . . . 193 194 148 148 Home equity and second mortgage. . . . . . . . 5,373 5,531 4,798 5,041 Credit card and revolving lines . . . . . . . . . 5,767 6,031 5,213 5,455 Other consumer installment . . . . . . 5,112 5,351 5,431 5,513 Allowance for credit losses. . . . . . . . . . (1,009) -- (993) -- --------------------------------------------- Net loans . . . . . . . . 53,699 57,389 51,362 54,110 --------------------------------------------- Total financial assets. . 66,210 69,900 64,574 67,336 NONFINANCIAL ASSETS: Core deposit intangible. . . . 160 1,400 165 1,406 Mortgage servicing portfolio . 19 22 23 28 --------------------------------------------- Total . . . . . . . . . . 66,389 $71,322 64,762 $68,770 ------- ------- ------- ------- Other assets . . . . . . . . . . 4,906 4,987 ------- ------- Total Assets. . . . . . . $71,295 $69,749 ------- ------- ------- ------- FINANCIAL LIABILITIES: Deposits: Noninterest-bearing . . . . $14,544 $14,544 $14,344 $14,344 Interest-bearing checking and other savings . . . . 31,199 31,199 31,610 31,610 Savings certificates and certificates GREATER THAN $100,000 . . . . . . 3,284 3,313 3,402 3,355 --------------------------------------------- Total deposits. . . . . . 49,027 49,056 49,356 49,309 Federal funds purchased. . . . 800 800 1,672 1,672 Securities sold under agreements to repurchase . . 1,518 1,518 1,729 1,729 Other short-term funds borrowed . . . . . . . . . . 974 974 3,191 3,191 Long-term debt . . . . . . . . 10,247 10,416 5,369 5,454 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company . . . . . . . 600 636 600 600 --------------------------------------------- Total financial liabilities . . . . . . 63,166 $63,400 61,917 $61,955 ------- ------- ------- ------- NONFINANCIAL LIABILITIES . . . . 2,239 2,069 SHAREHOLDERS' EQUITY . . . . . . 5,890 5,763 ------- ------- Total Liabilities and Shareholders' Equity. . $71,295 $69,749 ------- ------- ------- ------- Off-Balance Sheet Financial Instruments: Unrecognized gain on interest rate swaps and options . . . N/A $ 67 N/A $ 25 Unrecognized loss on interest rate swaps and options . . . N/A -- N/A 3 Loan commitments . . . . . . . N/A -- N/A -- Letters of credit. . . . . . . N/A -- N/A -- - - ------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------
64 U.S. Bancorp NOTE Q COMMITMENTS AND CONTINGENT LIABILITIES Rental expense for operating leases amounted to $114.6 million in 1997, $116.1 million in 1996, and $112.5 million in 1995. 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, 1997:
Capitalized Operating (In Millions) Leases Leases - - ------------------------------------------------------------------------------- 1998 . . . . . . . . . . . . . . . . . . . . . . . $ 8.7 $ 93.6 1999 . . . . . . . . . . . . . . . . . . . . . . . 8.7 85.4 2000 . . . . . . . . . . . . . . . . . . . . . . . 8.7 77.7 2001 . . . . . . . . . . . . . . . . . . . . . . . 8.6 80.1 2002 . . . . . . . . . . . . . . . . . . . . . . . 6.9 71.6 Thereafter . . . . . . . . . . . . . . . . . . . . 61.7 387.2 ------------------- Total minimum lease payments . . . . . . . . . . . 103.3 $795.6 ------ ------ Less amount representing interest. . . . . . . . . 48.9 ------ Present value of net minimum lease payments. . . . $ 54.4 - - ------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------
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 R SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET Time certificates of deposit in denominations of $100,000 or more totaled $3,284 million and $3,402 million at December 31, 1997, and 1996, respectively. CONSOLIDATED STATEMENT OF CASH FLOWS Listed below are supplemental disclosures to the Consolidated Statement of Cash Flows.
Year Ended December 31 (In Millions) 1997 1996 1995 - - ------------------------------------------------------------------------------- Income taxes paid. . . . . . . . . . . .$ 464.3 $ 508.6 $ 444.3 Interest paid. . . . . . . . . . . . . . 2,226.5 2,137.0 2,039.1 Net noncash transfers to foreclosed property . . . . . . . . . . . . . . . 46.8 97.0 97.7 Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $32.9 in 1997, $16.5 in 1996 and $112.1 in 1995 . . . 54.6 (27.2) 177.0 -------------------------------- -------------------------------- Cash acquisitions of businesses: Fair value of noncash assets acquired . . . . . . . . . . . . . .$ 194.6 $ 38.3 $ 120.6 Liabilities assumed. . . . . . . . . . (171.0) -- (7.4) -------------------------------- Net . . . . . . . . . . . . . . . .$ 23.6 $ 38.3 $ 113.2 -------------------------------- -------------------------------- Stock acquisitions of businesses: Fair value of noncash assets acquired . . . . . . . . . . . . . .$ 451.9 $ 5,284.9 $ 746.9 Net cash acquired. . . . . . . . . . . 43.2 245.8 55.4 Liabilities assumed. . . . . . . . . . (407.7) (4,493.9) (696.7) -------------------------------- Net value of common stock issued. .$ 87.4 $ 1,036.8 $ 105.6 - - ------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------
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, 1997, for the Company and its significant bank subsidiaries, see Tables 18 and 19 from which such information is incorporated by reference into these Notes to Consolidated Financial Statements. U.S. Bancorp 65 NOTE S U.S. BANCORP (PARENT COMPANY) CONDENSED BALANCE SHEET
December 31 (In Millions) 1997 1996 - - ------------------------------------------------------------------------------- ASSETS Deposits with subsidiary banks, principally interest-bearing . . . . . . . . . . . . . . . . $ 489 $ 348 Available-for-sale securities. . . . . . . . . . . 180 179 Investments in: Bank affiliates. . . . . . . . . . . . . . . . . 6,396 6,232 Nonbank affiliates . . . . . . . . . . . . . . . 178 136 Advances to: Bank affiliates. . . . . . . . . . . . . . . . . 1,293 1,757 Nonbank affiliates . . . . . . . . . . . . . . . 147 122 Other assets . . . . . . . . . . . . . . . . . . . 791 758 ------------------- Total assets. . . . . . . . . . . . . . . . . $9,474 $9,532 ------------------- ------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Short-term funds borrowed. . . . . . . . . . . . . $ -- $ 161 Advances from subsidiaries . . . . . . . . . . . . 19 25 Long-term debt . . . . . . . . . . . . . . . . . . 2,410 2,430 Junior subordinated debentures issued to subsidiary trusts. . . . . . . . . . . . . . . . 618 618 Other liabilities. . . . . . . . . . . . . . . . . 537 535 Shareholders' equity . . . . . . . . . . . . . . . 5,890 5,763 ------------------- Total liabilities and shareholders' equity. . $9,474 $9,532 - - ------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------
CONDENSED STATEMENT OF INCOME
Year Ended December 31 (In Millions) 1997 1996 1995 - - ------------------------------------------------------------------------------- INCOME Dividends from subsidiaries (including $441.2, $1,269.4 and $927.7 from bank subsidiaries). . . . . . . . . . . . . $488.9 $1,334.0 $ 950.0 Interest from subsidiaries . . . . . . . 139.8 97.6 71.7 Service and management fees from subsidiaries . . . . . . . . . . . . . 201.7 204.9 232.7 Other income . . . . . . . . . . . . . . 75.7 299.0 30.5 ------------------------------ Total income. . . . . . . . . . . . 906.1 1,935.5 1,284.9 EXPENSES Interest on short-term funds borrowed. . 13.8 17.4 20.0 Interest on long-term debt . . . . . . . 180.0 154.7 132.8 Interest on junior subordinated debentures issued to subsidiary trusts . . . . . . . . . . . . . . . . 50.7 2.8 -- Operating expenses paid to subsidiaries . . . . . . . . . . . . . 3.4 19.2 70.0 Merger, integration, and resizing. . . . 251.5 13.0 45.6 Other expenses . . . . . . . . . . . . . 245.1 246.0 265.0 ------------------------------ Total expenses. . . . . . . . . . . 744.5 453.1 533.4 ------------------------------ Income before income taxes and equity in undistributed income of subsidiaries . . . . . . . . . . . . . 161.6 1,482.4 751.5 Income tax (credit) expense. . . . . . . (65.7) 68.3 (58.5) ------------------------------ Income of parent company . . . . . . . . 227.3 1,414.1 810.0 Equity (deficiency) in undistributed income of subsidiaries: Bank affiliates. . . . . . . . . . . . 584.7 (161.4) 75.0 Nonbank affiliates . . . . . . . . . . 26.5 (34.0) 12.1 ------------------------------ 611.2 (195.4) 87.1 ------------------------------ Net income. . . . . . . . . . . . . $838.5 $1,218.7 $ 897.1 - - ------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------
66 U.S. Bancorp CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31 (In Millions) 1997 1996 1995 - - ------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income . . . . . . . . . . . . . . . $ 838.5 $ 1,218.7 $ 897.1 Adjustments to reconcile net income to net cash provided by operating activities: (Equity) deficiency in undistributed income of subsidiaries . . . . . . . (611.2) 195.4 (87.1) Gains on available-for-sale securities . . . . . . . . . . . . . (1.7) (37.5) (.5) Depreciation and amortization of bank premises and equipment. . . . . 17.1 19.2 19.1 (Credit) provision for deferred income taxes . . . . . . . . . . . . (5.3) (5.2) 28.5 Amortization of goodwill and other intangible assets. . . . . . . . . . 13.5 20.1 16.3 Decrease (increase) in accrued receivables, net . . . . . . . . . . 4.9 165.9 (81.3) (Decrease) increase in accrued liabilities, net . . . . . . . . . . (13.9) 163.6 (89.0) Other - net. . . . . . . . . . . . . . (73.9) (115.0) 40.8 -------------------------------- Net cash provided by operating activities. . . . . . . . . . . . 168.0 1,625.2 743.9 INVESTING ACTIVITIES Securities transactions: Sales and maturities . . . . . . . . . 142.4 230.8 224.4 Purchases. . . . . . . . . . . . . . . (140.2) (73.9) (282.9) Investments in subsidiaries. . . . . . . (221.2) (27.9) (142.6) Equity distributions from subsidiaries . 769.5 304.6 111.5 Net decrease (increase) in short-term advances to affiliates . . . . . . . . 521.6 (91.9) (65.6) Long-term advances made to affiliates. . (80.0) (868.5) (259.7) Principal collected on long-term advances made to affiliates. . . . . . -- 33.5 25.2 Other - net. . . . . . . . . . . . . . . 30.8 (22.3) 10.1 -------------------------------- Net cash provided (used) by investing activities. . . . . . . 1,022.9 (515.6) (379.6) FINANCING ACTIVITIES Net decrease in short-term advances from subsidiaries. . . . . . . . . . . (9.9) (17.1) (27.7) Net (decrease) increase in short-term funds borrowed . . . . . . . . . . . . (161.3) (67.0) 17.7 Proceeds from long-term debt . . . . . . 307.0 552.5 1,050.5 Principal payments on long-term debt . . (331.6) (299.9) (631.5) Proceeds from issuances of junior subordinated debentures to subsidiary trusts . . . . . . . . . . . . . . . . -- 618.6 -- Redemption of preferred stock. . . . . . (150.0) -- (13.2) Proceeds from dividend reinvestment, stock option, and stock purchase plans. . . . . . . . . . . . . . . . . 183.5 108.6 88.9 Repurchase of common stock . . . . . . . (431.0) (1,490.1) (721.0) Cash dividends . . . . . . . . . . . . . (456.3) (414.8) (344.5) -------------------------------- Net cash used by financing activities. . . . . . . . . . . .(1,049.6) (1,009.2) (580.8) -------------------------------- Change in cash and cash equivalents . . . . . . . . . . . 141.3 100.4 (216.5) Cash and cash equivalents at beginning of year. . . . . . . . . . . 348.2 247.8 464.3 -------------------------------- Cash and cash equivalents at end of year . . . . . . . . . . .$ 489.5 $ 348.2 $ 247.8 - - ------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------
The 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. NOTE T SUBSEQUENT EVENT On February 18, 1998, the Company's Board of Directors announced its intention to declare a three-for-one split of the Company's common stock and to increase the number of common and preferred shares which the Company has authority to issue from 500 million shares and 10 million shares, respectively, to 1.5 billion shares and 50 million shares, respectively. The increase in the number of authorized shares is subject to shareholder approval. The stock split would be in the form of a dividend payable May 18, 1998 to shareholders of record on May 4,1998. The impact of the stock split has not been reflected in the financial statements or any share or per share data. U.S. Bancorp 67 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 generally accepted accounting principles appropriate in the circumstances and include amounts that are based on management's best estimates and judgment. All financial information throughout the annual report 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 generally accepted auditing standards, 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 JOHN F. GRUNDHOFER President and Chief Executive Officer /s/ SUSAN E. LESTER SUSAN E. LESTER Executive Vice President and Chief Financial Officer 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, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing standards. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Minneapolis, Minnesota January 15, 1998 68 U.S. Bancorp CONSOLIDATED BALANCE SHEET -- FIVE-YEAR SUMMARY
% Change December 31 (Dollars In Millions) 1997 1996 1995 1994 1993 1996-1997 - - ------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks. . . . . . . . . $ 4,739 $ 4,813 $ 4,253 $ 3,828 $ 3,468 (1.5)% Federal funds sold and resale agreements . . . . . . . . . . . . . . 692 898 771 1,012 1,634 (22.9) Trading account securities . . . . . . . 195 231 366 215 264 (15.6) Held-to-maturity securities. . . . . . . -- 797 865 1,986 2,288 * Available-for-sale securities: U.S. Treasury. . . . . . . . . . . . . 628 1,028 1,686 2,106 2,776 (38.9) Mortgage-backed. . . . . . . . . . . . 4,366 4,104 3,218 4,051 3,717 6.4 State and political. . . . . . . . . . 1,331 573 271 181 196 * U.S. agencies and other. . . . . . . . 560 768 1,248 1,267 1,057 (27.1) ----------------------------------------------------------- Total securities. . . . . . . . . . 6,885 6,473 6,423 7,605 7,746 6.4 Loans. . . . . . . . . . . . . . . . . . 54,708 52,355 49,345 46,375 43,870 4.5 Less allowance for credit losses . . . 1,009 993 908 863 811 1.6 ----------------------------------------------------------- Net loans . . . . . . . . . . . . . 53,699 51,362 48,437 45,512 43,059 4.6 Other assets . . . . . . . . . . . . . . 5,085 5,175 4,553 4,579 3,998 (1.7) ----------------------------------------------------------- Total assets. . . . . . . . . . . . $71,295 $69,749 $65,668 $64,737 $62,457 2.2% ----------------------------------------------------------- ----------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing. . . . . . . . . . $14,544 $14,344 $12,367 $11,353 $12,913 1.4% Interest-bearing . . . . . . . . . . . 34,483 35,012 33,412 34,762 34,921 (1.5) ----------------------------------------------------------- Total deposits. . . . . . . . . . . 49,027 49,356 45,779 46,115 47,834 (.7) Short-term borrowings. . . . . . . . . . 3,292 6,592 7,984 7,501 4,638 (50.1) Long-term debt . . . . . . . . . . . . . 10,247 5,369 4,583 4,225 3,231 90.9 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company . . . . . . . . . . . . 600 600 -- -- -- -- Other liabilities. . . . . . . . . . . . 2,239 2,069 1,980 1,791 1,568 8.2 ----------------------------------------------------------- Total liabilities . . . . . . . . . 65,405 63,986 60,326 59,632 57,271 2.2 Shareholders' equity . . . . . . . . . . 5,890 5,763 5,342 5,105 5,186 2.2 ----------------------------------------------------------- Total liabilities and shareholders' equity . . . . . . . . . . . . . . $71,295 $69,749 $65,668 $64,737 $62,457 2.2% - - ------------------------------------------------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------------------------------------------------
*NOT MEANINGFUL U.S. Bancorp 69 CONSOLIDATED STATEMENT OF INCOME -- FIVE-YEAR SUMMARY
Year Ended December 31 (Dollars % Change in Millions) 1997 1996 1995 1994 1993 1996-1997 - - ------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME Loans. . . . . . . . . . . . . . . . . . $4,784.5 $4,537.7 $4,373.4 $3,686.6 $3,361.7 5.4% Securities: Taxable. . . . . . . . . . . . . . . . 371.5 420.5 420.3 535.1 596.3 (11.7) Exempt from federal income taxes . . . 68.1 71.0 59.8 62.8 59.7 (4.1) Other interest income. . . . . . . . . . 69.5 85.2 67.3 63.5 63.9 (18.4) ----------------------------------------------------------- Total interest income. . . . . . . . . 5,293.6 5,114.4 4,920.8 4,348.0 4,081.6 3.5 INTEREST EXPENSE Deposits . . . . . . . . . . . . . . . . 1,436.8 1,441.3 1,416.7 1,121.1 1,174.1 (.3) Federal funds purchased and repurchase agreements . . . . . . . . . . . . . . 183.0 197.9 218.2 190.8 83.1 (7.5) Other short-term funds borrowed. . . . . 117.6 198.0 189.8 68.3 53.0 (40.6) Long-term debt . . . . . . . . . . . . . 459.0 303.8 273.4 227.2 184.3 51.1 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company . . . . . . . . . . . . 49.1 2.8 -- -- -- * ----------------------------------------------------------- Total interest expense. . . . . . . 2,245.5 2,143.8 2,098.1 1,607.4 1,494.5 4.7 ----------------------------------------------------------- Net interest income. . . . . . . . . . . 3,048.1 2,970.6 2,822.7 2,740.6 2,587.1 2.6 Provision for credit losses . . . . . . 460.3 271.2 239.1 243.7 239.3 69.7 ----------------------------------------------------------- Net interest income after provision for credit losses. . . . . . . . . . . 2,587.8 2,699.4 2,583.6 2,496.9 2,347.8 (4.1) NONINTEREST INCOME Credit card fee revenue. . . . . . . . . 418.8 351.5 303.9 248.9 204.7 19.1 Service charges on deposit accounts. . . 396.2 377.2 345.0 346.7 320.7 5.0 Trust and investment management fees . . 348.0 302.3 241.1 224.5 208.4 15.1 Gain on sale of mortgage banking operations, branches and other assets. . . . . . . 9.4 71.4 39.9 62.9 65.1 (86.8) Securities gains (losses). . . . . . . . 3.6 20.8 3.0 (124.2) .8 (82.7) Termination fee. . . . . . . . . . . . . -- 190.0 -- -- -- * State income tax refund. . . . . . . . . -- 65.0 -- -- -- * Other. . . . . . . . . . . . . . . . . . 439.2 404.9 380.4 356.1 444.1 8.5 ----------------------------------------------------------- Total noninterest income . . . . . . . 1,615.2 1,783.1 1,313.3 1,114.9 1,243.8 (9.4) NONINTEREST EXPENSE Salaries . . . . . . . . . . . . . . . . 969.3 964.5 927.5 974.9 971.9 .5 Employee benefits. . . . . . . . . . . . 217.4 220.3 209.9 224.4 216.2 (1.3) Net occupancy. . . . . . . . . . . . . . 182.0 179.4 183.4 190.7 194.3 1.4 Furniture and equipment. . . . . . . . . 165.4 175.2 184.5 184.4 171.2 (5.6) Goodwill and other intangible assets . . 113.3 130.1 76.0 72.5 68.4 (12.9) Professional services. . . . . . . . . . 70.3 58.0 59.2 65.9 70.1 21.2 Other personnel costs. . . . . . . . . . 66.6 83.4 62.4 60.8 57.2 (20.1) FDIC insurance . . . . . . . . . . . . . 9.0 11.9 64.5 105.7 105.5 (24.4) Merger, integration, and resizing. . . . 511.6 88.1 98.9 222.7 72.2 * SAIF special assessment. . . . . . . . . -- 61.3 -- -- -- * Other. . . . . . . . . . . . . . . . . . 507.4 565.9 609.6 630.1 587.9 (10.3) ----------------------------------------------------------- Total noninterest expense. . . . . . . 2,812.3 2,538.1 2,475.9 2,732.1 2,514.9 10.8 ----------------------------------------------------------- Income from continuing operations before income taxes . . . . . . . . . . . . . 1,390.7 1,944.4 1,421.0 879.7 1,076.7 (28.5) Applicable income taxes. . . . . . . . . 552.2 725.7 523.9 311.5 374.9 (23.9) ----------------------------------------------------------- Income from continuing operations. . . . 838.5 1,218.7 897.1 568.2 701.8 (31.2) Income (loss) from discontinued operations . . . . . . . . . . . . . . -- -- -- (8.5) 2.5 * ----------------------------------------------------------- Net income . . . . . . . . . . . . . . . $ 838.5 $1,218.7 $ 897.1 $ 559.7 $ 704.3 (31.2)% ----------------------------------------------------------- ----------------------------------------------------------- Net income applicable to common equity . $ 827.9 $1,200.3 $ 877.4 $ 534.9 $ 662.9 (31.0)% - - ------------------------------------------------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------------------------------------------------
*NOT MEANINGFUL 70 U.S. Bancorp QUARTERLY CONSOLIDATED FINANCIAL DATA
1997 1996 ----------------------------------------------------------------------------------------------- Fourth Third Second First Fourth Third Second First (Dollars in Millions, Except Per Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Share Data) - - --------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans . . . . . . . . . . . . . $1,222.6 $1,211.1 $1,197.6 $1,153.2 $1,167.4 $1,149.3 $1,120.7 $1,100.3 Securities: Taxable. . . . . . . . . . . . 90.5 89.0 95.4 96.6 101.1 104.5 105.8 109.1 Exempt from federal income taxes. . . . . . . . . . . . 16.6 16.8 17.4 17.3 17.5 18.0 19.0 16.5 Other interest income. . . . . . 18.8 15.2 18.4 17.1 17.2 22.6 22.3 23.1 ----------------------------------------------------------------------------------------------- Total interest income. . . . . 1,348.5 1,332.1 1,328.8 1,284.2 1,303.2 1,294.4 1,267.8 1,249.0 INTEREST EXPENSE Deposits . . . . . . . . . . . . 359.1 362.3 363.6 351.8 362.6 363.6 358.3 356.8 Federal funds purchased and repurchase agreements. . . . . 42.4 41.9 50.8 47.9 47.7 51.2 47.0 52.0 Other short-term funds borrowed. 19.4 28.2 33.1 36.9 48.8 48.2 49.6 51.4 Long-term debt . . . . . . . . . 144.4 122.1 104.2 88.3 79.1 77.5 74.0 73.2 Company-obligated mandatority redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company. . . . . . . . . . . . 12.2 12.3 12.3 12.3 2.8 -- -- -- ----------------------------------------------------------------------------------------------- Total interest expense. . . 577.5 566.8 564.0 537.2 541.0 540.5 528.9 533.4 ----------------------------------------------------------------------------------------------- Net interest income. . . . . . . 771.0 765.3 764.8 747.0 762.2 753.9 738.9 715.6 Provision for credit losses . . 90.0 185.0 101.1 84.2 75.5 73.1 61.5 61.1 ----------------------------------------------------------------------------------------------- Net interest income after provision for credit losses. . 681.0 580.3 663.7 662.8 686.7 680.8 677.4 654.5 NONINTEREST INCOME Credit card fee revenue. . . . . 123.1 106.2 98.8 90.7 91.3 90.1 88.7 81.4 Service charges on deposit accounts . . . . . . . . . . . 101.2 102.2 97.4 95.4 97.4 96.4 92.9 90.5 Trust and investment management fees . . . . . . . . . . . . . 88.8 87.4 87.2 84.6 77.3 74.2 77.4 73.4 Gain on sale of mortgage banking operations, branches and other assets . . . . . . . . . -- 9.4 -- -- -- -- 25.7 45.7 Securities gains . . . . . . . . -- -- 1.9 1.7 .5 .9 1.4 18.0 Termination fee. . . . . . . . . -- -- -- -- -- -- 75.0 115.0 State income tax refund. . . . . -- -- -- -- -- -- 65.0 -- Other . . . . . . . . . . . . . 107.4 104.5 122.2 105.1 94.3 99.5 103.8 107.3 ----------------------------------------------------------------------------------------------- Total noninterest income . . . 420.5 409.7 407.5 377.5 360.8 361.1 529.9 531.3 NONINTEREST EXPENSE Salaries . . . . . . . . . . . . 239.6 242.2 246.9 240.6 240.0 238.1 243.7 242.7 Employee benefits. . . . . . . . 49.9 49.2 57.2 61.1 52.2 52.2 56.0 59.9 Net occupancy. . . . . . . . . . 45.7 45.3 45.2 45.8 45.5 44.6 43.0 46.3 Furniture and equipment. . . . . 38.0 40.4 44.2 42.8 43.8 42.1 44.5 44.8 Goodwill and other intangible assets . . . . . . . . . . . . 31.0 29.1 25.8 27.4 27.4 27.1 24.6 51.0 Professional services. . . . . . 22.8 18.9 15.1 13.5 17.4 13.5 14.9 12.2 Other personnel costs. . . . . . 19.5 14.3 16.4 16.4 22.3 23.8 21.1 16.2 FDIC insurance . . . . . . . . . 2.1 2.4 2.4 2.1 .5 2.5 4.5 4.4 Merger, integration, and resizing . . . . . . . . . . . 71.4 440.2 -- -- -- -- 9.8 78.3 SAIF special assessment. . . . . -- -- -- -- -- 61.3 -- -- Other . . . . . . . . . . . . . 124.2 121.1 136.3 125.8 137.8 137.1 141.2 149.8 ----------------------------------------------------------------------------------------------- Total noninterest expense. . . 644.2 1,003.1 589.5 575.5 586.9 642.3 603.3 705.6 ----------------------------------------------------------------------------------------------- Income before income taxes . . . 457.3 (13.1) 481.7 464.8 460.6 399.6 604.0 480.2 Applicable income taxes. . . . . 168.4 34.5 177.8 171.5 168.5 143.9 222.8 190.5 ----------------------------------------------------------------------------------------------- Net income (loss). . . . . . . . $ 288.9 $ (47.6) $ 303.9 $ 293.3 $ 292.1 $ 255.7 $ 381.2 $ 289.7 ----------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------- Net income (loss) applicable to common equity. . . . . . . . . $ 287.5 $ (50.7) $ 300.8 $ 290.3 $ 287.7 $ 251.1 $ 376.5 $ 285.0 ----------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------- Net income (loss) per common share. . . . . . . . . . . . . $ 1.17 $ (.21) $ 1.23 $ 1.18 $ 1.17 $ 1.00 $ 1.49 $ 1.15 Diluted net income (loss) per common share . . . . . . . . . $ 1.16 $ (.21) $ 1.22 $ 1.17 $ 1.15 $ .98 $ 1.46 $ 1.13 SELECTED AVERAGE BALANCES Loans . . . . . . . . . . . . . $ 54,386 $ 53,690 $53,515 $52,438 $52,108 $51,240 $50,605 $49,450 Earning assets . . . . . . . . . 62,365 61,541 61,859 60,886 60,854 60,639 60,148 59,147 Total assets . . . . . . . . . . 69,861 68,423 68,877 67,890 68,132 67,871 67,420 66,168 Deposits . . . . . . . . . . . . 47,468 47,035 47,688 47,160 47,784 47,573 47,444 46,197 Long-term debt . . . . . . . . . 9,534 8,008 6,768 5,751 5,119 5,020 4,847 4,629 Common equity. . . . . . . . . . 5,698 5,736 5,616 5,615 5,692 5,789 5,706 5,533 - - --------------------------------------------------------------------------------------------------------------------------------- - - ---------------------------------------------------------------------------------------------------------------------------------
U.S. Bancorp 71 CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
Year ended December 31 1997 1996 - - ----------------------------------------------------------------------------------------------------------------------------- Interest Yields Interest Yields (Dollars In Millions) Balance Interest and Rates Balance Interest and Rates - - ----------------------------------------------------------------------------------------------------------------------------- ASSETS Available-for-sale securities: U.S. Treasury. . . . . . . . . . . . . $ 734 $ 42.7 5.82% $1,255 $ 74.3 5.92% Mortgage-backed. . . . . . . . . . . . 4,239 290.5 6.85 4,158 279.7 6.73 State and political subdivisions . . . 889 69.8 7.85 555 47.0 8.47 U.S. agencies and other. . . . . . . . 595 36.1 6.07 978 65.7 6.72 ---------------------- -------------------- Total available-for-sale securities. . . . . . . . . . . . 6,457 439.1 6.80 6,946 466.7 6.72 Unrealized gain (loss) on available-for-sale securities. . . . . 3 (21) ---------- ------- Net available-for-sale securities . 6,460 6,925 Held-to-maturity securities. . . . . . . 449 35.5 7.91 834 64.0 7.67 Trading account securities . . . . . . . 168 9.7 5.77 233 13.2 5.67 Federal funds sold and resale agreements . . . . . . . . . . . . . . 577 31.6 5.48 872 46.5 5.33 Loans: Commercial: Commercial. . . . . . . . . . . . . 22,466 1,829.8 8.14 20,910 1,708.0 8.17 Real estate: Commercial mortgage . . . . . . . 8,037 728.5 9.06 7,630 687.5 9.01 Construction. . . . . . . . . . . 2,255 216.9 9.62 1,707 165.4 9.69 ---------------------- -------------------- Total commercial. . . . . . . . . 32,758 2,775.2 8.47 30,247 2,560.9 8.47 Consumer: Residential mortgage. . . . . . . . 4,879 389.7 7.99 5,495 444.2 8.08 Residential mortgage held for sale. . . . . . . . . . . . . . . 165 12.4 7.52 239 16.8 7.03 Home equity and second mortgage . . 5,115 493.8 9.65 4,385 416.1 9.49 Credit card . . . . . . . . . . . . 3,702 462.9 12.50 3,452 444.0 12.86 Other . . . . . . . . . . . . . . . 6,894 673.2 9.77 7,037 680.6 9.67 ---------------------- -------------------- Total consumer. . . . . . . . . . 20,755 2,032.0 9.79 20,608 2001.7 9.71 ---------------------- -------------------- Total loans . . . . . . . . . . . 53,513 4,807.2 8.98 50,855 4,562.6 8.97 Allowance for credit losses. . . . . . 998 973 ---------- ------- Net loans . . . . . . . . . . . . . 52,515 49,882 Other earning assets . . . . . . . . . . 511 28.4 5.56 461 25.5 5.53 ---------------------- -------------------- Total earning assets* . . . . . . 61,675 5,351.5 8.68 60,201 5,178.5 8.60 Cash and due from banks. . . . . . . . . 3,682 3,729 Other assets . . . . . . . . . . . . . . 4,409 4,466 ---------- ------- Total assets. . . . . . . . . . . $68,771 $67,402 ---------- ------- ---------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits . . . . . . $12,680 $11,970 Interest-bearing deposits: Interest checking . . . . . . . . . 5,561 92.2 1.66 5,678 90.1 1.59 Money market accounts . . . . . . . 10,440 401.9 3.85 10,068 379.4 3.77 Other savings accounts. . . . . . . 2,799 61.2 2.19 3,157 70.7 2.24 Savings certificates. . . . . . . . 12,278 668.9 5.45 12,985 703.2 5.42 Certificates over $100,000. . . . . 3,578 212.6 5.94 3,394 197.9 5.83 ---------------------- -------------------- Total interest-bearing deposits . 34,656 1,436.8 4.15 35,282 1,441.3 4.09 Short-term borrowings. . . . . . . . . . 5,314 300.6 5.66 7,187 395.9 5.51 Long-term debt . . . . . . . . . . . . . 7,527 459.0 6.10 4,908 303.8 6.19 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company . . . . . . . . . . . . 600 49.1 8.18 36 2.8 8.18 ---------------------- -------------------- Total interest-bearing liabilities . . . . . . . . . . 48,097 2,245.5 4.67 47,413 2,143.8 4.52 Other liabilities. . . . . . . . . . . . 2,196 2,100 Preferred equity . . . . . . . . . . . . 131 240 Common equity. . . . . . . . . . . . . . 5,665 5,693 Unrealized gain (loss) on available-for-sale securities, net of tax . . . . . . . . . . . . . . 2 (14) ---------- ------- Total liabilities and shareholders' equity. . . . . . $68,771 $67,402 ---------- ------- ---------- ------- Net interest income. . . . . . . . . . . $3,106.0 $3,034.7 ---------- ---------- ---------- ---------- Gross interest margin. . . . . . . . . . 4.01% 4.08% -------- -------- -------- -------- Gross interest margin without taxable-equivalent increments. . . . . 3.91% 3.98% -------- -------- -------- -------- PERCENT OF EARNING ASSETS Interest income. . . . . . . . . . . . . 8.68% 8.60% Interest expense . . . . . . . . . . . . 3.64 3.56 -------- -------- Net interest margin . . . . . . . . 5.04 5.04 -------- -------- Net interest margin without taxable-equivalent increments. . . . . 4.94% 4.93% - - ----------------------------------------------------------------------------------------------------------------------------- - - ----------------------------------------------------------------------------------------------------------------------------- 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 GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES. **NOT MEANINGFUL ***DETAIL NOT AVAILABLE 72 U.S. Bancorp YIELDS AND RATES Year ended December 31 1995 1994 - - ----------------------------------------------------------------------------------------------------------------------------- Interest Yields Interest Yields (Dollars In Millions) Balance Interest and Rates Balance Interest and Rates - - ----------------------------------------------------------------------------------------------------------------------------- ASSETS Available-for-sale securities: U.S. Treasury. . . . . . . . . . . . . $ 1,864 $ 109.0 5.85% $ 2,704 $ 142.6 5.27% Mortgage-backed. . . . . . . . . . . . 2,711 171.0 6.31 4,085 253.8 6.21 State and political subdivisions . . . 177 18.9 10.68 188 20.0 10.64 U.S. agencies and other. . . . . . . . 1,125 82.5 7.33 1,179 65.0 5.51 ---------------------- -------------------- Total available-for-sale securities. . . . . . . . . . . . 5,877 381.4 6.49 8,156 481.4 5.90 Unrealized gain (loss) on available-for-sale securities. . . . . (69) (97) ---------- ------- Net available-for-sale securities . 5,808 8,059 Held-to-maturity securities. . . . . . . 1,833 131.7 7.18 2,162 151.1 6.99 Trading account securities . . . . . . . 266 15.8 5.94 247 13.3 5.38 Federal funds sold and resale agreements . . . . . . . . . . . . . . 531 30.8 5.80 715 30.7 4.29 Loans: Commercial: Commercial. . . . . . . . . . . . . *** *** *** *** Real estate: Commercial mortgage . . . . . . . *** *** *** *** Construction. . . . . . . . . . . *** *** *** *** ---------------------- -------------------- Total commercial. . . . . . . . . 27,048 2,415.2 8.93 24,630 1,934.6 7.85 Consumer: Residential mortgage. . . . . . . . *** *** *** *** Residential mortgage held for sale. . . . . . . . . . . . . . . *** *** *** *** Home equity and second mortgage . . *** *** *** *** Credit card . . . . . . . . . . . . *** *** *** *** Other . . . . . . . . . . . . . . . *** *** *** *** ---------------------- -------------------- Total consumer. . . . . . . . . . 20,655 1,989.2 9.63 19,954 1,785.9 8.95 ---------------------- -------------------- Total loans . . . . . . . . . . . 47,703 4,404.4 9.23 44,584 3,720.5 8.34 Allowance for credit losses. . . . . . 869 847 ---------- ------- Net loans . . . . . . . . . . . . . 46,834 43,737 Other earning assets . . . . . . . . . . 346 20.6 5.95 369 20.0 5.42 ---------------------- -------------------- Total earning assets* . . . . . . 56,556 4,984.7 8.81 56,233 4,417.0 7.85 Cash and due from banks. . . . . . . . . 3,516 3,573 Other assets . . . . . . . . . . . . . . 3,950 3,846 ---------- ------- Total assets. . . . . . . . . . . $63,084 $62,708 ---------- ------- ---------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits . . . . . . $10,646 $11,299 Interest-bearing deposits: Interest checking . . . . . . . . . 5,473 88.2 1.61 5,826 85.4 1.47 Money market accounts . . . . . . . 8,952 357.5 3.99 8,600 247.1 2.87 Other savings accounts. . . . . . . 3,566 87.8 2.46 4,540 100.8 2.22 Savings certificates. . . . . . . . 13,223 704.2 5.33 13,200 551.4 4.18 Certificates over $100,000. . . . . 2,866 179.0 6.25 2,681 136.4 5.09 ---------------------- -------------------- Total interest-bearing deposits . 34,080 1,416.7 4.16 34,847 1,121.1 3.22 Short-term borrowings. . . . . . . . . . 6,969 408.0 5.85 6,011 259.1 4.31 Long-term debt . . . . . . . . . . . . . 4,162 273.4 6.57 3,796 227.2 5.99 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company . . . . . . . . . . . . -- -- -- -- -- -- ---------------------- -------------------- Total interest-bearing liabilities . . . . . . . . . . 45,211 2,098.1 4.64 44,654 1,607.4 3.60 Other liabilities. . . . . . . . . . . . 1,882 1,575 Preferred equity . . . . . . . . . . . . 255 293 Common equity. . . . . . . . . . . . . . 5,134 4,948 Unrealized gain (loss) on available-for-sale securities, net of tax . . . . . . . . . . . . . . (44) (61) ---------- ------- Total liabilities and shareholders' equity. . . . . . $63,084 $62,708 ---------- ------- ---------- ------- Net interest income. . . . . . . . . . . $2,886.6 $2,809.6 ---------- ---------- ---------- ---------- Gross interest margin. . . . . . . . . . 4.17% 4.25% -------- -------- -------- -------- Gross interest margin without taxable-equivalent increments. . . . . 4.06% 4.13% -------- -------- -------- -------- PERCENT OF EARNING ASSETS Interest income. . . . . . . . . . . . . 8.81% 7.85% Interest expense . . . . . . . . . . . . 3.71 2.86 -------- -------- Net interest margin . . . . . . . . 5.10 4.99 -------- -------- Net interest margin without taxable-equivalent increments. . . . . 4.99% 4.87% - - ----------------------------------------------------------------------------------------------------------------------------- - - ----------------------------------------------------------------------------------------------------------------------------- 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 GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES. **NOT MEANINGFUL ***DETAIL NOT AVAILABLE U.S. Bancorp 73 CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES Year ended December 31 1993 1996-1997 - - ----------------------------------------------------------------------------------------------------------------------------- Interest Yields % Change (Dollars In Millions) Balance Interest and Rates Average Balance - - ----------------------------------------------------------------------------------------------------------------------------- - - ----------------------------------------------------------------------------------------------------------------------------- ASSETS Available-for-sale securities: U.S. Treasury. . . . . . . . . . . . . $ 1,866 $ 104.8 5.62% (41.5)% Mortgage-backed. . . . . . . . . . . . 3,323 207.8 6.25 1.9 State and political subdivisions . . . 202 22.4 11.09 60.2 U.S. agencies and other. . . . . . . . 865 52.2 6.03 (39.2) ---------------------- Total available-for-sale securities. . . . . . . . . . . . 6,256 387.2 6.19 (7.0) Unrealized gain (loss) on available-for-sale securities. . . . . -- ** ---------- Net available-for-sale securities . 6,256 (6.7) Held-to-maturity securities. . . . . . . 4,603 299.8 6.51 (46.2) Trading account securities . . . . . . . 313 14.7 4.70 (27.9) Federal funds sold and resale agreements . . . . . . . . . . . . . . 1,081 32.7 3.02 (33.8) Loans: Commercial: Commercial. . . . . . . . . . . . . *** *** 7.4 Real estate: Commercial mortgage . . . . . . . *** *** 5.3 Construction. . . . . . . . . . . *** *** 32.1 ---------------------- Total commercial. . . . . . . . . 22,652 1,690.9 7.46 8.3 Consumer: Residential mortgage. . . . . . . . *** *** (11.2) Residential mortgage held for sale. . . . . . . . . . . . . . . *** *** (31.0) Home equity and second mortgage . . *** *** 16.6 Credit card . . . . . . . . . . . . *** *** 7.2 Other . . . . . . . . . . . . . . . *** *** (2.0) ---------------------- Total consumer. . . . . . . . . . 18,440 1,707.4 9.26 .7 Total loans . . . . . . . . . . . 41,092 3,398.3 8.27 5.2 Allowance for credit losses. . . . . . 823 2.6 ---------- Net loans . . . . . . . . . . . . . 40,269 5.3 Other earning assets . . . . . . . . . . 381 20.0 5.25 10.8 ---------------------- Total earning assets* . . . . . . 53,726 4,152.7 7.73 2.4 Cash and due from banks. . . . . . . . . 3,484 (1.3) Other assets . . . . . . . . . . . . . . 3,800 (1.3) ---------- Total assets. . . . . . . . . . . $60,187 2.0% ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits . . . . . . $11,295 5.9% Interest-bearing deposits: Interest checking . . . . . . . . . 5,605 93.4 1.67 (2.1) Money market accounts . . . . . . . 8,362 220.9 2.64 3.7 Other savings accounts. . . . . . . 4,323 102.9 2.38 (11.3) Savings certificates. . . . . . . . 14,300 621.6 4.35 (5.4) Certificates over $100,000. . . . . 2,731 135.3 4.95 5.4 ---------------------- Total interest-bearing deposits . 35,321 1,174.1 3.32 (1.8) Short-term borrowings. . . . . . . . . . 4,110 136.1 3.31 (26.1) Long-term debt . . . . . . . . . . . . . 2,916 184.3 6.32 53.4 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company . . . . . . . . . . . . -- -- -- ** ---------------------- Total interest-bearing liabilities . . . . . . . . . . 42.347 1,494.5 3.53 1.4 Other liabilities. . . . . . . . . . . . 1,533 4.6 Preferred equity . . . . . . . . . . . . 510 (45.4) Common equity. . . . . . . . . . . . . . 4,502 (.5) Unrealized gain (loss) on available-for-sale securities, net of tax . . . . . . . . . . . . . . -- ** ---------- Total liabilities and shareholders' equity. . . . . . $60,187 2.0% ---------- ---------- ------ Net interest income. . . . . . . . . . . $2,658.2 ---------- ---------- Gross interest margin. . . . . . . . . . 4.20% -------- -------- Gross interest margin without taxable-equivalent increments. . . . . 4.07% -------- -------- PERCENT OF EARNING ASSETS Interest income. . . . . . . . . . . . . 7.73% Interest expense . . . . . . . . . . . . 2.78 -------- Net interest margin . . . . . . . . 4.95 -------- Net interest margin without taxable-equivalent increments. . . . . 4.82% - - ----------------------------------------------------------------------------------------------------------------------------- - - ----------------------------------------------------------------------------------------------------------------------------- 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 GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES. **NOT MEANINGFUL ***DETAIL NOT AVAILABLE
U.S. Bancorp 73 SUPPLEMENTAL FINANCIAL DATA
EARNINGS PER SHARE SUMMARY 1997 1996 1995 1994 1993 - - ------------------------------------------------------------------------------------------------------ Earnings per share from continuing operations. . . . $3.39 $4.81 $3.56 $2.19 $2.71 Income (loss) from discontinued operations. . . -- -- -- (.03) .01 Earnings per share . . . . . . $3.39 $4.81 $3.56 $2.16 $2.72 Diluted earnings per share from continuing operations . $3.34 $4.72 $3.48 $2.14 $2.64 Income (loss) from discontinued operations. . . -- -- -- (.03) .01 Diluted earnings per share . . $3.34 $4.72 $3.48 $2.11 $2.65 - - ------------------------------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------------------------------
RATIOS 1997 1996 1995 1994 1993 - - ------------------------------------------------------------------------------------------------------ Return on average assets . . . 1.22% 1.81% 1.42% .89% 1.17% Return on average common equity . . . . . . . . . . . 14.6 21.1 17.2 10.9 14.7 Average total equity to average assets . . . . . . . 8.4 8.8 8.5 8.3 8.3 Dividends per share to net income per share . . . . . . 54.9 34.3 40.7 53.7 36.8 - - ------------------------------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------------------------------
OTHER STATISTICS 1997 1996 1995 1994 1993 - - ------------------------------------------------------------------------------------------------------ Common shares outstanding - year end*. . . . . . . . . . 246,644,338 246,005,990 241,031,881 248,686,447 244,023,773 Average common shares outstanding and common stock equivalents: Earnings per share . . . . . 244,516,964 249,726,158 246,217,723 248,052,659 244,133,540 Diluted earnings per share. . . . . . . . . . . 247,637,912 255,390,668 254,887,049 258,269,631 254,007,511 Number of shareholders - year-end** . . . . . . . . . 41,657 43,353 41,701 47,911 48,585 Average number of employees (full-time equivalents). . . 25,858 27,157 27,795 31,185 31,674 Common dividends paid (millions) . . . . . . . . . $445.7 $406.9 $327.4 $276.5 $222.7 - - ------------------------------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------------------------------
* 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 1997 1996 ----------------------------------------------------------------------------------- Sales Price Dividends Sales Price Dividends ----------------------- ----------------------- High Low Paid High Low Paid - - ---------------------------------------------------------------------------------------------------------------------- First quarter. . . . . . . . . $ 84.50 $ 67.50 $.4650 $59.88 $46.00 $.4125 Second quarter . . . . . . . . 87.50 71.00 .4650 63.75 56.25 .4125 Third quarter. . . . . . . . . 97.50 85.56 .4650 68.00 55.38 .4125 Fourth quarter . . . . . . . . 116.63 92.25 .4650 74.00 63.75 .4125 Closing price - December 31. . 111.94 68.25 - - ---------------------------------------------------------------------------------------------------------------------- - - ----------------------------------------------------------------------------------------------------------------------
THE COMMON STOCK OF U.S. BANCORP IS TRADED ON THE NEW YORK STOCK EXCHANGE, UNDER THE TICKER SYMBOL, "USB." 74 U.S. Bancorp COMMERCIAL LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
December 31, 1997 ------------------------------------------ In 1 Year After 1 Year (In Millions) or Less Through 5 Years After 5 Years - - --------------------------------------------------------------------------- Commercial, lease financing and agricultural . . . . . . . . . $18,402 $4,097 $ 900 Real estate: Commercial mortgage. . . . . . 4,172 2,219 1,634 Construction . . . . . . . . . 2,254 91 14 Total . . . . . . . . . . . $24,828 $6,407 $ 2,548 - - --------------------------------------------------------------------------- - - --------------------------------------------------------------------------- Due in Due After One Year One Year Total ------------------------------------------ Loans at fixed interest rates. . $ 2,706 $6,764 $ 9,470 Loans at variable interest rates. . . . . . . . . . . . . 22,122 2,191 24,313 Total . . . . . . . . . . . $24,828 $8,955 $33,783 - - --------------------------------------------------------------------------- - - ---------------------------------------------------------------------------
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 (In Millions) Months Months Months Months Total - - --------------------------------------------------------------------------- 1997 . . . . . . . . $1,077 $762 $508 $937 $3,284 1996 . . . . . . . . 1,749 573 483 597 3,402 1995 . . . . . . . . 1,226 377 432 597 2,632 - - --------------------------------------------------------------------------- - - ---------------------------------------------------------------------------
SHORT-TERM FUNDS BORROWED
Average Maximum Average Weighted Daily Outstanding Interest Rate Average Outstanding Amount Month-End Paid During Interest Rate (In Millions) at Year-End Outstanding Balance the Year at Year-End - - ----------------------------------------------------------------------------------------------- 1997 Federal funds purchased and securities sold under agreements to repurchase. . . . . . . $2,318 $3,242 $4,188 5.64% 5.23% Other. . . . . . . . . . 974 2,072 3,082 5.68 5.33 ------------------------- Total. . . . . . . . . . $3,292 $5,314 6,879 5.66 5.26 ------------------------- ------------------------- 1996 Federal funds purchased and securities sold under agreements to repurchase . . . . . . $3,401 $3,719 $4,114 5.32% 5.34% Other. . . . . . . . . . 3,191 3,468 4,330 5.71 5.53 ------------------------- Total. . . . . . . . . . $6,592 $7,187 7,797 5.51 5.43 ------------------------- ------------------------- 1995 Federal funds purchased and securities sold under agreements to repurchase . . . . . . $3,914 $3,795 $4,649 5.75% 5.25% Other. . . . . . . . . . 4,070 3,174 4,658 5.98 5.61 ------------------------- Total. . . . . . . . . . $7,984 $6,969 8,037 5.85 5.43 - - ----------------------------------------------------------------------------------------------- - - -----------------------------------------------------------------------------------------------
U.S. Bancorp 75 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, 1997. 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 $1.25. Securities registered pursuant to Section 12(g) of the Act: Warrants to Purchase Shares of Common Stock. As of January 31, 1998, U.S. Bancorp had 246,936,015 shares of common stock outstanding. The aggregate market value of common stock held by non-affiliates as of January 31, 1998, was approximately $25,838,000,000. 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. This Annual Report and Form 10-K incorporates into a single document the requirements of the accounting profession and the Securities and Exchange Commission. Only those sections of the Annual Report referenced in the following cross-reference index and the information under the caption "Forward-Looking Statements" are incorporated in the Form 10-K.
Cross-Reference Page - - ------------------------------------------------------ PART I ITEM 1 Business General. . . . . . . . . . . . . . . . . . 77 Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential. . . 22-23, 72-73 Investment Portfolio . . . . . .28-29, 49, 69 Loan Portfolio . .26-28, 30-34, 45-46, 50, 75 Summary of Loan Loss Experience.23, 30-34, 50 Deposits . . . . . . . . . . . .29, 72-73, 75 Return on Equity and Assets. . . . . . . . 74 Short-Term Borrowings. . . . . . . . . . . 75 ITEM 2 Properties . . . . . . . . . . . . . . . . 77 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. . . . . . . . . . . .37-38, 67, 76 ITEM 6 Selected Financial Data. . . . . . . . . . 19 ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . .18-40 ITEM 7A Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . .34-36 ITEM 8 Financial Statements and Supplementary Data . . . . . . . . . 71, 78 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. . . . . . . . . . .80-81* 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. . . . . . . .78-79
*U.S. BANCORP'S DEFINITIVE PROXY STATEMENT FOR THE 1998 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." 76 U.S. Bancorp GENERAL U.S. Bancorp, formerly known as First Bank System, Inc. (the "Company"), is the organization created by the acquisition by First Bank System, Inc. of U.S. Bancorp of Portland, Oregon. The Company is a regional, multi-state bank holding company headquartered in Minneapolis, Minnesota. The Company was incorporated in Delaware in 1929 and owns 100 percent of the capital stock of each of eight banks, and eleven trust companies, having 1,009 banking offices in Minnesota, Oregon, Washington, Colorado, California, Idaho, Nebraska, North Dakota, Nevada, South Dakota, Montana, Iowa, Illinois, Utah, Wisconsin, Kansas, and Wyoming. 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 $48.1 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, employment during 1997 averaged a total of 25,858 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 5 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 5 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. Effective June 1, 1997, the Interstate Act authorized interstate branching by acquisition and consolidation in those states that had not opted out by that date. 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 as such, are subject to examination thereby. 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 under long-term leases. The Company also leases a freestanding operations center in St. Paul and owns operations centers in Fargo, Portland, and Boise. At December 31, 1997, the Company's subsidiaries owned and operated a total of 603 facilities and leased an additional 638 facilities, all of which are well maintained. Additional information with respect to premises and equipment is presented in Notes G and Q to the Consolidated Financial Statements. U.S. Bancorp 77 EXHIBITS
Financial Statements Filed Page - - ------------------------------------------------------------------------------- U.S. Bancorp and Subsidiaries Consolidated Financial Statements 41 Notes to Consolidated Financial Statements 45 Report of Independent Auditors 68
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, 1997, the Company filed the following Current Reports on Form 8-K: Form 8-K filed October 17, 1997, relating to the announcement of the Company's third quarter 1997 earnings. Form 8-K filed December 15, 1997, relating to the announcement of the Company's agreement to acquire Piper Jaffray Companies Inc., the analyst presentation made in connection with the announcement, and the merger agreement between the Company and Piper Jaffray Companies Inc. The following Exhibit Index lists the Exhibits to the Annual Report on Form 10-K. (1)3.1 Restated Certificate of Incorporation, as amended. Filed as Exhibit 3.1 to Form 8-K dated August 1, 1997. 3.2 Bylaws, as amended. 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 Warrant Agreement, dated as of November 20, 1990, between Metropolitan Financial Corporation and American Stock Transfer and Trust Company, as Warrant Agent; Supplemental Warrant Agreement, dated as of January 24, 1995, between U.S. Bancorp and American Stock Transfer and Trust Company, as Warrant Agent; and Form of Warrant. Filed as Exhibit 4E to report on Form 10-K for the year ended December 31, 1996. (1)10.1 Stock Purchase Agreements dated as of May 30, 1990, among Corporate Partners, L.P.; Corporate Offshore Partners, L.P.; The State Board of Administration of Florida and U.S. Bancorp and related documents. Filed as Exhibits 4.8-4.15 to Registration Statement on Form S-3, File No. 33-42650. (2)10.2 U.S. Bancorp 1997 Stock Incentive Plan, as amended. (1)(2)10.3 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. (2)10.4 U.S. Bancorp Restated Employee Stock Purchase Plan, as amended. (1)(2)10.5 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)10.6 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)10.7 U.S. Bancorp Executive Deferral Plan, as amended. Filed as Exhibit 10C to report on Form 10-Q for the quarter ended March 31, 1997. (1)(2)10.8 U.S. Bancorp Nonqualified Supplemental Executive Retirement Plan, as amended. Filed as Exhibit 10B to report on Form 10-Q for the quarter ended March 31, 1997. (2)10.9 U.S. Bancorp Special Executive Deferral Plan. (2)10.10 Amended and Restated Supplemental Benefits Plan of the former U.S. Bancorp. (2)10.11 1991 Executive Deferred Compensation Plan, as amended, of the former U.S. Bancorp. (2)10.12 Deferred Compensation Trust Agreement of the former U.S. Bancorp. (2)10.13 1991 Performance and Equity Incentive Plan of the former U.S. Bancorp. (2)10.14 Description of Retirement Benefits of Joshua Green III. (2)10.15 Form of Director Indemnification Agreement entered into with former Directors of the former U.S. Bancorp. (2)10.16 Description of health insurance premium reimbursement plan for former Directors of West One Bancorp. (1)(2)10.17 U.S. Bancorp Independent Director Retirement and Death Benefit Plan, as amended. Filed as Exhibit 10D to report on Form 10-Q for the quarter ended March 31, 1997. (2)10.18 U.S. Bancorp Deferred Compensation Plan for Directors, as amended. (1)(2)10.19 Form of Change-in-Control Agreement between U.S. Bancorp and certain officers of the Company. Filed as Exhibit 10J to report on Form 10-K for the year ended December 31, 1996. (1)(2)10.20 Employment Agreement with Gerry B. Cameron. Filed as Exhibit 10.1 to Registration Statement on Form_S-4, File No. 333-29409. (1)(2)10.21 Employment Agreement with John F. Grundhofer. Filed as Exhibit 10(a) to report on Form 10-Q for the quarter ended September 30, 1997. (1)(2)10.22 Employment Agreement with Gary T. Duim. Filed as Exhibit 10.2 to Registration Statement on Form S-4, File No. 333-29409. (1)(2)10.23 Employment Agreement with Philip G. Heasley. Filed as Exhibit 10(b) to report on Form 10-Q for the quarter ended September 30, 1997.
(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. 78 U.S. Bancorp (1)(2)10.24 Employment Agreement with Robert D. Sznewajs. Filed as Exhibit 10.3 to Registration Statement on Form S-4, File No. 333-29409. (1)(2)10.25 Employment Agreement with Richard A. Zona. Filed as Exhibit 10(c) to report on Form 10-Q for the quarter ended September 30, 1997. (1)(2)10.26 Consulting Agreement with Norman M. Jones. Filed as Exhibit 10T to report on Form 10-K for the year ended December 31, 1994. (1)10.27 Agreement and Plan of Merger, dated as of March 19, 1997, by and between First Bank System, Inc. and U.S. Bancorp. Filed as Exhibit 2 to report on Form 8-K dated March 19, 1997. 12 Statement re: Computation of Ratio of Earnings to Fixed Charges. 13 Annual Report to Shareholders for the year ended December 31, 1997. 21 Subsidiaries of the Registrant. 23 Consent of Ernst & Young LLP. 27 Financial Data Schedule.
(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. 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 18, 1998, on its behalf by the undersigned thereunto duly authorized. U.S. Bancorp By: John F. Grundhofer President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 18, 1998, by the following persons on behalf of the registrant and in the capacities indicated. JOHN F. GRUNDHOFER President, Chief Executive Officer, and Director (principal executive officer) SUSAN E. LESTER Executive Vice President and Chief Financial Officer (principal financial officer) DAVID J. PARRIN Senior Vice President and Controller (principal accounting officer) LINDA L. AHLERS Director HARRY L. BETTIS Director GERRY B. CAMERON Chairman and Director CAROLYN SILVA CHAMBERS Director ARTHUR D. COLLINS, JR. Director PETER H. COORS Director FRANKLIN G. DRAKE Director ROBERT L. DRYDEN Director JOHN B. FERY Director JOSHUA GREEN III Director ROGER L. HALE Director DELBERT W. JOHNSON Director NORMAN M. JONES Director RICHARD L. KNOWLTON Director JERRY W. LEVIN Director KENNETH A. MACKE Director ALLEN T. NOBLE Director EDWARD J. PHILLIPS Director PAUL A. REDMOND Director S. WALTER RICHEY Director RICHARD L. ROBINSON Director N. STEWART ROGERS Director RICHARD L. SCHALL Director WALTER SCOTT, JR. Director BENJAMIN R. WHITELEY Director U.S. Bancorp 79 EXECUTIVE OFFICERS GERRY B. CAMERON Mr. Cameron, 59, has been Chairman of the Board of U.S. Bancorp since August 1, 1997. He had been Chairman, President and Chief Executive Officer of the former U.S. Bancorp, where he previously served as Vice Chairman. JOHN F. GRUNDHOFER Mr. Grundhofer, 59, has been President and Chief Executive Officer of U.S. Bancorp since August 1, 1997. From 1990 to 1997 he served as Chairman, President and Chief Executive officer of First Bank System, Inc. (now U.S. Bancorp). GARY T. DUIM Mr. Duim, 54, has been Vice Chairman of U.S. Bancorp since August 1, 1997, with responsibilities for Commercial & Business Banking and Private Financial Services, as well as U.S. Bancorp Leasing & Financial. He had been Executive Vice President, Retail Banking Group, for the former U.S. Bancorp since 1996. From 1993 to 1996 Mr. Duim headed the Corporate Banking Group of the former U.S. Bancorp. PHILIP G. HEASLEY Mr. Heasley, 48, has served as Vice Chairman since 1993. He is responsible for retail bank products, payment systems, and operations and technology. ROBERT D. SZNEWAJS Mr. Sznewajs, 51, has served as Vice Chairman of U.S. Bancorp since August 1, 1997 and oversees retail bank branches. He had been Vice Chairman of the former U.S. Bancorp since 1995. From 1994 to 1995, he was Executive Vice President of the former U.S. Bancorp in charge of the Support and Financial Services and Products Group, as well as Executive Vice President of U.S. Bank of Oregon and U.S. Bank of Washington. From 1989 until 1993, Mr. Sznewajs was Executive Vice President and Manager of Retail Banking for Valley National Bank of Arizona in Phoenix. In early 1993, he became chairman of Bank of America, N.A., the credit card bank of BankAmerica Corporation. RICHARD A. ZONA Mr. Zona, 53, Vice Chairman, assumed responsibilities in 1997 for Commercial Banking and Institutional Financial Services, in addition to his ongoing responsibilities for Finance, Business Banking and Private Financial Services, and Corporate Trust Services. He was named Vice Chairman-Finance in February 1996, and previously served as Vice Chairman and Chief Financial Officer. J. ROBERT HOFFMANN Mr. Hoffmann, 52, has been Executive Vice President and Chief Credit Officer since 1990. SUSAN E. LESTER Ms. Lester, 41, was named Executive Vice President and Chief Financial Officer in February 1996. She had served as Executive Vice President, Finance, since December 1995. From May 1994 to November 1995, Ms. Lester was Executive Vice President and Chief Financial Officer of Shawmut National Corporation. Before that, she served as Executive Vice President and Controller at First Bank System, Inc. LEE R. MITAU Mr. Mitau, 49, was named Executive Vice President, General Counsel and Secretary in 1995. Previously, he was a Partner at Dorsey & Whitney LLP. JOHN M. MURPHY, JR. Mr. Murphy, 56, has been Chairman and Chief Investment Officer, U.S. Bank Trust National Association, formerly First Trust National Association, since 1990. DANIEL C. ROHR Mr. Rohr, 51, was named Executive Vice President of Commercial & Business Banking in 1997. He had been Executive Vice President of Commercial Banking since 1990. ROBERT H. SAYRE Mr. Sayre, 58, has served as Executive Vice President of Human Resources since 1990. JOHN R. DANIELSON Mr. Danielson, 53, has served as Senior Vice President of Investor and Corporate Relations since 1996. He previously served as Senior Vice President of Investor Relations. DAVID P. GRANDSTRAND Mr. Grandstrand, 42, has served as Senior Vice President and Treasurer since 1996. He previously served as Senior Vice President of Asset/Liability Management and Funding. DAVID J. PARRIN Mr. Parrin, 42, has been Senior Vice President and Controller since 1994. Previously, he was a Partner at Ernst & Young LLP. 80 U.S. Bancorp DIRECTORS GERRY B. CAMERON CHAIRMAN OF THE BOARD U.S. Bancorp JOHN F. GRUNDHOFER PRESIDENT AND CHIEF EXECUTIVE OFFICER U.S. Bancorp LINDA L. AHLERS PRESIDENT Department Store Division of Dayton Hudson Corporation Minneapolis, Minnesota HARRY L. BETTIS RANCHER Payette, Idaho CAROLYN SILVA CHAMBERS CHAIRMAN AND CHIEF EXECUTIVE OFFICER Chambers Communications Corp. Eugene, Oregon ARTHUR D. COLLINS, JR. PRESIDENT AND CHIEF OPERATING OFFICER Medtronic, Inc. Minneapolis, Minnesota PETER H. COORS VICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER Coors Brewing Company Golden, Colorado FRANKLIN G. DRAKE CHAIRMAN AND CHIEF EXECUTIVE OFFICER Drake Management Company Portland, Oregon ROBERT L. DRYDEN EXECUTIVE VICE PRESIDENT, AIRPLANE PRODUCTION The Boeing Company Commercial Airplane Group Seattle, Washington JOHN B. FERY RETIRED CHAIRMAN AND CHIEF EXECUTIVE OFFICER Boise Cascade Corporation Boise, Idaho JOSHUA GREEN III CHAIRMAN AND CHIEF EXECUTIVE OFFICER Joshua Green Corporation Seattle, Washington ROGER L. HALE PRESIDENT AND CHIEF EXECUTIVE OFFICER TENNANT Company Minneapolis, Minnesota DELBERT W. JOHNSON CHAIRMAN AND CHIEF EXECUTIVE OFFICER Pioneer Metal Finishing Minneapolis, Minnesota NORMAN M. JONES CHAIRMAN Metro Bancorp, Inc. Minneapolis, Minnesota RICHARD L. KNOWLTON CHAIRMAN The Hormel Foundation Austin, Minnesota JERRY W. LEVIN CHAIRMAN Revlon, Inc. New York, New York CHAIRMAN AND CHIEF EXECUTIVE OFFICER The Coleman Company, Inc. Wichita, Kansas KENNETH A. MACKE GENERAL PARTNER Macke Partners Golden Valley, Minnesota ALLEN T. NOBLE PRESIDENT Farm Development Corporation Boise, Idaho EDWARD J. PHILLIPS CHAIRMAN AND CHIEF EXECUTIVE OFFICER Phillips Beverage Company Minneapolis, Minnesota PAUL A. REDMOND CHAIRMAN AND CHIEF EXECUTIVE OFFICER The Washington Water Power Company Spokane, Washington S. WALTER RICHEY CHAIRMAN AND CHIEF EXECUTIVE OFFICER Meritex, Inc. Minneapolis, Minnesota RICHARD L. ROBINSON CHAIRMAN AND CHIEF EXECUTIVE OFFICER Robinson Dairy, Inc. Denver, Colorado N. STEWART ROGERS Chairman of the Board Penford Corporation Mercer Island, Washington RICHARD L. SCHALL RETIRED VICE CHAIRMAN OF THE BOARD Dayton Hudson Corporation Minneapolis, Minnesota WALTER SCOTT, JR. CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER Peter Kiewit Sons', Inc. Omaha, Nebraska BENJAMIN R. WHITELEY CHAIRMAN OF THE BOARD Standard Insurance Company Portland, Oregon U.S. Bancorp 81 CORPORATE DATA EXECUTIVE OFFICES U.S. Bancorp 601 Second Avenue South Minneapolis, Minnesota 55402-4302 ANNUAL MEETING The annual meeting of shareholders will be held at 2:00 p.m. on Wednesday, April 22, 1998, at the Minneapolis Convention Center, 1301 Second Avenue South, Minneapolis, Minnesota 55403. COMMON STOCK TRANSFER AGENT AND REGISTRAR First Chicago Trust Company of New York acts as transfer agent and registrar, dividend paying agent, and dividend reinvestment plan agent for U.S. Bancorp and maintains all shareholder records for the corporation. For information about U.S. Bancorp stock, or if you have questions regarding your stock certificates (including transfers), address or name changes, lost dividend checks, lost stock certificates, or Form 1099s, please call First Chicago's Shareholder Services Center at (800) 446-2617. Representatives are available weekdays 8:30 a.m. to 7:00 p.m. EST, and the interactive voice response system is available 24 hours a day, seven days a week. The TDD telephone number for the hearing impaired is (201) 222-4955. First Chicago Trust Company of New York, P.O. Box 2500, Jersey City, New Jersey 07303-2500. Telephone: (201) 324-0498 Fax: (201) 222-4892 Internet address: http://www.fctc.com E-mail address: fctc@em.fcnbd.com COMMON STOCK LISTING AND TRADING U.S. Bancorp Common Stock is listed and traded on the New York Stock Exchange under the ticker symbol USB. DIVIDENDS U.S. Bancorp currently pays quarterly dividends on its Common Stock on or about the 15th of March, June, September and December, subject to prior Board approval. Shareholders may choose to have dividends electronically deposited directly into their bank accounts. For enrollment information, please call First Chicago at (800) 446-2617. DIVIDEND REINVESTMENT PLAN U.S. Bancorp shareholders can take advantage of a plan that provides automatic reinvestment of dividends and/or optional cash purchases of additional shares of U.S. Bancorp Common Stock up to $60,000 per calendar year. For more information, please contact First Chicago Trust Company of New York, P.O. Box 2598, Jersey City, New Jersey 07303-2598, (800) 446-2617. INVESTMENT COMMUNITY CONTACTS John R. Danielson Senior Vice President, Investor and Corporate Relations (612) 973-2261 Judith T. Murphy Vice President, Investor Relations (612) 973-2264 FINANCIAL INFORMATION U.S. Bancorp news and financial results are available by fax, mail and the company's Web site. FAX. To access our fax-on-demand service, call (800) 758-5804. When asked, enter U.S. Bancorp's extension number, "312402." Enter "1" for the most current news release or "2" for a menu of news releases. Enter your fax and telephone numbers as directed. The information will be faxed to you promptly. MAIL. At your request, we will mail to you our quarterly earnings news releases, quarterly financial data on Form 10-Q, and additional annual reports. To be added to U.S. Bancorp's mailing list for quarterly earnings news releases, or to request other information, please contact: Investor and Corporate Relations (612) 973-2263 U.S. Bancorp 601 Second Avenue South, MPFP1703 Minneapolis, Minnesota 55402-4302 WEB SITE. For information about U.S. Bancorp, including news and financial results, product information, and service locations, access our home page on the World Wide Web. The address is http://www.usbank.com. COMMUNITY ANNUAL REPORT For information about U.S. Bancorp's community reinvestment activities, call U.S. Bancorp Community Relations, (612) 973-2322. U.S. Bancorp, including each of its subsidiaries, is an Equal Opportunity Employer and a Drug-Free Workplace. 82 U.S. Bancorp DESIGN AND TYPOGRAPHY: Larsen Design Office, Inc. PRINTING: Banta Direct Marketing Group: The Press [LOGO] P.O. Box 522 Minneapolis, Minnesota 55480 http://www.usbank.com EX-3.2 2 EXHIBIT 3.2 BYLAWS OF U.S. BANCORP ARTICLE I. OFFICES Section 1. OFFICES. The registered office of the Corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle, State of Delaware. The Corporation shall have offices at such other places as the Board of Directors may from time to time determine. ARTICLE II. STOCKHOLDERS Section 1. ANNUAL MEETING. The annual meeting of the stockholders for the election of Directors and for the transaction of such other business as may properly come before the meeting shall be held on such date as the Board of Directors shall each year fix. Each such annual meeting shall be held at such place, within or without the State of Delaware, and hour as shall be determined by the Board of Directors. The day, place and hour of such annual meeting shall be specified in the notice of annual meeting. The meeting may be adjourned from time to time and place to place until its business is completed. Section 2. SPECIAL MEETING. Special meetings of stockholders may be called by the Board of Directors or the Chief Executive Officer. The notice of such meeting shall state the purpose of such meeting and no business shall be transacted thereat except as stated in the notice thereof. Any such meeting may be held at such place within or without the State of Delaware as may be fixed by the Board of Directors or the Chief Executive Officer, and as may be stated in the notice of such meeting. 1 Section 3. NOTICE OF MEETING. Notice of every meeting of the stockholders shall be given in the manner prescribed by law. Section 4. QUORUM. Except as otherwise required by law, the Certificate of Incorporation or these Bylaws, the holders of not less than one-third of the shares entitled to vote at any meeting of the stockholders, present in person or by proxy, shall constitute a quorum and the act of the majority of such quorum shall be deemed the act of the stockholders. If a quorum shall fail to attend any meeting, the chairman of the meeting may adjourn the meeting to another place, date, or time. Section 5. QUALIFICATION OF VOTERS. The Board of Directors may fix a day and hour not more than sixty nor less than ten days prior to the day of holding any meeting of the stockholders as the time as of which the stockholders entitled to notice of and to vote at such meeting shall be determined. Only those persons who were holders of record of voting stock at such time shall be entitled to notice of and to vote at such meeting. Section 6. PROCEDURE. The presiding officer at each meeting of stockholders shall conclusively determine the order of business, all matters of procedure and whether or not a proposal is proper business to be transacted at the meeting and has been properly brought before the meeting. The Board shall appoint two or more inspectors of election to serve at every meeting of the stockholders at which Directors are to be elected. Section 7. NOMINATION OF DIRECTORS. Only persons nominated in accordance with the following procedures shall be eligible for election by stockholders as Directors. Nominations of persons for election as Directors at a meeting of stockholders called for the purpose of electing Directors may be made (a) by or at the direction of the Board of Directors or (b) by any stockholder in the manner herein provided. For a nomination to be 2 properly made by a stockholder, the stockholder must give written notice to the Secretary of the Corporation so as to be received at the principal executive offices of the Corporation not later than (i) with respect to an annual meeting of stockholders, 90 days in advance of such meeting and (ii) with respect to a special meeting of stockholders for the election of directors, the close of business on the seventh day following the date on which the notice of such meeting is first given to stockholders. Each such notice shall set forth (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understanding between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board; and (e) the consent of each nominee to serve as a Director of the Corporation if so elected. ARTICLE III. DIRECTORS Section 1. NUMBER AND ELECTION. The Board of Directors of the Corporation shall consist of such number of Directors as are fixed from time to time by resolution of the Board and within the requirements set forth in the Certificate of Incorporation. Commencing with the annual election of Directors by the stockholders in 1986, the Directors shall be divided into three classes: Class I, Class II and Class III, each such class, as nearly as possible, to have the same number of Directors. The term of office of the initial Class I Directors shall expire at the annual election of Directors by the stockholders in 1987, the term of office of the initial Class II Directors shall expire at the annual election of Directors by the stockholders in 1988, and the term of office of the initial Class III Directors shall expire at the annual election of Directors by the stockholders in 1989. At each annual election of Directors by the stockholders held after 1985, the Directors chosen to succeed those whose terms have then expired shall be identified as being of the same class as the Directors they succeed and shall be elected by the 3 stockholders for a term expiring at the third succeeding annual election of Directors. In all cases, Directors shall hold office until their respective successors are elected by the stockholders and have qualified. In the event that the holders of any class or series of stock of the Corporation having a preference as to dividends or upon liquidation of the Corporation shall be entitled, by a separate class vote, to elect Directors as may be specified pursuant to Article Fourth of the Corporation's Restated Certificate of Incorporation, then the provisions of such class or series of stock with respect to their rights shall apply. The number of Directors that may be elected by the holders of any such class or series of stock shall be in addition to the number fixed pursuant to the preceding paragraph. Except as otherwise expressly provided pursuant to Article Fourth of the Corporation's Restated Certificate of Incorporation, the number of Directors that may be so elected by the holders of any such class or series of stock shall be elected for terms expiring at the next annual meeting of stockholders and without regard to the classification of the remaining members of the Board of Directors and vacancies among Directors so elected by the separate class vote of any such class or series of stock shall be filled by the remaining Directors elected by such class or series, or, if there are no such remaining Directors, by the holders of such class or series in the same manner in which such class or series initially elected a Director. If at any meeting for the election of Directors, more than one class of stock, voting separately as classes, shall be entitled to elect one or more Directors and there shall be a quorum of only one such class of stock, that class of stock shall be entitled to elect its quota of Directors notwithstanding the absence of a quorum of the other class or classes of stock. Section 2. VACANCIES. Vacancies and newly created directorships resulting from an increase in the number of Directors shall be filled by a majority of the Directors then in office, although less than a quorum, or by a sole remaining Director, and such Directors so chosen shall hold office until the next election of the class for which such Directors shall have been chosen, and until their successors are elected and qualified. Section 3. REGULAR MEETINGS. Regular meetings of the Board shall be held at such times and places as the Board may from time to time determine. 4 Section 4. SPECIAL MEETINGS. Special meetings of the Board may be called at any time, at any place and for any purpose by the Chairman of the Board, or the President, or by any officer of the Corporation upon the request of a majority of the entire Board. Section 5. NOTICE OF MEETINGS. Notice of regular meetings of the Board need not be given. Notice of every special meeting of the Board shall be given to the Directors at their usual places of business, or at such other addresses as shall have been furnished by them for the purpose. Such notice shall be given at least twelve hours (three hours if meeting is to be conducted by conference telephone) before the meeting by telephone or by being personally delivered, mailed, or telegraphed. Such notice need not include a statement of the business to be transacted at, or the purpose of, any such meeting. Section 6. QUORUM. Except as may be otherwise provided by law or in these Bylaws, the presence of one-third of the entire Board shall be necessary and sufficient to constitute a quorum for the transaction of business at any meeting of the Board, and the act of a majority of such quorum shall be deemed the act of the Board. Less than a quorum may adjourn any meeting of the Board from time to time without notice. Section 7. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Members of the Board, or of any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. Section 8. POWERS. The business, property, and affairs of the Corporation shall be managed by or under the direction of its Board of Directors, which shall have and may exercise all the powers of the Corporation to do all 5 such lawful acts and things as are not by law, or by the Certificate of Incorporation, or by these Bylaws, directed or required to be exercised or done by the stockholders. Section 9. COMPENSATION OF DIRECTORS. Directors shall receive such compensation for their services as shall be determined by a majority of the entire Board provided that Directors who are serving the Corporation as officers or employees and who receive compensation for their services as such officers or employees shall not receive any salary or other compensation for their services as Directors. Section 10. COMMITTEES OF THE BOARD. A majority of the entire Board of Directors may designate one or more standing or temporary committees consisting of one or more Directors. The Board may invest such committees with such powers and authority, subject to the limitations of law and such conditions as it may see fit. ARTICLE IV. EXECUTIVE COMMITTEE Section 1. ELECTION. At any meeting of the Board, an Executive Committee, composed of the Chairman of the Board, the President, and not less than three other members, may be elected by a majority vote of the entire Board to serve until the Board shall otherwise determine. Either the Chairman of the Board or the President, whichever is the Chief Executive Officer, shall be the Chairman of the Executive Committee, and the other shall be the Vice Chairman thereof, unless the Board shall otherwise determine. Members of the Executive Committee shall be members of the Board. Section 2. POWERS. The Executive Committee shall have and may exercise all of the powers of the Board of Directors when the Board is not in session, except that, unless specifically authorized by the Board of Directors, it shall have no power to (a) elect directors or officers; (b) alter, amend, or repeal these Bylaws or any resolution of the Board of Directors relating to the Executive Committee; (c) declare any dividend or make any other distribution to the stockholders of the Corporation; (d) 6 appoint any member of the Executive Committee; or (e) take any other action which legally may be taken only by the Board. Section 3. RULES. The Executive Committee shall adopt such rules as it may see fit with respect to the calling of its meetings, the procedure to be followed thereat, and its functioning generally. Any action taken with the written consent of all members of the Executive Committee shall be as valid and effectual as though formally taken at a meeting of said Executive Committee. Section 4. VACANCIES. Vacancies in the Executive Committee may be filled at any time by a majority vote of the entire board. ARTICLE V. OFFICERS Section 1. NUMBER. The officers of the Corporation shall be appointed or elected by the Board of Directors. The officers shall be a Chairman of the Board, a President, one or more Vice Chairmen, such number of Vice Presidents or other officers as the Board may from time to time determine, a Secretary, a Treasurer, and a Controller. The President shall be Chief Executive Officer unless the Board shall determine otherwise. The Chairman of the Board shall preside at all meetings of the Board and shall perform such other duties as may be assigned from time to time by the Board. In the absence of the Chairman or if such office shall be vacant, the President shall preside at all meetings of the Board. In the absence of the Chairman of the Board and the President, any other Board member designated by the Board may preside at all meetings of the stockholders and of the Board. The Board of Directors may appoint or elect a person as a Vice Chairman without regard to whether such person is a member of the Board of Directors. Section 2. STAFF AND DIVISIONAL OFFICERS. The Chief Executive Officer may appoint at his discretion such persons to hold the title of staff vice president, divisional chairman, divisional president, divisional vice president or other similar designation. Such persons shall not be officers of the Corporation and shall retain such title at the sole discretion of the Chief Executive 7 Officer who may at his will and from time to time make or revoke such designation. Section 3. TERMS OF OFFICE. All officers, agents, and employees of the Corporation shall hold their respective offices or positions at the pleasure of the Board of Directors or the appropriate appointing authority and may be removed at any time by such authority with or without cause. Section 4. DUTIES. The officers, agents, and employees shall perform the duties and exercise the powers usually incident to the offices or positions held by them respectively, and/or such other duties and powers as may be assigned to them from time to time by the Board of Directors or the Chief Executive Officer. ARTICLE VI. INDEMNIFICATION OF DIRECTORS, OFFICERS, AND EMPLOYEES Section 1. The Corporation shall indemnify to the full extent permitted by, and in the manner permissible under the Delaware General Corporation Law, as amended from time to time, any person made, or threatened to be made, a party to any action, suit, or proceeding, whether criminal, civil, administrative, or investigative, by reason of the fact that such person (i) is or was a director, advisory director, or officer of the Corporation or any predecessor of the Corporation, or (ii) is or was a director, advisory director or officer of the Corporation or any predecessor of the Corporation and served any other corporation, partnership, joint venture, trust or other enterprise as a director, advisory director, officer, partner, trustee, employee or agent at the request of the Corporation or any predecessor of the Corporation. The foregoing rights of indemnification shall not be deemed exclusive of any other rights to which any such director, advisory director or officer may be entitled apart from the provisions of this Article. The Board of Directors in its discretion shall have power on behalf of the Corporation to indemnify any person, other than such a director, advisory director or officer, made a party to any action, suit, or proceeding by reason of the fact that such person, or the testator or intestate of such person, is or was an employee of the Corporation. 8 Section 2. Expenses incurred by a director, advisory director or officer in defending a civil or criminal action, suit or proceeding for which indemnification is required pursuant to Section 1 shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director, advisory director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized by Delaware law. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. ARTICLE VII. STOCK Section 1. CERTIFICATED OR UNCERTIFICATED SHARES. The Board of Directors may authorize the issuance of stock either in certificated or in uncertificated form. If shares are issued in uncertificated form, each stockholder shall be entitled upon written request to a stock certificate or certificates, representing and certifying the number and kind of full shares held, signed as provided in Section 2 of this Article VII. Certificates for shares of stock shall be in such form as the Board of Directors may from time to time prescribe. The shares of the stock of the Corporation shall be transferable on the books of the Corporation by the holder thereof in person or by his or her attorney upon surrender for cancellation of a certificate or certificates for the same number of shares, or other evidence of ownership if no certificates shall have been issued, with an assignment and power of transfer endorsed thereon or attached thereto, duly executed, and with such proof of the validity of the signature as the Corporation or its agents may reasonably require. Section 2. SIGNATURES. The certificates of stock shall be signed by the Chairman, President, or a Vice President and by the Secretary or an Assistant Secretary, provided that if such certificates are signed by a transfer agent or transfer clerk and by a registrar, the signatures of such Chairman, President, Vice President, Secretary, or Assistant Secretary may be facsimiles, engraved, or printed. Section 3. REPLACEMENT. No certificate for shares of stock in the Corporation shall be issued in place of any certificate alleged to have been lost, stolen, or destroyed except upon production of such evidence of such loss, theft, or destruction and upon delivery to the Corporation of a bond of indemnity in such amount, and upon such terms and secured by such 9 surety as the Board of Directors or the Executive Committee in its discretion may require. ARTICLE VIII. MISCELLANEOUS Section 1. SEAL. The Corporation seal shall bear the name of the Corporation, the date 1929 and the words "Corporate Seal, Delaware". Section 2. FISCAL YEAR. The fiscal year of the Corporation shall begin on the first day of January in each year and shall end on the thirty-first day of December following. ARTICLE IX. AMENDMENTS Section 1. These Bylaws, or any of them, may from time to time be supplemented, amended, or repealed (a) by a majority vote of the entire Board of Directors or (b) at any annual or special meeting of the stockholders. ARTICLE X. EMERGENCY BYLAW Section 1. OPERATIVE EVENT. The Emergency Bylaw provided in this Article X shall be operative during any emergency resulting from an attack on the United States, any nuclear or atomic incident, or other event which creates a state of disaster of sufficient severity to prevent the normal conduct and management of the affairs and business of the Corporation, notwithstanding any different provision in the preceding articles of the Bylaws or in the Certificate of Incorporation of the Corporation or in the General Corporation Law of Delaware. To the extent not inconsistent with this Emergency Bylaw, the Bylaws provided in the preceding Articles shall remain in effect during such emergency and upon the termination of such emergency the Emergency Bylaw shall cease to be operative unless and until another such emergency shall occur. 10 Section 2. NOTICE OF MEETING. During any such emergency, any meeting of the Board of Directors may be called by any officer of the Corporation or by any Director. Notice shall be given by such person or by any officer of the Corporation. The notice shall specify the place of the meeting, which shall be the head office of the Corporation at the time if feasible and otherwise any other place specified in the notice. The notice shall also specify the time of the meeting. Notice may be given only to such of the Directors as it may be feasible to reach at the time and by such means as may be feasible at the time, including publication or radio. If given by mail, messenger, telephone, or telegram, the notice shall be addressed to the Directors at their residences or business addresses, or such other places as the person giving the notice shall deem most suitable. Notice shall be similarly given, to the extent feasible, to the other persons serving as Directors referred to in Section 3 below. Notice shall be given at least two days before the meeting if feasible in the judgment of the person giving the notice and otherwise on any shorter time he may deem necessary. Section 3. QUORUM. During any such emergency, at any meeting of the Board of Directors, a quorum shall consist of one-third of the number of Directors fixed at the time pursuant to Article III of the Bylaws. If the Directors present at any particular meeting shall be fewer than the number required for such quorum, other persons present, to the number necessary to make up such quorum, shall be deemed Directors for such particular meeting as determined by the following provisions and in the following order of priority: (a) All Executive Vice Presidents of the Corporation in order of their seniority of first election to such office, or if two or more shall have been first elected to such office on the same day, in the order of their seniority in age; and (b) All Senior Vice Presidents of the Corporation in order of their seniority of first election to such office, or if two or more shall have been first elected to such office on the same day, in the order of their seniority in age; and (c) All Vice Presidents of the Corporation in order of their seniority of first election to such office, or if two or more shall have been first elected to such office on the same day, in the order of their seniority in age; and 11 (d) Any other persons that are designated on a list that shall have been approved by the Board of Directors before the emergency, such persons to be taken in such order of priority and subject to such conditions as may be provided in the resolution approving the list. Section 4. LINES OF MANAGEMENT SUCCESSION. The Board of Directors, during as well as before any such emergency, may provide and from time to time modify lines of succession in the event that during such an emergency any or all officers or agents of the Corporation shall for any reason be rendered incapable of discharging their duties. Section 5. OFFICE RELOCATION. The Board of Directors, during as well as before any such emergency, may, effective in the emergency, change the head office or designate several alternative head offices or regional offices, or authorize the officers to do so. Section 6. LIABILITY. No officer, director, or employee acting in accordance with this Emergency Bylaw shall be liable except for willful misconduct. Section 7. REPEAL OR AMENDMENT. This Emergency Bylaw shall be subject to repeal or change by further action of the Board of Directors or by action of the stockholders, except that no such repeal or change shall modify the provisions of the next preceding paragraph with regard to action or inaction prior to the time of such repeal or change. Any such amendment of this Emergency Bylaw may make any further or different provision that may be practical and necessary for the circumstances of the emergency deems it to be in the best interest of the Corporation to do so. 12 EX-10.2 3 EXHIBIT 10.2 As Amended November 4, 1997 U.S. BANCORP 1997 STOCK INCENTIVE PLAN SECTION 1. PURPOSE; EFFECT ON PRIOR PLANS. (a) PURPOSE. The purpose of the U.S. Bancorp 1997 Stock Incentive Plan (the "Plan") is to aid in attracting and retaining employees, management personnel and other personnel and members of the Board of Directors who are not also employees ("Non-Employee Directors") of First Bank System, Inc. (which, following the Merger as defined herein will be renamed U.S. Bancorp) (the "Company") capable of assuring the future success of the Company, to offer such personnel and Non-Employee Directors incentives to put forth maximum efforts for the success of the Company's business and to afford such personnel and Non-Employee Directors an opportunity to acquire a proprietary interest in the Company. (b) EFFECT ON PRIOR PLANS. First Bank System, Inc. hereby adopts the Plan, subject to approval by the stockholders of First Bank System, Inc., and subject further to consummation of the merger of the current U. S. Bancorp with and into First Bank System, Inc. (the "Merger") pursuant to the terms of the Agreement and Plan of Merger by and between First Bank System, Inc. and the current U. S. Bancorp dated as of March 19, 1997. As so established and approved, the Plan shall be known as the 1997 Stock Incentive Plan. On the effective date of the Plan determined in accordance with Section 10 of the Plan, for purposes of administration and share accounting pursuant to Sections 3 and 4 of the Plan, the following plans of First Bank System, Inc. and the current U. S. Bancorp shall be considered to be incorporated in the Plan: the First Bank System, Inc. 1996 Stock Incentive Plan, the First Bank System, Inc. 1987 Stock Option Plan, the 1988 Equity Participation Plan, the FirsTier Financial, Inc. Omnibus Equity Plan (as assumed by First Bank System, Inc.), and the WCIC 1984 Stock Option and Incentive Plan (as assumed by First Bank System, Inc.) (the "FBS Plans") and the current U. S. Bancorp's 1993 Stock Incentive Plan, 1985 Stock Incentive Plan, 1984 Stock Incentive Plan, 1973 Stock Incentive Plan, HeartFed Option Plan, West One Option Plan, CBI Employee Plan, 1995 Director Plan, 1993 Director Plan, 1990 Director Plan and Subsidiary Director Plan (the "U. S. Bancorp Plans"). All outstanding options, restricted stock and other awards issued under the FBS Plans and the U. S. Bancorp Plans shall remain subject to the terms and conditions of the plans under which they were issued, but shares of stock relating to outstanding options, restricted stock or other awards issued under the FBS Plans -1- and the U. S. Bancorp Plans are considered shares of stock subject to the Plan under Section 4 of the Plan. SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have the meanings set forth below: (a) "Affiliate" shall mean (i) any entity that, directly or indirectly through one or more intermediaries, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, as determined by the Committee. (b) "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Performance Award or other Stock-Based Award granted under the Plan. (c) "Award Agreement" shall mean any written agreement, contract or other instrument or document evidencing any Award granted under the Plan. (d) "Change in Control" shall have the meaning ascribed to such term in any Award Agreement, and shall include phrases of similar meaning such as, by way of example but not limitation, "Full Change in Control" and "Partial Change in Control." (e) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and any regulations promulgated thereunder. (f) "Committee" shall mean a committee of the Board of Directors of the Company designated by such Board to administer the Plan and composed of not less than two directors, each of whom is a "Non-Employee Director" within the meaning of Rule 16b-3 (which term "Non-Employee Director" is defined in this paragraph for purposes of the definition of "Committee" only and is not intended to define such term as used elsewhere in the Plan). Each member of the Committee shall also be an "outside director" within the meaning of Section 162(m) of the Code. (g) "Eligible Person" shall mean any employee, officer, director (including any Non-Employee Director), consultant or independent contractor providing services to the Company or any Affiliate who the Committee determines to be an Eligible Person. (h) "Fair Market Value" shall mean, with respect to any property (including, without limitation, any Shares or other -2- securities), the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee. Notwithstanding the foregoing, for purposes of the Plan, the Fair Market Value of Shares on a given date shall be the closing price of the Shares as reported on the New York Stock Exchange on such date, if the Shares are then traded on the New York Stock Exchange. (i) "Incentive Stock Option" shall mean an option granted under Section 6(a) of the Plan that is intended to meet the requirements of Section 422 of the Code or any successor provision. (j) "Non-Qualified Stock Option" shall mean an option granted under Section 6(a) of the Plan, or Section 6(g) of the Plan in the case of grants to Non-Employee Directors, that is not intended to be an Incentive Stock Option. (k) "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option. (l) "Other Stock-Based Award" shall mean any right granted under Section 6(e) of the Plan. (m) "Participant" shall mean an Eligible Person designated to be granted an Award under the Plan. (n) "Performance Award" shall mean any right granted under Section 6(d) of the Plan. (o) "Person" shall mean any individual, corporation, partnership, association or trust. (p) "Qualifying Termination" shall mean a termination of employment under circumstances that, in the judgment of the Committee, warrant acceleration of the exercisability of Options or the lapse of restrictions relating to Restricted Stock or Restricted Stock Units. A Qualifying Termination may apply to large-scale terminations of employment involving the disposition or divestiture of businesses or legal entities or similar circumstances. (q) "Restricted Stock" shall mean any Share granted under Section 6(c) of the Plan. (r) "Restricted Stock Unit" shall mean any unit granted under Section 6(c) of the Plan evidencing the right to receive a Share (or a cash payment equal to the Fair Market Value of a Share) at some future date. -3- (s) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934. (t) "Shares" shall mean shares of Common Stock, $1.25 par value, of the Company or such other securities or property as may become subject to Awards pursuant to an adjustment made under Section 7(c) of the Plan. (u) "Stock Appreciation Right" shall mean any right granted under Section 6(b) of the Plan. SECTION 3. ADMINISTRATION. The Plan shall be administered by the Committee. Subject to the terms of the Plan and applicable law, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to each Participant under the Plan; (iii) determine the number of Shares to be covered by (or with respect to which payments, rights or other matters are to be calculated in connection with) each Award; (iv) determine the terms and conditions of any Award or Award Agreement; (v) amend the terms and conditions of any Award or Award Agreement and accelerate the exercisability of Options or the lapse of restrictions relating to Restricted Stock or Restricted Stock Units; PROVIDED, HOWEVER, that any such acceleration of exercisability or lapse of restrictions shall be limited to accelerations relating to a Change in Control, a Qualifying Termination, death, disability or any circumstances set forth in an Award Agreement in effect at the time this proviso was adopted as part of the Plan; (vi) determine whether, to what extent and under what circumstances Awards may be exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited or suspended; (vii) determine whether, to what extent and under what circumstances cash, Shares, other securities, other Awards, other property and other amounts payable with respect to an Award under the Plan shall be deferred either automatically or at the election of the holder thereof or the Committee; (viii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; (ix) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (x) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations and other decisions under or with respect to the Plan -4- or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive and binding upon any Participant, any holder or beneficiary of any Award and any employee of the Company or any Affiliate. SECTION 4. SHARES AVAILABLE FOR AWARDS. (a) SHARES AVAILABLE. Subject to adjustment as provided in Section 7(c), the total number of Shares available for granting Awards under the Plan shall be 22,125,802 (12,894,977 of which were previously authorized and subject to outstanding Awards under the FBS Plans or authorized and available for grant under the First Bank System, Inc. 1996 Stock Incentive Plan, 3,230,825 of which were previously authorized and subject to outstanding Awards under the U.S. Bancorp Plans and 6,000,000 of which will be authorized upon stockholder approval of the Plan and subject to consummation of the Merger); PROVIDED, HOWEVER, that the total number of Shares authorized under the Plan shall be deemed to be reduced automatically, as of the effective date of the Plan determined in accordance with Section 10 of the Plan, by that number of Shares that were subject to outstanding awards under the FBS Plans and the U. S. Bancorp Plans, as of the date of adoption of the Plan by the First Bank System, Inc. Board of Directors, that are no longer subject to outstanding awards as of the date of the Merger. Not more than 1,000,000 of such Shares, subject to adjustment as provided in Section 7(c) of the Plan, will be available for granting additional Awards of Restricted Stock following the effective date of the Plan determined in accordance with Section 10 of the Plan. If any Shares covered by an Award or to which an Award relates are not purchased or are forfeited, or if an Award otherwise terminates without delivery of any Shares, then the number of Shares counted against the aggregate number of Shares available under the Plan with respect to such Award, to the extent of any such forfeiture or termination, shall again be available for granting Awards under the Plan. In addition, any Shares that are used by a Participant as full or partial payment to the Company of the purchase price relating to an Award, or in connection with satisfaction of tax obligations relating to an Award, shall again be available for granting Awards under the Plan. For purposes of the previous two sentences, the term "Award" shall explicitly include any awards outstanding under the FBS Plans and the U. S. Bancorp Plans as of the effective date of the Plan determined in accordance with Section 10 of the Plan. (b) ACCOUNTING FOR AWARDS. For purposes of this Section 4, if an Award entitles the holder thereof to receive or purchase Shares, the number of Shares covered by such Award or to which such Award relates shall be counted on the date of grant of such Award against the -5- aggregate number of Shares available for granting Awards under the Plan. Such Shares may again become available for granting Awards under the Plan pursuant to the provisions of Section 4(a) of the Plan, subject to the limitations set forth in Section 4(c) of the Plan. (c) INCENTIVE STOCK OPTIONS. Notwithstanding the foregoing, the number of Shares available for granting Incentive Stock Options under the Plan, on and after the effective date of the Plan determined in accordance with Section 10 of the Plan, shall not exceed 6,000,000, subject to adjustment as provided in Section 7(c) of the Plan and Section 422 or 424 of the Code or any successor provisions. (d) AWARD LIMITATIONS UNDER THE PLAN. No Eligible Person may be granted any Award or Awards, the value of which Awards are based solely on an increase in the value of the Shares after the date of grant of such Awards, for more than 1,000,000 Shares (subject to adjustment as provided in Section 7(c) of the Plan), in the aggregate, in any calendar year beginning with the year commencing January 1, 1997. The foregoing limitation specifically includes the grant of any "performance-based" Awards within the meaning of Section 162(m) of the Code. SECTION 5. ELIGIBILITY. Any Eligible Person, including any Eligible Person who is an officer or director of the Company or any Affiliate, shall be eligible to be designated a Participant; PROVIDED, HOWEVER, that an Incentive Stock Option may only be granted to full or part-time employees (which term as used herein includes, without limitation, officers and directors who are also employees) and an Incentive Stock Option shall not be granted to an employee of an Affiliate unless such Affiliate is also a "subsidiary corporation" of the Company within the meaning of Section 424(f) of the Code or any successor provision. SECTION 6. AWARDS. (a) OPTIONS. The Committee is hereby authorized to grant Options to Participants with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine: (i) EXERCISE PRICE. The purchase price per Share purchasable under an Option shall be determined by the Committee; PROVIDED, HOWEVER, that such purchase price shall not be less than 100% of the Fair Market Value of a Share on the date of grant of such Option. -6- (ii) OPTION TERM. The term of each Option shall be fixed by the Committee. (iii) TIME AND METHOD OF EXERCISE. The Committee shall determine the time or times at which an Option may be exercised in whole or in part and the method or methods by which, and the form or forms (including, without limitation, cash, Shares, other securities, other Awards or other property, or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise price) in which, payment of the exercise price with respect thereto may be made or deemed to have been made. (iv) RELOAD OPTIONS. The Committee may grant "reload" options, separately or together with another Option, pursuant to which, subject to the terms and conditions established by the Committee and any applicable requirements of Rule 16b-3 or any other applicable law, the Participant would be granted a new Option when the payment of the exercise price of a previously granted option is made by the delivery of shares of the Company's Common Stock owned by the Participant pursuant to Section 6(a)(iii) hereof or the relevant provisions of another plan of the Company, and/or when shares of the Company's Common Stock are tendered or forfeited as payment of the amount to be withheld under applicable tax laws in connection with the exercise of an option, which new Option would be an option to purchase the number of Shares not exceeding the sum of (A) the number of shares of the Company's Common Stock provided as consideration upon the exercise of the previously granted option to which such "reload" option relates and (B) the number of shares of the Company's Common Stock tendered or forfeited as payment of the amount to be withheld under applicable tax laws in connection with the exercise of the option to which such "reload" option relates. "Reload" options may be granted with respect to options granted under this Plan or any other stock option plan of the Company or any of its affiliates (which shall explicitly include plans assumed by the Company in connection with mergers and the like). Such "reload" options shall have a per share exercise price equal to the Fair Market Value as of the date of grant of the new Option. Any such reload options shall be subject to availability of sufficient shares for grant under the Plan. (b) STOCK APPRECIATION RIGHTS. The Committee is hereby authorized to grant Stock Appreciation Rights to Participants subject to the terms of the Plan and any applicable Award Agreement. A Stock -7- Appreciation Right granted under the Plan shall confer on the holder thereof a right to receive upon exercise thereof the excess of (i) the Fair Market Value of one Share on the date of exercise (or, if the Committee shall so determine, at any time during a specified period before or after the date of exercise) over (ii) the grant price of the Stock Appreciation Right as specified by the Committee, which price shall not be less than 100% of the Fair Market Value of one Share on the date of grant of the Stock Appreciation Right. Subject to the terms of the Plan and any applicable Award Agreement, the grant price, term, methods of exercise, dates of exercise, methods of settlement and any other terms and conditions of any Stock Appreciation Right shall be as determined by the Committee. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it may deem appropriate. (c) RESTRICTED STOCK AND RESTRICTED STOCK UNITS. The Committee is hereby authorized to grant Awards of Restricted Stock and Restricted Stock Units to Participants with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine: (i) RESTRICTIONS. Shares of Restricted Stock and Restricted Stock Units shall be subject to such restrictions as the Committee may impose (including, without limitation, any limitation on the right to vote a Share of Restricted Stock or the right to receive any dividend or other right or property with respect thereto), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise as the Committee may deem appropriate. Except as otherwise provided herein, Awards of Restricted Stock and Restricted Stock Units shall contain restrictions that lapse no sooner than three years following the date of grant or, in the case of Awards with performance-based vesting provisions, no sooner than one year following the date of grant; PROVIDED, HOWEVER, that restrictions may lapse sooner than such dates as to portions of such Awards so long as restrictions as to the total number of Shares covered by such Awards do not lapse sooner than such dates; and PROVIDED, FURTHER, that such limitations shall not apply to Awards granted to new employees as part of initial terms of employment, Awards granted to new or existing employees in connection with the acquisition of businesses or assets by the Company, or to Awards in effect at the time this proviso was adopted as part of the Plan. (ii) STOCK CERTIFICATES. Any Restricted Stock granted under the Plan shall be evidenced by issuance of a stock -8- certificate or certificates, which certificate or certificates shall be held by the Company. Such certificate or certificates shall be registered in the name of the Participant and shall bear an appropriate legend referring to the restrictions applicable to such Restricted Stock. In the case of Restricted Stock Units, no Shares shall be issued at the time such Awards are granted. (iii) FORFEITURE; DELIVERY OF SHARES. Except as otherwise determined by the Committee, upon termination of employment (as determined under criteria established by the Committee) during the applicable restriction period, all Shares of Restricted Stock and all Restricted Stock Units at such time subject to restriction shall be forfeited and reacquired by the Company; PROVIDED, HOWEVER, that the Committee may, when it finds that a waiver would be in the best interest of the Company, including, without limitation, in connection with Changes in Control, Qualifying Terminations, death or disability, waive in whole or in part any or all remaining restrictions with respect to Shares of Restricted Stock or Restricted Stock Units. Shares representing Restricted Stock that is no longer subject to restrictions shall be delivered to the holder thereof promptly after the applicable restrictions lapse or are waived. Upon the lapse or waiver of restrictions and the restricted period relating to Restricted Stock Units evidencing the right to receive Shares, such Shares shall be issued and delivered to the holders of the Restricted Stock Units. (d) PERFORMANCE AWARDS. The Committee is hereby authorized to grant Performance Awards to Participants subject to the terms of the Plan and any applicable Award Agreement. A Performance Award granted under the Plan (i) may be denominated or payable in cash, Shares (including, without limitation, Restricted Stock), other securities, other Awards or other property and (ii) shall confer on the holder thereof the right to receive payments, in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee shall establish. Subject to the terms of the Plan and any applicable Award Agreement, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award granted and the amount of any payment or transfer to be made pursuant to any Performance Award shall be determined by the Committee. (e) OTHER STOCK-BASED AWARDS. The Committee is hereby authorized to grant to Participants such other Awards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without -9- limitation, securities convertible into Shares), as are deemed by the Committee to be consistent with the purpose of the Plan; PROVIDED, HOWEVER, that such grants must comply with applicable law. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the terms and conditions of such Awards. Shares or other securities delivered pursuant to a purchase right granted under this Section 6(e) shall be purchased for such consideration, which may be paid by such method or methods and in such form or forms (including without limitation, cash, Shares, other securities, other Awards or other property or any combination thereof), as the Committee shall determine, the value of which consideration, as established by the Committee, shall not be less than 100% of the Fair Market Value of such Shares or other securities as of the date such purchase right is granted. (f) GENERAL. Except as otherwise specified with respect to Awards to Non-Employee Directors pursuant to Section 6(g) of the Plan: (i) NO CASH CONSIDERATION FOR AWARDS. Awards shall be granted for no cash consideration or for such minimal cash consideration as may be required by applicable law. (ii) AWARDS MAY BE GRANTED SEPARATELY OR TOGETHER. Awards may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with or in substitution for any other Award or any award granted under any plan of the Company or any Affiliate other than the Plan. Awards granted in addition to or in tandem with other Awards or in addition to or in tandem with awards granted under any such other plan of the Company or any Affiliate may be granted either at the same time as or at a different time from the grant of such other Awards or awards. (iii) FORMS OF PAYMENT UNDER AWARDS. Subject to the terms of the Plan and of any applicable Award Agreement, payments or transfers to be made by the Company or an Affiliate upon the grant, exercise or payment of an Award may be made in such form or forms as the Committee shall determine (including, without limitation, cash, Shares, other securities, other Awards or other property or any combination thereof), and may be made in a single payment or transfer, in installments or on a deferred basis, in each case in accordance with rules and procedures established by the Committee. Such rules and procedures may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments. -10- (iv) LIMITS ON TRANSFER OF AWARDS. No Award and no right under any such Award shall be transferable by a Participant otherwise than by will or by the laws of descent and distribution; PROVIDED, HOWEVER, that, if so determined by the Committee, a Participant may, in the manner established by the Committee, designate a beneficiary or beneficiaries to exercise the rights of the Participant and receive any property distributable with respect to any Award upon the death of the Participant; and PROVIDED, FURTHER, except in the case of an Incentive Stock Option, Awards may be transferable as specifically provided in any applicable Award Agreement or amendment thereto pursuant to terms determined by the Committee. Except as otherwise provided in any applicable Award Agreement or amendment thereto (other than an Award Agreement relating to an Incentive Stock Option), pursuant to terms determined by the Committee, each Award or right under any Award shall be exercisable during the Participant's lifetime only by the Participant or, if permissible under applicable law, by the Participant's guardian or legal representative. Except as otherwise provided in any applicable Award Agreement or amendment thereto (other than an Award Agreement relating to an Incentive Stock Option), no Award or right under any such Award may be pledged, alienated, attached or otherwise encumbered, and any purported pledge, alienation, attachment or encumbrance thereof shall be void and unenforceable against the Company or any Affiliate. (v) TERM OF AWARDS. The term of each Award shall be for such period as may be determined by the Committee. (vi) RESTRICTIONS; SECURITIES EXCHANGE LISTING. All certificates for Shares or other securities delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations and other requirements of the Securities and Exchange Commission and any applicable federal or state securities laws, and the Committee may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. If the Shares or other securities are traded on a securities exchange, the Company shall not be required to deliver any Shares or other securities covered by an Award unless and until such Shares or other securities have been admitted for trading on such securities exchange. -11- (g) NON-QUALIFIED STOCK OPTIONS TO NON-EMPLOYEE DIRECTORS. The Committee shall issue Non-Qualified Stock Options to Non-Employee Directors in accordance with this Section 6(g). Each Non-Employee Director serving on the Company's Board of Directors immediately prior to the Merger was granted an Option to purchase 2,500 Shares (subject to adjustment pursuant to Section 7(c) of the Plan) pursuant to the terms of the First Bank System, Inc. 1991 Stock Incentive Plan or the First Bank System, Inc. 1996 Stock Incentive Plan. Each Non-Employee Director first elected or appointed to the Company's Board of Directors following the Merger and during the term of the Plan shall be granted, as of the date of such Director's first election or appointment to the Board of Directors, a Non-Qualified Stock Option to purchase 2,500 Shares (subject to adjustment pursuant to Section 7(c) of the Plan). Each Non-Employee Director shall be granted during the term of the Plan, as of the date of each Annual Meeting of Stockholders of the Company commencing with the 1998 Annual Meeting of Stockholders of the Company, if such Director's term of office continues after such date, a Non-Qualified Stock Option to purchase 1,700 Shares (subject to adjustment pursuant to Section 7(c) of the Plan). Each Non-Qualified Stock Option granted to a Non-Employee Director pursuant to this Section 6(g) shall be exercisable in full as of the date of grant, shall have an exercise price equal to the Fair Market Value of a Share on the date of grant and shall expire on the tenth anniversary of the date of grant, except as provided below. Except as hereinafter provided, each Option granted pursuant to this Section 6(g) (including those Options granted pursuant to Section 6(h) of the First Bank System, Inc. 1991 Stock Incentive Plan as provided therein and under Section 6(g) of the First Bank System, Inc. 1996 Stock Incentive Plan as provided therein) shall be deemed to include a provision entitling the optionee to a further Non-Qualified Stock Option (a "Non-Employee Director Reload Option") in the event the optionee exercises such an Option, in whole or in part, by surrendering other Shares in accordance with this Section 6(g) (including any predecessor provision under the First Bank System, Inc. 1991 Stock Incentive Plan or the First Bank System, Inc. 1996 Stock Incentive Plan) and the terms of the Option and/or when shares of the Companys Common Stock are delivered or withheld as payment of an amount representing tax obligations in connection with the exercise of an option. Any such Non-Employee Director Reload Option (i) shall be for a number of Shares equal to the sum of (x) the number of Shares surrendered as part or all of the exercise price of the Option to which it relates plus (y) the number of -12- Shares, if any, delivered or withheld as payment of an amount representing tax obligations in connection with the exercise of the Option to which it relates; (ii) shall have an expiration date which is the same as the expiration date of the Option to which it relates; (iii) shall have an exercise price equal to the Fair Market Value of a Share on the date of exercise of the Option to which it relates; and (iv) shall be exercisable in full as of the date of grant. A Non-Employee Director Reload Option may be reloaded under the same terms, provided that the original Option to which such series of Non-Employee Director Reload Options relates may be reloaded a maximum of three times. Non-Employee Director Reload Options shall only be granted to a Director during such Director's term as a Non-Employee Director. Any such Non-Employee Director Reload Option shall be subject to availability of sufficient shares for grant under the Plan. Shares surrendered as part or all of the exercise price of the Option to which it relates that have been owned by the optionee less than six months will not be counted for purposes of determining the number of Shares that may be purchased pursuant to a Non-Employee Director Reload Option. All grants of Non-Qualified Stock Options pursuant to this Section 6(g) shall be automatic and non-discretionary and shall be made strictly in accordance with the foregoing terms and the following additional provisions: (i) Non-Qualified Stock Options granted to a Non-Employee Director hereunder shall terminate and may no longer be exercised if such Director ceases to be a Non-Employee Director of the Company, except that: (A) If such Director's term shall be terminated for any reason other than gross and willful misconduct, death, disability, or retirement, such Director may at any time within a period of three months after such termination, but not after the termination date of the Option, exercise the Option. (B) If such Director's term shall be terminated by reason of gross and willful misconduct during the course of the term, including but not limited to, wrongful appropriation of funds of the Company or the commission of a gross misdemeanor or felony, the Option shall be terminated as of the date of the misconduct. (C) If such Director's term shall be terminated by reason of disability or retirement, such Director may exercise the Option in accordance with the terms thereof -13- as though such termination had never occurred. If such Director shall die following any such termination, the Option may be exercised in accordance with its terms by the personal representatives or administrators of such Director or by any person or persons to whom the Option has been transferred by will or the applicable laws of descent and distribution. (D) If such Director shall die while a Director of the Company or within three months after termination of such Director's term for any reason other than disability or retirement or gross and willful misconduct, the Option may be exercised in accordance with its terms by the personal representatives or administrators of such Director or by any person or persons to whom the Option has been transferred by will or the applicable laws of descent and distribution. (ii) Non-Qualified Stock Options granted to Non-Employee Directors may be exercised in whole or in part from time to time by serving written notice of exercise on the Company at its principal executive offices, to the attention of the Company's Secretary. The notice shall state the number of shares as to which the Option is being exercised and be accompanied by payment of the purchase price. A Non-Employee Director may, at such Director's election, pay the purchase price by check payable to the Company, by promissory note, or in shares of the Company's Common Stock, or in any combination thereof having a Fair Market Value on the exercise date equal to the applicable exercise price. If payment or partial payment is made by promissory note, such note shall be a full recourse note and shall (A) be secured by the Shares to be delivered upon exercise of such Option, (B) be limited in principal amount to the maximum amount permitted under applicable laws, rules and regulations, (C) be for a term of six years and (D) bear interest at the applicable federal rate (as determined in accordance with Section 1274(d) of the Code), compounded semi-annually. (iii) In order for a Non-Employee Director to satisfy obligations under tax laws in connection with an Option granted pursuant to this Section 6(g) (including any predecessor provision under the First Bank System, Inc. 1991 Stock Incentive Plan and the First Bank System, Inc. 1996 Stock Incentive Plan), such Director may (A) elect to have the Company withhold a portion of the Shares otherwise to be delivered upon exercise of such Option with a Fair Market Value equal to the amount of such taxes (an "Election") or (B) deliver -14- to the Company Shares other than Shares issuable upon exercise of such Option with a Fair Market Value equal to the amount of such taxes. An Election, if any, must be made on or before the date that the amount of tax to be withheld is determined. SECTION 7. AMENDMENT AND TERMINATION; ADJUSTMENTS. Except to the extent prohibited by applicable law and unless otherwise expressly provided in an Award Agreement or in the Plan: (a) AMENDMENTS TO THE PLAN. The Board of Directors of the Company may amend, alter, suspend, discontinue or terminate the Plan at any time and from time to time; PROVIDED, HOWEVER, that, notwithstanding any other provision of the Plan or any Award Agreement, without the approval of the stockholders of the Company, no such amendment, alteration, suspension, discontinuation or termination shall be made that, absent such approval: (i) would violate the rules or regulations of the New York Stock Exchange, any other securities exchange or the National Association of Securities Dealers, Inc. that are applicable to the Company; or (ii) would cause the Company to be unable, under the Code, to grant Incentive Stock Options under the Plan. (b) AMENDMENTS TO AWARDS. Except as otherwise explicitly provided herein, the Committee may waive any conditions of or rights of the Company under any outstanding Award, prospectively or retroactively. The Committee may not amend, alter, suspend, discontinue or terminate any outstanding Award, prospectively or retroactively, without the consent of the Participant or holder or beneficiary thereof, except as otherwise herein provided. Except as provided in Section 7(c) hereof, no Option may be amended to reduce its initial exercise price and no Option shall be canceled and replaced with an Option or Options having a lower exercise price without the approval of the stockholders of the Company. (c) ADJUSTMENTS. In the event that any dividend or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Shares or other securities of the Company or other similar corporate transaction or event affecting the Shares would be reasonably likely to result in the diminution or enlargement of any of the benefits or potential benefits intended to be made -15- available under the Plan or under an Award (including, without limitation, the benefits or potential benefits of provisions relating to the term, vesting or exercisability of any Option, the availability of any tandem stock appreciation rights or "reload" option rights, if any, contained in any Option Award, and any change in control or similar provisions of any Award), the Committee shall, in such manner as it shall deem equitable or appropriate in order to prevent such diminution or enlargement of any such benefits or potential benefits, adjust any or all of (i) the number and type of Shares (or other securities or other property) which thereafter may be made the subject of Awards, (ii) the number and type of Shares (or other securities or other property) subject to outstanding Awards and (iii) the purchase or exercise price with respect to any Award; PROVIDED, HOWEVER, that the number of Shares covered by any Award or to which such Award relates shall always be a whole number. (d) CORRECTION OF DEFECTS, OMISSIONS AND INCONSISTENCIES. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem desirable to carry the Plan into effect. SECTION 8. INCOME TAX WITHHOLDING. In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes, which are the sole and absolute responsibility of a Participant, are withheld or collected from such Participant. In order to assist a Participant in paying all federal and state taxes to be withheld or collected upon exercise or receipt of (or the lapse of restrictions relating to) an Award, the Committee, in its discretion and subject to such additional terms and conditions as it may adopt, may permit the Participant to satisfy such tax obligation by (i) electing to have the Company withhold a portion of the Shares otherwise to be delivered upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes or (ii) delivering to the Company Shares other than Shares issuable upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes. The election, if any, must be made on or before the date that the amount of tax to be withheld is determined. SECTION 9. GENERAL PROVISIONS. (a) NO RIGHTS TO AWARDS. Except as otherwise provided in Section 6(g) of the Plan, no Eligible Person, Participant or other Person shall have any claim to be granted any Award under the Plan, -16- and there is no obligation for uniformity of treatment of Eligible Persons, Participants or holders or beneficiaries of Awards under the Plan. The terms and conditions of Awards need not be the same with respect to different Participants. (b) DELEGATION. The Committee may delegate to one or more officers of the Company or any Affiliate or a committee of such officers the authority, subject to such terms and limitations as the Committee shall determine, to grant Awards to Eligible Persons who are not officers or directors of the Company for purposes of Section 16 of the Securities Exchange Act of 1934, as amended. (c) AWARD AGREEMENTS. No Participant will have rights under an Award granted to such Participant unless and until an Award Agreement shall have been duly executed on behalf of the Company. (d) NO LIMIT ON OTHER COMPENSATION ARRANGEMENTS. Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other or additional compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases. (e) NO RIGHT TO EMPLOYMENT, ETC. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ, or as giving a Non-Employee Director the right to continue as a Director, of the Company or any Affiliate. In addition, the Company or an Affiliate may at any time dismiss a Participant from employment, or terminate the term of a Non-Employee Director, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement. (f) GOVERNING LAW. The validity, construction and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Minnesota. (g) SEVERABILITY. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction or Award, and the remainder of the Plan or any such Award shall remain in full force and effect. -17- (h) NO TRUST OR FUND CREATED. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Affiliate. (i) NO FRACTIONAL SHARES. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash shall be paid in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated or otherwise eliminated. (j) HEADINGS. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. (k) SECTION 16 COMPLIANCE. The Plan is intended to comply in all respects with Rule 16b-3 or any successor provision, as in effect from time to time and in all events the Plan shall be construed in accordance with the requirements of Rule 16b-3. If any Plan provision does not comply with Rule 16b-3 as hereafter amended or interpreted, the provision shall be deemed inoperative. The Board of Directors, in its absolute discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan with respect to persons who are officers or directors subject to Section 16 of the Securities and Exchange Act of 1934, as amended, without so restricting, limiting or conditioning the Plan with respect to other Participants. SECTION 10. EFFECTIVE DATE OF THE PLAN. The Plan shall be effective as of the effective date of the Merger, subject to prior approval by the stockholders of First Bank System, Inc. in accordance with applicable law. SECTION 11. TERM OF THE PLAN. New Awards shall only be granted under the Plan during a 10-year period beginning on the effective date of the Plan. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award theretofore granted may extend beyond the end of such 10-year period, and the authority of the Committee provided for hereunder with respect to the Plan and any Awards, and -18- the authority of the Board of Directors of the Company to amend the Plan, shall extend beyond the end of such period. -19- EX-10.4 4 EXHIBIT 10.4 U.S. BANCORP EMPLOYEE STOCK PURCHASE PLAN 1984 (As Amended and Restated April 24, 1991 and reflecting further amendments through February 18, 1998) ARTICLE I. INTRODUCTION Section 1.01 Purpose. The purpose of this 1984 Employee Stock Purchase Plan (as amended and restated as of April 24, 1991, and reflecting further amendments through November 4, 1997) (the "Plan") is to provide employees of U.S. Bancorp, a Delaware corporation (the "Company"), and certain related corporations with an opportunity to share in the ownership of the Company by providing them with a convenient means for regular and systematic purchases of the Company's Common Stock, par value $1.25 per share, and, thus, to develop a stronger incentive to work for the continued success of the Company. The Plan shall constitute an amendment and restatement of the Company's existing 1984 Employee Stock Purchase Plan (as amended January 31, 1987) (the "Former Plan") and as such shall supersede and replace the Former Plan. No additional offers to purchase shares of the Company's Common Stock or any other rights or benefits shall be provided or granted under the Former Plan; provided, however, that the Former Plan shall deem to be outstanding to the extent necessary solely for the purpose of determining the terms and conditions of any such purchase offer or other rights previously granted under the Former Plan. Section 1.02 Rules of Interpretation. It is intended that the Plan be an "employee stock purchase plan" as defined in Section 423(b) of the Internal Revenue Code of 1986, as amended (the "Code"), and Treasury Regulations promulgated thereunder, if approved by the Company's shareholders. Accordingly, the Plan will be interpreted and administered in a manner consistent therewith if so approved. All Participants in the Plan will have the same rights and privileges consistent with the provisions of the Plan. Section 1.03 Definitions. For purposes of the Plan, the following terms will have the meanings set forth below: (a) "ACCELERATION DATE" means the earlier of the date of shareholder approval or approval by the Company's Board of Directors of (i) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Company Stock would be converted into cash, securities or other property, -1- other than a merger of the Company in which shareholders immediately prior to the merger have the same proportionate ownership of stock in the surviving corporation immediately after the merger; (ii) any sale lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all, of the assets of the Company; or (iii) any plan of liquidation or dissolution of the Company. (b) "AFFILIATE" means any parent or subsidiary corporation of the Company, as defined in Sections 425(e) and 425(f) of the Code, whether now or hereafter acquired or established. (c) "COMMITTEE" means the committee appointed under Section 10.01. (d) "COMPANY" means U.S. Bancorp, a Delaware corporation, and its successors by merger or consolidation as contemplated by Article XI herein. (e) "CURRENT COMPENSATION" means all gross cash compensation (including wage, salary, incentive, bonus and overtime earnings) paid by the Company or an Affiliate to a Participant, but excluding all expense allowances or reimbursements and stock options, but including compensation paid in a form other than cash and including amounts which would have constituted compensation but for a Participant's election to defer or reduce compensation pursuant to any deferred compensation, cafeteria, capital accumulation or any other similar plan provided by the Company. (f) "FAIR MARKET VALUE" as of a given date means such value of the Common Stock as reasonably determined by the committee but which is not less than the last sale price as reported by the New York Stock Exchange. (g) "PARTICIPANT" means a Regular Full-Time Employee who is eligible to participate in the Plan under Section 2.01 and who has elected to participate in the Plan. (h) "PARTICIPATING AFFILIATE" means an Affiliate which has been designated by the Committee in advance of the Purchase Period in question as a corporation whose eligible Regular Full-Time Employees may participate in the Plan. (i) "REGULAR FULL-TIME EMPLOYEE" means an employee of the Company or a Participating Affiliate as of the first day of a Purchase Period, including an officer or director who is also an employee, except an employee whose customary employment is less than 20 hours per week or any -2- employee who has not been employed by the Company or its Affiliates for more than one (1) year. (j) "PLAN" means the U.S. Bancorp 1984 Employee Stock Purchase Plan as amended and restated as of April 24, 1991, and reflecting further amendments through February 18, 1998, the provisions of which are set forth herein. (k) "PURCHASE PERIOD" means a period beginning on such business day as may be designated by the Committee prior thereto and ending on the earlier of such business day as may be designated by the Committee prior to the first business day of such Purchase Period or any Acceleration Date; provided, however, that in no event shall the Committee designate a Purchase Period which is less than six (6) months in duration. (l) "STOCK" means the Company's Common Stock, $1.25 par value, as such stock may be adjusted for changes in the stock or the Company as contemplated by Article XI herein. (m) "STOCK PURCHASE ACCOUNT" means the account maintained on the books and records of the Company recording the amount received from each Participant through payroll deductions made under the Plan. ARTICLE II. ELIGIBILITY AND PARTICIPATION Section 2.01 Eligible Employees. All Regular Full-Time Employees shall be eligible to participate in the Plan beginning on the first day of the first Purchase Period to commence after such person becomes a Regular Full-Time Employee. Subject to the provisions of Article VI, each such employee will continue to be eligible to participate in the Plan so long as he or she remains a Regular Full-Time Employee. Section 2.02 Election to Participate. An eligible Regular Full-Time Employee may elect to participate in the Plan for a given Purchase Period by filing with the Company, in advance of that Purchase Period and in accordance with such terms and conditions as the Committee in its sole discretion may impose, a form provided by the Company for such purpose (which authorizes regular payroll deductions from Current Compensation beginning with the first payday in that Purchase Period and continuing until the employee withdraws from the Plan or ceases to be eligible to participate in the Plan). Section 2.03 Limits on Stock Purchase. No employee shall be granted any right to purchase Stock hereunder if such employee, immediately -3- after such a right to purchase is granted, would own, directly or indirectly, within the meaning of Section 423(b)(3) and Section 425(d) of the Code, stock possessing 5% or more of the total combined voting power or value of all the then classes of the capital stock of the Company or of all Affiliates. Section 2.04 Voluntary Participation. Participation in the Plan on the part of the Participant is voluntary and such participation is not a condition of employment nor does participation in the Plan entitle a Participant to be retained as an employee. ARTICLE III. PAYROLL DEDUCTIONS AND STOCK PURCHASE ACCOUNT Section 3.01 Deduction from Pay. The form described in Section 2.02 will permit a participant to elect payroll deductions of any whole dollar amount or whole percentage of Current Compensation for each pay period, subject to such limitations as the Committee in its sole discretion may impose. A Participant may cease making payroll deductions at any time, as provided in Section 6.01. Section 3.02 Credit to Account. Payroll deductions will be credited to the Participant's Stock Purchase Account on each payday. Section 3.03 Interest. No interest will be paid upon payroll deductions or on any amount credited to, or on deposit in, a Participant's Stock Purchase Account. Section 3.04 Nature of Account. The Stock Purchase Account is established solely for accounting purposes, and all amounts credited to the Stock Purchase Account will remain part of the general assets of the Company or the Participating Affiliate (as the case may be). Section 3.05 No Additional Contributions. A Participant may not make any payment into the Stock Purchase Account other than the payroll deductions made pursuant to the Plan. ARTICLE IV. RIGHT TO PURCHASE SHARES Section 4.01 Number of Shares. Each Participant will have the right to purchase on the last business day of the Purchase Period all, but not less than all, of the largest number of shares of Stock, both whole and any fractional share, that can be purchased at the price specified in Section 4.02 with the entire credit balance in the Participant's Stock Purchase Account, subject to the limitations that (a) no more than 5,000 shares of Stock may be -4- purchased under the Plan by any one Participant for a given Purchase Period and (b) in accordance with Section 423(b)(8) of the Code, no more than $25,000 in Fair Market Value (determined at the beginning of each Purchase Period) of Stock and other stock may be purchased under the Plan and all other employee stock purchase plans (if any) of the Company and the Affiliates by any one Participant for each calendar year. If the purchases for all Participants would otherwise cause the aggregate number of shares of Stock to be sold under the Plan to exceed the number specified in Section 10.03, however, each Participant shall be allocated a pro rata portion of the Stock to be sold. Section 4.02 Purchase Price. The purchase price for any Purchase Period shall be that price as announced by the Committee prior to the first business day of that Purchase Period, which price may, in the discretion of the Committee, be a price which is not fixed or determinable as of the first business day of that Purchase Period; provided, however, that in no event shall the purchase price for any Purchase Period be less than (a) 85% of the Fair Market Value of the Stock on the first business day of that Purchase Period or (b) 85% of the Fair Market Value of the Stock on the last business day of that Purchase Period, in each case rounded up to the next higher full cent, whichever is lower. ARTICLE V. EXERCISE OF RIGHT Section 5.01 Purchase of Stock. On the last business day of a Purchase Period, the entire credit balance in each Participant's Stock Purchase Account will be used to purchase the largest number of both whole and any fractional shares of Stock purchasable with such amount (subject to the limitations of Section 4.01), unless the Participant has filed with the Company, in advance of that date and subject to such terms and conditions as the Committee in its sole discretion may impose, a form provided by the Company (which elects to receive the entire credit balance in cash). Section 5.02 Cash Distributions. Any amount remaining in a Participant's Stock Purchase Account after the last business day of a Purchase Period will be paid to the Participant in cash within 30 days after the end of that Purchase Period. Section 5.03 Notice of Acceleration Date. The Company shall use its best efforts to notify each Participant in writing at least ten days prior to any Acceleration Date that the then current Purchase Period will end on such Acceleration Date. ARTICLE VI. WITHDRAWAL FROM PLAN -5- Section 6.01 Voluntary Withdrawal. A Participant may, in accordance with such terms and conditions as the Committee in its sole discretion may impose, withdraw from the Plan and cease making payroll deductions by filing with the Company a form provided for this purpose. In such event, the entire credit balance in the Participant's Stock Purchase Account will be paid to the Participant in cash within 30 days. A Participant who withdraws from the Plan will not be eligible to reenter the Plan until the beginning of the next Purchase Period. Section 6.02 Death. Subject to such terms and conditions as the Committee in its sole discretion may impose, upon the death of a Participant, no further amounts shall be credited to the Participant's Stock Purchase Account. Thereafter, on the last business day of the Purchase Period during which such Participant's death occurred and in accordance with Section 5.01, the entire credit balance in such Participant's Stock Purchase Account will be used to purchase Stock, unless Participant's estate has filed with the Company, in advance of that day and subject to such terms and conditions as the Committee in it sole discretion may impose, a form provided by the Company which elects to have the entire credit balance in such Participant's Stock Purchase Account will be used to purchase Stock, unless Participant's estate has filed with the Company, in advance of that day and subject to such terms and conditions as the Committee in its sole discretion may impose, a form provided by the Company which elects to have the entire credit balance in such participant's Stock Account distributed in cash, in accordance with Section 5.02 or at such earlier time as the Committee in its sole discretion may decide. Each Participant, however, may designate one or more beneficiaries who, upon death, are to receive the stock or the amount that otherwise would have been distributed or paid to the Participant's estate and may change or revoke any such designation from time to time. No such designation, change or revocation will be effective unless made by the Participant in writing and filed with the Company during the Participant's lifetime. Unless the Participant has otherwise specified in the beneficiary designation, the beneficiary or beneficiaries so designated will become fixed as of death so that, if a beneficiary survives the Participant but dies before the receipt of the payment due such beneficiary, the payment will be made to such beneficiary's estate. Section 6.03 Termination of Employment. Subject to such terms and conditions as the Committee in its sole discretion may impose, upon a Participant's normal or early retirement with the consent of the Company under any pension or retirement plan of the Company or Participating Affiliate, no further amounts shall be credited to the Participant's Stock Purchase Account. Thereafter, on the last business day of the Purchase Period during which such Participant's approved retirement occurred and in -6- accordance with Section 5.01, the entire credit balance in such Participant's Stock Purchase Account will be used to purchase Stock, unless such Participant has filed with the Company, in advance of that day and subject to such terms and conditions as the Committee in its sole discretion may impose, a form provided by the Company which elects to receive the entire credit balance in such Participant's Stock Purchase Account in cash, in accordance with Section 5.02; provided, however, that such Participant shall have no right to purchase Stock in the event that the last day of such a Purchase Period occurs more than three (3) months following the termination of such Participant's employment with the Company by reason of such an approved retirement. In the event of any other termination of employment (other than death) with the Company or a Participatory Affiliate by a Participant, participation in the Plan will cease on the date the Participant ceases to be a Regular Full-Time Employee for any reason. In such event, the entire credit balance in such Participant's Stock Purchase Account will be paid to the Participant in cash within 30 days. For purposes of this Section, a transfer of employment to any Affiliate, or a leave of absence which has been approved by the Committee, will not be deemed a termination of employment as a Regular Full-Time Employee. ARTICLE VII. NONTRANSFERABILITY Section 7.01 Nontransferable Right to Purchase. The right to purchase Stock hereunder may not be assigned, transferred, pledged or hypothecated (whether by operation of law or otherwise), except as provided in Section 6.02, and will not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge, hypothecation or other disposition or levy of attachment or similar process upon the right to purchase will be null and void and without effect. Section 7.02 Nontransferable Account. Except as provided in Section 6.02, the amounts credited to a Stock Purchase Account may not be assigned, transferred, pledged or hypothecated in any way, and any attempted assignment, transfer, pledge, hypothecation or other disposition of such amount will be null and void and without effect. ARTICLE VIII. STOCK CERTIFICATES Section 8.01 Delivery. Promptly after the last day of each Purchase Period and subject to such terms and conditions as the Committee in its sole discretion may impose, the Company will cause to be delivered to or for the benefit of the Participant a certificate representing the Stock purchased on the last business day of such Purchase Period or cause its -7- transfer agent to provide for a book-entry credit representing such Stock for the benefit of the Participant. Section 8.02 Securities Laws. The Company shall not be required to issue or deliver any certificate representing Stock prior to registration under the Securities Act of 1933, as amended, or registration or qualification under any state law if such registration is required. The Company will use its best efforts to accomplish such registration (if and to the extent required) not later than a reasonable time following the Purchase Period, and delivery of certificates may be deferred until such registration is accomplished. Section 8.03 Completion of Purchase. A Participant will have no interest in the Stock purchased until a certificate representing the same is issued to or for the benefit of the Participant or a book-entry credit has been made for the benefit of the Participant. Section 8.04 Form of Ownership. The certificates representing Stock issued under the Plan will be registered in the name of the Participant or jointly in the name of the Participant and another person, as the Participant may direct on a form provided by the Company. ARTICLE IX. EFFECTIVE DATE AND AMENDMENT OR TERMINATION OF PLAN Section 9.01 Effective Date. The Plan will become effective on February 15, 1989, but only if the Plan is approved by the Company's shareholders at their 1989 annual meeting. Section 9.02 Powers of Board. The Board of Directors of the Company may at any time amend or terminate the Plan, except that no amendment will be made without prior approval of the shareholders which would (a) authorize an increase in the number of shares of Stock which may be purchased under the Plan, except as provided in Section 11.01, (b) permit the issuance of Stock before payment therefor in full, or (c) reduce the price per share at which the Stock may be purchased. Section 9.03 Automatic Termination. No Purchase Period shall begin after May 1, 2001. ARTICLE X. ADMINISTRATION Section 10.01 Appointment of Committee. The Board of Directors of the Company shall appoint a Committee to administer the Plan -8- consisting of two or more persons (who may, but need not be, directors of the Company or of a Participating Affiliate). The Board will determine the size of the Committee from time to time and will have the power to remove and replace members thereof. Section 10.02. Powers of Committee. Subject to the provisions of the Plan, the Committee will have full authority to administer the Plan, including authority to interpret and construe any provision of the Plan, to establish deadlines by which the various administrative forms must be received in order to be effective, and to adopt such other rules and regulations for administering the Plan as it may deem appropriate. The Committee shall have full and complete authority to determine whether all or any part of the Stock acquired pursuant to the Plan shall be subject to restrictions on the transferability thereof or any other restrictions affecting in any manner a Participant's rights with respect thereto but any such restrictions shall be contained in the form by which a Participant elects to participate in the Plan pursuant to Section 2.02. Decisions of the Committee will be final and binding on all parties who have an interest in the Plan. Section 10.03. Stock to be Sold. The Stock to be issued and sold under the Plan may be treasury stock or authorized but unissued Stock, or the Company may purchase Stock in the market for sale under the Plan. Except as provided in Section 11.01, the aggregate number of shares of Stock to be sold under the Plan will not exceed 4,600,000 shares. Section 10.03. Notices. Notices to the Committee should be addressed as follows: U.S. Bancorp 601 Second Avenue South Minneapolis, Minnesota 55402 Attn: Employee Stock Purchase Plan Committee ARTICLE XI. ADJUSTMENT FOR CHANGES IN STOCK OR COMPANY Section 11.01 Stock Dividend or Reclassification. If the outstanding shares of Stock are increased, decreased, changed into or exchanged for a different number or kind of securities of the Company, or shares of a different par value or without par value, through reorganization, recapitalization, reclassification, stock dividend, stock split, amendment to the Company's Articles of Incorporation, reverse stock split or otherwise, an appropriate adjustment shall be made in the maximum numbers and/or -9- kind of securities to be sold under this Plan with a corresponding adjustment in the purchase price to be paid therefor. Section 11.02 Merger or Consolidation. If the Company is merged into or consolidated with one or more corporations during the term of the Plan, appropriate adjustments will be made to give effect thereto on an equitable basis in terms of issuance of shares of the corporation surviving the merger or of the consolidated corporation, as the case may be. ARTICLE XII. APPLICABLE LAW Rights to purchase Stock granted under this Plan shall be construed and shall take effect in accordance with the laws of the State of Minnesota. ARTICLE XIII. PARTICIPATION OF NON-EMPLOYEE DIRECTORS Section 13.01 Eligible Directors. Each director of the Company is eligible to participate in the Plan pursuant to this Article XIII unless such director is an employee of the Company or Affiliate. An eligible director is herein referred to as a "non-employee Director." A Non-employee Director shall be eligible to participate in the Plan beginning on the first day of the first Purchase Period to commence after such person becomes a Non-employee Director. Subject to the provisions of this Article XIII, each such Non-employee Director will continue to be eligible to participate in the Plan so long as he or she remains a Non-employee Director. Section 13.02 Election to Participate. A Non-employee Director may elect to participate in the Plan for a given Purchase Period by filing with the Company, in advance of that Purchase Period and in accordance with such terms and conditions as the Committee in its sole discretion may impose, a form provided by the Company for such purpose (which authorizes the Company to deduct for the purchase of Stock hereunder all or a portion of the Director Compensation (as defined below) that such Non-employee Director is entitled to receive for the period beginning with the first day in that Purchase Period and continuing until the Non-employee Director withdraws from the Plan or ceases to be eligible to participate in the Plan.) "Director Compensation" shall mean all amounts which the director would be entitled to receive for serving as a director in the relevant Purchase Period, including fees for attendance at meetings of the Board of Directors or any committee of the Board of Directors or for any other services as a director of the Company. -10- Section 13.03. Deduction from Director Compensation. The form described in Section 13.02 will permit a Non-employee Director to elect deductions of any whole dollar amount or whole percentage of Director Compensation to be used to purchase Stock hereunder. Director Compensation will be credited to the Non-employee Director's Stock Purchase Account on each day that Director Compensation would otherwise be paid to such Non-employee Director, subject to Section 3.04. Section 13.04 Interest. No interest will be paid upon deductions from Director Compensation or on any amount credited to, or on deposit in, a Non-employee Director's Stock Purchase Account. Section 13.05 No Additional Contributions. A Non-employee Director may not make any payment into the Stock Purchase Account other than the deductions from Director Compensation made pursuant to the Plan. Section 13.06 Purchase of Shares; Purchase Price. (a) Each Non-employee Director will automatically purchase on the last day of the Purchase Period all of the largest number of shares of stock, both whole and any fractional, that can be purchased at the purchase price specified in Section 13.06(b) with the entire credit balance in the Non-employee Director's Stock Purchase Account, unless the Non-employee Director has filed with the Company, in advance of that date and subject to such terms and conditions as the Committee in its sole discretion may impose, a form provided by the Company (which elects to receive the entire credit balance in cash). Any amount remaining in a Non-employee Director's Stock Purchase Account after the last business day of a Purchase Period will be paid to the Non-employee Director in cash within 30 days after the end of that Purchase Period. (b) The purchase price for Non-employee Directors for any Purchase Period shall be the lower of (i) 85% of the Fair Market Value of the Stock on the first business day of that Purchase Period or (b) 85% of the Fair Market Value of the Stock on the last business day of that Purchase Period, in each case rounded up to the next higher full cent. Section 13.07 Voluntary Withdrawal. A Non-employee Director may, in accordance with such terms and conditions as the Committee in its sole discretion may impose, withdraw from the Plan and cease having deductions made from Director Compensation by filing with the Company a form provided for this purpose. In such event, the entire credit balance in the Non-employee Director's Stock Purchase Account will be paid to the Non-employee Director in cash within 30 days. A Non-employee Director -11- who withdraws from the Plan will not be eligible to reenter the Plan until the beginning of the next Purchase Period. Section 13.08 Death. Upon the death of a Non-employee Director, no further amounts shall be credited to the Non-employee Director's Stock Purchase Account. Thereafter, on the last business day of the Purchase Period during which such Non-employee Director's death occurred and in accordance with Section 13.06, the entire credit balance in such Non-employee Director's Stock Purchase Account will be used to purchase Stock. Each Non-employee Director, however, may designate one or more beneficiaries who, upon death, are to receive the stock and any amount that otherwise would have been distributed or paid to the Non-employee Director's estate and may change or revoke any such designation from time to time. No such designation, change or revocation will be effective unless made by the Non-employee Director in writing and filed with the Company during the Non-employee Director's lifetime. Unless the Non-employee Director has otherwise specified in the beneficiary designation, the beneficiary or beneficiaries so designated will become fixed as of death so that, if a beneficiary survives the Non-employee Director but dies before the receipt of the payment due such beneficiary, the payment will be made to such beneficiary's estate. Section 13.10 Termination as a Director. Participation in the Plan will cease on the date the Non-employee Director ceases to be eligible to participate in the Plan pursuant to Section 13.01. In such event, on the last business day of the Purchase Period during which such Non-employee Director ceased to be eligible under Section 13.01 and in accordance with Section 13.06 the entire credit balance in such Non-employee Director's Stock Purchase Account will be used to purchase Stock. Section 13.11 Nontransferable Right to Purchase. The right to purchase Stock hereunder may not be assigned, transferred, pledged or hypothecated (whether by operation of law or otherwise), except as provided in Section 13.08 and will not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge, hypothecation or other disposition or levy of attachment or similar process upon the right to purchase will be null and void and without effect. Section 13.12 Nontransferable Account. Except as provided in Section 13.08 the amounts credited to a Stock Purchase Account may not be assigned, transferred, pledged or hypothecated in any way, and any attempted assignment, transfer, pledge, hypothecation or other disposition of such amounts will be null and void and without effect. -12- Section 13.13 Stock Certificates. All matters pertaining to the issuance and delivery of and the Non-employee Director's interest in the Stock purchased pursuant to this Plan and the certificates representing such Stock shall be governed by Article VIII. Section 13.14 Tax Matters. This Article XIII is not subject to Section 423 of the Code or any other provision of the Plan which refers to, or is based upon, such section. For tax purposes, this Article XIII shall be treated as separate and apart from the balance of the Plan. -13- EX-10.9 5 EXHIBIT 10.9 U.S. BANCORP SPECIAL EXECUTIVE DEFERRAL PLAN Effective November 1, 1997 U.S. BANCORP SPECIAL EXECUTIVE DEFERRAL PLAN TABLE OF CONTENTS PAGE SECTION 1. INTRODUCTION 1 1.1. Statement of Plan 1.2. Definitions 1.2.1. Account 1.2.2. Affiliate 1.2.3. Annual Valuation Date 1.2.4. Beneficiary 1.2.5. Change in Control 1.2.6. Earliest Retirement Age 1.2.7. Effective Date 1.2.8. EIP 1.2.9. Employer 1.2.10. Event of Maturity 1.2.11. Normal Retirement Age 1.2.12. Participant 1.2.13. Plan 1.2.14. Plan Statement 1.2.15. Plan Year 1.2.16. Principal Sponsor 1.2.17. Termination of Employment 1.2.18. USB 1.2.19. Valuation Date 1.2.20. Service 1.3. Rules of Interpretation SECTION 2. PARTICIPATION 4 2.1. Participation 2.2. Enrollment 2.3. Specific Exclusion SECTION 3. ADJUSTMENT OF ACCOUNTS 5 -2- 3.1. Establishment of Accounts 3.2. Adjustments of Accounts 3.2.1. Intermediate Distributions Subtraction 3.2.2. Investment Addition 3.2.3. Deferral Addition 3.2.4. Final Distributions Subtraction SECTION 4. VESTING OF ACCOUNT 6 SECTION 5. MATURITY 6 5.1. Events of Maturity 5.2. Effect of Maturity upon Further Participation in Plan SECTION 6. DISTRIBUTION 7 6.1. Form of Distribution 6.1.1. Form of Distribution 6.1.2. Time of Payment 6.1.3. Installment Amounts 6.1.4. Default 6.2. Previously Scheduled Distribution 6.2.1. Enrolling for the Distribution 6.2.2. Scheduled Distribution 6.3. Hardship Distributions 6.3.1. When Available 6.3.2. Purposes 6.3.3. Limitations 6.3.4. Forfeiture 6.4. Change in Control Distributions 6.4.1. When Available 6.4.2. Limitations 6.4.3. Forfeiture 6.5. Acceleration of Annual Installments 6.5.1. When Available 6.5.2. Forfeiture 6.6. Designation of Beneficiaries 6.6.1. Right to Designate 6.6.2. Failure of Designation 6.6.3. Disclaimers by Beneficiaries 6.6.4. Definitions -3- 6.6.5. Special Rules 6.6.6. No Spousal Rights 6.7. Death Prior to Full Distribution 6.8. Facility of Payment SECTION 7. FUNDING OF PLAN 14 7.1. Unfunded Agreement 7.2. Spendthrift Provision SECTION 8. AMENDMENT AND TERMINATION 15 SECTION 9. DETERMINATIONS -- RULES AND REGULATIONS 15 9.1. Determinations 9.2. Rules and Regulations 9.3. Method of Executing Instruments 9.4. Claims Procedure 9.4.1. Original Claim 9.4.2. Claims Review Procedure 9.4.3. General Rules 9.5. Information Furnished by Participants SECTION 10. PLAN ADMINISTRATION 17 10.1. Employer 10.1.1. Officers 10.1.2. Chief Executive Officer 10.1.3. Board of Directors 10.2. Conflict of Interest 10.3. Administrator 10.4. Service of Process SECTION 11. DISCLAIMERS 18 11.1. Term of Employment 11.2. Source of Payment 11.3. Delegation APPENDIX A -- CHANGE IN CONTROL DEFINITIONS A-1 -4- U.S. BANCORP SPECIAL EXECUTIVE DEFERRAL PLAN SECTION 1 INTRODUCTION 1.1. STATEMENT OF PLAN. Effective November 1, 1997, U.S. BANCORP, a Delaware corporation (hereinafter sometimes referred to as "Principal Sponsor") hereby creates a nonqualified, unfunded, elective deferral plan for the purpose of allowing a select group of management and highly compensated employees of the Principal Sponsor and other Employers to defer the receipt of compensation which would otherwise be paid to those employees, in order to offset the effect of direct dividend payments made to those employees pursuant to the U.S. Bancorp Employee Investment Plan. 1.2. DEFINITIONS. When the following terms are used herein with initial capital letters, they shall have the following meanings: 1.2.1. ACCOUNT -- the separate bookkeeping account representing the unfunded and unsecured general obligation of the Principal Sponsor established with respect to each Participant to which is credited the dollar amounts specified in Section 3 and from which are subtracted payments and forfeitures made pursuant to Section 6. To the extent necessary to accommodate and effect the distribution elections made by Participants pursuant to Section 2, separate bookkeeping sub-accounts shall be established with respect to each of the several annual deferral elections made by Participants. 1.2.2. AFFILIATE -- a business entity which is affiliated in ownership with the Principal Sponsor or an Employer and is recognized as an Affiliate by the Principal Sponsor for the purposes of this Plan. 1.2.3. ANNUAL VALUATION DATE -- each December 31. 1.2.4. BENEFICIARY -- a person designated by a Participant (or automatically by operation of this Plan Statement) to receive all or a part of the Participant's Account in the event of the Participant's death prior to full distribution thereof. A person so designated shall not be considered a Beneficiary until the death of the Participant. -5- 1.2.5. CHANGE IN CONTROL -- The definition of Change in Control, as well as certain other definitions relating to Change in Control used herein, appear in Appendix A to this Plan Statement. 1.2.6. EARLIEST RETIREMENT AGE -- the earlier of: (i) the earliest date that a Participant who is at least age fifty-five (55) years has a sum of his or her age (in whole years) and Service (also in whole years) that equals at least sixty-five (65), or (ii) the date a Participant attains Normal Retirement Age. 1.2.7. EFFECTIVE DATE -- November 1, 1997. 1.2.8. EIP -- the U.S. BANCORP EMPLOYEE INVESTMENT PLAN, or any similar successor plan. 1.2.9. EMPLOYER -- the Principal Sponsor and any business entity affiliated with the Principal Sponsor that employs persons who are designated for participation in this Plan. 1.2.10. EVENT OF MATURITY -- any of the occurrences described in Section 5 by reason of which a Participant or Beneficiary may become entitled to a distribution from the Plan. 1.2.11. NORMAL RETIREMENT AGE -- the last day of the calendar month in which a Participant attains age sixty-five (65) years. 1.2.12. PARTICIPANT -- an employee of the Employer who is identified in Appendix B and elects to participate in accordance with the terms of this Plan and becomes a Participant in the Plan in accordance with the provisions of Section 2. An employee shall not be eligible to become a Participant unless the employee is a member of a select group of management or highly compensated employees. No employee is presumed or automatically eligible to participate in this Plan. An employee who has become a Participant shall be considered to continue as a Participant in the Plan until the date of the Participant's death or, if earlier, the date when the Participant is no longer employed by an Employer or an Affiliate and upon which the Participant no longer has any Account under the Plan (that is, the Participant has received a distribution of all of the Participant's Account). 1.2.13. PLAN -- the nonqualified, income deferral program maintained by the Principal Sponsor established for the benefit of Participants eligible to participate therein, as set forth in this Plan Statement. (As used herein, "Plan" does not refer to the documents pursuant to which the Plan is maintained. Those documents are referred to herein as the "Plan Statement"). -6- The Plan shall be referred to as the "U.S. BANCORP SPECIAL EXECUTIVE DEFERRAL PLAN." 1.2.14. PLAN STATEMENT -- this document entitled "U.S. BANCORP SPECIAL EXECUTIVE DEFERRAL PLAN" as adopted by the Compensation and Human Resources Committee of the Board of Directors of U.S. BANCORP effective as of November 1, 1997, as the same may be amended from time to time thereafter. 1.2.15. PLAN YEAR -- the twelve (12) consecutive month period ending on any Annual Valuation Date. 1.2.16. PRINCIPAL SPONSOR -- U.S. BANCORP, a Delaware corporation. 1.2.17. TERMINATION OF EMPLOYMENT -- a complete severance of an employee's employment relationship with the Employer and all Affiliates, if any, for any reason other than the employee's death. A transfer from employment with the Employer to employment with an Affiliate of the Employer shall not constitute a Termination of Employment. If an Employer who is an Affiliate ceases to be an Affiliate because of a sale of substantially all the stock or assets of the Employer, then Participants who are employed by that Employer and who cease to be employed by the Principal Sponsor or an Employer on account of the sale of substantially all the stock or assets of the Employer shall be deemed to have thereby had a Termination of Employment for the purpose of commencing distributions from this Plan. 1.2.18. USB -- U.S. BANCORP, a Delaware corporation, or any successor thereto. 1.2.19. VALUATION DATE -- the last day of each calendar month of the Plan Year. 1.2.20. SERVICE -- a measure of an employee's service with the Employer and all Affiliates (stated as a number of years) which is equal to the number of years of service credited to the employee for the purpose of determining the nonforfeitable portion of the employee's benefit under the rules of the tax-qualified defined benefit pension plan in which the employee participates as those rules may exist at the time the Participant's Service is being determined. 1.3. RULES OF INTERPRETATION. An individual shall be considered to have attained a given age on such individual's birthday for that age (and not on the day before). Individuals born on February 29 in a leap year shall be considered to have their birthdays on February 28 in each year that is not a leap year. Notwithstanding any other provision of this Plan Statement or any election or designation made under the Plan, any individual who feloniously and intentionally kills a Participant or Beneficiary shall be deemed for all purposes of this Plan and all elections and designations made under this Plan to have died before such Participant or Beneficiary. A -7- final judgment of conviction of felonious and intentional killing is conclusive for the purposes of this section. In the absence of a conviction of felonious and intentional killing, the Principal Sponsor shall determine whether the killing was felonious and intentional for the purposes of this section. Whenever appropriate, words used herein in the singular may be read in the plural, or words used herein in the plural may be read in the singular; the masculine may include the feminine; and the words "hereof", "herein" or "hereunder" or other similar compounds of the word "here" shall mean and refer to this entire Plan Statement and not to any particular paragraph or section of this Plan Statement unless the context clearly indicates to the contrary. The titles given to the various sections of this Plan Statement are inserted for convenience of reference only and are not part of this Plan Statement, and they shall not be considered in determining the purpose, meaning or intent of any provision hereof. This Plan Statement shall be construed and this Plan shall be administered to create an unfunded plan providing deferred compensation to a select group of management or highly compensated employees so that it is exempt from the requirements of Parts 2, 3 and 4 of Title I of ERISA and qualifies for a form of simplified, alternative compliance with the reporting and disclosure requirements of Part 1 of Title I of ERISA. Any reference in this Plan Statement to a statute or regulation shall be considered also to mean and refer to any subsequent amendment or replacement of that statute or regulation. This document has been executed and delivered in the State of MINNESOTA and has been drawn in conformity to the laws of that State and shall be construed and enforced in accordance with the laws of the State of MINNESOTA to the extent not preempted by ERISA. SECTION 2 PARTICIPATION 2.1. PARTICIPATION. Each employee of the Employer identified in Appendix B to this Plan Statement shall be a participant in the Plan as of November 1, 1997, provided the employee has enrolled as a Participant prior to that date. 2.2. ENROLLMENT. Prior to November 1, 1997, an employee who is identified in Appendix B to this Plan Statement may enroll for the period commencing November 1, 1997 and ending December 31, 1997 (the "Enrollment Period"). No subsequent enrollments shall be permitted. Each such enrollment: (a) Shall be irrevocable once it has been received by the Principal Sponsor. (b) Shall designate the amount or portion of the Participant's base compensation which is earned during the Enrollment Period (without regard to whether it would be paid during that or a subsequent Plan Year) which shall not be paid to the Participant but instead shall be accumulated -8- in this Plan under Section 3 and distributed from this Plan under Section 6. The amount or portion of the base compensation that can be designated may not exceed the dividends paid to the Participant during 1997 pursuant to Section 8.7 of the EIP. The amount or portion of the base compensation that can be designated also shall not exceed one hundred percent (100%) of the Participant's base compensation during the Enrollment Period less all previously authorized non-tax deductions. (c) Shall specify the form in which distribution of the Account shall be made under Section 6 upon the occurrence of an Event of Maturity (and if such designation is not clearly made to the contrary shall be deemed to have been an election of a single lump sum distribution). (d) Shall specify whether and what amount of the Account shall be distributed before an Event of Maturity in accordance with Section 6.2. (e) Shall be made upon forms furnished by the Principal Sponsor and shall conform to such other procedural and substantive rules as the Principal Sponsor shall make. 2.3. SPECIFIC EXCLUSION. Notwithstanding anything apparently to the contrary in this Plan Statement or in any written communication, summary, resolution or document or oral communication, no individual shall be a Participant in this Plan, develop benefits under this Plan or be entitled to receive benefits under this Plan (either for himself or herself or his or her survivors) unless such individual is a member of a select group of management or highly compensated employees (as that expression is used in ERISA). If a court of competent jurisdiction, any representative of the U.S. Department of Labor or any other governmental, regulatory or similar body makes any direct or indirect, formal or informal, determination that an individual is not a member of a select group of management or highly compensated employees (as that expression is used in ERISA), such individual shall not be (and shall not have ever been) a Participant in this Plan at any time. If any person not so defined has been erroneously treated as a Participant in this Plan, upon discovery of such error such person's erroneous participation shall immediately terminate AB INITIO and the Employer shall distribute the individual's Account immediately. SECTION 3 ADJUSTMENT OF ACCOUNTS -9- 3.1. ESTABLISHMENT OF ACCOUNTS. There shall be established for each Participant an unfunded bookkeeping Account which shall be adjusted each Valuation Date. 3.2. ADJUSTMENTS OF ACCOUNTS. As of each Valuation Date (the "current Valuation Date"), the value of each Account determined as of the immediately preceding Valuation Date (the "initial Account value") shall be increased (or decreased) by the following adjustments made in the following sequence: 3.2.1. INTERMEDIATE DISTRIBUTIONS SUBTRACTION. The initial Account value shall be reduced by the total amount distributed in fact to (or with respect to) the Participant (or forfeited in connection with a distribution) from such Account as of a date subsequent to the immediately preceding Valuation Date but prior to the current Valuation Date. 3.2.2. INVESTMENT ADDITION. The initial Account value (as adjusted above) shall be increased by interest. (a) The rate shall be determined from time to time by the Principal Sponsor. Except as provided in Section 8, the rate may be changed by the Principal Sponsor by amendment of the Plan Statement without notice to or the consent of any Participant, former Participant or any Beneficiary. (b) Beginning November 1, 1997, the rate for each month in a Plan Year shall be equal to the monthly equivalent of one hundred percent (100%) of the 120 month rolling average of the 10-year Treasury Note determined as of September 30 of the preceding Plan Year. (c) This rate shall be uniform for all Participants for the same Valuation Date but may change from Valuation Date to Valuation Date. 3.2.3. DEFERRAL ADDITION. The initial Account value (as adjusted above) shall be increased by the total amount of compensation, if any, which would have been paid to the Participant as of a date subsequent to the immediately preceding Valuation Date but prior to or coincident with the current Valuation Date but for the enrollment agreement signed by the Participant pursuant to Section 2. No increases shall be made pursuant to this Section 3.2.3 for amounts paid as of a date after December 31, 1997. 3.2.4. FINAL DISTRIBUTIONS SUBTRACTION. The initial Account value (as adjusted above) shall be reduced by the total amount distributed in fact to (or with respect to) the Participant (or forfeited in connection with a distribution) from such Account as of the current Valuation Date. -10- SECTION 4 VESTING OF ACCOUNT Except as provided in Section 6.2 and Section 6.4 (relating to the forfeiture for hardship or Change in Control distributions) and Section 8 (relating to the ability to amend the Plan Statement and terminate the Plan), the Account of each Participant shall be fully (100%) vested and nonforfeitable at all times. SECTION 5 MATURITY 5.1. EVENTS OF MATURITY. A Participant's Account shall mature and shall become distributable in accordance with Section 6 upon the earliest occurrence of any of the following events while in the employment of the Employer or an Affiliate: (a) his or her death, or (b) his or her Termination of Employment from the Employer, or (c) termination of the Plan; provided, however, that a transfer of employment to an Affiliate that is not an Employer shall not constitute an Event of Maturity. 5.2. EFFECT OF MATURITY UPON FURTHER PARTICIPATION IN PLAN. On the occurrence of an Event of Maturity, a Participant shall cease to have any interest in the Plan other than the right to receive payment of his or her Account as provided in Section 6 hereof, adjusted from time to time as provided in Section 3. SECTION 6 DISTRIBUTION 6.1. FORM OF DISTRIBUTION. Upon the occurrence of an Event of Maturity effective as to a Participant, the Principal Sponsor shall commence payment of such Participant's Account (reduced by the amount of any applicable payroll, withholding and other taxes) in the form -11- designated by the Participant in his or her enrollment. A Participant shall not be required to make application to receive payment. Distribution shall not be made to any Beneficiary, however, until such Beneficiary shall have filed a written application for benefits in a form acceptable to the Principal Sponsor and such application shall have been approved by the Principal Sponsor. 6.1.1. FORM OF DISTRIBUTION. Distribution shall be made in whichever of the following forms as the Participant shall have designated in writing at the time of his or her enrollment (to the extent that such election is consistent with the rules of this Plan Statement): (a) TERM CERTAIN INSTALLMENTS TO PARTICIPANT. If the Distributee is a Participant, the Account at the Termination of Employment is at least Twenty Thousand Dollars ($20,000) and the Participant had attained Earliest Retirement Age at the Termination of Employment, in a series of annual installments payable over fifteen (15) years. (b) CONTINUED TERM CERTAIN INSTALLMENTS TO BENEFICIARY. If the Distributee is a Beneficiary of a deceased Participant and distribution had commenced to the deceased Participant before his or her death over a fifteen (15) year period as specified in paragraph (a) above, in a series of annual installments payable over the remainder of the fifteen (15) year period. (c) LUMP SUM. If the Distributee is a Participant, in a single lump sum. If the Distributee is a Beneficiary of a deceased Participant and distribution had not commenced to the deceased Participant before his or her death, in a single lump sum payment. 6.1.2. TIME OF PAYMENT. Payment shall be made or commenced to a Participant in accordance with the following rules: (a) RETIREMENT. If the Participant's Termination of Employment is on a date on or after the Participant's Earliest Retirement Age, payment shall be made or commenced as of the Annual Valuation Date coincident with or immediately following the Participant's Termination of Employment and shall be made or commenced as soon as practicable after such Annual Valuation Date. (b) DEATH. If the payment is made or commenced on account of the Participant's death, payment shall be made or commenced as of the Annual Valuation Date coincident with or immediately following the -12- Participant's Termination of Employment and shall be made or commenced as soon as practicable after such Annual Valuation Date. (c) OTHER. In all other cases, payment to the Participant shall be made as of the second Valuation Date subsequent to the Participant's Termination of Employment and shall be made as soon as practicable after such second Valuation Date. (d) CODE SECTION 162(m) DELAY. If the Principal Sponsor determines that delaying the time of the initial payments are made or commenced would increase the probability that such payments would be fully deductible for federal or state income tax purposes, the Principal Sponsor may unilaterally delay the time of the making or commencement of payments for up to twenty-four (24) months after the date such payments would otherwise be payable. 6.1.3. INSTALLMENT AMOUNTS. The amount of the annual installments shall be determined by dividing the amount of the Account as of the Annual Valuation Date as of which the installment is being paid by the number of remaining installment payments to be made (including the payment being determined). 6.1.4. DEFAULT. If for any reason a Participant shall have failed to make a timely written designation of form for distribution (including reasons entirely beyond the control of the Participant), the distribution shall be made in a single lump sum. No spouse, former spouse, Beneficiary or other person shall have any right to participate in the Participants selection of a form of benefit. 6.2. PREVIOUSLY SCHEDULED DISTRIBUTION. 6.2.1. ENROLLING FOR THE DISTRIBUTION. At the time of enrollment, each enrolling Participant shall have the opportunity to elect to cause the Plan to make a scheduled distribution to the Participant from the Account of a fixed dollar amount or percentage of Account (not less than $2,000) as of an Annual Valuation Date designated by the Participant in the enrollment which distribution shall be made as soon as practicable after such Annual Valuation Date. 6.2.2. SCHEDULED DISTRIBUTION. As of the Annual Valuation Date designated by the Participant in his or her enrollment, there shall be distributed from the Account to the Participant such amount as the Participant shall have elected to receive from the Account when the Participant enrolled. Notwithstanding the dollar amount designated by the Participant in his or her enrollment, if a scheduled distribution is required as of an Annual Valuation Date and the value of the portion of the Account that is attributable to the Participants deferrals on such -13- Annual Valuation Date is less than Five Thousand Dollars ($5,000) the entire Account attributable to that Participant's deferrals shall be distributed. In no event shall such scheduled distributions occur after the death of the Participant or after any other Event of Maturity with respect to the Participant. In no event shall such scheduled distributions made pursuant to an enrollment for a Plan Year exceed the Account attributable to that Plan Year. 6.3. HARDSHIP DISTRIBUTIONS. 6.3.1. WHEN AVAILABLE. A Participant may receive a hardship distribution from his or her Account if the Principal Sponsor determines that such hardship distribution is for a purpose described in Section 6.3.2 and the conditions in Section 6.3.3 and Section 6.3.4 have been fulfilled. To receive such a distribution, the Participant must file a written hardship distribution application with the Principal Sponsor and furnish such documentation as the Principal Sponsor may require. In the application, the Participant shall specify the basis for the distribution and the dollar amount to be distributed. If such hardship distribution is approved by the Principal Sponsor, distribution shall be made as of the Valuation Date coincident with or next following the approval of a completed application by the Principal Sponsor and such hardship distribution shall be made in a lump sum cash payment as soon as administratively feasible after such Valuation Date. 6.3.2. PURPOSES. Hardship distributions shall be allowed under Section 6.3.1 only if the Participant establishes that the hardship distribution is to be made on account of an immediate and heavy financial need of the Participant for which the Participant does not have other available resources. 6.3.3. LIMITATIONS. The amount of the hardship distribution shall not exceed the amount of the Participant's proven immediate and heavy financial need. A hardship distribution shall not be made after the death of the Participant or after the occurrence of any other Event of Maturity. The amount of approved hardship distribution (and the forfeiture described below) shall not exceed the value of the Account. 6.3.4. FORFEITURE. Upon the approval of a hardship distribution, there shall be irrevocably forfeited from the Account of the Participant an amount equal to ten percent (10%) of the amount approved for distribution. 6.4. CHANGE IN CONTROL DISTRIBUTIONS. 6.4.1. WHEN AVAILABLE. A Participant or Beneficiary may receive a distribution of his or her entire Account (after reduction for the forfeiture described in Section 6.4.3) if a Full Change in Control or a Qualifying Termination has occurred and the condition in Section 6.4.2 has been fulfilled (a "Change in Control Distribution"). To receive such a distribution, the Participant or Beneficiary must file a written distribution application with the Principal Sponsor. -14- The Principal Sponsor shall approve the Change in Control Distribution if such application has been filed and a Full Change in Control or a Qualifying Termination has occurred. Distribution of the entire Account (after reduction for the forfeiture described in Section 6.4.3) shall be made as of the Valuation Date coincident with or next following the approval of a completed application by the Principal Sponsor. Such distribution shall be made in a lump sum cash payment as soon as administratively feasible after such Valuation Date. 6.4.2. LIMITATIONS. The amount of approved Change in Control Distribution (and the forfeiture described below) shall not exceed the value of the Account. 6.4.3. FORFEITURE. Upon the approval of a Change in Control Distribution, there shall be irrevocably forfeited from the Account of the Participant or Beneficiary an amount equal to five percent (5%) of the Account. 6.5. ACCELERATION OF ANNUAL INSTALLMENTS. 6.5.1. WHEN AVAILABLE. A Participant or Beneficiary who is receiving annual installments may receive an accelerated payment of his or her entire Account (after reduction for the forfeiture described in Section 6.5.2). To receive such an accelerated payment, the Participant or Beneficiary must file a written payment application with the Principal Sponsor. Payment of the accelerated payment (after reduction for the forfeiture described in Section 6.5.2) shall be made as of the Annual Valuation Date coincident with or next following the approval of a completed application by the Principal Sponsor. Such accelerated payment shall be made in a lump sum cash payment as soon as administratively feasible after such Valuation Date. The amount of the accelerated payment shall be equal to the value of the Account as of such Annual Valuation Date (after reduction for the forfeiture described below). 6.5.2. FORFEITURE. Upon the approval of an accelerated payment, there shall be irrevocably forfeited from the Account of the Participant or Beneficiary an amount equal to ten percent (10%) of the Account. 6.6. DESIGNATION OF BENEFICIARIES. 6.6.1. RIGHT TO DESIGNATE. Each Participant may designate, upon forms to be furnished by and filed with the Principal Sponsor, one or more primary Beneficiaries or alternative Beneficiaries to receive all or a specified part of such Participant's Account in the event of such Participant's death. The Participant may change or revoke any such designation from time to time without notice to or consent from any Beneficiary. No such designation, change or revocation shall be effective unless executed by the Participant and received by the Principal Sponsor during the Participant's lifetime. -15- 6.6.2. FAILURE OF DESIGNATION. If a Participant: (a) fails to designate a Beneficiary, (b) designates a Beneficiary and thereafter revokes such designation without naming another Beneficiary, or (c) designates one or more Beneficiaries and all such Beneficiaries so designated fail to survive the Participant, such Participant's Account, or the part thereof as to which such Participant's designation fails, as the case may be, shall be payable to the first class of the following classes of automatic Beneficiaries with a member surviving the Participant and (except in the case of surviving issue) in equal shares if there is more than one member in such class surviving the Participant: Participant's surviving spouse Participant's surviving issue per stirpes and not per capita Participant's surviving parents Participant's surviving brothers and sisters Representative of Participant's estate. 6.6.3. DISCLAIMERS BY BENEFICIARIES. A Beneficiary entitled to a distribution of all or a portion of a deceased Participant's Account may disclaim an interest therein subject to the following requirements. To be eligible to disclaim, a Beneficiary must be a natural person, must not have received a distribution of all or any portion of the Account at the time such disclaimer is executed and delivered, and must have attained at least age twenty-one (21) years as of the date of the Participant's death. Any disclaimer must be in writing and must be executed personally by the Beneficiary before a notary public. A disclaimer shall state that the Beneficiary's entire interest in the undistributed Account is disclaimed or shall specify what portion thereof is disclaimed. To be effective, duplicate original executed copies of the disclaimer must be both executed and actually delivered to the Principal Sponsor after the date of the Participant's death but not later than one hundred eighty (180) days after the date of the Participant's death. A disclaimer shall be irrevocable when delivered to the Principal Sponsor. A disclaimer shall be considered to be delivered to the Principal Sponsor only when actually received by the Principal Sponsor. The Principal Sponsor shall be the sole judge of the content, interpretation and validity of a purported disclaimer. Upon the filing of a valid disclaimer, the Beneficiary shall be considered not to have survived the Participant as to the interest disclaimed. A disclaimer by a Beneficiary shall not be considered to be a transfer of an interest in violation of the provisions of Section 6 and shall not be considered to be an assignment or alienation of benefits in violation of federal law prohibiting the assignment or alienation of benefits under this Plan. No other form of attempted disclaimer shall be recognized by the Principal Sponsor. -16- 6.6.4. DEFINITIONS. When used herein and, unless the Participant has otherwise specified in the Participant's Beneficiary designation, when used in a Beneficiary designation, "issue" means all persons who are lineal descendants of the person whose issue are referred to, including legally adopted descendants and their descendants but not including illegitimate descendants and their descendants; "child" means an issue of the first generation; "per stirpes" means in equal shares among living children of the person whose issue are referred to and the issue (taken collectively) of each deceased child of such person, with such issue taking by right of representation of such deceased child; and "survive" and "surviving" mean living after the death of the Participant. 6.6.5. SPECIAL RULES. Unless the Participant has otherwise specified in the Participant's Beneficiary designation, the following rules shall apply: (a) If there is not sufficient evidence that a Beneficiary was living at the time of the death of the Participant, it shall be deemed that the Beneficiary was not living at the time of the death of the Participant. (b) The automatic Beneficiaries specified in Section 6.6.2 and the Beneficiaries designated by the Participant shall become fixed at the time of the Participant's death so that, if a Beneficiary survives the Participant but dies before the receipt of all payments due such Beneficiary hereunder, such remaining payments shall be payable to the representative of such Beneficiary's estate. (c) If the Participant designates as a Beneficiary the person who is the Participant's spouse on the date of the designation, either by name or by relationship, or both, the dissolution, annulment or other legal termination of the marriage between the Participant and such person shall automatically revoke such designation. (The foregoing shall not prevent the Participant from designating a former spouse as a Beneficiary on a form executed by the Participant and received by the Principal Sponsor after the date of the legal termination of the marriage between the Participant and such former spouse, and during the Participant's lifetime.) (d) Any designation of a nonspouse Beneficiary by name that is accompanied by a description of relationship to the Participant shall be given effect without regard to whether the relationship to the Participant exists either then or at the Participant's death. -17- (e) Any designation of a Beneficiary only by statement of relationship to the Participant shall be effective only to designate the person or persons standing in such relationship to the Participant at the Participant's death. A Beneficiary designation is permanently void if it either is executed or is filed by a Participant who, at the time of such execution or filing, is then a minor under the law of the state of the Participant's legal residence. The Principal Sponsor shall be the sole judge of the content, interpretation and validity of a purported Beneficiary designation. 6.6.6. NO SPOUSAL RIGHTS. No spouse or surviving spouse of a Participant and no person designated to be a Beneficiary shall have any rights or interest in the benefits accumulated under this Plan including, but not limited to, the right to be the sole Beneficiary or to consent to the designation of Beneficiaries (or the changing of designated Beneficiaries) by the Participant. 6.7. DEATH PRIOR TO FULL DISTRIBUTION. If, at the death of the Participant, any payment to the Participant was due or otherwise pending but not actually paid, the amount of such payment shall be included in the Account which are payable to the Beneficiary (and shall not be paid to the Participant's estate). 6.8. FACILITY OF PAYMENT. In case of the legal disability, including minority, of a Participant or Beneficiary entitled to receive any distribution under the Plan, payment shall be made, if the Principal Sponsor shall be advised of the existence of such condition: (a) to the duly appointed guardian, conservator or other legal representative of such Participant or Beneficiary, or (b) to a person or institution entrusted with the care or maintenance of the incompetent or disabled Participant or Beneficiary, provided such person or institution has satisfied the Principal Sponsor that the payment will be used for the best interest and assist in the care of such Participant or Beneficiary, and provided further, that no prior claim for said payment has been made by a duly appointed guardian, conservator or other legal representative of such Participant or Beneficiary. Any payment made in accordance with the foregoing provisions of this section shall constitute a complete discharge of any liability or obligation of the Principal Sponsor therefor. SECTION 7 -18- FUNDING OF PLAN 7.1. UNFUNDED AGREEMENT. The obligation of the Employer to make payments under this Plan constitutes only the unsecured (but legally enforceable) promise of the Employer to make such payments. The Participant shall have no lien, prior claim or other security interest in any property of the Employer. The Employer is not required to establish or maintain any fund, trust or account (other than a bookkeeping account or reserve) for the purpose of funding or paying the benefits promised under this Plan. If such a fund is established, the property therein shall remain the sole and exclusive property of the Employer. The Employer will pay the cost of this Plan out of its general assets. All references to accounts, accruals, gains, losses, income, expenses, payments, custodial funds and the like are included merely for the purpose of measuring the Employer's obligation to Participants in this Plan and shall not be construed to impose on the Employer the obligation to create any separate fund for purposes of this Plan. If the Employer elects to finance all or a portion of its costs in connection with this Plan through the purchase of life insurance or other similar investments, the Participant agrees, as a condition of participation in this Plan, to cooperate with the Employer in the purchase of such investment to any extent reasonably required by the Employer and relinquishes any claim he or she may have either for himself or herself or any beneficiary to the proceeds of any such investment or any other rights or interests in such investment. If a Participant fails or refuses to cooperate, then notwithstanding any other provision of this Plan Statement (including, without limiting the generality of the foregoing, Section 4) the Employer shall distribute the individual's Account immediately and the Participant shall not be eligible to enroll in the Plan again. 7.2. SPENDTHRIFT PROVISION. No Participant or Beneficiary shall have any interest in any Account which can be transferred nor shall any Participant or Beneficiary have any power to anticipate, alienate, dispose of, pledge or encumber the same while in the possession or control of the Employer, nor shall the Employer recognize any assignment thereof, either in whole or in part, nor shall any Account be subject to attachment, garnishment, execution following judgment or other legal process while in the possession or control of the Employer. The power to designate Beneficiaries to receive the Account of a Participant in the event of such Participant's death shall not permit or be construed to permit such power or right to be exercised by the Participant so as thereby to anticipate, pledge, mortgage or encumber such Participant's Account or any part thereof, and any attempt of a Participant so to exercise said power in violation of this provision shall be of no force and effect and shall be disregarded by the Employer. This section shall not prevent the Employer from exercising, in its discretion, any of the applicable powers and options granted to it upon the occurrence of an Event of Maturity, as such powers may be conferred upon it by any applicable provision hereof. -19- SECTION 8 AMENDMENT AND TERMINATION The Principal Sponsor reserves the power to amend the Plan Statement or terminate the Plan prior to a Full Change in Control. No such amendment of the Plan Statement or termination of the Plan, however, shall reduce a Participant's Account earned as of the date of such amendment unless the Participant so affected consents in writing to the amendment. After a Full Change in Control, the Plan cannot be amended or terminated (as applied to Participants who are Participants on the date of the Full Change in Control) unless: (a) all Accounts of all Participants as of the date of the Full Change in Control have been paid, or (b) eighty percent (80%) of all the Participants as of the date of the Full Change in Control give written consent to such amendment or termination. SECTION 9 DETERMINATIONS -- RULES AND REGULATIONS 9.1. DETERMINATIONS. The Principal Sponsor shall make such determinations as may be required from time to time in the administration of the Plan. The Principal Sponsor shall have the discretionary authority and responsibility to interpret and construe the Plan Statement and to determine all factual and legal questions under the Plan, including but not limited to the entitlement of Participants and Beneficiaries, and the amounts of their respective interests. Each interested party may act and rely upon all information reported to them hereunder and need not inquire into the accuracy thereof, nor be charged with any notice to the contrary. 9.2. RULES AND REGULATIONS. Any rule not in conflict or at variance with the provisions hereof may be adopted by the Principal Sponsor. 9.3. METHOD OF EXECUTING INSTRUMENTS. Information to be supplied or written notices to be made or consents to be given by the Principal Sponsor pursuant to any provision of this Plan Statement may be signed in the name of the Principal Sponsor by any officer who has been authorized to make such certification or to give such notices or consents. -20- 9.4. CLAIMS PROCEDURE. The claims procedure set forth in this Section 9.4 shall be the exclusive procedure for the disposition of claims for benefits arising under the Plan until such time as a Full Change in Control occurs. 9.4.1. ORIGINAL CLAIM. Any employee, former employee or beneficiary of such employee or former employee may, if he or she so desires, file with the Principal Sponsor a written claim for benefits under the Plan. Within ninety (90) days after the filing of such a claim, the Principal Sponsor shall notify the claimant in writing whether the claim is upheld or denied in whole or in part or shall furnish the claimant a written notice describing specific special circumstances requiring a specified amount of additional time (but not more than one hundred eighty days from the date the claim was filed) to reach a decision on the claim. If the claim is denied in whole or in part, the Principal Sponsor shall state in writing: (a) the specific reasons for the denial; (b) the specific references to the pertinent provisions of this Plan Statement on which the denial is based; (c) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (d) an explanation of the claims review procedure set forth in this section. 9.4.2. CLAIMS REVIEW PROCEDURE. Within sixty (60) days after receipt of notice that the claim has been denied in whole or in part, the claimant may file with the Principal Sponsor a written request for a review and may, in conjunction therewith, submit written issues and comments. Within sixty (60) days after the filing of such a request for review, the Principal Sponsor shall notify the claimant in writing whether, upon review, the claim was upheld or denied in whole or in part or shall furnish the claimant a written notice describing specific special circumstances requiring a specified amount of additional time (but not more than one hundred twenty days from the date the request for review was filed) to reach a decision on the request for review. 9.4.3. GENERAL RULES. (a) No inquiry or question shall be deemed to be a claim or a request for a review of a denied claim unless made in accordance with the claims procedure. The Principal Sponsor may require that any claim for benefits and any request for a review of a denied claim be filed on forms to be furnished by the Principal Sponsor upon request. -21- (b) All decisions on claims and on requests for a review of denied claims shall be made by the Principal Sponsor. (c) the Principal Sponsor may, in its discretion, hold one or more hearings on a claim or a request for a review of a denied claim. (d) A claimant may be represented by a lawyer or other representative (at the claimant's own expense), but the Principal Sponsor reserves the right to require the claimant to furnish written authorization. A claimant's representative shall be entitled to copies of all notices given to the claimant. (e) The decision of the Principal Sponsor on a claim and on a request for a review of a denied claim shall be served on the claimant in writing. If a decision or notice is not received by a claimant within the time specified, the claim or request for a review of a denied claim shall be deemed to have been denied. (f) Prior to filing a claim or a request for a review of a denied claim, the claimant or his or her representative shall have a reasonable opportunity to review a copy of this Plan Statement and all other pertinent documents in the possession of the Principal Sponsor. 9.5. INFORMATION FURNISHED BY PARTICIPANTS. The Principal Sponsor shall not be liable or responsible for any error in the computation of the Account of a Participant resulting from any misstatement of fact made by the Participant, directly or indirectly, to the Principal Sponsor, and used by it in determining the Participant's Account. The Principal Sponsor shall not be obligated or required to increase the Account of such Participant which, on discovery of the misstatement, is found to be understated as a result of such misstatement of the Participant. However, the Account of any Participant which are overstated by reason of any such misstatement shall be reduced to the amount appropriate in view of the truth. SECTION 10 PLAN ADMINISTRATION 10.1. EMPLOYER. -22- 10.1.1. OFFICERS. Except as hereinafter provided, functions generally assigned to the Principal Sponsor shall be discharged by its officers or delegated and allocated as provided herein. 10.1.2. CHIEF EXECUTIVE OFFICER. Except as hereinafter provided, the Chief Executive Officer of the Principal Sponsor may delegate or redelegate and allocate and reallocate to one or more persons or to a committee of persons jointly or severally, and whether or not such persons are directors, officers or employees, such functions assigned to the Employer generally hereunder as the Chief Executive Officer may from time to time deem advisable. 10.1.3. BOARD OF DIRECTORS. Notwithstanding the foregoing, the Compensation and Human Resources Committee of the Board of Directors of the Principal Sponsor shall have the exclusive authority, which may not be delegated, to act for the Principal Sponsor to amend this Plan Statement, to terminate this Plan, and to determine eligibility to participate in the Plan under Section 2. 10.2. CONFLICT OF INTEREST. If any officer or employee of the Employer, or any member of the Compensation and Human Resources Committee of the Board of Directors of the Employer to whom authority has been delegated or redelegated hereunder shall also be a Participant in the Plan, such Participant shall have no authority as such officer, employee or member with respect to any matter specially affecting such Participant's individual interest hereunder or the interest of a person superior to him or her in the organization (as distinguished from the interests of all Participants and Beneficiaries or a broad class of Participants and Beneficiaries), all such authority being reserved exclusively to the other officers, employees or members as the case may be, to the exclusion of such Participant, and such Participant shall act only in such Participant's individual capacity in connection with any such matter. 10.3. ADMINISTRATOR. U.S. BANCORP shall be the administrator for purposes of section 3(16)(A) of the Employee Retirement Income Security Act of 1974. 10.4. SERVICE OF PROCESS. In the absence of any designation to the contrary by the Employer, the Secretary of U.S. BANCORP is designated as the appropriate and exclusive agent for the receipt of service of process directed to the Plan in any legal proceeding, including arbitration, involving the Plan. SECTION 11 DISCLAIMERS -23- 11.1. TERM OF EMPLOYMENT. Neither the terms of this Plan Statement nor the benefits hereunder nor the continuance thereof shall be a term of the employment of any employee. The Employer shall not be obliged to continue the Plan. The terms of this Plan Statement shall not give any employee the right to be retained in the employment of the Employer. 11.2. SOURCE OF PAYMENT. Neither the Employer nor any of its officers nor any member of the Compensation and Human Resources Committee of the Board of Directors in any way secure or guarantee the payment of any benefit or amount which may become due and payable hereunder to any Participant or to any Beneficiary or to any creditor of a Participant or a Beneficiary. Each Participant, Beneficiary or other person entitled at any time to payments hereunder shall look solely to the assets of the Employer for such payments or to the Accounts distributed to any Participant or Beneficiary, as the case may be, for such payments. In each case where Accounts shall have been distributed to a former Participant or a Beneficiary or to the person or any one of a group of persons entitled jointly to the receipt thereof and which purports to cover in full the benefit hereunder, such former Participant or Beneficiary, or such person or persons, as the case may be, shall have no further right or interest in the other assets of the Employer. Neither the Employer nor any of its officers nor any member of its Board of Directors shall be under any liability or responsibility for failure to effect any of the objectives or purposes of the Plan by reason of the insolvency of the Employer. 11.3. DELEGATION. The Employer and its officers and the members of its Board of Directors shall not be liable for an act or omission of another person with regard to a responsibility that has been allocated to or delegated to such other person pursuant to the terms of this Plan Statement or pursuant to procedures set forth in this Plan Statement. -24- APPENDIX A CHANGE IN CONTROL DEFINITIONS SECTION 1 1.1. ACQUIRING PERSON -- any Person who or which, together with all Affiliates (CIC) and Associates of such person, is the Beneficial Owner, directly or indirectly, of securities of USB representing 20% or more of the combined voting power of USB's then outstanding securities, but shall not include any Company Entity. 1.2. AFFILIATE (CIC) -- shall have the meaning ascribed to the term "Affiliate" in Rule 12b-2 promulgated under the Exchange Act. 1.3. ASSOCIATE -- shall have the meaning ascribed to such term in Rule 12b-2 promulgated under the Exchange Act. 1.4. BENEFICIAL OWNER -- shall have the meaning ascribed to such term in Rule 13d-3 promulgated under the Exchange Act. 1.5. BOARD OF DIRECTORS -- the board of directors of USB. 1.6. COMPANY ENTITY -- USB, any subsidiary of USB or any employee benefit plan of USB or of any subsidiary of USB or any entity holding shares of the voting capital stock of USB organized, appointed or established for, or pursuant to the terms of, any such plan. 1.7. CONTINUING DIRECTOR -- any person who is a member of the Board of Directors, while such person is a member of the Board of Directors, who is not an Acquiring Person or an Affiliate (CIC) or Associate of an Acquiring Person, or a representative of an Acquiring Person or of any such Affiliate (CIC) or Associate, and who (x) was a member of the Board of Directors as of July 17, 1996 or (y) subsequently becomes a member of the Board of Directors, if such person's initial nomination for election or initial election to the Board of Directors has been approved in advance by the Continuing Directors; provided that any director designated by or on behalf of a Person who has entered into an agreement with USB (or who is contemplating entering into such an agreement) to effect a consolidation or merger of USB or a Company Entity, or other reorganization, with or into one or more entities which are not Company Entities, and any director that serves in connection with the act of the Board of Directors of increasing the number of directors and filling vacancies in connection with, or in contemplation of, any such transaction, shall not be deemed to have received such advance approval for initial nomination or A-25 election, and any such director shall not be deemed to be a Continuing Director; provided, further, that any such director shall subsequently become a Continuing Director at such time as a new term of office as a director is approved by USB's shareholders at an annual meeting of shareholders occurring subsequent to the completion of any such transaction (and excluding any annual meeting at which the shareholders approve any such transaction); and, provided, further, that in the case of a Permitted Transaction, any such director shall not become a Continuing Director until the later of (i) the end of the three-year period following consummation of such Permitted Transaction or (ii) such time as a new term of office as a director is approved by USB's shareholders at an annual meeting of shareholders occurring subsequent to the completion of such Permitted Transaction. 1.8. EXCHANGE ACT -- the Securities Exchange Act of 1934, as amended. 1.9. FULL CHANGE IN CONTROL -- shall mean: (a) the public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by USB or any Person that a Person (other than a Company Entity) has become the Beneficial Owner, directly or indirectly, of securities of USB (x) representing 20% or more, but not more than 50%, of the combined voting power of USB's then outstanding securities unless the transaction resulting in such ownership has been approved in advance by the Continuing Directors or (y) representing more than 50% of the combined voting power of USB's then outstanding securities (regardless of any approval by the Continuing Directors); or (b) the Continuing Directors cease to constitute a majority of the Board of Directors of USB or the Resulting Corporation, except in accordance with the terms of a Permitted Transaction and except as a result of the death, retirement or disability of one or more Continuing Directors (unless any such death, retirement or disability occurs following a Permitted Transaction and any vacancies created thereby are not filled in accordance with the terms of the written agreement governing such Permitted Transaction); or (c) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the consolidated assets of USB and its subsidiaries or the adoption of any plan of liquidation or dissolution of USB. 1.10. PARTIAL CHANGE IN CONTROL -- shall mean: A-26 (a) a consolidation or merger of USB or a Company Entity, or other reorganization, with or into one or more entities which are not Company Entities, as a result of which less than 60% of the outstanding voting securities of the Resulting Corporation are, or are to be, owned by former shareholders of USB as determined immediately prior to consummation of such transaction (excluding voting securities of the Resulting Corporation owned, or to be owned, by such shareholders by reason of their ownership prior to such transaction of securities of any entity other than USB) and as a result of which the Continuing Directors constitute (i) more than 50% of the Board of Directors of the Resulting Corporation or (ii) exactly 50% of the Board of Directors of the Resulting Corporation if the transaction resulting in such event is a Permitted Transaction; or (b) the public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by USB or any Person that a Person (other than a Company Entity) has become the Beneficial Owner, directly or indirectly, of securities of USB representing 20% or more, but not more than 50%, of the combined voting power of USB's then outstanding securities if the transaction resulting in such ownership has been approved in advance by the Continuing Directors. 1.11. PERMITTED TRANSACTION -- a transaction in which, pursuant to a written agreement between USB and all Persons who have entered into an agreement with USB to effect a transaction described in paragraph (a) of the definition of Partial Change in Control, it is agreed that (w) the Chief Executive Officer of USB immediately prior to the consummation of such transaction shall be the Chief Executive Officer of the Resulting Corporation for not less than three years following consummation of such transaction, (x) upon termination of service of any Continuing Director for any reason, including upon death, disability or retirement, prior to the expiration of such director's term during such three-year period, the vacancy thereby created shall be filled by a nominee selected solely by the Continuing Directors, (y) upon expiration of the term of any such director during such three-year period, the nominee to succeed such director shall be selected solely by the Continuing Directors and (z) the parties will take other appropriate steps to ensure that the Board of Directors of the Resulting Corporation will be evenly divided between Continuing Directors and all directors designated by other parties to the transaction during such three-year period. 1.12. PERSON -- shall have the meaning ascribed to such term as such term is used in Sections 13(d) and 14(d) of the Exchange Act. A-27 1.13. QUALIFYING TERMINATION -- a termination of employment of a Participant prior to a Full Change in Control or prior to or following a Partial Change in Control that results in such Participant becoming entitled to receive change in control related severance payments pursuant to the terms of the change in control provisions of an employment contract, an individual change in control severance agreement, the U.S. Bancorp Senior Management Change in Control Severance Pay Plan (including any successor plan thereto), the U.S. Bancorp Middle Management Change in Control Severance Pay Program (including any successor program thereto) or the U.S. Bancorp Broad-Based Change in Control Severance Pay Program (including any successor program thereto). 1.14. RESULTING CORPORATION -- the surviving corporation in any consolidation, merger or other reorganization to which USB is a party; provided, however, that if the surviving corporation in any such transaction is a subsidiary of another corporation, then the Resulting Corporation is the ultimate parent corporation of such surviving corporation; and provided, further, that in the event of a consolidation, merger or other reorganization to which a Company Entity (other than USB) is a party, then USB shall be deemed the Resulting Corporation. A-29 EX-10.10 6 EXHIBIT 10.10 U. S. BANCORP AMENDED AND RESTATED SUPPLEMENTAL BENEFITS PLAN EFFECTIVE FEBRUARY 15, 1996 (WORKING COPY INCORPORATING AMENDMENTS 1, 2 AND 3) TABLE OF CONTENTS Page ARTICLE I PURPOSE OF PLAN . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II NATURE OF PLAN . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE III SPONSORING EMPLOYERS . . . . . . . . . . . . . . . . . . . . 2 ARTICLE IV ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE V PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE VI BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 6.1 Retirement Plan-Related Benefit . . . . . . . . . . . . . . . . 3 6.1.1 Retirement Benefits . . . . . . . . . . . . . . . . . 3 (a) Restoration Benefit . . . . . . . . . . . . . . . 4 (b) Early Retirement Subsidy Benefit . . . . . . . . . 5 (c) Additional Benefit Service Benefit . . . . . . . . 6 (d) Change in Control Benefits . . . . . . . . . . . . 6 (1) Benefit . . . . . . . . . . . . . . . . . . . 6 (2) Change in Control Defined . . . . . . . . . . 8 (3) Cause Defined . . . . . . . . . . . . . . . . 11 (4) Good Reason Defined . . . . . . . . . . . . . 12 (e) Additional Eligibility Service Benefit . . . . . . 15 (f) Enhanced Retirement Benefit. . . . . . . . . . . . 15 (1) Definitions . . . . . . . . . . . . . . . . . 15 (2) Benefit . . . . . . . . . . . . . . . . . . . 16 (3) Benefit Service Credit. . . . . . . . . . . . 18 (4) Prior Employer Benefits . . . . . . . . . . . 18 (5) Early Retirement Reduction . . . . . . . . . 18 (6) Vesting . . . . . . . . . . . . . . . . . . . 19 (7) Effect of Change in Control . . . . . . . . . 19 (8) Credit for Additional Benefit Service. . . . 20 (g) Gross-Up Payment . . . . . . . . . . . . . . . . . 21 (1) Definitions . . . . . . . . . . . . . . . . . 21 (2) General . . . . . . . . . . . . . . . . . . . 21 (3) Determination of Excise Tax . . . . . . . . . 22 (4) Determining Amount of Gross-Up Payment. . . . 22 (5) Effect of Other Agreements. . . . . . . . . . 22 (6) Limitation. . . . . . . . . . . . . . . . . . 22 (h) Special Retirement Opportunity Benefit . . . . . . 23 (1) Definitions . . . . . . . . . . . . . . . . . 23 (2) Designation in Connection with Other Benefit. 24 (3) Benefit . . . . . . . . . . . . . . . . . . . 24 (4) Termination Date. . . . . . . . . . . . . . . 25 6.1.2 Coordination of Benefits . . . . . . . . . . . . . . . 25 6.1.3 Time and Manner of Payment . . . . . . . . . . . . . . 26 (a) Joint and Survivor Annuity . . . . . . . . . . . . 27 (b) Supplemental Income Option . . . . . . . . . . . . 28 6.1.4 Early Retirement Reduction . . . . . . . . . . . . . . 28 6.1.5 Benefit Forfeitability . . . . . . . . . . . . . . . . 29 6.1.6 Preretirement Death Benefit. . . . . . . . . . . . . . 30 6.1.7 Lump-Sum Payments of Small Benefits. . . . . . . . . . 31 6.1.8 Arbitration . . . . . . . . . . . . . . . . . . . . . 32 6.2 Investment Plan-Related Benefit. . . . . . . . . . . . . . . . . 32 6.2.1 Annual Credit. . . . . . . . . . . . . . . . . . . . . 32 (a) Deferred Compensation Credit . . . . . . . . . . . 33 (b) Section 415 Limitation Credit. . . . . . . . . . . 33 (c) Before-Tax Contribution Limitation Credit. . . . . 33 (d) Matching Credit. . . . . . . . . . . . . . . . . . 34 6.2.2 Investment Plan Benefit Account . . . . . . . . . . . 35 6.2.3 Time and Manner of Payment . . . . . . . . . . . . . . 35 6.2.4 Death Benefit. . . . . . . . . . . . . . . . . . . . . 35 6.3 FBS Change in Control Benefit. . . . . . . . . . . . . . . . . . 35 6.3.1 Benefit for Participant in Retirement Plan . . . . . . 35 (a) Participants Designated for a Restoration Benefit. 35 (b) Participants not Designated for a Restoration Benefit . . . . . . . . . . . . . . . . . . . . . 36 (c) Treatment of FBS Change in Control Benefit . . . . 37 6.3.2 Benefit for Participant in WO Retirement Plan or WO SERP. . . . . . . . . . . . . . . . . . . . . . . . 38 (a) Participants Participating in WO SERP . . . . . . 38 (b) Participants not Participating in WO SERP. . . . . 39 (c) Time and Manner of Payment . . . . . . . . . . . . 40 (c) Preretirement Death Benefit. . . . . . . . . . . . 41 (d) Lump-Sum Payments of Small Benefits. . . . . . . . 42 6.3.3 Two Year Assumption . . . . . . . . . . . . . . . . . 42 6.4 Special Retirement Plan Make-Up Benefits . . . . . . . . . . . . 42 6.4.1 Benefit for Participant in Retirement Plan . . . . . . 42 (a) Amount of Special Retirement Plan Make-Up Benefit. 42 (b) Treatment of Special Retirement Plan Make-Up Benefit . . . . . . . . . . . . . . . . . . . . . 43 -2- 6.4.2 Benefit for Participant in WO Retirement Plan. . . . . 43 (a) Amount of Special Retirement Plan Make-Up Benefit. 43 (b) Distribution of Special Retirement Plan Make-Up Benefit . . . . . . . . . . . . . . . . . . . . . 44 (c) Preretirement Death Benefit. . . . . . . . . . . . 45 (d) Lump-Sum Payments of Small Benefits . . . . . . . 45 ARTICLE VII VESTING . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 ARTICLE VIII SOURCE OF BENEFITS . . . . . . . . . . . . . . . . . . . . . 46 ARTICLE IX ADMINISTRATION OF THE PLAN . . . . . . . . . . . . . . . . . . 47 ARTICLE X MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . 48 10.1 Nonassignability of Benefits . . . . . . . . . . . . . 48 10.2 Governing Law. . . . . . . . . . . . . . . . . . . . . 48 10.3 No Right of Continued Employment . . . . . . . . . . . 48 10.4 Withholding Taxes. . . . . . . . . . . . . . . . . . . 48 10.5 Severability . . . . . . . . . . . . . . . . . . . . . 48 ARTICLE XI CLAIMS PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . 49 11.1 Initial Claim. . . . . . . . . . . . . . . . . . . . . 49 11.2 Decision on Initial Claim. . . . . . . . . . . . . . . 49 11.2.1 Time Period for Denial Notice . . . . . . . 49 11.2.2 Contents of Notice. . . . . . . . . . . . . 49 11.2.3 Deemed Denied . . . . . . . . . . . . . . . 50 11.3 Review of Denied Claim . . . . . . . . . . . . . . . . 50 11.4 Decision on Review . . . . . . . . . . . . . . . . . . 51 ARTICLE XII AMENDMENTS AND TERMINATION. . . . . . . . . . . . . . . . . . 52 -3- U. S. BANCORP AMENDED AND RESTATED SUPPLEMENTAL BENEFITS PLAN THIS SUPPLEMENTAL BENEFITS PLAN (the "Plan") is amended and restated by U. S. Bancorp, an Oregon corporation ("Bancorp"), effective February 15, 1996. Whenever used herein, the term "Bancorp" also refers to any successor of Bancorp that maintains this Plan. ARTICLE I PURPOSE OF PLAN The continued growth and success of Bancorp are dependent upon its ability to attract and retain the services of key executives of the highest competence and to provide incentives for their effective service and superior performance. The purpose of this Plan is to advance the interests of Bancorp and its shareholders through a supplemental compensation program that will attract, motivate, and retain key executives. ARTICLE II NATURE OF PLAN This Plan is intended to be and shall be administered and maintained by Bancorp as an income tax nonqualified, unfunded plan primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended. Notwithstanding any other provision of this Plan, no benefit shall be payable under this Plan that would cause the Plan to not be a select group plan. ARTICLE III SPONSORING EMPLOYERS Any corporation in which Bancorp owns (directly or indirectly) stock possessing 50 percent or more of the combined voting power may, by resolution of its board of directors, sponsor and maintain this Plan for its executives. Such corporations shall be referred to as "Sponsoring Employers." ARTICLE IV ELIGIBILITY Any key executive (including officers who may also be directors) of Bancorp and the Sponsoring Employers who is a member of a select group of management or highly compensated employees shall be eligible to participate in this Plan. ARTICLE V PARTICIPATION A "Participant" is an eligible employee who has been designated to receive one or more benefits under this Plan for one or more years. The Compensation Committee of Bancorp's Board of Directors (the "Compensation Committee") shall have the exclusive power to make and revise benefit designations, if any, with respect to Bancorp's Chairman of the Board, its Chief Executive Officer, and the members of Bancorp's Executive Committee (the "Executive Committee") and with respect to all benefit designations under 6.1.1(d) and 6.1.1(f). The Compensation Committee may, in its discretion, delegate by resolution to the Executive Committee -2- the power to make and revise benefit designations, if any, for all other eligible employees, other than benefit designations under 6.1.1(d) and 6.1.1(f). In the absence of such delegation, the Compensation Committee shall retain the power and authority to make and revise all benefit designations under the Plan. By sponsoring and maintaining the Plan for its employees, the Board of Directors of each Sponsoring Employer expressly delegates to the Compensation Committee and the Executive Committee, respectively, the authority to make and revise benefit designations under the Plan for all employees of the Sponsoring Employer. Notwithstanding the foregoing, all eligible employees who are both employed in a position that is covered by the First Bank System, Inc. Senior Management Change in Control Severance Pay Plan (the "FBS Change in Control Plan") and participants in any of the West One Bancorp Employee Retirement Plan (the "WO Retirement Plan"), the West One Bancorp Supplemental Executive Retirement Plan (the "WO SERP") or participants in the U. S. Bancorp Retirement Plan ("Retirement Plan") are hereby designated to receive an "FBS Change in Control Benefit" under Section 6.3. ARTICLE VI BENEFITS 6.1 RETIREMENT PLAN-RELATED BENEFIT. 6.1.1 RETIREMENT BENEFITS. Except as otherwise provided, a Participant shall receive a monthly U. S. Bancorp Retirement Plan-Related Benefit for the Participant's life only equal to the sum of the "Restoration Benefit," "Early Retirement Subsidy Benefit," "Additional Benefit Service Benefit," "Change in Control Benefits," "Additional Eligibility Service Benefit," and "Enhanced Retirement Benefit," as defined below, for which the Participant is designated. For purposes of this 6.1.1, any reference to a Participant's Retirement Plan benefit shall include any portion of such -3- Retirement Plan benefit payable to an alternate payee pursuant to a qualified domestic relations order. (a) RESTORATION BENEFIT. A Participant designated to receive a "Restoration Benefit" (previously referred to as the "Additional Benefit") under this Plan shall receive a monthly benefit equal to the sum of: (1) the amount by which such Participant's early, normal, or delayed retirement benefit under the Retirement Plan, as set forth in Exhibit A attached hereto and incorporated by reference herein, is reduced by application of federal law limiting benefits under income tax qualified plans as provided in the Retirement Plan; and (2) the difference (to the extent such difference is not included in 6.1.1(a)(1) above) between: (i) the early, normal, or delayed retirement benefit that would have been payable to the Participant under the Retirement Plan: A) had deferred compensation (other than deferred compensation under the U. S. Bancorp Long-Term Management Incentive Plan or the U. S. Bancorp 1993 Stock Incentive Plan) counted as Compensation under the Retirement Plan at the time at which such compensation would have been paid had it not been deferred; and B) had any nondeferred awards payable to the Participant after retirement under the U. S. Bancorp Executive Annual Incentive Plan or Management Annual Incentive Plan (an -4- "Annual Plan") counted as Compensation under the Retirement Plan at the time such awards were earned or accrued in lieu of the corresponding award for the first year of the five-year period for which Average Monthly Compensation is computed; and (ii) the Participant's actual early, normal, or delayed retirement benefit under the Retirement Plan. In calculating the benefit described in 6.1.1(a)(2)(i), the period of time used to determine a Participant's Average Monthly Compensation may be different than the period of time used to determine the Participant's Average Monthly Compensation in calculating the benefit actually payable under the Retirement Plan. Also, an award under an Annual Plan for a year shall be treated as earned pro-rata over the 12 months of the year (or such lesser portion of the year that the award relates to). Notwithstanding the foregoing, no Participant shall have a lesser monthly Restoration Benefit than the amount required to ensure that the sum of the Participant's early, normal, or delayed retirement benefit under the Retirement Plan plus the Participant's Restoration Benefit under this Plan is not less than the sum of such benefits as of December 31, 1988. (b) EARLY RETIREMENT SUBSIDY BENEFIT. Upon early retirement at or after a designated age, a Participant designated to receive an "Early Retirement Subsidy Benefit" under this Plan, who was eligible for early retirement under the Retirement Plan on ceasing to be an employee of Bancorp and its affiliates, shall receive a monthly benefit equal to the amount by which such Participant's normal retirement benefit under the Retirement Plan is reduced by reason of such early retirement. -5- (c) ADDITIONAL BENEFIT SERVICE BENEFIT. Upon retirement at or after a designated age with less than 25 years of Benefit Service, a Participant designated to receive an "Additional Benefit Service Benefit" under this Plan, who was eligible for retirement under the Retirement Plan on ceasing to be an employee of Bancorp and its affiliates, shall receive a monthly benefit equal to the difference between: (1) the early, normal, or delayed retirement benefit that would have been payable to the Participant under the Retirement Plan based on the lesser of: (i) 25 years of Benefit Service; or (ii) a designated number of years of Benefit Service; and (2) the Participant's actual early, normal, or delayed retirement benefit under the Retirement Plan. (d) CHANGE IN CONTROL BENEFITS. The purpose of the benefits provided by this 6.1.1(d) is to encourage the designated Participants to continue in the employment of Bancorp. The designated Participants are innovative, highly experienced, and knowledgeable banking executives whose creativity, expertise, and effort have been instrumental in the development of the business and growth of Bancorp. For purposes of this 6.1.1(d), references to Bancorp or a Sponsoring Employer shall include any successor to Bancorp or the Sponsoring Employer. (1) BENEFIT. Upon termination from employment with Bancorp or a Sponsoring Employer within two years from the date of occurrence of any event constituting a "Change in Control" (it being recognized that more than one such event may occur in which case the two-year period shall run from the -6- date of occurrence of each such event), other than termination by Bancorp or a Sponsoring Employer for "Cause" or by the Participant without "Good Reason," as those terms are defined below, a designated Participant who is vested by meeting the "Applicable Service Requirement," as described below, at termination of employment shall receive the benefit under (i) and/or (ii) below. A Participant may be designated for either or both of the following benefits: (i) A monthly benefit (a "Change in Control Early Retirement Subsidy Benefit") equal to the amount by which such Participant's normal retirement benefit under the Exhibit A Retirement Plan is reduced by reason of early retirement due to the termination. (ii) A monthly benefit (a "Change in Control Additional Benefit Service Benefit") equal to the difference between: A) the early, normal, or delayed retirement (which is the same as the type of actual retirement under 6.1.1(d)(1)(ii)B)) benefit that would have been payable to the Participant under the Exhibit A Retirement Plan based on the lesser of: 1) 25 years of Benefit Service; or 2) a designated number of years of Benefit Service; and B) the Participants actual early, normal, or delayed retirement benefit under the Exhibit A Retirement Plan. -7- For purposes of the Change in Control Early Retirement Subsidy Benefit described in 6.1.1(d)(1)(i), the Applicable Service Requirement is at least ten years of Eligibility Service. For purposes of the Change in Control Additional Benefit Service Benefit described in 6.1.1(d)(1)(ii), the Applicable Service Requirement is at least five years of Eligibility Service. Participants continue to earn Eligibility Service after a Change in Control. The benefits in this 6.1.1(d) cannot be eliminated by amendment or termination of this Plan after a Change in Control. (2) CHANGE IN CONTROL DEFINED. A "Change in Control" of Bancorp shall mean: (i) The acquisition by any Acquiring Person of beneficial ownership (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act")) of 20 percent or more of the combined voting power of the then outstanding Voting Securities; provided, however, that for purposes of this paragraph (i) the following acquisitions shall not constitute a Change in Control: (a) any acquisition directly from Bancorp, (b) any acquisition by Bancorp, (c) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Bancorp or any corporation controlled by Bancorp, or (d) any acquisition by any corporation pursuant to a transaction that complies with clauses (a), (b), and (c) of paragraph (iii) of this definition of Change in Control; or (ii) During any period of 12 consecutive calendar months, individuals who at the beginning of such period constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a -8- majority of the Board; provided, however, that any individual who becomes a director during the period whose election, or nomination for election, by Bancorp's shareholders was approved by a vote of at least a majority of the directors then constituting the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Consummation of a reorganization, merger, or consolidation or sale or other disposition of all or substantially all of the assets of Bancorp (a "Business Combination") in each case, unless, following such Business Combination, (a) all or substantially all of the individuals and entities who were the beneficial owners of the Voting Securities outstanding immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50 percent of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns Bancorp or all or substantially all of Bancorp's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the voting Securities, (b) no Person (excluding any -9- employee benefit plan, or related trust, of Bancorp or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20 percent or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (c) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) Approval by the shareholders of Bancorp of any plan or proposal for the liquidation or dissolution of Bancorp. For purposes of this "Change in Control" definition, the term "Acquiring Person" means any person or related person or related persons which constitute a "group" for purposes of Section 13(d) and Rule 13d-5 under the Exchange Act; provided, however, that the term Acquiring Person shall not include (a) Bancorp or any of its subsidiaries, (b) any employee benefit plan or related trust of Bancorp or any of its subsidiaries, (c) any entity holding voting capital stock of Bancorp for or pursuant to the term of any such employee benefit plan, or (d) any person or group solely because such person or group has voting power with respect to capital stock of Bancorp arising from a revocable proxy or consent given in response to a public proxy or consent solicitation made pursuit to the Exchange Act. -10- (3) CAUSE DEFINED. For purposes of 6.1.1(d), "Cause" for termination of employment means: (i) A material act of fraud or dishonesty by the Participant within the course of performing his or her duties for Bancorp or a Sponsoring Employer; (ii) Gross negligence or intentional misconduct by the Participant in the performance of material duties for Bancorp or a Sponsoring Employer; (iii) Commission of an act (or failure to take an action) intentionally against the interest of Bancorp or a Sponsoring Employer that causes Bancorp or a Sponsoring Employer material injury; or (iv) An act of serious moral turpitude that causes Bancorp or a Sponsoring Employer material injury. Notwithstanding the foregoing, a Participant shall not be deemed to have been terminated for Cause unless and until there have been delivered to the Participant a copy of a resolution duly adopted by Bancorp's Board of Directors (the "Board") at a meeting of the Board called and held for that purpose (after reasonable notice to the Participant and an opportunity for the Participant, together with the Participant's counsel, to be heard before the Board) finding that in the good faith opinion of the Board, the Participant was guilty of conduct constituting Cause as defined in this Plan and specifying the particulars thereof in detail. -11- Any dispute as to whether a designated Participant was terminated for Cause shall be submitted to arbitration pursuant to 6.1.8. (4) GOOD REASON DEFINED. Termination by a designated Participant of employment for "Good Reason" shall mean termination based on any of the following: (i) A change in the Participant's duties or position or positions with Bancorp which represents a demotion from his or her duties or position or positions as in effect immediately prior to the Change in Control, or a change in the Participant's duties or responsibilities which is inconsistent with such duties or position or positions, or any removal of the Participant from or any failure to reappoint or reelect the Participant to such position or positions, except in connection with the termination of the Participant's employment for Cause or disability or as a result of the Participant's death or the termination by the Participant other than for Good Reason; (ii) A reduction by Bancorp in the Participant's base salary as in effect immediately prior to the Change in Control; (iii) The failure by Bancorp to continue in effect any benefit plan (as defined below) in which the Participant is participating at the time of the Change in Control (or Benefit Plans providing the Participant with at least substantially similar benefits), other than as a result of the normal expiration of any such Benefit Plan in accordance with its terms or a modification of such Benefit Plan which modification is applicable to all employees who participate in such Benefit Plan, as in -12- effect at the time of the Change in Control, or the taking of any action, or the failure to act, by Bancorp which would adversely affect the Participant's continued participation in any of such Benefit Plans on at least as favorable a basis to the Participant as is the case on the date of the Change in Control or which would materially reduce the Participants benefits in the future under any of such Benefit Plans or deprive the Participant of any material benefit enjoyed by the Participant at the time of the Change in Control; (iv) The failure by Bancorp to provide and credit the Participant with the number of paid vacation days to which the Participant is then entitled in accordance with Bancorp's normal vacation policy an in effect immediately prior to the Change in Control; (v) Bancorp's requiring the Participant to be based anywhere more than 35 miles from where the Participant's office is located immediately prior to the Change in Control except for required travel on Bancorp's business to an extent substantially consistent with the business travel obligations which the Participant undertook on behalf of Bancorp prior to the Change in Control; (vi) The failure by Bancorp to obtain from any successor the assent to this 6.1.1(d); (vii) Any purported termination by Bancorp of a Participant's employment which is not effected pursuant to a Notice of Termination as defined below; and for purposes of this 6.1.1(d), no such purported termination shall be effective; or -13- (viii) Any refusal by Bancorp to continue to allow the participant to attend to matters or engage in activities not directly related to the business of Bancorp which, prior to the Change in Control, the Participant was permitted by the Board to attend to or engage in. For purposes of this "Good Reason" definition, "Notice of Termination" means any notice of any termination of the Participant's employment shall be communicated by written Notice of Termination to the other party. A "Notice of Termination" of a Participant's employment by Bancorp shall mean a notice which shall indicate the specific termination provision relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Participant's employment under the provision so indicated. "Benefit Plan" shall mean any compensation plan (including this Plan) providing for incentive or deferred compensation, stock options or other stock or stock-related grants or awards, or any employee benefit plan such as a thrift, investment, savings, pension, profit sharing, medical, disability, accident, life insurance, cafeteria, or relocation plan or any other plan, policy, or program of Bancorp providing similar types of benefits to employees of Bancorp. Any dispute as to whether a designated Participant has Good Reason for termination of employment shall be submitted to arbitration pursuant to 6.1.8. (e) ADDITIONAL ELIGIBILITY SERVICE BENEFIT. A Participant designated to receive an "Additional Eligibility Service Benefit" shall be treated as having years of Eligibility Service equal to the designated Participant's actual years of Eligibility Service plus a designated number of additional years of Eligibility Service. The total of the actual and the additional designated years of Eligibility Services will be referred -14- to as the "Designated Total." Upon ceasing to be an employee of Bancorp and its affiliates, a participant designated for an Additional Eligibility Service Benefit: (1) shall receive a monthly benefit equal to the difference between: (i) the early, normal, or delayed retirement (which is the same as the type of actual retirement under 6.1.1(e)(1)(ii)) benefit that would have been payable to the Participant under the Retirement Plan had the Participant retired with the Designated Total number of years of Eligibility Service; and (ii) the Participant's actual early, normal, or delayed retirement benefits, if any, under the Retirement Plan; and (2) shall be treated as having the Designated Total number of years of Eligibility Service for purposes of any other Retirement Plan-Related Benefit under this Plan for which the Participant is designated. (f) ENHANCED RETIREMENT BENEFIT. (1) DEFINITIONS. As used in this 6.1.1(f), the following terms shall have the definitions set forth below: "ADJUSTED AVERAGE MONTHLY COMPENSATION" means Average Monthly Compensation (as defined in Exhibit A to this Plan) adjusted in the manner described in 6.1.1(a). "CAUSE" has the meaning defined in 6.1.1(d)(3). "CHANGE IN CONTROL" has the meaning defined in 6.1.1(d)(2). -15- "CHANGE IN CONTROL DATE" means the date of occurrence of an event constituting a Change in Control (it being recognized that more than one such event may occur, in which case the date of occurrence of each such event is a Change in Control Date). "EARLY RETIREMENT REDUCTION" has the meaning described in 6.1.1(f)(5). "GOOD REASON" has the meaning defined in 6.1.1(d)(4). "PRIOR EMPLOYER BENEFITS" has the meaning described in 6.1.1(f)(4). "TARGET BENEFIT" means a monthly benefit equal to 2.75 percent of a Participant's Adjusted Average Monthly Compensation multiplied by the Participant's years, and fractions thereof, of Benefit Service up to 20 years. "TERMINATION DATE" means the date a Participant ceased to be an employee of Bancorp or a Sponsoring Employer. (2) BENEFIT. A Participant designated to receive an "Enhanced Retirement Benefit" under this Plan shall receive, upon termination of employment with Bancorp or a Sponsoring Employer after attaining age 55 (providing the Participant is vested in such benefit as provided in 6.1.1(f)(6)), a monthly benefit equal to the Target Benefit, adjusted (in the event the Participant terminates employment before attaining age 62) by the amount, if any, of Early Retirement Reduction, and then reduced by the sum of the following: (i) A hypothetical Social Security benefit payable as of the Participant's age on the Termination Date or, if later, age 62, calculated -16- based on the law in effect on the Termination Date assuming (A) that the Participant' s covered compensation equaled or exceeded the Social Security wage base for all prior years and (B) the Participant will have no compensation in any year (or portion of a year) following the Termination Date; (ii) An amount equal to the single life annuity equivalent of the Retirement Plan benefit which would have become payable to the Participant as of the Termination Date had the Participant elected retirement under the Retirement Plan as of the Termination Date; (iii) The amount of Prior Employer Benefits payable to the Participant for such month or attributable to such month as described in 6.1.1(f)(4); and (iv) The amounts payable to the Participant as other Retirement Plan-Related Benefits under this Plan as described in 6.1.2(e). (3) BENEFIT SERVICE CREDIT. For purposes of this 6.1.1(f), the Compensation Committee may, at the time a Participant is designated for an Enhanced Retirement Benefit, or at any time thereafter, credit the Participant with years of Benefit Service for service with a prior employer. The number of years, and fractions thereof, of Benefit Service credited shall be specified by resolution of the Compensation Committee. (4) PRIOR EMPLOYER BENEFITS. Whenever the Compensation Committee gives a Participant Benefit Service credit for service with a former employer, the Compensation Committee shall by resolution specify the amount -17- of Prior Service Benefits, if any, to be offset against the Participant's Enhanced Retirement Benefit. Prior Service Benefits shall be a monthly offset amount determined by, or at the direction of, the Compensation Committee to reflect the Participant's accrued and vested benefits attributable to service with the prior employer from qualified and nonqualified pension, profit sharing, and similar deferred compensation arrangements (but excluding any such benefits attributable to the Participant's own contributions, whether made on a before-tax or after-tax basis). The Compensation Committee, or its delegates, shall determine for each Prior Employer Benefit a monthly offset amount based on a single life annuity form equivalent to the Prior Employer Benefit (assuming the same commencement date as the Participant's Enhanced Retirement Benefit). (5) EARLY RETIREMENT REDUCTION. If a Participant who is otherwise vested in an Enhanced Retirement Benefit (as provided in 6.1.1(f)(6)) terminates employment with Bancorp or a Sponsoring Employer prior to attaining age 62, the Participant's Target Benefit shall be reduced by an Early Retirement Reduction equal to the accrued Target Benefit multiplied by the product of a Reduction Percentage (as described below) and the difference (in years and a fraction of a year based on whole calendar months) between the Participant's age at the Termination Date and 62. The Reduction Percentage shall be 7 percent except where a Participant's retirement or termination of employment is approved by the Compensation Committee, in which case the Reduction Percentage shall be 3 percent. However, the Compensation Committee may, in extraordinary circumstances, designate a different Reduction Percentage between 0 percent and 7 percent. -18- (6) VESTING. Except as provided in 6.1.1(f)(7), a Participant's right to an Enhanced Retirement Benefit is vested and nonforfeitable when the Participant both attains age 55 and has at least 10 years of Eligibility Service while still an employee of Bancorp or a Sponsoring Employer. If a Participant designated for an Enhanced Retirement Benefit ceases to be an employee of Bancorp or a Sponsoring Employer either (a) before the Participant has 10 years of Eligibility Service or (b) before the Participant attains age 55, the Participant shall not receive any Enhanced Retirement Benefit. (7) EFFECT OF CHANGE IN CONTROL. Upon termination from Bancorp or a Sponsoring Employer within two years after a Change in Control Date, other than termination for Cause or without Good Reason, the Enhanced Retirement Benefit for a designated Participant shall be subject to the following provisions: (i) Notwithstanding 6.1.1(f)(6), upon a Change in Control, a Participant designated for an Enhanced Retirement Benefit who has at least five years of Eligibility Service shall become immediately vested in the accrued Enhanced Retirement Benefit, whether or not the Participant had attained age 55 as of the later of the Change in Control Date or the Termination Date. (ii) If a Participant has not attained age 55 as of the Termination Date, the Participant's Enhanced Retirement Benefit shall commence on the first day of the calendar month in which the Participant attains age 55. -19- (iii) For purposes of computing a Participant's Target Benefit, a Participant will continue to accrue Benefit Service after a Change in Control. (iv) The Early Retirement Reduction Percentage for each Participant vested in an Enhanced Retirement Benefit (pursuant to 6.1.1(f)(6) or 6.1.1(f)(7)) shall be 3 percent. (v) The provisions of this 6.1.1(f)(7) cannot be eliminated by amendment or termination of this Plan after a Change in Control. (8) CREDIT FOR ADDITIONAL BENEFIT SERVICE. For purposes of computing a designated Participant's Target Benefit, the Committee may, in special circumstances, credit the Participant with an additional number of years of Benefit Service as determined by the Committee. (g) GROSS-UP PAYMENT. (1) DEFINITIONS. As used in this 6.1.1(g), the following terms have the definitions set forth below: "CHANGE IN CONTROL" has the meaning defined in 6.1.1(d)(2). "CODE" means the Internal Revenue Code of 1986, as amended. Any reference to a Code provision will include any successor provision. "EXCISE TAX" means a tax imposed by Section 4999(a) of the Code with respect to Excess Parachute Payments. "GROSS-UP PAYMENT" means a payment described in 6.1.1(g)(2) with respect to an Excise Tax. -20- "OUTSIDE TAX COUNSEL" means outside tax counsel selected by Bancorp and reasonably satisfactory to a Participant. "SERP BENEFITS" means all benefits payable to a Participant pursuit to this Plan. (2) GENERAL. Subject to the provisions of this 6.1.1(g), in the event any portion of the SERP Benefits payable to a Participant will be subject to the Excise Tax, Bancorp will pay the Participant an additional amount (the "Gross-Up Payment") equal to: (a) The Excise Tax imposed on the Participant with respect to the portion of the SERP Benefits that constitutes an Excess Parachute Payment; plus (b) All federal, state, and local taxes and Excise Tax imposed on the Participant with respect to the Gross-Up Payment. (3) DETERMINATION OF EXCISE TAX. For purposes of determining whether any portion of the SERP Benefits will constitute an Excess Parachute Payment subject to the Excise Tax and the amount of any Excise Tax, the entire amount of the SERP Benefits will be treated as an Excess Parachute Payment unless and to the extent, in the written opinion of Outside Tax Counsel, the SERP Benefits, in whole or in part, do not constitute an Excess Parachute Payment and thus are not subject to the Excise Tax. (4) DETERMINING AMOUNT OF GROSS-UP PAYMENT. For purposes of determining the amount of a Gross-Up Payment for a Participant, the Participant will be deemed to pay federal, state, and local income taxes (for the -21- state and locality of the Participant's residence at the date the Gross-Up Payment is made) at the highest marginal rates applicable to individuals (including any applicable surtaxes and taking into account any applicable loss or reduction of deductions or exemptions) for the calendar year in which the Gross-Up Payment will be made. (5) EFFECT OF OTHER AGREEMENTS. No Gross-Up Payment will be due under this Plan if, or to the extent, a Participant is entitled to a similar payment with respect to the SERP Benefits under any other agreement or arrangement with Bancorp, a person whose actions result in a Change in Control of Bancorp, or any person affiliated with Bancorp or such person. (6) LIMITATION. Bancorp shall have no obligation to make any payments pursuant to 6.1.1(d), 6.1.1(f), or this 6.1.1(g) in connection with a Change in Control of Bancorp if, or to the extent, any such payments are prohibited by any applicable law or regulation, including without limitation the FDIC's regulations regarding Golden Parachute and Indemnification Payments promulgated under the Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990. (h) SPECIAL RETIREMENT OPPORTUNITY BENEFIT. (1) DEFINITIONS. As used in this 6.1.1(h), the following terms shall have the definitions set forth below: "DEEMED AGE" means an age equal to five years more than a designated Participant's actual age as of August 31, 1994. -22- "DEEMED BENEFIT YEARS" means a number of years of Benefit Service, as defined in the Retirement Plan, equal to 5.667 years more than a designated Participant's actual years of Benefit Service as of December 31, 1993. "DEEMED ELIGIBILITY YEARS" means a number of years of Eligibility Service, as defined in the Retirement Plan, equal to six years more than a designated Participant's actual years of Eligibility Service as of December 31, 1993. "SRO AVERAGE MONTHLY COMPENSATION" means the greater of: (i) The monthly average of the designed Participant's Compensation (adjusted as described in 6.1.1(a)) during the highest consecutive five of the ten Plan Years beginning in 1984; or (ii) The monthly average of the designated Participant's Compensation (adjusted as described in 6.1.1(a)) for the 60 months ending August 31, 1994, based on: A) The Participant's bonuses paid during the eight calendar months ending August 31, 1994, plus eight times the Participant's monthly base salary as in effect on January 1, 1994; B) The Participant's base salary and bonuses paid during calendar years 1990 through 1993; and C) A portion equal to four-twelfths (4/12) of the Participant's base salary (excluding bonuses) paid in calendar year 1989. -23- "SRO CONNECTED BENEFIT" means the Benefit (either a Restoration Benefit, an Enhanced Retirement Benefit, or both) under the Plan in connection with which a Participant is designated for a Special Retirement Opportunity Benefit. (2) DESIGNATION IN CONNECTION WITH OTHER BENEFIT. A Special Retirement Opportunity Benefit shall be in connection with either (or both) of the following benefits for which the designated Participant is also designated: a Restoration Benefit under 6.1.1(a) or an Enhanced Retirement Benefit under 6.1.1(f). (3) BENEFIT. If a Participant is designated for a Special Retirement Opportunity Benefit under this 6.1.1(h), the Participant's SRO Connected Benefit (or Benefits) shall be based on treating the Participant; (i) As having attained the greater of the Participant's actual age as of the Annuity Starting Date (as defined in the Retirement Plan) or the Deemed Age; (ii) As having the Deemed Eligibility Years and the Deemed Benefit Years; and (iii) As having Average Monthly Compensation equal to the SRO Average Monthly Compensation. (4) TERMINATION DATE. The Committee may, in its discretion, condition the designation of a Participant for a Special Retirement Opportunity Benefit upon the Participant's termination of employment not later than a date specified by the Committee. -24- 6.1.2 COORDINATION OF BENEFITS. The following rules shall apply where a Participant is designated for more than one benefit under 6.1.1: (a) If a Participant receives an Early Retirement Subsidy Benefit under 6.1.1(b) or a Change in Control Early Retirement Subsidy Benefit under 6.1.1(d)(1), there shall be no early retirement reduction with respect to the Participant's benefits, if any, described in 6.1.1(a), 6.1.1(c), and 6.1.1(d)(2). (b) If a Participant receives an Additional Benefit Service Benefit under 6.1.1(c) or a Change in Control Additional Benefit Service under 6.1.1(d)(2), the Participant's benefits, if any, described in 6.1.1(a), 6.1.1(b), and 6.1.1(d)(1) shall be based on the lesser of 25 years of Benefit Service or the designated number of years of Benefit Service. (c) If a Participant is designated for an Early Retirement Subsidy Benefit under 6.1.1(b) and a Change in Control Early Retirement Subsidy Benefit under 6.1.1(d)(1), the Participant's Change in Control Early Retirement Subsidy Benefit under 6.1.1(d)(l) shall be reduced by the amount payable as an Early Retirement Subsidy Benefit under 6.1.1(b). (d) If a Participant is designated for an Additional Benefit Service Benefit under 6.1.1(c) and a Change in Control Additional Benefit Service Benefit under 6.1.1(d)(2), the Participant's Change in Control Additional Benefit Service Benefit under 6.1.1(d)(2) shall be reduced by the amount payable as an Additional Benefit Service Benefit under 6.1.1(c). (e) If a Participant is designated for an Enhanced Retirement Benefit under 6.1.1(f) and is also designated for any other Retirement Plan-Related Benefit under 6.1.1, the Participant's Enhanced Retirement Benefit under 6.1.1(f) shall be -25- reduced by the aggregate amounts payable as any other Retirement Plan-Related Benefits under 6.1.1 (after taking into account any other applicable coordination provisions of this 6.1.2). 6.1.3 TIME AND MANNER OF PAYMENT. A vested Participant's Retirement Plan-Related Benefit (other than an Enhanced Retirement Benefit pursuant to 6.1.1(f)) shall be paid after his or her ceasing to be an employee of Bancorp or a Sponsoring Employer, beginning with the earlier of the first day of the month after the Participant is age 55 and not yet age 65 and has at least ten years of Eligibility Service ("early retirement date") or after the Participant is at least age 65 and is vested or has had the fifth anniversary of the Participant's commencement of participation. A Participant who is vested in an Enhanced Retirement Benefit shall be paid such Enhanced Retirement Benefit after the Participant ceases to be an employee of Bancorp or a Sponsoring Employer, beginning with the first day of the first calendar month after the Participant terminates employment. A Participant's Retirement Plan-Related Benefit under the Plan is earned in the single life annuity form with no benefit payable to anyone on the Participant's post-retirement death. A Participant may make a one-time election to receive that benefit in one of the forms provided below. The Participant's election must be made before the Participant's commencing participation. If no election is made by that latest election date, then the Participant's benefit shall be paid in the single life annuity form. The following optional forms are available: (a) JOINT AND SURVIVOR ANNUITY. An actuarial equivalent reduced monthly benefit for life to the Participant with 50 percent or 100 percent, as elected, of that amount payable to the survivor designated at retirement, if then living, for life -26- after the death of the Participant. The straight life annuity is converted to a 50 percent survivor annuity by multiplying the straight life annuity amount by: [.94 + .004 x (spouse's age - Participant's age at death)]; not greater than 1.000. The straight life annuity is converted to a 100 percent survivor annuity by multiplying it by: [.89 + .006 x (beneficiary's age - retired Participant's age)]; not greater than 1.000. If the designated survivor dies before the Participant retires, then the Participant shall select another survivor within 30 days. Except for death of the survivor the Participant shall have no power to name a new survivor. If there is no living designated survivor on the Participant's retirement, the benefit shall be paid in the straight life annuity form. If the designated survivor dies after the Participant retires but before the Participant dies, then payments will continue to the Participant in the same reduced amount and another survivor cannot be selected. No payments will be made to anyone after the death of both the Participant and the designated survivor. (b) SUPPLEMENTAL INCOME OPTION. An actuarial equivalent benefit whereby monthly straight life annuity or joint and survivor annuity payments to the Participant before the Participant is first eligible for Social Security benefits are greater than the remaining Participant life annuity payments so as to provide approximately equal payments throughout the Participant's life annuity payment period, including payments from Social Security. The actuarial equivalent factors are as follows: Amount of straight life annuity equivalent to $1 of temporary annuity to age 62 and 1/12 equals $.006 times months of payments. -27- If this benefit form is elected in conjunction with a benefit form that provides payments after the Participant's death, the post-death payments shall be based on the payments that would have been made to the Participant after first eligibility for Social Security whether the retired Participant dies before or after such eligibility. 6.1.4 EARLY RETIREMENT REDUCTION. Except as provided in 6.1.2, if a Participant's Retirement Plan-Related Benefit (other than an Enhanced Retirement Benefit under 6.1.1(f)) starts before the first of the month after age 65 ("normal retirement date") and the Participant was eligible for early retirement an terminating Bancorp employment, and the Participant is not eligible for an Early Retirement Subsidy Benefit under 6.1.1(b), the Participant's Retirement Plan-Related Benefit calculated under 6.1 shall be reduced by 1/3 of 1 percent of such normal retirement benefit for each month by which the early retirement date precedes the following reference age:
YEARS OF ELIGIBILITY SERVICE REFERENCE AGE ------------------------------ --------------- Less than 25 65 25 or more 62
No reduction shall be made if the Participant is at least age 62 and has at least 25 years of Eligibility Service. If a Participant was not eligible for early retirement on terminating Bancorp employment, the 6.1 benefit shall be reduced by .5833 percent for each full month from age 60 to age 65 and 1/3 of 1 percent from age 55 to age 60 by which the early retirement date precedes the normal retirement date. 6.1.5 BENEFIT FORFEITABILITY. A Participant shall forfeit the entire amount of the Participant's Retirement Plan-Related Benefit described in 6.1.1(b) and -28- 6.1.1(c) or, if payments of said benefits have already begun, any remaining payments, if the Participant, either directly or indirectly, on the Participant's own behalf or as a partner, officer, employee, consultant, financier, stockholder (except by ownership of less than 1 percent of the outstanding stock of a publicly held corporation), director, or trustee of any person, firm, or corporation, or otherwise, engages in any business competing with the business carried on by Bancorp or any of its affiliates at the time of the Participant's termination of employment with Bancorp and its affiliates during the period ending on the later of (i) the date that is ten years after the Participant's termination of employment with Bancorp and its affiliates, or (ii) the Participant's normal retirement date under the Retirement Plan. 6.1.6 PRERETIREMENT DEATH BENEFIT. If a vested Participant dies prior to retirement under this Plan and has a surviving spouse, such surviving spouse or designated nonspouse beneficiary, shall receive a monthly preretirement death benefit equal to one-half of the Participant's straight life annuity calculated as provided below. No preretirement death benefit is payable to a designated nonspouse beneficiary if the Participant is not married on the date of death. The preretirement death benefit shall begin to be paid within 30 days after the Manager of the Human Resources Group or his or her designee (the "Manager") is notified of the Participant's death, if the Participant was an employee of Bancorp or a Sponsoring Employer at death, and if not, then within 30 days after the Participant would have first been eligible for early or normal retirement under this Plan had the Participant survived to that date, whether or not the corresponding benefit has begun under the Retirement Plan, and shall be payable for the life of the spouse. For Retirement Plan-Related Benefits other than an Enhanced Retirement Benefit, if the Participant was not an employee of Bancorp or Sponsoring -29- Employer and was not yet age 65 on the date of death, then the Participant's age 65 single life annuity benefit shall be reduced by the reduction factors in 6.1.3 for a Participant who is not eligible for early retirement on terminating employment. If the Participant was an employee of Bancorp or a Sponsoring Employer on the date of death then the Participant's age 65 single life annuity benefit shall be reduced by the reduction factors in 6.1.3 for a Participant who was eligible for early retirement on terminating Bancorp employment, but there shall be no reduction below age 55 if the Participant died before age 55. For Enhanced Retirement Benefits under 6.1.1(f), if the Participant was an employee of Bancorp or a Sponsoring Employer on the date of death and was vested in an Enhanced Retirement Benefit, the Participant's Target Benefit shall be reduced by applying the reduction factors in 6.1.1(f)(5) as if the Compensation Committee had approved the Participant's retirement or termination of employment. If the beneficiary is the spouse, then the above death benefit shall be paid for the life of the spouse with no further payments made after the spouse's death. If the beneficiary is a person other than the spouse and the beneficiary is more than five years younger than the Participant, then the survivor benefit shall be paid for the life of the nonspouse survivor but not to exceed the life expectancy of a beneficiary who is exactly five years younger than the Participant. If the nonspouse beneficiary is five or less years younger than the Participant, then the survivor shall receive the death benefit for life with no payments after the survivor's death. 6.1.7 LUMP-SUM PAYMENTS OF SMALL BENEFITS. Notwithstanding any other provision of this Plan, the Retirement Plan-Related Benefit or the preretirement death benefit shall be paid in an actuarial equivalent lump sum within 30 days after the Manager determines that the present value of such benefit is less than an amount -30- fixed and revised from time to time, in the Manager's discretion. The actuarial equivalent shall be determined using the 1971 TPF&C forecast mortality for males, set back five years for the Participant and one year for the survivor, if any, at the "applicable interest rate". The "applicable interest rate" shall mean the interest rate or rates that would have been used as of the first day of the calendar year that contains the distribution date by the Pension Benefit Guaranty Corporation ("PBGC") for the purpose of determining the present value of the Participant's benefits under the Plan, assuming the Plan was insured by the PBGC even though it is not, and terminated on the date distribution commences with insufficient assets to provide benefits guaranteed by the PBGC on that date. 6.1.8 ARBITRATION. Any dispute with respect to whether a Participant designated for a benefit described in 6.1.1(d) or 6.1.1(f ) was terminated for "Cause" or terminated employment with "Good Reason," as those terms are defined in 6.1.1(d), shall, after compliance with the claims procedure set forth in Article XI of this Plan, be submitted to arbitration for a binding determination by a single arbitrator agreed upon by the Participant and the Board, or if the Participant and the Board are unable to agree upon an arbitrator within 20 days after either the Participant or the Board demands arbitration, appointed by the presiding judge of the Circuit Court of the State of Oregon for Multnomah County. After the appointment of an arbitrator, the arbitration proceedings shall follow the rules of the American Arbitration Association but shall not be conducted under its auspices. The arbitrator shall have the power to grant limited discovery in his or her discretion upon good cause shown by the party seeking discovery. 6.2 INVESTMENT PLAN-RELATED BENEFIT. -31- 6.2.1 ANNUAL CREDIT. Each Participant shall receive, for each calendar year commencing prior to January 1, 1998 for which the Participant has been designated for this benefit, a credit to the Participant's "Investment Plan Benefit Account" of an amount equal to the sum of the Participant's "Deferred Compensation Credit," "Section 415 Limitation Credit," "Before-Tax Contribution Limitation Credit," and "Matching Credit," to the extent such credits are not duplicative, as described below. (a) DEFERRED COMPENSATION CREDIT. The amount of the Deferred Compensation Credit is the amount of the employer matching contribution that would have been allocated to the Participant's Bancorp Contribution Account under the U. S. Bancorp Employee Investment Plan (the "Investment Plan") had deferred compensation counted as nondeferred compensation under the Investment Plan. In computing the amount that would have been so allocated, the whole number percentage that has been actually elected by the Participant to determine the elective before-tax contribution under the Investment Plan shall be used. Furthermore, computation of the Participant's Deferred Compensation Credit shall not take into account (i) the limitation on annual additions required by Section 415 of the Internal Revenue Code, (ii) the federal income tax limitations on the amount of compensation that can be taken into account under the Investment Plan, and (iii) the federal income tax limitations on the amount of elective before-tax contributions. (b) SECTION 415 LIMITATION CREDIT. The amount of the Section 415 Limitation Credit is the amount by which the employer matching contribution that would have been allocated to the Participant's Bancorp Contribution Account under the terms of the Investment Plan is reduced by application of the limitation on annual additions required by Section 415 of the Internal Revenue Code. -32- (c) BEFORE-TAX CONTRIBUTION LIMITATION CREDIT. The amount of the Before-Tax Contribution Limitation Credit is the difference between: (1) the amount of the employer matching contribution that would have been allocated to the Participant's Bancorp Contribution Account under the Investment Plan based on the Participant's actual compensation and the whole number percentage that has been actually elected by the Participant to determine the elective before-tax contribution, before application of federal income tax limitations on the amount of compensation that can be taken into account under the Investment Plan and the amount of elective before-tax contributions, and (2) the amount of the employer matching contribution actually allocated to the Participant's Bancorp Contribution Account under the Investment Plan. (d) MATCHING CREDIT. For any Participants not eligible to participate in the Investment Plan, the amount of the Matching Credit is the amount of the employer matching contribution that would have been allocated to the Participant's Bancorp Contribution Account under the Investment Plan had the Participant's deferred compensation under any applicable plan or plans counted as elective before-tax contributions under the Investment Plan. For this purpose, an applicable plan is a deferred compensation plan approved by the Board that specifically provides that compensation deferred under the plan is to be taken into account in determining the Matching Credit under this Plan. Also, computation of the Participant's Matching Credit shall not take into account (i) the limitation on annual addition required by Section 415 of the Internal Revenue Code, (ii) the federal income tax limitations on the amount of compensation that can be taken into account under the Investment Plan, -33- and (iii) the federal income tax limitations on the amount of elective before-tax contributions. 6.2.2 INVESTMENT PLAN BENEFIT ACCOUNT. An Investment Plan Benefit Account shall be maintained for each Participant designated for the benefits described under 6.2.1. The balance in the Investment Plan Benefit Account shall be adjusted upward or downward as of each Investment Plan valuation date by the same percentage amount as the Participant's actual Bancorp Contribution Account under the Investment Plan is adjusted. 6.2.3 TIME AND MANNER OF PAYMENT. The Investment Plan Benefit Account shall be paid to the Participant in a lump sum within 30 days after termination of employment with Bancorp and its affiliates (or as soon thereafter as practical), except that if prior to the adoption of this amended and restated Plan the Participant had terminated such employment and elected to receive payment of that Account on a date specific, then such Account shall be paid on that date. 6.2.4 DEATH BENEFIT. In the event of a Participant's death, the Investment Plan Benefit Account shall be paid to the beneficiary named in accordance with procedures established by the Manager or, in the absence of a named beneficiary, to the Participant's beneficiary under the terms of the Investment Plan, in a lump sum within 30 days after the Participant's death. 6.3 FBS CHANGE IN CONTROL BENEFIT. 6.3.1 BENEFIT FOR PARTICIPANT IN RETIREMENT PLAN. (a) PARTICIPANTS DESIGNATED FOR A RESTORATION BENEFIT. A Participant who is designated to receive both an "FBS Change in Control Benefit" and a -34- "Restoration Benefit" under this Plan shall receive a monthly FBS Change in Control Benefit equal to the difference between: (1) the benefit the Participant would have received under Section 6.1.1(a) had such benefit been calculated after inserting the following paragraphs C and D immediately after paragraph B in Section 6.1.1(a)(2)(i): C) had the Participant accrued two additional years of Benefit Service, as defined in the Retirement Plan, as of his or her termination date; and D) had the Participant's Average Monthly Compensation, as defined in the Retirement Plan, been calculated by assuming that the Participant remained employed by Bancorp or a Sponsoring Employer for an additional two years and received Compensation, as defined in the Retirement Plan, over that period in the amount determined in accordance with the first paragraph of Section 4.2 of the FBS Change in Control Plan (such Compensation to be treated as having been earned and paid at such time(s) as the Manager of Human Resources (or his or her designee) may determine); and (2) the Participant's actual benefit under Section 6.1.1(a). (b) PARTICIPANTS NOT DESIGNATED FOR A RESTORATION BENEFIT. A Participant who is designated to receive an "FBS Change in Control Benefit," but not a Restoration Benefit, under this Plan and who is a participant in the Retirement Plan shall receive a monthly FBS Change in Control Benefit equal to the difference between: -35- (1) the early, normal, or delayed retirement benefit that would have been payable to the Participant under the Retirement Plan: A) had the Participant accrued two additional years of Benefit Service, as defined in the Retirement Plan, as of his or her termination date; and B) had the Participant's Average Monthly Compensation, as defined in the Retirement Plan, been calculated by assuming that the Participant remained employed by Bancorp or a Sponsoring Employer for an additional two years and received Compensation, as defined in the Retirement Plan, over that period in the amount determined in accordance with the first paragraph of Section 4.2 of the FBS Change in Control Plan (such Compensation to be treated as having been earned and paid at such time(s) as the Manager of Human Resources (or his or her designee) may determine); and (2) the Participant's actual early, normal, or delayed retirement benefit under the Retirement Plan. In calculating the benefit described in this Section 6.3.1(b), the period of time used to determine a Participant's Average Monthly Compensation may be different than the period of time used to determine the Participant's Average Monthly Compensation in calculating the benefit actually payable under the Retirement Plan. (c) TREATMENT OF FBS CHANGE IN CONTROL BENEFIT. Except as provided in Section 6.3.3, a Participant's FBS Change in Control Benefit shall be treated for all purposes, including, but not limited to, distribution, reduction for early commencement, forfeitability, death benefits and small benefit cash out, as if it were a -36- Restoration Benefit; provided, however, that with respect to a Participant whose FBS Change in Control Benefit is calculated under Section 6.3.1(b), such benefit shall be distributed in the form of a single life annuity payable over the Participant's lifetime with no benefit payable to anyone on the Participant's death, unless the Manager of Human Resources (or his or her designee), in his or her sole discretion, approves the Participant's request (prior to benefit commencement) of one of the other forms of payment provided in Section 6.1.3. 6.3.2 BENEFIT FOR PARTICIPANT IN WO RETIREMENT PLAN OR WO SERP. (a) PARTICIPANTS PARTICIPATING IN WO SERP. A Participant who is designated to receive an "FBS Change in Control Benefit" under this Plan and who is a participant in the WO SERP, but who is not eligible for a benefit under Section 6.3.1 shall receive a monthly FBS Change in Control Benefit equal to the difference between: (1) the benefit to which such Participant would have been entitled under the WO SERP had: A) the Participant's Final Average Earnings, as defined in the WO SERP, for purposes of calculating 65% thereof, been calculated by assuming that the Participant had remained employed by Bancorp or a Sponsoring Employer for an additional two years and received Earnings, as defined in the WO SERP, over that period in the amount determined in accordance with the first paragraph of Section 4.2 of the FBS Change in Control Plan (such Earnings to be treated as having been earned and paid at such time(s) as the Manager of Human Resources (or his or her designee) may determine); and -37- B) for purposes of calculating any reduction related to years of Credited Service, as defined in the WO SERP, the Participant accrued two additional years of Credited Service as of his or her termination date; and (2) the Participant's actual benefit under the WO SERP. In calculating the benefit described in this Section 6.3.2(a), the period of time used to determine a Participant's Final Average Earnings may be different than the period of time used to determine the Participant's Final Average Earnings in calculating the benefit actually payable under the WO SERP. (b) PARTICIPANTS NOT PARTICIPATING IN WO SERP. A Participant who is designated to receive an "FBS Change in Control Benefit" and who is a participant in the WO Retirement Plan, but who is not a participant in the WO SERP and who is not eligible for a benefit under Section 6.3.1, shall receive a monthly FBS Change in Control Benefit equal to the difference between: (1) the benefit to which such Participant would have been entitled under the WO Retirement Plan: A) had the Participant accrued two additional years of Credited Service, as defined in the WO Retirement Plan, as of his termination date; and B) had the Participant's Final Average Earnings, as defined in the WO Retirement Plan, been calculated by assuming that the Participant had remained employed by Bancorp or a Sponsoring Employer for an additional two years and received Earnings, as defined -38- in the WO Retirement Plan, over that period in the amount determined in accordance with the first paragraph of Section 4.2 of the FBS Change in Control Plan (such Compensation to be treated as having been earned and paid at such time(s) as the Manager of Human Resources (or his or her designee) may determine); and (2) the Participant's actual benefit under the WO Retirement Plan. In calculating the benefit described in this Section 6.3.2(b), the period of time used to determine a Participant's Final Average Earnings may be different than the period of time used to determine the Participant's Final Average Earnings in calculating the benefit actually payable under the WO Retirement Plan. (c) TIME AND MANNER OF PAYMENT. Although Sections 6.3.2(a) and 6.3.2(b) calculate a Participant's FBS Change in Control Benefit as a single life annuity, with no benefits payable to anyone after the Participant's post- termination death, such benefit shall be paid as follows: A) With respect to any Participant whose FBS Change in Control Benefit is calculated under Section 6.3.2(a), such benefit shall be paid in the form and at the time such Participant's benefit under the WO SERP is paid. In the event such payment is an a form other than a single life annuity payable for the Participant's life, the monthly benefit amount shall be the actuarial equivalent, determined using the factors and assumptions used under the WO SERP, of the amount calculated under Section 6.3.2(a). Furthermore, in the event such payment commences prior to the Participant's normal retirement (within the meaning of the WO SERP), the monthly benefit amount shall be -39- reduced for such early commencement in accordance with the applicable reduction factors in the WO SERP. B) With respect to any Participant whose FBS Change in Control Benefit is calculated under Section 6.3.2(b), such benefit shall be paid at the time it would have been paid had it been provided under the WO SERP and in the form of a single life annuity payable over the Participant's lifetime with no benefit payable to anyone on the Participant's death, unless the Manager of Human Resources (or his or her designee), in his or her sole discretion, approves the Participant's request (prior to benefit commencement) of one of the other forms of payment provided under the WO SERP (which form must be in the form of an annuity, except as provided in Section 6.3.2(d)). In the event such payment is an a form other than a single life annuity payable for the Participant's life, the monthly benefit amount shall be the actuarial equivalent, determined using the factors and assumptions used under the WO SERP, of the amount calculated under Section 6.3.2(b). Furthermore, in the event such payment commences prior to the Participant's normal retirement (within the meaning of the WO SERP), the monthly benefit amount shall be reduced for such early commencement in accordance with the applicable reduction factors in the WO SERP. (c) PRERETIREMENT DEATH BENEFIT. If a vested Participant who is entitled to an FBS Change in Control Benefit under this Section 6.3.2 dies before such benefit is paid or commences to be paid and has a surviving spouse, such surviving spouse shall be entitled to receive a monthly preretirement death benefit equal to the portion of the FBS Change in Control Benefit that would have been payable as a death -40- benefit under the WO SERP were such benefit to be paid as a death benefit under the WO SERP in addition to any other benefit payable thereunder. (d) LUMP-SUM PAYMENTS OF SMALL BENEFITS. Notwithstanding any other provision of this Plan, any FBS Change in Control Benefit or the preretirement death benefit calculated under this Section 6.3.3 shall be subject to the provisions of Section 6.1.7 as if it were a Retirement Plan-Related Benefit (or a preretirement death benefit related to such a benefit). 6.3.3 TWO YEAR ASSUMPTION. The FBS Change in Control Benefit of any Participant is calculated assuming that such benefit commences at least two years after the date on which the Participant ceases to be an employee of Bancorp or a Sponsoring Employer. In the event that such benefit commences within two years of such date, it shall be reduced in a manner determined by the Manager of Human Resources (or his or her designee) to reflect such early commencement. 6.4 SPECIAL RETIREMENT PLAN MAKE-UP BENEFIT 6.4.1 BENEFIT FOR PARTICIPANT IN RETIREMENT PLAN. (a) AMOUNT OF SPECIAL RETIREMENT PLAN MAKE-UP BENEFIT. A Participant who is designated to receive a "Special Retirement Plan Make-Up Benefit," under this Plan and who is an active participant in the Retirement Plan on January 1, 1998 shall receive a monthly Special Retirement Make-Up Benefit equal to the difference between: (1) the early, normal, or delayed retirement benefit that would have been payable to the Participant under the Retirement Plan had any compensation deferred by the Participant under the U. S. Bancorp Executive -41- Deferral Plan after December 31, 1997 counted as Compensation under the Retirement Plan at the time at which such compensation would have been paid had it not been deferred; and (2) the Participant's actual early, normal, or delayed retirement benefit under the Retirement Plan. (b) TREATMENT OF SPECIAL RETIREMENT PLAN MAKE-UP BENEFIT. A Participant's Special Retirement Plan Make-Up Benefit shall be treated for all purposes, including, but not limited to, distribution, reduction for early commencement, forfeitability, death benefits and small benefit cash out, as if it were a Restoration Benefit; provided, however, that unless Section 6.1.7 applies, such benefit shall be distributed in the form of a single life annuity payable over the Participant's lifetime with no benefit payable to anyone on the Participant's death, unless the Manager of Human Resources (or his or her designee), in his or her sole discretion, approves the Participant's request (prior to benefit commencement) of one of the other forms of payment provided in Section 6.1.3. 6.4.2 BENEFIT FOR PARTICIPANT IN WO RETIREMENT PLAN. (a) AMOUNT OF SPECIAL RETIREMENT PLAN MAKE-UP BENEFIT. A Participant who is designated to receive a "Special Retirement Plan Make-Up Benefit" and who is an active participant in the WO Retirement Plan on January 1, 1998 shall receive a monthly Special Retirement Plan Make-Up Benefit equal to the difference between: (1) the benefit that would have been payable to the Participant under the WO Retirement Plan had any compensation deferred by the Participant under the U. S. Bancorp Executive Deferral Plan after December 31, 1997 -42- counted as Earnings under the WO Retirement Plan at the time at which such compensation would have been paid had it not been deferred; and (2) the Participant's actual benefit under the WO Retirement Plan. (b) DISTRIBUTION OF SPECIAL RETIREMENT PLAN MAKE-UP BENEFIT. Although Section 6.4.2(a) calculates a Participant's Special Retirement Plan Make-Up Benefit as a single life annuity, with no benefits payable to anyone after the Participant's post-termination death, such benefit shall be paid as follows: (1) With respect to any Participant who is an active participant in the WO Retirement Plan on January 1, 1998 and who is a participant in the WO SERP, the Participant's Special Retirement Plan Make-Up Benefit shall be paid in the form and at the time such Participant's benefit under the WO SERP is paid. In the event such payment is in a form other than a single life annuity payable for the Participant's life, the monthly benefit amount shall be the actuarial equivalent, determined using the factors and assumptions used under the WO SERP, of the amount calculated under Section 6.4.2(a). Furthermore, in the event such payment commences prior to the Participant's normal retirement (within the meaning of the WO SERP), the monthly benefit amount shall be reduced for such early commencement in accordance with the applicable reduction factors in the WO SERP. (2) With respect to any Participant who is an active participant in the WO Retirement Plan on January 1, 1998, but who is not a participant in the WO SERP, the Participant's Special Retirement Plan Make-Up Benefit shall be paid at the time it would have been paid had it been provided under the WO SERP and in the form of a single life annuity payable over the Participant's -43- lifetime with no benefit payable to anyone on the Participant's death, unless the Manager of Human Resources (or his or her designee), in his or her sole discretion, approves the Participant's request (prior to benefit commencement) of one of the other forms of payment provided under the WO SERP. In the event such payment is in a form other than a single life annuity payable for the Participant's life, the monthly benefit amount shall be the actuarial equivalent, determined using the factors and assumptions used under the WO SERP, of the amount calculated under Section 6.4.2. Furthermore, in the event such payment commences prior to the Participant's normal retirement (within the meaning of the WO SERP), the monthly benefit amount shall be reduced for such early commencement in accordance with the applicable reduction factors in the WO SERP. (c) PRERETIREMENT DEATH BENEFIT. If a vested Participant who is entitled to a Special Retirement Plan Make-Up Benefit under this Section 6.4.2 dies before such benefit is paid or commences to be paid and has a surviving spouse, such surviving spouse shall be entitled to receive a monthly preretirement death benefit equal to the portion of the Special Retirement Plan Make-Up Benefit that would have been payable as a death benefit under the WO SERP were such benefit to be paid as a death benefit under the WO SERP in addition to any other benefit payable thereunder. (d) LUMP-SUM PAYMENTS OF SMALL BENEFITS. Notwithstanding any other provision of this Plan, any Special Retirement Plan Make-Up Benefit or preretirement death benefit calculated under this Section 6.4.2 shall be subject to the provisions of Section 6.1.7 as if it were a Retirement Plan- Related Benefit (or a preretirement death benefit related to such a benefit). -44- ARTICLE VII VESTING Except as provided in 6.1.1(d), 6.1.1(f), 6.1.4, and in this Article VII, a Participant's right to any benefit under the Plan is vested and nonforfeitable at the same time as and to the same extent as the Participant is vested in related plan benefits. In connection with the designation of a Participant for any benefit under the Plan, the Compensation Committee or the Executive Committee may specify different vesting provisions for a particular benefit. ARTICLE VIII SOURCE OF BENEFITS This Plan and the benefits payable hereunder shall be unfunded and shall be payable only from the general assets of Bancorp or a Sponsoring Employer. Bancorp and Sponsoring Employers do not represent that a specific portion of their assets will be used to provide the benefits hereunder. Participants, surviving spouses, and beneficiaries shall have no interest in any specific assets of Bancorp or any Sponsoring Employer. Nothing contained herein shall be deemed to create a trust of any kind or create any fiduciary relationship. To the extent that any person acquires a right to receive payments from Bancorp or any Sponsoring Employer under this Plan, such rights shall be no greater than the rights of their unsecured general creditors. Notwithstanding the foregoing, Bancorp and the Sponsoring Employer may deposit moneys under the U. S. Bancorp Deferred Compensation Trust Agreement (the "Trust") for the purpose of paying benefits hereunder from these moneys and the income thereon, unless such Trust assets are required to satisfy the obligations of Bancorp and the Sponsoring Employers to their general creditors. -45- ARTICLE IX ADMINISTRATION OF THE PLAN Except for matters specifically reserved to the Compensation Committee, the Plan shall be administered by the Executive Committee. Except as otherwise provided and subject to review and supervision by the Compensation Committee, the Executive Committee shall have the authority and responsibility for all matters in connection with the operation and administration of the Plan. The Executive Committee's powers and duties shall include, but shall not be limited to, the following: (a) Responsibility for the compilation and maintenance of all records necessary in connection with the Plan, including records of Participant designations; (b) Authorizing the payment of all benefits and expenses of the Plan as they become payable under the Plan; and (c) Authority to engage such legal, accounting, and other professional services as it may deem proper. Decisions by the Executive Committee shall be final and binding upon all parties affected by the Plan, including the surviving spouses and beneficiaries of Participants. The Executive Committee may rely on information and recommendations provided by supervisory management. The Executive Committee may delegate to a subcommittee composed of less than all Executive Committee members or to supervisory management who are not Executive Committee members, the responsibility for decisions that it may make or actions that it may take under the -46- terms of the Plan, subject to the reserved right of the Executive Committee and the Compensation Committee to review such decisions or actions and modify them when necessary or appropriate under the circumstances. The Executive Committee shall not allow any employee to engage directly or indirectly in any decisions or actions that affect that employee's Plan benefits. ARTICLE X MISCELLANEOUS 10.1 NONASSIGNABILITY OF BENEFITS. Benefits under this Plan cannot be sold, transferred, anticipated, assigned, pledged, hypothecated, seized by legal process, subjected to claims of creditors in any way, or otherwise disposed of. 10.2 GOVERNING LAW. This Plan and any amendments shall be construed, administered, and governed in all respects in accordance with applicable federal law and the laws of the State of Oregon. 10.3 NO RIGHT OF CONTINUED EMPLOYMENT. Nothing in this Plan shall be construed to give a Participant the right to remain an employee of Bancorp or any of its affiliates, and Bancorp and its affiliates reserve the right to discharge a Participant with or without cause at any time. 10.4 WITHHOLDING TAXES. Bancorp or the Sponsoring Employer shall withhold any taxes required by law to be withheld in connection with payment of benefits under this Plan. 10.5 SEVERABILITY. The invalidity or unenforceability of any provision of this Plan shall not affect the validity or enforceability of any other provision of this -47- Plan, and each provision of this Plan shall be severable and enforceable to the extent permitted by law. ARTICLE XI CLAIMS PROCEDURE 11.1 INITIAL CLAIM. Any person claiming a benefit under this Plan ("Claimant") shall present the claim in writing to the Manager. Any dispute with respect to a claim for benefits under 6.1.1(d) as to whether the designated Participant's termination was for "Cause" or with "Good Reason" shall, after compliance with the claims procedure of this Article XI, be submitted to binding arbitration pursuant to 6.1.8. 11.2 DECISION ON INITIAL CLAIM. 11.2.1 TIME PERIOD FOR DENIAL NOTICE. A decision shall be made on the claim as noon as practicable and shall be communicated in writing by the Manager to the Claimant within a reasonable period after receipt of the claim by the Manager. In no Parent shall the decision on an initial claim be given more than 90 days after the date the claim was filed, unless special circumstances require an extension of time for processing. If there is an extension, the Claimant shall be notified of such within 90 days of the date the claim was filed. The extension notice shall indicate the special circumstances and the date by which a decision is expected. The extension shall not exceed 90 days from the end of the initial response period. 11.2.2 CONTENTS OF NOTICE. If the claim is wholly or partially denied, the notice of denial shall indicate: (a) The specific reasons for the denial; -48- (b) The specific references to pertinent Plan provisions on which the denial is based; (c) A description of additional material or information necessary for the Claimant to perfect the claim and an explanation of why such material or information is necessary; and (d) An explanation of the Plan's claim review procedure. 11.2.3 DEEMED DENIED. If written notice of the decision wholly or partially denying the claim has not been furnished within 90 days after the claim is filed or there has been an extension and no notice of a decision is furnished by the end of the extension period, and if the claim has not been granted within such period, the claim shall be deemed denied as of the end of the 90-day or 180-day period for purposes of proceeding to the review stage described in 11.3 and 11.4. 11.3 REVIEW OF DENIED CLAIM. If a Claimant receives a notice of denial or his or her claim is deemed denied pursuant to 11.2 above, the Claimant may request a review of the claim. The request for review is made by personally delivering or mailing a written request for review, prepared by either the Claimant or his or her authorized representative, to the Executive Committee. The Claimant's request for review must be made within a reasonable period of time taking into consideration the nature of the benefit that is the Subject of the claim and other attendant circumstances. In no event shall the period for requesting review expire less than 60 days after receipt of the notice of denial or the date on which the claim is deemed denied if no notice is received. If the written request for review is not made on a timely basis, the Claimant shall be deemed to waive his or her right to review. The Claimant or his or -49- her duly authorized representative may, at or after the time of making the request, review all pertinent documents and submit issues and comments in writing. 11.4 DECISION ON REVIEW. A review shall be promptly made by the Executive Committee after receipt of a timely filed request for review. A decision on review shall be made and furnished in writing to the Claimant. The decision shall be made not later than 60 days after receipt of the request for review. If special circumstances require an extension of time for processing (such as the need to hold a hearing), a decision shall be made and furnished to the Claimant not later than 120 days after such receipt. If an extension is required, the Claimant shall be notified of such within 60 days after the request for review was filed. The written decision shall include the reasons for such decision with reference to the provisions of the Plan upon which the decision is based. The decision shall be final and binding upon the Claimant and Bancorp and its affiliates and all other persons involved. If the decision on review is not furnished within the applicable time period, the claim shall be deemed denied on review. The scope of any subsequent review of the benefit claim, judicial or otherwise, shall be limited to a determination as to whether the Executive Committee acted arbitrarily or capriciously in the exercise of its discretion. In no event shall any such further review be on a de novo basis as the Executive Committee has discretionary authority to determine eligibility for benefits and to construe the terms of this Plan. -50- ARTICLE XII AMENDMENTS AND TERMINATION Except as expressly provided in 6.1.1(d)(1) and 6.1.1(f)(7)(vi), the Board has the power to terminate this Plan at any time or to amend this Plan at any time and in any manner that it may deem advisable. -51- EX-10.11 7 EXHIBIT 10.11 U. S. BANCORP 1991 EXECUTIVE DEFERRED COMPENSATION PLAN FIRST RESTATEMENT This RESTATED 1991 EXECUTIVE DEFERRED COMPENSATION PLAN (the "Plan") is adopted by U. S. Bancorp, an Oregon corporation ("Bancorp"), effective February 21, 1991. ARTICLE I PURPOSE OF PLAN The continued growth and success of Bancorp are dependent upon its ability to attract and retain the services of key executives of the highest competence and to provide incentives for their effective service and superior performance. The purpose of the Plan is to advance the interests of Bancorp and its shareholders through a deferred compensation program that will attract and retain key executives. ARTICLE II NATURE OF PLAN This Plan is intended to be and shall be administered by Bancorp as an income tax nonqualified, unfunded plan primarily for the purpose of providing deferred compensation for a "select group of management or highly compensated employees" within the meaning of Sections 201(2), 301(a)(3), and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended. ARTICLE III SPONSORING EMPLOYERS The corporations whose employees are covered by the Plan (the "Sponsoring Employers") are Bancorp and those subsidiaries of Bancorp that adopt the U. S. Bancorp Supplemental Benefits Plan or adopt this Plan. ARTICLE IV ELIGIBILITY Any key executive (including officers who may also be directors) of Bancorp and the Sponsoring Employers who is (or will be) for one or more calendar years a participant in the U. S. Bancorp Supplemental Benefits Plan, and any other key employee of Bancorp or a Sponsoring Employer who is designated by Bancorp's Executive Management Committee (the "Committee") as eligible to participate in the Plan for one or more calendar years, shall be eligible to participate in this Plan ("Eligible Employees"). ARTICLE V PARTICIPATION 5.1 ELECTION. An Eligible Employee may participate in the Plan by filing with Bancorp an election, on a form provided by Bancorp (an "Election"), to participate in the Plan for one or more calendar years. An Eligible Employee who makes an Election for a calendar year shall be a "Participant" for such year. For purposes of this Plan, the period from April 1, 1991, through December 31, 1991 (the "1991 Plan Year"), shall be treated as a calendar year. Each Election shall be in a form prescribed by the Manager of Bancorp's Human Resources Group or his or her delegate (the "Manager"), and shall set forth the Participant's election to participate in the Plan for one or more calendar years, the percentage or amount of Compensation (as defined in Section 5.4) to be deferred for each such calendar year, and a payment method pursuant to Section 8.1. A Participant may elect to defer all or any specified portion of Compensation for a calendar year. The portion of a Participant's Compensation deferred under the Plan shall be referred to as the "Deferred Amount." 5.2 ELECTION FOR 1991 PLAN YEAR. A Participant must file an Election to defer a specified portion of Compensation during the 1991 Plan Year on or prior to March 31, 1991. 5.3 TIME FOR FILING ELECTION; AMENDMENT OR TERMINATION OF ELECTION. An Election to defer Compensation for any calendar year after 1991 must be filed with the Manager on or before December 31 next preceding such calendar year. An Election covering one or more calendar years may be amended or terminated by filing an Amendment or Termination of Deferral Election in a form prescribed by the Manager not later than December 31 next preceding the first calendar year covered by such amended or terminated Election. An Election for any calendar year may not be amended, modified, revoked, or terminated after the beginning of such calendar year. A Participant who has made an Election covering more than one calendar year and who ceases to be an Eligible Employee shall be deemed to have terminated his or her Election for all remaining calendar years covered by his or her Election which begin after the Participant ceases to be an Eligible Employee. 5.4 COMPENSATION. For purposes of this Article V, "Compensation" means regular cash compensation, including any awards or bonuses payable under any incentive compensation plan or program maintained by the Sponsoring Employers, other than the plans described in paragraph (d) of this Section 5.4. For purposes of this Section 5.4, "Compensation" does not include: (a) employee elected contributions towards the purchase of any benefit in lieu of cash under the U. S. Bancorp U-Select Plan or any other -2- cafeteria plan of Bancorp as defined in Section 125 of the Internal Revenue Code of 1986 (the "Code"); (b) any employee elected contributions under the U. S. Bancorp Employee Investment Plan or any other plan under Code Section 401(k); (c) any other similar employee elected contribution or purchase of benefits under any plan specifically designated for such purpose by the Committee; or (d) incentive compensation under any plan or program of the Sponsoring Employers which is designated by the Committee as ineligible for deferral under the Plan. ARTICLE VI DEFERRED ACCOUNTS 6.1 DEFERRED ACCOUNTS. All Deferred Amounts shall be withheld and credited to the Participant's "Deferred Account" at the time the Compensation would otherwise be payable. Each Deferred Account shall be maintained solely for recordkeeping purposes. 6.2 INTEREST. With respect to Deferred Amounts credited to a Deferred Account prior to December 31, 1995, each Deferred Account shall accrue an additional amount (computed like interest compounded quarterly) from the date Deferred Amounts are credited to the Deferred Account pursuant to Section 5.1 until: (a) With respect to Participants for whom payment of their Deferred Accounts becomes due or commences on or before January 1, 1996, the date of final payment of the balance of the Deferred Account; and (b) With respect to all other Participants, December 31, 1995. The rate of interest during a calendar year shall equal the monthly average interest rate on five-year Treasury Notes for the month of November prior to that calendar year, as published in the Federal Reserve Statistical Release G.13 (or a corresponding successor publication as determined by the Committee), plus 75 basis points. 6.3 ADDITIONAL AMOUNTS CREDITED AS GROWTH FACTOR. (a) General. For all periods beginning on or after January 1, 1996, each Deferred Account (other than Deferred Accounts in payout status on December 31, 1995) will accrue an additional amount as described in this -3- section ("Growth Factor") from the date Deferred Amounts are credited to the Deferred Account pursuant to Section 5.1 until the date of final payment of the balance of the Deferred Account. (b) Growth Factor. For each Deferred Account, the Growth Factor for any period will be the amount of investment income that would have been realized had an amount equal to the total balance of the Deferred Account as of the first day of the period been invested in the Hypothetical Investment or Investments (as described in Section 6.3(c)) specified for that period by the Participant. (c) Hypothetical Investments. For purposes of measuring Growth Factor, a Participant may designate one or a combination of Hypothetical Investments authorized from time to time by, or at the direction of, the Manager. The Hypothetical Investment or combination of Hypothetical Investments designated by a Participant will be referred to as the Participant's "Investment Selection." Pursuant to forms and procedures to be adopted by or at the direction of the Manager, a Participant may modify the Investment Section from time to time, effective as of the first day of any calendar quarter. The Manager may designate a Hypothetical Investment that will be effective if a Participant does not otherwise make an effective Investment Selection. A Participant's Investment Selection will be effective for all amounts credited to the Participant's Deferred Account, including previous Deferred Amounts and accrued Growth Factor as well as future Deferred Amounts. (d) No Beneficial Interest. Hypothetical Investments are solely for the purpose of determining the amount of Growth Factor to be credited to Deferred Accounts. The Sponsoring Employers have no obligation to make actual investments corresponding to the Hypothetical Investments. In the event that, for measurement purposes, the Sponsoring Employers (directly or through the U. S. Bancorp Deferred Compensation Trust) make actual investments corresponding to the Investment Selections of the Participants, no Participant will have any rights or beneficial interest in such actual investments greater than the rights of an unsecured creditor of Bancorp or the Sponsoring Employer. ARTICLE VII SOURCE OF BENEFITS 7.1 UNFUNDED PLAN. This Plan and the benefits payable hereunder shall be unfunded and shall be payable only from the general assets of Bancorp or Sponsoring Employers. Bancorp and the Sponsoring Employers do not represent that a specific portion of their assets will be used to provide the benefits hereunder. Participants or beneficiaries shall not have any interest in any assets of Bancorp or a -4- Sponsoring Employer. Nothing contained herein shall be deemed to create a trust of any kind or create any fiduciary relationship. To the extent that any person acquires a right to receive payments from Bancorp or any Sponsoring Employer under this Plan, such rights shall be no greater than the right of any unsecured general creditor of Bancorp or such Sponsoring Employer. 7.2 TRUST. Notwithstanding the foregoing, Bancorp and its Sponsoring Employers may deposit monies under the U. S. Bancorp Deferred Compensation Trust Agreement (the "Trust") for the purpose of paying benefits hereunder from those monies and the income thereon, unless such Trust assets are required to satisfy the obligations of Bancorp and its Sponsoring Employers to their general creditors. ARTICLE VIII PAYMENT OF DEFERRED COMPENSATION 8.1 PAYMENT OPTIONS. (A) ELECTION. Each Participant shall set forth in each Election an irrevocable election of one of the methods of payment of the accrued balance of the Participant's Deferred Account described in Section 8.1(b). If no method of payment is effectively elected, a Participant's Deferred Account shall be paid in cash in a single lump sum within 30 days following the Retirement Year. (B) PAYMENT METHODS. A Participant may elect one of the following payment methods: (i) A lump-sum cash payment to be made within 30 days following the calendar year in which the Participant retires under the U. S. Bancorp Retirement Plan (the "Retirement Year"); or (ii) Payment in ten annual installments as described below beginning within 30 days following the Retirement Year: (A) The first installment will be an amount equal to one-tenth of the total balance of the Deferred Account as of the last day of the Retirement Year; (B) The second (and subsequent) installments will be an amount equal to one-ninth (and then one-eighth, etc.) of the total balance of the Deferred Account as of the end of the calendar year preceding the installment payment date; and -5- (C) The tenth and final installment will be the total remaining balance of the Deferred Account. During the 10-year payout period, the Deferred Account will continue to accrue Growth Factor, and the Participant may continue to make or modify Investment Selections, as provided in Section 6.3. 8.2 DEATH BENEFIT. If a Participant dies before receiving full payment of the Deferred Account, the balance shall be paid in a lump-sum cash payment to the Participant's beneficiary or, if no beneficiary has been effectively designated, to the Participant's estate within 30 days after a Participant's death. 8.3 ACCELERATION OF PAYMENT. The Committee, in its sole discretion, may accelerate payment of the balance of a Deferred Account if a Participant requests payment and the Committee finds that an unforeseeable emergency exists, but only to the extent needed to satisfy the emergency. An unforeseeable emergency is a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in Section 152(a) of the Code) of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The circumstances that will constitute an unforeseeable emergency will depend upon the facts of each case, but, in any case, payment may not be made to the extent that such hardship is or may be relieved-- (a) Through reimbursement or compensation by insurance or otherwise; (b) By liquidation of the Participant's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship; or (c) By cessation of deferrals under the Plan. Examples of what are not considered to be unforeseeable emergencies include the need to send a Participant's child to college or the desire to purchase a home. 8.4 TERMINATION. If a Participant ceases to be employed by Bancorp and its subsidiaries for any reason other than death or retirement, the Committee shall pay the balance of the Participant's Deferred Account in a lump-sum cash payment within 30 days after the Participant's termination. -6- ARTICLE IX ADMINISTRATION The Plan shall be administered by the Committee. The Committee shall have the exclusive authority and responsibility for all matters in connection with the operation and administration of the Plan. The Committee's powers and duties shall include, but shall not be limited to, the following: (a) Responsibility for the compilation and maintenance of all records necessary in connection with the Plan; (b) Authorizing the payment of all benefits and expenses of the Plan as they become payable under the Plan; and (c) Authority to engage such legal, accounting, and other professional services as it may deem proper. Decisions by the Committee shall be final and binding upon all parties affected by the Plan, including Participants and the beneficiaries of Participants. The Committee may rely on information and recommendations provided by supervisory management. The Committee may delegate to a subcommittee composed of less than all Committee members or to supervisory management who are not Committee members the responsibility for decisions that it may make or actions that it may take under the terms of the Plan, subject to the Committee's reserved right to review such decisions or actions and modify them when necessary or appropriate under the circumstances. The Committee shall not allow any employee to obtain control over decisions or actions that affect that employee's Plan benefits. ARTICLE X MISCELLANEOUS 10.1 NONASSIGNABILITY OF BENEFITS. A Participant's benefits under the Plan, including the right to receive payment of the Deferred Account, cannot be sold, transferred, anticipated, assigned, pledged, hypothecated, seized by legal process, subjected to claims of creditors in any way, or otherwise disposed of. 10.2 GOVERNING LAW. This Plan and any amendments shall be construed, administered, and governed in all respects in accordance with applicable federal law and the laws of the State of Oregon. 10.3 NO RIGHT OF CONTINUED EMPLOYMENT. Nothing in the Plan shall confer upon any person the right to continue in the employ of Bancorp or any -7- Sponsoring Employer or interfere in any way with the right of Bancorp or any Sponsoring Employer to terminate the person's employment at any time. 10.4 WITHHOLDING TAXES. Bancorp or the Sponsoring Employer shall withhold any taxes required by law to be withheld in connection with payment of deferred compensation under this Plan. In the event Bancorp or any Sponsoring Employer shall be required to withhold taxes with respect to amounts deferred pursuant to the Plan, Bancorp or the Sponsoring Employer shall have the right to require a Participant to reimburse them for any such taxes. ARTICLE XI CLAIMS PROCEDURE 11.1 INITIAL CLAIM. Any person claiming any benefit under this Plan (the "Claimant") shall present a claim in writing (a "Claim") to the Manager of the Human Resources Group (the "Manager"). 11.2 DECISION ON INITIAL CLAIM. (a) Time Period for Denial Notice. A decision shall be made on the Claim as soon as practicable and shall be communicated in writing by the Manager to the Claimant within a reasonable period after receipt of the Claim by the Manager. In no event shall the decision on an initial Claim be given more than 90 days after the date the Claim was filed, unless special circumstances require an extension of time for processing. If there is an extension, the Claimant shall be notified of such within 90 days of the date the Claim was filed. The extension notice shall indicate the special circumstances and the date by which a decision is expected. The extension shall not exceed 90 days from the end of the initial response period. (b) Contents of Notice. If the Claim is wholly or partially denied, the Claimant shall be given a written notice of denial which shall indicate: (1) The specific reasons for the denial; (2) The specific references to pertinent Plan provisions on which the denial is based; (3) A description of additional material or information necessary for the Claimant to perfect the Claim and an explanation of why such material or information is necessary; and (4) An explanation of the Plan's Claim review procedure. -8- (c) Deemed Denied. If written notice of the decision wholly or partially denying the Claim has not been furnished within 90 days after the Claim is filed or there has been an extension and no notice of a decision is furnished by the end of the extension period, and if the Claim has not been granted within such period, the Claim shall be deemed denied as of the end of the 90-day or 180-day period for purposes of proceeding to the review stage described in 11.3 and 11.4. 11.3 REVIEW OF DENIED CLAIM. If a Claimant receives a notice of denial or his or her Claim is deemed denied pursuant to 11.2 above, the Claimant may request a review of the Claim. The request for review is made by personally delivering or mailing a written request for review, prepared by either the Claimant or his or her authorized representative, to the Committee. The Claimant's request for review must be made within a reasonable period of time taking into consideration the nature of the benefit which is the subject of the Claim and other attendant circumstances. In no event shall the period for requesting review expire less than 60 days after receipt of the notice of denial or the date on which the Claim is deemed denied if no notice is received. If the written request for review is not made on a timely basis, the Claimant shall be deemed to waive his or her right to review. The Claimant or his or her duly authorized representative may, at or after the time of making the request, review all pertinent documents and submit issues and comments in writing. 11.4 DECISION ON REVIEW. A review shall be promptly made by the Committee after receipt of a timely filed request for review. A decision on review shall be made and furnished in writing to the Claimant. The decision shall be made not later than 60 days after receipt of the request for review. If special circumstances require an extension of time for processing (such as the need to hold a hearing), a decision shall be made and furnished to the Claimant not later than 120 days after such receipt. If an extension is required, the Claimant shall be notified of such within 60 days after the request for review was filed. The written decision shall include the reasons for such decision with reference to the provisions of the Plan upon which the decision is based. The decision shall be final and binding upon the Claimant and Bancorp and its subsidiaries and all other persons involved. If the decision on review is not furnished within the applicable time period, the Claim shall be deemed denied on review. The scope of any subsequent review of the benefit Claim, judicial or otherwise, shall be limited to a determination as to whether the Committee acted arbitrarily or capriciously in the exercise of its discretion. In no event shall any such further review be on a de novo basis as the Committee has discretionary authority to determine eligibility for benefits and to construe the terms of this Plan. -9- ARTICLE XII AMENDMENTS AND TERMINATION Bancorp's Board of Directors has the power to terminate this Plan at any time or to amend this Plan at any time and in any manner that it may deem advisable. In the event of termination of the Plan, compensation deferred pursuant to the Plan prior to the effective date of the termination shall continue to be subject to the provisions of the Plan as if the Plan had not been terminated. -10- U. S. BANCORP 1991 EXECUTIVE DEFERRED COMPENSATION PLAN FIRST RESTATEMENT FIRST AMENDMENT THIS FIRST AMENDMENT is adopted by U. S. Bancorp, an Oregon corporation ("Bancorp"), effective October 15, 1992. RECITALS A. Bancorp adopted the First Restatement of the U. S. Bancorp 1991 Deferred Compensation Plan (the "Plan") effective February 21, 1991; and B. Bancorp desires to amend the Plan effective October 15, 1992. AMENDMENT Pursuant to Article XII of the Plan, Bancorp amends the Plan effective October 15, 1992, as follows: ARTICLE V - PARTICIPATION Section 5.4 is revised at pages 3, 4, and 4a. -11- U. S. BANCORP 1991 EXECUTIVE DEFERRED COMPENSATION PLAN FIRST RESTATEMENT SECOND AMENDMENT THIS SECOND AMENDMENT is adopted by U. S. Bancorp, an Oregon corporation ("Bancorp"), effective December 15, 1992. RECITALS A. Bancorp adopted the First Restatement of the U. S. Bancorp 1991 Deferred Compensation Plan (the "Plan") effective February 21, 1991; B. Bancorp previously amended the Plan effective October 15, 1992; and C. Bancorp desires to further amend the Plan effective December 15, 1992. AMENDMENT Pursuant to Article XII of the Plan, Bancorp amends the Plan effective December 15, 1992, as follows: (1) Article IV is revised at page 2. (2) Sections 5.1 and 5.3 of Article V are revised at pages 2, 3, and 3a. -12- U. S. BANCORP 1991 EXECUTIVE DEFERRED COMPENSATION PLAN FIRST RESTATEMENT THIRD AMENDMENT THIS THIRD AMENDMENT is adopted by U. S. Bancorp, an Oregon corporation ("Bancorp"), effective November 16, 1995. RECITALS A. Bancorp adopted the First Restatement of the U. S. Bancorp 1991 Deferred Compensation Plan (the "Plan") effective February 21, 1991; B. Bancorp previously amended the Plan effective October 15, 1992, and December 15, 1992; and C. Bancorp desires to further amend the Plan effective November 16, 1995. AMENDMENT Pursuant to Article XII of the Plan, Bancorp amends the Plan effective November 16, 1995, as follows: (1) Articles III and IV are revised at page 2. (2) Section 5.4(d) of Article V is revised at page 4. (3) Section 6.2 of Article VI is revised at page 4a. (4) New Section 6.3 is added to Article VI at pages 5, 5a, and 5b. (5) Section 8.1 of Article VIII is amended at pages 6 and 6a. -13- EX-10.12 8 EXHIBIT 10.12 U. S. BANCORP DEFERRED COMPENSATION TRUST AGREEMENT THIS TRUST AGREEMENT effective January 1, 1990, between U. S. BANCORP, (hereinafter called "Trustor"), and UNITED STATES NATIONAL BANK OF OREGON, (hereinafter called "Trustee"), W I T N E S S E T H : WHEREAS, certain employees of Trustor and certain of its affiliates (hereinafter called "Employees" and "Employers" respectively) and certain members of the boards of directors of Employers (hereinafter called "Directors") are entitled to benefits (hereinafter called "Benefits") under certain income tax nonqualified, unfunded plans (hereinafter called "Plans") and individual employment agreements (hereinafter called "Agreements"); and WHEREAS, the amount and the timing of payments to Employees, Directors, and their surviving spouses or other beneficiaries, if any, (hereinafter individually and collectively called "Trust Beneficiaries") of Benefits to which they are entitled, are specified in the Plans and Agreements which are listed in Exhibit A and attached hereto as Exhibits B through I and by this reference are made a part hereof; and WHEREAS, Trustor wishes to establish a trust (hereinafter called the "Trust") so that each Employer that, by resolution of its board of directors, agrees to be bound to the terms of this Trust may, in its discretion, transfer to the Trust assets which shall be held therein, subject to the claims of such Employer's general creditors in the event such Employer becomes Insolvent (as defined in Section 3.1), until paid to Trust Beneficiaries as Benefits in such manner and at such times as specified in the Plans and Agreements; NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held, and disposed of as follows: ARTICLE I TRUST FUND 1.1 INITIAL PRINCIPAL. Subject to the claims of its general creditors as set forth in Article III, Trustor hereby deposits with Trustee in trust One Dollar ($1.00), which shall become the initial principal of the Trust to be held, administered and disposed of by Trustee as provided in this Trust Agreement. 1.2 DATE TRUST IS IRREVOCABLE. The Trust hereby established shall be revocable in writing by Trustor at any time until the earliest of: (i) thirty (30) days following the issuance by the Internal Revenue Service of tax rulings requested by Trustor in conjunction with the establishment of this Trust; or (ii) the date of a change in control of Trustor. Thereafter, this Trust shall be irrevocable. 1.3 SEPARATE FUND. The principal of the Trust, and any earnings thereon which are not paid to an Employer as provided in Article IV, shall be held separate and apart from other funds of Employers and shall be used exclusively for the uses and purposes herein set forth. 1.4 UNSECURED CONTRACTUAL CLAIMS. Neither the Trust Beneficiaries, nor the Plans and Agreements, shall have any preferred claim on, or any beneficial ownership or interest in, any assets of the Trust prior to the time such assets are paid -2- to the Trust Beneficiaries as Benefits as provided in Article II. All rights created under the Plans and Agreements and this Trust Agreement shall be mere unsecured contractual rights of the Trust Beneficiaries against the respective Employer. 1.5 EMPLOYER DEPOSITS OF CASH IN TRUST. Each Employer may, in its sole discretion, make deposits of cash in trust with the Trustee from time to time (including when a change in control occurs) to provide for the projected Benefits of the Trust Beneficiaries. These deposits shall be held, administered and disposed of by Trustee as provided in this Trust Agreement. Trustee shall establish and maintain a separate account with respect to each Employer (hereinafter called an "Account") to which such Employer's contributions are credited pursuant to 6.2. ARTICLE II PAYMENTS TO TRUST BENEFICIARIES 2.1 TRUSTEE MAKES PAYMENTS IF EMPLOYER IS NOT INSOLVENT AND EMPLOYER IS NOT MAKING PAYMENTS. Trustee shall make payments of Benefits to Trust Beneficiaries in accordance with the Plans and Agreements from the Account of the Employer which is responsible for the Benefit liability, provided (i) such Employer is not Insolvent as defined in Section 3.1 and (ii) such Employer is not making payment of such Benefits. 2.2 TRUST BENEFICIARIES HAVE NO RIGHTS AGAINST TRUST IF TRUST FUNDS NOT SUFFICIENT. If an Employer's Account is not sufficient to make payments of Benefits to Trust Beneficiaries pursuant to Section 2.1, such Trust Beneficiaries shall have no further rights against this Trust. -3- ARTICLE III TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARIES WHEN EMPLOYER INSOLVENT 3.1 DEFINITION OF INSOLVENT. An Employer shall be considered "Insolvent" for purposes of this Trust Agreement if (i) the Employer is unable to pay its debts as they mature, or (ii) the Employer is a debtor in a case under the Bankruptcy Code or a receiver is appointed for the Employer. 3.2 TRUST FUNDS SUBJECT TO CLAIMS OF GENERAL CREDITORS. At all times during the continuance of this Trust, an Employer's Account shall be subject to claims of general creditors of the Employer as hereinafter set forth. At any time Trustee has determined pursuant to Section 3.4 that an Employer is Insolvent, Trustee shall deliver the Employer's Account to satisfy such claims as a court of competent jurisdiction may direct. 3.3 DUTY OF BOARD TO NOTIFY TRUSTEE OF EMPLOYER INSOLVENCY. The board of directors of an Employer and its chief executive officer shall immediately notify the Trustee in writing if that Employer becomes Insolvent. 3.4 TRUSTEE DUTY TO DISCONTINUE PAYMENTS AND INDEPENDENTLY DETERMINE INSOLVENCY. On receipt of such notice or any other written allegation of an Employer's Insolvency (such as from a creditor), Trustee shall independently determine, within thirty (30) days after receipt of such notice, whether the Employer is Insolvent. Pending such determination, Trustee (i) shall discontinue payments of Benefits to Trust Beneficiaries of that Employer, (ii) shall hold the Trust assets -4- allocable to that Employer for the benefit of the affected Employer's creditors, and (iii) shall resume payments of Benefits to Trust Beneficiaries of that Employer in accordance with Article II of this Trust Agreement only after Trustee has determined that the affected Employer is not Insolvent (or is no longer Insolvent, if Trustee initially determined the Employer to be Insolvent). In the event that an involuntary petition in bankruptcy or an application for appointment of a receiver is filed, the Trustee shall be entitled to delay determination of whether the Employer is Insolvent and not resume payments until the court or agency determines whether an order for relief should be entered or a receiver should be appointed. In such event, the Trustee shall abide by the determination of the court or agency. 3.5 TRUSTEE DETERMINATION OF EMPLOYER INSOLVENCY. Unless Trustee has actual knowledge or has received other written allegation of an Employer's Insolvency as provided in Sections 3.3 and 3.4, Trustee shall have no duty to inquire whether an Employee is Insolvent. Trustee may in all events rely on such evidence concerning an Employer's solvency as may be furnished to Trustee which will give Trustee a reasonable basis for making a determination concerning an Employer's solvency. For purposes of this Trust Agreement, Trustee shall be considered to possess only such knowledge or information concerning an Employer as is in the possession of Trustee's trust department. In particular, Trustee shall not be considered to possess any knowledge or information that is in possession of Trustee's other departments. -5- 3.6 RIGHTS OF TRUST BENEFICIARIES AS CREDITORS OF AN EMPLOYER. Nothing in this Trust Agreement shall in any way diminish any rights of Trust Beneficiaries to pursue their rights as creditors of an Employer with respect to Benefits or otherwise. 3.7 AMOUNT OF FIRST PAYMENT AFTER DISCONTINUANCE. If Trustee discontinues payments of Benefits to Trust Beneficiaries of an Employer pursuant to Section 3.4 and subsequently resumes such payments, the first payment following the discontinuance shall include the difference (together with interest thereon as defined below) between: (i) the aggregate amount of all payments that would have been made to the Trust Beneficiaries in accordance with the Plans and Agreements during the period of the discontinuance, and (ii) the aggregate amount of payments made to Trust Beneficiaries by the affected Employer in lieu of the payments provided for hereunder during any such period of discontinuance. The rate of interest during a calendar year shall initially equal the monthly average interest rate on five-year Treasury Notes for the month of November prior to that calendar year as published in the Federal Reserve Statistical Release G.13, plus 75 basis points. This rate of interest may be changed from time to time by Trustor. Trustor shall provide Trustee with advance written notice of changes in this rate of interest. ARTICLE IV PAYMENTS TO EMPLOYERS An Employer shall have no right or power to direct Trustee to return to the Employer or to divert to others any portion of the other Employers' Accounts. -6- Except as provided below and in Sections 1.2 and 10.4, an Employer shall have no right or power to direct Trustee to return to the Employer or to divert to others any of the Employer's Account before all payments of Benefits for which that Employer is responsible have been made to Trust Beneficiaries pursuant to the Plans and Agreements. In the event that the Employer's Account exceeds 125 percent of the present value (determined by an actuary in accordance with Section 7.3) of the accrued Benefits of such Employer's Trust Beneficiaries, all or a part of the Employer's Account in excess of 125 percent may, at the discretion of the Employer, be returned to the Employer, unless the Trustee determines otherwise to protect the Trust Beneficiaries. ARTICLE V INVESTMENT OF TRUST FUNDS Prior to a change in control of Trustor, Trustee shall invest the mingled principal contributed by Employers to the Trust, and any earnings thereon, as Trustor prescribes, other than in securities or obligations issued by Trustor. The Trustee shall act only as administrative agent in carrying out directed investment transactions and shall not be responsible for investment decisions. If a directed investment transaction violates any duty to diversify, to maintain liquidity, or to meet any other investment standard under this Trust or applicable law, the entire responsibility shall rest upon Trustor. Trustee shall be fully protected in acting upon or complying with any investment objectives, guidelines, restrictions, or directions provided by Trustor in accordance with this paragraph. If Trustor does -7- not respond to Trustee's written request for investment direction, Trustee shall direct investment of the Trust fund. After a change in control of Trustor, Trustee shall direct investment of the Trust fund. Trustor shall no longer be entitled to direct Trustee with respect to investment of the Trust fund, unless the written consent of a majority of Trust Beneficiaries is obtained. If such written consent is not obtained, the Trust fund shall be invested by Trustee in accordance with Section 7.1. ARTICLE VI ACCOUNTING BY TRUSTEE 6.1 TRUSTEE RECORDKEEPING RESPONSIBILITIES. Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be done, including such specific records as shall be agreed upon in writing between Trustor and Trustee. 6.2 EMPLOYER ACCOUNTS. An Employer's contributions to the Trust shall be credited to the Employer's Account. Also, each Employer's Account will be credited with its proportionate share of Trust earnings (as of each December 31 or such other valuation date as determined by the Trustee) based on the average amount of moneys in such Account throughout the valuation period. An Employer's Account will be debited with its proportionate share of general Trust expenses based on the average amount of moneys in such Account throughout the expense period (or such other method as determined by the Trustee to be a reasonably equitable method of allocating general Trust expenses). An Employer's Account will also be -8- debited with expenses specifically allocable to that Account, such as the payment of Benefits arising from employment with that Employer. 6.3 INSPECTION OF BOOKS AND RECORDS. All such Accounts, books and records shall be open to inspection and audit at all reasonable times by Trustor and Employers. 6.4 ANNUAL ACCOUNTING BY TRUSTEE. Within sixty (60) days following the close of each calendar year and within sixty (60) days after the removal or resignation of Trustee, Trustee shall deliver to Trustor a written account of its administration of the Trust during such year or during the period from the close of the last accounting period to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. ARTICLE VII RESPONSIBILITY OF TRUSTEE 7.1 PRUDENT MAN RULE. In acquiring, investing, reinvesting, exchanging, retaining, selling and managing property for the benefit of another, Trustee shall exercise the judgment and care under the circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their -9- own affairs, not in regard to speculation but in regard to the permanent disposition of their funds, considering the probable income as well as the probable safety of their capital. 7.2 INDEMNIFICATION FOR LITIGATION COSTS. Trustee shall not be required to undertake or to defend any litigation arising in connection with this Trust Agreement, unless it be first indemnified by the affected Employer against its prospective costs, expenses and liability, including reasonable attorneys' fees, and the Employers hereby agree to indemnify Trustee for such costs, expenses, and liability. In no event shall Employers indemnify Trustee for litigation for breach of Trustee's responsibilities under this Trust Agreement. 7.3 ADVICE TO ACTUARY. The Trustee may consult with an actuary in order to determine whether (based upon reasonable actuarial assumptions) certain Trust assets exceed 125 percent of the present value of the accrued Benefits under Article IV, and shall be fully protected in acting or refraining from acting in accordance with the advice of such actuary. Prior to a change in control of Trustor, the actuary shall be selected by Trustor. After a change in control of Trustor, the actuary shall be selected by Trustee, provided the Trustor may select the actuary with written consent of a majority of Trust Beneficiaries. 7.4 AUTHORITY TO HIRE. Trustee may hire, at the expense of the Trust, agents, accountants, legal counsel, actuaries and financial consultants, subject to Trustor's prior approval in writing. Trustee shall have no power to conduct a business under the provisions of this Trust. -10- 7.5 GENERAL POWERS. Except as provided in Section 7.6, Trustee shall have, without exclusion, all powers conferred on trustees by applicable law unless expressly provided otherwise herein. 7.6 INSURANCE POLICIES. If an insurance policy is held as an asset of the Trust, Trustee shall have no power, except in accordance with Section 1.2 or Article IV hereof, to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy. 7.7 DOCUMENTS PROVIDED TO TRUSTEE. Trustor shall provide to Trustee with copies of the following documents: (i) the Plans and Agreements; (ii) all amendments to Plans and Agreements; and (iii) a list, updated annually, of all employees who participate in each Plan and Agreement under this Trust Agreement. ARTICLE VIII COMPENSATION AND EXPENSES OF TRUSTEE Trustee shall receive such reasonable compensation for its services as shall be agreed upon in writing by Trustor and Trustee, including Trustee's reasonable expenses incurred with respect to the administration of the Trust. Trustee shall notify Trustor periodically of expenses and fees and Trustor may elect to pay them and may allocate the cost among the Employers. Otherwise the compensation and expenses shall be charged to the Trust to the extent permitted by law. -11- ARTICLE IX REPLACEMENT OF TRUSTEE 9.1 RESIGNATION AND REMOVAL. Trustee may resign at any time by written notice to Trustor, which shall be effective in 60 days or on such earlier or later date agreed to by Trustor and Trustee. Upon a change of control of Trustor, United States National Bank of Oregon shall resign as Trustee. Trustee may be removed at any time by Trustor by written notice. 9.2 APPOINTMENT OF SUCCESSOR. Trustor shall appoint a national or state bank or trust company that is independent of Trustor as a successor to replace Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the successor Trustee. ARTICLE X AMENDMENT OR TERMINATION 10.1 AMENDMENT. Prior to a change in control of Trustor, this Trust Agreement may be amended any time and to any extent by a written instrument executed by Trustor. In particular, Trustor may amend this Trust Agreement to change the Plans and Agreements subject to it. After a change in control of Trustor, this Trust Agreement may be amended only with (i) the written consent of a majority of the Trust Beneficiaries on the date of such amendment, (ii) as required to obtain a favorable ruling from the Internal Revenue Service with respect to the tax consequences of this Trust, or (iii) as necessary to obtain an opinion of counsel that the Trust does not cause the Plans -12- and Agreements to be funded deferred compensation arrangements. In particular, Trustor may not amend this Trust Agreement to add any additional Plans or Agreements or Trust Beneficiaries unless a separate Employer's Account is provided for such additional Trust Beneficiaries. Notwithstanding the foregoing, any Trust amendment may be made by written consent of Trustor and Trustee without written consent of a majority of the Trust Beneficiaries if such amendment will not have a material adverse effect on the rights of the Trust Beneficiary. 10.2 TERMINATION. Unless revoked sooner pursuant to Section 1.2, this Trust shall not terminate until the date on which (i) Trust Beneficiaries are entitled to no more Benefits, (ii) the Trust assets are exhausted, or (iii) the Trust terminates pursuant to Section 11.1. 10.3 DISTRIBUTION OF ASSETS UPON TERMINATION. Upon termination of the Trust as provided in Section 10.2, any assets remaining in the Trust shall be returned to the Employers based on each Employer's Account. 10.4 SALE OF DISPOSITION OF EMPLOYER. In the event of a sale or disposition of an Employer any assets remaining in the Employer's Account shall remain in this Trust. 10.5 CHANGE IN CONTROL. For purposes of this Trust, a change in control of Trustor shall be deemed to have occurred upon receipt by Trustee of written notice to that effect or that a potential change in control has occurred from Trustor's board of directors. -13- ARTICLE XI SEVERABILITY AND ALIENATION 11.1 SEVERABILITY. Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of such prohibition without invalidating the remaining provisions of the Trust; except that if the remaining provisions of the Trust would not substantially achieve the purpose of Trustor in establishing this Trust, then this Trust shall terminate. 11.2 ALIENATION. The right of a Trust Beneficiary to receive payments under this Agreement may not be anticipated, assigned (either at law or equity), pledged, alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process. ARTICLE XII GOVERNING LAW This Trust Agreement shall be governed by and construed in accordance with the laws of Oregon. -14- EX-10.13 9 EXHIBIT 10.13 WEST ONE BANCORP 1991 PERFORMANCE AND EQUITY INCENTIVE PLAN AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 27, 1991 WEST ONE BANCORP 1991 PERFORMANCE AND EQUITY INCENTIVE PLAN ARTICLE I ESTABLISHMENT AND PURPOSE 1.1 ESTABLISHMENT; AMENDMENT AND RESTATEMENT. West One Bancorp ("Corporation") established the West One Bancorp 1991 Performance and Equity Incentive Plan (the "Plan"), effective as of January 17, 1991, and amended and restated the Plan as set forth herein effective February 27, 1991, subject to shareholder approval as provided in Article 18. 1.2 PURPOSE. The purpose of the Plan is to promote and advance the interest of Corporation and its shareholders by enabling Corporation to attract, retain, and reward key employees and directors of Corporation and its subsidiaries. It is also intended to strengthen the mutuality of interests between such employees and directors and Corporation's shareholders. The Plan is designed to meet this intent by offering performance-based stock and cash incentives and other equity-based incentive awards, thereby providing a proprietary interest in pursuing the long-term growth, profitability, and financial success of Corporation. ARTICLE 2 DEFINITIONS 2.1 DEFINED TERMS. For purposes of the Plan, the following terms shall have the meanings set forth below: "AWARD" means an award or grant made to a Participant of the Options, Stock Appreciation Rights, Restricted Awards, Performance Awards, or Other Stock-Based Awards pursuant to the Plan. "AWARD AGREEMENT" means an agreement as described in Section 6.3. "BOARD" means the Board of Directors of Corporation. "CODE" means the Internal Revenue Code of 1986, as amended and in effect from time to time, or any successor thereto, together with rules, regulations, and interpretations promulgated thereunder. Where the context so requires, any reference to a particular Code Section shall be construed to refer to the successor provision to such Code section. "COMMITTEE" means the committee appointed by the Board to administer the Plan as provided in Article 3 of the Plan. "COMMON STOCK" means the Common Stock, $1.00 par value, of Corporation or any security of Corporation issued in substitution, exchange, or lieu thereof. "CONTINUING RESTRICTION" means a Restriction contained in Sections 6.4(g), 17.4, 17.5, and 17.7 of the Plan and any other Restrictions expressly designated by the Committee in an Award Agreement as a Continuing Restriction. "CORPORATION" means West One Bancorp, an Idaho corporation, or any successor corporation. "DEFERRED COMPENSATION OPTION" means a Nonqualified Option granted with an option price less than Fair Market Value on the date of grant pursuant to Section 7.9 of the Plan. "DISABILITY" means disability as determined by the Committee in accordance with standards and procedures similar to those under Corporation's long-term disability plan. However, the Committee may change the foregoing definition of "Disability" or may adopt a different definition for purposes of specific Awards. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended and in effect from time to time, or any successor statute. Where the context so requires, any reference to a particular section of the Exchange Act, or to any rule promulgated under the Exchange Act, shall be construed to refer to successor provisions to such section or rule. "FAIR MARKET VALUE" means on any given date, the average of the high and low sale prices of Common Stock, as reported for such date by the National Market System of the NASDAQ (or such exchange on which the Common Stock may be listed) or, if Common Stock was not traded on such date, on the next preceding day on which Common Stock was traded. "INCENTIVE STOCK OPTION" or "ISO" means any Option granted pursuant to the Plan that is intended to be and is specifically designated in its Award Agreement as an "incentive stock option" within the meaning of Section 422A of the Code. "NON-EMPLOYEE BOARD DIRECTOR" means a member of the Board who is not an employee of Corporation or any Subsidiary. "NON-EMPLOYEE DIRECTOR" means either a Non-Employee Board Director or a Non-Employee Subsidiary Director. -2- "NON-EMPLOYEE SUBSIDIARY DIRECTOR" means a member of the board of directors of a Subsidiary who is neither an employee of Corporation or a Subsidiary nor a member of the Board. "NON-QUALIFIED OPTION" or NQO" means any Option, including a Deferred Compensation Option, granted pursuant to the Plan that is not an Incentive Stock Option. "OPTION" means an ISO, an NQO, or a Deferred Compensation Option. "PARTICIPANT" means an employee of Corporation or a Subsidiary or a Non-Employee Director who is granted an Award under the Plan. "PERFORMANCE AWARD" means an Award granted pursuant to the provisions of Article 10 of the Plan, the Vesting of which is contingent on performance attainment. "PERFORMANCE CYCLE" means a designated performance period pursuant to the provisions of Section 10.3 of the Plan. "PERFORMANCE GOAL" means a designated performance objective pursuant to the provisions of Section 10.4 of the Plan. "PLAN" means this West One Bancorp 1991 Performance and Equity Incentive Plan, as set forth herein and as it may be hereafter amended and from time to time in effect. "REPORTING PERSON" means a Participant who is subject to the reporting requirements of Section 16(a) of the Exchange Act. "RESTRICTED AWARD" means a Restricted Share or a Restricted Unit granted pursuant to Article 9 of the Plan. "RESTRICTED SHARE" means an Award described in Section 9.1(a) of the Plan. "RESTRICTED UNIT" means an Award of units representing Shares described in Section 9.1(b) of the Plan. "RESTRICTION" means a provision in the Plan or in an Award Agreement which limits the exercisability or transferability, or which governs the forfeiture, of an Award or the Shares, cash, or other property payable pursuant to an Award. -3- "RETIREMENT" means: (a) for Participants who are employees, retirement from active employment with Corporation and its Subsidiaries on or after the normal retirement date specified in Corporation's retirement plan for salaried employees or such earlier retirement date as approved by the Committee for purposes of the Plan; and (b) for Participants who are Non-Employee Directors, retirement from the applicable board of directors after attaining the maximum age specified in the articles of incorporation or bylaws of the applicable corporation. However, the Committee may change the foregoing definition of "Retirement" or may adopt a different definition for purposes of specific Awards. "SHARE" means a share of Common Stock. "STOCK APPRECIATION RIGHT" or "SAR" means an Award to benefit from the appreciation of Common Stock granted pursuant to the provisions of Article 8 of the Plan. "SUBSIDIARY" means a "subsidiary corporation" of Corporation, within the meaning of Section 425 of the Code, namely any corporation in which Corporation directly or indirectly controls 50 percent or more of the total combined voting power of all classes of stock having voting power. "VEST" or "VESTED" means: (a) In the case of an Award that requires exercise, to be or to become immediately and fully exercisable and free of all Restrictions (other than Continuing Restrictions); (b) In the case of an Award that is subject to forfeiture, to be or to become nonforfeitable, freely transferable, and free of all Restrictions (other than Continuing Restrictions); (c) In the case of an Award that is required to be earned by attaining specified Performance Goals, to be or to become earned and nonforfeitable, freely transferable, and free of all Restrictions (other than Continuing Restrictions); or (d) In the case of any other Award as to which payment is not dependent solely upon the exercise of a right, election, exercise, or option, to -4- be or to become immediately payable and free of all Restrictions (except Continuing Restrictions). 2.2 GENDER AND NUMBER. Except where otherwise indicated by the context, any masculine or feminine terminology used in the Plan shall also include the opposite gender; and the definition of any term in Section 2.1 in the singular shall also include the plural, and vice versa. ARTICLE 3 ADMINISTRATION 3.1 GENERAL. The Plan shall be administered by a Committee composed as described in Section 3.2. 3.2 COMPOSITION OF THE COMMITTEE. The Committee shall be appointed by the Board and shall consist of not less than a sufficient number of disinterested members of the Board so as to qualify the Committee to administer the Plan as contemplated by Rule 16b-3 under the Exchange Act, or any successor or replacement rule. The Board may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee, however caused, shall be filled by the Board. The initial members of the Committee shall be the members of the Corporation's existing Compensation and Benefits Committee. The Board may at any time replace the Compensation and Benefits Committee with another Committee. In the event that the Compensation and Benefits Committee shall cease to satisfy the requirements of Rule 16b-3, the Board shall appoint another Committee satisfying such requirements. 3.3 AUTHORITY OF THE COMMITTEE. The Committee shall have full power and authority (subject to such orders or resolutions as may be issued or adopted from time to time by the Board) to administer the Plan in its sole discretion, including the authority to: (a) Construe and interpret the Plan and any Award Agreement; (b) Promulgate, amend, and rescind rules and procedures relating to the implementation of the Plan; (c) Select the employees and Non-Employee Subsidiary Directors who shall be granted Awards; (d) Determine the number and types of Awards to be granted to each Participant; -5- (e) Determine the number of Shares, or Share equivalents, to be subject to each Award; (f) Determine the option price, purchase price, base price, or similar feature for any Award; and (g) Determine all the terms and conditions of all Award Agreements, consistent with the requirements of the Plan. Decisions of the Committee, or any delegate as permitted by the Plan, shall be final, conclusive, and binding on all Participants. 3.4 ACTION BY THE COMMITTEE. A majority of the members of the Committee shall constitute a quorum for the transaction of business. Action approved by a majority of the members present at any meeting at which a quorum is present, or action in writing by a majority of the members of the Committee, shall be the valid acts of the Committee. 3.5 DELEGATION. Notwithstanding the foregoing, the Committee may delegate to one or more officers of Corporation the authority to determine the recipients, types, amounts, and terms of Awards granted to Participants who are not Reporting Persons. 3.6 LIABILITY OF COMMITTEE MEMBERS. No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan, any Award, or any Participant. 3.7 AWARDS TO NON-EMPLOYEE BOARD MEMBERS. The Committee shall have no discretion as to any aspects of Awards to Non-Employee Board Directors which shall be governed by Article 14. 3.8 COSTS OF PLAN. The costs and expenses of administering the Plan shall be borne by Corporation. ARTICLE 4 DURATION OF THE PLAN AND SHARES SUBJECT TO THE PLAN 4.1 DURATION OF THE PLAN. The Plan is effective January 17, 1991, subject to approval by Corporation's shareholders as provided in Article 18. The Plan shall remain in effect until Awards have been granted covering all the available Shares or the Plan is otherwise terminated by the Board. Termination of the Plan shall not affect outstanding Awards. -6- 4.2 SHARES SUBJECT TO THE PLAN. The shares which may be made subject to Awards under the Plan shall be Shares of Common Stock, which may be either authorized and unissued Shares or reacquired Shares. No fractional Shares shall be issued under the Plan. The maximum number of Shares for which Awards may be granted under the Plan shall be 850,000 Shares, plus any Shares available for grant under Corporation's existing Executive Incentive Program, subject to adjustment pursuant to Article 15. If an Award under the Plan or under the Executive Incentive Program is canceled or expires for any reason prior to having been fully Vested or exercised by a Participant or is settled in cash in lieu of Shares or is exchanged for other Awards, all Shares covered by such Awards shall be made available for future Awards under the Plan. Furthermore, any Shares used as full or partial payment to Corporation by a Participant of the option, purchase, or other exercise price of an Award and any Shares covered by a Stock Appreciation Right which are not issued upon exercise shall become available for future Awards. ARTICLE 5 ELIGIBILITY 5.1 EMPLOYEES AND NON-EMPLOYEE SUBSIDIARY DIRECTORS. Officers and other key employees of Corporation and its Subsidiaries (who may also be directors of Corporation or a Subsidiary) and Non-Employee Subsidiary Directors who, in the Committee's judgment, are or will be contributors to the long-term success of Corporation shall be eligible to receive Awards under the Plan. 5.2 NON-EMPLOYEE BOARD DIRECTORS. All Non-Employee Board Directors shall be eligible to receive Awards pursuant to Article 14 of the Plan. ARTICLE 6 AWARDS 6.1 TYPES OF AWARDS. The types of Awards that may be granted under the Plan are: (a) Options governed by Article 7 of the Plan; (b) Stock Appreciation Rights governed by Article 8 of the Plan; (c) Restricted Awards governed by Article 9 of the Plan; (d) Performance Awards governed by Article 10 of the Plan; and -7- (e) Other Stock-Based Awards or Combination Awards governed by Article 11 of the Plan. In the discretion of the Committee, any Award may be granted alone, in addition to, or in tandem with other Awards under the Plan. 6.2 GENERAL. Subject to the limitations of the Plan, the Committee may cause Corporation to grant Awards to such Participants, at such times, of such types, in such amounts, for such periods, with such option prices, purchase prices, or base prices, and subject to such terms, conditions, limitations, and restrictions as the Committee, in its discretion, shall deem appropriate. Awards may be granted as additional compensation to a Participant or in lieu of other compensation to such Participant. A Participant may receive more than one Award and more than one type of Award under the Plan. 6.3 NONUNIFORM DETERMINATIONS. The Committee's determinations under the Plan or under one or more Award Agreements, including without limitation, (a) the selection of Participants to receive Awards, (b) the type, form, amount, and timing of Awards, (c) the terms of specific Award Agreements, and (d) elections and determinations made by the Committee with respect to exercise or payments of Awards, need not be uniform and may be made by the Committee selectively among Participants and Awards, whether or not Participants are similarly situated. 6.4 AWARD AGREEMENTS. Each Award shall be evidenced by a written Award Agreement between Corporation and the Participant. Award Agreements may, subject to the provisions of the Plan, contain any provision approved by the Committee. 6.5 PROVISIONS GOVERNING ALL AWARDS. All Awards shall be subject to the following provisions: (a) ALTERNATIVE AWARDS. If any awards are designated in their Award Agreements as alternative to each other, the exercise of all or part of one Award automatically shall cause an immediate equal (or pro rata) corresponding termination of the other alternative Award or Awards. (b) RIGHTS AS SHAREHOLDERS. No Participant shall have any rights of a shareholder with respect to Shares subject to an Award until such Shares are issued in the name of the Participant. (c) EMPLOYMENT RIGHTS. Neither the adoption of the Plan nor the granting of any Award shall confer on any person the right to -8- continued employment with Corporation or any Subsidiary or the right to remain as a director of Corporation or any Subsidiary, as the case may be, nor shall it interfere in any way with the right of Corporation or a Subsidiary to terminate such person's employment or to remove such person as a director at any time for any reason, with or without cause. (d) NONTRANSFERABLE. Each Award (other than Restricted Shares after they Vest) shall not be transferable otherwise than by will or the laws of descent and distribution and shall be exercisable (if exercise is required) during the lifetime of the Participant, only by the Participant or, in the event the Participant becomes legally incompetent, by the Participant's guardian or legal representative. (e) TERMINATION OF EMPLOYMENT. The terms and conditions under which an Award may be exercised, if at all, after a Participant's termination of employment or service as a Non-Employee Director shall be determined by the Committee and specified in the applicable Award Agreement. (f) CHANGE IN CONTROL. The Committee, in its discretion, may provide in any Award Agreement that in the event of a change in control of Corporation (as the Committee may define such term in the Award Agreement), as of the date of such change in control: (i) All, or a specified portion of, Awards requiring exercise shall become fully and immediately exercisable, notwithstanding any other limitations on exercise; (ii) All, or a specified portion of, Awards subject to Restrictions shall become fully Vested; and (iii) All, or a specified portion of, Awards subject to Performance Goals shall be deemed to have been fully earned. The Committee, in its discretion, may include change in control provisions in some Award Agreements and not in others, may include different change in control provisions in different Award Agreements, and may include change in control provisions for some Awards or some Participants and not for others. (g) REPORTING PERSONS. With respect to all Awards granted to Reporting Persons, the Award Agreement shall comply with any -9- applicable restrictions imposed by Rule 16b-3 under the Exchange Act and any amendments to such rule. ARTICLE 7 OPTIONS 7.1 TYPES OF OPTIONS. Options granted under the Plan may be in the form of Incentive Stock Options or Non-Qualified Options (including Deferred Compensation Options). The grant of each Option and the Award Agreement governing each Option shall identify the Option as an ISO or an NQO. In the event the Code is amended to provide for tax-favored forms of stock options other than or in addition to Incentive Stock Options, the Committee may grant Options under the Plan meeting the requirements of such forms of options. 7.2 GENERAL. Options shall be subject to the terms and conditions set forth in Article 6 and this Article 7 and shall contain such additional terms and conditions, not inconsistent with the express provisions of the Plan, as the Committee shall deem desirable. 7.3 OPTION PRICE. Each Award Agreement for Options shall state the option exercise price per Share of Common Stock purchasable under the Option, which shall not be less than: (a) the par value of a Share, in the case of a Deferred Compensation Option; or (b) 100 percent of the Fair Market Value of a Share on the date of grant for all other Options. 7.4 OPTION TERM. The Award Agreement for each Option shall specify the term of each Option, which may be unlimited or may have a specified period during which the Option may be exercised, as determined by the Committee. 7.5 TIME OF EXERCISE. The Award Agreement for each Option shall specify, as determined by the Committee: (a) the time or times when the Option shall become exercisable and whether the Option shall become exercisable in full or in graduated amounts over a period specified in the Award Agreement; (b) such other terms, conditions, and restrictions as to when the Option may be exercised as shall be determined by the Committee; and -10- (c) the extent, if any, that the Option shall remain exercisable after the Participant ceases to be an employee or director of Corporation or a Subsidiary. An Award Agreement for an Option may, in the discretion of the Committee, provide whether, and to what extent, the Option will become immediately and fully exercisable (i) in the event of the death, Disability, or Retirement of the Participant or (ii) upon the occurrence of a change in control of Corporation. 7.6 METHOD OF EXERCISE. The Award Agreement for each Option shall specify the method or methods of payment acceptable upon exercise of an Option. An Award Agreement may provide that the option price is payable in full in cash or, at the discretion of the Committee: (a) in installments on such terms and over such period as the Committee shall determine; (b) in previously acquired Shares (including Restricted Shares); (c) by surrendering outstanding Awards under the Plan denominated in Shares or in Share equivalent units; (d) by delivery (in a form approved by the Committee) of an irrevocable direction to a securities broker acceptable to the Committee: (i) to sell Shares subject to the Option and to deliver all or a part of the sales proceeds to Corporation in payment of all or a part of the option price and withholding taxes due; or (ii) to pledge Shares subject to the Option to the broker as security for a loan and to deliver all or a part of the loan proceeds to Corporation in payment of all or a part of the option price and withholding taxes due; or (e) in any combination of the foregoing or in any other form approved by the Committee. If Restricted Shares are surrendered in full or partial payment of an option price, a corresponding number of the Shares issued upon exercise of the Option shall be Restricted Shares subject to the same Restrictions as the surrendered Restricted Shares. -11- 7.7 SPECIAL RULES FOR INCENTIVE STOCK OPTIONS. In the case of an Option designated as an Incentive Stock Option, the terms of the Option and the Award Agreement shall be in conformance with the statutory and regulatory requirements specified in Section 422A of the Code, as in effect on the date such ISO is granted. ISOs may not be granted under the Plan after January 16, 2001, unless the 10-year limitation of Section 422A(b)(2) of the Code is removed or extended. 7.8 RESTRICTED SHARES. In the discretion of the Committee, the Shares issuable upon exercise of an Option may be Restricted Shares if so provided in the Award Agreement. 7.9 DEFERRED COMPENSATION OPTIONS. The Committee may, in its discretion, grant Deferred Compensation Options with an option price less than Fair Market Value to provide a means for deferral of compensation to future dates. The option price shall be determined by the Committee subject to Section 7.3 of the Plan. The number of Shares subject to a Deferred Compensation Option shall be determined by the Committee, in its discretion, by dividing the amount of compensation to be deferred by the difference between the Fair Market Value of a Share on the date of grant and the option price of the Deferred Compensation Option. Amounts of compensation deferred with Deferred Compensation Options may include amounts earned under Awards granted under the Plan or under any other compensation program or arrangement of Corporation as permitted by the Committee. The Committee shall grant Deferred Compensation Options only if it reasonably determines that the recipient of such an Option is not likely to be deemed to be in constructive receipt for income tax purposes of the income being deferred. 7.10 RELOAD OPTIONS. The Committee, in its discretion, may provide in an Award Agreement for an Option that in the event all or a portion of the Option is exercised by the Participant using previously acquired Shares, the Participant shall automatically be granted a replacement Option (with an option price equal to the Fair Market Value of a Share on the date of such exercise) for a number of Shares equal to (or equal to a portion of) the number of shares surrendered upon exercise of the Option. Such reload Option features may be subject to such terms and conditions as the Committee shall determine, including without limitation, a condition that the Participant retain the Shares issued upon exercise of the Option for a specified period of time. ARTICLE 8 STOCK APPRECIATION RIGHTS 8.1 GENERAL. Stock Appreciation Rights shall be subject to the terms and conditions set forth in Article 6 and this Article 8 and shall contain such -12- additional terms and conditions, not inconsistent with the express terms of the Plan, as the Committee shall deem desirable. 8.2 NATURE OF STOCK APPRECIATION RIGHT. A Stock Appreciation Right is an Award entitling a Participant to receive an amount equal to the excess (or if the Committee shall determine at the time of grant, a portion of the excess) of the Fair Market Value of a Share of Common Stock on the date of exercise of the SAR over the Base Price, as described below, on the date of grant of the SAR, multiplied by the number of Shares with respect to which the SAR shall have been exercised. The Base Price shall be designated by the Committee in the Award Agreement for the SAR and may be the Fair Market Value of a Share on the grant date of the SAR or such other higher or lower price as the Committee shall determine. 8.3 EXERCISE. A Stock Appreciation Right may be exercised by a Participant in accordance with procedures established by the Committee. The Committee may also provide that a SAR shall be automatically exercised on one or more specified dates or upon the satisfaction of one or more specified conditions. In the case of SARs granted to Reporting Persons, exercise of the SAR shall be limited by the Committee to the extent required to comply with the applicable requirements of Rule 16b-3 under the Exchange Act. 8.4 FORM OF PAYMENT. Payment upon exercise of a Stock Appreciation Right may be made in cash, in installments, in Shares of Common Stock, by issuance of a Deferred Compensation Option, or in any combination of the foregoing or in any other form as the Committee shall determine. ARTICLE 9 RESTRICTED AWARDS 9.1 TYPES OF RESTRICTED AWARDS. Restricted Awards granted under the Plan may be in the form of either Restricted Shares or Restricted Units. (a) RESTRICTED SHARES. A Restricted Share is an Award of Shares transferred to a Participant subject to such terms and conditions as the Committee deems appropriate, including without limitation, restrictions on the sale, assignment, transfer, or other disposition of such Restricted Shares and may include a requirement that the Participant forfeit such Restricted Shares back to Corporation upon termination of Participant's employment (or service as a director) for specified reasons within a specified period of time or upon other conditions, as set forth in the Award Agreement for such Restricted Shares. Each Participant receiving a Restricted Share shall be issued a stock certificate in respect of such Shares, registered in the name of such Participant, and shall execute a stock power in blank with respect to the Shares evidenced by such certificate. The certificate evidencing such -13 Restricted Shares and the stock power shall be held in custody by Corporation until the Restrictions thereon shall have lapsed. (b) RESTRICTED UNITS. A Restricted Unit is an Award of units (with each unit having a value equivalent to one Share) granted to a Participant subject to such terms and conditions as the Committee deems appropriate and may include a requirement that the Participant forfeit such Restricted Units upon termination of Participant's employment (or service as a director) for specified reasons within a specified period of time or upon other conditions, as set forth in the Award Agreement for such Restricted Units. 9.2 GENERAL. Restricted Awards shall be subject to the terms and conditions of Article 6 and this Article 9 and shall contain such additional terms and conditions, not inconsistent with the express provisions of the Plan, as the Committee shall deem desirable. 9.3 RESTRICTION PERIOD. Restricted Awards shall provide that such Awards, and the Shares subject to such Awards, may not be transferred and may provide that in order for a Participant to Vest in such Awards, the Participant must remain in the employment (or a director) of Corporation or its Subsidiaries, subject to relief for reasons specified in the Award Agreement, for a period commencing on the date of the Award and ending on such later date or dates as the Committee may designate at the time of the Award (the "Restriction Period"). During the Restriction Period, a Participant may not sell, assign, transfer, pledge, encumber, or otherwise dispose of Shares received under or governed by a Restricted Award grant. The Committee, in its sole discretion, may provide for the lapse of restrictions in installments during the Restriction Period. Upon expiration of the applicable Restriction Period (or lapse of restrictions during the Restriction Period where the restrictions lapse in installments) the Participant shall be entitled to settlement of the Restricted Award or portion thereof, as the case may be. Although Restricted Awards shall usually Vest based on continued employment (or service as a director) and Performance Awards under Article 10 shall usually Vest based on attainment of Performance Goals, the Committee, in its discretion, may condition Vesting of Restricted Awards on attainment of Performance Goals as well as continued employment (or service as a director). In such case, the Restriction Period for such a Restricted Award shall include the period prior to satisfaction of the Performance Goals. 9.4 FORFEITURE. If a Participant ceases to be an employee or Non-Employee Director of Corporation or a Subsidiary during the Restriction Period for any reason other than reasons which may be specified in an Award Agreement (such as death, Disability, or Retirement) the Award Agreement may require that all non-Vested Restricted Awards previously granted to the Participant be forfeited and returned to Corporation. -14- 9.5 SETTLEMENT OF RESTRICTED AWARDS. (a) RESTRICTED SHARES. Upon Vesting of a Restricted Share Award, the legend on such Shares will be removed and the Participant's stock power will be returned and the Shares will no longer be Restricted Shares. The Committee may also, in its discretion, permit a Participant to receive, in lieu of unrestricted Shares at the conclusion of the Restriction Period, payment in cash, installments, or by issuance of a Deferred Compensation Option equal to the Fair Market Value of the Restricted Shares as of the date the Restrictions lapse. (b) RESTRICTED UNITS. Upon Vesting of a Restricted Unit Award, a Participant shall be entitled to receive payment for Restricted Units in an amount equal to the aggregate Fair Market Value of the Shares covered by such Restricted Units at the expiration of the Applicable Restriction Period. Payment in settlement of a Restricted Unit shall be made as soon as practicable following the conclusion of the applicable Restriction Period in cash, in installments, in Shares equal to the number of Restricted Units, by issuance of a Deferred Compensation Option, or in any other manner or combination of such methods as the Committee, in its sole discretion, shall determine. 9.6 RIGHTS AS A SHAREHOLDER. A Participant shall have, with respect to unforfeited Shares received under a grant of Restricted Shares, all the rights of a shareholder of Corporation, including the right to vote the shares, and the right to receive any cash dividends. Stock dividends issued with respect to Restricted Shares shall be treated as additional Shares covered by the grant of Restricted Shares and shall be subject to the same Restrictions. ARTICLE 10 PERFORMANCE AWARDS 10.1 GENERAL. Performance Awards shall be subject to the terms and conditions set forth in Article 6 and this Article 10 and shall contain such other terms and conditions not inconsistent with the express provisions of the Plan, as the Committee shall deem desirable. 10.2 NATURE OF PERFORMANCE AWARDS. A Performance Award is an Award of units (with each unit having a value equivalent to one Share) granted to a Participant subject to such terms and conditions as the Committee deems appropriate, including without limitation, the requirement that the Participant forfeit such Performance Award or a portion thereof in the event specified performance criteria are not met within a designated period of time. -15- 10.3 PERFORMANCE CYCLES. For each Performance Award, the Committee shall designate a performance period (the "Performance Cycle") with a duration to be determined by the Committee in its discretion within which specified Performance Goals are to be attained. There may be several Performance Cycles in existence at any one time and the duration of Performance Cycles may differ from each other. 10.4 PERFORMANCE GOALS. The Committee shall establish Performance Goals for each Performance Cycle on the basis of such criteria and to accomplish such objectives as the Committee may from time to time select. Performance Goals may be based on performance criteria for Corporation, a Subsidiary, or an operating group, or based on a Participant's individual performance. Performance Goals may include objective and subjective criteria. During any Performance Cycle, the Committee may adjust the Performance Goals for such Performance Cycle as it deems equitable in recognition of unusual or nonreoccurring events affecting Corporation, changes in applicable tax laws or accounting principles, or such other factors as the Committee may determine. 10.5 DETERMINATION OF AWARDS. As soon as practicable after the end of a Performance Cycle, the Committee shall determine the extent to which Performance Awards which have been earned on the basis of performance in relation to the established Performance Goals. 10.6 TIMING AND FORM OF PAYMENT. Settlement of earned Performance Awards shall be made to the Participant as soon as practicable after the expiration of the Performance Cycle and the Committee's determination under Section 10.5, in the form of cash, installments, Shares, Deferred Compensation Options, or any combination of the foregoing or in any other form as the Committee shall determine. ARTICLE 11 OTHER STOCK-BASED AND COMBINATION AWARDS 11.1 OTHER STOCK-BASED AWARDS. The Committee may grant other Awards under the Plan pursuant to which Shares are or may in the future be acquired, or Awards denominated in or measured by Share equivalent units, including Awards valued using measures other than the market value of Shares. Such Other Stock-Based Awards may be granted either alone, in addition to, or in tandem with, any other type of Award granted under the Plan. 11.2 COMBINATION AWARDS. The Committee may also grant Awards under the Plan in tandem or combination with other Awards or in exchange of Awards, or in tandem or combination with, or as alternatives to grants or rights under any other employee plan of Corporation, including the plan of any acquired -16- entity. No action authorized by this section shall reduce the amount of any existing benefits or change the terms and conditions thereof without the Participant's consent. ARTICLE 12 DEFERRAL ELECTIONS The Committee may permit a Participant to elect to defer receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant by virtue of the exercise, earn out, or Vesting of an Award made under the Plan. If any such election is permitted, the Committee shall establish rules and procedures for such payment deferrals, including but not limited to: (a) payment or crediting of reasonable interest on such deferred amounts credited in cash, (b) the payment or crediting of dividend equivalents in respect of deferrals credited in Share equivalent units, or (c) granting of Deferred Compensation Options. ARTICLE 13 DIVIDEND EQUIVALENTS Any Awards may, at the discretion of the Committee, earn dividend equivalents. In respect of any such Award which is outstanding on a dividend record date for Common Stock, the Participant may be credited with an amount equal to the amount of cash or stock dividends that would have been paid on the Shares covered by such Award, had such covered Shares been issued and outstanding on such dividend record date. The Committee shall establish such rules and procedures governing the crediting of dividend equivalents, including the timing, form of payment, and payment contingencies of such dividend equivalents, as it deems are appropriate or necessary. ARTICLE 14 NON-EMPLOYEE BOARD DIRECTORS 14.1 GENERAL. Awards shall be made to Non-Employee Board Directors only under this Article 14. No person, including the members of the Board or the Committee, shall have any discretion as to the selection of eligible recipients or the determination of the type, amount, or terms of Awards pursuant to this Article 14. 14.2 ELIGIBILITY. The persons eligible to receive Awards pursuant to this Article 14 are all Non-Employee Board Directors. 14.3 ELECTIVE RESTRICTED SHARES. Each Non-Employee Board Director shall have the right to elect (as provided in Section 14.4 of the Plan) to receive in lieu of all or a portion of his or her annual retainer fee or attendance fees, or both, -17- for service on the Board an Award of Restricted Shares in an amount equal to the specified portion of the amounts otherwise payable as retainer or attendance fees divided by the Fair Market Value of a Share on the date such fee is otherwise payable. If, or to the extent, a Non-Employee Board Director does not elect to receive Restricted Shares, the retainer and attendance fees shall be payable in cash. 14.4 ELECTION. Each Non-Employee Board Director may elect to receive Restricted Shares pursuant to Section 14.3 by a written notice to the Committee (the "Election"). The Election shall specify the percentage portion, if any, of the retainer fee and the percentage portion, if any, of the attendance fees otherwise payable in cash to such Non-Employee Board Director which shall be payable in Restricted Shares. Each election shall specify the calendar year or years (or a portion of a calendar year beginning on a specified date) to be covered by the Election. Each Election must be made not later than six months prior to the first day of the first calendar year (or the specified beginning of a portion of a calendar year) covered by the Election. Elections may be revoked only effective as of a specified date which is more than six months after the date of a written notice to the Committee of such revocation. 14.5 AWARD AGREEMENTS. Each Award of Restricted Shares made pursuant to a Non-Employee Board Director's Election, shall be governed by and shall be subject to the Restrictions, terms, and conditions set forth in an Award Agreement in the form attached to this Plan as Appendix A. Except to the extent otherwise provided in this Article 14 or in such Award Agreement, each such Award shall be governed by Article 9 of the Plan. ARTICLE 15 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, ETC. 15.1 PLAN DOES NOT RESTRICT CORPORATION. The existence of the Plan and the Awards granted hereunder shall not affect or restrict in any way the right or power of the Board or the shareholders of Corporation to make or authorize any adjustment, recapitalization, reorganization, or other change in Corporation's capital structure or its business, any merger or consolidation of the Corporation, any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting Corporation's capital stock or the rights thereof, the dissolution or liquidation of Corporation or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding. 15.2 ADJUSTMENTS BY THE COMMITTEE. In the event of any change in capitalization affecting the Common Stock of Corporation, such as a stock dividend, stock split, recapitalization, merger, consolidation, split-up, combination or exchange of shares or other form of reorganization, or any other change affecting the Common Stock, such proportionate adjustments, if any, as the Committee in its -18- discretion may deem appropriate to reflect such change, shall be made with respect to the aggregate number of Shares for which Awards in respect thereof may be granted under the Plan, the maximum number of Shares which may be sold or awarded to any Participant, the number of Shares covered by each outstanding Award, and the price per Share in respect of outstanding Awards. The Committee may also make such adjustments in the number of Shares covered by, and price or other value of any outstanding Awards in the event of a spin-off or other distribution (other than normal cash dividends) of Corporation Assets to shareholders. ARTICLE 16 AMENDMENT AND TERMINATION Without further approval of Corporation's shareholders, the Board may at any time terminate the Plan, or may amend it from time to time in such respects as the Board may deem advisable, except that the Board may not, without approval of the shareholders, make any amendment which would (i) materially increase the benefits accruing to Participants under the Plan, (ii) materially increase the aggregate number of shares of Common Stock which may be issued under the Plan (except for adjustments pursuant to Article 15 of the Plan) or (iii) materially modify the requirements as to eligibility for participation in the Plan. Without further shareholder approval, the Board may amend the Plan to take into account changes in applicable securities, federal income tax laws, and other applicable laws. Further, should the provisions of Rule 16b-3, or any successor rule, under the Exchange Act be amended, the Board, without further shareholder approval, may amend the Plan as necessary to comply with any modifications to such rule. The provisions of Article 14 of the Plan shall not be amended more than once every six months, other than to comport with changes in the Code or in Rule 16b-3 under the Exchange Act. ARTICLE 17 MISCELLANEOUS 17.1 TAX WITHHOLDING. (a) GENERAL. Corporation shall have the right to deduct from any settlement, including the delivery or vesting of Shares, made under the Plan any federal, state, or local taxes of any kind required by law to be withheld with respect to such payments or to take such other action as may be necessary in the opinion of Corporation to satisfy all obligation for the payment of such taxes. The recipient of any payment or distribution under the Plan shall make arrangements satisfactory to Corporation for the satisfaction of any such withholding tax obligations. Corporation shall not be required to make any such payment or distribution under the Plan until such obligations are satisfied. -19- (b) STOCK WITHHOLDING. The Committee, in its sole discretion, may Permit a Participant to satisfy all or a part of the withholding tax obligations incident to the settlement of an Award involving payment or delivery of Shares to the Participant by having Corporation withhold a portion of the Shares that would otherwise be issuable to the Participant. Such shares shall be valued based on their Fair Market Value on the date the tax withholding is required to be made. Any stock withholding with respect to a Reporting Person shall be subject to such limitations as the Committee may impose to comply with the requirements of the Exchange Act. 17.2 UNFUNDED PLAN. The Plan shall be unfunded and Corporation shall not be required to segregate any assets that may at any time be represented by Awards under the Plan. Any liability of Corporation to any person with respect to any Award under the Plan shall be based solely upon any contractual obligations that may be effected pursuant to the Plan. No such obligation of Corporation shall be deemed to be secured by any pledge of, or other encumbrance on, any property of Corporation. 17.3 PAYMENTS TO TRUST. The Committee is authorized to cause to be established a trust agreement or several trust agreements whereunder the Committee may make payments of amounts due or to become due to Participants in the Plan. 17.4 ANNULMENT OF AWARDS. The grant of any Award under the Plan payable in cash is provisional until cash is paid in settlement thereof. The grant of any Award payable in Shares is provisional until the Participant becomes entitled to the certificate in settlement thereof. In the event the employment (or membership on the Board or the board of directors of a Subsidiary) of a Participant is terminated for cause (as defined below), any Award which is provisional shall be annulled as of the date of such termination for cause. For the purpose of this Section 17.4, the term "terminated for cause" means any discharge (or removal) for material or flagrant violation of the policies and procedures of Corporation or for other job performance or conduct which is materially detrimental to the best interests of Corporation, as determined by the Committee. 17.5 ENGAGING IN COMPETITION WITH THE CORPORATION. In the event a Participant terminates employment with Corporation or a Subsidiary for any reason whatsoever, and within 18 months after the date thereof accepts employment with any competitor of, or otherwise engages in competition with, Corporation, the Committee, in its sole discretion, may require such Participant to return to Corporation the economic value of any Award which is realized or obtained (measured at the date of exercise, Vesting, or payment) by such Participant at any -20- time during the period beginning on that date which is six months prior to the date of such Participant's termination of employment with Corporation. 17.6 OTHER CORPORATION BENEFIT AND COMPENSATION PROGRAMS. Payments and other benefits received by a Participant under an Award made pursuant to the Plan shall not be deemed a part of a Participant's regular, recurring compensation for purposes of the termination indemnity or severance pay law of any country and shall not be included in, nor have any effect on, the determination of benefits under any other employee benefit plan or similar arrangement provided by Corporation or a Subsidiary unless expressly so provided by such other plan or arrangements, or except where the Committee expressly determines that inclusion of an Award or portion of an Award should be included to accurately reflect competitive compensation practices or to recognize that an Award has been made in lieu of a portion of competitive annual cash compensation. Awards under the Plan may be made in combination with or in tandem with, or as alternatives to, grants, awards, or payments under any other Corporation or Subsidiary plans, arrangements, or programs. The Plan notwithstanding, Corporation or any Subsidiary may adopt such other compensation programs and additional compensation arrangements as it deems necessary to attract, retain, and reward employees and directors for their service with Corporation and its Subsidiaries. 17.7 SECURITIES LAW RESTRICTIONS. No Shares shall be issued under the Plan unless counsel for Corporation shall be satisfied that such issuance will be in compliance with applicable federal and state securities laws. Certificates for Shares delivered under the Plan may be subject to such stop-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Common Stock is then listed, and any applicable federal or state securities law. The Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 17.8 GOVERNING LAW. Except with respect to references to the Code or federal securities laws, the Plan and all actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Idaho. ARTICLE 18 SHAREHOLDER APPROVAL The adoption of the Plan and the grant of Awards under the Plan are expressly subject to the approval of the Plan by the affirmative vote of the holders of at least two-thirds (2/3) of the shares entitled to vote thereon at the 1991 annual meeting of Corporation's shareholders. -21- AMENDMENT TO AWARD AGREEMENTS UNDER THE WEST ONE BANCORP 1991 PERFORMANCE AND EQUITY INCENTIVE PLAN NON-QUALIFIED STOCK OPTIONS THIS AMENDMENT made effective November 17, 1995, by West One Bancorp ("Corporation"). 1. DEFINITIONS. For purposes of this Amendment, the following terms have the meanings specified below: - "EFFECTIVE TIME" means the time and date the Merger is consummated. - "EXCHANGE RATIO" means the ratio that Corporation's Common Stock will be converted into U.S. Bancorp Common Stock pursuant to the Merger, namely 1.47 shares of U.S. Bancorp Common Stock for each share of Corporation's Common Stock. - "EXISTING OPTIONS" means the Non-Qualified Stock Options and Non-Qualified Reload Stock Options granted under the Plan for which an Award Agreement is identified on Appendix A to this Amendment. - "MERGER" means the proposed merger of Corporation with and into U.S. Bancorp, an Oregon corporation, pursuant to the Merger Agreement. - "MERGER AGREEMENT" means the Plan and Agreement of Merger between Corporation and U.S. Bancorp dated as of May 5, 1995. - "PARTICIPANT" means each Participant named on Appendix A to this Amendment who entered into an Award Agreement with Corporation with respect to one or more Existing Options. - "PLAN" means the West One Bancorp 1991 Performance and Equity Incentive Plan. - "SUBSTITUTE OPTION" means a stock option to purchase U.S. Bancorp Common Stock, as described in Section 3 of this Amendment. 2. AMENDMENT TO SECTION 5. Section 5 of the Award Agreement for each Existing Option is amended as follows: Notwithstanding the fifth sentence of the second paragraph of Section 5, the Award will not terminate or cease to be exercisable as of the Effective Time. 3. CONVERSION. As of the Effective Time, each Existing Option will be converted to and become a Substitute Option with the following terms and conditions: (a) The shares covered by each Substituted Option will be the number of shares of U.S. Bancorp Common Stock equal to the product of the number of shares of Corporation's Common Stock covered by the Existing Option multiplied by the Exchange Ratio, rounded down to the nearest share; (b) The exercise price per share of U.S. Bancorp Common Stock subject to each Substitute Option will be equal to the exercise price per share -2- of Corporation's Common Stock under the Existing Option divided by the Exchange Ratio, rounded to the nearest cent; (c) To the extent not previously exercised, each Substitute Option will remain vested and fully exercisable after the Merger; and (d) The duration and other terms and conditions of each Substitute Option will otherwise be governed by the Award Agreement for the Existing Option. The foregoing Amendment to each Award Agreement for each Existing Option is approved and adopted as of the date first set forth above by the Corporation's Compensation and Benefits Committee. WEST ONE BANCORP By ------------------------------- Its ------------------------------ -3- NOTICE TO PARTICIPANTS UNDER THE WEST ONE BANCORP 1991 PERFORMANCE AND EQUITY INCENTIVE PLAN 1. The Board of Directors and Shareholders of West One Bancorp ("Corporation") have approved a Plan and Agreement of Merger of Corporation with and into U.S. Bancorp in which U.S. Bancorp will be the surviving corporation. 2. Under the original terms of Section 5 of the Award Agreements for Non-Qualified Stock Options and Non-Qualified Reload Stock Options ("Existing Options") granted under the Corporation's 1991 Performance and Equity Incentive Plan (the "Plan"): (a) Each Existing Option has become immediately and fully vested and exercisable; and (b) Each Existing Option, to the extent not exercised before the consummation of the merger of Corporation into U.S. Bancorp (the "Merger"), would terminate and cease to be exercisable as of the effective date of the Merger. 3. Effective November 17, 1995, West One Bancorp amended the Award Agreement for each Existing Option to provide: (a) Each Existing Option remains fully vested and exercisable; (b) Notwithstanding the original terms of the Award Agreement for Existing Options, the Existing Options will remain exercisable after the Merger; and (c) As of the effective date of the Merger, each Existing Option will be automatically converted into an option to purchase U.S. Bancorp Common Stock with the following terms and conditions: (i) The number of shares of U.S. Bancorp Common Stock subject to the option will be the number of shares of Corporation's Common Stock covered by the option multiplied by 1.47 (the "Exchange Ratio" under the Merger), rounded down to the nearest share; (ii) The exercise price per share of U.S. Bancorp Common Stock subject to the option will be equal to the exercise price per share of Corporation's Common Stock divided by 1.47, rounded to the nearest cent; and (iii) The duration and other terms of each option will otherwise continue to be governed by the original Option Agreement. 3. A copy of the Amendment described above is attached to this Notice and should be retained with the original Award Agreement. Dated: November 17, 1995. WEST ONE BANCORP -2- EX-10.14 10 EXHIBIT 10.14 DESCRIPTION OF RETIREMENT BENEFITS OF JOSHUA GREEN III On June 17, 1993, the Board of Directors approved the award to Joshua Green III, a director and former executive officer, commencing as of April 1, 1993, of a retirement benefit in the amount of $170,886 per year ($14,240.50 per month), reduced by the amounts otherwise payable to Mr. Green, or his surviving spouse, under the U. S. Bancorp Retirement Plan, the U. S. Bancorp Supplemental Benefits Plan, and the Social Security supplemental retirement benefit awarded to Mr. Green on February 18, 1993, pursuant to which he is entitled to a monthly benefit of $900 from the date of his retirement until he reaches age 62 or, if earlier, his death (at which time he will be eligible for Social Security benefits). EX-10.15 11 EXHIBIT 10.15 INDEMNIFICATION AGREEMENT This Agreement made this _____ day of June, 1988, between U. S. Bancorp, an Oregon corporation ("Bancorp"), and ______________________________ ("Director"). WHEREAS, Director is a member of the board of directors ("Board") of Bancorp and in such capacity is performing a valuable service for Bancorp; WHEREAS, the shareholders of Bancorp have adopted an amendment to Bancorp's articles of incorporation providing for the indemnification of directors as authorized by the Oregon Business Corporation Act ("Act"); WHEREAS, said amendment and Section 60.414 of the Act are by their terms not exclusive and expressly recognize that agreements may be entered into between a corporation and its directors with respect to indemnification; WHEREAS, both Bancorp and Director recognize the increased risk of litigation and other claims being asserted against directors of public corporations; and WHEREAS, Bancorp has determined that it is in the best interests of Bancorp to enter into this Agreement in recognition of Director's need for substantial protection against personal liability in order to assure Director's continued service to Bancorp in an effective manner and to provide contractual assurance that such protection will be available to Director notwithstanding any amendment of the Act or Bancorp's articles of incorporation. NOW, THEREFORE, in consideration of Director's continued service as a member of the Board after the date of this Agreement, the parties hereto agree as follows: 1. BASIC INDEMNITY. Subject to the exclusions in Section 6, Bancorp hereby agrees to hold harmless and indemnify Director and the estate or personal representative of Director to the full extent authorized or permitted by (i) the Act or any other applicable law or Bancorp's articles of incorporation or bylaws as in effect on the date hereof, or (ii) by any amendment thereof or other statutory provisions authorizing or permitting such indemnification adopted after the date hereof. 2. MAINTENANCE OF INSURANCE. Bancorp presently has in effect policies of director and officer liability insurance ("D&O Insurance") in amounts satisfactory to Director. Subject to Section 3, Bancorp agrees that, so long as Director continues to serve as a director of Bancorp and thereafter so long as Director is subject to any possible Claim (as hereinafter defined), it will purchase and maintain in effect for the benefit of Director one or more valid, binding and enforceable policies of D&O Insurance providing coverage at least comparable to the coverage provided by the existing policies. 3. SELF INSURANCE. Notwithstanding Section 2, Bancorp shall not be required to maintain in effect policies of D&O Insurance if such insurance is not reasonably available or if, in the reasonable business judgment of the then members of the Board, either (i) the premium cost for such insurance is substantially disproportionate to the amount of coverage or (ii) the coverage provided by such insurance is so limited by exclusions, deductions or otherwise that there is insufficient benefit to warrant the cost of maintaining such insurance. In the event Bancorp does not maintain such insurance in effect, Bancorp agrees to hold harmless and indemnify Director and the estate and personal representative of Director to the full extent of the coverage provided by the existing policies of D&O Insurance. Anything in this Agreement to the contrary notwithstanding, to the extent and so long as Bancorp or any parent of Bancorp shall choose to maintain in effect any policy or policies of D&O Insurance while Director is subject to any possible Claim, Bancorp shall be required to maintain in effect similar and equivalent policies for the benefit of Director, whether more or less favorable to Director than the existing policies of D&O Insurance. 4. ADDITIONAL INDEMNITY. Subject to the exclusions in Section 6 and without limiting Bancorp's obligations under Section 1, Bancorp hereby agrees to hold harmless and indemnify Director and the estate and personal representative of Director against all Liability (as hereinafter defined) incurred in connection with any Claim including, without limiting the generality of the foregoing, a Claim by or in the right of Bancorp. 5. ADVANCEMENT OF EXPENSES. Bancorp shall, if requested by Director, pay all costs and expenses (including attorneys' fees) incurred by Director in investigating, defending or appealing any Claim in advance of the final disposition of a Claim. If required by the Act or other applicable statute, any such request shall be accompanied by a written affirmation of Director's good faith belief that Director has met the standard of conduct described in Section 60.391 of the Act. Bancorp shall pay any statement for such costs and expenses within 20 days after receipt of the statement. Director agrees to repay Bancorp for all costs and expenses paid by Bancorp pursuant to this Section 5 in the event and only to the extent that it is ultimately determined that Director is not entitled to be indemnified by Bancorp for such costs and expenses. 6. EXCLUSIONS. No indemnity pursuant to Sections 1 or 4 shall be paid by Bancorp: 6.1. If a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful. 2 6.2. On account of acts or omissions by Director which are finally adjudged to have been not in good faith or to have involved intentional misconduct or a knowing violation of law. 6.3. On account of any Liability arising under Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or any similar provision of federal or state statutory law. 7. NOTIFICATION AND DEFENSE OF CLAIMS. Promptly after receipt by Director of notice of the commencement of any action, suit or proceeding, Director will, if a claim in respect thereof is to be made under this Agreement, notify Bancorp of the commencement thereof; but the omission so to notify Bancorp will not relieve it from its obligations to Director under this Agreement unless Bancorp shall be prejudiced by reason of such omission. With respect to any such action, suit or proceeding as to which Director notifies Bancorp of the commencement thereof: 7.1. Bancorp shall be entitled to participate therein at its own expense. 7.2. Except as otherwise provided below, Bancorp jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Director. After notice from Bancorp to Director of its election to assume the defense thereof, Bancorp will not be liable to Director under this Agreement for any legal or other expenses subsequently incurred by Director in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. Director shall have no right to employ counsel in such action, suit or proceeding, but the fees and expenses of such counsel incurred after notice from Bancorp of its assumption of the defense thereof shall be at the expense of Director unless (i) the employment of counsel by Director has been authorized by Bancorp, (ii) Director shall have reasonably concluded that there may be a conflict of interest between Bancorp and Director in the conduct of the defense of such action or (iii) Bancorp shall not in fact have employed counsel reasonably satisfactory to Director to assume the defense of such action, in each of which cases the fees and expenses of counsel employed by Director shall be at the expense of Bancorp. Bancorp shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of Bancorp or as to which Director shall have the right to employ counsel at Bancorp's expense pursuant to clause (ii) or (iii) above. 7.3. Bancorp shall not be liable to indemnify Director under this Agreement for any amounts paid in settlement of any Claim effected without its written consent. Bancorp shall not settle any Claim in any manner which would impose any penalty or limitation on Director without Director's 3 written consent. Neither Bancorp nor Director will unreasonably withhold their consent to any proposed settlement. 8. PARTIAL INDEMNITY; BURDEN OF PROOF. If Director is entitled under any provision of this Agreement to indemnification by Bancorp for a portion of the Liability incurred in connection with a Claim but not, however, for the total amount thereof, Bancorp shall nevertheless indemnify Director for the portion thereof to which Director is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that Director has been successful on the merits or otherwise in defense of any Claim or in defense of any issue or matter therein, including dismissal without prejudice, Director shall be indemnified against all expenses incurred in connection therewith. In connection with any determination by the Board or otherwise as to whether Director is entitled to be indemnified under this Agreement, the burden of proof shall be on Bancorp to establish that Director is not so entitled. 9. NO PRESUMPTION. For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Director did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. 10. NONEXCLUSIVITY, ETC. The rights of Director hereunder shall be in addition to any other rights Director may have under the articles of incorporation or bylaws of Bancorp, the Act or otherwise. 11. PERIOD OF LIMITATIONS. No legal action shall be brought and no cause of action shall be asserted by or on behalf of Bancorp or any affiliate of Bancorp against Director or the estate or personal representative of Director after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of Bancorp or its affiliate shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern. 12. AMENDMENTS, ETC. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. 13. SUBROGATION. In the event of payment under this Agreement, Bancorp shall be subrogated to the extent of such payment to all of the rights of recovery of 4 Director, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Bancorp effectively to bring suit to enforce such rights. 14. NO DUPLICATION OF PAYMENTS. Bancorp shall not be liable under this Agreement to make any payment in connection with any Claim to the extent Director has otherwise actually received payment (under any insurance policy or otherwise) of the amounts otherwise indemnifiable hereunder. 15. CONTINUATION OF AGREEMENT. All agreements and obligations of Bancorp contained herein shall continue during the period Director is a director of Bancorp and shall continue thereafter so long as Director is subject to any possible Claim. 16. BINDING EFFECT, ETC. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto, the assigns, estate and personal representative of Director, and the successors and assigns of Bancorp including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or a substantial part of the business and/or assets of Bancorp. Bancorp shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all or a substantial part of the business and/or assets of Bancorp, by written agreement in form and substance satisfactory to Director, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that Bancorp would be required to perform if no such succession had taken place; provided, however, that the failure of any successor to enter into any such written agreement shall not prejudice any of the rights of Director hereunder or relieve such successor of any of its obligations hereunder. This Agreement shall continue in effect regardless of whether Director continues to serve as a director of Bancorp. 17. ATTORNEYS' FEES. In the event Director is required to bring any action to enforce rights or to collect moneys due under this Agreement and is successful in such action, Bancorp shall reimburse Director for all of Director's reasonable fees and expenses at trial and on appeal in bringing and pursuing such action. 18. SEPARABILITY. The parties intend this Agreement to be enforced as written; however (i) if any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court having jurisdiction, then the remainder of this Agreement or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and be enforceable to the fullest extent permitted by laws, and (ii) if any provision, or any part thereof, is held to be unenforceable because of the scope of indemnification, Bancorp and Director agree that the court making such 5 determination shall have the power to reduce the scope of such provision, and in its reduced form such provision shall then be enforceable and shall be enforced. 19. CERTAIN DEFINITIONS. For the purposes of this Agreement, the following terms have the meanings indicated: 19.1. "Claim" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal, arising out of or related to the fact that Director is or was a director, officer, fiduciary, employee or agent of Bancorp or is or was serving at Bancorp's request as a director, officer, partner, fiduciary, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprises. 19.2. "Liability" means the obligation to pay a judgment, settlement, penalty or fine, including any excise tax assessed with respect to any employee benefit plan, or reasonable expenses (including attorneys' fees). 20. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the state of Oregon without giving effect to the principles of conflicts of laws. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the date first above written. U. S. BANCORP By ----------------------------- Bancorp --------------------------------- Director 6 EX-10.16 12 EXHIBIT 10.16 DESCRIPTION OF HEALTH INSURANCE PREMIUM REIMBURSEMENT PLAN FOR U. S. BANCORP DIRECTORS U. S. Bancorp shall reimburse or subsidize a portion of the cost of premiums incurred by non-employee directors of U.S. Bancorp who were former directors of West One Bancorp for health care insurance coverage of such directors and his or her dependents upon the director's request, provided that no portion of such premiums are reimbursed or subsidized by any other employer. Such reimbursement and the criteria for eligibility shall be subject to the same conditions and limits as are applicable to active employees of U. S. Bancorp. EX-10.18 13 EXHIBIT 10.18 U.S. BANCORP DEFERRED COMPENSATION PLAN FOR DIRECTORS (1998 RESTATEMENT) First Effective January 1, 1988 As Amended and Restated Effective January 1, 1998 U.S. BANCORP DEFERRED COMPENSATION PLAN FOR DIRECTORS (1998 RESTATEMENT) TABLE OF CONTENTS PAGE SECTION 1. INTRODUCTION 1 1.1. Restatement of Plan 1.2. Definitions 1.2.1. Account 1.2.2. Annual Valuation Date 1.2.3. Beneficiary 1.2.4. Director 1.2.5. Event of Maturity 1.2.6. Plan 1.2.7. Plan Statement 1.2.8. Plan Year 1.2.9. Prior Plan Statement 1.2.10. USB 1.2.11. Valuation Date 1.3. Rules of Interpretation 1.4. Additional Definitions 1.4.1. Acquiring Person 1.4.2. Affiliate 1.4.3. Associate 1.4.4. Beneficial Owner 1.4.5. Board of Directors 1.4.6. Company Entity 1.4.7. Continuing Director 1.4.8. Exchange Act 1.4.9. Full Change In Control 1.4.10. Partial Change in Control 1.4.11. Permitted Transaction 1.4.12. Person 1.4.13. Resulting Corporation -2- SECTION 2. PARTICIPATION 5 2.1. Participation 2.2. Enrollment 2.3. Revocation 2.4. Prior Years' Enrollments SECTION 3. ADDITIONS TO ACCOUNTS 6 SECTION 4. ESTABLISHMENT AND ADJUSTMENT OF ACCOUNTS 6 4.1. Establishment of Accounts 4.2. Payment of Accounts 4.2.1. Intermediate Distributions Adjustment 4.2.2. Investment Adjustment for Account 4.2.3. Contribution Adjustment 4.2.4. Final Distributions Adjustment SECTION 5. VESTING OF ACCOUNT 7 SECTION 6. MATURITY 7 6.1. Events of Maturity 6.2. Determination of Account 6.3. Effect of Maturity upon Further Participation in Plan SECTION 7. DISTRIBUTION 8 7.1. Time of Distribution 7.1.1. Form of Distribution 7.1.2. Time of Distribution 7.1.3. Substantially Equal 7.1.4. Default 7.1.5. Change In Control 7.2. Designation of Beneficiaries 7.2.1. Right To Designate 7.2.2. Failure of Designation 7.2.3. Disclaimers by Beneficiaries 7.2.4. Definitions 7.2.5. Special Rules 7.2.6. No Spousal Rights -3- 7.3. Death Prior to Full Distribution 7.4. Facility of Payment SECTION 8. FUNDING OF PLAN 12 8.1. Unfunded Agreement 8.2. Spendthrift Provision SECTION 9. AMENDMENT AND TERMINATION 13 SECTION 10. DETERMINATIONS -- RULES AND REGULATIONS 13 10.1. Determinations 10.2. Rules and Regulations 10.3. Method of Executing Instruments 10.4. Information Furnished by Directors SECTION 11. PLAN ADMINISTRATION 14 11.1. USB 11.2. Conflict of Interest SECTION 12. DISCLAIMERS 14 -4- U.S. BANCORP DEFERRED COMPENSATION PLAN FOR DIRECTORS (1998 RESTATEMENT) SECTION 1 INTRODUCTION 1.1. RESTATEMENT OF PLAN. Effective January 1, 1988, FIRST BANK SYSTEM, INC., a Delaware corporation (hereinafter sometimes referred to as "FBS") authorized the creation of a nonqualified, unfunded, directors' deferral plan for the purpose of allowing Directors who are not full-time salaried employees of FBS to defer the receipt of directors' fees which would otherwise be paid to the Director. FBS created and established a series of substantially identical annual directors' deferral plans, effective as of January 1, 1988. They were set forth in documents referred to collectively as the "Prior Plan Statement." On August 1, 1997, following its merger with U.S. Bancorp, an Oregon corporation, FBS changed its name to U.S. BANCORP ("USB"). USB has reserved the power to amend and terminate the Prior Plan Statement from time to time. USB now desires to exercise that reserved power of amendment by the adoption of this Plan Statement effective as of January 1, 1998. 1.2. DEFINITIONS. When the following terms are used herein with initial capital letters, they shall have the following meanings: 1.2.1. ACCOUNT -- the separate bookkeeping account representing the unfunded and unsecured general obligation of USB established with respect to each Director to which is credited the dollar amounts specified in Section 3 and Section 4 and from which are subtracted payments made pursuant to Section 5 and Section 7. To the extent necessary to accommodate different distribution elections made pursuant to Section 2, the Account shall be maintained as separate sub-accounts in sufficient number to accommodate each such distribution election. 1.2.2. ANNUAL VALUATION DATE -- each December 31. 1.2.3. BENEFICIARY -- a person designated by a Director (or automatically by operation of this Plan Statement) to receive all or a part of the Director's Account in the event of the Director's death prior to full distribution thereof. A person so designated shall not be considered a Beneficiary until the death of the Director. 1.2.4. DIRECTOR -- an individual serving on the Board of Directors of USB who is not at the same time a common law employee of USB or any of its subsidiary corporations. -5- 1.2.5. EVENT OF MATURITY -- any of the occurrences described in Section 6 by reason of which a Director or Beneficiary may become entitled to a distribution from the Plan. 1.2.6. PLAN -- the income deferral program maintained by USB established for the benefit of Directors eligible to participate therein, as first set forth in the Prior Plan Statement and as amended and restated in this Plan Statement. (As used herein, "Plan" does not refer to the documents pursuant to which the Plan is maintained. Those documents are referred to herein as the "Prior Plan Statement" and the "Plan Statement"). The Plan shall be referred to as the "U.S. BANCORP DEFERRED COMPENSATION PLAN FOR DIRECTORS." 1.2.7. PLAN STATEMENT -- this document entitled "U.S. BANCORP DEFERRED COMPENSATION PLAN FOR DIRECTORS (1998 Restatement)" as adopted by the Board of Directors of U.S. BANCORP effective as of January 1, 1998, as the same may be amended from time to time thereafter. 1.2.8. PLAN YEAR -- the twelve (12) consecutive month period ending on any Annual Valuation Date. 1.2.9. PRIOR PLAN STATEMENT -- the series of documents pursuant to which the Plan was established effective as of January 1, 1988, and operated thereafter until January 1, 1998. 1.2.10. USB -- U.S. BANCORP (formerly known as FIRST BANK SYSTEM, INC.), a Delaware corporation, or any successor thereto. 1.2.11. VALUATION DATE -- the last day of each calendar month of the Plan Year. 1.3. RULES OF INTERPRETATION. Whenever appropriate, words used herein in the singular may be read in the plural, or words used herein in the plural may be read in the singular; the masculine may include the feminine; and the words "hereof," "herein" or "hereunder" or other similar compounds of the word "here" shall mean and refer to this entire Plan Statement and not to any particular paragraph or section of this Plan Statement unless the context clearly indicates to the contrary. The titles given to the various sections of this Plan Statement are inserted for convenience of reference only and are not part of this Plan Statement, and they shall not be considered in determining the purpose, meaning or intent of any provision hereof. Any reference in this Plan Statement to a statute or regulation shall be considered also to mean and refer to any subsequent amendment or replacement of that statute or regulation. This document has been executed and delivered in the State of MINNESOTA and has been drawn in conformity to the laws of that State and shall be construed and enforced in accordance with the laws of the State of MINNESOTA. -6- 1.4. ADDITIONAL DEFINITIONS. When the following terms are used herein with initial capital letters, they shall have the following meanings: 1.4.1. ACQUIRING PERSON -- any Person who or which, together with all Affiliates and Associates of such person, is the Beneficial Owner, directly or indirectly, of securities of USB representing 20% or more of the combined voting power of USB's then outstanding securities, but shall not include any Company Entity. 1.4.2. AFFILIATE -- shall have the meaning ascribed to the term "Affiliate" in Rule 12b-2 promulgated under the Exchange Act. 1.4.3. ASSOCIATE -- shall have the meaning ascribed to such term in Rule 12b-2 promulgated under the Exchange Act. 1.4.4. BENEFICIAL OWNER -- shall have the meaning ascribed to such term in Rule 13d-3 promulgated under the Exchange Act. 1.4.5. BOARD OF DIRECTORS -- the board of directors of USB. 1.4.6. COMPANY ENTITY -- USB, any subsidiary of USB or any employee benefit plan of USB or of any subsidiary of USB or any entity holding shares of the voting capital stock of USB organized, appointed or established for, or pursuant to the terms of, any such plan. 1.4.7. CONTINUING DIRECTOR -- any person who is a member of the Board of Directors, while such person is a member of the Board of Directors, who is not an Acquiring Person or an Affiliate or Associate of an Acquiring Person, or a representative of an Acquiring Person or of any such Affiliate or Associate, and who (x) was a member of the Board of Directors as of July 17, 1996 or (y) subsequently becomes a member of the Board of Directors, if such person's initial nomination for election or initial election to the Board of Directors has been approved in advance by the Continuing Directors; provided that any director designated by or on behalf of a Person who has entered into an agreement with USB (or who is contemplating entering into such an agreement) to effect a consolidation or merger of USB or a Company Entity, or other reorganization, with or into one or more entities which are not Company Entities, and any director that serves in connection with the act of the Board of Directors of increasing the number of directors and filling vacancies in connection with, or in contemplation of, any such transaction, shall not be deemed to have received such advance approval for initial nomination or election, and any such director shall not be deemed to be a Continuing Director; provided, further, that any such director shall subsequently become a Continuing Director at such time as a new term of office as a director is approved by USB's shareholders at an annual meeting of -7- shareholders occurring subsequent to the completion of any such transaction (and excluding any annual meeting at which the shareholders approve any such transaction); and, provided, further, that in the case of a Permitted Transaction, any such director shall not become a Continuing Director until the later of (i) the end of the three-year period following consummation of such Permitted Transaction or (ii) such time as a new term of office as a director is approved by USB's shareholders at an annual meeting of shareholders occurring subsequent to the completion of such Permitted Transaction. 1.4.8. EXCHANGE ACT -- the Securities Exchange Act of 1934, as amended. 1.4.9. FULL CHANGE IN CONTROL -- shall mean: (a) the public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by USB or any Person that a Person (other than a Company Entity) has become the Beneficial Owner, directly or indirectly, of securities of USB (x) representing 20% or more, but not more than 50%, of the combined voting power of USB's then outstanding securities unless the transaction resulting in such ownership has been approved in advance by the Continuing Directors or (y) representing more than 50% of the combined voting power of USB's then outstanding securities (regardless of any approval by the Continuing Directors); or (b) the Continuing Directors cease to constitute a majority of the Board of Directors of USB or the Resulting Corporation, except in accordance with the terms of a Permitted Transaction and except as a result of the death, retirement or disability of one or more Continuing Directors (unless any such death, retirement or disability occurs following a Permitted Transaction and any vacancies created thereby are not filled in accordance with the terms of the written agreement governing such Permitted Transaction); or (c) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the consolidated assets of USB and its subsidiaries or the adoption of any plan of liquidation or dissolution of USB. 1.4.10. PARTIAL CHANGE IN CONTROL -- shall mean: (a) a consolidation or merger of USB or a Company Entity, or other reorganization, with or into one or more entities which are not Company -8- Entities, as a result of which less than 60% of the outstanding voting securities of the Resulting Corporation are, or are to be, owned by former shareholders of USB as determined immediately prior to consummation of such transaction (excluding voting securities of the Resulting Corporation owned, or to be owned, by such shareholders by reason of their ownership prior to such transaction of securities of any entity other than USB) and as a result of which the Continuing Directors constitute (i) more than 50% of the Board of Directors of the Resulting Corporation or (ii) exactly 50% of the Board of Directors of the Resulting Corporation if the transaction resulting in such event is a Permitted Transaction; or (b) the public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by USB or any Person that a Person (other than a Company Entity) has become the Beneficial Owner, directly or indirectly, of securities of USB representing 20% or more, but not more than 50%, of the combined voting power of USB's then outstanding securities if the transaction resulting in such ownership has been approved in advance by the Continuing Directors. 1.4.11. PERMITTED TRANSACTION -- a transaction in which, pursuant to a written agreement between USB and all Persons who have entered into an agreement with USB to effect a transaction described in paragraph (a) of the definition of Partial Change in Control, it is agreed that (w) the Chief Executive Officer of USB immediately prior to the consummation of such transaction shall be the Chief Executive Officer of the Resulting Corporation for not less than three years following consummation of such transaction, (x) upon termination of service of any Continuing Director for any reason, including upon death, disability or retirement, prior to the expiration of such director's term during such three-year period, the vacancy thereby created shall be filled by a nominee selected solely by the Continuing Directors, (y) upon expiration of the term of any such director during such three-year period, the nominee to succeed such director shall be selected solely by the Continuing Directors and (z) the parties will take other appropriate steps to ensure that the Board of Directors of the Resulting Corporation will be evenly divided between Continuing Directors and all directors designated by other parties to the transaction during such three-year period. 1.4.12. PERSON -- shall have the meaning ascribed to such term as such term is used in Sections 13(d) and 14(d) of the Exchange Act. 1.4.13. RESULTING CORPORATION -- the surviving corporation in any consolidation, merger or other reorganization to which USB is a party; provided, however, that if the surviving corporation in any such transaction is a subsidiary of another corporation, then the Resulting -9- Corporation is the ultimate parent corporation of such surviving corporation; and provided, further, that in the event of a consolidation, merger or other reorganization to which a Company Entity (other than USB) is a party, then USB shall be deemed the Resulting Corporation. SECTION 2 PARTICIPATION 2.1. PARTICIPATION. Each Director of USB shall be a participant in the Plan as of the first day the Director first becomes a Director. 2.2. ENROLLMENT. Prior to the first day of participation, the Director may enroll in the Plan for the remainder of that Plan Year. Prior to the first day of any subsequent Plan Year, a Director may make a new enrollment for that Plan Year. Once made, the enrollment shall be irrevocable for the remainder of the Plan Year with respect to which it is made. Each such enrollment, whether for the initial Plan Year or for a subsequent Plan Year, shall designate in writing: (a) the amount or portion of the Director's annual retainer and meeting fees which shall not be paid to the Director but instead shall be accumulated in this Plan under Section 3 and Section 4 and distributed from this Plan under Section 6 and Section 7; and (b) the time and form in which the Account or portion of Account attributable to such Plan Year's accumulation shall be paid to the Director in accordance with Section 7. 2.3. REVOCATION. A Director's written enrollment for the 1998 Plan Year or any later Plan Year shall continue in effect after the Plan Year with respect to which it is made until an Event of Maturity occurs as to the Director or until the last day of the Plan Year in which the Director files a written revocation of the Director's enrollment, whichever occurs first. 2.4. PRIOR YEARS' ENROLLMENTS. Notwithstanding the forgoing, elections made by Directors about the payment of benefits under the Prior Plan Statement attributable to accumulations for Plan Years ending before January 1, 1998, shall not be modified by the adoption of this Plan Statement. SECTION 3 -10- ADDITIONS TO ACCOUNTS USB shall credit monthly to the Account of each Director such amount as the Director in his or her sole discretion shall have determined in accordance with Section 2.2. The amount shall be separately determined by each Director and need not be equal or bear a uniform relationship to the deferrals of other Directors. The amount so allocated to a Director shall be credited to such Director's Account as of the Valuation Date in the month for which it is made. SECTION 4 ESTABLISHMENT AND ADJUSTMENT OF ACCOUNTS 4.1. ESTABLISHMENT OF ACCOUNTS. There shall be established for each Director an unfunded bookkeeping Account which shall be adjusted each Valuation Date. 4.2. ADJUSTMENT OF ACCOUNTS. As of each Valuation Date (the "current Valuation Date"), the value of each Account determined as of the immediately preceding Valuation Date (the "initial Account value") shall be increased (or decreased) by the following adjustments made in the following sequence: 4.2.1. INTERMEDIATE DISTRIBUTIONS ADJUSTMENT. The initial Account value shall be reduced by the total amount distributed in fact to (or with respect to) the Director from such Account as of a date subsequent to the immediately preceding Valuation Date but prior to the current Valuation Date. 4.2.2. INVESTMENT ADJUSTMENT FOR ACCOUNT. The initial Account value of each Director's Account (as adjusted above) shall be increased by interest. The rate shall be determined from time to time by USB. The rate may be changed by USB without amendment of the Plan Statement and without notice to or the consent of any Director, former Director or any Beneficiary. Beginning January 1, 1998, the rate for each month in a Plan Year shall be equal to the monthly equivalent of one hundred percent (100%) of the 120 month rolling average of the 10-year Treasury Note, determined as of September 30 of the immediately preceding Plan Year. This percentage shall be uniform for all Directors for the same Valuation Date but may change from Valuation Date to Valuation Date. 4.2.3. CONTRIBUTION ADJUSTMENT. The initial Account value (as adjusted above) shall be increased by the total amount, if any, credited to such Account under Section 3 as of the current Valuation Date. -11- 4.2.4. FINAL DISTRIBUTIONS ADJUSTMENT. The initial Account value (as adjusted above) shall be reduced by the total amount distributed in fact to (or with respect to) the Director from such Account as of the current Valuation Date. SECTION 5 VESTING OF ACCOUNT The Account of each Director shall be fully (100%) vested at all times. SECTION 6 MATURITY 6.1. EVENTS OF MATURITY. A Director's Account shall mature and shall become distributable in accordance with Section 7 upon the earliest occurrence of any of the following events while in the employment of USB or an Affiliate: (a) his or her death, or (b) his or her removal or resignation from the Board of Directors of USB, whether voluntary or involuntary, or (c) his or her Disability, or (d) termination of the Plan. 6.2. DETERMINATION OF ACCOUNT. Upon the occurrence of an Event of Maturity effective as to a Director, the value of such Director's Account as of the Valuation Date coincident with or next following the Event of Maturity shall be determined. 6.3. EFFECT OF MATURITY UPON FURTHER PARTICIPATION IN PLAN. On the occurrence of an Event of Maturity, a Director shall cease to have any interest in the Plan other than the right to receive payment of his or her Account as provided in Section 7 hereof, adjusted from time to time as provided in Section 4. SECTION 7 -12- DISTRIBUTION 7.1. TIME OF DISTRIBUTION. Upon the occurrence of an Event of Maturity effective as to a Director, USB shall commence payment of such Director's Account in the manner designated by the Director in his or her enrollment. 7.1.1. FORM OF DISTRIBUTION. Distribution shall be made in whichever of the following forms as the Director shall have designated in writing: (a) In a series of substantially equal annual installments payable over ten (10) years. (b) In a single, lump sum payment. 7.1.2. TIME OF DISTRIBUTION. Distribution shall be made (in the case of a single lump sum) or commenced (in the case of installments) as of the first business day of January after the Director's Event of Maturity. 7.1.3. SUBSTANTIALLY EQUAL. Distributions shall be considered to be substantially equal if the amount of the distribution required to be made for each calendar year (the "distribution year") is determined by dividing the amount of the Account as of the last Valuation Date in the calendar year immediately preceding the distribution year (such preceding calendar year being the "valuation year") by the number of remaining installment payments to be made (including the distribution being determined). The amount of the Account as of such Valuation Date shall be decreased by the amount of any distributions made in the valuation year and after such Valuation Date. 7.1.4. DEFAULT. If for any reason a Director shall have failed to make a written designation of form and time for distribution (including reasons entirely beyond the control of the Director), the distribution shall be made in a single lump sum during the January following the date the Director shall have had an Event of Maturity. No spouse, former spouse, Beneficiary or other person shall have any right to participate in the Director's selection of a form of benefit. 7.1.5. CHANGE IN CONTROL. Notwithstanding the foregoing provisions of this Section or any designation made by a Director, in the event of a Full Change in Control the Plan shall be automatically terminated and every Account shall be paid in a single lump sum distribution within thirty (30) days after the Full Change in Control. 7.2. DESIGNATION OF BENEFICIARIES. -13- 7.2.1. RIGHT TO DESIGNATE. Each Director may designate, upon forms to be furnished by and filed with USB, one or more primary Beneficiaries or alternative Beneficiaries to receive all or a specified part of such Director's Account in the event of such Director's death. The Director may change or revoke any such designation from time to time without notice to or consent from any Beneficiary. No such designation, change or revocation shall be effective unless executed by the Director and received by USB during the Director's lifetime. 7.2.2. FAILURE OF DESIGNATION. If a Director: (a) fails to designate a Beneficiary, (b) designates a Beneficiary and thereafter revokes such designation without naming another Beneficiary, or (c) designates one or more Beneficiaries and all such Beneficiaries so designated fail to survive the Director, such Director's Account, or the part thereof as to which such Director's designation fails, as the case may be, shall be payable to the first class of the following classes of automatic Beneficiaries with a member surviving the Director and (except in the case of surviving issue) in equal shares if there is more than one member in such class surviving the Director: Director's surviving spouse Director's surviving issue per stirpes and not per capita Director's surviving parents Director's surviving brothers and sisters Representative of Director's estate. 7.2.3. DISCLAIMERS BY BENEFICIARIES. A Beneficiary entitled to a distribution of all or a portion of a deceased Director's Account may disclaim an interest therein subject to the following requirements. To be eligible to disclaim, a Beneficiary must be a natural person, must not have received a distribution of all or any portion of the Account at the time such disclaimer is executed and delivered, and must have attained at least age twenty-one (21) years as of the date of the Director's death. Any disclaimer must be in writing and must be executed personally by the Beneficiary before a notary public. A disclaimer shall state that the Beneficiary's entire interest in the undistributed Account is disclaimed or shall specify what portion thereof is disclaimed. To be effective, duplicate original executed copies of the disclaimer must be both executed and actually delivered to USB after the date of the Director's death but not later than one hundred eighty (180) days after the date of the Director's death. A disclaimer shall be irrevocable when delivered to USB. A disclaimer shall be considered to be delivered to USB only when actually received by USB. USB shall be the sole judge of the content, interpretation and -14- validity of a purported disclaimer. Upon the filing of a valid disclaimer, the Beneficiary shall be considered not to have survived the Director as to the interest disclaimed. A disclaimer by a Beneficiary shall not be considered to be a transfer of an interest in violation of the provisions of Section 8. No other form of attempted disclaimer shall be recognized by USB. 7.2.4. DEFINITIONS. When used herein and, unless the Director has otherwise specified in the Director's Beneficiary designation, when used in a Beneficiary designation, "issue" means all persons who are lineal descendants of the person whose issue are referred to, including legally adopted descendants and their descendants but not including illegitimate descendants and their descendants; "child" means an issue of the first generation; "per stirpes" means in equal shares among living children of the person whose issue are referred to and the issue (taken collectively) of each deceased child of such person, with such issue taking by right of representation of such deceased child; and "survive" and "surviving" mean living after the death of the Director. 7.2.5. SPECIAL RULES. Unless the Director has otherwise specified in the Director's Beneficiary designation, the following rules shall apply: (a) If there is not sufficient evidence that a Beneficiary was living at the time of the death of the Director, it shall be deemed that the Beneficiary was not living at the time of the death of the Director. (b) The automatic Beneficiaries specified in Section 7.2.2 and the Beneficiaries designated by the Director shall become fixed at the time of the Director's death so that, if a Beneficiary survives the Director but dies before the receipt of all payments due such Beneficiary hereunder, such remaining payments shall be payable to the representative of such Beneficiary's estate. (c) If the Director designates as a Beneficiary the person who is the Director's spouse on the date of the designation, either by name or by relationship, or both, the dissolution, annulment or other legal termination of the marriage between the Director and such person shall automatically revoke such designation. (The foregoing shall not prevent the Director from designating a former spouse as a Beneficiary on a form executed by the Director and received by USB after the date of the legal termination of the marriage between the Director and such former spouse, and during the Director's lifetime.) (d) Any designation of a nonspouse Beneficiary by name that is accompanied by a description of relationship to the Director shall be given effect -15- without regard to whether the relationship to the Director exists either then or at the Director's death. (e) Any designation of a Beneficiary only by statement of relationship to the Director shall be effective only to designate the person or persons standing in such relationship to the Director at the Director's death. USB shall be the sole judge of the content, interpretation and validity of a purported Beneficiary designation. 7.2.6. NO SPOUSAL RIGHTS. No spouse or surviving spouse of a Director and no person designated to be a Beneficiary shall have any rights or interest in the benefits accumulated under this Plan including, but not limited to, the right to be the sole Beneficiary or to consent to the designation of Beneficiaries (or the changing of designated Beneficiaries) by the Director. 7.3. DEATH PRIOR TO FULL DISTRIBUTION. If a Director dies after an Event of Maturity but before distribution of such Director's Account has been completed, the remaining undistributed Account shall be distributed in the same manner as hereinbefore provided in Section 7.1. If, at the death of the Director, any payment to the Director was due or otherwise pending but not actually paid, the amount of such payment shall be included in the Account which are payable to the Beneficiary (and shall not be paid to the Director's estate). 7.4. FACILITY OF PAYMENT. In case of the legal disability of a Director or Beneficiary entitled to receive any distribution under the Plan, payment shall be made, if USB shall be advised of the existence of such condition: (a) to the duly appointed guardian, conservator or other legal representative of such Director or Beneficiary, or (b) to a person or institution entrusted with the care or maintenance of the incompetent or disabled Director or Beneficiary, provided such person or institution has satisfied USB that the payment will be used for the best interest and assist in the care of such Director or Beneficiary, and provided further, that no prior claim for said payment has been made by a duly appointed guardian, conservator or other legal representative of such Director or Beneficiary. Any payment made in accordance with the foregoing provisions of this section shall constitute a complete discharge of any liability or obligation of USB therefor. SECTION 8 -16- FUNDING OF PLAN 8.1. UNFUNDED AGREEMENT. The obligations of USB to make payments under this Plan constitute only the unsecured (but legally enforceable) promise of USB to make such payments. The Director shall have no lien, prior claim or other security interest in any property of USB. USB is not required to establish or maintain any fund, trust or account (other than a bookkeeping account or reserve) for the purpose of funding or paying the benefits promised under this Plan. If such a fund is established, the property therein shall remain the sole and exclusive property of USB. USB will pay the cost of this Plan out of its general assets. All references to accounts, accruals, gains, losses, income, expenses, payments, custodial funds and the like are included merely for the purpose of measuring USB's obligation to Directors in this Plan and shall not be construed to impose on USB the obligation to create any separate fund for purposes of this Plan. 8.2. SPENDTHRIFT PROVISION. No Director or Beneficiary shall have any transmissible interest in any Account nor shall any Director or Beneficiary have any power to anticipate, alienate, dispose of, pledge or encumber the same while in the possession or control of USB, nor shall USB recognize any assignment thereof, either in whole or in part, nor shall any Account be subject to attachment, garnishment, execution following judgment or other legal process while in the possession or control of USB. The power to designate Beneficiaries to receive the Account of a Director in the event of such Director's death shall not permit or be construed to permit such power or right to be exercised by the Director so as thereby to anticipate, pledge, mortgage or encumber such Director's Account or any part thereof, and any attempt of a Director so to exercise said power in violation of this provision shall be of no force and effect and shall be disregarded by USB. This section shall not prevent USB from exercising, in its discretion, any of the applicable powers and options granted to it upon the occurrence of an Event of Maturity, as such powers may be conferred upon it by any applicable provision hereof. SECTION 9 AMENDMENT AND TERMINATION USB reserves the power to amend or terminate the Plan prior to a Full Change in Control. No amendment or termination of the Plan, however, shall reduce a Director's Account earned as of the date of such amendment unless the Director so affected consents thereto in writing. A Director's Account earned as of the date of an amendment or termination shall be determined as if the Director had an Event of Maturity on that date. After a Full Change in Control, the Plan -17- cannot be amended or terminated (as applied to Directors who are Directors on the date of the Full Change in Control) unless: (a) all Accounts of all Directors as of the date of the Full Change in Control have been paid, or (b) eighty percent (80%) of all the Directors as of the date of the Full Change in Control give written consent to such amendment or termination. SECTION 10 DETERMINATIONS -- RULES AND REGULATIONS 10.1. DETERMINATIONS. USB shall make such determinations as may be required from time to time in the administration of the Plan. USB, in its sole discretion, shall have the authority and responsibility to interpret and construe the Plan Statement and to determine all factual and legal questions under the Plan, including but not limited to the entitlement of Directors and Beneficiaries, and the amounts of their respective interests. Each interested party may act and rely upon all information reported to them hereunder and need not inquire into the accuracy thereof, nor be charged with any notice to the contrary. 10.2. RULES AND REGULATIONS. Any rule not in conflict or at variance with the provisions hereof may be adopted by USB. 10.3. METHOD OF EXECUTING INSTRUMENTS. Information to be supplied or written notices to be made or consents to be given by USB pursuant to any provision of this Plan Statement may be signed in the name of USB by any officer or director thereof who has been authorized to make such certification or to give such notices or consents. 10.4. INFORMATION FURNISHED BY DIRECTORS. USB shall not be liable or responsible for any error in the computation of the Account of a Director resulting from any misstatement of fact made by the Director, directly or indirectly, to USB, and used by it in determining the Director's Account. USB shall not be obligated or required to increase the Account of such Director which, on discovery of the misstatement, is found to be understated as a result of such misstatement of the Director. However, the Account of any Director which are overstated by reason of any such misstatement shall be reduced to the amount appropriate in view of the truth. SECTION 11 -18- PLAN ADMINISTRATION 11.1. USB. Except as hereinafter provided, functions generally assigned to USB shall be discharged by the Compensation and Human Resources Committee of the Board of Directors or delegated and allocated as provided herein. 11.2. CONFLICT OF INTEREST. If any member of the Board of Directors of USB to whom authority has been delegated or redelegated hereunder shall have an Account in the Plan, such Director shall have no authority as such Director with respect to any matter specially affecting such Directors individual interest hereunder (as distinguished from the interests of all Director's and Beneficiaries or a broad class of Directors and Beneficiaries), all such authority being reserved exclusively to the other Directors, to the exclusion of such Director, and such Director shall act only in such Director's individual capacity in connection with any such matter. SECTION 12 DISCLAIMERS Neither the terms of this Plan Statement nor the benefits hereunder nor the continuance thereof shall be an obligation of any Director. USB shall not be obliged to continue the Plan. The terms of this Plan Statement shall not give any Director the right to be retained on the Board of Directors of USB. Neither USB nor any of its officers nor any member of its Board of Directors in any way secure or guarantee the payment of any benefit or amount which may become due and payable hereunder to any Director or to any Beneficiary or to any creditor of a Director or a Beneficiary. Each Director, Beneficiary or other person entitled at any time to payments hereunder shall look solely to the assets of USB for such payments or to the Account distributed to any Director or Beneficiary, as the case may be, for such payments. In each case where an Account shall have been distributed to a former Director or a Beneficiary or to the person or any one of a group of persons entitled jointly to the receipt thereof and which purports to cover in full the benefit hereunder, such former Director or Beneficiary, or such person or persons, as the case may be, shall have no further right or interest in the other assets of USB. Neither USB nor any of its officers nor any member of its Board of Directors shall be under any liability or responsibility for failure to effect any of the objectives or purposes of the Plan by reason of the insolvency of USB. USB and its officers and the members of its Board of Directors shall not be liable for an act or omission of another person with regard to a responsibility that has been allocated to or delegated to such other person pursuant to the terms of this Plan Statement or pursuant to procedures set forth in this Plan Statement. -19- EX-12 14 EXHIBIT 12 EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Year Ended December 31 (Dollars in Millions) 1997 1996 1995 1994 1993 - - ------------------------------------------------------------------------------------------------------------------------------------ EARNINGS 1. Net income from continuing operations $838.5 $1,218.7 $897.1 $568.2 $701.8 2. Applicable income taxes 552.2 725.7 523.9 311.5 374.9 ------------------------------------------------------------- 3. Income before taxes (1 + 2) $1,390.7 $1,944.4 $1,421.0 $879.7 $1,076.7 ------------------------------------------------------------- ------------------------------------------------------------- 4. Fixed charges: a. Interest expense excluding interest on deposits $808.7 $702.5 $681.4 $486.3 $320.4 b. Portion of rents representative of interest and amortization of debt expense 41.2 45.4 46.6 48.7 52.1 ------------------------------------------------------------- c. Fixed charges excluding interest on deposits (4a + 4b) 849.9 747.9 728.0 535.0 372.5 d. Interest on deposits 1,436.8 1,441.3 1,416.7 1,121.1 1,174.1 ------------------------------------------------------------- e. Fixed charges including interest on deposits (4c + 4d) $2,286.7 $2,189.2 $2,144.7 $1,656.1 $1,546.6 ------------------------------------------------------------- ------------------------------------------------------------- 5. Amortization of interest capitalized $ -- $ -- $ -- $.1 $.1 6. Earnings excluding interest on deposits (3 + 4c + 5) 2,240.6 2,692.3 2,149.0 1,414.8 1,449.3 7. Earnings including interest on deposits (3 + 4e + 5) 3,677.4 4,133.6 3,565.7 2,535.9 2,623.4 8. Fixed charges excluding interest on deposits (4c) 849.9 747.9 728.0 535.0 372.5 9. Fixed charges including interest on deposits (4e) 2,286.7 2,189.2 2,144.7 1,656.1 1,546.6 RATIO OF EARNINGS TO FIXED CHARGES 10. Excluding interest on deposits (line 6 / line 8) 2.64 3.60 2.95 2.64 3.89 11. Including interest on deposits (line 7 / line 9) 1.61 1.89 1.66 1.53 1.70 - - ------------------------------------------------------------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------------------------------------------------------------
EX-13 15 EXHIBIT 13 Exhibit 13 Pursuant to General Instruction (H) to form 10-K the Company is filing an integrated Annual Report on Form 10-K. See page 76 for 10-K cover page for the sections of the Annual Report incorporated into the Form 10-K. EX-21 16 EXHIBIT 21 Exhibit 21 U.S. BANCORP BANKING AND NON-BANKING SUBSIDIARIES BANK AND TRUST OPERATIONS MINNESOTA U.S. Bank National Association - Has branches in Minnesota, Oregon, Washington, Colorado, California, Idaho, Nebraska, North Dakota, Nevada, South Dakota, Montana, Iowa, Illinois, Utah, Wisconsin, Kansas and Wyoming. Does business under the names First Bank , Colorado National Bank and U.S. Bank. Melrose State Bank The First National Bank of Little Falls Zapp National Bank of St. Cloud First Trust National Association ARIZONA First Trust of Arizona, National Association CALIFORNIA First Trust of California, National Association ILLINOIS First Trust National Association MONTANA First Bank Montana, National Association First Trust Company of Montana National Association NEW YORK First Trust of New York, National Association NORTH DAKOTA First Bank National Association ND First Trust Company of North Dakota National Association OREGON First State Bank of Oregon U.S. Bank Trust Company, National Association SOUTH DAKOTA First Bank of South Dakota (National Association) UTAH West One Trust Company WASHINGTON First Trust National Association WYOMING Wyoming Trust and Management Company NON-BANKING SUBSIDIARIES State of Subsidiary Incorporation ---------- ------------- FBS Capital I Delaware FBS Card Services, Inc. Minnesota FBS Community Development Corporation Minnesota FBS Information Services Corporation Minnesota FBS Merchant Banking Co. Minnesota FBS Portfolio, Inc. Minnesota FBS Service Center, Inc. North Dakota FBS Trade Services Limited Hong Kong FBS Venture Capital Corporation Minnesota First Bank System Foundation Minnesota First Building Corporation Minnesota First Group Royalties, Inc. Minnesota First System Services, Inc. Minnesota Boulevard Technical Services, Incorporated Illinois U.S. Bancorp Capital I Delaware U.S. Bancorp Insurance Services, Inc. Delaware U.S. Trade Services, Inc. Oregon EX-23 17 EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the following Registration Statements and related Prospectuses of U.S. Bancorp (formerly First Bank System, Inc.) of our report dated January 15, 1998, with respect to the consolidated financial statements of U.S. Bancorp included in this Annual Report (Form 10-K) for the year ended December 31, 1997.
Registration Form Statement No. Purpose - - ------------------------------------------------------------------------------ S-8 33-16242 1987 Stock Option Plan S-8 33-42333 Employee Stock Purchase Plan S-8 33-55932 WCIC Options S-8 33-52835 1988 Equity Participation Plan S-8 333-01099 FirsTier Financial, Inc. Omnibus Equity Plan (as assumed by U.S. Bancorp) S-8 333-01421 1994 & 1991 Stock Incentive Plan S-8 333-02623 1996 Stock Incentive Plan S-8 333-02621 Amended & Restated Employee Stock Purchase Plan S-8 333-21291 Capital Accumulation Plan S-8 333-32653 Employee Investment Plan S-8 333-32635 1997 Stock Incentive Plan S-3 33-33508 Dividend Reinvestment Plan S-3 33-57169 Metropolitan Financial Corporation warrants S-3 33-61667 Warrants for settlement of Edina Realty litigation S-3 333-02983 Automatic Dividend Reinvestment and Common Stock Purchase Plan S-3 333-32701 Automatic Dividend Reinvestment and Common Stock Purchase Plan (1997 DRIP) S-3 333-45211 Universal Shelf Registration
/s/ Ernst & Young LLP Minneapolis, Minnesota February 27, 1998 EX-27 18 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE U.S. BANCORP DECEMBER 31, 1997, 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 4,739,000 0 692,000 195,000 6,885,000 0 0 54,708,000 1,008,700 71,295,000 49,027,000 3,292,000 1,704,000 10,247,000 0 0 308,000 5,582,000 71,295,000 4,784,500 439,600 69,500 5,293,600 1,436,800 2,245,500 3,048,100 460,300 3,600 2,812,300 1,390,700 838,500 0 0 838,500 3.39 3.34 5.04 293,100 93,800 4,000 0 992,500 576,400 126,700 1,008,700 0 0 0
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