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Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2007
    or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission file number: 1-6880
U.S. Bancorp
(Exact name of registrant as specified in its charter)
 
     
Delaware
  41-0255900
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
800 Nicollet Mall, Minneapolis, Minnesota 55402
(Address of principal executive offices) (Zip Code)
 
(651) 446-3000
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
         
Title of each class
 
Name of each exchange on which registered
 
 
Common Stock, $.01 par value per share
    New York Stock Exchange
 
Depositary Shares (each representing
  1/1,000th interest in a share of Series B
  Non-Cumulative Preferred Stock, par value $1.00)
    New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark if 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.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
     
Large accelerated filer  þ
  Accelerated filer  o
Non-accelerated filer  o
(Do not check if a smaller reporting company)
  Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ
 
As of June 29, 2007, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $56.9 billion based on the closing sale price as reported on the New York Stock Exchange.
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
     
    Outstanding at
Class
 
January 31, 2008
 
Common Stock, $.01 par value per share
  1,729,744,917 shares
 
DOCUMENTS INCORPORATED BY REFERENCE
 
             
     
Document
  Parts Into Which Incorporated
 
  1.     Portions of the Annual Report to Shareholders for the Fiscal Year Ended December 31, 2007 (2007 Annual Report)   Parts I and II
  2.     Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held April 15, 2008 (Proxy Statement)   Part III
 


TABLE OF CONTENTS

PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
SIGNATURES
Employment Agreement with Pamela A. Joseph
Statement re: Computation of Ratio of Earnings to Fixed Charges
2007 Annual Report
Subsidiaries of the Registrant
Consent of Ernst & Young LLP
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906


Table of Contents

 
PART I
 
Item 1.   Business
 
Information in response to this Item 1 can be found in our 2007 Annual Report on pages 114 to 115 under the headings “General Business Description,” “Competition,” “Government Policies” and “Supervision and Regulation”; on pages 56 to 60 under the heading “Line of Business Financial Review”; and on page 119 under the heading “Website Access to SEC Reports.” That information is incorporated into this report by reference.
 
Item 1A.   Risk Factors
 
Information in response to this Item 1A can be found in our 2007 Annual Report on pages 115 to 119 under the heading “Risk Factors.” That information is incorporated into this report by reference.
 
Item 1B.   Unresolved Staff Comments
 
None.
 
Item 2.   Properties
 
Information in response to this Item 2 can be found in our 2007 Annual Report on page 115 under the heading “Properties.” That information is incorporated into this report by reference.
 
Item 3.   Legal Proceedings
 
None.
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
None.
 
Capital Covenants
 
The Company has entered into several transactions involving the issuance of capital securities (“Capital Securities”) by Delaware statutory trusts formed by the Company (the “Trusts”), the issuance by the Company of preferred stock (“Preferred Stock”) or the issuance by an indirect subsidiary of U.S. Bank National Association of preferred stock exchangeable for the Company’s Preferred Stock under certain circumstances (“Exchangeable Preferred Stock”). Simultaneously with the closing of each of those transactions, the Company entered into a replacement capital covenant (each, a “Replacement Capital Covenant” and collectively, the “Replacement Capital Covenants”) for the benefit of persons that buy, hold or sell a specified series of long-term indebtedness of the Company or U.S. Bank National Association (the “Covered Debt”). Each of the Replacement Capital Covenants provides that neither the Company nor any of its subsidiaries (including any of the Trusts) will repay, redeem or purchase any of the Preferred Stock, Exchangeable Preferred Stock or the Capital Securities and the securities held by the Trust (the “Other Securities”), as applicable, on or before the date specified in the applicable Replacement Capital Covenant, with certain limited exceptions, except to the extent that, during the 180 days prior to the date of that repayment, redemption or purchase, the Company has received proceeds from the sale of qualifying securities that (i) have equity-like characteristics that are the same as, or more equity-like than, the applicable characteristics of the Preferred Stock, the Exchangeable Preferred Stock, the Capital Securities or Other Securities, as applicable, at the time of repayment, redemption or purchase, and (ii) the Company has obtained the prior approval of the Federal Reserve Board, if such approval is then required by the Federal Reserve Board or, in the case of the Exchangeable Preferred Stock, the approval of the Office of the Comptroller of the Currency.
 
The Company will provide a copy of any Replacement Capital Covenant to a holder of the relevant Covered Debt. For copies of any of these documents, holders should write to Investor Relations, U.S. Bancorp, 800 Nicollet Mall, Minneapolis, Minnesota 55402, or call (866) 775-9668.


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The following table identifies the (i) closing date for each transaction, (ii) issuer, (iii) series of Capital Securities, Preferred Stock or Exchangeable Preferred Stock issued in the relevant transaction, (iv) Other Securities, if any, and (v) applicable Covered Debt.
 
                 
        Capital Securities or
       
Closing Date
  Issuer   Preferred Stock   Other Securities   Covered Debt
 
12/29/05
  USB Capital VIII and U.S. Bancorp   USB Capital VIII’s $375,000,000 6.35% Trust Preferred Securities   U.S. Bancorp’s $375,000,000 6.35% Income Capital Obligation Notes due 2065   U.S. Bancorp’s 4.50% Medium-Term Notes, Series P (CUSIP No. 91159HGJ3)
3/17/06
  USB Capital IX and U.S. Bancorp   USB Capital IX’s $1,250,000,000 of 6.189% Fixed-to-Floating Rate Normal Income Trust Securities   (i) U.S. Bancorp’s Remarketable Junior Subordinated Notes and (ii) Stock Purchase Contract to Purchase U.S. Bancorp’s Series A Non-Cumulative Perpetual Preferred Stock   U.S. Bancorp’s 5.875% junior subordinated debentures due 2035, underlying the 5.875% trust preferred securities of USB Capital VII (Cusip No. 903301208)
3/27/06
  U.S. Bancorp   U.S. Bancorp’s 40,000,000 Depositary Shares ($25 per Depositary Share) each representing a 1/1000th interest in a share of Series B Non-Cumulative Preferred Stock   Not Applicable   U.S. Bancorp’s 5.875% junior subordinated debentures due 2035, underlying the 5.875% trust preferred securities of USB Capital VII (CUSIP No. 903301208)
4/12/06
  USB Capital X and U.S. Bancorp   USB Capital X’s $500,000,000 6.50% Trust Preferred Securities   U.S. Bancorp’s 6.50% Income Capital Obligation Notes due 2066   U.S. Bancorp’s 5.875% junior subordinated debentures due 2035, underlying the 5.875% trust preferred securities of USB Capital VII (CUSIP No. 903301208)
8/30/06
  USB Capital XI and U.S. Bancorp   USB Capital XI’s $765,000,000 6.60% Trust Preferred Securities   U.S. Bancorp’s 6.60% Income Capital Obligation Notes due 2066   U.S. Bancorp’s 5.875% junior subordinated debentures due 2035, underlying the 5.875% trust preferred securities of USB Capital VII (CUSIP No. 903301208)
12/22/06
  USB Realty Corp.(a) and U.S. Bancorp   USB Realty Corp.’s 5,000 shares of Fixed-Floating-Rate Exchangeable Non-cumulative Perpetual Series A Preferred Stock exchangeable for shares of U.S. Bancorp’s Series C Non-cumulative Perpetual Preferred Stock(b)   Not applicable   U.S. Bancorp’s 5.875% junior subordinated debentures due 2035, underlying 5.875% trust preferred securities of USB Capital VII (CUSIP No. 903301208)
2/1/07
  USB Capital XII and U.S. Bancorp   USB Capital XII’s $535,000,000 6.30% Trust Preferred Securities   U.S. Bancorp’s 6.30% Income Capital Obligation Notes due 2067   U.S. Bancorp’s 5.875% junior subordinated debentures due 2035, underlying the 5.875% trust preferred securities of USB Capital VII (CUSIP No. 903301208)
 
 
(a) USB Realty Corp. is an indirect subsidiary of U.S. Bank National Association.
 
(b) Under certain circumstances, upon the direction of the Office of the Comptroller of the Currency, each share of USB Realty Corp.’s Series A Preferred Stock will be automatically exchanged for one share of the U.S. Bancorp’s Series C Non-cumulative Perpetual Preferred Stock.


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PART II
 
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Information in response to this Item 5 can be found in our 2007 Annual Report on pages 52 to 54 under the heading “Capital Management”; and on page 111 under the heading “U.S. Bancorp Supplemental Financial Data.” That information is incorporated into this report by reference.
 
At January 31, 2008, there were 63,721 holders of record of the Company’s common stock.
 
Item 6.   Selected Financial Data
 
Information in response to this Item 6 can be found in our 2007 Annual Report on page 19 under the heading “Table 1 — Selected Financial Data.” That information is incorporated into this report by reference.
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Information in response to this Item 7 can be found in our 2007 Annual Report on pages 18 to 64 under the heading “Management’s Discussion and Analysis.” That information is incorporated into this report by reference.
 
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
 
Information in response to this Item 7A can be found in our 2007 Annual Report on pages 33 to 54 under the heading “Corporate Risk Profile.” That information is incorporated into this report by reference.
 
Item 8.   Financial Statements and Supplementary Data
 
Information in response to this Item 8 can be found in our 2007 Annual Report on pages 65 to 113 under the headings “Report of Management,” “Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements,” “Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting,” “U.S. Bancorp Consolidated Balance Sheet,” “U.S. Bancorp Consolidated Statement of Income,” “U.S. Bancorp Consolidated Statement of Shareholders’ Equity,” “U.S. Bancorp Consolidated Statement of Cash Flows,” “Notes to Consolidated Financial Statements,” “U.S. Bancorp Consolidated Balance Sheet — Five Year Summary,” “U.S. Bancorp Consolidated Statement of Income — Five Year Summary,” “U.S. Bancorp Quarterly Consolidated Financial Data,” “U.S. Bancorp Supplemental Financial Data” and “U.S. Bancorp Consolidated Daily Average Balance Sheet and Related Yields and Rates.” That information is incorporated into this report by reference.
 
Item 9.   Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A.   Controls and Procedures
 
Information in response to this Item 9A can be found in our 2007 Annual Report on page 64 under the heading “Controls and Procedures” and on pages 65 and 67 under the headings “Report of Management” and “Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting.” That information is incorporated into this report by reference.
 
Item 9B.   Other Information
 
None.


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PART III
 
Item 10.   Directors, Executive Officers and Corporate Governance
 
 
Executive Officers of the Registrant
 
 
Richard K. Davis
 
Mr. Davis is Chairman, President and Chief Executive Officer of U.S. Bancorp. Mr. Davis, 50, has served as Chairman of U.S. Bancorp since December 2007, Chief Executive Officer since December 2006 and President since October 2004. He also served as Chief Operating Officer from October 2004 until December 2006. From the time of the merger of Firstar Corporation and U.S. Bancorp in February 2001 until October 2004, Mr. Davis served as Vice Chairman of U.S. Bancorp. From the time of the merger, Mr. Davis was responsible for Consumer Banking, including Retail Payment Solutions (card services), and he assumed additional responsibility for Commercial Banking in 2003. Mr. Davis has held management positions with our Company since joining Star Banc Corporation, one of our predecessors, in 1993 as Executive Vice President.
 
Jennie P. Carlson
 
Ms. Carlson is Executive Vice President of U.S. Bancorp. Ms. Carlson, 47, has served as Executive Vice President, Human Resources since January 2002. Until that time, she served as Executive Vice President, Deputy General Counsel and Corporate Secretary of U.S. Bancorp since the merger of Firstar Corporation and U.S. Bancorp in February 2001. From 1995 until the merger, she was General Counsel and Secretary of Firstar Corporation and Star Banc Corporation.
 
Andrew Cecere
 
Mr. Cecere is Vice Chairman and Chief Financial Officer of U.S. Bancorp. Mr. Cecere, 47, has served as Chief Financial Officer of U.S. Bancorp since February 2007, and Vice Chairman since the merger of Firstar Corporation and U.S. Bancorp in February 2001. From February 2001 until February 2007 he was responsible for Wealth Management & Securities Services. Previously, he had served as an executive officer of the former U.S. Bancorp, including as Chief Financial Officer from May 2000 through February 2001.
 
William L. Chenevich
 
Mr. Chenevich is Vice Chairman of U.S. Bancorp. Mr. Chenevich, 64, has served as Vice Chairman of U.S. Bancorp since the merger of Firstar Corporation and U.S. Bancorp in February 2001, when he assumed responsibility for Technology and Operations Services. Previously, he served as Vice Chairman of Technology and Operations Services of Firstar Corporation from 1999 to 2001.
 
Richard C. Hartnack
 
Mr. Hartnack is Vice Chairman of U.S. Bancorp. Mr. Hartnack, 62, has served in this position since April 2005, when he joined U.S. Bancorp to assume responsibility for Consumer Banking. Prior to joining U.S. Bancorp, he served as Vice Chairman of Union Bank of California from 1991 to 2005 with responsibility for Community Banking and Investment Services.
 
Richard J. Hidy
 
Mr. Hidy is Executive Vice President and Chief Risk Officer of U.S. Bancorp. Mr. Hidy, 45, has served in these positions since 2005. From 2003 until 2005, he served as Senior Vice President and Deputy General Counsel of U.S. Bancorp, having served as Senior Vice President and Associate General Counsel of U.S. Bancorp and Firstar Corporation since 1999.


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Joseph C. Hoesley
 
Mr. Hoesley is Vice Chairman of U.S. Bancorp. Mr. Hoesley, 53, has served as Vice Chairman of U.S. Bancorp since June 2006. From June 2002 until June 2006, he served as Executive Vice President and National Group Head of Commercial Real Estate at U.S. Bancorp, having previously served as Senior Vice President and Group Head of Commercial Real Estate at U.S. Bancorp since joining U.S. Bancorp in 1992.
 
Pamela A. Joseph
 
Ms. Joseph is Vice Chairman of U.S. Bancorp. Ms. Joseph, 48, has served as Vice Chairman of U.S. Bancorp since December 2004. Since November 2004, she has been Chairman and Chief Executive Officer of NOVA Information Systems, Inc., a wholly owned subsidiary of U.S. Bancorp. Prior to that time, she had been President and Chief Operating Officer of NOVA Information Systems, Inc. since February 2000.
 
Lee R. Mitau
 
Mr. Mitau is Executive Vice President and General Counsel of U.S. Bancorp. Mr. Mitau, 59, has served in these positions since 1995. Mr. Mitau also serves as Corporate Secretary. Prior to 1995 he was a partner at the law firm of Dorsey & Whitney LLP.
 
Joseph M. Otting
 
Mr. Otting is Vice Chairman of U.S. Bancorp. Mr. Otting, 50, has served in this position since April 2005, when he assumed responsibility for Commercial Banking. Previously, he served as Executive Vice President, East Commercial Banking Group of U.S. Bancorp from June 2003 to April 2005. He served as Market President of U.S. Bank in Oregon from December 2001 until June 2003.
 
P.W. Parker
 
Mr. Parker is Executive Vice President and Chief Credit Officer of U.S. Bancorp. Mr. Parker, 51, has served in this position since October 2007. From March 2005 until October 2007, he served as Executive Vice President of Credit Portfolio Management of U.S. Bancorp, having served as Senior Vice President of Credit Portfolio Management of U.S. Bancorp since January 2002.
 
Richard B. Payne, Jr.
 
Mr. Payne is Vice Chairman of U.S. Bancorp. Mr. Payne, 60, has served in this position since July 2006, when he joined U.S. Bancorp to assume responsibility for Corporate Banking. Prior to joining U.S. Bancorp, he served as Executive Vice President for National City Corporation in Cleveland, with responsibility for Capital Markets, since 2001.
 
Diane L. Thormodsgard
 
Ms. Thormodsgard is Vice Chairman of U.S. Bancorp. Ms. Thormodsgard, 57, has served as Vice Chairman of U.S. Bancorp since April 2007, when she assumed responsibility for Wealth Management & Securities Services. From 1999 until April 2007, she served as President of Corporate Trust and Institutional Trust & Custody services of U.S. Bancorp, having previously served as Chief Administrative Officer of Corporate Trust at U.S. Bancorp from 1995 to 1999.
 
Code of Ethics and Business Conduct
 
We have adopted a Code of Ethics and Business Conduct that applies to our principal executive officer, principal financial officer and principal accounting officer. Our Code of Ethics and Business Conduct can be found at www.usbank.com by clicking on About U.S. Bancorp and then Corporate Governance. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers from, certain provisions of the Code of Ethics and Business Conduct that apply to our principal executive officer, principal financial officer


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and principal accounting officer by posting such information on our website, at the address and location specified above.
 
Additional Information
 
Additional information in response to this Item 10 can be found in our Proxy Statement under the headings “Section 16(a) Beneficial Ownership Reporting Compliance” and “Director Nominees for Terms Ending in 2009,” “Directors with Terms Ending in 2009,” “Directors with Terms Ending in 2010” and “Board Meetings and Committees.” That information is incorporated into this report by reference.
 
Item 11.   Executive Compensation
 
Information in response to this Item 11 can be found in our Proxy Statement under the headings “Executive Compensation,” “Director Compensation” and “Compensation Committee Interlocks and Insider Participation.”
 
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Equity Compensation Plan Information
 
The following table summarizes information regarding the Company’s equity compensation plans in effect as of December 31, 2007:
 
                         
                Number of securities
 
                remaining
 
                available for future
 
    Number of securities
          issuance under
 
    to be issued
    Weighted-average
    equity compensation plans
 
    upon exercise of
    exercise price of
    (excluding securities
 
    outstanding options,
    outstanding options,
    reflected in the
 
Plan Category
  warrants and rights     warrants and rights     first column)(a)  
 
Equity compensation plans approved by security holders(b)
    71,246,975     $ 27.25       68,344,883  
Equity compensation plans not approved by security holders(c)(d)
    6,314,226       23.09        
Total
    77,561,201     $ 25.96       68,344,883  
 
 
(a) No shares are available for granting future awards under the U.S. Bancorp 2001 Stock Incentive Plan, the U.S. Bancorp 1998 Executive Stock Incentive Plan or the U.S. Bancorp 1991 Executive Stock Incentive plan. The 68,344,883 shares available under the U.S. Bancorp 2007 Stock Incentive Plan are available for future awards in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards or other stock-based awards, except that only 24,830,820 of these shares are available for future grants of awards other than stock options or stock appreciation rights.
 
(b) Includes shares underlying stock options and restricted stock units (convertible into shares of the Company’s common stock on a one-for-one basis) under the U.S. Bancorp 2007 Stock Incentive Plan, the U.S. Bancorp 2001 Stock Incentive Plan, the U.S. Bancorp 1998 Executive Stock Incentive Plan and the U.S. Bancorp 1991 Executive Stock Incentive Plan. Excludes 17,095,731 shares underlying outstanding stock options and warrants assumed by U.S. Bancorp in connection with acquisitions by U.S. Bancorp. Of the excluded shares, 16,144,794 underlie stock options granted under equity compensation plans of the former U.S. Bancorp that were approved by the shareholders of the former U.S. Bancorp.
 
(c) Includes 3,178,642 shares of common stock issuable pursuant to various current and former deferred compensation plans of U.S. Bancorp and its predecessor entities. All of the remaining identified shares underlie stock options granted to a broad-based employee population pursuant to the U.S. Bancorp 2001 Employee Stock Incentive Plan (“2001 Plan”), the Firstar Corporation 1999 Employee Stock Incentive Plan (“1999 Plan”) and the Firstar Corporation 1998 Employee Stock Incentive Plan (“1998 Plan”).
 
(d) The weighted-average exercise price does not include any assumed price at issuance of shares that may be issuable pursuant to the deferred compensation plans.


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As of December 31, 2007, options to purchase an aggregate of 1,891,326 shares were outstanding under the 2001 Plan. Under the 2001 Plan, nonqualified stock options were granted to full-time or part-time employees actively employed by U.S. Bancorp on the grant date, other than individuals eligible to participate in any of the Company’s executive stock incentive plans. All options outstanding under the plan were granted on February 27, 2001.
 
As of December 31, 2007, options to purchase an aggregate of 521,689 shares of the Company’s common stock were outstanding under the 1999 Plan. Under this plan, stock options were granted to each full-time or part-time employee actively employed by Firstar Corporation on the grant date, other than managers who participated in an executive stock incentive plan.
 
As of December 31, 2007, options to purchase an aggregate of 722,569 shares of the Company’s common stock were outstanding under the 1998 Plan. Under this plan, stock options were granted to each full-time or part-time employee actively employed by Firstar Corporation on the grant date, other than managers who participated in an executive stock incentive plan.
 
No further options will be granted under the 2001 Plan, the 1999 Plan or the 1998 Plan. Under all of these plans, the exercise price of the options equals the fair market value of the underlying common stock on the grant date. All options granted under the plans have a term of 10 years from the grant date and become exercisable over a period of time set forth in the relevant plan or as determined by the committee administering the relevant plan. Options granted under the plans are nontransferable and, during the optionee’s lifetime, are exercisable only by the optionee.
 
If an optionee is terminated as a result of his or her gross misconduct or offense, all options terminate immediately, whether or not vested. Under the 2001 Plan, the 1999 Plan and the 1998 Plan, in the event an optionee is terminated immediately following a change in control (as defined in the plans) of U.S. Bancorp, and the termination is due to business needs resulting from the change in control and not as a result of the optionee’s performance or conduct, all of the optionee’s outstanding options will become immediately vested and exercisable as of the date of termination.
 
If the outstanding shares of the Company’s common stock are changed into or exchanged for a different number or kind of stock or other securities as a result of a reorganization, recapitalization, stock dividend, stock split, combination of shares, reclassification, merger, consolidation or similar event, the number of shares underlying outstanding options also may be adjusted. The plans may be terminated, amended or modified by the Board of Directors at any time.
 
The deferred compensation plans allow non-employee directors and members of the Company’s senior management to defer all or part of their compensation until the earlier of retirement or termination of employment. The deferred compensation is deemed to be invested in one of several investment alternatives at the option of the participant, including shares of U.S. Bancorp common stock. Deferred compensation deemed to be invested in U.S. Bancorp stock may be received at the time of distribution at the election of the participant, in the form of shares of U.S. Bancorp common stock. The 3,178,642 shares included in the table assumes that participants in the plans whose deferred compensation had been deemed to be invested in U.S. Bancorp common stock had elected to receive all of that deferred compensation in shares of U.S. Bancorp common stock on December 31, 2007. The U.S. Bancorp 2005 Executive Employees Deferred Compensation Plan and the U.S. Bancorp 2005 Outside Directors Deferred Compensation Plan are the Company’s only deferred compensation plans under which compensation may currently be deferred.
 
Additional Information
 
Additional Information in response to this Item 12 can be found in our Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and Management.” That information is incorporated into this report by reference.


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Item 13.   Certain Relationships and Related Transactions, and Director Independence
 
Information in response to this Item 13 can be found in our Proxy Statement under the headings “Director Independence” and “Certain Relationships and Related Transactions.” That information is incorporated into this report by reference.
 
Item 14.   Principal Accounting Fees and Services
 
Information in response to this Item 14 can be found in our Proxy Statement under the headings “Audit Fees,” “Audit-Related Fees,” “Tax Fees,” “All Other Fees” and “Administration of Engagement of Independent Auditor.” That information is incorporated into this report by reference.
 
PART IV
 
Item 15.   Exhibits, Financial Statement Schedules
 
List of documents filed as part of this report
 
1.   Financial Statements
 
  •  Report of Management
 
  •  Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements
 
  •  Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
 
  •  U.S. Bancorp Consolidated Balance Sheet as of December 31, 2007 and 2006
 
  •  U.S. Bancorp Consolidated Statement of Income for each of the three years in the period ended December 31, 2007
 
  •  U.S. Bancorp Consolidated Statement of Shareholders’ Equity for each of the three years in the period ended December 31, 2007
 
  •  U.S. Bancorp Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 2007
 
  •  Notes to Consolidated Financial Statements
 
  •  U.S. Bancorp Consolidated Balance Sheet — Five Year Summary
 
  •  U.S. Bancorp Consolidated Statement of Income — Five Year Summary
 
  •  U.S. Bancorp Quarterly Consolidated Financial Data
 
  •  U.S. Bancorp Supplemental Financial Data
 
  •  U.S. Bancorp Consolidated Daily Average Balance Sheet and Related Yields and Rates
 
2.   Financial Statement Schedules
 
All financial statement schedules for the Company have been included in the consolidated financial statements or the related footnotes, or are either inapplicable or not required.


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3.   Exhibits
 
Shareholders may obtain a copy of any of the exhibits to this report upon payment of a fee covering our reasonable expenses in furnishing the exhibits. You can request exhibits by writing to Investor Relations, U.S. Bancorp, 800 Nicollet Mall, Minneapolis, Minnesota 55402.
 
     
Exhibit
   
Number  
Description
 
(1)3.1
  Restated Certificate of Incorporation. Filed as Exhibit 3.1 to Form 8-K filed on April 18, 2007
(1)3.2
  Amended and Restated Bylaws. Filed as Exhibit 3.2 to Form 8-K filed on January 17, 2008
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
  Amended and Restated Rights Agreement, dated as of December 31, 2002, between U.S Bancorp and Mellon Investor Services LLC. Filed as Exhibit 4.2 to Amendment No. 1 to Registration Statement on Form 8-A (File No. 001-06880) on December 31, 2002
(1)(2)10.1
  U.S. Bancorp 2001 Stock Incentive Plan. Filed as Exhibit 10.1 to Form 10-K for the year ended December 31, 2001
(1)(2)10.2
  Amendment No. 1 to U.S. Bancorp 2001 Stock Incentive Plan. Filed as Exhibit 10.2 to Form 10-K for the year ended December 31, 2002
(1)(2)10.3
  U.S. Bancorp 1998 Executive Stock Incentive Plan. Filed as Exhibit 10.3 to Form 10-K for the year ended December 31, 2002
(1)(2)10.4
  Summary of U.S. Bancorp 1991 Executive Stock Incentive Plan. Filed as Exhibit 10.4 to Form 10-K for the year ended December 31, 2002
(1)(2)10.5
  U.S. Bancorp 2001 Employee Stock Incentive Plan. Filed as Exhibit 10.5 to Form 10-K for the year ended December 31, 2002
(1)(2)10.6
  Firstar Corporation 1999 Employee Stock Incentive Plan. Filed as Exhibit 10.6 to Form 10-K for the year ended December 31, 2002
(1)(2)10.7
  Firstar Corporation 1998 Employee Stock Incentive Plan. Filed as Exhibit 10.7 to Form 10-K for the year ended December 31, 2002
(1)(2)10.8
  U.S. Bancorp 2006 Executive Incentive Plan. Filed as Exhibit 10.1 to Form 8-K filed on April 21, 2006
(1)(2)10.9
  U.S. Bancorp Executive Deferral Plan, as amended. Filed as Exhibit 10.7 to Form 10-K for the year ended December 31, 1999
(1)(2)10.10
  Summary of Nonqualified Supplemental Executive Retirement Plan, as amended, of the former U.S. Bancorp. Filed as Exhibit 10.4 to Form 10-K for the year ended December 31, 2001
(1)(2)10.11
  Form of Director Indemnification Agreement entered into with former directors of the former U.S. Bancorp. Filed as Exhibit 10.15 to Form 10-K for the year ended December 31, 1997
(1)(2)10.12
  U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit 10.16 to Form 10-K for the year ended December 31, 2002
(1)(2)10.13
  Appendix B-10 to U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit 10.1 to Form 10-Q for the quarterly period ended March 31, 2005
(1)(2)10.14
  Amendments No. 1, 2 and 3 to U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit 10.17 to Form 10-K for the year ended December 31, 2003
(1)(2)10.15
  Amendment No. 4 to U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit 10.1 to Form 8-K filed on December 23, 2004
(1)(2)10.16
  Amendment No. 5 to U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit 10.2 to Form 10-Q for the quarterly period ended March 31, 2005
(1)(2)10.17
  Amendment No. 6 to U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit 10.1 to Form 8-K filed on October 20, 2005
(1)(2)10.18
  U.S. Bancorp Executive Employees Deferred Compensation Plan. Filed as Exhibit 10.18 to Form 10-K for the year ended December 31, 2003


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Exhibit
   
Number  
Description
 
(1)(2)10.19
  U.S. Bancorp 2005 Executive Employees Deferred Compensation Plan. Filed as Exhibit 10.2 to Form 8-K filed on December 21, 2005
(1)(2)10.20
  U.S. Bancorp Outside Directors Deferred Compensation Plan. Filed as Exhibit 10.19 to Form 10-K for the year ended December 31, 2003
(1)(2)10.21
  U.S. Bancorp 2005 Outside Directors Deferred Compensation Plan. Filed as Exhibit 10.1 to Form 8-K filed on December 21, 2005
(1)(2)10.22
  Form of Change in Control Agreement, effective November 16, 2001, between U.S. Bancorp and certain executive officers of U.S. Bancorp. Filed as Exhibit 10.12 to Form 10-K for the year ended December 31, 2001
(1)(2)10.23
  Form of Executive Officer Stock Option Agreement with cliff and performance vesting under U.S. Bancorp 2001 Stock Incentive Plan. Filed as Exhibit 10.1 to Form 10-Q for the quarterly period ended September 30, 2004
(1)(2)10.24
  Form of Executive Officer Stock Option Agreement with annual vesting under U.S. Bancorp 2001 Stock Incentive Plan. Filed as Exhibit 10.2 to Form 10-Q for the quarterly period ended September 30, 2004
(1)(2)10.25
  Form of 2006 Executive Officer Stock Option Agreement with annual vesting under U.S. Bancorp 2001 Stock Incentive Plan. Filed as Exhibit 10.1 to Form 8-K filed on January 17, 2006
(1)(2)10.26
  Form of Executive Officer Restricted Stock Award Agreement under U.S. Bancorp 2001 Stock Incentive Plan. Filed as Exhibit 10.3 to Form 10-Q for the quarterly period ended September 30, 2004
(1)(2)10.27
  Form of Director Stock Option Agreement under U.S. Bancorp 2001 Stock Incentive Plan. Filed as Exhibit 10.4 to Form 10-Q for the quarterly period ended September 30, 2004
(1)(2)10.28
  Form of Director Restricted Stock Unit Agreement under U.S. Bancorp 2001 Stock Incentive Plan. Filed as Exhibit 10.5 to Form 10-Q for the quarterly period ended September 30, 2004
(1)(2)10.29
  Form of Executive Officer Restricted Stock Unit Agreement under U.S. Bancorp 2001 Stock Incentive Plan. Filed as Exhibit 10.6 to Form 10-Q for the quarterly period ended September 30, 2004
(1)(2)10.30
  Employment Agreement with Jerry A. Grundhofer. Filed as Exhibit 10.13 to Form 10-K for the year ended December 31, 2001
(1)(2)10.31
  Amendment of Employment Agreement with Jerry A. Grundhofer. Filed as Exhibit 10.1 to Form 10-Q for the quarterly period ended June 30, 2004
(1)(2)10.32
  Amendment No. 2 of Employment Agreement with Jerry A. Grundhofer. Filed as Exhibit 10.8 to Form 10-Q for the quarterly period ended September 30, 2004
(1)(2)10.33
  Restricted Stock Unit Award Agreement with Jerry A. Grundhofer dated January 2, 2002. Filed as Exhibit 10.7 to Form 10-Q for the quarterly period ended September 30, 2004
(1)(2)10.34
  Offer of Employment to Richard C. Hartnack. Filed as Exhibit 10.3 to Form 10-Q for the quarterly period ended March 31, 2005
(1)(2)10.35
  Terms of Jerry A. Grundhofer’s service as Non-Executive Chairman of the Board of Directors. Described in Item 1 of Form 8-K filed on July 20, 2006
(1)(2)10.36
  Agreement with David M. Moffett dated January 19, 2007. Filed as Exhibit 10.37 to Form 10-K for the year ended December 31, 2006
(2)10.37
  Employment Agreement with Pamela A. Joseph dated May 7, 2001
(1)(2)10.38
  U.S. Bancorp 2007 Stock Incentive Plan. Filed as Exhibit 10.1 to Form 8-K filed on April 18, 2007
(1)(2)10.39
  Form of 2007 U.S. Bancorp Executive Officer Non-Qualified Stock Option Agreement under U.S. Bancorp 2007 Stock Incentive Plan. Filed as Exhibit 10.2 to Form 8-K filed on April 18, 2007
(1)(2)10.40
  Form of 2007 U.S. Bancorp Executive Officer Restricted Stock Award Agreement under U.S. Bancorp 2007 Stock Incentive Plan. Filed as Exhibit 10.3 to Form 8-K filed on April 18, 2007
(1)(2)10.41
  Form of 2007 U.S. Bancorp Director Restricted Stock Unit Award Agreement under U.S. Bancorp 2007 Stock Incentive Plan. Filed as Exhibit 10.1 to Form 10-Q/A filed for the quarterly period ended September 30, 2007

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Table of Contents

     
Exhibit
   
Number  
Description
 
(1)(2)10.42
  Form of 2008 U.S. Bancorp Executive Officer Restricted Stock Unit Award Agreement under U.S. Bancorp 2007 Stock Incentive Plan. Filed as Exhibit 10.1 to Form 8-K filed on January 17, 2008
12
  Statement re: Computation of Ratio of Earnings to Fixed Charges
13
  2007 Annual Report, pages 18 through 121
21
  Subsidiaries of the Registrant
23.1
  Consent of Ernst & Young LLP
31.1
  Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2
  Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32
  Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
 
 
(1) Exhibit has been previously filed with the Securities and Exchange Commission and is incorporated herein as an exhibit by reference to the prior filing.
 
(2) Management contracts or compensatory plans or arrangements.

11


Table of Contents

 
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 25, 2008, on its behalf by the undersigned, thereunto duly authorized.
 
U.S. BANCORP
 
  By 
/s/  Richard K. Davis
Richard K. Davis
Chairman, President and Chief Executive Officer
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 25, 2008, by the following persons on behalf of the registrant and in the capacities indicated.
 
     
Signature and Title
   
 
/s/  Richard K. Davis

Richard K. Davis,
Chairman, President, and Chief Executive Officer
(principal executive officer)
   
     
/s/  Andrew Cecere
Andrew Cecere,
Vice Chairman and Chief Financial Officer
(principal financial officer)
   
     
/s/  Terrance R. Dolan

Terrance R. Dolan,
Executive Vice President and Controller
(principal accounting officer)
   
     
    

Douglas M. Baker, Jr., Director
   
     
/s/  Victoria Buyniski Gluckman

Victoria Buyniski Gluckman, Director
   
     
/s/  Arthur D. Collins, Jr.

Arthur D. Collins, Jr., Director
   
     
/s/  Peter H. Coors

Peter H. Coors, Director
   
     
/s/  Joel W. Johnson

Joel W. Johnson, Director
   


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Table of Contents

     
Signature and Title
   
 
     
     
/s/  Olivia F. Kirtley

Olivia F. Kirtley, Director
   
     
/s/  Jerry W. Levin

Jerry W. Levin, Director
   
     
/s/  David B. O’Maley

David B. O’Maley, Director
   
     
/s/  O’dell M. Owens, M.D., M.P.H.

O’dell M. Owens, M.D., M.P.H., Director
   
     
/s/  Richard G. Reiten

Richard G. Reiten, Director
   
     
/s/  Craig D. Schnuck

Craig D. Schnuck, Director
   
     
/s/  Warren R. Staley

Warren R. Staley, Director
   
     
/s/  Patrick T. Stokes

Patrick T. Stokes, Director
   


13

exv10w37
 

Exhibit 10.37
EMPLOYMENT AGREEMENT
     THIS EMPLOYMENT AGREEMENT (this “Agreement”) is made as of this 7th day of May, 2001 by and among Pamela A. Joseph (hereinafter referred to as “Employee”), NOVA Corporation, a Georgia corporation (“NOVA Corp”), NOVA INFORMATION SYSTEMS, INC., a Georgia corporation (“NOVA”) and U.S. Bancorp, a Delaware corporation (“Parent”).
WITNESSETH:
     WHEREAS, NOVA Corp, through its direct and indirect subsidiaries, and Parent are in the business of providing credit card and debit card transaction processing services and settlement services (including the related products and services of automated teller machines and check guarantee services) to merchants, financial institutions, independent sales organizations (“ISOs”), and other similar customers (collectively, the “Business”) throughout the United States and in Europe;
     WHEREAS, Employee currently serves as President of NOVA, and as Senior Executive Vice President of NOVA Corp pursuant to an Employment Agreement between Employee and NOVA Corp effective February 22, 2001 (the “Prior Agreement”);
     WHEREAS, Parent and NOVA Corp have entered into the Agreement and Plan of Merger dated as of May 7, 2001 (the “Merger Agreement”), pursuant to which NOVA Corp will be merged with and into Parent (the “Merger”) on the terms and subject to the conditions of the Merger Agreement;
     WHEREAS, NOVA and Parent, or their assigns, will continue to engage in the Business throughout the United States and Europe (the “Territory”);
     WHEREAS, NOVA Corp and Employee desire to terminate the Prior Agreement, which termination shall be contemporaneous with the effectiveness of this Agreement;
     WHEREAS, Parent desires to retain the services of Employee on the terms and conditions set forth in this Agreement, and Employee desires to be employed by Parent on such terms and conditions;
     NOW, THEREFORE, for and in consideration of the Confidential Information and Trade Secrets (as hereafter defined) furnished to Employee by NOVA and Parent in order that she may perform her duties under this Agreement, the mutual covenants and agreements herein contained, and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
     1. Employment of Employee. Parent hereby employs Employee for a period beginning as of the effective date of the Merger (the “Effective Date”) and ending two (2) years thereafter (the “Initial Term”), unless Employee’s employment by Parent is sooner terminated or automatically renewed pursuant to the terms of this Agreement (Employee’s employment by Parent pursuant to the terms of this Agreement shall hereinafter be referred to as “Employment”).
     (a) Employee agrees to such Employment on the terms and conditions herein set forth and agrees to devote her reasonable best efforts to her duties under this Agreement and to perform such duties diligently and efficiently and in accordance with the directions of NOVA’s Chief Executive Officer.
     (b) During the term of Employee’s Employment, Employee shall serve as Senior Executive Vice President of NOVA. Employee shall be responsible primarily for such duties as

 


 

are assigned to her, from time to time, by NOVA’s Chief Executive Officer, which in any event shall be such duties as are customary for an officer in those positions.
     (c) Employee shall devote substantially all of her business time, attention, and energies to the business and the affairs of Parent, shall act at all times in the best interests of Parent, and shall not during the term of her Employment be engaged in any other business activity, whether or not such business is pursued for gain, profit, or other pecuniary advantage, or permit such personal interests as she may have to interfere with the performance of her duties hereunder. Notwithstanding the foregoing, Employee may participate in industry, civic and charitable activities so long as such activities do not materially interfere with the performance of her duties hereunder.
     2. Compensation. During the term of Employee’s Employment and in accordance with the terms hereof, Parent shall pay or otherwise provide to Employee the following compensation:
     (a) Employee’s annual salary during the term of her Employment shall be Three Hundred Sixty Thousand and No/100 Dollars ($360,000) (or such increased base salary as approved by NOVA Corp prior to the Merger, not to exceed 115% of such amount) (“Base Salary”) , with such increases (each, a “Merit Increase”) as may from time to time be deemed appropriate by NOVA’s Chief Executive Officer; provided, however, that so long as this Agreement remains in effect, Employee’s Base Salary shall be reviewed annually by NOVA’s Chief Executive Officer in each fiscal year, within a reasonable time following the availability of Parent’s financial statements for the preceding fiscal year. The Base Salary shall be paid by Parent in accordance with Parent’s regular payroll practice. As used herein, the term “Base Salary” shall be deemed to include any Merit Increases granted to Employee.
     (b) In addition to the Base Salary, Employee shall be eligible to receive annual bonus compensation (“Bonus Compensation”) in the amount, and on the terms and conditions described in the Annual Incentive Compensation Schedule attached as Exhibit A or such other terms as NOVA’s Chief Executive Officer shall, prior to the Merger and after reasonable consultation with Employee, determine (the “Incentive Compensation Plan”), provided, however, that if Employee no longer is working primarily in the Business, Parent shall provide Employee with a different incentive compensation plan under which Employee will have a substantially similar opportunity to achieve annual bonus compensation in a substantially similar amount.
     (c) Employee will be granted on the Effective Date the option to purchase 250,000 shares of Parent common stock at a price per share equal to the closing price of Parent common stock on the Effective Date (the “Option”). The Option will vest in four (4) equal increments of 25%. The first increment will vest on the first anniversary of the Effective Date. Another increment of the Option will vest every year thereafter until 100% of the Option is vested.
     (d) Parent may withhold from any benefits payable under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling.
     3. Benefits. During the term of Employee’s employment, and for such time thereafter as may be required by Section 7 hereof, Parent shall provide to Employee the following benefits (or in lieu thereof for a transitional period immediately following the Merger, benefits equivalent to those provided to Employee by NOVA Corp immediately prior to the Merger):

2


 

     (a) Medical Insurance. Employee and her dependents shall be entitled to participate in such medical, dental, vision, prescription drug, wellness, or other health care or medical coverage plans as may be established, offered or adopted from time to time by Parent for the benefit of similarly situated employees pursuant to the terms set forth in such plans.
     (b) Life Insurance. Employee shall be entitled to participate in any life insurance plans established, offered, or adopted from time to time by Parent for the benefit of its similarly situated employees.
     (c) Disability Insurance. Employee shall be entitled to participate in any disability insurance plans established, offered, or adopted from time to time by Parent for the benefit of its similarly situated employees.
     (d) Vacations. Holidays. Employee shall be entitled to at least four (4) weeks of paid vacation each year and all holidays observed Parent.
     (e) Stock Option Plans. Employee shall be eligible for participation in any stock option plan or restricted stock plan adopted by Parent’s Board of Directors or the Compensation Committee.
     (f) Other Benefits. In addition to and not in any way in limitation of the benefits set forth in this Section 3, Employee shall be eligible to participate in all additional employee benefits provided by Parent (including, without limitation, all tax-qualified retirement plans, non qualified retirement and/or deferred compensation plans, incentive plans, other stock option or purchase plans, and fringe benefits) on the same basis as such are afforded to similarly situated employees of Parent during the term of this Agreement.
     (g) Terms and Provisions of Plans. Parent agrees that it shall not take action (during the term of this Agreement or the “Continuation Period,” as defined in Section 7(a)) to modify the terms and provisions of any such plan or arrangement so as to exclude only Employee and/or her dependents, either by excluding Employee and/or her dependents explicitly by name or by modifying provisions generally applicable to all employees and dependents so that only Employee and/or her dependents would be affected.
     (h) Vesting of Rights. Upon the occurrence of a “Change in Control” (as defined in Section 7(f)) during the term of this Agreement, and regardless of whether Employee terminates this Agreement following such occurrence, and notwithstanding any provision to the contrary in any other agreement or document (including Parent’s applicable plan documents), all stock options, restricted stock, and other similar rights that have been granted to Employee and that are not vested on the date of occurrence of such an event, as well as any non-qualified retirement balance or deferred compensation plan balance (collectively, the “Rights”) that are not vested on the date of occurrence of such an event, shall become vested and exercisable immediately . As provided under the applicable plan or agreement, Employee shall have the right to exercise any or all of the Rights. Upon the Effective Date, the Rights of Employee existing on the Effective Date shall be and become fully vested, nonforfeitable and immediately exercisable.
     4. Personnel Policies. Employee shall conduct herself at all times in a businesslike and professional manner as appropriate for a person in her position and shall represent Parent in all respects with good business and ethical practices. In addition, Employee shall be subject to and abide by the policies and procedures of Parent applicable generally to personnel of Parent, as adopted from time to time.

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     5. Reimbursement for Business Expenses. Employee shall be reimbursed, on no less frequently than a monthly basis, for all out-of-pocket business expenses incurred by her in the performance of her duties hereunder, provided that Employee shall first document and substantiate said business expenses in the manner generally required by Parent under its policies and procedures.
     6. Term and Termination of Employment.
          (a) This Agreement shall be effective as of the Effective Date.
     (b) Employee’s Employment shall terminate immediately upon the discharge of Employee by Parent for “Cause.” For the purposes of this Agreement, the term “Cause,” when used with respect to termination by Parent of Employee’s Employment hereunder, shall mean termination as a result of: (i) Employee’s violation of the covenants set forth in Section 10 or 11; (ii) Employee’s willful, intentional, or grossly negligent failure to perform her duties under this Agreement diligently and in accordance with the directions of Parent; (iii) Employee’s willful, intentional, or grossly negligent failure to comply with the decisions or policies of Parent; or (iv) final conviction of Employee of a felony; provided, however, that in the event Parent desires to terminate Employee’s Employment pursuant to subsections (i), (ii), or (iii) of this Section 6(b), Parent shall first give Employee written notice of such intent, detailed and specific description of the reasons and basis therefor, and thirty (30) days to remedy or cure such perceived breaches or deficiencies (the “Cure Period”); provided, however, that with respect only to breaches that it is not possible to cure within such thirty (30) day period, so long as Employee is diligently using her best efforts to cure such breaches or deficiencies within such period and thereafter, the Cure Period shall be automatically extended for an additional period of time (not to exceed sixty (60) days) to enable Employee to cure such breaches or deficiencies, provided, further, that Employee continues to diligently use her best efforts to cure such breaches or deficiencies. If Employee does not cure the perceived breaches or deficiencies within the Cure Period, Parent may discharge Employee immediately upon written notice to Employee. If Parent desires to terminate Employee’s Employment pursuant to subsection (iv) of this Section 6(b), Parent shall first give Employee three (3) days prior written notice of such intent.
     (c) Employee’s Employment shall terminate immediately upon the death of Employee.
     (d) Employee’s Employment shall terminate immediately upon thirty (30) days prior written notice to Employee if Employee shall at any time be incapacitated by reason of physical or mental illness or otherwise become incapable of performing the duties under this Agreement for a continuous period of one hundred eighty (180) consecutive days; provided, however, to the extent Parent could, with reasonable accommodation and without undue hardship, continue to employ Employee in some other capacity after such one hundred eighty (180) day period, Parent shall, to the extent required by the Americans With Disabilities Act, offer to do so, and, if such offer is accepted by Employee, Employee shall be compensated accordingly.
     (e) Employee may terminate this Agreement, upon thirty (30) days prior written notice to Parent (the “Notice Period”), in the event (i) there is a material diminution in Employee’s duties and responsibilities from the duties and responsibilities held by Employee immediately prior to the Merger, or such greater duties and responsibilities, as may be assigned to Employee from time to time; provided, however, that the change in Employee’s duties and responsibilities resulting from Employee no longer being an officer of a publicly traded company shall not, by itself, be sufficient to qualify as a “Responsibilities Breach”; (ii) Employee is required to relocate to an office that is more than thirty-five (35) miles from Employee’s current

4


 

office located at One Concourse Parkway, Suite 300, Atlanta, Georgia 30328; (iii) there is a reduction in Employee’s Base Salary payable under Section 2, an adverse change in the terms of the Incentive Compensation Plan, or a material reduction in benefits provided to Employee under Section 3 (whether occurring at once or over a period of time); or (iv) NOVA or Parent materially breaches this Agreement, (each of (i), (ii), (iii) and (iv) being referred to as a “Responsibilities Breach”), and Parent fails to cure said Responsibilities Breach within the Notice Period; provided, however, that with respect only to breaches that it is not possible to cure within the Notice Period, so long as Parent is diligently using its best efforts to cure such breaches within such Notice Period, the Notice Period shall be automatically extended for an additional period of time (not to exceed sixty (60) days) to enable Parent to cure such breaches, provided, further, that Parent continues to diligently use its best efforts to cure such breaches. Notwithstanding anything to the contrary in this Section 6(e), the Notice Period for any breach arising from the failure to pay compensation shall be five (5) days.
     (f) Employee may terminate this Agreement at any time, without cause, upon thirty
(30) days prior written notice to Parent.
     (g) Parent may terminate this Agreement at any time, without cause, upon written
notice to Employee.
     (h) This Agreement shall automatically renew for successive one (1) year terms (each a “Renewal Term”) unless either Parent or Employee hereto gives the other party hereto written notice of its or her intent not to renew this Agreement no later than one hundred eighty (180) days prior to the date the Initial Term, or the then-current Renewal Term, is scheduled to expire. Employee’s Employment shall terminate upon termination or expiration of this Agreement.
     7. Termination Payments.
     (a) Upon termination of Employee’s Employment, for whatever reason (other than termination for “Cause” pursuant to Section 6(b), termination by Employee pursuant to Section 6(f), expiration of this Agreement following notice of non-renewal by Employee pursuant to Section 6(h), or termination because Employee otherwise “quits” or voluntarily terminates her employment other than pursuant to Section 6(e) (each, a “Termination Exclusion”)) (the effective date of such termination or expiration being referred to as the “Termination Date”), in addition to any amounts payable to Employee hereunder (including but not limited to accrued but unpaid Base Salary), and any other benefits required to be provided to Employee and her dependents under contract and applicable law:
     (i) Parent shall pay Employee in cash an amount equal to her “Annual Base Compensation” (as defined in Section 7(f)) multiplied by two (2) (the “Severance Payment”). The Severance Payment shall be paid in twenty-four (24) equal monthly installments, the .first of which shall be made on the first day of the calendar month following the calendar month in which the Termination Date occurs; provided, however, that:
     (A) if Employee’s Employment is terminated (other than by reason of a Termination Exclusion) within two (2) years after a Change in Control as defined in Section 7(f)(i)(A), (B) or (C), Parent shall pay Employee the Severance Payment in one lump sum within thirty (30) days of the Termination Date.

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     (B) if, within the two-year period immediately following a Change in Control as defined in Section 7(f)(i)(D), Employee’s Employment is terminated by Employee pursuant to Section 6(f), because Employee “quits” or voluntarily terminates her employment or this Agreement expires following notice of non- renewal by Employee pursuant to Section 6(h), such a termination shall not be deemed to be a Termination Exclusion for purposes of this Section 7. Accordingly, Parent shall pay Employee an amount equal to her Annual Base Compensation multiplied by two (2), and Parent shall pay Employee this Severance Payment in one lump sum within thirty (30) days of the Termination Date; provided, however, in such a case, (i) Employee will not be paid any Supplemental Payment and (ii) Employee will not be entitled to her Bonus Compensation if such a terminating event occurs prior to the date when any accrued Bonus Compensation would be paid to Employee (even if she was employed for the entire calendar year upon which such Bonus Compensation would be calculated).
     (C) in the event Employee is terminated for Cause pursuant to the terms of Section 6(b), such event shall be governed by Section 7(b) hereof even if such Termination Date is within two (2) years after a Change in Control.
     (ii) Parent shall pay Employee an amount (the “Supplemental Payment”) equal to (x) the amount of Bonus Compensation payable to Employee for the calendar year immediately preceding the year in which the Termination Date occurs (the “Prior Bonus Amount”) multiplied by (y) a fraction, the numerator of which is the number of days beginning on January 1st of the calendar year in which the Termination Date occurs and ending on the Termination Date, and the denominator of which is 365. The Supplemental Payment shall be paid to Employee concurrently with the payment of the Prior Bonus Amount; provided, however, that if the Prior Bonus Amount has already been paid to Employee, the Supplemental Payment shall be paid within 30 days of the Termination Date. In the event the Termination Date occurs in the first calendar year of Employee’s employment, then the Supplemental Payment shall equal the pro rata percentage (determined using the fraction above) of the Bonus Compensation Employee would have received for the calendar year in which the Termination Date occurred had Employee remained employed for the entire calendar year in which the Termination Date occurred, and the Supplemental Payment shall be paid to Employee concurrently with Parent’s payment of Bonus Compensation generally for such calendar year.
     (iii) Notwithstanding any provision to the contrary in any nonqualified deferred compensation plan of Parent or NOVA (the “Nonqualified Plan”), Employee shall become fully vested immediately in all of her Nonqualified Plan benefits and accounts as of the Termination Date.
     (iv) Notwithstanding any provision to the contrary in any other agreement or document (including but not limited to Parent’s applicable plan documents), all stock options, restricted stock and other similar rights that, as of the Termination Date, have been granted to Employee shall become vested and exercisable immediately upon notice of such termination and, as provided under the applicable plan or agreement, Employee shall have the right to exercise any or all of such rights. Further, in the event Employee’s Employment is terminated for whatever reason (other than termination for “Cause” pursuant to Section 6(b)) within two (2) years after a Change in Control as-defined in Section 7(f)(i)(D), Employee shall have the continuing right to exercise the “Qualified

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Options” (as defined in Section 7(f)(iv)), at any time prior to the date which is one (1) year after the Termination Date (without regard to any provision thereof requiring earlier expiration upon termination of employment).
     (v) Until the earlier to occur of (x) the expiration of the Severance Period or (y) Employee becomes an employee of another company providing Employee and her dependents with medical, life and disability insurance (the period from the Termination Date until such event being referred to herein as the “Continuation Period”), Parent shall provide to Employee and her dependents the coverage for the benefits described in Sections 3(a), (b) and (c); provided, however, such coverage shall not be provided to the extent that such coverage is generally provided through an insurance contract with a licensed insurance company and such insurance company will not agree to insure for such coverage.
During the two (2) year period following the Termination Date (the “Severance Period”), Employee shall comply with the non-disclosure obligations and covenants not to solicit or compete set forth in Sections 10 and 11 below.
Except as provided in Section 7(a)(i)(B), for purposes of this Section 7(a), any accrued but unpaid Bonus Compensation shall be paid to Employee on the date that Bonus Compensation would have been payable under the Incentive Compensation Plan had termination of Employee’s Employment not occurred.
     (b) In the event Employee’s Employment is terminated as a result of the Termination Exclusions identified in Section 7(a), Employee shall be paid her accrued but unpaid Base Salary through the Termination Date, and any other benefits required to be provided to Employee and her dependents under contract and applicable law. Employee will not be entitled to her Bonus Compensation if Employee’s Employment is terminated as a result of one of the Termination Exclusions prior to the date when any earned Bonus Compensation would be paid to Employee. In such a case, Employee shall not be entitled to any portion of her Bonus Compensation upon such termination of employment even if she was employed for the entire calendar year upon which such Bonus Compensation would be calculated.
     (c) In the event Employee’s Employment is terminated as a result of one of the Termination Exclusions identified in Section 7(a), Parent, at its sole option and its sole discretion and at any time within thirty (30) days of the Termination Date, may cause Employee to be obligated to comply with the non-disclosure obligations and covenants not to solicit or compete set forth in Sections 10 and 11 below for a period of one (1) or two (2) years following the Termination Date, as set forth below:
     (i) By giving notice to Employee at any time within thirty (30) days of the Termination Date of its intent to exercise the “One Year Option” herein described, Parent may cause Employee to be obligated to comply with the non-disclosure obligations and covenants not to solicit or compete set forth in Sections 10 and 11 below for a period of one (1) year following the Termination Date; provided, however, that Parent shall pay Employee an aggregate amount in cash equal to Employee’s then Base Salary in effect immediately prior to the Termination Date multiplied by one (1) (the “One Year Payment”). The One Year Payment shall be paid by Parent to Employee in twelve (12) equal monthly payments, the first of which shall be made on the first day of the calendar month following the calendar month in which the Termination Date occurs. In the event

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Parent exercises the One Year Option, the one (1) year period following the Termination Date shall be deemed the “Exclusion Period”;
     (ii) By giving notice to Employee any time within thirty (30) days of the Termination Date of its intent to exercise the “Two Year Option” herein described, Parent may cause Employee to be obligated to comply with the non-disclosure obligations and covenants not to solicit or compete set forth in Sections 10 and 11 below for a period of two (2) years following the Termination Date; provided, however, that Parent shall pay Employee an aggregate amount in cash equal to Employee’s Base Salary in effect immediately prior to the Termination Date multiplied by two (2) (the “Two Year Payment”). The Two Year Payment shall be paid by Parent to Employee in twenty-four (24) equal monthly payments, the first of which shall be made on the first day of the calendar month following the calendar month in which the Termination Date occurs. In the event Parent exercises the Two Year Option, the two (2) year period following the Termination Date shall be deemed the “Exclusion Period”.
Notwithstanding the foregoing, in the event Employee’s employment is terminated within two (2) years after the Effective Date as a result of one of the Termination Exclusions identified in Section 7(a), the provisions of Section 10 and 11 below will apply until the second anniversary of the Effective Date without any payment by Parent. If Parent, upon Employee’s termination, elects a One Year Option or Two Year Option, Parent shall not be obligated to make any payments with respect to such One Year Option or Two Year Option covering the portion of the applicable period occurring prior to the second anniversary of the Effective Date and any such payments which would have otherwise been made to Employee pursuant to this Section 7(c) prior to the second anniversary of the Effective Date shall be waived.
          (d) In the event of the death of Employee, all benefits and compensation hereunder shall, unless otherwise specified by Employee, be payable to, or exercisable by, Employee’s estate.
          (e) Gross-Up Payment.
     (i) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment, grant, acceleration or distribution by or on behalf of Parent to or for the benefit of Employee as a result of any change in control (within the meaning of Section 280 G of the internal revenue code) or as otherwise payable under Sections 3(h), 7(a) or 16 (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 7(e) (a “Payment”)) would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), or any interest or penalties are incurred by Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then Employee shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that, after payment by Employee of all taxes upon the Gross-Up Payment (such taxes including, without limitation, any income taxes and Excise Tax imposed upon the Gross-Up Payment, and any interest or penalties imposed with respect to such taxes), Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment.

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     (ii) Subject to the provisions of Section 7(e)(iii), all determinations required to be made under this Section 7, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized accounting firm or law firm selected by Employee and reasonably acceptable to Parent (the “Tax Firm”); provided, however, that the Tax Firm shall not determine that no Excise Tax is payable by Employee unless it delivers to Employee a written opinion (the “Accounting Opinion”) that failure to pay the Excise Tax and to report the Excise Tax and the payments potentially subject thereto on or with Employee’s applicable federal income tax return will not result in the imposition of an accuracy-related or other penalty on Employee. All fees and expenses of the Tax Firm shall be borne solely by Parent. Within fifteen (15) business days of the receipt of notice from Employee that there has been a Payment, the Tax Firm shall make all determinations required under this Section 7, shall provide to Parent and Employee a written report setting forth such determinations, together with detailed supporting calculations, and, if the Tax Firm determines that no Excise Tax is payable, shall deliver the Accounting Opinion to Employee. Any Gross-Up Payment, as determined pursuant to this Section 7, shall be paid by Parent to Employee within fifteen (15) days of the receipt of the Tax Firm’s determination. Subject to the remainder of this Section, any determination by the Tax Firm shall be binding upon Parent and Employee; provided, however, that Employee shall only be bound to the extent that the determinations of the Tax Firm hereunder, including the determinations made in the Accounting Opinion, are reasonable and reasonably supported by applicable law. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Tax Firm hereunder, it is possible that Gross-Up Payments which will not have been made by Parent should have been made (“Underpayment”), consistent with the calculations required to be made hereunder. In the event that it is ultimately determined in accordance with the procedures set forth in Section 7(e)(iii) that Employee is required to make a payment of any Excise Tax, the Tax Firm shall reasonably determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by Parent to or for the benefit of Employee. In determining the reasonableness of Tax Firm’s determinations hereunder, and the effect thereof, Parent and Employee shall be provided a reasonable opportunity to review such determinations with Tax Firm and their respective tax counsel, if separate from the Tax Firm. Tax Firm’s determinations hereunder, and the Accounting Opinion, shall not be deemed reasonable until Employee’s reasonable objections and comments thereto have been satisfactorily accommodated by Tax Firm.
     (iii) Employee shall notify Parent in writing of any claims by the Internal Revenue Service that, if successful, would require the payment by Parent of the Gross-Up Payment. Such notification shall be given as soon as practicable, but no later than thirty (30) calendar days after Employee actually receives notice in writing of such claim, and shall apprise Parent of the nature of such claim and the date on which such claim is requested to be paid; provided, however, that the failure of Employee to notify Parent of such claim (or to provide any required information with respect thereto) shall not affect any rights granted to Employee under this Section except to the extent that Parent is materially prejudiced in the defense of such claim as a direct result of such failure. Employee shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which she gives such notice to Parent (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If Parent

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notifies Employee in writing prior to the expiration of such period that it desires to contest such claim, Employee shall do all of the following:
     (A) give Parent any information reasonably requested by Parent relating to such claim;
     (B) take such action in connection with contesting such claim as Parent shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney selected by Parent and reasonably acceptable to Employee;
     (C) cooperate with Parent in good faith in order effectively to contest such claim;
     (D) if Parent elects not to assume and control the defense of such claim, permit Parent to participate in any proceedings relating to such claim; provided, however, that Parent shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Employee harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 7, Parent shall have the right, at its sole option, to assume the defense of and control all proceedings in connection with such contest, in which case it may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may either direct Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as Parent shall determine; provided, however, that if Parent directs Employee to pay such claim and sue for a refund, Parent shall advance the amount of such payment to Employee, on an interest- free basis and shall indemnify and hold Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, Parent’s right to assume the defense of and control the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.
     (iv) If, after the receipt by Employee of an amount advanced by Parent pursuant to this Section 7(e), Employee becomes entitled to receive any refund with respect to such claim, Employee shall (subject to Parent’s complying with the requirements of Section 7(e)(iii)) promptly pay to Parent the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Employee of an amount advanced by Parent pursuant to Section 7(e)(iii), a determination is made that Employee is not entitled to a refund with

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respect to such claim and Parent does not notify Employee in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall, to the extent of such denial, be forgiven and shall not be required to be repaid and the amount of forgiven advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.
     (f) For purposes of this Agreement, the following terms shall be defined as follows:
     (i) “Change in Control” shall mean :
     (A) The acquisition (other than from Parent) by any person, entity or “group”, within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the “Exchange Act”) (excluding, for this purpose, any employee benefit plan of Parent or its subsidiaries which acquires beneficial ownership of voting securities of Parent) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either the then outstanding shares of Parent’s stock or the combined voting power of Parent’s then outstanding voting securities entitled to vote generally in the election of directors; or
     (B) The consummation by Parent of a reorganization, merger, consolidation, in each case, with respect to which the shares of Parent voting stock outstanding immediately prior to such reorganization, merger or consolidation do not constitute or become exchanged for or converted into more than 50% of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company’s then outstanding voting securities, or a liquidation or dissolution of Parent or of the sale of all or substantially all of the assets of Parent; or
     (C) The failure for any reason of individuals who constitute the Incumbent Board to continue to constitute at least a majority of the board of directors of Parent; or
     (D) The sale, assignment or transfer of the Business to an unaffiliated third party, whether by sale of all or substantially all the assets of the Business, sale of stock or merger.
     (ii) “Annual Base Compensation” means the greater of (x) Employee’s Base Salary in effect on the Termination Date, or (y) the greatest Base Salary in effect during the calendar year immediately prior to the calendar year in which the Termination Date occurs.
     (iii) “Incumbent Board” shall mean the members of the Board of Directors of Parent as of the Effective Date hereof and any person becoming a member of the Board of Directors of Parent hereafter whose election, or nomination for election by Parent’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of Parent, as such terms are used in Rule 14a-l 1 of Regulation 14A promulgated under the Exchange Act).

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     (iv) “Qualified Options” shall mean all stock options, restricted stock, and other similar rights (a) granted to Employee prior to February 22, 2001 (whether vested or unvested), that entitle Employee to acquire NOVA Corp stock for a price per share equal to or greater than $17.92 (such options being converted by virtue of the Merger into the right to acquire stock of Parent); or (b) granted to Employee on or after February 22, 2001.
     8. Products, Notes, Records and Software. Employee acknowledges and agrees that all memoranda, notes, records and other documents and computer software created, developed, compiled, or used by Employee or made available to her during the term of her Employment concerning or relative to the business and affairs of NOVA or Parent, including, without limitation, all customer data, billing information, service data, and other technical material of NOVA or Parent is and shall be NOVA’s or Parent’s, as the case may be, property. Employee agrees to deliver without demand all such materials to Parent within three (3) days after the termination of Employee’s Employment. Employee further agrees not to use such materials for any reason after said termination.
     9. Arbitration.
     (a) Parent and Employee acknowledge and agree that (except as specifically set forth in Section 9(d)) any claim or controversy arising out of or relating to this Agreement shall be settled by binding arbitration in Atlanta, Georgia, in accordance with the National Rules of the American Arbitration Association for the Resolution of Employment Disputes in effect on the date of the event giving rise to the claim or controversy. Parent and Employee further acknowledge and agree that either party must request arbitration of any claim or controversy within one (1) year of the date of the event giving rise to the claim or controversy by giving written notice of the party’s request for arbitration. Failure to give notice of any claim or controversy within one (1) year of the event giving rise to the claim or controversy shall constitute waiver of the claim or controversy.
     (b) All claims or controversies subject to arbitration pursuant to Section 9(a) above shall be submitted to arbitration within six (6) months from the date that a written notice of request for arbitration is effective. All claims or controversies shall be resolved by a panel of three arbitrators who are licensed to practice law in the State of Georgia and who are experienced in the arbitration of labor and employment disputes. These arbitrators shall be selected in accordance with the National Rules of the American Arbitration Association for the Resolution of Employment Disputes in effect at the time the claim or controversy arises. Either party may request that the arbitration proceeding be stenographically recorded by a Certified Shorthand Reporter. The arbitrators shall issue a written decision with respect to all claims or controversies within thirty (30) days from the date the claims or controversies are submitted to arbitration. The parties shall be entitled to be represented by legal counsel at any arbitration proceedings.
     (c) Parent and Employee acknowledge and agree that the arbitration provisions in this Agreement may be specifically enforced by either party, and that submission to arbitration proceedings may be compelled by any court of competent jurisdiction. Parent and Employee further acknowledge and agree that the decision of the arbitrators may be specifically enforced by either party in any court of competent jurisdiction.
     (d) Notwithstanding the arbitration provisions set forth herein, Employee and Parent acknowledge and agree that nothing in this Agreement shall be construed to require the arbitration of any claim or controversy arising under Sections 10 and 11 of this Agreement nor shall such provisions prevent Parent from seeking equitable relief from a court of competent

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jurisdiction for violations of Sections 10 and 11 of this Agreement. These provisions shall be enforceable by any court of competent jurisdiction and shall not be subject to arbitration except by mutual written consent of the parties signed after the dispute arises, any such consent, and the terms and conditions thereof, then becoming binding on the parties. Employee and Parent further acknowledge and agree that nothing in this Agreement shall be construed to require arbitration of any claim for workers’ compensation or unemployment compensation.
     10. Nondisclosure.
     (a) Confidential Information. Employee acknowledges and agrees that because of her Employment, she will have access to proprietary information of NOVA and Parent concerning or relative to the business of NOVA and Parent which is of a special and unique value (collectively, “Confidential Information”) which includes, without limitation, technical material of NOVA and Parent, sales and marketing information, customer account records, billing information, training and operations information, materials and memoranda, personnel records, pricing and financial information relating to the business, accounts, customers, prospective customers, employees and affairs of NOVA and Parent, and any information marked “Confidential” by NOVA or Parent. Employee acknowledges and agrees that Confidential Information is and shall be NOVA’s or Parent’s property, as the case may be, prior to and after the Merger. Employee recognizes and acknowledges that this Agreement furthers Parent’s interest in connection with entering into the Merger Agreement and the consummation of the transactions contemplated thereby. Employee agrees that except as required by Employee’s duties with NOVA or, following the Merger, Parent, Employee shall keep NOVA’s or Parent’s Confidential Information confidential, and Employee shall not use Confidential Information for any reason other than on behalf of NOVA and Parent pursuant to, and in strict compliance with, the terms of this Agreement. Employee further agrees that during the Severance Period or the Exclusion Period, as applicable, Employee shall continue to keep Confidential Information confidential, and Employee shall not use Confidential Information for any reason or in any manner.
     (b) Notwithstanding the foregoing, Employee shall not be subject to the restrictions set forth in subsection (a) of this Section 10 with respect to information which:
     (i) becomes generally available to the public other than as a result of disclosure by Employee or the breach of Employee’s obligations under this Agreement;
     (ii) becomes available to Employee from a source which is unrelated to her Employment or the exercise of her duties under this Agreement, provided that such source lawfully obtained such information and is not bound by a confidentiality agreement with Parent or NOVA; or
     (iii) is required by law to be disclosed.
     (c) Trade Secrets. Employee acknowledges and agrees that because of her Employment, she will have access to “trade secrets” (as defined in the Uniform Trade Secrets Act, O.C.G.A. § 10-1-760, et seq. (the “Uniform Trade Secrets Act”) of NOVA (‘Trade Secrets”). Nothing in this Agreement is intended to alter the applicable law and remedies with respect to information meeting the definition of “trade secrets” under the Uniform Trade Secrets Act, which law and remedies shall be in addition to the obligations and rights of the parties hereunder.
     11. Covenants Not to Solicit or Compete. Employee acknowledges and agrees that, because of her Employment and the anticipated Merger, she does and will continue to have access to

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confidential or proprietary information concerning merchants, associate banks and ISOs of Parent and shall have established relationships with such merchants, associate banks and ISOs as well as with the vendors, consultants, and suppliers used to service such merchants, associate banks and ISOs. As an inducement to Parent to enter into, complete and close the Merger and in consideration for Parent’s agreement to employ Employee with the compensation and benefits described herein, Employee agrees that from and after the Effective Date, and continuing throughout the Severance Period or the Exclusion Period, as applicable, Employee shall not, directly or indirectly, either individually, in partnership, jointly, or in conjunction with, or on behalf of, any person, firm, partnership, corporation, or unincorporated association or entity of any kind:
     (a) compete with Parent in providing credit card and debit card transaction processing services within the Territory or otherwise associate with, obtain any interest in (except as a shareholder holding less than five percent (5%) interest in a corporation traded on a national exchange or over-the-counter), advise, consult, lend money to, guarantee the debts or obligations of, or perform services in either a supervisory or managerial capacity or as an advisor, consultant or independent contractor for, or otherwise participate in the ownership, management, or control of, any person, firm, partnership, corporation, or unincorporated association of any kind which is providing credit card and debit card transaction processing services within the Territory;
     (b) solicit or contact, for the purpose of providing products or services the same as or substantially similar to those provided by the Business (or any other business of Parent in which Employee was engaged), any person or entity that during the term of Employee’s Employment was a merchant, associate bank, ISO or customer (including any actively-sought prospective merchant, associate bank, ISO or customer) with whom Employee had material contact or about whom Employee learned material information during the last twelve (12) months of her Employment;
     (c) persuade or attempt to persuade any merchant, associate bank, ISO, customer, or supplier of Parent to terminate or modify such merchant’s, associate bank’s, ISO’s, customer’s, or supplier’s relationship with Parent if Employee had material contact with or learned material information about such merchant, associate bank, ISO, customer or supplier during the last twelve (12) months of her
Employment; or
     (d) persuade or attempt to persuade any person who was employed by Parent or any of its subsidiaries as of the date of the termination of Employee’s Employment, to terminate or modify her employment relationship, whether or not pursuant to a written agreement, with Parent or any of its subsidiaries, as the case may be.
     12. New Developments. Any discovery, invention, process or improvement made or discovered by Employee during the term of her Employment in connection with or in any way affecting or relating to the business of Parent (as then carried on or under active consideration) shall forthwith be disclosed to Parent and shall belong to and be the absolute property of Parent; provided, however, that this provision does not apply to_an invention for which no equipment, supplies, facility, trade secret information of Parent was used and which was developed entirely on Employee’s own time, unless (a) the invention relates (i) directly to the Business or (ii) to Parent’s actual or demonstrably anticipated research or development; or (b) the invention results from any work performed by Employee for Parent.
     13. Remedy for Breach. Employee acknowledges and agrees that her breach of any of the covenants contained in Sections 8, 10, 11 and 12 of this Agreement would cause irreparable injury to Parent and that remedies at law of Parent for any actual or threatened breach by Employee of such covenants would be inadequate and that Parent shall be entitled to specific performance of the covenants

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in such sections or injunctive relief against activities in violation of such sections, or both, by temporary or permanent injunction or other appropriate judicial remedy, writ or order, without the necessity of proving actual damages. This provision with respect to injunctive relief shall not diminish the right of Parent to claim and recover damages against Employee for any breach of this Agreement in addition to injunctive relief. Employee acknowledges and agrees that the covenants contained in Sections 8, 10, 11 and 12 of this Agreement shall be construed as agreements independent of any other provision of this or any other contract between the parties hereto, and that the existence of any claim or cause of action by Employee against Parent, whether predicated upon this or any other contract, shall not constitute a defense to the enforcement by Parent of said covenants.
     14. Reasonableness. Employee has carefully considered the nature and extent of the restrictions upon her and the rights and remedies conferred on Parent under this Agreement, and Employee hereby acknowledges and agrees that:
     (a) the restrictions and covenants contained herein, and the rights and remedies conferred upon Parent, are necessary to protect the goodwill and other value of the Business;
     (b) the restrictions placed upon Employee hereunder are narrowly drawn, are fair and reasonable in time and territory, will not prevent her from earning a livelihood, and place no greater restraint upon Employee than is reasonably necessary to secure the Business and goodwill of Parent;
     (c) Parent is relying upon the restrictions and covenants contained herein in continuing to make available to Employee information concerning the Business; and
     (d) Employee’s Employment places her in a position of confidence and trust with Parent and its employees, merchants, associate banks, ISOs, customers, vendors and suppliers.
     15. Invalidity of Any Provision. It is the intention of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies of each state and jurisdiction in which such enforcement is sought, but that the unenforceability (or the modification to conform with such laws or public policies) of any provision hereof shall not render unenforceable or impair the remainder of this Agreement which shall be deemed amended to delete or modify, as necessary, the invalid or unenforceable provisions. The parties further agree to alter the balance of this Agreement in order to render the same valid and enforceable. The terms of the non-competition provisions of this Agreement shall be deemed modified to the extent necessary to be enforceable and, specifically, without limiting the foregoing, if the term of the non-competition is too long to be enforceable, it shall be modified to encompass the longest term which is enforceable and, if the scope of the geographic area of non-competition is too great to be enforceable, it shall be modified to encompass the greatest area that is enforceable. The parties further agree to submit any issues regarding such modification to a court of competent jurisdiction if they are unable to agree and further agree that if said court declines to so amend or modify this Agreement, the parties will submit the issue of amendment or modification of the non-competition covenants in this Agreement to binding arbitration in accordance with the commercial arbitration rules then in effect of the American Arbitration Association. Any such arbitration hearing will be held in Atlanta, Georgia, and this Agreement shall be construed and enforced in accordance with the laws of the State of Georgia, including this arbitration provision.
     16. Settlement Payments; Termination of Merger Agreement.
     (a) In consideration for Employee’s agreement to terminate the Prior Agreement and waive the right to receive cash payments or other benefits under the Prior Agreement upon

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termination of employment following a change in control by reason of consummation of the Merger, Parent shall provide on the Effective Date the compensation described in this Section 16 (provided this Agreement is not terminated prior to the Effective Date), and Employee shall have no other right to receive payments or other benefits under this Agreement or the Prior Agreement by reason of the Merger:
     (i) Parent shall pay Employee in cash an amount equal to her annual base salary as of the date of this Agreement multiplied by three (3) (the “Cash Settlement Payment”). The Cash Settlement Payment shall be paid in two (2) equal installments, the first of which shall be made on the Effective Date, the second of which shall be paid on the first anniversary of the Effective Date; provided, however, that if Employee’s Employment is terminated, for whatever reason, prior to the first anniversary of the Effective Date, Parent shall pay Employee an amount equal to her annual base salary as of the date of this Agreement multiplied by one-half (1/2) in lieu of the second installment of the Cash Settlement Payment. In the event the second installment of the Cash Settlement Payment is made on the first anniversary date of the Effective Date and Employee’s employment is terminated pursuant to a Termination Exclusion prior to the second anniversary of the Effective Date, then Employee shall reimburse Parent an amount equal to the “Unearned Payment” (as defined below). The number of days Employee is employed, following the first anniversary of the Effective Date and prior to the second anniversary of the Effective Date, shall be referred to as the “Accrued Days” and the ratio of (A) 365 minus the Accrued Days to (B) 365 shall be referred to as the “Unearned Ratio”. The “Unearned Payment” shall equal Employee’s annual base salary as of the date of this Agreement multiplied by the Unearned Ratio.
     (ii) The provisions of Section 7(e) of this Agreement shall be applicable to the payments provided for in this Section 16. All payments under Section 16 are in addition to, and not in lieu of, any payment due under this Agreement following termination of Employee’s employment.
     (iii) At the election of Employee, with respect to up to 75% of the aggregate number of shares subject to stock option agreements outstanding as of the Effective Date (“Option Shares”), Employee shall be entitled to receive from Parent in exchange for cancellation of the stock option agreements (or portion thereof) relating to such Option Shares for which Employee elects, a cash payment in an amount equal to (1) the Cash Consideration (as defined in the Merger Agreement) multiplied by the aggregate number of Option Shares subject to the option agreements (or portion thereof) to be cancelled less (2) the aggregate exercise price set forth in the stock option agreements (or portion thereof) being cancelled. Employee shall notify Parent no later than three (3) business days prior to the Effective Date with respect to the number of Option Shares subject to the stock option agreements Employee wishes to make the election pursuant to this Section 16(a)(iii). In exchange for such cash payments, Employee agrees to execute a cancellation agreement with respect to the Option Shares subject to the stock option agreements (or portion thereof) being cancelled, which cancellation agreement stall be in a form reasonably acceptable to Parent. The remaining Option Shares subject to stock option agreements (or portions thereof) not being cancelled hereunder shall be converted into the right to acquire shares of Parent’s common stock in accordance with Section 3.06 of the Merger Agreement and in the event Employee’s Employment is terminated for whatever reason (other than termination for “Cause” pursuant to Section 6(b)) within two (2) years after the Effective Date, Employee shall have the continuing right to exercise such remaining Option Shares at any time prior to the date which is one (1) year after the

16


 

Termination Date (without regard to any provisions thereof requiring earlier expiration upon termination of employment).
     (b) Employee acknowledges and agrees that upon the Effective Date, the Prior Agreement is terminated, cancelled and of no further force and effect; provided, however, that this Agreement shall terminate upon any termination of the Merger Agreement (and, in case of any such termination hereof, this Agreement shall be deemed to be void ab initio and the Prior Agreement shall be deemed to have remained in full force and effect); provided further, that the termination of this Agreement shall only become effective if the Merger Agreement terminates prior to the Effective Date. Until the Effective Date, the Prior Agreement remains in full force and effect.
     17. Applicable Law. This Agreement shall be construed and enforced in accordance with the laws of the State of Georgia.
     18. Waiver of Breach. The waiver by Parent of a breach of any provision of this Agreement by Employee shall not operate or be construed as a waiver of any subsequent breach by Employee.
     19. Successors and Assigns. This Agreement shall inure to the benefit of Parent, its subsidiaries and affiliates, and their respective successors and assigns. This Agreement is not assignable by Employee but shall be freely assignable by Parent.
     20. Notices. All notices, demands and other communications hereunder shall be in writing and shall be delivered in person or deposited in the United States mail, certified or registered, with return receipt requested, as follows:
         
 
  (i)   If to Employee, to:
 
       
 
      Pamela A. Joseph
580 Owens Farm Road
 
      Alpharetta, Georgia 30004
 
       
 
  (ii)   If to NOVA Corp or NOVA, to:
 
       
 
      NOVA Corporation
 
      One Concourse Parkway
 
      Suite 300
 
      Atlanta, Georgia 30328
 
      Attention: Edward Grzedzinski
 
                       Chief Executive Officer
 
       
 
  (iii)   If to Parent, to:
 
       
 
      U.S. Bancorp
 
      U.S. Bank Place
 
      601 Second Avenue South
 
      Minneapolis, Minnesota 55402
 
      Attention: General Counsel

17


 

     21. Entire Agreement. This Agreement contains the entire agreement of the parties, and as of the Effective Date, supersedes all other prior negotiations, commitments, agreements and understandings (written or oral) between the parties with respect to the subject matter hereof, including but not limited to the Prior Agreement, which is hereby terminated as of the Effective Date. It may not be changed orally but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension, or discharge is sought.
     22. Indemnification; Legal Expenses.
     (a) At all times during and after Employee’s Employment and the effectiveness of this Agreement, Parent shall indemnify Employee (as a director, officer, employee and otherwise) to the fullest extent permitted by law and shall at all times maintain appropriate provisions in its Articles of Incorporation and Bylaws which mandate that Parent provide such indemnification.
     (b) Parent’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counter-claim, recoupment, defense or other claim, right or action which Parent may have against Employee or others. In no event shall Employee be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to Employee under any of the provisions of this Agreement. Parent agrees to pay, to the full extent permitted by law, all legal fees and expenses which Employee may reasonably incur as a result of any legitimate, non-frivolous contest (regardless of the outcome thereof) by Parent or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any legitimate, non-frivolous contest by Employee about the amount of any payment pursuant to Section 7 or Section 16 of this Agreement), plus in each case interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. Parent will not be bound to pay any legal fees or expenses arising out of baseless, meritless or frivolous contests brought hereunder by Employee or others. A contest will be deemed baseless, meritless and/or frivolous if a court or other arbiter assesses penalties or sanctions for bringing said contest, or a court or other arbiter dismisses said contest for failure to state a colorable claim.
     (c) As a condition to receiving payments under Section 7(a), Employee must execute a release in the form attached hereto as Exhibit B.
     23. Survival. The provisions of Sections 7, 8, 9, 10,11, 12, 13, 14,15, 16, 17, 20, 22, 23 and 24 shall survive termination of Employee’s Employment and termination of this Agreement.
     24. Withholding. All payments required to be made by Parent under this Agreement will be subject to the withholding of such amounts, if any, relating to federal, state and local taxes as may be required by law. Nothing in this Section shall be construed to reduce Employee’s right to payments described in Section 7(e).

18


 

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement under seal as of the date first above shown.
         
  “EMPLOYEE”:
 
 
  By:   /s/ Pamela A. Joseph    
    Pamela A. Joseph   
       
  “NOVA”:  
 
  NOVA Corporation
 
 
  By:   /s/ Edward Grzedzinski    
    Edward Grzedzinski   
    Chairman, CEO and President   
 
  NOVA Information Systems, Inc.
 
 
  By:   /s/ Edward Grzedzinski   
    Edward Grzedzinski   
    Chairman, CEO and President   
 
  PARENT:  
 
  U.S. Bancorp  
 
  By:   /s/ Lee R. Mitau   
    Name:   Lee R. Mitau   
    Title:   Executive Vice President and General Counsel  

19


 

         
EXHIBIT A
Annual Incentive Compensation Schedule
*   Payment of annual incentive compensation (the “Bonus Payment”) to be based upon relative achievement of Targeted Net Income (as defined).
 
*   Net Income is Net Income determined in accordance with GAAP as determined from the annual audited Financial Statements, as adjusted to exclude non-operating gains and losses.
 
*   Targeted Net Income will be established annually by the Chief Executive Officer of NOVA, as approved by the Chief Executive Officer of Parent.
 
*   The Bonus Payment will be calculated by following the steps outlined below:
  (1)   Determining the percentage equivalent to a fraction, the numerator of which is Net Income and the denominator of which is Targeted Net Income (such percentage being referred to as the “Actual/Targeted Ratio”).
 
  (2)   Values will be calculated based on (A) through (E):
  (A)   For each full percentage point (up to 84%) by which the Actual/Targeted Ratio equals or exceeds 80%, a value of 1% will be awarded.
 
  (B)   For each full percentage point (up to 89%) by which the Actual/Targeted Ratio exceeds 84%, a value of 2% will be awarded.
 
  (C)   For each full percentage point (up to 94%) by which the Actual/Targeted Ratio exceeds 89%, a value of 3% will be awarded.
 
  (D)   For each full percentage point (up to 99%) by which the Actual/Targeted Ratio exceeds 94%, a value of 4% will be awarded.
 
  (E)   For each full percentage point (up to 150%) by which the Actual/Targeted Ratio exceeds 100%, a value of 1% will be awarded, (note: for this purpose, no value will be awarded for equaling 100%).
  (3)   The sum of the values calculated in (A) through (E) (the “Bonus Percentage”) shall be multiplied by Employee’s then current Base Salary to yield the Bonus Payment.
     Examples:
  n   If the Actual/Targeted Ratio is 92%, the Bonus Percentage would be 29%. This is calculated by adding:
             
 
      5% (1% for 80-84% of Actual/Targeted Ratio)    
 
  +   15% (2% for 85-89% of Actual/Targeted Ratio)    
 
  +   9% (3% for 90-92% of Actual/Targeted Ratio)
29%
   

20


 

      Employee’s Bonus Payment would be equal to Employee’s then-current Base Salary multiplied by 29%.
 
  n   If the Actual/Targeted Ratio is 112%, the Bonus Percentage would be 62%.
This is calculated by adding:
             
 
      5% (1% for 80-84% of Actual/Targeted Ratio)    
 
  +   10% (2% for 85-89% of Actual/Targeted Ratio)    
 
  +   15% (3% for 90-94% of Actual/Targeted Ratio)    
 
  +   20% (4% for 95-99% of Actual/Targeted Ratio)    
 
  +   0% (0% for 100% of Actual/Targeted Ratio)    
 
  +   12% (1% for 101-112% of Actual/Targeted Ratio)    
 
           
 
      62%    
      Employee’s Bonus Payment would be equal to Employee’s then-current Base Salary multiplied by 62%.
*   The foregoing notwithstanding, in order for any bonus to be payable with respect to any calendar year, the “Revenue” (as defined below) for such calendar year must equal or exceed 105% of the Revenue for the immediately preceding calendar year. “Revenue” means revenue of NOVA determined in accordance with GAAP as determined from the annual audited Financial Statements, as adjusted to exclude non-operating items.
 
*   Notwithstanding anything to the contrary in this Agreement, in order to receive Bonus Compensation for any calendar year, Employee must be employed by NOVA on the last day of such calendar year.

21

exv12
 

EXHIBIT 12
Computation of Ratio of Earnings to Fixed Charges
                                             
Year Ended December 31 (Dollars in Millions)   2007   2006   2005   2004   2003
 
Earnings                                        
1.
  Income from continuing operations   $ 4,324     $ 4,751     $ 4,489     $ 4,167     $ 3,710  
2.
  Applicable income taxes     1,883       2,112       2,082       2,009       1,941  
         
3.
  Income from continuing operations before income taxes (1 + 2)   $ 6,207     $ 6,863     $ 6,571     $ 6,176     $ 5,651  
         
4.
  Fixed charges:                                        
 
 
a. Interest expense excluding interest on deposits
  $ 3,693     $ 3,133     $ 1,937     $ 1,171     $ 972  
 
 
b. Portion of rents representative of interest
    76       71       70       69       74  
         
 
 
c. Fixed charges excluding interest on deposits (4a + 4b)
    3,769       3,204       2,007       1,240       1,046  
 
 
d. Interest on deposits
    2,754       2,389       1,559       904       1,097  
         
 
 
e. Fixed charges including interest on deposits (4c + 4d)
  $ 6,523     $ 5,593     $ 3,566     $ 2,144     $ 2,143  
         
5.
  Amortization of interest capitalized   $     $     $     $     $  
6.
  Earnings excluding interest on deposits (3 + 4c + 5)     9,976       10,067       8,578       7,416       6,697  
7.
  Earnings including interest on deposits (3 + 4e + 5)     12,730       12,456       10,137       8,320       7,794  
8.
  Fixed charges excluding interest on deposits (4c)     3,769       3,204       2,007       1,240       1,046  
9.
  Fixed charges including interest on deposits (4e)     6,523       5,593       3,566       2,144       2,143  
 
                                           
Ratio of Earnings to Fixed Charges                                        
10.
  Excluding interest on deposits (line 6/line 8)     2.65       3.14       4.27       5.98       6.40  
11.
  Including interest on deposits (line 7/line 9)     1.95       2.23       2.84       3.88       3.64  
 

exv13
 

Management’s Discussion and Analysis
 
OVERVIEW
 
In 2007, U.S. Bancorp and its subsidiaries (the “Company”) continued to demonstrate its financial strength and shareholder focus, despite a particularly challenging economic environment for the banking industry. Throughout 2007, the mortgage lending and homebuilding industries experienced stress resulting in higher delinquencies, net charge-offs and nonperforming loans for the industry, especially within the sub-prime mortgage sector. The financial markets experienced significant turbulence during the second half of 2007 as the impact of sub-prime mortgage delinquencies, defaults and foreclosures adversely affected investor confidence in a broad range of investment sectors and asset classes. Despite these challenges, the Company’s prudent credit culture, balance sheet strength and capital management enabled it to manage through the turbulent market conditions. The Company’s financial strength enabled it to remain focused on organic growth and investing in business initiatives that strengthen its presence and product offerings for customers. This focus over the past several years has created a well diversified business, generating strong fee-based revenues that represented over 50 percent of total net revenue in 2007. While net interest income declined in 2007 due to lower net interest margins, average earning assets increased 4.5 percent year-over-year, despite a very competitive credit environment in the first half of the year. By the end of 2007, the Company’s net interest margin was beginning to stabilize and average earning assets grew by 11.1 percent, on an annualized basis, in the fourth quarter, compared with the third quarter of 2007. The Company’s performance was also driven by the continued strong credit quality of the Company’s loan portfolios, despite stress in the mortgage lending and homebuilding industries and an anticipated increase in consumer charge-offs, primarily related to credit cards. The ratio of nonperforming assets to total loans and other real estate was .45 percent at December 31, 2007, compared with .41 percent at December 31, 2006. Total net charge-offs were .54 percent of average loans outstanding in 2007, compared with .39 percent in 2006. In 2008, credit quality within the industry is expected to continue to deteriorate. While the Company’s loan portfolios are not immune to these economic factors and will deteriorate somewhat, credit quality trends of the Company are expected to be manageable through the foreseeable business cycle. Finally, the Company’s efficiency ratio (the ratio of noninterest expense to taxable-equivalent net revenue excluding net securities gains or losses) was 49.3 percent in 2007, compared with 45.4 percent in 2006, and continues to be an industry leader. The Company’s ability to effectively manage its cost structure has provided a strategic advantage in this highly competitive environment. As a result of these factors, the Company achieved a return on average common equity of 21.3 percent in 2007.
The Company’s strong performance is also reflected in its capital levels and the favorable credit ratings assigned by various credit rating agencies. Equity capital of the Company continued to be strong at 5.1 percent of tangible assets at December 31, 2007, compared with 5.5 percent at December 31, 2006. The Company’s regulatory Tier 1 capital ratio was 8.3 percent at December 31, 2007, compared with 8.8 percent at December 31, 2006. In 2007, the Company’s credit ratings were upgraded by Standard & Poor’s Ratings Services. Credit ratings assigned by various credit rating agencies reflect the rating agencies’ recognition of the Company’s industry-leading earnings performance and credit risk profile.
In concert with this financial performance, the Company achieved its objective of returning at least 80 percent of earnings to shareholders in the form of dividends and share repurchases by returning 111 percent of 2007 earnings to shareholders. In December 2007, the Company increased its cash dividend by 6.3 percent from the dividend rate of the fourth quarter of 2006. During 2007, the Company continued to repurchase common shares under the share repurchase program announced in August 2006.
The Company’s financial and strategic objectives are unchanged from those goals that have enabled it to deliver industry-leading financial performance. While net income declined in 2007 and is expected to grow somewhat moderately in 2008, the Company’s financial objectives are to achieve 10 percent long-term growth in earnings per common share and a return on common equity of at least 20 percent. The Company will continue to focus on effectively managing credit quality and maintaining an acceptable level of credit and earnings volatility. The Company intends to achieve these financial objectives by providing high-quality customer service and continuing to make strategic investments in businesses that diversify and generate fee-based revenues, enhance the Company’s distribution network or expand its product offerings. Finally, the Company continues to target an 80 percent return of earnings to its shareholders through dividends or share repurchases.
 
Earnings Summary The Company reported net income of $4.3 billion in 2007, or $2.43 per diluted common share, compared with $4.8 billion, or $2.61 per diluted common

18  U.S. BANCORP


 

share, in 2006. Return on average assets and return on average common equity were 1.93 percent and 21.3 percent, respectively, in 2007, compared with returns of 2.23 percent and 23.6 percent, respectively, in 2006. The decline in the Company’s net income was driven by several significant items discussed below and management’s decision to further invest in payment services businesses, geographical presence, technology, relationship management and other customer service initiatives and product innovations. Also, credit losses increased in 2007 due to loan portfolio growth, somewhat higher levels of nonperforming assets from stress in the mortgage lending and homebuilding industries and deterioration in consumer credit quality experienced throughout the banking industry.

 

Table 1    SELECTED FINANCIAL DATA
 
                                         
Year Ended December 31
                             
(Dollars and Shares in Millions, Except Per Share Data)   2007     2006     2005     2004     2003  
   
 
Condensed Income Statement
                                       
Net interest income (taxable-equivalent basis) (a)
  $ 6,764     $ 6,790     $ 7,088     $ 7,140     $ 7,217  
Noninterest income
    7,157       6,832       6,151       5,624       5,068  
Securities gains (losses), net
    15       14       (106 )     (105 )     245  
     
     
Total net revenue
    13,936       13,636       13,133       12,659       12,530  
Noninterest expense
    6,862       6,180       5,863       5,785       5,597  
Provision for credit losses
    792       544       666       669       1,254  
     
     
Income from continuing operations before taxes
    6,282       6,912       6,604       6,205       5,679  
Taxable-equivalent adjustment
    75       49       33       29       28  
Applicable income taxes
    1,883       2,112       2,082       2,009       1,941  
     
     
Income from continuing operations
    4,324       4,751       4,489       4,167       3,710  
Discontinued operations (after-tax)
                            23  
     
     
Net income
  $ 4,324     $ 4,751     $ 4,489     $ 4,167     $ 3,733  
     
     
Net income applicable to common equity
  $ 4,264     $ 4,703     $ 4,489     $ 4,167     $ 3,733  
     
     
Per Common Share
                                       
Earnings per share from continuing operations
  $ 2.46     $ 2.64     $ 2.45     $ 2.21     $ 1.93  
Diluted earnings per share from continuing operations
    2.43       2.61       2.42       2.18       1.92  
Earnings per share
    2.46       2.64       2.45       2.21       1.94  
Diluted earnings per share
    2.43       2.61       2.42       2.18       1.93  
Dividends declared per share
    1.625       1.390       1.230       1.020       .855  
Book value per share
    11.60       11.44       11.07       10.52       10.01  
Market value per share
    31.74       36.19       29.89       31.32       29.78  
Average common shares outstanding
    1,735       1,778       1,831       1,887       1,924  
Average diluted common shares outstanding
    1,758       1,804       1,857       1,913       1,936  
Financial Ratios
                                       
Return on average assets
    1.93 %     2.23 %     2.21 %     2.17 %     1.99 %
Return on average common equity
    21.3       23.6       22.5       21.4       19.2  
Net interest margin (taxable-equivalent basis) (a)
    3.47       3.65       3.97       4.25       4.49  
Efficiency ratio (b)
    49.3       45.4       44.3       45.3       45.6  
Average Balances
                                       
Loans
  $ 147,348     $ 140,601     $ 131,610     $ 120,670     $ 116,937  
Loans held for sale
    4,298       3,663       3,290       3,079       5,041  
Investment securities
    41,313       39,961       42,103       43,009       37,248  
Earning assets
    194,683       186,231       178,425       168,123       160,808  
Assets
    223,621       213,512       203,198       191,593       187,630  
Noninterest-bearing deposits
    27,364       28,755       29,229       29,816       31,715  
Deposits
    121,075       120,589       121,001       116,222       116,553  
Short-term borrowings
    28,925       24,422       19,382       14,534       10,503  
Long-term debt
    44,560       40,357       36,141       35,115       33,663  
Shareholders’ equity
    20,997       20,710       19,953       19,459       19,393  
Period End Balances
                                       
Loans
  $ 153,827     $ 143,597     $ 136,462     $ 124,941     $ 116,811  
Allowance for credit losses
    2,260       2,256       2,251       2,269       2,369  
Investment securities
    43,116       40,117       39,768       41,481       43,334  
Assets
    237,615       219,232       209,465       195,104       189,471  
Deposits
    131,445       124,882       124,709       120,741       119,052  
Long-term debt
    43,440       37,602       37,069       34,739       33,816  
Shareholders’ equity
    21,046       21,197       20,086       19,539       19,242  
Regulatory capital ratios
                                       
Tier 1 capital
    8.3 %     8.8 %     8.2 %     8.6 %     9.1 %
Total risk-based capital
    12.2       12.6       12.5       13.1       13.6  
Leverage
    7.9       8.2       7.6       7.9       8.0  
Tangible common equity
    5.1       5.5       5.9       6.4       6.5  
 
 
(a) Presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.

U.S. BANCORP  19


 

Total net revenue, on a taxable-equivalent basis for 2007, was $300 million (2.2 percent) higher than 2006, primarily reflecting a 4.8 percent increase in noninterest income, partially offset by a .4 percent decline in net interest income from a year ago. Noninterest income growth was driven primarily by organic growth in fee-based revenue of 8.6 percent, muted somewhat by $107 million of market valuation losses related to securities purchased during 2007 from certain money market funds managed by an affiliate. Refer to the “Market Risk Management” section for further information on securities purchased from certain money market funds managed by an affiliate. The fee-based revenue growth was further offset by the net favorable impact in 2006 of $142 million from several previously reported items, including a $50 million gain related to certain derivatives, $67 million of gains from the initial public offering and subsequent sale of equity interests in a cardholder association, a $52 million gain from the sale of a 401(k) defined contribution recordkeeping business and a $10 million gain related to a favorable settlement in the merchant processing business, offset by a $37 million reduction in mortgage banking revenue due principally to the adoption of fair value accounting for mortgage servicing rights (“MSRs”). The modest decline in net interest income reflected growth in average earning assets, more than offset by a lower net interest margin. In 2007, average earning assets increased $8.5 billion (4.5 percent), compared with 2006, primarily due to growth in total average loans of $6.7 billion (4.8 percent) and investment securities of $1.4 billion (3.4 percent). The net interest margin in 2007 was 3.47 percent, compared with 3.65 percent in 2006. The year-over-year decline in net interest margin reflected lower credit spreads given the competitive environment, a flat yield curve during early 2007 and lower net free funds relative to a year ago. In addition, funding costs were higher as rates paid on interest-bearing deposits increased and the funding mix continued to shift toward higher cost deposits and wholesale funding sources. These adverse factors impacting the net interest margin were offset somewhat by higher loan fees.
Total noninterest expense in 2007 increased $682 million (11.0 percent), compared with 2006, representing an efficiency ratio of 49.3 percent in 2007, compared with 45.4 percent in 2006. The increase included $330 million of charges recognized in 2007 for the Company’s proportionate share of a contingent obligation to indemnify Visa Inc. for certain litigation matters, including the settlement between Visa U.S.A. Inc. and American Express (collectively “Visa Charge”). For more information on the Visa Charge, refer to Note 21 of the Notes to Consolidated Financial Statements. Additionally, the increase in noninterest expense was caused by specific management decisions to make further investments in revenue-enhancing business initiatives designed to expand the Company’s geographical presence, strengthen corporate and commercial banking relationship management, capitalize on current product offerings, further improve technology and support innovation of products and services for customers. Growth in expenses from a year ago also included costs related to acquired payments businesses, investments in affordable housing and other tax-advantaged products, an increase in credit-related costs for other real estate owned and collection activities, and an increase in merchant airline processing expenses primarily due to sales volumes and business expansion with a major airline. The increase in these costs was partially offset by a $33 million debt prepayment charge recorded in 2006.
The provision for credit losses was $792 million for 2007, an increase of $248 million (45.6 percent) from 2006, reflecting growth in credit card accounts, increasing retail loan delinquencies and higher commercial and consumer credit losses from a year ago. In addition, the provision for credit losses in 2006 partially reflected the favorable residual impact on net charge-offs, principally for credit cards and other retail charge-offs, resulting from changes in bankruptcy laws enacted in the fourth quarter of 2005.
 
STATEMENT OF INCOME ANALYSIS
 
Net Interest Income Net interest income, on a taxable-equivalent basis, was $6.8 billion in 2007, $6.8 billion in 2006 and $7.1 billion in 2005. Average earning assets were $194.7 billion for 2007, compared with $186.2 billion and $178.4 billion for 2006 and 2005, respectively. The $8.5 billion (4.5 percent) increase in average earning assets for 2007, compared with 2006, was primarily driven by growth in total average loans of $6.7 billion (4.8 percent) and average investment securities of $1.4 billion (3.4 percent). The positive impact on net interest income from growth in earning assets was more than offset by a lower net interest margin from a year ago. The net interest margin in 2007 was 3.47 percent, compared with 3.65 percent and 3.97 percent in 2006 and 2005, respectively. The 18 basis point decline in 2007 net interest margin, compared with 2006, reflected the competitive business environment in 2007, the impact of a flat yield curve during the first half of the year and declining net free funds relative to a year ago. Compared with 2006, credit spreads tightened by approximately 6 basis points across most lending products due to competitive loan pricing. The reduction in net free funds was primarily due to a decline in non-interest bearing deposits, an investment in bank-owned life insurance, share repurchases through mid-third quarter 2007 and the impact of acquisitions. In addition, funding costs were higher as rates paid on interest-bearing deposits

20  U.S. BANCORP


 

 

Table 2    ANALYSIS OF NET INTEREST INCOME
                                         
                      2007
    2006
 
(Dollars in Millions)   2007     2006     2005     v 2006     v 2005  
Components of Net Interest Income
                                       
Income on earning assets (taxable-equivalent basis) (a)
  $ 13,309     $ 12,351     $ 10,584     $ 958     $ 1,767  
Expense on interest-bearing liabilities (taxable-equivalent basis)
    6,545       5,561       3,496       984       2,065  
                                         
Net interest income (taxable-equivalent basis)
  $ 6,764     $ 6,790     $ 7,088     $ (26 )   $ (298 )
                                         
                                         
Net interest income, as reported
  $ 6,689     $ 6,741     $ 7,055     $ (52 )   $ (314 )
                                         
                                         
Average Yields and Rates Paid
                                       
Earning assets yield (taxable-equivalent basis)
    6.84 %     6.63 %     5.93 %     .21 %     .70 %
Rate paid on interest-bearing liabilities (taxable-equivalent basis)
    3.91       3.55       2.37       .36       1.18  
                                         
Gross interest margin (taxable-equivalent basis)
    2.93 %     3.08 %     3.56 %     (.15 )%     (.48 )%
                                         
Net interest margin (taxable-equivalent basis)
    3.47 %     3.65 %     3.97 %     (.18 )%     (.32 )%
                                         
                                         
Average Balances
                                       
Investment securities
  $ 41,313     $ 39,961     $ 42,103     $ 1,352     $ (2,142 )
Loans
    147,348       140,601       131,610       6,747       8,991  
Earning assets
    194,683       186,231       178,425       8,452       7,806  
Interest-bearing liabilities
    167,196       156,613       147,295       10,583       9,318  
Net free funds (b)
    27,487       29,618       31,130       (2,131 )     (1,512 )
                                         
                                         
(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a federal tax rate of 35 percent.
(b) Represents noninterest-bearing deposits, allowance for loan losses, unrealized gain (loss) on available-for-sale securities, non-earning assets, other noninterest-bearing liabilities and equity.

increased and the funding mix continued to shift toward higher cost deposits and other funding sources. An increase in loan fees partially offset these factors. During the second half of 2007, the financial markets experienced significant turbulence as the impact of sub-prime mortgage delinquencies, defaults and foreclosures adversely affected investor confidence in a broad range of investment sectors and asset classes. In response to certain liquidity disruptions, the increasing risk of a credit crunch and other economic factors, the Federal Reserve Bank began to reduce interest rates beginning in September 2007, in an effort to stimulate the economy and restore investor confidence in the financial markets. Since that time, the target Federal Fund rate declined 100 basis points through year-end and another 125 basis points during January 2008. If the Federal Reserve Bank leaves rates unchanged from the current Federal Funds rate of 3.00 percent, the Company would expect the net interest margin to remain relatively stable at levels similar to 2007. This outlook is based on expectations that credit spreads will improve slightly, higher yielding retail loans will continue to grow, funding and liquidity in the overnight financial markets will normalize and the Company will resume its share repurchase program after the first quarter of 2008.
Average loans in 2007 were $6.7 billion (4.8 percent) higher than 2006, driven by growth in retail loans, commercial loans and residential mortgages of $3.5 billion (7.7 percent), $2.4 billion (5.2 percent) and $1.0 billion (4.9 percent), respectively, partially offset by a modest decline in commercial real estate loans of $.2 billion (.6 percent). The favorable change in average retail loans included strong growth in credit card balances of 25.4 percent as a result of growth in branch originated, co-branded and financial institution partner portfolios. Average installment loans, including automobile loans, increased 11.2 percent from a year ago. Average home equity loans increased at a more moderate growth rate of 5.1 percent, impacted somewhat by the changing trends in residential home valuations, while retail leasing balances declined approximately 8.4 percent from a year ago. The increase in average commercial loans was principally due to growth in corporate and industrial lending, equipment leasing and corporate payments product offerings. The decline in average commercial real estate balances reflected customer refinancing activities in the capital markets during the first half of 2007, a decision by the Company to reduce condominium construction financing and the impact of a economic slowdown in residential homebuilding since 2006.
Average investment securities were $1.4 billion (3.4 percent) higher in 2007, compared with 2006. The increase principally reflected higher balances in the municipal securities portfolio and the purchase in the fourth quarter of 2007 of securities from certain money market funds managed by an affiliate. This increase was partially offset by a reduction in mortgage-backed assets due to prepayments. Refer to the “Interest Rate Risk Management” section for further information on the sensitivity of net interest income to changes in interest rates.
Average noninterest-bearing deposits in 2007 were $1.4 billion (4.8 percent) lower than 2006. The year-over-

U.S. BANCORP  21


 

 

Table 3    NET INTEREST INCOME — CHANGES DUE TO RATE AND VOLUME (a)
 
                                                 
    2007 v 2006     2006 v 2005  
(Dollars in Millions)   Volume     Yield/Rate     Total     Volume     Yield/Rate     Total  
                                                 
Increase (decrease) in
                                               
Interest Income
                                               
Investment securities
  $ 70     $ 106     $ 176     $ (100 )   $ 201     $ 101  
Loans held for sale
    41             41       20       35       55  
                                                 
Loans
                                               
Commercial
    155       19       174       164       304       468  
Commercial real estate
    (12 )     (13 )     (25 )     51       249       300  
Residential mortgages
    60       70       130       167       56       223  
Retail
    279       199       478       167       410       577  
                                                 
Total loans
    482       275       757       549       1,019       1,568  
Other earning assets
    (22 )     6       (16 )     45       (2 )     43  
                                                 
Total earning assets
    571       387       958       514       1,253       1,767  
Interest Expense
                                               
Interest-bearing deposits
                                               
Interest checking
    25       93       118       5       93       98  
Money market savings
    (28 )     110       82       (32 )     243       211  
Savings accounts
    (1 )     1             (1 )     5       4  
Time certificates of deposit less than $100,000
    34       86       120       17       118       135  
Time deposits greater than $100,000
    2       43       45       51       331       382  
                                                 
Total interest-bearing deposits
    32       333       365       40       790       830  
Short-term borrowings
    229       60       289       179       373       552  
Long-term debt
    201       129       330       145       538       683  
                                                 
Total interest-bearing liabilities
    462       522       984       364       1,701       2,065  
                                                 
Increase (decrease) in net interest income
  $ 109     $ (135 )   $ (26 )   $ 150     $ (448 )   $ (298 )
                                                 
                                                 
(a) This table shows the components of the change in net interest income by volume and rate on a taxable-equivalent basis utilizing a tax rate of 35 percent. 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. The change in interest not solely due to changes in volume or rates has been allocated on a pro-rata basis to volume and yield/rate.

year decrease reflected a decline in personal and business demand deposits, partially offset by higher trust deposits. The decline in personal demand deposit balances occurred within the Consumer Banking business line. The decline in business demand deposits occurred within most business lines as business customers utilized deposit balances to fund business growth and meet other liquidity requirements.
Average total savings products increased $.9 billion (1.7 percent) in 2007, compared with 2006, as increases in interest checking balances more than offset declines in money market and savings balances, primarily within Consumer Banking. Interest checking balances increased $2.6 billion (10.9 percent) in 2007, compared with 2006, due to higher broker-dealer, government and institutional trust balances. Average money market savings balances declined year-over-year by $1.3 billion (5.0 percent) as a result of the Company’s deposit pricing decisions for money market products in relation to other fixed-rate deposit products. During 2007, a portion of branch-based money market savings accounts migrated to fixed-rate time certificates, as customers took advantage of higher interest rates for these products.
Average time certificates of deposit less than $100,000 were $.9 billion (6.5 percent) higher in 2007, compared with 2006. The year-over-year growth in time certificates less than $100,000 was primarily due to branch-based time deposits, reflecting customer migration to higher rate deposit products and pricing decisions for these products. Average time deposits greater than $100,000 were basically unchanged in 2007, compared with 2006. Time deposits greater than $100,000 are largely viewed as purchased funds and are managed at levels deemed appropriate, given alternative funding sources.
The decline in net interest income in 2006, compared with 2005, reflected growth in average earning assets, more than offset by a lower net interest margin. The $7.8 billion (4.4 percent) increase in average earning assets for 2006, compared with 2005, was primarily driven by growth in average loans, partially offset by a decrease in average investment securities. The 32 basis point decline in net interest margin in 2006, compared with 2005, reflected the competitive lending environment and the impact of a flatter yield curve. The net interest margin also declined due to funding incremental asset growth with higher cost wholesale funding, share repurchases and asset/liability decisions. An

22  U.S. BANCORP


 

increase in the margin benefit of net free funds and loan fees partially offset these factors.
Average loans in 2006 were higher by $9.0 billion (6.8 percent), compared with 2005, driven by growth in residential mortgages, commercial loans and retail loans. Average investment securities were $2.1 billion (5.1 percent) lower in 2006, compared with 2005, principally reflecting asset/liability management decisions to reduce the focus on residential mortgage-backed assets given the rising interest rate environment in 2006 and the mix of loan growth experienced by the Company. Average noninterest-bearing deposits in 2006 were $.5 billion (1.6 percent) lower than in 2005. The year-over-year decrease reflected a decline in personal and business demand deposits, partially offset by higher corporate trust deposits resulting from acquisitions. Average total savings products declined $2.1 billion (3.6 percent) in 2006, compared with 2005, due to reductions in average money market savings and other savings accounts, partially offset by an increase in interest checking balances. Average money market savings account balances declined from 2005 to 2006 by $2.6 billion (9.0 percent), primarily due to a decline in branch-based balances. The decline was primarily the result of the Company’s deposit pricing decisions for money market products in relation to other fixed-rate deposit products offered. During 2006, a portion of branch-based money market savings balances migrated to fixed-rate time certificates to take advantage of higher interest rates for these products. Average time certificates of deposit less than $100,000 and average time deposits greater than $100,000 grew $.6 billion (4.3 percent) and $1.6 billion (7.7 percent), respectively, in 2006 compared with 2005, primarily driven by the migration of money market balances within the Consumer Banking and Wealth Management & Securities Services business lines, as customers migrated balances to higher rate deposits.
 
Provision for Credit Losses The provision for credit losses is recorded to bring the allowance for credit losses to a level deemed appropriate by management, based on factors discussed in the “Analysis and Determination of Allowance for Credit Losses” section.
In 2007, the provision for credit losses was $792 million, compared with $544 million and $666 million in 2006 and 2005, respectively. The $248 million (45.6 percent) increase in the provision for credit losses in 2007 reflected growth in credit card accounts, increasing loan delinquencies and nonperforming loans, and higher commercial and consumer credit losses from a year ago. In addition, the provision for 2006 partially reflected the favorable residual impact on net charge-offs, principally for credit cards and other retail charge-offs, resulting from changes in bankruptcy laws enacted in the fourth quarter of 2005. Nonperforming loans increased $87 million (18.5 percent) from December 31, 2006, as a result of stress in condominium and other residential home construction. Accruing loans ninety days past due increased $235 million (67.3 percent), primarily related to residential mortgages, credit cards and home equity loans. Restructured loans that continue to accrue interest increased $127 million (31.3 percent), reflecting the impact of programs for certain credit card and sub-prime residential mortgage customers in light of current economic conditions. Net charge-offs increased $248 million (45.6 percent) from 2006, primarily due to an anticipated increase in consumer charge-offs principally related to growth in credit card balances, and somewhat higher commercial loan net charge-offs. In addition, net charge-offs were lower during 2006, reflecting the beneficial impact of bankruptcy legislation that went into effect during the fourth quarter of 2005.
The $122 million (18.3 percent) decrease in the provision for credit losses in 2006, compared with 2005, reflected stable credit quality in 2006 and the adverse impact in the fourth quarter of 2005 on net charge-offs from changes in bankruptcy laws enacted in 2005. Nonperforming loans, principally reflecting favorable changes in the quality of commercial loans, declined $74 million from December 31, 2005. However, accruing loans ninety days past due and restructured loans that continue to accrue interest increased by $186 million over this same period. Net charge-offs declined $141 million from 2005, principally due to the impact of changes in bankruptcy laws that went into effect during the fourth quarter of 2005. In 2005, approximately $64 million of incremental net charge-offs occurred due to the change in bankruptcy laws and a separate policy change related to overdraft balances. As a result of these changes, bankruptcy charge-offs were lower in 2006, while customers experiencing credit deterioration migrated further through contractual delinquencies. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.
 
Noninterest Income Noninterest income in 2007 was $7.2 billion, compared with $6.8 billion in 2006 and $6.0 billion in 2005. The $326 million (4.8 percent) increase in 2007 over 2006, was driven by strong organic fee-based revenue growth (8.6 percent) in most fee categories, offset somewhat by the $107 million in valuation losses related to securities purchased from certain money market funds managed by an affiliate. Additionally, 2006 included several significant items representing approximately $142 million of incremental revenue, including: higher trading income related to gains from the termination of certain interest rate swaps, equity gains from the initial public offering and

U.S. BANCORP  23


 

 

Table 4    NONINTEREST INCOME
                                     
                  2007
    2006
 
(Dollars in Millions)   2007   2006   2005     v 2006     v 2005  
Credit and debit card revenue
  $ 949   $ 800   $ 713       18.6 %     12.2 %
Corporate payment products revenue
    631     557     488       13.3       14.1  
ATM processing services
    245     243     229       .8       6.1  
Merchant processing services
    1,101     963     770       14.3       25.1  
Trust and investment management fees
    1,339     1,235     1,009       8.4       22.4  
Deposit service charges
    1,058     1,023     928       3.4       10.2  
Treasury management fees
    472     441     437       7.0       .9  
Commercial products revenue
    433     415     400       4.3       3.8  
Mortgage banking revenue
    259     192     432       34.9       (55.6 )
Investment products fees and commissions
    146     150     152       (2.7 )     (1.3 )
Securities gains (losses), net
    15     14     (106 )     7.1       *  
Other
    524     813     593       (35.5 )     37.1  
                                     
Total noninterest income
  $ 7,172   $ 6,846   $ 6,045       4.8 %     13.3 %
                                     
                                     
* Not meaningful

subsequent sale of the equity interests in a cardholder association, a gain on the sale of a 401(k) defined contribution recordkeeping business, and a favorable settlement in the merchant processing business, offset by lower mortgage banking revenue due to adopting fair value accounting standards for MSRs.
The growth in credit and debit card revenue of 18.6 percent was primarily driven by an increase in customer accounts and higher customer transaction volumes from a year ago. The increase coincides with the strong organic growth in credit card balances during the year. The corporate payment products revenue growth of 13.3 percent reflected growth in customer sales volumes and card usage, and the impact of an acquired business. Merchant processing services revenue was 14.3 percent higher in 2007, compared with 2006, reflecting an increase in customers and sales volumes on both a domestic and global basis. Trust and investment management fees increased 8.4 percent primarily due to core account growth and favorable equity market conditions during the year. Deposit service charges were 3.4 percent higher year-over-year due primarily to increased transaction-related fees and the impact of continued growth in net new checking accounts. This growth in deposit account-related revenue was muted somewhat as service charges, traditionally reflected in this fee category, continued to migrate to yield-related loan fees as customers utilized new consumer products. Treasury management fees increased 7.0 percent over the prior year due, in part, to new customer account growth, new product offerings and higher transaction volumes. Commercial products revenue increased 4.3 percent over the prior year due to higher syndication fees, and foreign exchange and commercial leasing revenue. Mortgage banking revenue increased 34.9 percent in 2007, compared with 2006, due to an increase in mortgage originations and servicing income, partially offset by an adverse net change in the valuation of MSRs and related economic hedging activities given changing interest rates. In 2006, mortgage banking revenue included a valuation loss of $37 million related to the adoption of fair value accounting for MSRs.
Growth in these fee-based revenue categories was partially offset by slightly lower investment products fees and commissions and a decline in other income. The 35.5 percent reduction of other revenue in 2007, compared with 2006, included $107 million in valuation losses recognized in 2007, related to securities purchased from certain money market funds managed by an affiliate. In addition, 2006 results reflected a $52 million gain on the sale of a 401(k) defined contribution recordkeeping business, $67 million of gains on the initial public offering and subsequent sale of the equity interests in a cardholder association, a $10 million favorable legal settlement within the merchant processing business and a $50 million trading gain related to terminating certain interest rate swaps.
The $801 million (13.3 percent) increase in 2006 over 2005, was driven by organic business growth in several fee categories, expansion in trust and payment processing businesses, a favorable change of $120 million in net securities gains (losses) and other gains recorded in 2006 of $179 million. These included the gains from terminated interest rate swaps, equity gains from the initial public offering and subsequent sale of the equity interests in a cardholder association, gains from the sale of a 401(k) defined contribution recordkeeping business and a favorable legal settlement in the merchant processing business. The growth in credit and debit card revenue was principally driven by higher customer transaction sales volumes and fees related to cash advances, balance transfers and over-limit positions. The corporate payment products revenue growth reflected organic growth in sales volumes and card usage, enhancements in product pricing and acquired business expansion. ATM processing services revenue was higher due

24  U.S. BANCORP


 

to an ATM business acquisition in May 2005. Merchant processing services revenue reflected an increase in sales volume driven by acquisitions, higher same store sales, new merchant signings and associated equipment fees. The increase in trust and investment management fees was primarily due to organic customer account growth, improving asset management fees given favorable equity market conditions, and incremental revenue generated by acquisitions of corporate and institutional trust businesses. Deposit service charges grew due to increased transaction-related fees and the impact of net new checking accounts. Mortgage banking revenue declined primarily due to the adoption of fair value accounting for MSRs. Other income increased primarily due to the notable asset gains previously discussed.
 
Noninterest Expense Noninterest expense in 2007 was $6.9 billion, compared with $6.2 billion and $5.9 billion in 2006 and 2005, respectively. The Company’s efficiency ratio increased to 49.3 percent in 2007 from 45.4 percent in 2006. The change in the efficiency ratio and the $682 million (11.0 percent) increase in noninterest expenses in 2007, compared with 2006, was principally due to a $330 million Visa Charge recognized in 2007 for the contingent obligation for certain Visa U.S.A. Inc. litigation matters. The remaining expense increase was principally related to higher credit costs, incremental growth in tax-advantaged projects or specific management investment in revenue-enhancing business initiatives designed to expand the Company’s geographical presence, strengthen corporate and commercial banking relationship management, capitalize on current product offerings, further improve technology and support innovation of products and services for customers. The impact of these factors was reflected in various expense categories.
Compensation expense was 5.1 percent higher year-over-year primarily due to investment in personnel within the branch distribution network, Wholesale Banking and Payment Services in connection with various business initiatives, including the Company’s PowerBank initiative with Consumer Banking, expanding its corporate banking team, enhancing relationship management processes and supporting organic business growth and acquired businesses. Employee benefits expense increased 2.7 percent year-over-year as higher medical costs were partially offset by lower pension costs. Net occupancy and equipment expense increased 3.9 percent primarily due to bank acquisitions and investments in branches. Professional services expense was 17.1 percent higher due to revenue enhancing business initiatives, higher litigation-related costs, and higher legal fees associated with the establishment of a bank charter in Ireland to support pan-European payment processing. Marketing and business development expense increased 11.5 percent over the prior year due to higher customer promotion, solicitation and advertising activities. Postage, printing and supplies increased 6.8 percent due to increasing customer promotional mailings and changes in postal rates from a year ago. Other intangibles expense increased 5.9 percent year-over-year due to recent acquisitions in Consumer Banking, Wealth Management & Securities Services and Payment Services. Other expense increased $444 million (46.6 percent) over the prior year primarily due to the $330 million Visa Charge, higher costs related to affordable housing and other tax-advantaged investments, an increase in merchant processing expenses to support organic growth in Payment Services, integration expenses related to recent acquisitions and higher credit-related costs for other real estate owned and loan collection activities. These increases were partially offset by $33 million of debt prepayment charges recorded during 2006.
The $317 million (5.4 percent) increase in noninterest expenses in 2006, compared with 2005, was primarily driven by incremental operating and business integration costs associated with acquisitions, increased pension costs and higher expense related to certain tax-advantaged

 

Table 5    NONINTEREST EXPENSE
                                         
                      2007
    2006
 
(Dollars in Millions)   2007     2006     2005     v 2006     v 2005  
Compensation
  $ 2,640     $ 2,513     $ 2,383       5.1 %     5.5 %
Employee benefits
    494       481       431       2.7       11.6  
Net occupancy and equipment
    686       660       641       3.9       3.0  
Professional services
    233       199       166       17.1       19.9  
Marketing and business development
    242       217       235       11.5       (7.7 )
Technology and communications
    512       505       466       1.4       8.4  
Postage, printing and supplies
    283       265       255       6.8       3.9  
Other intangibles
    376       355       458       5.9       (22.5 )
Debt prepayment
          33       54       *       (38.9 )
Other (a)
    1,396       952       774       46.6       23.0  
                                         
Total noninterest expense
  $ 6,862     $ 6,180     $ 5,863       11.0 %     5.4 %
                                         
                                         
Efficiency ratio (b)
    49.3 %     45.4 %     44.3 %                
                                         
                                         
(a) Included in other expense in 2007 was a $330 million charge related to the Company’s contingent obligation to Visa U.S.A. Inc for indemnification of certain litigation matters.
(b) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.
* Not meaningful

U.S. BANCORP  25


 

investments. This was partially offset by a reduction in other intangibles expense and lower debt prepayment charges in 2006. Compensation expense was higher primarily due to corporate and institutional trust and payments processing acquisitions and other growth initiatives undertaken by the Company. Employee benefits increased primarily as a result of higher pension expense. Net occupancy and equipment expense increased primarily due to business expansion. Professional services expense was higher primarily due to revenue enhancement-related business initiatives and higher legal costs. Technology and communications expense rose, reflecting higher outside data processing expense principally associated with expanding a prepaid gift card program and acquisitions. Other intangibles expense decreased in connection with the adoption of fair value accounting for MSRs in 2006, and the impact of eliminating the amortization and related impairments or reparations of these servicing rights. Debt prepayment charges declined from 2005 and were related to longer-term callable debt that was prepaid by the Company as part of asset/liability decisions to improve funding costs and reposition the Company’s interest rate risk position. Other expense increased primarily due to increased investments in tax-advantaged projects and business integration costs.
 
Pension Plans Because of the long-term nature of pension plans, the administration and accounting for pensions is complex and can be impacted by several factors, including investment and funding policies, accounting methods and the plans’ actuarial assumptions. Refer to Note 16 of the Notes to Consolidated Financial Statements for further information on funding practices, investment policies and asset allocation strategies.
The Company’s pension accounting policy follows generally accepted accounting standards and reflects the long-term nature of benefit obligations and the investment horizon of plan assets. Actuarial gains and losses include the impact of plan amendments and various unrecognized gains and losses related to differences in actual plan experience compared with actuarial assumptions, which are deferred and amortized over the future service periods of active employees. The actuarially derived market-related value utilized to determine the expected return on plan assets is based on fair value, adjusted for the difference between expected returns and actual performance of plan assets. The unrealized difference between actual experience and expected returns is included in the actuarially derived market-related value and amortized as a component of pension expense ratably over a five-year period. At September 30, 2007, this accumulated unrecognized gain approximated $358 million, compared with $249 million at September 30, 2006. The impact on pension expense of the unrecognized asset gains will incrementally decrease pension costs in each year from 2008 to 2012, by approximately $38 million, $29 million, $24 million, $15 million and $12 million, respectively. This assumes that the performance of plan assets in 2008 and beyond equals the assumed long-term rate of return (“LTROR”). Actual results will vary depending on the performance of plan assets and changes to assumptions required in the future. Refer to Note 1 of the Notes to Consolidated Financial Statements for further discussion of the Company’s accounting policies for pension plans.
In 2008, the Company anticipates that pension costs will decrease by approximately $36 million. The decrease will be primarily driven by utilizing a higher discount rate and amortization of unrecognized actuarial gains from prior years, accounting for approximately $14 million and $37 million of the anticipated decrease, respectively, partially offset by a $15 million increase related to a change in the assumption of future salary growth.
Due to the complexity of forecasting pension plan activities, the accounting method utilized for pension plans, management’s ability to respond to factors impacting the plans and the hypothetical nature of this information, the actual changes in periodic pension costs could be different than the information provided in the sensitivity analysis below.
 
Note 16 of the Notes to Consolidated Financial Statements provides a summary of the significant pension plan assumptions. Because of the subjective nature of plan assumptions, a sensitivity analysis to hypothetical changes in the LTROR and the discount rate is provided below:
                         
        Base
   
LTROR (Dollars in Millions)   7.9%   8.9%   9.9%
 
Incremental benefit (cost)
  $ (25 )   $     $ 25  
Percent of 2007 net income
    (.36 )%     %     .36 %
 
 
        Base
   
Discount Rate (Dollars in Millions)   5.3%   6.3%   7.3%
 
Incremental benefit (cost)
  $ (56 )   $     $ 42  
Percent of 2007 net income
    (.80 )%     %     .60 %
 
 
 
Income Tax Expense The provision for income taxes was $1,883 million (an effective rate of 30.3 percent) in 2007, compared with $2,112 million (an effective rate of 30.8 percent) in 2006 and $2,082 million (an effective rate of 31.7 percent) in 2005. The decrease in the effective tax rate from 2006 primarily reflected higher tax exempt income from investment securities and insurance products as well as incremental tax credits from affordable housing and other tax-advantaged investments.
Included in 2006 was a reduction of income tax expense of $61 million related to the resolution of federal income tax examinations covering substantially all of the Company’s legal entities for all years through 2004 and $22 million related to certain state examinations. Included in the determination of income taxes for 2005 was a reduction

26  U.S. BANCORP


 

of income tax expense of $94 million related to the resolution of income tax examinations. The Company anticipates that its effective tax rate for the foreseeable future will remain stable relative to the full year rate for 2007 of 30.3 percent of pretax earnings.
For further information on income taxes, refer to Note 18 of the Notes to Consolidated Financial Statements.
 
BALANCE SHEET ANALYSIS
 
Average earning assets were $194.7 billion in 2007, compared with $186.2 billion in 2006. The increase in average earning assets of $8.5 billion (4.5 percent) was due to growth in total average loans (4.8 percent), investment securities (3.4 percent) and loans held-for-sale (17.3 percent), partially offset by slightly lower trading and other earning assets. The change in total average earning assets was principally funded by increases in wholesale funding.
For average balance information, refer to Consolidated Daily Average Balance Sheet and Related Yields and Rates on pages 112 and 113.
 
Loans The Company’s loan portfolio was $153.8 billion at December 31, 2007, an increase of $10.2 billion (7.1 percent) from December 31, 2006. The increase was driven by growth in all major loan categories with strong growth in commercial loans (10.6 percent), retail loans (6.9 percent), and residential mortgages (7.0 percent) and more moderate

 

Table 6    LOAN PORTFOLIO DISTRIBUTION
 
                                                                                 
    2007     2006     2005     2004     2003  
          Percent
          Percent
          Percent
          Percent
          Percent
 
At December 31 (Dollars in Millions)   Amount     of Total     Amount     of Total     Amount     of Total     Amount     of Total     Amount     of Total  
Commercial
                                                                               
Commercial
  $ 44,832       29.1 %   $ 40,640       28.3 %   $ 37,844       27.7 %   $ 35,210       28.2 %   $ 33,536       28.7 %
Lease financing
    6,242       4.1       5,550       3.9       5,098       3.7       4,963       4.0       4,990       4.3  
                                                                                 
Total commercial
    51,074       33.2       46,190       32.2       42,942       31.4       40,173       32.2       38,526       33.0  
Commercial Real Estate
                                                                               
Commercial mortgages
    20,146       13.1       19,711       13.7       20,272       14.9       20,315       16.3       20,624       17.6  
Construction and development
    9,061       5.9       8,934       6.2       8,191       6.0       7,270       5.8       6,618       5.7  
                                                                                 
Total commercial real estate
    29,207       19.0       28,645       19.9       28,463       20.9       27,585       22.1       27,242       23.3  
Residential Mortgages
                                                                               
Residential mortgages
    17,099       11.1       15,316       10.7       14,538       10.7       9,722       7.8       7,332       6.3  
Home equity loans, first liens
    5,683       3.7       5,969       4.1       6,192       4.5       5,645       4.5       6,125       5.2  
                                                                                 
Total residential mortgages
    22,782       14.8       21,285       14.8       20,730       15.2       15,367       12.3       13,457       11.5  
Retail
                                                                               
Credit card
    10,956       7.1       8,670       6.0       7,137       5.2       6,603       5.3       5,933       5.1  
Retail leasing
    5,969       3.9       6,960       4.9       7,338       5.4       7,166       5.7       6,029       5.2  
Home equity and second mortgages
    16,441       10.7       15,523       10.8       14,979       11.0       14,851       11.9       13,210       11.3  
Other retail
                                                                               
Revolving credit
    2,731       1.8       2,563       1.8       2,504       1.8       2,541       2.0       2,540       2.2  
Installment
    5,246       3.4       4,478       3.1       3,582       2.6       2,767       2.2       2,380       2.0  
Automobile
    8,970       5.8       8,693       6.1       8,112       6.0       7,419       5.9       7,165       6.1  
Student
    451       .3       590       .4       675       .5       469       .4       329       .3  
                                                                                 
Total other retail
    17,398       11.3       16,324       11.4       14,873       10.9       13,196       10.5       12,414       10.6  
                                                                                 
Total retail
    50,764       33.0       47,477       33.1       44,327       32.5       41,816       33.4       37,586       32.2  
                                                                                 
Total loans
  $ 153,827       100.0 %   $ 143,597       100.0 %   $ 136,462       100.0 %   $ 124,941       100.0 %   $ 116,811       100.0 %
                                                                                 
                                                                                 
 

Table 7    SELECTED LOAN MATURITY DISTRIBUTION
                           
          Over One
       
    One Year
    Through
  Over Five
   
December 31, 2007 (Dollars in Millions)   or Less     Five Years   Years   Total
 
 
Commercial
  $ 21,999     $ 25,092   $ 3,983   $ 51,074
Commercial real estate
    9,308       13,182     6,717     29,207
Residential mortgages
    899       2,540     19,343     22,782
Retail
    18,661       18,607     13,496     50,764
     
     
Total loans
  $ 50,867     $ 59,421   $ 43,539   $ 153,827
Total of loans due after one year with
                         
Predetermined interest rates
                      $ 52,001
Floating interest rates
                      $ 50,959
 
 

U.S. BANCORP  27


 

growth in commercial real estate loans (2.0 percent). Table 6 provides a summary of the loan distribution by product type, while Table 7 provides a summary of selected loan maturity distribution by loan category. Average total loans increased $6.7 billion (4.8 percent) in 2007, compared with 2006. The increase was due to strong growth in retail loans and moderate growth in commercial loans and residential mortgages, while average commercial real estate loans were essentially unchanged from a year ago.
 
Commercial Commercial loans, including lease financing, increased $4.9 billion (10.6 percent) as of December 31, 2007, compared with December 31, 2006. During 2007, the Company made certain personnel investments and organizational changes to better emphasize corporate banking, with an enhanced focus on relationship banking. As a result of these business initiatives and changing economic conditions, the Company experienced growth in commercial loans driven by new customer relationships, utilization of lines of credit and growth in commercial leasing and corporate payment card balances. Average commercial loans increased $2.4 billion (5.2 percent) in 2007, compared with 2006, primarily due to these initiatives and an increase in commercial loan demand driven by general economic conditions in 2007.
Table 8 provides a summary of commercial loans by industry and geographical locations.
 
Commercial Real Estate The Company’s portfolio of commercial real estate loans, which includes commercial mortgages and construction loans, was essentially unchanged from a year ago. Total commercial real estate balances increased $.6 billion (2.0 percent) at December 31, 2007, compared with December 31, 2006. Average commercial real estate loans decreased $.2 billion (.6 percent) in 2007, compared with 2006. Since 2006, growth in commercial real estate balances has been limited due to capital market

 

Table 8    COMMERCIAL LOANS BY INDUSTRY GROUP AND GEOGRAPHY
 
                               
    December 31, 2007     December 31, 2006  
Industry Group (Dollars in Millions)   Loans     Percent     Loans   Percent  
Consumer products and services
  $ 9,576       18.8 %   $ 9,303     20.1 %
Financial services
    7,693       15.1       6,375     13.8  
Commercial services and supplies
    4,144       8.1       4,645     10.1  
Capital goods
    3,982       7.8       3,872     8.4  
Property management and development
    3,239       6.3       3,104     6.7  
Agriculture
    2,746       5.4       2,436     5.3  
Healthcare
    2,521       4.9       2,328     5.0  
Paper and forestry products, mining and basic materials
    2,289       4.5       2,190     4.7  
Consumer staples
    2,197       4.3       1,749     3.8  
Transportation
    1,897       3.7       1,662     3.6  
Private investors
    1,685       3.3       1,565     3.4  
Energy
    1,576       3.1       1,104     2.4  
Information technology
    1,085       2.1       821     1.8  
Other
    6,444       12.6       5,036     10.9  
                               
Total
  $ 51,074       100.0 %   $ 46,190     100.0 %
                               
                               
Geography
                             
                               
California
  $ 5,091       10.0 %   $ 4,112     8.9 %
Colorado
    2,490       4.9       2,958     6.4  
Illinois
    2,899       5.7       2,789     6.0  
Minnesota
    6,254       12.2       6,842     14.8  
Missouri
    1,690       3.3       1,862     4.0  
Ohio
    2,554       5.0       2,672     5.8  
Oregon
    2,021       4.0       1,870     4.0  
Washington
    2,364       4.6       2,212     4.8  
Wisconsin
    2,337       4.6       2,295     5.0  
Iowa, Kansas, Nebraska, North Dakota, South Dakota
    5,150       10.1       4,308     9.3  
Arkansas, Indiana, Kentucky, Tennessee
    2,066       4.0       2,070     4.5  
Idaho, Montana, Wyoming
    1,033       2.0       1,015     2.2  
Arizona, Nevada, Utah
    1,947       3.8       1,602     3.5  
                               
Total banking region
    37,896       74.2       36,607     79.2  
Outside the Company’s banking region
    13,178       25.8       9,583     20.8  
                               
Total
  $ 51,074       100.0 %   $ 46,190     100.0 %
                               
                               

28  U.S. BANCORP


 

 

Table 9    COMMERCIAL REAL ESTATE BY PROPERTY TYPE AND GEOGRAPHY
                               
    December 31, 2007     December 31, 2006  
Property Type (Dollars in Millions)   Loans     Percent     Loans   Percent  
Business owner occupied
  $ 10,340       35.4 %   $ 10,027     35.0 %
Commercial property
                             
Industrial
    818       2.8       939     3.3  
Office
    2,424       8.3       2,226     7.8  
Retail
    2,979       10.2       2,732     9.5  
Other commercial
    3,184       10.9       2,745     9.6  
Homebuilders
                             
Condominiums
    1,081       3.7       1,117     3.9  
Other residential
    3,008       10.3       3,440     12.0  
Multi-family
    4,001       13.7       3,850     13.4  
Hotel/motel
    1,051       3.6       1,126     3.9  
Health care facilities
    321       1.1       443     1.6  
                               
Total
  $ 29,207       100.0 %   $ 28,645     100.0 %
                               
 
Geography
                             
                               
California
  $ 5,783       19.8 %   $ 6,044     21.1 %
Colorado
    1,577       5.4       1,404     4.9  
Illinois
    1,110       3.8       1,060     3.7  
Minnesota
    1,723       5.9       1,833     6.4  
Missouri
    1,577       5.4       1,461     5.1  
Ohio
    1,314       4.5       1,375     4.8  
Oregon
    1,840       6.3       1,747     6.1  
Washington
    2,950       10.1       3,065     10.7  
Wisconsin
    1,460       5.0       1,547     5.4  
Iowa, Kansas, Nebraska, North Dakota, South Dakota
    2,103       7.2       1,948     6.8  
Arkansas, Indiana, Kentucky, Tennessee
    1,402       4.8       1,404     4.9  
Idaho, Montana, Wyoming
    1,227       4.2       1,060     3.7  
Arizona, Nevada, Utah
    2,629       9.0       2,406     8.4  
                               
Total banking region
    26,695       91.4       26,354     92.0  
Outside the Company’s banking region
    2,512       8.6       2,291     8.0  
                               
Total
  $ 29,207       100.0 %   $ 28,645     100.0 %
                               
 

conditions in early 2007 that enabled customer refinancing of projects, a management decision to reduce condominium construction financing in selected markets, and a slowdown in residential homebuilding impacting construction lending. During the fourth quarter of 2007, the Company experienced growth of 2.4 percent in commercial real estate loans as developers sought bank financing as liquidity disruptions in the capital markets occurred. Table 9 provides a summary of commercial real estate by property type and geographical locations.
The Company maintains the real estate construction designation until the completion of the construction phase and, if retained, the loan is reclassified to the commercial mortgage category. Approximately $107 million of construction loans were permanently financed and reclassified to the commercial mortgage loan category in 2007. At December 31, 2007, $231 million of tax-exempt industrial development loans were secured by real estate. The Company’s commercial real estate mortgages and construction loans had unfunded commitments of $8.9 billion at December 31, 2007 and 2006. 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 were included in the commercial loan category and totaled $1.8 billion at December 31, 2007.
 
Residential Mortgages Residential mortgages held in the loan portfolio at December 31, 2007, increased $1.5 billion (7.0 percent) from December 31, 2006. The growth was principally the result of an increase in consumer finance originations during the year. The majority of loans retained in the portfolio represented originations to customers with better than sub-prime credit risk ratings. Average residential mortgages increased 1.0 billion (4.9 percent) in 2007, compared with 2006. The growth in average residential mortgages from the consumer finance distribution channel was offset somewhat by lower balances from traditional branch and mortgage banking channels.
 
Retail Total retail loans outstanding, which include credit card, retail leasing, home equity and second mortgages and other retail loans, increased $3.3 billion (6.9 percent) at December 31, 2007, compared with December 31, 2006.

U.S. BANCORP  29


 

 

Table 10    RESIDENTIAL MORTGAGES AND RETAIL LOANS BY GEOGRAPHY
                             
    December 31, 2007     December 31, 2006  
(Dollars in Millions)   Loans   Percent     Loans   Percent  
Residential Mortgages
                           
California
  $ 1,426     6.2 %   $ 1,356     6.4 %
Colorado
    1,566     6.9       1,480     6.9  
Illinois
    1,450     6.3       1,359     6.4  
Minnesota
    2,292     10.1       2,287     10.7  
Missouri
    1,562     6.9       1,516     7.1  
Ohio
    1,605     7.0       1,529     7.2  
Oregon
    968     4.2       952     4.5  
Washington
    1,266     5.6       1,273     6.0  
Wisconsin
    1,142     5.0       1,100     5.2  
Iowa, Kansas, Nebraska, North Dakota, South Dakota
    1,502     6.6       1,512     7.1  
Arkansas, Indiana, Kentucky, Tennessee
    1,886     8.3       1,676     7.9  
Idaho, Montana, Wyoming
    521     2.3       470     2.2  
Arizona, Nevada, Utah
    1,267     5.6       1,168     5.5  
                             
Total banking region
    18,453     81.0       17,678     83.1  
Outside the Company’s banking region
    4,329     19.0       3,607     16.9  
                             
Total
  $ 22,782     100.0 %   $ 21,285     100.0 %
                             
                             
Retail Loans
                           
California
  $ 6,261     12.3 %   $ 5,769     12.1 %
Colorado
    2,427     4.8       2,284     4.8  
Illinois
    2,614     5.1       2,429     5.1  
Minnesota
    5,247     10.3       5,075     10.7  
Missouri
    2,522     5.0       2,464     5.2  
Ohio
    3,276     6.5       3,224     6.8  
Oregon
    2,244     4.4       2,024     4.3  
Washington
    2,492     4.9       2,278     4.8  
Wisconsin
    2,529     5.0       2,454     5.2  
Iowa, Kansas, Nebraska, North Dakota, South Dakota
    3,203     6.3       3,096     6.5  
Arkansas, Indiana, Kentucky, Tennessee
    3,748     7.4       3,588     7.6  
Idaho, Montana, Wyoming
    1,564     3.1       1,339     2.8  
Arizona, Nevada, Utah
    2,231     4.4       1,964     4.1  
                             
Total banking region
    40,358     79.5       37,988     80.0  
Outside the Company’s banking region
    10,406     20.5       9,489     20.0  
                             
Total
  $ 50,764     100.0 %   $ 47,477     100.0 %
                             
                             

The increase was primarily driven by growth in credit card, installment and home equity loans, partially offset by decreases in retail leasing and student loan balances. Average retail loans increased $3.5 billion (7.7 percent) in 2007, principally reflecting growth in credit card and installment loans. Strong growth in credit cards occurred in branch originated, co-branded and financial institution partner portfolios.
Of the total retail loans and residential mortgages outstanding, approximately 80.0 percent were to customers located in the Company’s primary banking region. Table 10 provides a geographic summary of residential mortgages and retail loans outstanding as of December 31, 2007 and 2006.
 
Loans Held for Sale Loans held for sale, consisting primarily of residential mortgages and student loans to be sold in the secondary market, were $4.8 billion at December 31, 2007, compared with $3.3 billion at December 31, 2006. The increase in loans held for sale was principally due to an increase in residential mortgage loan balances. Average loans held for sale were $4.3 billion in 2007, compared with $3.7 billion in 2006. During 2007, certain companies in the mortgage banking industry experienced significant disruption due to their inability to access financing through the capital markets as investor concerns increased related to the quality of sub-prime loan originations and related securitizations. The Company’s primary focus of originating conventional mortgages packaged through government agencies enabled it to avoid these issues impacting other mortgage banking firms. Given these market conditions and the nature of the Company’s mortgage banking business, residential mortgage originations increased in 2007 by 21.2 percent as customers sought more reliable financing alternatives.
 
Investment Securities The Company uses its investment securities portfolio for several purposes. It serves as a vehicle to manage interest rate risk, generates interest and dividend income from the investment of excess funds depending on

30  U.S. BANCORP


 

loan demand, provides liquidity and is used as collateral for public deposits and wholesale funding sources. While it is the Company’s intent to hold its investment securities indefinitely, the Company may take actions in response to structural changes in the balance sheet and related interest rate risk and to meet liquidity requirements, among other factors.
At December 31, 2007, investment securities, both available-for-sale and held-to-maturity, totaled $43.1 billion, compared with $40.1 billion at December 31, 2006. The $3.0 billion (7.5 percent) increase reflected securities purchases of $9.7 billion partially offset by securities sales, maturities and prepayments. Included in purchases during 2007, were approximately $3.0 billion of securities from certain money market funds managed by an affiliate of the Company. These securities primarily represent beneficial interests in structured investment vehicles or similar

 

Table 11    INVESTMENT SECURITIES
 
                                                       
    Available-for-Sale     Held-to-Maturity  
              Weighted-
                Weighted-
     
              Average
  Weighted-
            Average
  Weighted-
 
    Amortized
    Fair
  Maturity in
  Average
    Amortized
  Fair
  Maturity in
  Average
 
December 31, 2007 (Dollars in Millions)   Cost     Value   Years   Yield (d)     Cost   Value   Years   Yield (d)  
U.S. Treasury and Agencies
                                                     
Maturing in one year or less
  $ 134     $ 134     .1     5.82 %   $   $         %
Maturing after one year through five years
    27       27     3.2     6.54                    
Maturing after five years through ten years
    21       21     6.2     5.52                    
Maturing after ten years
    225       223     12.4     6.00                    
                                                       
Total
  $ 407     $ 405     7.5     5.95 %   $   $         %
                                                       
Mortgage-Backed Securities (a)
                                                     
Maturing in one year or less
  $ 261     $ 258     .6     5.91 %   $   $         %
Maturing after one year through five years
    15,804       15,476     3.4     4.72       6     6     3.1     6.29  
Maturing after five years through ten years
    12,114       11,765     6.7     5.31                    
Maturing after ten years
    3,121       3,104     12.5     6.36                    
                                                       
Total
  $ 31,300     $ 30,603     5.6     5.12 %   $ 6   $ 6     3.1     6.29 %
                                                       
Asset-Backed Securities (a)(e)