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 MARCH 31, 1995
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 April 30, 1995
Common Stock, $1.25 Par Value 135,567,431 shares
Total # of pages: 27
Exhibit Index appears on page 1.
FINANCIAL SUMMARY
MARCH 31 MARCH 31
(DOLLARS in millions, except per share amounts) 1995 1994
THREE MONTHS ENDED
Income from continuing operations $133.8 $111.9
Discontinued operations -- (1.2)
Net income $133.8 $110.7
PER COMMON SHARE
Income from continuing operations $.97 $.80
Discontinued operations -- (.01)
Net income $.97 $.79
Dividends paid $.3625 $.29
Common shareholders' equity 19.58 19.49
RETURN ON AVERAGE ASSETS
Income from continuing operations 1.66 % 1.41 %
Discontinued operations -- (.01)
Return on average assets 1.66% 1.40%
RETURN ON AVERAGE COMMON EQUITY
Income from continuing operations 21.1% 17.2 %
Discontinued operations -- (.2)
Return on average common equity 21.1% 17.0 %
Net interest margin (taxable-equivalent basis) 5.05% 4.75%
Efficiency ratio 55.7 58.5
MARCH 31 DECEMBER 31
1995 1994
PERIOD END
Loans $25,215 $24,556
Allowance for credit losses 470 475
Assets 32,712 34,128
Total shareholders' equity 2,757 2,612
Common equity to total assets 8.1% 7.3%
Tier 1 capital ratio 7.7 7.3
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 Operations (Item 2) 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 23
PART II -- OTHER INFORMATION
Submission of Matters to a Vote of Security Holders (Item 4) 24
Exhibits and Reports on Form 8-K (Item 6) 24
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
Earnings Summary
First Bank System, Inc. (the "Company") reported first quarter 1995 operating
earnings of $133.8 million, an increase of $21.9 million, or 19.6 percent,
from the first quarter of 1994. On a per share basis, operating earnings were
$.97 in the first quarter of 1995, compared with $.80 in the first quarter of
1994, an increase of 21.3 percent. Reported net income for the first quarters
of 1995 and 1994 was $133.8 million and $110.7 million, or $.97 and $.79 per
share, respectively.
Return on average assets and return on average common equity in the first
quarter of 1995 were 1.66 percent and 21.1 percent, respectively, compared
with returns of 1.41 percent and 17.2 percent from continuing operations in
the first quarter of 1994. The net interest margin on a taxable-equivalent
basis increased 30 basis points from the first quarter of 1994, to 5.05
percent. The efficiency ratio, the ratio of expenses to revenues, was 55.7
percent, an improvement of 282 basis points from 58.5 percent in the first
quarter of 1994.
The strong quarterly improvement in net income resulted from loan and fee
income growth, ongoing expense control, continued improvement in credit
quality and effective capital management. During the first quarter of 1995,
net interest income on a taxable-equivalent basis increased $27.3 million, or
8.0 percent, and noninterest income increased $18.2 million, or 11.3 percent,
as compared with the first quarter of 1994. The provision for credit losses
was essentially unchanged from that of the first quarter of 1994. Noninterest
expense for the quarter increased only 3.8 percent over last year, despite
the addition of expenses associated with several acquisitions. These included
Boulevard Bancorp, Inc. ("Boulevard") and Rocky Mountain Financial
Corporation ("Rocky Mountain"), which were both acquired on March 25, 1994,
and the corporate trust business of J.P. Morgan, acquired on September 2,
1994. All were accounted for as purchases. Compared with noninterest expense
for the first quarter of 1994, adjusted to include the operations of
Boulevard, Rocky Mountain and the acquired corporate trust business, on a pro
forma basis, noninterest expense for the current quarter declined by $20.4
million, or 6.3 percent.
Nonperforming assets declined $16.6 million, or 7.1 percent, from December
31, 1994, to a level of $215.7 million at March 31, 1995. The ratio of the
allowance for credit losses to nonperforming loans at quarter-end was 318
percent compared with 283 percent at the end of 1994.
ACQUISITIONS
On January 24, 1995, the Company issued approximately 21.7 million shares to
complete its merger with Metropolitan Financial Corporation ("MFC"). At
December 31, 1994, MFC had $7.9 billion in assets, $5.5 billion in deposits,
and 211 offices, principally in North Dakota, Minnesota, Nebraska, Iowa,
Kansas, South Dakota, Wisconsin, and Wyoming. Results for 1994 have been
restated to reflect this pooling of interests. Because of regulatory
restrictions on nonbanking activities, the Company expects to sell Edina
Realty, Inc., MFC's real estate brokerage subsidiary, within two years.
Accordingly, the operations of Edina Realty are accounted for as discontinued
operations in the accompanying financial statements.
TABLE 1. Summary of Consolidated Income
THREE MONTHS ENDED
(Taxable-equivalent basis; MARCH 31 MARCH 31
Dollars in millions, except per share data) 1995 1994
Interest income $629.1 $518.3
Interest expense 262.3 178.8
Net interest income 366.8 339.5
Provision for credit losses 26.0 26.6
Net interest income after provision for credit losses 340.8 312.9
Noninterest income 179.6 161.4
Noninterest expense 304.3 293.1
Income from continuing operations before income taxes 216.1 181.2
Taxable-equivalent adjustment 3.5 3.7
Income taxes 78.8 65.6
Income from continuing operations 133.8 111.9
Loss from discontinued operations -- (1.2)
Net income $133.8 $110.7
Return on average assets 1.66% 1.40%
Return on average common equity 21.1 17.0
Net interest margin 5.05 4.75
Efficiency ratio 55.7 58.5
Per share:
Income from continuing operations $0.97 $0.80
Loss from discontinued operations -- (0.01)
Net income $0.97 $0.79
Common dividends paid $0.3625 $0.29
TABLE 2. Line of Business Financial Performance
TRUST AND
RETAIL & COMMUNITY COMMERCIAL INVESTMENT CONSOLIDATED
BANKING PAYMENT SYSTEMS BANKING GROUP COMPANY
THREE MONTHS ENDED MARCH 31,
(Dollars in Millions) 1995 1994 1995 1994 1995 1994 1995 1994 1995 1994
CONDENSED INCOME STATEMENT:
Net interest income
(taxable-equivalent basis) $259.7 $232.7 $41.1 $46.6 $57.7 $54.3 $ 8.3 $ 5.9 $366.8 $339.5
Provision for credit
losses 3.3 9.6 20.3 14.5 2.4 2.5 -- -- 26.0 26.6
Noninterest income 53.8 62.1 58.4 41.2 18.0 15.3 49.4 42.8 179.6 161.4
Noninterest expense 192.2 194.9 47.8 40.5 24.1 23.3 40.2 34.4 304.3 293.1
Income taxes and
taxable-equivalent
adjustment 44.9 34.4 12.0 12.6 18.7 16.8 6.7 5.5 82.3 69.3
Income from continuing
operations $ 73.1 $ 55.9 $19.4 $20.2 $30.5 $27.0 $10.8 $ 8.8 133.8 111.9
Loss from discontinued
operations -- (1.2)
Net income $133.8 $110.7
AVERAGE BALANCE SHEET DATA:
Commercial loans $5,584 $4,932 $ 643 $ 391 $4,794 $5,141 $ -- $ -- $11,021 $10,464
Consumer loans 11,277 10,856 2,294 1,736 -- -- -- -- 13,571 12,592
Assets 22,141 22,369 3,661 2,671 6,055 6,391 845 728 32,702 32,159
Deposits 20,854 21,199 32 22 1,768 2,729 921 961 23,575 24,911
Common equity 1,524 1,604 340 288 424 463 243 142 2,531 2,497
Return on average assets* 1.34% 1.01% 2.15% 3.07% 2.04% 1.71% ** ** 1.66% 1.41%
Return on average common
equity* 19.5 14.1 23.1 28.4 29.2 23.7 18.0% 25.1% 21.1 17.2
Efficiency ratio 61.3 66.1 48.0 46.1 31.8 33.5 69.7 70.6 55.7 58.5
* From continuing operations
**Not meaningful
Note: Preferred dividends are not allocated to the business lines.
In February 1995, the Company entered into agreements to sell deposits of
approximately $960 million and incidental assets associated with 63 former
MFC branch locations. These dispositions are expected to close in the second
and third quarters of 1995. This portion of MFC's branch network was not part
of MFC's core business and was used primarily as a funding source. In 1994,
the 63 branches contributed approximately 2 percent of total loans originated
and 2.5 percent of noninterest income generated by MFC. The incidental
assets, consisting primarily of deposit-related loans and premises and
equipment, represent less than 1 percent of MFC's total assets. The
operations of these branches were not material to MFC in 1994. The $960
million of deposits will be replaced with other sources of funding.
On March 16, 1995, the Company completed the acquisition of First Western
Corporation ("FWC"), a $317 million bank holding company based in Sioux
Falls, South Dakota. FWC owned Western Bank, which had nine branches in and
around Sioux Falls, South Dakota. The transaction was accounted for as a
purchase.
Line of Business Financial Review
Each of the Company's four business lines--Retail and Community Banking,
Payment Systems, Commercial Banking, and the Trust and Investment
Group--contributed to the strong financial performance in the first quarter
of 1995.
Business line results are derived from the Company's business unit
profitability reporting system. Designations, assignments, and allocations
may change from time to time as management accounting systems are enhanced or
product lines change. During 1995 certain methodologies changed and 1994
results are presented on a consistent basis.
RETAIL AND COMMUNITY BANKING - Retail and Community Banking, which includes
consumer, small business and middle market banking services and residential
mortgage lending, achieved strong revenue growth while containing costs. Net
income increased 30.8 percent to $73.1 million in the first quarter of 1995
compared with the first quarter of 1994. Return on assets increased to 1.34
percent from 1.01 percent, and return on equity increased to 19.5 percent from
14.1 percent.
The increase in net interest income is attributable to strong home equity loan
growth and aggressive small- and middle-market business lending. Noninterest
income was down over the prior year quarter primarily due to reduced residential
mortgage activity resulting from higher market interest rates. The decrease in
the provision for credit losses reflects continuing improvement in credit
quality. Noninterest expense improved slightly despite the acquisition of
Boulevard and Rocky Mountain on March 25, 1994, reflecting the benefits of
integrating recent business combinations including MFC which was integrated
within one month of completing the transaction. The efficiency ratio improved to
61.3 percent in the first quarter of 1995 compared with 66.1 percent in the
first quarter of 1994.
PAYMENT SYSTEMS - Payment Systems includes consumer credit card, corporate and
purchasing card services, card-accessed secured and unsecured lines of credit,
ATM processing, and merchant processing. This business line reported net
earnings of $19.4 million in the first quarter of 1995, down slightly from first
quarter of 1994. Return on assets was 2.15 percent compared with 3.07 percent in
the first quarter of 1994. Return on equity was 23.1 percent compared with 28.4
percent for the same quarter in the previous year.
Net interest income decreased due to lower interest rates earned on retail
credit cards, consistent with recent rate competitiveness in the industry, and
increased Corporate Card activity. The increase in fee-based noninterest income
is attributable to growth in the sales volume of the Corporate Card, the
Purchasing Card, the Northwest Airlines WorldPerks credit card, and merchant
processing. The increase in the provision for credit losses reflects growth in
the loan portfolio and a significant increase in sales volume. Noninterest
expense increased due to the initial investment expenses associated with the
expanded automated teller machines ("ATM") network. Net earnings from this
business line are expected to be stronger in the remaining quarters of 1995 as
the ATM network's transaction volume increases and the seasonal retail credit
card activity increases. Payment Systems continues to be cost effective as
measured by its efficiency ratios of 48.0 percent in the first quarter of 1995
and 46.1 percent in the first quarter of 1994. Excluding initial investment
expenses incurred with the ATM network the efficiency ratio was essentially flat
year over year.
COMMERCIAL BANKING - Commercial Banking, which provides lending, treasury
management, and other financial services to middle market, large corporate and
mortgage banking companies, contributed net earnings of $30.5 million in the
first quarter of 1995, a 13.0 percent increase over the first quarter of 1994.
Return on assets rose to 2.04 percent in the first quarter of 1995 from 1.71
percent in the same quarter a year ago.
The earnings increase reflects continuing strong performance in both net
interest income and noninterest income as well as ongoing credit quality and
expense control. Commercial Banking's average loans, excluding loans to mortgage
banking companies, increased $655 million, or 18.2 percent, from the first
quarter of 1994. The decline in deposits relates to less activity in the
mortgage banking sector. The efficiency ratio improved to 31.8 percent in the
first quarter of 1995 compared with 33.5 percent in the first quarter of 1994.
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 an earnings increase of
22.7 percent in the first quarter of 1995 compared with the first quarter of
1994. The return on average common equity was 18.0 percent in the first quarter
of 1995 and 25.1 percent in the first quarter of the prior year.
The current quarter's net earnings increased over the first quarter of 1994
primarily due to recent acquisitions, including J.P. Morgan and Boulevard.
Stronger noninterest income is due to growth in Corporate Trust and investment
sales and management fees as well as recent acquisitions. Although the recent
acquisitions have improved net earnings, the return on equity reflects increased
investment in recent acquisitions. The efficiency ratio was 69.7 percent in the
first quarter compared with 70.6 percent in the first quarter of 1994,
reflecting the effective integration of acquisitions and revenue growth.
TABLE 3. Analysis of Net Interest Income
THREE MONTHS ENDED
MARCH 31 MARCH 31
(Dollars in millions) 1995 1994
Net interest income (taxable-equivalent basis) $366.8 $339.5
Average balances of earning assets supported by:
Interest-bearing liabilities $23,534 $21,897
Noninterest-bearing liabilities 5,932 7,073
Total earning assets $29,466 $28,970
Average yields and weighted average rates (taxable-equivalent basis):
Earning assets yield 8.66% 7.26%
Rate paid on interest-bearing liabilities 4.52 3.31
Gross interest margin 4.14% 3.95%
Net interest margin 5.05% 4.75%
Net interest margin without taxable-equivalent increments 5.00% 4.70%
Income Statement Analysis
NET INTEREST INCOME - Net interest income on a taxable-equivalent basis was
$366.8 million in the first quarter of 1995, an increase of $27.3 million, or
8.0 percent, from the first quarter of 1994. The improvement in net interest
income reflects increases in average loan yields and average loan balances. The
average yield on loans in the first quarter was 9.06 percent, or 139 basis
points higher than the yield of 7.67 percent in the first quarter of last year,
reflecting increases in the Company's average reference rate during 1994 and the
increasing proportion of higher-yielding consumer loans. The effect of the
increase in average yields on loans more than offset the impact of higher rates
paid on interest-bearing liabilities; the average of these rates was 4.52
percent in the first quarter, or 121 basis points higher than for the same
period of 1994. Average loans totaled $24.6 billion in the first quarter of
1995, an increase of $1.5 billion, or 6.7 percent, reflecting growth in both
nonmortgage consumer and commercial loans (including loans acquired with
Boulevard and Rocky Mountain) partially offset by decreases in the balance of
loans to mortgage bankers and residential mortgage loans. Excluding these
mortgage-related balances and the effect of Boulevard and Rocky Mountain loans,
average loans for the quarter increased $2.3 billion, or 14.4 percent, over the
same quarter in 1994, reflecting strong growth in small business and middle
market loans, credit cards, and home equity loans. The decline in nonperforming
assets also contributed to the growth in net interest income.
The net interest margin on a taxable-equivalent basis was 5.05 percent in the
first quarter of 1995, an increase of 30 basis points from 4.75 percent in the
first quarter of 1994. The increase in the net interest margin from a year ago
results from both a shift in the mix of earning assets from lower margin
securities and residential mortgage-related loan balances to higher yielding
consumer and commercial loans, and a widening of the spread between earning
assets and interest-bearing liabilities that repriced during the period.
PROVISION FOR CREDIT LOSSES - The provision for credit losses was $26.0 million
in the first quarter of 1995, essentially unchanged from the level in the first
quarter of 1994. Total net charge-offs of $32.1 million also were essentially
unchanged from the total of $31.3 million for the same quarter a year ago. The
allowance for credit losses was $470.4 million at March 31, 1995, down slightly
from $474.7 million at December 31, 1994. Reserve coverage remains strong as the
ratio of the allowance for credit losses to nonperforming loans increased to 318
percent at quarter-end compared with 283 percent at the end of 1994.
NONINTEREST INCOME - Noninterest income in the first quarter of 1995 was $179.6
million, an increase of $18.2 million, or 11.3 percent, from the first quarter
last year, reflecting growth in credit card and trust fees. Credit card fees
increased $15.6 million, or 43.3 percent, from the prior year quarter,
reflecting higher sales volumes for Corporate Card, Purchasing Card, and the
Northwest Airlines WorldPerks credit card. Trust fees were up over the first
quarter of 1994 by $3.2 million, or 8.3 percent, reflecting growth in corporate
trust fees, including fees attributable to the September 1994 J.P. Morgan
corporate trust unit acquisition. Insurance commissions were higher this quarter
because of increased commission income on annuity sales.
NONINTEREST EXPENSE - Noninterest expense was $304.3 million in the first
quarter of 1995, an increase of $11.2 million, or 3.8 percent, from first
quarter of 1994. The increase reflects the addition of Boulevard, Rocky Mountain
and the J.P. Morgan corporate trust acquisition. Compared with noninterest
expense for the first quarter of 1994, adjusted to include the expenses of these
acquisitions on a pro forma basis, noninterest expense for the first quarter of
1995 declined by $20.4 million, or 6.3 percent. This decline reflects the
benefits of integrating recent business combinations, including MFC which was
integrated within one month of closing the transaction. The Company's efficiency
ratio, the measure of expenses to revenues, improved to 55.7 percent for the
quarter from 58.5 percent for the same quarter a year ago.
TABLE 4. Noninterest Income
THREE MONTHS ENDED
MARCH 31 MARCH 31
(Dollars in millions) 1995 1994
Credit card fees $51.6 $36.0
Trust fees 41.7 38.5
Service charges on deposit accounts 32.1 32.2
Insurance commissions 6.3 5.8
Trading account profits and commissions 3.2 2.7
Other 44.7 46.2
Total noninterest income $179.6 $161.4
TABLE 5. Noninterest Expense
THREE MONTHS ENDED
MARCH 31 MARCH 31
(Dollars in millions, except per employee data) 1995 1994
Salaries $112.1 $106.5
Employee benefits 28.5 27.3
Total personnel expense 140.6 133.8
Net occupancy 25.7 25.5
Furniture and equipment 23.5 21.4
Amortization of goodwill and other intangible assets 14.1 10.7
FDIC insurance 13.6 14.6
Advertising 6.3 9.5
Other personnel costs 7.6 8.6
Professional services 6.6 7.5
Data processing 4.3 4.9
Printing, stationery and supplies 4.8 5.7
Postage 5.9 5.8
Telephone 5.8 6.2
Other real estate -- 0.9
Other 45.5 38.0
Total noninterest expense $304.3 $293.1
Efficiency ratio* 55.7% 58.5%
Quarterly average number of employees (full-time equivalents) 13,874 14,406
Annualized personnel expense per employee $40,536 $37,151
*Computed as noninterest expense divided by the sum of net interest income on
a taxable-equivalent basis and noninterest income net of securities gains and
losses.
Total salaries and benefits expense for the first quarter of 1995 increased $6.8
million, or 5.1 percent, from the first quarter of 1994, primarily due to
acquisitions in 1994. Average full-time equivalent employees decreased by 10.3
percent, to 13,874 in the first quarter of 1995, compared with 15,459 (including
the employees of Boulevard, Rocky Mountain and the J.P Morgan trust business, on
a pro forma basis) for the first quarter of 1994. The increase in net occupancy
and furniture and equipment expense for the current quarter, compared with the
first quarter of 1994, also was the result of acquisitions. Advertising expense
decreased $3.2 million, or 33.7 percent, over the 1994 level, reflecting
efficiencies realized from the overlap of MFC's and the Company's geographic
markets. Compared with the same period of 1994, amortization of goodwill and
intangibles expense for the first quarter increased by $3.4 million, or 31.8
percent, due to recent acquisitions.
PROVISION FOR INCOME TAXES - The provision for income taxes was $78.8 million in
the first quarter of 1995, compared with $65.6 million in the first quarter of
1994. The increase primarily results from a higher level of taxable income.
At March 31, 1995, the Company's net deferred tax asset was $312.8 million,
compared with $363.0 million at December 31, 1994. For further information
regarding income taxes, refer to Note H on page 20.
Balance Sheet Analysis
LOANS - On an aggregate basis, the Company's loan portfolio increased $659
million, or 2.7 percent, to $25.2 billion at March 31, 1995, from $24.6 billion
at December 31, 1994. An increase of $942 million primarily in the commercial,
automobile, and home equity and second mortgage portfolios was offset by a $283
million decrease in loans to mortgage bankers and residential mortgages.
Commercial. The Company's portfolio of commercial loans totaled $7.8 billion at
March 31, 1995, up $828 million from December 31, 1994. The increase over prior
quarter reflects growth in small business and middle-market business lending and
in the Payment Systems balances associated with corporate and purchasing cards.
Financial Institutions. The portfolio of loans to financial institutions totaled
$.6 billion at March 31, 1995, a decrease of $228 million from the $.8 billion
balance at December 31, 1994. The decrease from December 31, 1994, is
attributable to cyclical activity in the Company's secured loans to mortgage
banking firms. The mortgage banking firms' loan volume decreased due to a
decline in refinancing activity in response to a rise in market interest rates.
Commercial Real Estate. The Company's portfolio of commercial real estate
mortgages and construction loans grew approximately $51 million during the first
quarter of 1995, to $2.8 billion at March 31, 1995. The Company is seeing
increased activity in commercial real estate loans as market prices stabilize
and vacant space declines, allowing more projects to meet the Company's
stringent credit standards.
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"), remains at relatively low levels.
At March 31, 1995, the Company had HLT outstandings totaling $348 million and
was committed under definitive agreements to lend an additional amount of
approximately $202 million. This exposure increased from December 31, 1994, when
outstandings were $283 million and additional commitments were $179 million. The
increase in HLT originations is consistent with industry and economic trends.
The Company continues to have vigorous underwriting criteria and monitoring
procedures for HLT lending.
Consumer. Total consumer loan outstandings were $13.6 billion at March 31, 1995,
essentially unchanged from December 31, 1994. A $159 million increase, primarily
in home equity and second mortgages and automobile loans, was offset by a $216
million decrease in residential mortgage loans, residential mortgage loans held
for sale, and credit card loans. Home equity and second mortgages increased
primarily due to successful promotions, and automobile loans increased due to
growth in indirect auto loans. The reduction in residential mortgage loans is
the result of management's decision to focus on other consumer loan products.
Residential mortgage loans held for sale declined primarily due to fewer housing
starts and refinancings as a result of rising market interest rates. The
decrease in credit cards reflects seasonal fluctuations.
ALLOWANCE FOR CREDIT LOSSES - At March 31, 1995, the allowance for credit losses
was $470.4 million, compared with an allowance of $474.7 million at December 31,
1994. The ratio of the allowance for credit losses to nonperforming loans
increased to 318 percent at March 31, 1995, from 283 percent at December 31,
1994. For further information on the allowance for credit losses, refer to
"Credit Management" on page 9.
SECURITIES - At March 31, 1995, securities were $3.5 billion compared with $5.2
billion at December 31, 1994, reflecting the sale of $1.56 billion of securities
in connection with the Company's interest rate risk management process.
Trading and other short-term earning assets were $344 million at March 31, 1995,
compared with $576 million at December 31, 1994. The decrease is primarily the
result of the decline in federal funds sold and resale agreements to $253
million at March 31, 1995, from $471 million at December 31, 1994.
DEPOSITS - Noninterest-bearing deposits were $5.3 billion at March 31, 1995,
down $.6 billion from December 31, 1994. The decrease in noninterest-bearing
deposits results from reduced loan production at mortgage banking firm customers
which generate noninterest-bearing deposits.
Interest-bearing deposits include certificates of deposit, savings certificates,
money market accounts, other savings accounts, and interest checking products.
These deposits were $18.1 billion at March 31, 1995, essentially unchanged from
December 31, 1994.
TABLE 6. Summary of Allowance for Credit Losses
THREE MONTHS ENDED
MARCH 31 MARCH 31
(Dollars in millions) 1995 1994
Balance at beginning of period $474.7 $466.1
CHARGE-OFFS:
Commercial:
Commercial 4.6 11.4
Financial institutions -- --
Real estate:
Commercial mortgage 7.5 9.8
Construction -- --
HLTs -- 3.1
Total commercial 12.1 24.3
Consumer:
Residential mortgage 1.1 1.2
Credit card 23.0 16.7
Other 15.5 12.1
Total consumer 39.6 30.0
Total 51.7 54.3
RECOVERIES:
Commercial:
Commercial 7.8 9.6
Financial institutions 0.1 0.1
Real estate:
Commercial mortgage 2.3 3.5
Construction -- 0.2
HLTs 2.4 4.0
Total commercial 12.6 17.4
Consumer:
Residential mortgage 0.3 0.1
Credit card 2.7 2.2
Other 4.0 3.3
Total consumer 7.0 5.6
Total 19.6 23.0
NET CHARGE-OFFS:
Commercial:
Commercial (3.2) 1.8
Financial institutions (0.1) (0.1)
Real estate:
Commercial mortgage 5.2 6.3
Construction -- (0.2)
HLTs (2.4) (0.9)
Total commercial (0.5) 6.9
Consumer:
Residential mortgage 0.8 1.1
Credit card 20.3 14.5
Other 11.5 8.8
Total consumer 32.6 24.4
Total 32.1 31.3
Provision charged to operating expense 26.0 26.6
Additions related to acquisitions 1.8 23.9
Balance at end of period $470.4 $485.3
Allowance as a percentage of period-end loans 1.87% 2.04%
Allowance as a percentage of nonperforming loans 318 238
Allowance as a percentage of nonperforming assets 218 153
BORROWINGS - Short-term borrowings, which include federal funds purchased,
securities sold under agreements to repurchase and other short-term borrowings,
were $2.9 billion at March 31, 1995, down from $3.5 billion at the end of 1994.
The decrease is primarily due to repayment of approximately $400 million of
securities sold under agreements to repurchase. Intermediate- and long-term debt
declined to $2.5 billion at March 31, 1995, from $2.7 billion at December 31,
1994 due to maturities.
TABLE 7. Nonperforming Assets
MARCH 31 DECEMBER 31
(Dollars in millions) 1995 1994
Nonaccrual loans $148.0 $167.8
Restructured loans 0.1 0.1
Nonperforming loans 148.1 167.9
Other real estate 63.7 64.0
Other nonperforming assets 3.9 0.4
Nonperforming assets $215.7 $232.3
Accruing loans 90 days or more past due $34.4 $26.0
Nonperforming loans to total loans 0.59 % 0.68 %
Nonperforming assets to total loans plus other real estate 0.85 0.94
Credit Management
The Company's credit management process includes central credit policy and
administration functions and standard 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.
Quarterly, management reviews large loans and all loans experiencing
deterioration of credit quality. A standard 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. The Company's
primary operating region includes Minnesota, Colorado, Montana, North Dakota,
South Dakota, Wisconsin, Iowa, Kansas, Nebraska, Wyoming, and Illinois.
Approximately 80 percent of the loan portfolio consists of extensions of
credit to customers in the Company's primary operating region.
ANALYSIS OF NET LOAN CHARGE-OFFS - Net loan charge-offs totaled $32.1 million in
the first quarter of 1995, essentially unchanged from the first quarter of 1994.
Commercial loan net recoveries for the quarter were $.5 million, compared with
net charge-offs of $6.9 million in the first quarter of 1994, reflecting
continued improvement in the credit quality of this portfolio. Consumer loan net
charge-offs increased $8.2 million, or 33.6 percent, from the first quarter of
1994, commensurate with the growth in the balance of nonmortgage consumer loans
and sales volume activity in credit card products over the past year.
ANALYSIS OF NONPERFORMING ASSETS - Nonperforming assets include all nonaccrual,
impaired, and restructured loans, other real estate and other nonperforming
assets owned by the Company. At March 31, 1995, nonperforming assets totaled
$215.7 million, down $16.6 million, or 7.1 percent, from December 31, 1994. The
ratio of nonperforming assets to loans and other real estate improved to .85
percent at March 31, 1995, from .94 percent at December 31, 1994. Significant
decreases occurred in the categories of nonperforming HLT and commercial loans,
primarily as the result of loan repayments.
TABLE 8. Nonperforming Assets by Industry
MARCH 31 DECEMBER 31
(Dollars in millions) 1995 1994
COMMERCIAL:
Commercial $19.9 $26.6
Real estate:
Commercial mortgage 69.1 71.0
Construction 2.5 1.6
HLTs 1.8 9.9
Total commercial 93.3 109.1
CONSUMER:
Residential mortgage 41.9 43.5
Credit card 10.2 9.9
Other 2.7 5.4
Total consumer 54.8 58.8
Total nonperforming loans 148.1 167.9
OTHER REAL ESTATE 63.7 64.0
OTHER NONPERFORMING ASSETS 3.9 0.4
Total nonperforming assets $215.7 $232.3
TABLE 9. Interest Rate Swap Hedging Portfolio Notional Balances and Yields by
Maturity Date
At March 31, 1995 (Dollars in millions)
WEIGHTED WEIGHTED
AVERAGE AVERAGE
Receive Fixed Swaps* NOTIONAL INTEREST RATE INTEREST RATE
Maturity Date AMOUNT RECEIVED PAID
1995 (remaining nine months) $345 7.79% 6.27%
1996 433 7.96 6.13
1997 275 6.42 6.15
1998 406 5.93 6.18
1999 575 6.88 6.27
After 1999** 675 6.89 6.23
Total $2,709 6.98% 6.21%
* At March 31, 1995, the Company does not have any swaps in its portfolio
which requires it to pay fixed-rate interest.
**At March 31, 1995, all swaps with a maturity after 1999 hedge fixed-rate
subordinated notes.
Interest Rate Risk Management
The Company's principal objective for interest rate risk management is to
control the exposure of net interest income to risks associated with interest
rate movements. The Company uses derivative financial instruments
("derivatives") to hedge on-balance sheet items and, to a lesser extent, in
connection with intermediated transactions for customers. The market risk on
intermediated transactions is limited by entering into generally matching or
offsetting positions. The Company does not enter into derivative contracts
for speculative purposes.
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, simulation modeling which produces
projections of net interest income under various interest rate scenarios and
balance sheet strategies, and valuation modeling which measures the economic
value of various components of the balance sheet under various interest rate
scenarios. The significant assumptions used in these analyses include rate
sensitivities, prepayment risks, and the timing of changes in prime and
deposit rates compared with changes in money market rates.
Including the effect of interest rate swaps, futures, options and other
hedging instruments, the Company had a cumulative positive repricing gap
position at one year of $102 million at March 31, 1995, 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, prepayment risk, and other option risks. Due to these limitations,
management places a greater reliance on simulation and valuation modeling to
measure and manage interest rate risk.
The Company's policy is to maintain a low interest rate risk position by
limiting the amount of forecasted net interest income at risk over a 12-month
period assuming an immediate and sustained 100-basis point change in interest
rates. The Company invests in fixed rate assets or receives the fixed rate
payment on interest rate swaps as a hedge to maintain acceptable interest
rate risk levels.
The derivatives the Company uses to achieve its hedging objectives are
primarily interest rate swaps, caps, and floors. As of March 31, 1995, the
Company received payments on $2.7 billion notional amount of interest rate
swap agreements, based on fixed interest rates, and made payments based on
variable interest rates. These swaps had an average fixed rate of 6.98
percent and an average variable rate, which is tied to various LIBOR rates,
of 6.21 percent. The maturity of these agreements ranged from one month to
9.6 years with an average remaining maturity of 3.9 years.
Swaps contributed to the Company's net interest margin by reducing interest
expense $4.5 million and $25.6 million for the quarters ended March 31, 1995,
and 1994, respectively.
Interest rate caps and floors are used similarly by the Company to minimize the
impact of fluctuating interest rates on earnings. The total notional amount of
cap agreements purchased as of March 31, 1995, was $200 million with a strike
level of 3-month LIBOR at 6.00 percent. The premium on caps is amortized over
the life of the cap. The impact of caps on interest income was not material for
the quarters ended March 31, 1995, or March 31, 1994. The total notional amount
of floor agreements purchased as of March 31, 1995, was $950 million with an
average strike level of 3-month LIBOR at 3.50 percent and an average remaining
maturity of 2.7 years. Floors did not materially affect interest income for the
quarters ended March 31, 1995, or March 31, 1994.
TABLE 10. Capital Ratios
MARCH 31 DECEMBER 31
(Dollars in millions) 1995 1994
Common equity $2,651 $2,494
As a percent of assets 8.1% 7.3%
Tangible common equity* $2,225 $2,082
As a percent of assets 6.9% 6.2%
Total shareholders' equity $2,757 $2,612
As a percent of assets 8.4% 7.7%
Tier 1 capital $2,219 $2,052
As a percent of risk-adjusted assets 7.7% 7.3%
Total risk-based capital $3,405 $3,227
As a percent of risk-adjusted assets 11.8% 11.4%
Leverage ratio 6.9 6.2
*Defined as common equity less goodwill
Forward contracts, totaling $200 million at March 31, 1995, hedged the
interest rate risk of the fixed rate mortgage loans originated and held for
sale by the Company's mortgage subsidiary. The Company enters into foreign
currency commitments primarily as an intermediary for customers. The Company
manages its credit risk on derivative contracts through counterparty and
credit limit approvals and monitoring credit concentration risks. Refer to
Note I on page 21 for further information on interest rate swaps and options.
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 funding needs, excess funding
positions and maintenance of contingent funding sources to achieve a balance
sheet structure that provides sufficient liquidity.
Capital Management
The ratio of common equity to assets increased 80 basis points from December
31, 1994, to 8.1 percent at March 31, 1995. Common equity per share was
$19.58 at March 31, 1995, compared with $18.63 at December 31, 1994. Total
equity to assets was 8.4 percent at March 31, 1995, up from 7.7 percent at
December 31, 1994. The increases are primarily due to earnings retention and
improvement in the market value of available-for-sale securities.
Tier 1 and total risk-based capital ratios were 7.7 percent and 11.8 percent
on March 31, 1995, compared with 7.3 percent and 11.4 percent at December 31,
1994, respectively. The leverage ratio, the measure of Tier 1 capital to
total quarterly average assets, also increased to 6.9 percent from 6.2
percent at the end of 1994.
On January 18, 1995, and February 15, 1995, the Board of Directors authorized
repurchase programs of two million and 14 million shares of common stock,
respectively. The two million share authorization is intended to provide
shares for stock purchase and option plans and for the purchase acquisition
of First Western Corporation. One million shares were repurchased and
subsequently reissued in the first quarter for these purposes. The 14 million
share authorization is intended to allow the Company to buy back shares in
connection with the future excess capital retention expected over the next
two years and is predicated upon such excess capital, as well as for stock
purchase and option plans. No shares have been repurchased under this
authorization at March 31, 1995.
Accounting Changes
Effective January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. ("SFAS") 114, "Accounting by Creditors for Impairment of a Loan."
This Statement 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 effective interest rate of the
loan, or the observable market price or the fair value of a collateral dependent
loan. This differs from the Company's prior policy in that it requires the
establishment of a valuation allowance for uncollectible interest in addition to
the principal amounts of impaired loans. The Statement also requires the
reclassification of in-substance foreclosures from other real estate to
nonperforming loans for all periods if the Company has not taken possession of
the collateral. The adoption of SFAS 114 did not have a material effect on the
Company.
The Financial Accounting Standards Board recently issued SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," which requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The impairment is measured based on the present value of
expected future cash flows from the use of the asset and its eventual
disposition. If the expected future cash flows are less than the carrying
amount of the asset, an impairment loss is recognized based on current fair
values. The Statement is effective for fiscal years ending after December 15,
1995. The adoption of SFAS 121 is not expected to have a material effect on
the Company.
CONSOLIDATED BALANCE SHEET
MARCH 31 DECEMBER 31
(In millions, except shares) 1995 1994
ASSETS
Cash and due from banks $ 1,598 $ 1,707
Federal funds sold 26 135
Securities purchased under agreements to resell 227 336
Trading account securities 90 77
Available-for-sale securities 3,535 5,185
Loans 25,215 24,556
Less allowance for credit losses 470 475
Net loans 24,745 24,081
Bank premises and equipment 475 479
Interest receivable 185 198
Customers' liability on acceptances 189 178
Other assets 1,642 1,752
Total assets $ 32,712 $ 34,128
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 5,346 $ 5,933
Interest-bearing 18,131 18,323
Total deposits 23,477 24,256
Federal funds purchased 1,839 1,630
Securities sold under agreements to repurchase 440 938
Other short-term funds borrowed 650 955
Long-term debt 2,542 2,684
Acceptances outstanding 189 178
Other liabilities 818 875
Total liabilities 29,955 31,516
Shareholders' equity:
Preferred stock 106 118
Common stock, par value $1.25 a share-authorized 200,000,000 shares; issued:
3/31/95 - 135,424,331 shares; 12/31/94 - 134,599,409 shares 169 168
Capital surplus 868 866
Retained earnings 1,671 1,593
Unrealized loss on securities, net of tax (57) (106)
Less cost of common stock in treasury: 3/31/95 - 2,976 shares; 12/31/94 - 767,000
shares -- (27)
Total shareholders' equity 2,757 2,612
Total liabilities and shareholders' equity $ 32,712 $ 34,128
CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED
MARCH 31 MARCH 31
(In millions, except per share data) 1995 1994
INTEREST INCOME
Loans $547.2 $433.7
Securities:
Taxable 66.5 71.2
Exempt from federal income taxes 2.8 3.0
Other interest income 9.1 6.7
Total interest income 625.6 514.6
INTEREST EXPENSE
Deposits 178.4 136.9
Federal funds purchased and repurchase agreements 30.9 9.7
Other short-term funds borrowed 10.1 6.3
Long-term debt 42.9 25.9
Total interest expense 262.3 178.8
Net interest income 363.3 335.8
Provision for credit losses 26.0 26.6
Net interest income after provision for credit losses 337.3 309.2
NONINTEREST INCOME
Credit card fees 51.6 36.0
Trust fees 41.7 38.5
Service charges on deposit accounts 32.1 32.2
Insurance commissions 6.3 5.8
Other 47.9 48.9
Total noninterest income 179.6 161.4
NONINTEREST EXPENSE
Salaries 112.1 106.5
Employee benefits 28.5 27.3
Net occupancy 25.7 25.5
Furniture and equipment 23.5 21.4
Amortization of goodwill and other intangible assets 14.1 10.7
FDIC insurance 13.6 14.6
Advertising 6.3 9.5
Other personnel costs 7.6 8.6
Professional services 6.6 7.5
Data processing 4.3 4.9
Other real estate -- 0.9
Other 62.0 55.7
Total noninterest expense 304.3 293.1
Income from continuing operations before income taxes 212.6 177.5
Applicable income taxes 78.8 65.6
Income from continuing operations 133.8 111.9
Loss from discontinued operations -- (1.2)
Net income $133.8 $110.7
Net income applicable to common equity $131.9 $104.8
EARNINGS PER COMMON SHARE
Average common and common equivalent shares 135,545,733 132,349,979
Income from continuing operations $.97 $.80
Loss from discontinued operations -- $(.01)
Net income $.97 $.79
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
UNREALIZED
GAINS/(LOSSES)
COMMON ON
SHARES PREFERRED COMMON CAPITAL RETAINED SECURITIES, TREASURY
(In millions, except shares) OUTSTANDING* STOCK STOCK SURPLUS EARNINGS NET OF TAXES STOCK** TOTAL
BALANCE DECEMBER 31, 1993 130,408,480 $278.1 $169.8 $852.2 $1,575.4 $ 38.0 $(169.4) $2,744.1
Net Income 110.7 110.7
Dividends declared:
Preferred (5.9) (5.9)
Common (38.1) (38.1)
Purchase of treasury stock (860,812) (0.5) (8.6) (14.8) (23.9)
Acquisition of Boulevard Bancorp,
Inc. for common stock, warrants,
and stock options 6,227,649 1.9 54.9 149.4 206.2
Other business acquisitions 526,000 (8.1) 16.2 8.1
Issuance of common stock:
Dividend reinvestment 51,070 1.6 1.6
Stock option and stock purchase
plans 283,692 0.1 2.7 (3.1) 3.8 3.5
Stock warrants exercised 23,437 0.1 0.1
Redemption of preferred stock (160.0) (7.0) (167.0)
Change in unrealized
gains/(losses) (57.4) (57.4)
BALANCE MARCH 31, 1994 136,659,516 118.1 171.3 901.3 1,623.9 (19.4) (13.2) 2,782.0
BALANCE DECEMBER 31, 1994 133,832,409 $118.1 $168.3 $865.8 $1,592.8 $(106.4) $(26.7) $2,611.9
Net Income 133.8 133.8
Dividends declared:
Preferred (1.9) (1.9)
Common (48.6) (48.6)
Purchase of treasury stock (1,040,475) (39.7) (39.7)
Business acquisitions 1,619,998 0.3 4.3 52.4 57.0
Issuance of common stock:
Dividend reinvestment 57,142 0.1 2.1 2.2
Stock option and stock purchase
plans 926,355 0.7 (2.0) (3.7) 10.9 5.9
Stock warrants exercised 25,926 (0.7) 0.9 0.2
Redemption of preferred stock (12.2) (1.0) (13.2)
Change in unrealized
gains/(losses) 49.8 49.8
BALANCE MARCH 31, 1995 135,421,355 $105.9 $169.3 $868.2 $1,670.7 $ (56.6) $ (0.1) $2,757.4
* Defined as total common shares less common stock held in treasury.
**Ending treasury shares were 2,976 at March 31, 1995; 767,000 at December
31, 1994; 398,337 at March 31, 1994; and 5,391,883 at December 31, 1993.
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31 MARCH 31
(In millions) 1995 1994
OPERATING ACTIVITIES
Net income $133.8 $110.7
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses 26.0 26.6
Depreciation and amortization of bank premises and equipment 19.6 17.8
Provision for deferred income taxes 22.3 14.7
Amortization of goodwill and other intangible assets 14.1 10.7
Amortization and write-downs of loan servicing related intangibles 3.4 9.3
Write-downs of other real estate 0.3 0.6
Changes in operating assets and liabilities, excluding the effects of purchase
acquisitions:
Increase in trading account securities (13.0) (5.2)
(Increase) decrease in loans held for sale (24.2) 598.9
Decrease (increase) in accrued receivables 25.2 (30.3)
Decrease in accrued liabilities (10.3) (58.9)
Other - net 0.7 (16.0)
Net cash provided by operating activities 197.9 678.9
INVESTING ACTIVITIES
Net cash provided (used) by:
Interest-bearing deposits with banks 28.9 31.7
Loans outstanding (445.6) 394.5
Securities purchased under agreements to resell 109.6 37.9
Available-for-sale securities:
Sales 1,739.7 318.5
Maturities 172.0 539.5
Purchases (138.5) (722.1)
Investment securities:
Maturities -- 113.4
Purchases -- (233.4)
Proceeds from sales/repayments of other real estate 10.5 22.2
Proceeds from sales of bank premises and equipment 1.8 2.1
Purchases of bank premises and equipment (16.3) (13.2)
Purchases of loans (1.0) (467.0)
Cash and cash equivalents of acquired subsidiaries 16.3 72.8
Business acquisitions, net of cash received -- (49.8)
Other - net 1.0 8.4
Net cash provided by investing activities 1,478.4 55.5
FINANCING ACTIVITIES
Net cash provided (used) by:
Deposits (1,042.5) (1,600.1)
Federal funds purchased and securities sold under agreements to repurchase (288.7) 1.1
Short-term borrowings (442.3) (63.8)
Purchases of deposits -- 11.1
Long-term debt transactions:
Proceeds -- 532.0
Principal payments (25.4) (196.8)
Redemption of preferred stock (13.2) (0.9)
Proceeds from dividend reinvestment, stock option, and stock purchase plans 8.1 5.1
Purchase of treasury stock (39.7) (23.9)
Stock warrants exercised 0.2 0.1
Cash dividends (50.5) (44.0)
Net cash used by financing activities (1,894.0) (1,380.1)
Change in cash and cash equivalents (217.7) (645.7)
Cash and cash equivalents at beginning of period 1,841.9 2,798.6
Cash and cash equivalents at end of period $1,624.2 $2,152.9
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 Company's
Current Report on Form 8-K filed March 3, 1995, which includes a copy of the
Company's restated consolidated financial statements and footnotes for the
year ended December 31, 1994, which give effect to the acquisition of
Metropolitan Financial Corporation, as discussed in Note C below. Certain
amounts in prior periods have been reclassified to conform to the current
presentation.
NOTE B. Accounting Changes
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN - In January 1995, the Company
adopted Statement of Financial Accounting Standards No. ("SFAS") 114,
"Accounting by Creditors for Impairment of a Loan." The adoption of this
Statement, which did not have a material effect on the Company, 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 loan's effective interest rate, or the observable
market price or the fair value of a collateral dependent loan. Accordingly, the
Company established a valuation allowance for uncollectible interest in addition
to the principal amounts of impaired loans. In addition, in-substance
foreclosures, where the Company has not taken possession of the collateral, were
reclassified from other real estate to nonperforming loans for all periods.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF - The Financial Accounting Standards Board recently issued SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. The impairment is measured based on the present value of expected
future cash flows from the use of the asset and its eventual disposition. If the
expected future cash flows are less than the carrying amount of the asset, an
impairment loss is recognized based on current fair values. The Statement is
effective for fiscal years ending after December 15, 1995. The adoption of SFAS
121 is not expected to have a material effect on the Company.
NOTE C. Business Combinations and Discontinued Operations
METROPOLITAN FINANCIAL CORPORATION - Effective December 23, 1994, the Company
received all regulatory approvals on the previously announced merger with
Metropolitan Financial Corporation ("MFC"), a regional financial services
holding company headquartered in Minneapolis, Minnesota. On January 24, 1995,
the Company issued approximately 21.7 million shares to complete the
transaction. As of December 31, 1994, MFC had approximately $7.9 billion in
assets, $5.5 billion in deposits and 211 offices principally in North Dakota,
Minnesota, Nebraska, Iowa, Kansas, South Dakota, Wisconsin, and Wyoming. The
Company used the pooling of interests method to account for the transaction.
Accordingly, the Company's financial statements have been restated for all
periods prior to the merger to include the accounts and operations of MFC. The
operations of Edina Realty, Inc., MFC's real estate brokerage subsidiary, are
accounted for as discontinued operations because the Company expects to sell the
subsidiary within two years to comply with regulations which restrict nonbanking
activities.
Operating results of the Company and MFC for the three months ended March 31,
1994, prior to restatement are:
THREE MONTHS ENDED
(In millions) MARCH 31, 1994
The Company
Net interest income $281.3
Net income 98.5
MFC
Net interest income 54.5
Loss from discontinued operations (1.2)
Net income 12.2
Combined
Net interest income 335.8
Loss from discontinued operations (1.2)
Net income 110.7
BOULEVARD BANCORP, INC. - On March 25, 1994, the Company completed the
acquisition of Boulevard Bancorp, Inc. ("Boulevard"), a $1.6 billion commercial
bank holding company headquartered in Chicago, Illinois, which was accounted for
as a purchase. Under the terms of the purchase agreement, 6.2 million shares of
the Company's common stock were issued and 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. The Company bought 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 results of operations of
Boulevard are 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 on January 1, 1994. 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, principally amortization of intangibles.
THREE MONTHS ENDED
(In millions, except per-share amounts) MARCH 31, 1994
Net interest income $347.8
Loss from discontinued operations (1.2)
Net income 94.6
Net income per share .64
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.
OTHER ACQUISITIONS - On March 16, 1995, the Company completed the acquisition of
First Western Corporation, parent company of Western Bank, with $317 million in
assets and nine branches in and around Sioux Falls, South Dakota. On March 25,
1994, the Company completed the acquisition of Rocky Mountain Financial
Corporation, a $537 million savings bank holding company located in Cheyenne,
Wyoming. Both of these acquisitions were accounted for as purchases.
NOTE D. Securities
The detail of the amortized cost and fair value of available-for-sale
securities consisted of the following:
MARCH 31, 1995 DECEMBER 31, 1994
AMORTIZED FAIR AMORTIZED FAIR
(In millions) COST VALUE COST VALUE
U.S. Treasury $1,004 $971 $1,177 $1,113
Mortgage-backed
securities 1,945 1,877 3,400 3,297
Other U.S. agencies 236 230 333 323
State and political 178 183 178 181
Other 263 274 269 271
Total $3,626 $3,535 $5,357 $5,185
NOTE E. Loans
The composition of the loan portfolio was as follows:
MARCH 31 DECEMBER 31
(In millions) 1995 1994
COMMERCIAL:
Commercial $7,830 $7,002
Financial institutions 559 787
Real estate:
Commercial mortgage 2,461 2,454
Construction 374 330
HLTs 348 283
Total commercial loans 11,572 10,856
CONSUMER:
Residential mortgage 5,060 5,098
Residential mortgage held for sale 180 197
Home equity and second mortgage 2,505 2,453
Credit card 2,248 2,409
Automobile 1,837 1,770
Revolving credit 737 725
Installment 699 712
Student loans held for sale 377 336
Total consumer loans 13,643 13,700
Total loans $25,215 $24,556
At March 31, 1995, the recorded investment in loans considered impaired under
SFAS 114 was $93 million, which was included in nonaccrual loans. Of this
amount, $3 million was measured using the present value of expected future
cash flows, $82 million using the fair value of the loans' collateral, and $8
million was below the Company's threshold for valuing individual loans. The
carrying value of the impaired loans was greater than or equal to the present
value of expected future cash flows and, accordingly, no allowance for credit
losses was specifically allocated to impaired loans. For the quarter ended
March 31, 1995, the average recorded investment in impaired loans was
approximately $101 million. No interest income was recognized on these
impaired loans during the quarter.
NOTE F. Long-Term Debt
Long-term debt (debt with original maturities of more than one year)
consisted of the following:
MARCH 31 DECEMBER 31
(In millions) 1995 1994
Floating-rate subordinated capital notes - due November 29, 1996 $150 $150
Fixed-rate 8.25% subordinated notes - due October 1, 1999 86 86
Fixed-rate 6.625% subordinated notes - due May 15, 2003 100 100
Fixed-rate 6.00% subordinated notes - due October 15, 2003 100 100
Fixed-rate 7.55% subordinated notes - due June 15, 2004 100 100
Fixed-rate 8.00% subordinated notes - due July 2, 2004 125 125
Fixed-rate 8.35% subordinated notes - due November 1, 2004 100 100
Step-up subordinated notes - due August 15, 2005 100 100
Floating-rate subordinated notes - due November 30, 2010 107 107
Federal Home Loan Bank advances 971 1,088
Medium-term notes (6.125% to 9.89%) - maturities to November 1997 492 514
Other 111 114
Total $2,542 $2,684
NOTE G. Shareholders' Equity
On January 18, 1995, and February 15, 1995, the Board of Directors authorized
repurchase programs of two million and 14 million shares of common stock,
respectively. The two million share authorization is intended to provide
shares for stock purchase and option plans and for the purchase acquisition
of First Western Corporation. One million shares were repurchased and
subsequently reissued in the first quarter for these purposes. The 14 million
share authorization is intended to allow the Company to buy back shares in
connection with the future excess capital retention expected over the next
two years and is predicated upon such excess capital, as well as for stock
purchase and option plans. No shares have been repurchased under this
authorization at March 31, 1995.
On January 19, 1994, the Board of Directors authorized the redemption of the
1989A and 1989B series of preferred stock. This redemption is reflected in
the March 31, 1994, capital ratios.
NOTE H. Income Taxes
The components of income tax expense were:
THREE MONTHS ENDED
MARCH 31 MARCH 31
(In millions) 1995 1994
FEDERAL:
Current tax $52.8 $41.6
Deferred tax provision 18.3 13.9
Federal income tax 71.1 55.5
STATE:
Current tax 3.7 9.3
Deferred tax provision 4.0 0.8
State income tax 7.7 10.1
Total income tax provision $78.8 $65.6
The reconciliation between income tax expense and the amount computed by
applying the statutory federal income tax rate was as follows:
THREE MONTHS ENDED
MARCH 31 MARCH 31
(In millions) 1995 1994
Tax at statutory rate (35%) $74.4 $62.1
State income tax, net of federal tax benefit 5.0 6.5
Tax effect of:
Tax-exempt interest:
Loans (1.3) (1.4)
Securities (1.0) (1.0)
Amortization of goodwill 3.4 1.9
Other items (1.7) (2.5)
Applicable income taxes $78.8 $65.6
At March 31, 1995, the Company's net deferred tax asset was $312.8 million,
compared with $363.0 million at December 31, 1994.
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:
MARCH 31 DECEMBER 31
(In millions) 1995 1994
Commitments to extend credit:
Commercial $6,507 $7,006
Corporate and purchasing cards 3,740 3,210
Consumer credit card 8,609 7,875
Other consumer 2,736 2,628
Letters of Credit:
Standby 1,325 1,321
Commercial 164 175
Interest rate swap contracts:
Hedge 2,709 2,674
Intermediated 127 127
Interest rate options contracts:
Hedge interest rate floors purchased 950 950
Hedge interest rate caps purchased 200 250
Intermediated interest rate caps and floors purchased 121 127
Intermediated interest rate caps and floors written 121 127
Liquidity support guarantees and forward and option contracts 353 338
Foreign currency commitments:
Commitments to purchase 1,062 941
Commitments to sell 1,062 941
Mortgages sold with recourse 306 312
Commitment to sell loans 780 935
The Company enters into interest rate swap contracts to hedge its balance
sheet for risks caused by fluctuations in interest rates and as an
intermediary for customers. Activity for the three months ending March 31,
1995, with respect to interest rate swaps which the Company uses 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, 1994 $2,674
Additions 150
Maturities 115
Notional amount outstanding at March 31, 1995 $2,709
For interest rate swaps designated as hedges, the weighted average interest
rates to be paid were 6.21 percent and 6.09 percent at March 31, 1995, and
December 31, 1994, respectively. At these same dates, the weighted average
interest rates to be received were 6.98 percent and 6.91 percent. The Company
is a receiver of fixed and payer of floating on all hedges as of March 31,
1995. The amortization of deferred gains and losses increased net interest
income by $.4 million in the first quarter of 1995 and decreased net interest
income by $.3 million in the first quarter of 1994. Net unamortized deferred
gains and losses were $6.0 million at March 31, 1995. The Company will
amortize these gains and losses through the year 2000. Interest rate floors
totaling $950 million with an average remaining maturity of 2.7 years at
March 31, 1995, and 3.0 years at December 31, 1994, hedged floating rate
commercial loans. For interest rate floors designated as hedges, the strike
rate ranged from 3.25 to 4.0 at March 31, 1995, and December 31, 1994. At
March 31, 1995, the total notional amount of caps purchased was $200 million
with a strike level of 3-month LIBOR at 6.00 percent. The total notional
amount of caps purchased at December 31, 1994, was $250 million with an
average strike level of 3-month LIBOR at 6.10 percent.
NOTE J. Supplemental Information to the Consolidated Financial Statements
CONSOLIDATED BALANCE SHEET - Time certificates of deposit in denominations of
$100,000 or more totaled $1,240 million and $1,318 million at March 31, 1995,
and December 31, 1994, respectively.
CONSOLIDATED STATEMENT OF CASH FLOWS - Listed below are supplemental disclosures
to the Consolidated Statement of Cash Flows.
THREE MONTHS ENDED
MARCH 31
(In millions) 1995 1994
Income taxes paid $ 36.9 $ 10.7
Interest paid 244.0 185.0
Net noncash transfers to foreclosed property 8.8 8.8
Noncash transfer to other liabilities resulting
from notification to shareholders of preferred stock redemption -- 166.1
Change in unrealized gain (loss) on available-for-sale
securities, net of taxes of $30.8 in 1995 and $32.6 in 1994 49.8 (57.4)
Cash acquisitions of businesses:
Fair value of noncash assets acquired $ -- $ 529.0
Liabilities assumed -- (479.2)
Net $ -- $ 49.8
Stock acquisitions of businesses:
Fair value of noncash assets acquired $ 329.3 $ 1,674.0
Net cash acquired 16.3 72.8
Liabilities assumed (288.6) (1,540.6)
Net value of common stock issued $ 57.0 $ 206.2
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
1995 1994
% CHANGE
INTEREST INTEREST AVERAGE
YIELDS YIELDS BALANCE
For the three months ended March 31 AND AND INCREASE
(In millions) BALANCE INTEREST RATES BALANCE INTEREST RATES (DECREASE)
ASSETS
Securities:
U.S. Treasury $ 1,065 $ 16.2 6.17% $ 1,676 $ 21.8 5.28% (36.5)%
Mortgage-backed securities 2,464 41.6 6.85 2,759 41.9 6.16 (10.7)
State & political subdivisions 175 4.6 10.66 193 5.0 10.51 (9.3)
U.S. agencies and other 551 8.3 6.11 430 5.8 5.47 28.1
Total securities 4,255 70.7 6.74 5,058 74.5 5.97 (15.9)
Unrealized gain/(loss) on
available-for-sale securities (138) 51
Net securities 4,117 5,109
Trading account securities 82 1.1 5.44 64 .6 3.80 28.1
Federal funds sold and resale agreements 311 4.6 6.00 547 4.3 3.19 (43.1)
Loans:
Commercial:
Commercial 7,496 165.1 8.93 6,253 105.6 6.85 19.9
Financial institutions 724 6.9 3.87 1,715 11.7 2.77 (57.8)
Real estate:
Commercial mortgage 2,444 51.5 8.55 2,262 45.7 8.19 8.0
Construction 357 8.2 9.32 234 4.2 7.28 52.6
Total commercial 11,021 231.7 8.53 10,464 167.2 6.48 5.3
Consumer:
Residential mortgage 5,069 96.1 7.69 5,312 98.5 7.52 (4.6)
Residential mortgage held for sale 174 3.5 8.16 680 11.2 6.68 (74.4)
Home equity and second mortgage 2,445 56.7 9.40 1,954 38.8 8.05 25.1
Credit card 2,294 71.5 12.64 1,736 56.2 13.13 32.1
Other 3,589 89.7 10.14 2,910 64.0 8.92 23.3
Total consumer 13,571 317.5 9.49 12,592 268.7 8.65 7.8
Total loans 24,592 549.2 9.06 23,056 435.9 7.67 6.7
Allowance for credit losses 478 480 (.4)
Net loans 24,114 22,576 6.8
Other earning assets 226 3.5 6.28 245 3.0 4.97 (7.8)
Total earning assets* 29,466 629.1 8.66 28,970 518.3 7.26 1.7
Cash and due from banks 1,677 1,718 (2.4)
Other assets 2,175 1,900 14.5
Total assets $32,702 $32,159 1.7%
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $5,511 $6,669 (17.4)%
Interest-bearing deposits:
Interest checking 2,967 12.4 1.69 3,087 10.4 1.37 (3.9)
Money market accounts 3,739 34.3 3.72 4,161 25.1 2.45 (10.1)
Other savings accounts 1,933 12.2 2.56 1,937 10.9 2.28 (.2)
Savings certificates 8,347 102.3 4.97 7,638 71.0 3.77 9.3
Certificates over $100,000 1,078 17.2 6.47 1,419 19.5 5.57 (24.0)
Total interest-bearing deposits 18,064 178.4 4.01 18,242 136.9 3.04 (1.0)
Short-term borrowings 2,801 41.0 5.94 1,682 16.0 3.86 66.5
Long-term debt 2,669 42.9 6.52 1,973 25.9 5.32 35.3
Total interest-bearing liabilities 23,534 262.3 4.52 21,897 178.8 3.31 7.5
Other liabilities 1,020 875 16.6
Preferred equity 106 221 (52.0)
Common equity 2,623 2,467 6.3
Unrealized gain/(loss) on available-for-sale
securities, net of taxes (92) 30 (406.7)
Total liabilities and shareholders' equity $32,702 $32,159 1.7%
Net interest income $366.8 $339.5
Gross interest margin 4.14% 3.95%
Gross interest margin without taxable-
equivalent increments 4.09% 3,89%
Net interest margin 5.05% 4.75%
Net interest margin without taxable-
equivalent increments 5.00% 4.70%
Interest and rates are presented on a fully taxable-equivalent basis under a
tax rate of 35 percent.
Interest income and rates on loans include loan fees. Nonaccrual loans are
included in average loan balances.
* Before deducting the allowance for credit losses and excluding the
unrealized gain/(loss) on available-for-sale securities.
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - The 66th Annual
Meeting of Shareholders of First Bank System, Inc. was held on Wednesday, April
26, 1995, at the Minneapolis Convention Center. John F. Grundhofer, Chairman,
President and Chief Executive Officer, presided.
The holders of 115,834,705 shares of common stock, 87 percent of the 133,374,350
outstanding shares entitled to vote, were represented at the meeting in person
or by proxy. The candidates for election as Class III Directors listed in the
proxy statement were elected to serve three-year terms expiring at the 1998
annual shareholders' meeting. The tabulation for each nominee for office is
listed in the table below.
The proposal to ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the year ending December 31, 1995, was approved. The
proposal to amend the Company's 1991 Stock Incentive Plan to provide for an
increase in the number of stock options automatically granted at the date of
each Annual Meeting of Stockholders and to provide for the grant of certain
"reload" options to nonemployee directors was approved. The 1995 Executive
Incentive Plan was approved.
SUMMARY OF MATTERS VOTED UPON BY SHAREHOLDERS
NUMBER OF SHARES
IN FAVOR WITHHELD
Election of Class III Directors:
John F. Grundhofer 115,329,085 505,620
Delbert W. Johnson 115,344,781 489,924
John H. Kareken 115,321,271 513,434
Kenneth A. Macke 115,289,206 545,499
IN FAVOR AGAINST ABSTAINED NON VOTE
Other Matters:
Ratification of appointment of Ernst & Young LLP
as independent auditors 115,232,026 328,008 274,671 --
Amendments to 1991 Stock Incentive Plan 94,668,524 19,965,192 1,200,989 --
Approval of 1995 Executive Incentive Plan 107,074,303 7,622,647 1,137,755 --
For a copy of the meeting minutes, please write to the Office of the Secretary,
First Bank System, P.O. Box 522, Minneapolis, Minnesota 55480.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10A First Bank System, Inc. 1991 Stock Incentive Plan, as amended*
10B First Bank System, Inc. 1995 Executive Incentive Plan*
10C First Bank System, Inc. Nonqualified Supplemental Executive Retirement
Plan, as amended*
11 Computation of Primary and Fully Diluted Net Income Per Common Share
12 Computation of Ratio of Earnings to Fixed Charges
27 Article 9 Financial Data Schedule*
(b) REPORTS ON FORM 8-K
During the three months ended March 31, 1995, the Company filed the following
reports on Form 8-K:
Form 8-K/A filed February 13, 1995, amending the Form 8-K filed on August
5, 1994, to include revised pro forma financial information.
Form 8-K filed March 3, 1995, which includes the Company's restated
consolidated financial statements and Management's Discussion and Analysis
of Financial Condition and Results of Operations for the year ended
December 31, 1994, to give effect to the acquisition of Metropolitan
Financial Corporation.
Form 8-K/A filed on March 7, 1995, amending the Form 8-K filed on March 3,
1995, which was originally filed with a technical EDGAR error.
*Copies of this exhibit will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the exhibit.
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)
May 12, 1995
First Bank System
P.O. BOX 522
MINNEAPOLIS, MINNESOTA
55480
First Class
U.S. Postage
PAID
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.