UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM (NOT APPLICABLE)
COMMISSION FILE NUMBER 1-6880
FIRST BANK SYSTEM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
41-0255900
(I.R.S. Employer
Identification No.)
FIRST BANK PLACE,
601 SECOND AVENUE SOUTH,
MINNEAPOLIS, MINNESOTA 55402-4302
(Address of principal executive offices and Zip Code)
612-973-1111
(Registrant's telephone number, including area code)
(NOT APPLICABLE)
(Former name, former address and former fiscal year,
if changed since last report).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date.
Class Outstanding as of July 31, 1994
Common Stock, $1.25 Par Value 114,233,513 shares
Total # of pages: 27
Exhibit Index appears on page 1.
FINANCIAL SUMMARY
Six Months Ended Three Months Ended
June 30 June 30 June 30 March 31 June 30
(Dollars in Millions, Except Per Share Data) 1994 1993 1994 1994 1993
Income before merger-related charges $201.2 $161.0 $ 102.7 $ 98.5 $ 83.5
Merger-related charges (after-tax) -- 50.0 -- -- 50.0
Net income $201.2 $111.0 $ 102.7 $ 98.5 $ 33.5
Return on average assets:
Before merger-related charges 1.59% 1.29% 1.58% 1.59% 1.32%
Based on net income 1.59 0.89 1.58 1.59 0.53
Return on average common equity:
Before merger-related charges 18.9 15.1 18.9 18.8 15.7
Based on net income 18.9 9.9 18.9 18.8 5.4
Net interest margin (taxable-equivalent basis) 5.19 5.11 5.19 5.19 5.17
Efficiency ratio 57.9 69.4 57.8 58.0 77.2
Efficiency ratio excluding merger-related charges 57.9 60.9 57.8 58.0 60.4
PER COMMON SHARE
Income before merger-related charges $ 1.71 $ 1.28 $ 0.87 $ 0.84 $ 0.67
Merger-related charges (after-tax) -- 0.43 -- -- 0.44
Net income $ 1.71 $ 0.85 $ 0.87 $ 0.84 $ 0.23
Dividends paid 0.58 0.50 0.29 0.29 0.25
Common shareholders' equity 18.74 18.84 17.25
PERIOD END
Loans $18,704 $18,256 $17,964
Allowance for credit losses 440 442 435
Assets 25,932 26,509 25,580
Deposits 18,917 20,768 20,366
Total shareholders' equity 2,245 2,289 2,329
Common equity to total assets 8.3% 8.2% 7.6%
Tier 1 capital ratio 8.3 8.4 9.5
TABLE OF CONTENTS AND FORM 10-Q CROSS-REFERENCE INDEX
PART I -- FINANCIAL INFORMATION
Management's Discussion and Analysis of Financial Condition and Results of 2
Operations (Item 2)
Financial Statements (Item 1):
Consolidated Balance Sheet 13
Consolidated Statement of Income 14
Consolidated Statement of Shareholders' Equity 15
Consolidated Statement of Cash Flows 16
Notes to Consolidated Financial Statements 17
Selected Statistical Information:
Consolidated Daily Average Balance Sheet and Related Yields and Rates (Six Months 23
Ended)
Consolidated Daily Average Balance Sheet and Related Yields and Rates (Three Months 24
Ended)
PART II -- OTHER INFORMATION
Exhibits and Reports on Form 8-K (Item 6) 25
Signature 25
Exhibit 11 - Computation of Primary and Fully Diluted Net Income Per Common Share 26
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW DISCUSSION
EARNINGS SUMMARY First Bank System, Inc. (the "Company") reported second
quarter 1994 earnings of $102.7 million, an increase of $69.2 million, or
206.6 percent, from the second quarter of 1993 which included $50.0 million,
or $.44 per share, in after-tax merger-related charges associated with the
acquisition of Colorado National Bankshares, Inc. ("CNB"). Excluding these
merger-related charges, second quarter 1994 earnings increased $19.2 million,
or 23.0 percent, from the second quarter of 1993. On the same basis, earnings
per share were $.87 in the second quarter of 1994, compared with earnings of
$.67 in the second quarter of 1993, an increase of 29.9 percent.
The Company's first half 1994 net income was $201.2 million, or $1.71 per share,
compared with $111.0 million, or $.85 per share in the first half of 1993.
The first half of 1993 income excluding merger-related charges totaled $161.0
million, or $1.28 per share.
Return on average assets increased to 1.58 percent in the second quarter of
1994 from .53 percent in the second quarter of 1993, and return on average
common equity increased to 18.9 percent from 5.4 percent over the same
period. Excluding merger-related charges, return on
average assets was 1.32 percent and return on average common equity was 15.7
percent in the second quarter of 1993. The efficiency ratio, the ratio of
expenses to revenues, was 57.8 percent, an improvement of 265 basis points
from 60.4 percent in the second quarter of 1993, excluding merger-related
charges.
Compared to the second quarter of 1993, the strong improvement in
net income resulted from an increase in net interest income on a
taxable-equivalent basis of $10.7 million, or 3.7 percent, an increase in
noninterest income of $13.2 million, or 9.4 percent, and a reduction in the
provision for credit losses of $10.1 million, or 30.5 percent. Noninterest
income was higher as a result of growth in fee revenues from the credit card
and trust businesses. The reduction in provision was driven by continued
declines in net charge-offs and in nonperforming assets. Noninterest expense
for the quarter increased only .9 percent over last year (excluding
merger-related charges), despite the addition of expenses associated with
Boulevard Bancorp, Inc. ("Boulevard"), a $1.6 billion commercial bank holding
company, acquired on March 25, 1994. Compared with noninterest expense for
the second quarter of 1993, including the operations of Boulevard on a pro
forma basis, noninterest expense for the quarter declined $15.6 million, or
5.6 percent.
TABLE 1
Summary of Consolidated Income
Three Months Ended
(Taxable-Equivalent Basis; June 30 March 31 December 31 September 30 June 30
Dollars In Millions, Except Per Share Data) 1994 1994 1993 1993 1993
Interest income $429.8 $396.2 $414.7 $419.2 $422.1
Interest expense 129.6 111.2 121.4 129.6 132.6
Net interest income 300.2 285.0 293.3 289.6 289.5
Provision for credit losses 23.0 24.0 27.0 27.0 33.1
Net interest income after provision for credit losses 277.2 261.0 266.3 262.6 256.4
Noninterest income 153.7 151.8 145.9 142.0 140.5
Merger-related charges -- -- -- -- 72.2
Other noninterest expense 262.2 253.3 255.3 255.7 259.8
Income before income taxes 168.7 159.5 156.9 148.9 64.9
Taxable-equivalent adjustment 3.9 3.7 3.7 4.3 4.7
Income taxes 62.1 57.3 57.3 53.5 26.7
Net Income $102.7 $ 98.5 $ 95.9 $ 91.1 $ 33.5
Return on average assets:
Before merger-related charges 1.58 % 1.59 % 1.45 % 1.41 % 1.32 %
Based on net income 1.58 1.59 1.45 1.41 0.53
Return on average common equity:
Before merger-related charges 18.9 18.8 18.3 16.8 15.7
Based on net income 18.9 18.8 18.3 16.8 5.4
Net interest margin 5.19 5.19 5.00 5.06 5.17
Efficiency ratio 57.8 58.0 58.1 59.2 77.2
Efficiency ratio excluding merger-related charges 57.8 58.0 58.1 59.2 60.4
Per share:
Net income $ 0.87 $ 0.84 $ 0.81 $ 0.74 $ 0.23
Common dividends paid 0.29 0.29 0.25 0.25 0.25
Nonperforming assets declined $126.4 million, or 38.5 percent,
from June 30, 1993, and $15.6 million, or 7.2 percent, from March 31, 1994,
to $202.1 million at June 30, 1994. The decrease from prior year was achieved
despite the addition of $29.3 million in nonperforming assets through the
acquisition of Boulevard. The ratio of the allowance for credit losses to
nonperforming loans at quarter-end was 300 percent compared with 293 percent
at the end of first quarter 1994 and 192 percent at the end of the second
quarter last year.
RECENT DEVELOPMENTS On July 21, 1994, the Company announced that it had
signed a definitive purchase agreement to acquire Metropolitan Financial
Corporation ("MFC"), a regional financial services holding company
headquartered in Minneapolis, Minnesota. As of June 30, 1994, MFC had
approximately $8.0 billion in assets, $5.6 billion in deposits and more than
200 offices principally in North Dakota, Minnesota, Nebraska, Iowa, Kansas,
South Dakota, Wisconsin, and Wyoming. The Company will issue .6803 shares of
FBS common stock for each share of MFC's outstanding common stock at closing,
subject to certain adjustments based on changes in FBS stock price. Based on
current outstanding MFC shares, approximately 21.2 million shares would be
issued. The transaction, which will be accounted for using the
pooling-of-interests method, is subject to the approval of regulatory
agencies and both companies' shareholders and is expected to close in the
first quarter of 1995.
On April 29, 1994, the Company completed the previously announced acquisition
of First Financial Investors, Inc., which had approximately $200 million in
assets. The transaction was accounted for as a purchase. The Company has
signed agreements to acquire two additional institutions in markets in which
the Company has an existing presence, serving to strengthen the Company's
retail banking market shares in these communities. United Bank of Bismarck,
with approximately $123 million in assets is located in Bismarck, North
Dakota. Green Mountain Bancorporation, Inc., the holding company for Green
Mountain Bank, located in Lakewood, Colorado, has approximately $32 million
in assets. These acquisitions are expected to close in the third quarter
of 1994.
In January 1994, the Company signed an agreement to acquire the domestic
corporate trust business of J. P. Morgan & Co., Incorporated. This business unit
provides trust services for approximately 650 clients with 3,800 bond issues in
the areas of municipal, revenue, housing and corporate bond indenture
trusteeships. The transaction is expected to close in the third quarter of 1994.
The Company's strong capital position has enabled it to pursue several stock
repurchases. On May 18, 1994, the Board of Directors authorized the repurchase
of up to 1.5 million shares of common stock. The shares will be used for
issuance under the Company's Employee Stock Purchase Plan, Dividend Reinvestment
Plan and other corporate purposes. The Company completed its previously
announced common stock repurchase programs, including the program related to the
Boulevard acquisition.
On April 1, 1994, the Company completed the redemption of $159.3 million of its
preferred stock, consisting of $89 million of Preferred Stock Series 1989A and
$70.3 million of Preferred Stock Series 1989B. During 1993, the Company redeemed
its $100 million Series 1983A Adjustable Rate Cumulative Preferred Stock and, as
of June 30, 1994, had repurchased $8.6 million of Preferred Stock Series 1991A.
LINE OF BUSINESS FINANCIAL REVIEW Each of the Company's three business
lines--Retail and Community Banking, Commercial Banking, and the Trust and
Investment Group--contributed to the strong financial performance for the
three months and six months ended June 30, 1994. Compared with the first half
of 1993 results, all achieved earnings increases of more than 15 percent. The
results for 1994 include the operating results of Boulevard since its
acquisition date of March 25, 1994.
Business line results are derived from the Company's business unit profitability
reporting system which specifically attributes most assets, deposits and income
statement items to a business line. The Company's internal Funds Transfer
Pricing system allocates a cost of funds used or credit for funds provided to
all assets and liabilities using a matched funding concept. Expenses which
directly support business line operations are charged based on a standard unit
cost and actual volume measurements. Expenses which indirectly support the
business line operations as well as those which primarily support the holding
company are allocated based on the ratio of the business line's noninterest
expense to total noninterest expense. Income taxes have been calculated based
upon the Company's consolidated effective tax rate.
Capital is allocated within the business unit profitability system based upon
credit, operational and business risks. Asset components subject to credit risk
are assigned risk factors based upon historic loss experience after taking into
consideration changes in business practice which may introduce more or less risk
into the portfolio. Certain lines of business, such as Trust and Investment
Group, which have no significant balance sheet components, are assigned capital
after taking into consideration operational risk, capital levels of independent
organizations operating similar businesses and regulatory minimums.
Designations, assignments, and allocations may change from time to time as
management accounting systems are enhanced or product lines change. During 1994
certain methodologies were changed, and accordingly, results for 1993 have been
restated to conform to the current presentation basis.
TABLE 2
Line of Business Financial Performance
Trust and
Retail & Community Commercial Investment Consolidated
Banking Banking Group Company
--------------- -------------- ------------- -------------------
SIX MONTHS ENDED JUNE 30
---------------------------------------------------------------------------------
(Dollars in Millions) 1994 1993 1994 1993 1994 1993 1994 1993
CONDENSED INCOME STATEMENT:
Net interest income
(taxable-equivalent basis) $ 463.7 $ 443.5 $ 108.9 $ 110.5 $ 12.6 $ 13.7 $ 585.2 $ 567.7
Provision for credit losses 44.0 55.8 3.0 15.4 -- -- 47.0 71.2
Noninterest income 180.2 163.0 29.6 28.9 95.7 89.8 305.5 281.7
Noninterest expense* 396.5 394.1 45.3 47.2 73.7 76.0 515.5 517.3
Income taxes and taxable-equivalent
adjustment 78.7 59.9 34.9 29.4 13.4 10.6 127.0 99.9
Income before merger-related charges $ 124.7 $ 96.7 $ 55.3 $ 47.4 $ 21.2 $ 16.9 201.2 161.0
Merger-related charges (after tax) -- (50.0)
Net income $ 201.2 $ 111.0
AVERAGE BALANCE SHEET DATA:
Commercial loans $ 5,037 $ 4,239 $4,938 $4,560 $-- $-- $ 9,975 $ 8,799
Consumer loans 8,277 8,186 -- -- -- -- 8,277 8,186
Assets 18,378 18,116 6,439 6,411 780 705 25,597 25,232
Deposits 16,092 17,000 2,604 2,291 933 810 19,629 20,101
Common equity 1,440 1,334 451 449 182 165 2,073 1,948
Return on average assets* 1.37% 1.08% 1.73% 1.49% ** ** 1.59% 1.29%
Return on average common equity* 17.5 14.6 24.7 21.3 23.4% 20.7% 18.9 15.1
Efficiency ratio* 61.6 65.0 32.7 33.9 68.0 73.4 57.9 60.9
THREE MONTHS ENDED JUNE 30
CONDENSED INCOME STATEMENT:
Net interest income
(taxable-equivalent basis) $ 240.1 $ 223.4 $ 53.9 $ 58.9 $ 6.2 $ 7.2 $ 300.2 $ 289.5
Provision for credit losses 21.9 26.9 1.1 6.2 -- -- 23.0 33.1
Noninterest income 91.3 80.7 14.2 14.2 48.2 45.6 153.7 140.5
Noninterest expense* 203.2 195.9 22.0 25.6 37.0 38.3 262.2 259.8
Income taxes and
taxable-equivalent adjustment 41.6 31.8 17.6 16.1 6.8 5.7 66.0 53.6
Income before merger-related charges $ 64.7 $ 49.5 $ 27.4 $ 25.2 $ 10.6 $ 8.8 102.7 83.5
Merger-related charges (after tax) -- (50.0)
Net income $ 102.7 $ 33.5
AVERAGE BALANCE SHEET DATA:
Commercial loans $ 5,322 $ 4,334 $4,735 $4,629 $-- $-- $10,057 $ 8,963
Consumer loans 8,412 8,329 -- -- -- -- 8,412 8,329
Assets 19,136 18,285 6,194 6,400 795 662 26,125 25,347
Deposits 16,295 16,862 2,468 2,602 892 820 19,655 20,284
Common equity 1,510 1,335 434 448 190 166 2,134 1,949
Return on average assets* 1.36% 1.09% 1.78% 1.58% ** ** 1.58% 1.32%
Return on average common equity* 17.2 14.9 25.4 22.5 22.3% 21.4% 18.9 15.7
Efficiency ratio* 61.3 64.4 32.4 35.0 68.0 72.6 57.8 60.4
* Excluding merger-related charges
** Not meaningful
Note: Preferred dividends are not allocated to the business lines.
RETAIL AND COMMUNITY BANKING. Retail and Community Banking, which includes
consumer, small business and middle market banking services, residential
mortgage lending, consumer and corporate credit card services and merchant
payment processing, achieved strong revenue growth while containing costs.
Earnings increased 30.7 percent in the second quarter of 1994 and 29.0
percent in the first six months of 1994 compared with similar periods in the
prior year. Second quarter return on average assets increased to 1.36 percent
from 1.09 percent and return on average common equity increased to 17.2
percent from 14.9 percent over the same period. Year-to-date profitability
ratios showed similar improvement.
The strong improvement in earnings is due to increases in net interest income
and noninterest income and a decrease in the provision for credit losses,
partially offset by slight increases in noninterest expense. Net interest income
and noninterest income increases are attributable to strong home equity loan
promotions, aggressive small and middle market business lending, and growth in
the mutual funds and Corporate Card products. The efficiency ratio improved 310
basis points in the second quarter and 340 basis points in the first six months
of 1994 compared to similar periods in 1993.
COMMERCIAL BANKING. Commercial Banking, which provides lending, cash
management, and other financial services to middle market, large corporate
and mortgage banking companies, reported a return on average assets of 1.78
percent in the second quarter and 1.73 percent in the first half of 1994.
These ratios improved from 1.58 percent and 1.49 percent in the same periods
in 1993. Earnings improved by 8.7 percent and 16.7 percent, respectively,
compared with the second quarter and first half of 1993.
The improvement in 1994 results was due to significant declines in the provision
for credit losses, reflecting improved credit quality, and decreases in
noninterest expenses, due to continued cost containment. These improvements were
partially offset by a slight decrease in net interest income, primarily caused
by the lower rates earned on deposit balances. Noninterest income remained
relatively unchanged from 1993.
TRUST AND INVESTMENT GROUP. The Trust and Investment Group, which includes
personal, institutional and corporate trust services, investment management
services, and a full-service brokerage company, reported earnings increases
of 20.5 percent in the second quarter and 25.4 percent in the first six
months of 1994 compared with similar periods in the prior year. The return on
average common equity improved to 22.3 percent in the second quarter and 23.4
percent in the first half of 1994 from 21.4 percent and 20.7 percent in the
same periods in 1993.
Stronger noninterest income is primarily due to growth in Corporate Trust and
investment sales and management fees. Noninterest expense decreased 3.4 percent
in the second quarter and 3.0 percent in the first half of 1994 compared with
similar periods in 1993. The efficiency ratio improved to 68.0 percent in both
the second quarter and first half of 1994 from 72.6 percent in the second
quarter and 73.4 percent in the first six months of 1993.
CAPITAL AND SHAREHOLDERS' EQUITY The ratio of common equity to assets
increased 62 basis points from a year ago to 8.3 percent at June 30, 1994,
primarily due to earnings retention. Common equity per share at June 30,
1994, was $18.74 compared with $18.84 at March 31, 1994, and $17.25 at June
30, 1993.
Total equity to assets was 8.7 percent at June 30, 1994, up from 8.6 percent at
March 31, 1994, and down from 9.1 percent at June 30, 1993. The decrease from a
year ago was due to the repurchase and redemption of $272.6 million of preferred
stock, as discussed in "Recent Developments" on page 3.
Risk-based capital ratios, which take into account the different credit risks of
various assets, reflect the Company's capital strength. Tier 1 and total
risk-based capital ratios were 8.3 percent and 12.6 percent on June 30, 1994,
compared with 9.5 percent and 13.0 percent at June 30, 1993, respectively. The
leverage ratio, the measure of Tier 1 capital to total quarterly average assets,
was 7.2 percent from 8.1 percent a year ago. The decrease in the ratios from the
prior year was due to the previously discussed preferred and common stock
repurchases.
TABLE 3
Capital Ratios
June 30 March 31 December 31 September 30 June 30
(Dollars in Millions) 1994 1994 1993 1993 1993
Common equity $2,139 $2,183 $1,979 $2,007 $1,950
As a percent of assets 8.3% 8.2% 7.5% 7.7% 7.6%
Tangible common equity* $1,824 $1,874 $1,811 $1,837 $1,777
As a percent of assets 7.1% 7.2% 6.9% 7.1% 7.0%
Total shareholders' equity $2,245 $2,289 $2,245 $2,276 $2,329
As a percent of assets 8.7% 8.6% 8.5% 8.8% 9.1%
Tier 1 capital $1,855 $1,871 $1,971 $2,022 $2,025
As a percent of risk-adjusted assets 8.3% 8.4% 9.2% 9.5% 9.5%
Total risk-based capital $2,828 $2,744 $2,863 $2,966 $2,767
As a percent of risk-adjusted assets 12.6% 12.3% 13.3% 13.9% 13.0%
Leverage ratio 7.2 7.6 7.6 8.0 8.1
*Defined as common equity less goodwill
NET INTEREST INCOME Net interest income on a taxable-equivalent basis was
$300.2 million in the second quarter of 1994, an increase of $10.7 million,
or 3.7 percent, from the second quarter of 1993. The improvement in net
interest income reflects increases in average loan balances. Average loans
totaled $18.5 billion in the second quarter of 1994, an increase of $1.2
billion, or 6.8 percent, from $17.3 billion in the second quarter of 1993.
The average balance of residential mortgage loans decreased by $751 million,
while other commercial and consumer loans increased by $1.9 billion,
including loans acquired through the purchase of Boulevard. The decline in
nonperforming assets also contributed to the net interest income growth.
The net interest margin on a taxable-equivalent basis was 5.19 percent in the
second quarter of 1994, essentially unchanged from the margins of 5.17 percent
in the second quarter of 1993 and 5.19 percent in the first quarter of 1994.
TABLE 4
Analysis of Net Interest Income
Three Months Ended
June 30 March 31 December 31 September 30 June 30
(Dollars in Millions) 1994 1994 1993 1993 1993
Net interest income
(taxable-equivalent basis) $ 300.2 $ 285.0 $ 293.3 $ 289.6 $ 289.5
Average balances of
earning assets supported by:
Interest-bearing liabilities $16,948 $15,658 $15,767 $15,946 $16,051
Noninterest-bearing liabilities 6,257 6,620 7,503 6,764 6,404
Total earning assets $23,205 $22,278 $23,270 $22,710 $22,455
Average yields and weighted
average rates (taxable-equivalent basis):
Earning assets yield 7.43% 7.21% 7.07% 7.32% 7.54%
Rate paid on interest-bearing liabilities 3.07 2.88 3.05 3.22 3.31
Gross interest margin 4.36% 4.33% 4.02% 4.10% 4.23%
Net interest margin 5.19% 5.19% 5.00% 5.06% 5.17%
Net interest margin without
taxable-equivalent increments 5.12% 5.12% 4.94% 4.98% 5.09%
PROVISION FOR CREDIT LOSSES The provision for credit losses was $23.0 million
in the second quarter of 1994, down $10.1 million from the level in the
second quarter of 1993. Net charge-offs totaled $25.7 million in the second
quarter of 1994, down from $41.6 million in the same quarter a year ago.
Commercial loan net charge-offs for the quarter were lower by $15.0 million,
or 72.5 percent, from the same quarter of the prior year, reflecting
continued improvement in the commercial loan portfolio. Consumer loan net
charge-offs were lower by $.9 million, or 4.3 percent, despite higher average
loan balances.
The allowance for credit losses was $439.9 million at June 30, 1994, up slightly
from $434.8 million at June 30, 1993, and down slightly from $442.5 million at
March 31, 1994. The increase from the prior year was due to the addition of a
$20.2 million allowance from the Boulevard acquisition. Reserve coverage
remained strong as the allowance for credit losses to nonperforming loans ratio
increased to 300 percent at quarter-end, compared with 293 percent at the end of
first quarter 1994 and 192 percent at the end of the second quarter 1993.
TABLE 5
Noninterest Income
Three Months Ended
June 30 March 31 December 31 September 30 June 30
(Dollars in Millions) 1994 1994 1993 1993 1993
Trust fees $ 40.1 $ 38.5 $ 37.5 $ 36.6 $ 36.5
Credit card fees 43.5 36.0 37.5 36.6 34.5
Service charges on deposit accounts 29.1 29.4 28.4 28.6 28.0
Insurance commissions 6.1 5.0 5.3 5.8 4.5
Trading account profits and
commissions 2.2 2.7 2.2 2.4 2.9
Other 32.7 40.2 35.0 32.0 34.1
Total noninterest income $153.7 $151.8 $145.9 $142.0 $140.5
NONINTEREST INCOME Noninterest income in the second quarter of 1994 was
$153.7 million, an increase of $13.2 million, or 9.4 percent, from the second
quarter last year. Trust fees and credit card fees increased $12.6 million,
or 17.7 percent, from the prior year quarter. Most of the increase occurred
in credit card fees, reflecting higher sales volumes for the Corporate Card,
the Procurement Card, the new Northwest Airlines WorldPerks credit card, and
merchant processing. Trust fees for the quarter were up from the second
quarter of 1993 level as a result of increased corporate trust fee revenue
and the acquisition of Boulevard.
NONINTEREST EXPENSE Noninterest expense was $262.2 million in the second
quarter of 1994, a decrease of $69.8 million, or 21.0 percent, from second
quarter of 1993. Included in second quarter 1993 noninterest expense were
merger, integration and restructuring charges totaling $72.2 million ($50.0
million on an after-tax basis) relating to the CNB acquisition. Charges of
$29.7 million were made to provide for anticipated reorganization and
restructuring costs, system conversions, and customer communication costs.
Premises and equipment write-downs of $14.3 million related to redundant main
office and branch facilities. Other charges, totaling $28.2 million,
primarily involved severance.
Second quarter noninterest expense was higher by $2.4 million, or .9 percent,
than in the second quarter of 1993, excluding merger-related charges. The modest
increase in expenses reflects the addition of Boulevard operations, offset by
the benefits realized through integrating recent acquisitions. Compared with
noninterest expense for the second quarter of 1993, including Boulevard's
expenses on a pro forma basis and excluding
merger-related charges, noninterest expense for the quarter declined by $15.6
million, or 5.6 percent. The Company's efficiency ratio, the measure of
expenses to revenues, improved to 57.8 percent for the quarter from 60.4
percent a year ago, excluding merger-related charges.
TABLE 6
Noninterest Expense
Three Months Ended
(Dollars in Millions, Except Per Employee June 30 March 31 December 31 September 30 June 30
Data) 1994 1994 1993 1993 1993
Salaries $ 98.5 $ 94.2 $ 95.0 $ 97.3 $ 97.3
Employee benefits 23.3 23.7 19.6 20.0 21.9
Total personnel expense 121.8 117.9 114.6 117.3 119.2
Net occupancy 22.2 21.5 22.8 22.8 23.2
Furniture and equipment 20.2 19.1 19.2 17.8 18.5
FDIC insurance 12.3 11.5 11.5 11.4 11.7
Advertising 8.1 8.1 4.7 6.0 5.1
Amortization of goodwill and other
intangible assets 9.9 8.0 7.7 7.7 7.7
Other personnel costs 8.8 7.7 8.5 7.2 6.6
Professional services 8.5 6.5 10.7 9.1 8.6
Telephone 5.6 5.1 5.0 4.4 4.7
Postage 4.7 4.9 4.8 4.6 4.9
Printing, stationery and supplies 4.9 4.8 6.8 4.5 5.7
Data processing 3.4 3.5 4.7 5.8 8.4
Merger, integration and restructuring -- -- -- -- 72.2
Other 31.8 34.7 34.3 37.1 35.5
Total noninterest expense $ 262.2 $ 253.3 $ 255.3 $ 255.7 $ 332.0
Efficiency ratio* 57.8% 58.0% 58.1% 59.2% 77.2%
Efficiency ratio excluding merger-related charges 57.8 58.0 58.1 59.2 60.4
Quarterly average number of employees
(full-time equivalents) 12,139 11,815 11,981 12,110 12,375
Annualized personnel expense per employee $40,135 $39,915 $38,261 $38,745 $38,529
* Computed as noninterest expense divided by the sum of net interest income
on a taxable-equivalent basis and noninterest income net of investment
securities gains.
Total salaries and benefits expense for the second quarter of 1994 increased by
$2.6 million, or 2.2 percent, from the second quarter of 1993. Average full-time
equivalent employees decreased by 1.9 percent, to 12,139 in the second quarter
of 1994, from 12,375 in the second quarter of 1993. Compared with the second
quarter of 1993, net occupancy and equipment expense increased by $.7 million,
or 1.7 percent. Advertising expense increased $3.0 million, or 58.8 percent,
over the 1993 level, reflecting expanded marketing efforts in the growing
consumer asset businesses. Other personnel costs increased $2.2 million, or 33.3
percent, primarily due to the increased use of temporary labor related to system
improvements and integrations. Professional services expenses remained
relatively constant at $8.5 million. Data processing decreased $5.0 million, or
59.5 percent, primarily due to efficiencies obtained through integrating recent
acquisitions and eliminating an outside data processor previously used for a
portion of the Company's items processing.
PROVISION FOR INCOME TAXES The provision for income taxes was $62.1 million
in the second quarter of 1994, compared with $26.7 million in the second
quarter of 1993. The increase is due to the higher level of taxable income.
At June 30, 1994, the Company's net deferred tax asset was $229.9 million,
compared with $219.7 million at March 31, 1994, and $195.5 million at June 30,
1993. The recent acquisition of Boulevard Bancorp caused most of the increase
over last year. For further information regarding income taxes, refer to Note H
on page 20.
ACCOUNTING CHANGES The Financial Accounting Standards Board has issued SFAS
114, "Accounting by Creditors for Impairment of a Loan," which requires
creditors to establish a valuation allowance when it is probable that all the
principal and interest due under the contractual terms of a loan will not be
collected. The adoption of this Statement is required for fiscal years
beginning after December 15, 1994. The adoption of SFAS 114 is not expected
to have a material effect on the Company.
CREDIT MANAGEMENT The Company's credit management process includes
centralized credit policy and administration functions and standardized
underwriting criteria for specialized lending categories, such as mortgage
banking, real estate construction, and consumer credit. The Company's credit
management process is supported by regular examinations conducted by the
credit administration function. Large loans and all loans experiencing
deterioration of credit quality are reviewed quarterly by management. A
standardized credit scoring system is used to assess consumer credit risks
and to price consumer products relative to their assigned risk rating.
In evaluating credit risk, the Company takes into consideration the composition
of its loan portfolio, its level of allowance coverage, macroeconomic concerns,
such as the level of debt outstanding in the public and private sectors, the
effects of domestic and international economic conditions and regional economic
conditions, and other issues.
LOAN PORTFOLIO REVIEW One of the ways the Company manages its credit risk is
by ensuring that its loan portfolio is well diversified by industry
classification, size and type of loan. The Company's primary operating region
includes Minnesota, Colorado, Montana, North Dakota, South Dakota, Wisconsin,
and Illinois. Approximately 80 percent of the loan portfolio consists of
extensions of credit to customers in the Company's operating region. A
discussion of the Company's major loan categories follows.
COMMERCIAL The Company's portfolio of commercial loans totaled $7.0 billion
at June 30, 1994, and comprised 37.6 percent of the total loan portfolio.
This level is up from $6.7 billion at March 31, 1994, and $5.9 billion at
June 30, 1993. As a percentage of the total portfolio, commercial loans
totaled 36.8 percent at March 31, 1994, and 32.6 percent at June 30, 1993.
The $1.2 billion increase over the second quarter of the prior year reflects
growth in small business and middle market loans as well as the acquisition
of Boulevard.
At June 30, 1994, commercial loans totaling $43.2 million were included in
nonperforming assets, up $10.8 million, or 33.3 percent from March 31, 1994, and
down $22.0 million, or 33.7 percent, from June 30, 1993. Net charge-offs of
commercial loans totaled $11.0 million in the second quarter of 1994 compared
with net charge-offs of $1.8 million and $4.5 million in the first quarter of
1994 and in the second quarter of 1993, respectively.
FINANCIAL INSTITUTIONS The portfolio of loans to financial institutions
totaled $.9 billion at June 30, 1994, a decrease of $494 million from the
$1.4 billion balance at March 31, 1994. Compared with the June 30, 1993,
balance, the portfolio was down $697 million. The decreases can be attributed
to the cyclical activity in the Company's secured loans to mortgage banking
firms. The mortgage banking firms' loan volume has decreased due to a decline
in refinancings resulting from a rise in market interest rates.
Net charge-offs on loans to financial institutions were $1.0 million in the
second quarter of 1994 compared with net recoveries of $.1 million in the first
quarter of 1994 and $1.2 million in the second quarter of 1993.
TABLE 7
Summary of Allowance for Credit Losses
Six Months Ended Three Months Ended
June 30 June 30 June 30 June 30
(Dollars in Millions) 1994 1993 1994 1993
Balance at beginning of period $423.2 $448.0 $442.5 $443.3
CHARGE-OFFS:
Commercial:
Commercial 32.9 23.1 21.5 13.7
Financial institutions 1.1 6.5 1.1 --
Real estate:
Commercial mortgage 9.3 34.2 1.4 19.2
Construction 0.1 0.4 0.1 0.4
HLTs 3.8 4.3 0.7 --
Total commercial 47.2 68.5 24.8 33.3
Consumer:
Residential mortgage 1.0 1.2 0.3 0.8
Credit card 34.1 35.0 17.4 17.2
Other 16.3 16.4 8.0 8.6
Total consumer 51.4 52.6 25.7 26.6
Total 98.6 121.1 50.5 59.9
RECOVERIES:
Commercial:
Commercial 20.1 16.1 10.5 9.2
Financial institutions 0.2 1.3 0.1 1.2
Real estate:
Commercial mortgage 11.3 4.9 7.8 1.6
Construction 0.3 0.8 0.1 0.1
HLTs 4.6 2.0 0.6 0.5
Total commercial 36.5 25.1 19.1 12.6
Consumer:
Residential mortgage 0.3 0.5 0.2 0.1
Credit card 4.5 4.7 2.3 2.4
Other 6.0 6.4 3.2 3.2
Total consumer 10.8 11.6 5.7 5.7
Total 47.3 36.7 24.8 18.3
NET CHARGE-OFFS:
Commercial:
Commercial 12.8 7.0 11.0 4.5
Financial institutions 0.9 5.2 1.0 (1.2)
Real estate:
Commercial mortgage (2.0) 29.3 (6.4) 17.6
Construction (0.2) (0.4) -- 0.3
HLTs (0.8) 2.3 0.1 (0.5)
Total commercial 10.7 43.4 5.7 20.7
Consumer:
Residential mortgage 0.7 0.7 0.1 0.7
Credit card 29.6 30.3 15.1 14.8
Other 10.3 10.0 4.8 5.4
Total consumer 40.6 41.0 20.0 20.9
Total 51.3 84.4 25.7 41.6
Provision charged to operating expense 47.0 71.2 23.0 33.1
Additions related to acquisitions 21.0 -- 0.1 --
Balance at end of period $439.9 $434.8 $439.9 $434.8
Allowance as a percentage of period-end
loans 2.35% 2.42%
Allowance as a percentage of
nonperforming loans 300 192
COMMERCIAL REAL ESTATE LENDING The commercial real estate mortgage and
construction loan portfolio totaled $2.0 billion at June 30, 1994, compared
with $1.9 billion at March 31, 1994, and $1.7 billion at June 30, 1993.
Commercial real estate loans included in nonperforming assets at the end of the
second quarter of 1994 decreased to $38.1 million from $46.4 million at the end
of the first quarter of 1994 and $55.2 million at the end of the second quarter
of 1993. Total commercial real estate exposure (including other real
estate-owned) on nonperforming status was $93.0 million at June 30, 1994, down
significantly from $112.7 million at March 31, 1994, and $154.6 million at June
30, 1993. The declines in total real estate exposure were due to reductions in
other real estate and nonperforming commercial and real estate loans, reflecting
sales of properties and loan repayments.
HIGHLY LEVERAGED TRANSACTIONS The Company's exposure to commercial loans
involving the buyout, recapitalization or acquisition of an existing
business, called highly leveraged transactions ("HLTs"), remained at
relatively low levels. At June 30, 1994, the Company had HLT outstandings
totaling $260 million and was committed under definitive agreements to lend
an additional amount of approximately $87 million. This exposure has
increased 32.4 percent from June 30, 1993, when outstandings were $209
million and additional commitments were $53 million.
HLT outstandings totaling $13.2 million are included in nonperforming assets at
June 30, 1994, compared with $16.1 million at March 31, 1994, and $67.2 million
at June 30, 1993. The significant drop in nonperforming HLT outstandings from
second quarter of 1993 was due to the repayment of a $37.5 million loan in the
third quarter of 1993. There has been no significant charge-off or recovery
activity in either the second quarter of 1994 or 1993.
CONSUMER LENDING The consumer loan portfolio, which includes residential
mortgages, totaled $8.6 billion at June 30, 1994. This portfolio is up $456
million since March 31, 1994, primarily due to increases in home equity and
second mortgages, credit card, and consumer lines of credit partially offset
by a decrease in residential mortgages held for sale. Total consumer loans
remained relatively unchanged from June 30, 1993. Home equity and second
mortgages increased $539 million, primarily due to successful marketing
promotions. In addition, credit card loans, including the Corporate Card, the
Procurement Card, and the new Northwest Airlines WorldPerks credit card, grew
$380 million. This growth was offset by a $961 million decrease in
residential mortgages and residential mortgages held for sale primarily due
to fewer housing starts and refinancings due to rising market interest rates.
Net charge-offs of consumer loans in the second quarter of 1994 were $20.0
million, a decrease of $.9 million, or 4.3 percent, from the second quarter
of 1993 despite higher average loan balances.
ANALYSIS OF NET LOAN CHARGE-OFFS AND ALLOWANCE FOR CREDIT LOSSES Net
charge-offs totaled $25.7 million in the second quarter of 1994, down $15.9
million, or 38.2 percent, from the $41.6 million reported in the second
quarter a year ago, primarily due to a decline in commercial mortgage loan
net charge-offs partially offset by an increase in commercial loan net
charge-offs.
At June 30, 1994, the allowance for credit losses was $439.9 million, or 2.35
percent of loans. This compares with an allowance of $442.5 million, or 2.42
percent of loans, at March 31, 1994, and $434.8 million, or 2.42 percent of
loans, at June 30, 1993. The increase from last year includes the addition of a
$20.2 million allowance from the Boulevard acquisition. The ratio of allowance
to nonperforming loans continues to be strong, increasing to 300 percent at June
30, 1994, compared with 293 percent at March 31, 1994, and 192 percent at June
30, 1993.
ANALYSIS OF NONPERFORMING ASSETS Nonperforming assets include all nonaccrual
loans, restructured loans, other real estate and other nonperforming assets
owned by the Company. At June 30, 1994, nonperforming assets totaled $202.1
million, down $15.6 million, or 7.2 percent, from March 31, 1994, and down
$126.4 million, or 38.5 percent, from June 30, 1993, despite the addition in
the first quarter of 1994 of $29.3 million in nonperforming assets from the
acquisition of Boulevard. The ratio of nonperforming assets to loans and
other real estate improved to 1.08 percent at June 30, 1994, from 1.19
percent at March 31, 1994, and 1.82 percent at June 30, 1993. Significant
decreases occurred in the categories of nonperforming HLT and commercial
loans and other real estate, primarily the result of loan repayments and
property sales.
Accruing loans 90 days or more past due at June 30, 1994, totaled $23.5 million,
compared with $26.7 million at March 31, 1994, and $25.1 million at June 30,
1993.
TABLE 8
Nonperforming Assets
June 30 March 31 December 31 September 30 June 30
(Dollars in Millions) 1994 1994 1993 1993 1993
Nonaccrual loans $146.4 $150.8 $157.6 $183.5 $226.7
Restructured loans -- -- -- -- --
Nonperforming loans 146.4 150.8 157.6 183.5 226.7
Other real estate 54.9 66.3 67.4 81.1 99.4
Other nonperforming assets 0.8 0.6 1.0 2.2 2.4
Nonperforming assets $202.1 $217.7 $226.0 $266.8 $328.5
Accruing loans 90 days or more past due $ 23.5 $ 26.7 $ 31.2 $ 32.1 $ 25.1
Nonperforming loans to total loans 0.78 % 0.83 % 0.84 % 0.99 % 1.26 %
Nonperforming assets to total loans plus other real estate 1.08 1.19 1.20 1.43 1.82
TABLE 9
Nonperforming Assets by Industry
June 30 March 31 December 31 September 30 June 30
(Dollars in Millions) 1994 1994 1993 1993 1993
COMMERCIAL:
Commercial $ 43.2 $ 32.4 $ 42.2 $ 49.7 $ 65.2
Financial institutions 0.6 0.6 0.9 2.5 1.6
Real estate:
Commercial mortgage 36.4 38.2 36.9 39.4 43.2
Construction 1.7 8.2 2.2 2.2 12.0
HLTs 13.2 16.1 20.1 27.4 67.2
Total commercial 95.1 95.5 102.3 121.2 189.2
CONSUMER:
Residential mortgage 39.7 42.8 44.8 51.4 25.8
Credit card 11.1 10.8 10.3 9.9 10.5
Other 0.5 1.7 0.2 1.0 1.2
Total consumer 51.3 55.3 55.3 62.3 37.5
Total nonperforming loans 146.4 150.8 157.6 183.5 226.7
OTHER REAL ESTATE 54.9 66.3 67.4 81.1 99.4
OTHER NONPERFORMING ASSETS 0.8 0.6 1.0 2.2 2.4
Total nonperforming assets $202.1 $217.7 $226.0 $266.8 $328.5
INTEREST RATE RISK MANAGEMENT The Company's principal objective for interest
rate risk management is to control exposure of net interest income to risks
associated with interest rate movements. Interest rate risk is measured and
reported to the Company's Asset and Liability Management Committee ("ALCO")
through the use of traditional gap analysis, which measures the difference
between assets and liabilities that reprice in a given time period, and
simulation modeling, which produces projections of net interest income under
various interest rate scenarios and balance sheet strategies.
Including the effect of interest rate swaps, futures, options and other hedging
instruments, the Company has a cumulative positive repricing gap position at
one year of $348 million at June 30, 1994, indicating that more assets than
liabilities reprice within that period. While this analysis is useful as a
point-in-time measurement of interest rate risk, there are certain risks that
the repricing gap position does not capture, such as basis risk and
prepayment risk. Due to these limitations, management places a greater
reliance on simulation modeling to measure and manage interest rate risk.
It is the Company's policy to maintain a low interest rate risk position by
limiting the amount of forecasted net interest income at risk under a gradual
200 basis point fluctuation in interest rates over a 12-month period. To
maintain acceptable interest rate risk levels, the Company will invest in fixed
rate assets or will receive fixed rates on interest rate swaps.
The Company has entered into interest rate swap agreements that hedge specific
assets and liabilities to manage the impact of fluctuating interest rates on
earnings. As of June 30, 1994, the Company receives payments on $3.0 billion
notional amount of interest rate swap agreements, based on fixed interest rates,
and makes payments based on variable interest rates. These swaps have an average
fixed rate of 6.75 percent and an average variable rate, which is tied to
various LIBOR rates, of 4.27 percent. The maturity of these agreements ranges
from one month to 10 years with an average remaining maturity of 3.4 years.
Swaps contributed to the Company's net interest margin by reducing interest
expense by $19.9 million and $22.3 million for the quarters ended June 30, 1994,
and 1993, respectively.
Interest rate caps and floors are similarly used by the Company to minimize the
impact of fluctuating interest rates on earnings. The total notional amount of
floor agreements purchased as of June 30, 1994, was $950 million with an average
strike level of 3-month LIBOR at 3.5 percent and an average remaining maturity
of 3.5 years. Floors decreased interest income by $.3 million for the quarter
ended June 30, 1994. Further information on interest rate swaps and options can
be found in Note I on page 21.
TABLE 10
Interest Rate Swap Hedging Portfolio Notional
Balances and Yields by Maturity Date
At June 30, 1994 (Dollars in Millions)
Weighted
Average
Receive Fixed Swaps Notional Interest Rate
Maturity Date Amount Received
1994 (remaining six months) $ 195 5.78%
1995 677 7.04
1996 629 7.95
1997 250 5.87
1998 406 6.21
After 1998 825 6.35
Total $2,982 6.75%
At June 30, 1994, the Company did not have any swaps in its portfolio which
required it to pay fixed-rate interest.
LIQUIDITY MANAGEMENT The objective of liquidity management is to ensure the
continuous availability of funds to meet the demands of depositors, investors
and borrowers. ALCO is responsible for managing these needs while achieving
the Company's financial objectives. ALCO meets regularly to review funding
capacity, current and forecasted loan demand and investment opportunities.
With this information, ALCO supervises the funding needs and excess funding
positions, as well as the maintenance of contingent funding sources, to
achieve a balance sheet structure that provides sufficient liquidity.
BALANCE SHEET ANALYSIS Average loans totaled $18.5 billion in the second
quarter of 1994, up $1.2 billion, or 6.8 percent, from the second quarter a
year ago. The increase reflected growth in home equity, credit card and
consumer lines of credit, as well as commercial loans, including loans
acquired with Boulevard. These increases more than offset the $751 million
decline in average residential mortgage loans over the same period.
Average securities for the second quarter of 1994 decreased $85 million from the
second quarter of 1993. The decrease was primarily due to the change in
accounting rules related to securities. The Company adopted the provisions of
SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," as
of December 31, 1993, and reported its entire $3.3 billion investment portfolio
as available-for-sale. Available-for-sale securities are accounted for at fair
value while investment securities were previously accounted for at cost. For the
quarter ended June 30, 1994, the available-for-sale portfolio averaged $4.1
billion including an average unrealized loss of $59 million.
Trading and other short-term earning assets averaged $.5 billion in the second
quarter of 1994, compared with an average of $.9 billion in the second quarter
of 1993. The decrease was primarily due to average federal funds sold and resale
agreements which dropped to $.4 billion in the second quarter of 1994 from $.8
billion in the second quarter of 1993.
Noninterest-bearing deposits averaged $6.2 billion in the second quarter of
1994, essentially unchanged from the second quarter of 1993.
Average domestic interest-bearing deposits include certificates of deposit,
savings certificates, money market savings, and interest checking products.
These deposits averaged $13.5 billion in the second quarter of 1994, compared
with $14.0 billion in the second quarter of 1993. The decrease reflects an $805
million decline in savings certificates.
Short-term borrowings, which include federal funds purchased, securities sold
under agreements to repurchase and other short-term borrowings, averaged $2.3
billion in the second quarter of 1994, compared with $1.2 billion in the second
quarter a year ago.
Average intermediate and long-term debt increased to $1.2 billion in the second
quarter of 1994 from $.8 billion in the second quarter of 1993. In June 1994,
the Company placed $100 million in subordinated debt in the form of 10-year
noncallable notes. The notes were priced at 7.55 percent, or 64 basis points
over the 10-year Treasury note. During the second half of 1993, the Company
placed three $100 million subordinated debt issuances.
CONSOLIDATED BALANCE SHEET
June 30 March 31 December 31 June 30
(In Millions, Except Shares) 1994 1994 1993 1993
ASSETS
Cash and due from banks $ 1,488 $ 1,932 $ 1,682 $ 1,713
Federal funds sold 119 131 1,032 201
Securities purchased under agreements to resell 293 268 306 257
Trading account securities 58 60 55 102
Available-for-sale securities 3,863 4,334 3,319 216
Investment securities (market value: 6/30/93 - $4,013) -- -- -- 3,937
Loans 18,704 18,256 18,779 17,964
Less allowance for credit losses 440 442 423 435
Net loans 18,264 17,814 18,356 17,529
Bank premises and equipment 391 387 382 381
Interest receivable 140 141 129 141
Customers' liability on acceptances 144 143 186 133
Other assets 1,172 1,299 938 970
Total assets $25,932 $26,509 $26,385 $25,580
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 5,829 $ 6,808 $ 7,489 $ 6,589
Interest-bearing 13,088 13,960 13,542 13,777
Total deposits 18,917 20,768 21,031 20,366
Federal funds purchased 1,602 414 553 692
Securities sold under agreements to repurchase 780 640 369 290
Other short-term funds borrowed 379 365 412 361
Long-term debt 1,312 1,090 1,015 857
Acceptances outstanding 144 143 186 133
Other liabilities 553 800 574 552
Total liabilities 23,687 24,220 24,140 23,251
Shareholders' equity:
Preferred stock 106 106 266 379
Common stock, par value $1.25 a share-authorized
200,000,000 shares;
issued: 6/30/94 and 3/31/94 - 116,300,311 shares;
12/31/93 and
6/30/93 - 114,793,547 shares 145 145 144 143
Capital surplus 729 731 676 676
Retained earnings 1,340 1,320 1,328 1,182
Less cost of common stock in treasury: 6/30/94 -
2,144,277 shares; 3/31/94 - 398,337 shares;
12/31/93 - 5,391,883 shares;
6/30/93 - 1,738,780 shares (75) (13) (169) (51)
Total shareholders' equity 2,245 2,289 2,245 2,329
Total liabilities and shareholders' equity $25,932 $26,509 $26,385 $25,580
CONSOLIDATED STATEMENT OF INCOME
Six Months Ended
June 30 June 30
(In Millions, Except Per-Share Data) 1994 1993
INTEREST INCOME
Loans $700.4 $692.1
Securities:
Taxable 100.2 118.4
Exempt from federal income taxes 6.1 6.7
Other interest income 11.7 18.7
Total interest income 818.4 835.9
INTEREST EXPENSE
Deposits 174.4 227.6
Federal funds purchased and
repurchase agreements 29.7 15.2
Other short-term funds borrowed 6.8 9.0
Long-term debt 29.9 26.1
Total interest expense 240.8 277.9
Net interest income 577.6 558.0
Provision for credit losses 47.0 71.2
Net interest income after
provision for credit losses 530.6 486.8
NONINTEREST INCOME
Trust fees 78.6 72.0
Credit card fees 79.5 63.0
Service charges on deposit accounts 58.5 58.3
Other 88.9 88.4
Total noninterest income 305.5 281.7
NONINTEREST EXPENSE
Salaries 192.7 196.8
Employee benefits 47.0 46.7
Net occupancy 43.7 47.8
Furniture and equipment 39.3 35.7
FDIC insurance 23.8 23.5
Advertising 16.2 9.8
Amortization of goodwill and
other intangible assets 17.9 15.2
Other personnel costs 16.5 11.8
Professional services 15.0 16.9
Data processing 6.9 16.5
Merger, integration and restructuring -- 72.2
Other 96.5 96.6
Total noninterest expense 515.5 589.5
Income before income taxes 320.6 179.0
Applicable income taxes 119.4 68.0
Net income $201.2 $111.0
Net income applicable to
common equity $193.8 $ 96.1
EARNINGS PER COMMON SHARE
Average common and
common equivalent shares 113,487,845 113,689,543
Net income $ 1.71 $ 0.85
CONSOLIDATED STATEMENT OF INCOME (continued)
Three Months Ended
June 30 March 31 December 31 September 30 June 30
(In Millions, Except Per-Share Data) 1994 1994 1993 1993 1993
INTEREST INCOME
Loans $362.2 $338.2 $352.6 $353.9 $348.6
Securities:
Taxable 53.8 46.4 46.9 52.9 58.4
Exempt from federal income taxes 3.1 3.0 4.7 3.2 3.3
Other interest income 6.8 4.9 6.8 4.9 7.1
Total interest income 425.9 392.5 411.0 414.9 417.4
INTEREST EXPENSE
Deposits 89.3 85.1 94.0 102.1 107.0
Federal funds purchased and
repurchase agreements 20.6 9.1 7.6 9.0 7.5
Other short-term funds borrowed 3.2 3.6 4.9 5.1 5.1
Long-term debt 16.5 13.4 14.9 13.4 13.0
Total interest expense 129.6 111.2 121.4 129.6 132.6
Net interest income 296.3 281.3 289.6 285.3 284.8
Provision for credit losses 23.0 24.0 27.0 27.0 33.1
Net interest income after
provision for credit losses 273.3 257.3 262.6 258.3 251.7
NONINTEREST INCOME
Trust fees 40.1 38.5 37.5 36.6 36.5
Credit card fees 43.5 36.0 37.5 36.6 34.5
Service charges on deposit accounts 29.1 29.4 28.4 28.6 28.0
Other 41.0 47.9 42.5 40.2 41.5
Total noninterest income 153.7 151.8 145.9 142.0 140.5
NONINTEREST EXPENSE
Salaries 98.5 94.2 95.0 97.3 97.3
Employee benefits 23.3 23.7 19.6 20.0 21.9
Net occupancy 22.2 21.5 22.8 22.8 23.2
Furniture and equipment 20.2 19.1 19.2 17.8 18.5
FDIC insurance 12.3 11.5 11.5 11.4 11.7
Advertising 8.1 8.1 4.7 6.0 5.1
Amortization of goodwill and
other intangible assets 9.9 8.0 7.7 7.7 7.7
Other personnel costs 8.8 7.7 8.5 7.2 6.6
Professional services 8.5 6.5 10.7 9.1 8.6
Data processing 3.4 3.5 4.7 5.8 8.4
Merger, integration and restructuring -- -- -- -- 72.2
Other 47.0 49.5 50.9 50.6 50.8
Total noninterest expense 262.2 253.3 255.3 255.7 332.0
Income before income taxes 164.8 155.8 153.2 144.6 60.2
Applicable income taxes 62.1 57.3 57.3 53.5 26.7
Net income $102.7 $ 98.5 $ 95.9 $ 91.1 $ 33.5
Net income applicable to
common equity $100.8 $ 93.0 $ 90.4 $ 83.7 $ 26.1
EARNINGS PER COMMON SHARE
Average common and
common equivalent shares 116,209,225 110,771,619 111,278,886 113,721,471 113,392,157
Net income $ 0.87 $ 0.84 $ 0.81 $ 0.74 $ 0.23
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common
Shares Preferred Common Capital
(In Millions, Except Shares) Outstanding* Stock Stock Surplus
BALANCE DECEMBER 31, 1992 113,450,425 $378.5 $141.8 $657.7
Net Income
Dividends declared:
Preferred
Common
Purchase of treasury stock (1,988,000)
Issuance of common stock:
Dividend reinvestment 132,410 0.3
Stock option and stock
purchase plans 1,459,932 1.7 18.2
BALANCE JUNE 30, 1993 113,054,767 $378.5 $143.5 $676.2
BALANCE DECEMBER 31, 1993 109,401,664 $265.9 $143.5 $676.4
Net Income
Dividends declared:
Preferred
Common
Purchase of treasury stock (3,002,566)
Repurchase of stock warrants (2.3)
Acquisition of Boulevard
Bancorp, Inc. for common
stock, warrants, and
stock options 6,227,649 1.9 54.9
Other business acquisitions 526,000
Issuance of common stock:
Dividend reinvestment 95,613 0.2
Stock option and stock
purchase plans 645,359 (0.6)
Stock warrants exercised 262,315
Redemption of preferred stock (160.0)
Change in unrealized
gains/(losses)
BALANCE JUNE 30, 1994 114,156,034 $105.9 $145.4 $728.6
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (continued)
Unrealized
Gains/(Losses)
Retained on Securities, Treasury
(In Millions, Except Shares) Earnings Net of Taxes Stock** Total
BALANCE DECEMBER 31, 1992 $1,140.3 $ -- $ -- $2,318.3
Net Income 111.0 111.0
Dividends declared:
Preferred (14.9) (14.9)
Common (54.1) (54.1)
Purchase of treasury stock (57.8) (57.8)
Issuance of common stock:
Dividend reinvestment 3.6 3.9
Stock option and stock purchase plans 2.8 22.7
BALANCE JUNE 30, 1993 $1,182.3 $ -- $(51.4) $2,329.1
BALANCE DECEMBER 31, 1993 $1,294.6 $34.0 $(169.4) $2,245.0
Net Income 201.2 201.2
Dividends declared:
Preferred (7.4) (7.4)
Common (65.0) (65.0)
Purchase of treasury stock (103.9) (103.9)
Repurchase of stock
warrants (2.3)
Acquisition of Boulevard
Bancorp, Inc. for common
stock, warrants, and
stock options 149.4 206.2
Other business acquisitions (8.1) 16.2 8.1
Issuance of common stock:
Dividend reinvestment 3.1 3.3
Stock option and stock
purchase plans (9.6) 19.7 9.5
Stock warrants exercised (6.2) 9.8 3.6
Redemption of preferred stock (7.0) (167.0)
Change in unrealized
gains/(losses) (85.9) (85.9)
BALANCE JUNE 30, 1994 $1,392.5 $(51.9) $(75.1) $2,245.4
*Defined as total common shares less common stock held in treasury.
**Ending treasury shares were 2,144,277 at June 30, 1994; 5,391,883 at
December 31, 1993; 1,738,780 at June 30, 1993; and none at December 31, 1992.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30
(In Millions) 1994 1993
OPERATING ACTIVITIES
Net income $ 201.2 $ 111.0
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for credit losses 47.0 71.2
Depreciation and amortization of bank premises and equipment 31.5 28.5
Provision for deferred income taxes 21.9 28.5
Amortization of goodwill and other intangible assets 17.9 15.2
Amortization and write-downs of loan servicing related intangibles 9.8 19.8
Write-downs of other real estate 1.2 11.5
Provision for merger, integration and restructuring -- 72.2
Changes in operating assets and liabilities, excluding the effects of
purchase acquisitions:
Increase in trading account securities (3.3) (8.3)
Decrease (increase) in loans held for sale 782.6 (337.7)
Decrease in securities held for sale -- 244.6
Decrease (increase) in accrued receivables 41.1 (27.6)
Decrease in accrued liabilities (93.9) (180.2)
Other - net 10.0 (23.7)
Net cash provided by operating activities 1,067.0 25.0
INVESTING ACTIVITIES
Net cash provided (used) by:
Interest-bearing deposits with banks 8.1 322.4
Loans outstanding of subsidiaries 52.5 (627.3)
Securities purchased under agreements to resell 13.0 (44.1)
Securities transactions:
Sales 311.5 42.7
Maturities 519.6 360.1
Purchases (697.3) (644.0)
Proceeds from sales/repayments of other real estate 30.0 62.4
Proceeds from sales of bank premises and equipment 2.9 16.5
Purchases of bank premises and equipment (26.3) (69.2)
Purchases of loans (29.9) (1.3)
Cash and cash equivalents of acquired subsidiaries 72.8 --
Business acquisitions, net of cash received (15.8) (3.0)
Other - net (10.3) 0.1
Net cash provided (used) by investing activities 230.8 (584.7)
FINANCING ACTIVITIES
Net cash provided (used) by:
Deposits (3,458.5) (733.5)
Federal funds purchased and securities sold under agreements to repurchase 1,154.3 (138.9)
Short-term borrowings (52.9) 6.2
Long-term debt transactions:
Proceeds 359.3 145.0
Principal payments (77.8) (119.6)
Redemption of preferred stock (167.0) --
Proceeds from dividend reinvestment, stock option, and stock purchase plans 12.8 26.6
Purchase of treasury stock and stock warrants (106.2) (57.8)
Stock warrants exercised 3.6 --
Cash dividends (72.4) (69.0)
Net cash used by financing activities (2,404.8) (941.0)
Change in cash and cash equivalents (1,107.0) (1,500.7)
Cash and cash equivalents at beginning of period 2,713.5 3,414.2
Cash and cash equivalents at end of period $ 1,606.5 $ 1,913.5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and therefore do not include
all information and footnotes necessary for a complete presentation of
financial position, results of operations, and cash flow activity required
under generally accepted accounting principles. In the opinion of management
of the Company, all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of results have been made and the
Company believes such presentation is adequate to make the information
presented not misleading. For further information, refer to the consolidated
financial statements and footnotes included in the Company's annual report on
Form 10-K for the year ended December 31, 1993. Certain amounts in prior
periods have been reclassified to conform to the current presentation.
NOTE B
Accounting Changes
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES Effective
December 31, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") 115, "Accounting for Certain
Investments in Debt and Equity Securities," and reported its entire $3.3
billion of investment securities as available for sale. SFAS 115 requires
that investments in debt securities and equity securities with readily
determinable fair values be classified into one of three categories which
then establishes the accounting requirements. The accounting for two of the
categories, trading securities and held-to-maturity securities, is
essentially the same as prior practice. The other category,
available-for-sale securities, is accounted for at fair value with unrealized
holding gains or losses being reported as a separate component of
shareholders' equity. At June 30, 1994, the Company's available-for-sale
securities portfolio was $3.9 billion, with an after-tax unrealized loss of
$51.9 million recorded in shareholders' equity.
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN The Financial Accounting
Standards Board has issued SFAS 114, "Accounting by Creditors for Impairment
of a Loan," which requires creditors to establish a valuation allowance when
it is probable that all the principal and interest due under the contractual
terms of a loan will not be collected. The impairment is measured based on
the present value of expected future cash flows based on the loans' effective
interest rate, observable market price or fair value of a collateral
dependent loan. This differs from the Company's current policy in that it
requires establishing a valuation allowance for uncollectible interest in
addition to the principal amounts of impaired loans. The adoption of this
Statement is required for fiscal years beginning after December 15, 1994. The
adoption of SFAS 114 is not expected to have a material effect on the
Company.
NOTE C
Business Combinations and Asset Acquisitions
On July 21, 1994, the Company announced that it had signed a definitive
purchase agreement to acquire Metropolitan Financial Corporation ("MFC"), a
regional financial services holding company headquartered in Minneapolis,
Minnesota. As of June 30, 1994, MFC had approximately $8.0 billion in assets,
$5.6 billion in deposits, and more than 200 offices principally in North
Dakota, Minnesota, Nebraska, Iowa, Kansas, South Dakota, Wisconsin, and
Wyoming. The Company will issue .6803 shares of FBS common stock for each
share of MFC's outstanding common stock at closing, subject to certain
adjustments based on changes in FBS stock price. Based on current outstanding
MFC shares, approximately 21.2 million shares would be issued. The
transaction, which will be accounted for using the pooling-of-interests
method, is subject to the approval of regulatory agencies and both companies'
shareholders and is expected to close in the first quarter of 1995.
On April 29, 1994, the Company completed the acquisition of First Financial
Investors, Inc., the holding company for St. Louis Bank for Savings, FSB,
located in Duluth, Minnesota. This acquisition was accounted for under the
purchase method of accounting and is not material to the Company's financial
position.
On March 25, 1994, the Company completed the acquisition of Boulevard
Bancorp, Inc. ("Boulevard"), a commercial bank holding company headquartered
in Chicago, Illinois, and under the terms of the purchase agreement, 6.2
million shares of the Company's common stock were issued. In addition,
Boulevard's outstanding stock options and warrants were converted into stock
options and warrants for the Company's common stock, at the same conversion
rate.
In connection with the Boulevard acquisition, the Company announced it would
buy back existing shares of its common stock approximately equal to the
number of shares issued at the time of closing of the Boulevard acquisition.
The repurchase of these shares began in October 1993 and was completed in
June 1994.
The acquisition of Boulevard was accounted for under the purchase method of
accounting, and accordingly, the purchase price of $206.2 million was
allocated to assets acquired and liabilities assumed based on their fair
market values at the date of acquisition. The excess of the purchase price
over the fair market values of net assets acquired was recorded as goodwill.
Core deposit intangibles of $23 million are being amortized over the
estimated lives of the deposits of approximately 10 years, and goodwill of
$144 million is being amortized over 25 years. The total assets acquired and
liabilities assumed at the time of acquisition were $1.6 billion and $1.5
billion, respectively. The results of operations of Boulevard have been
included in the Company's Consolidated Statement of Income since the date of
acquisition.
The following pro forma operating results of the Company assume that the
Boulevard acquisition had occurred at the beginning of each period presented.
In addition to combining the historical results of operations of the two
companies, the pro forma results include adjustments for the estimated effect
of purchase accounting on the Company's results.
Six Months Ended
June 30,
(In Millions, Except Per-Share
Amounts) 1994 1993
Net interest income $590.3 $584.8
Net income 184.3 112.0
Net income per share 1.52 .81
Three Months Ended
June 30,
(In Millions, Except Per-Share
Amounts) 1994 1993
Net interest income $296.3 $297.9
Net income 102.7 33.5
Net income per share .87 .22
The pro forma information may not be indicative of the results that
actually would have occurred if the combination had been in effect on
the dates indicated or which may be obtained in the future.
On February 28, 1994, the Company completed the acquisitions of
American Bankshares of Mankato, Inc. and Eagle Insurance Agency. These
acquisitions, accounted for using the pooling-of-interests method, are
not material to the Company's financial position or operating results
and prior years were not restated.
In the second quarter of 1993, the Company completed the acquisition
of Colorado National Bankshares, Inc. ("CNB"), which had $3.0 billion
in assets, $2.5 billion in deposits and $271 million in common equity.
Under the terms of the merger agreement, 20.6 million shares of the
Company's common stock were issued. The CNB acquisition was accounted
for using the pooling-of-interests method. Accordingly, the Company's
financial statements have been restated for all periods prior to the
acquisition to include the accounts and operations of CNB.
Additionally, the Company has signed agreements to acquire two
financial institutions in markets in which the Company has an existing
presence, serving to strengthen the Company's retail banking market
shares in these communities. United Bank of Bismarck, with
approximately $123 million in assets, is located in Bismarck, North
Dakota. Green Mountain Bancorporation, Inc., the holding company for
Green Mountain Bank, located in Lakewood, Colorado, has approximately
$32 million in assets. These acquisitions are expected to close in the
third quarter of 1994.
In January 1994, the Company announced that it had signed an agreement
to acquire the domestic corporate trust business of J.P. Morgan & Co.,
Incorporated. This business unit provides trust services for
approximately 650 clients with 3,800 bond issues in the areas of
municipal, revenue, housing and corporate bond indenture trusteeships.
The transaction is expected to close in the third quarter of 1994.
NOTE D
Securities
The detail of the amortized cost and fair value of securities
consisted of the following:
June 30, 1994 March 31, 1994 December 31, 1993 June 30, 1993
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
(In Millions) Cost Value Cost Value Cost Value Cost Value
U.S. Treasury $1,626 $1,575 $1,855 $1,829 $1,527 $1,541 $1,858 $1,892
Mortgage-backed securities 1,603 1,556 1,750 1,730 1,286 1,300 1,242 1,259
Other U.S. agencies 217 212 260 260 51 52 278 280
State and political subdivisions 183 189 186 194 184 196 183 197
Other 318 331 312 321 216 230 376 385
Total $3,947 $3,863 $4,363 $4,334 $3,264 $3,319 $3,937 $4,013
As described in Note B to the Consolidated Financial Statements, the
Company adopted SFAS 115 at December 31, 1993, and at that date, all
of the Company's investment securities were classified as available
for sale. At June 30, 1993, investment securities with amortized cost
totaling $3.9 billion were held as long-term investments, and
securities held for sale totaling $216 million were carried at lower
of cost or market.
NOTE E
Loans
The composition of the loan portfolio was as follows:
June 30 March 31 December 31 June 30
(In Millions) 1994 1994 1993 1993
COMMERCIAL:
Commercial* $ 7,039 $ 6,713 $ 6,176 $ 5,864
Financial institutions 876 1,370 2,004 1,573
Real estate:
Commercial mortgage 1,696 1,599 1,495 1,496
Construction 256 262 231 203
HLTs 260 191 183 209
Total commercial loans 10,127 10,135 10,089 9,345
CONSUMER:
Residential mortgage 2,375 2,389 2,422 2,552
Residential mortgage held for sale 284 355 1,088 1,068
Home equity and second mortgage 2,028 1,803 1,755 1,489
Credit card 2,142 1,801 1,757 1,762
Revolving credit 661 666 690 643
Automobile 413 429 342 427
Installment 390 384 376 438
Student loans held for sale 284 294 260 240
Total consumer loans 8,577 8,121 8,690 8,619
Total loans $18,704 $18,256 $18,779 $17,964
* Tax-exempt industrial development loans dependent upon real estate
interests included in commercial loans were aproximately $213 million, $218
million, $218 million and $256 million at June 30, 1994, March 31, 1994,
December 31, 1993, and June 30, 1993, respectively.
NOTE F
Long-Term Debt
During June 1994, the Company's largest subsidiary bank, First Bank National
Association, completed a $100 million subordinated debt offering bearing
interest at the rate of 7.55% with a maturity date of June 15, 2004. These
notes may not be redeemed prior to maturity.
Long-term debt (debt with original maturities of more than one year)
consisted of the following:
June 30 March 31 December 31 June 30
(In Millions) 1994 1994 1993 1993
Fixed-rate 8.00% subordinated debentures - due October 31, 1994 $ 11 $ 11 $ -- $ --
Floating-rate subordinated capital notes - due November 29, 1996 150 150 150 150
Floating-rate subordinated capital notes - due May 30, 1997 -- -- -- 93
Fixed-rate 6.63% subordinated notes - due May 15, 2003 100 100 100 100
Fixed-rate 6.00% subordinated notes - due October 15, 2003 100 100 100 --
Fixed-rate 7.55% subordinated notes - due June 15, 2004 100 -- -- --
Fixed-rate 8.00% subordinated notes - due July 2, 2004 125 125 125 125
Step-up subordinated notes - due August 15, 2005 100 100 100 --
Floating-rate subordinated notes - due November 30, 2010 107 107 107 107
Medium-term notes (4.33% to 9.91%) - maturities to April 1997 433 314 248 192
Other 86 83 85 90
Total $1,312 $1,090 $1,015 $ 857
NOTE G
Shareholders' Equity
On May 18, 1994, the Board of Directors authorized the repurchase of
up to 1.5 million shares of the Company's common stock. The shares
will be used for issuance under the Employee Stock Purchase Plan,
the Dividend Reinvestment Plan and other corporate purposes. As of
June 30, 1994, approximately 188,000 shares with a cost of $7.1
million had been repurchased.
On January 19, 1994, the Board of Directors authorized the redemption
of $159.3 million of the Company's preferred stock, consisting of the
entire $89 million of Preferred Stock Series 1989A and the entire
$70.3 million of Preferred Stock Series 1989B. This redemption was
completed on April 1, 1994. During 1993, the Company had redeemed the
$100 million Series 1983A Adjustable Rate Cumulative Preferred Stock.
As of June 30, 1994, the Company had repurchased $8.6 million of the
Preferred Stock Series 1991A.
The Company completed its previously announced common stock repurchase programs,
including the program related to the Boulevard acquisition. The repurchased
shares were used to replace a portion of the shares issued in connection with
the Boulevard and Bank Shares Incorporated acquisitions, to provide for
issuances under the Employee Stock Purchase Plan, the Dividend Reinvestment Plan
and other corporate purposes.
NOTE H
Income Taxes
The components of income tax expense were:
Three Months Ended
June 30 March 31 December 31 September 30 June 30
(In Millions) 1994 1994 1993 1993 1993
FEDERAL:
Current tax $43.2 $38.0 $12.6 $48.1 $ 3.6
Deferred tax provision (credit) 10.8 10.8 35.1 (4.8) 17.3
Federal income tax 54.0 48.8 47.7 43.3 20.9
STATE:
Current tax 8.0 8.3 4.3 10.3 5.8
Deferred tax provision (credit) 0.1 0.2 5.3 (0.1) --
State income tax 8.1 8.5 9.6 10.2 5.8
Total income tax provision $62.1 $57.3 $57.3 $53.5 $26.7
The reconciliation between income tax expense and the amount computed
by applying the statutory federal income tax rate was as follows:
Three Months Ended
June 30 March 31 December 31 September 30 June 30
(In Millions) 1994 1994 1993 1993 1993
Tax at statutory rate (35%; 34% prior
to September 30, 1993) $57.7 $54.5 $53.6 $52.4 $20.5
State income tax, net of federal tax benefit 5.3 5.5 6.3 6.5 3.2
Tax effect of:
Tax-exempt interest:
Loans (1.5) (1.4) (1.6) (1.9) (1.9)
Securities (1.0) (1.0) (0.9) (1.1) (1.3)
Amortization of goodwill 2.3 1.5 1.6 1.7 2.5
Non-deductible interest expense 0.2 0.1 0.4 0.5 4.3
Change in tax rate on deferred assets -- -- -- (6.6) --
Other items (0.9) (1.9) (2.1) 2.0 (0.6)
Applicable income taxes $62.1 $57.3 $57.3 $53.5 $26.7
At June 30, 1994, the Company's net deferred tax asset was $229.9
million, compared with $219.7 million at March 31, 1994, $160.0
million at December 31, 1993, and $195.5 million at June 30, 1993.
NOTE I
Commitments, Contingent Liabilities and Off-Balance Sheet Financial
Instruments
The Company uses various financial instruments that have off-balance
sheet risk in the normal course of business to meet the financing
needs of its customers and to manage its interest rate risk. The
contract or notional amounts of these financial instruments were as
follows:
June 30 March 31 December 31 June 30
(In Millions) 1994 1994 1993 1993
Commitments to extend credit (net):
Commercial $6,768 $6,340 $5,714 $5,794
Corporate Payment System 2,082 2,037 1,744 1,523
Consumer credit card 7,487 6,636 5,208 4,016
Other consumer 2,419 2,244 2,391 2,986
Standby letters of credit (net of participations) 1,252 1,225 1,208 1,279
Interest rate swap contracts:
Hedge 2,982 3,092 2,811 2,684
Intermediated 189 199 199 319
Interest rate options contracts:
Hedge interest rate floors puchased 950 950 950 250
Intermediated interest rate caps and floors purchased 220 214 198 172
Intermediated interest rate caps and floors written 220 214 198 172
Liquidity support guarantees and futures and forward contracts 400 628 1,509 1,825
Foreign currency commitments:
Commitments to purchase 1,429 1,171 1,101 929
Commitments to sell 1,432 1,166 1,100 929
Mortgages sold with recourse 142 201 198 304
Commitments to sell loans 878 973 132 92
The Company enters into interest rate swap contracts to hedge its
balance sheet for risk caused by fluctuations in interest rates and as
an intermediary for customers. Activity for the six months ended June
30, 1994, with respect to interest rate swaps which the Company used
to hedge medium-term notes, subordinated debt, deposit notes,
long-term certificates of deposit, deposit accounts, and savings
certificates was as follows:
(In Millions)
Notional amount outstanding at December 31, 1993 $2,811
Additions 600
Maturities 429
Terminations --
Notional amount outstanding at June 30, 1994 $2,982
Notional amount outstanding at June 30, 1993 $2,684
For interest rate swaps designated as hedges, the weighted average
interest rates to be paid were 4.27 percent and 3.26 percent at June
30, 1994, and 1993, respectively. At these same dates, the weighted
average interest rates to be received were 6.75 percent and 7.11
percent. FBS is a receiver of fixed and payer of floating on all
hedges as of June 30, 1994. The amortization of deferred gains and
losses on terminated hedges decreased net interest income by $.1
million and $.2 million in the second quarters of 1994 and 1993,
respectively. Unamortized deferred losses, net of gains, were $1.5
million at June 30, 1994. The Company will amortize these losses and
gains through the year 2000. At June 30, 1994, interest rate floors
totaling $950 million with an average remaining maturity of 3.5 years
hedged floating rate commercial loans. At June 30, 1993, interest rate
floors totaling $250 million with an average maturity of 4.8 years
hedged floating rate commercial loans. For interest rate floors
designated as hedges, the strike rate ranged from 3.25 to 4.00 at June
30, 1994, and was 4.00 at June 30, 1993.
NOTE J
Supplemental Information to the Consolidated Financial Statements
CONSOLIDATED BALANCE SHEET Time certificates of deposit in denominations of
$100,000 or more totaled $981 million, $1,105 million, $1,061 million, and
$1,224 million at June 30, 1994, March 31, 1994, December 31, 1993, and June
30, 1993, respectively.
CONSOLIDATED STATEMENT OF CASH FLOWS Listed below are supplemental
disclosures to the Consolidated Statement of Cash Flows.
Six Months Ended June 30
(In Millions) 1994 1993
Income taxes paid $ 90.1 $ 43.5
Interest paid 244.3 322.8
Net noncash transfers to foreclosed property 5.5 15.0
Noncash merger-related transfers to securities held for sale -- 181.6
Change in unrealized loss on available-for-sale securities, net of taxes of $52.6 (85.9) --
Cash acquisitions of businesses:
Fair value of noncash assets acquired 174.4 40.8
Liabilities assumed (158.6) (37.8)
Net $ 15.8 $ 3.0
Stock acquisition of Boulevard and related subsidiaries:
Fair value of noncash assets acquired 1,674.0 --
Net cash acquired 72.8 --
Liabilities assumed (1,540.6) --
Net value of common stock issued $ 206.2 --
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
1994 1993
----------------------------- -----------------------------
% Change
Interest Interest Average
Yields Yields Balance
For the Six Months Ended June 30 and and Increase
(In Millions) Balance Interest Rates Balance Interest Rates (Decrease)
ASSETS
Securities:
U.S. Treasury $ 1,714 $ 44.5 5.24% $ 1,834 $ 53.1 5.84% (6.5)%
Mortgage-backed securities 1,518 43.6 5.79 1,565 49.2 6.34 (3.0)
State & political subdivisions 184 10.1 11.07 190 10.4 11.04 (3.2)
U.S. agencies and other 442 11.2 5.11 565 13.9 4.96 (21.8)
Total securities 3,858 109.4 5.72 4,154 126.6 6.15 (7.1)
Unrealized loss on
available-for-sale securities (8)
Net securities 3,850 4,154
Trading account securities 62 1.3 4.23 103 2.2 4.31 (39.8)
Federal funds sold and resale agreements 456 7.9 3.49 955 13.9 2.94 (52.3)
Loans:
Commercial:
Commercial 6,760 239.1 7.13 6,008 215.7 7.24 12.5
Financial institutions 1,420 17.3 2.46 1,050 14.4 2.77 35.2
Real Estate:
Commercial mortgage 1,557 64.5 8.35 1,529 63.2 8.34 1.8
Construction 238 8.9 7.54 212 8.0 7.61 12.3
Total commercial 9,975 329.8 6.67 8,799 301.3 6.91 13.4
Consumer:
Residential mortgage 2,369 86.2 7.34 2,560 104.8 8.26 (7.5)
Residential mortgages held for sale 478 15.9 6.71 759 27.7 7.36 (37.0)
Credit card 1,880 114.2 12.25 1,727 118.9 13.88 8.9
Other 3,550 158.8 9.02 3,140 145.7 9.36 13.1
Total consumer 8,277 375.1 9.14 8,186 397.1 9.78 1.1
Total loans 18,252 704.9 7.79 16,985 698.4 8.29 7.5
Allowance for credit losses 445 454 (2.0)
Net loans 17,807 16,531 7.7
Other earning assets 117 2.5 4.31 190 4.5 4.78 (38.4)
Total earning assets* 22,745 826.0 7.32 22,387 845.6 7.62 1.6
Cash and due from banks 1,664 1,637 1.6
Other assets 1,641 1,662 (1.3)
Total assets $25,597 $25,232 1.4
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 6,293 $ 5,776 9.0%
Interest-bearing deposits:
Interest checking 2,626 18.1 1.39 2,430 26.6 2.21 8.1
Money market accounts 3,978 49.7 2.52 3,898 46.0 2.38 2.1
Other savings accounts 1,472 14.1 1.93 1,463 16.1 2.22 0.6
Savings certificates 4,252 62.9 2.98 5,303 103.3 3.93 (19.8)
Certificates over $100,000 1,008 29.6 5.92 1,231 35.6 5.83 (18.1)
Total interest-bearing deposits 13,336 174.4 2.64 14,325 227.6 3.20 (6.9)
Short-term borrowings 1,831 36.5 4.02 1,220 24.2 4.00 50.1
Long-term debt 1,140 29.9 5.29 831 26.1 6.33 37.2
Total interest-bearing liabilities 16,307 240.8 2.98 16,376 277.9 3.42 (0.4)
Other liabilities 767 753 1.9
Preferred equity 157 379 (58.6)
Common equity 2,073 1,948 6.4
Total liabilities and
shareholders' equity $25,597 $25,232 1.4
Net interest income $585.2 $567.7
Gross interest margin 4.34% 4.20%
Gross interest margin without
taxable-equivalent increments 4.28% 4.11%
Net interest margin 5.19% 5.11%
Net interest margin without taxable-
equivalent increments 5.12% 5.03%
Interest and rates are presented on a fully taxable-equivalent basis under
a tax rate of 35 percent for 1994 and 34 percent for 1993.
Interest income and rates on loans include loan fees. Nonaccrual loans are
included in average loan balances.
* Before deducting the allowance for credit losses and excluding the
unrealized loss on available-for-sale securities.
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
1994 1993
----------------------------- -----------------------------
% Change
Interest Interest Average
Yields Yields Balance
For the Three Months Ended June 30 and and Increase
(In Millions) Balance Interest Rates Balance Interest Rates (Decrease)
ASSETS
Securities:
U.S. Treasury $ 1,762 $ 22.9 5.21% $ 1,849 $ 26.6 5.77% (4.7)%
Mortgage-backed securities 1,686 24.4 5.80 1,657 24.2 5.86 1.8
State & political subdivisions 185 5.2 11.27 195 5.4 11.11 (5.1)
U.S. agencies and other 554 7.2 5.21 512 5.9 4.62 8.2
Total securities 4,187 59.7 5.72 4,213 62.1 5.91 (0.6)
Unrealized loss on
available-for-sale securities (59) --
Net securities 4,128 4,213
Trading account securities 61 0.7 4.60 108 1.1 4.09 (43.5)
Federal funds sold and resale agreements 366 3.6 3.95 758 5.5 2.91 (51.7)
Loans:
Commercial:
Commercial 7,071 128.2 7.27 6,038 111.8 7.43 17.1
Financial institutions 1,129 5.6 1.99 1,191 7.3 2.46 (5.2)
Real Estate:
Commercial mortgage 1,610 33.8 8.42 1,535 31.8 8.31 4.9
Construction 247 4.8 7.79 199 3.6 7.26 24.1
Total commercial 10,057 172.4 6.88 8,963 154.5 6.91 12.2
Consumer:
Residential mortgage 2,377 42.6 7.19 2,567 51.1 7.98 (7.4)
Residential mortgages held for sale 317 5.4 6.83 878 15.6 7.13 (63.9)
Credit card 2,023 58.0 11.50 1,727 58.0 13.47 17.1
Other 3,695 86.1 9.35 3,157 72.9 9.26 17.0
Total consumer 8,412 192.1 9.16 8,329 197.6 9.52 1.0
Total loans 18,469 364.5 7.92 17,292 352.1 8.17 6.8
Allowance for credit losses 452 448 0.9
Net loans 18,017 16,844 7.0
Other earning assets 122 1.3 4.27 84 1.3 6.21 45.2
Total earning assets* 23,205 429.8 7.43 22,455 422.1 7.54 3.3
Cash and due from banks 1,682 1,701 (1.1)
Other assets 1,749 1,639 6.7
Total assets $26,125 $25,347 3.1
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 6,187 $ 6,272 (1.4)%
Interest-bearing deposits:
Interest checking 2,681 9.4 1.41 2,428 12.7 2.10 10.4
Money market accounts 3,978 25.5 2.57 3,874 22.0 2.28 2.7
Other savings accounts 1,561 7.7 1.98 1,447 8.1 2.25 7.9
Savings certificates 4,244 32.1 3.03 5,049 46.4 3.69 (15.9)
Certificates over $100,000 1,004 14.6 5.83 1,214 17.8 5.88 (17.3)
Total interest-bearing deposits 13,468 89.3 2.66 14,012 107.0 3.06 (3.9)
Short-term borrowings 2,258 23.8 4.23 1,192 12.6 4.24 89.4
Long-term debt 1,222 16.5 5.42 847 13.0 6.16 44.3
Total interest-bearing liabilities 16,948 129.6 3.07 16,051 132.6 3.31 5.6
Other liabilities 750 696 7.8
Preferred equity 106 379 (72.0)
Common equity 2,134 1,949 9.5
Total liabilities and
shareholders' equity $26,125 $25,347 3.1
Net interest income $300.2 $289.5
Gross interest margin 4.36% 4.23%
Gross interest margin without
taxable-equivalent increments 4.29% 4.15%
Net interest margin 5.19% 5.17%
Net interest margin without taxable-
equivalent increments 5.12% 5.09%
Interest and rates are presented on a fully taxable-equivalent basis under
a tax rate of 35 percent for 1994 and 34 percent for 1993.
Interest income and rates on loans include loan fees. Nonaccrual loans are
included in average loan balances.
* Before deducting the allowance for credit losses and excluding the
unrealized loss on available-for-sale securities.
Part II -- Other Information
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
11 Computation of Primary and Fully Diluted Net Income Per Common Share
12 Computation of Ratio of Earnings to Fixed Charges
(B) REPORTS ON FORM 8-K
During the three months ended June 30, 1994, the Company filed the following
reports on Form 8-K:
Form 8-K filed April 20, 1994, relating to first quarter 1994 earnings.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST BANK SYSTEM, INC.
/s/ DAVID J. PARRIN
By: David J. Parrin
Senior Vice President & Controller
(Chief Accounting Officer and Duly Authorized Officer)
August 15, 1994
EXHIBIT 11
COMPUTATION OF PRIMARY AND FULLY DILUTED NET INCOME PER COMMON SHARE
SIX MONTHS ENDED JUNE 30 THREE MONTHS ENDED JUNE 30
(Dollars In Millions, Except Per Share Data) 1994 1993 1994 1993
PRIMARY:
Average shares outstanding 111,979,891 112,792,351 114,125,408 112,528,399
Net effect of the assumed purchase of stock under the stock option
and stock purchase plans - based on the treasury stock method using
average market price 1,507,954 897,192 2,083,817 863,758
113,487,845 113,689,543 116,209,225 113,392,157
Net income $201.2 $111.0 $102.7 $33.5
Preferred dividends (7.4) (14.9) (1.9) (7.4)
Net income applicable to common equity $193.8 $96.1 100.8 $26.1
Net income per common share $1.71 $0.85 $0.87 $0.23
FULLY DILUTED:*
Average shares outstanding 111,979,891 112,792,351 114,125,408 112,528,399
Net effect of the assumed purchase of stock under the stock option
and stock purchase plans - based on the treasury stock method using
average market price or period-end market price, whichever is higher 1,966,056 983,346 2,109,998 943,165
Assumed conversion of Series 1991A Preferred Stock 3,655,684 -- 3,655,684 --
117,601,631 113,775,697 119,891,090 113,471,564
Net income $201.2 $111.0 $102.7 $33.5
Preferred dividends (3.6) (10.9) -- (5.4)
Series 1991A Preferred Stock dividend -- (4.0) -- (2.0)
Net income applicable to common equity $197.6 $96.1 $102.7 $26.1
Net income per common share $1.68 $0.84 $0.86 $0.23
* This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 17 of APB Opinion
No. 15 because it results in dilution of less than 3%.
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Six Three
Months Months
Ended Ended
June 30 June 30
(Dollars in Thousands) 1994 1994
EARNINGS
1. Net income $201,200 $102,700
2. Applicable income taxes 119,400 62,100
3. Net income before taxes (1 + 2) $320,600 $164,800
4. Fixed charges:
a. Interest expense excluding interest on deposits $ 66,400 $ 40,300
b. Portion of rents representative of interest and amortization
of debt expense 13,418 7,642
c. Fixed charges excluding interest on deposits (4a + 4b) 79,818 47,942
d. Interest on deposits 174,400 89,300
e. Fixed charges including interest on deposits (4c + 4d) $254,218 $137,242
5. Amortization of interest capitalized $ 2,383 $ 1,229
6. Earnings excluding interest on deposits (3 + 4c + 5) 402,801 213,971
7. Earnings including interest on deposits (3 + 4e + 5) 577,201 303,271
8. Fixed charges excluding interest on deposits (4c) 79,818 47,942
9. Fixed charges including interest on deposits (4e) 254,218 137,242
RATIO OF EARNINGS TO FIXED CHARGES
10. Excluding interest on deposits (line 6/line 8) 5.05 4.46
11. Including interest on deposits (line 7/line 9) 2.27 2.21
FIRST BANK SYSTEM First Class
P.O. Box 522 U.S. Postage
Minneapolis, Minnesota PAID
55480 Permit No. 2440
Minneapolis, MN
SHAREHOLDER INQUIRIES
STOCK AND DIVIDEND INFORMATION
For matters related specifically to First Bank System stock records or
dividend payments, contact the Office of the Corporate Secretary,
612-973-0334.
DIVIDEND REINVESTMENT
For information regarding First Bank System's dividend reinvestment plan,
contact First Chicago Trust Company of New York, P.O. Box 13531, Newark, New
Jersey 07188-0001, 800-446-2617.
FINANCIAL INFORMATION
For further information contact John Danielson, Senior Vice President,
612-973-2261, or Karin Glasgow, Assistant Vice President, 612-973-2264.