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 SEPTEMBER 30, 1996
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 October 31, 1996
Common Stock, $1.25 Par Value 134,518,031 shares
FINANCIAL SUMMARY
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1996 1995
Income before nonrecurring items $ 169.1 $ 145.7 $ 496.3 $ 417.4
Nonrecurring items (31.6) -- 72.1 --
Net income $ 137.5 $ 145.7 $ 568.4 $ 417.4
PER COMMON SHARE
Primary income before nonrecurring items $ 1.22 $ 1.08 $ 3.56 $ 3.05
Nonrecurring items (.23) -- .52 --
Primary net income $ .99 $ 1.08 $ 4.08 $ 3.05
Fully diluted income before nonrecurring items $ 1.20 $ 1.06 $ 3.50 $ 2.99
Nonrecurring items (.22) -- .51 --
Fully diluted net income $ .98 $ 1.06 $ 4.01 $ 2.99
Earnings on a cash basis before nonrecurring items* $ 1.34 $ 1.16 $ 3.91 $ 3.30
Nonrecurring items (.23) -- .71 --
Earnings on a cash basis (fully diluted)* $ 1.11 $ 1.16 $ 4.62 $ 3.30
Dividends paid .4125 .3625 1.2375 1.0875
Common shareholders' equity 22.84 20.33
RETURN ON AVERAGE ASSETS
Income before nonrecurring items 1.90% 1.76% 1.87% 1.70%
Nonrecurring items (.35) -- .27 --
Return on average assets 1.55% 1.76% 2.14% 1.70%
RETURN ON AVERAGE COMMON EQUITY
Income before nonrecurring items 21.4% 21.2% 21.2% 20.9%
Nonrecurring items (4.0) -- 3.2 --
Return on average common equity 17.4% 21.2% 24.4% 20.9%
Net interest margin (taxable-equivalent basis) 4.91% 4.85% 4.89% 4.94%
Efficiency ratio before nonrecurring items 49.8 51.3 50.2 54.0
Efficiency ratio 58.1 53.9 51.4 54.8
SEPTEMBER 30 DECEMBER 31
1996 1995
PERIOD END
Loans $27,037 $26,400
Allowance for credit losses 521 474
Assets 36,843 33,874
Total shareholders' equity 3,181 2,725
Tangible common equity to total
assets 6.7% 6.5%
Tier 1 capital ratio 6.7 6.5
Total risk-based capital ratio 11.4 11.0
Leverage ratio 6.4 6.1
* Calculated by adding amortization of goodwill and other intangible assets
to net income.
Refer to Earnings Summary on page 2 for a description of nonrecurring items.
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) 14
PART II -- OTHER INFORMATION
Exhibits and Reports on Form 8-K (Item 6) 27
Signature 27
Exhibit 3 -- Bylaws of First Bank System, Inc., as amended **
Exhibit 10A -- First Bank System, Inc. 1996 Stock Incentive Plan, as amended **
Exhibit 10B -- First Bank System, Inc. Restated Employee Stock Purchase Plan, as amended **
Exhibit 11 -- Computation of Primary and Fully Diluted Net Income Per Common Share 28
Exhibit 12 -- Computation of Ratio of Earnings to Fixed Charges 29
Exhibit 27 -- Article 9 Financial Data Schedule **
**Copies of this exhibit will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the exhibit.
MANAGEMENT'S DISCUSSION AND ANALYSIS
EARNINGS SUMMARY
First Bank System, Inc. (the "Company") reported third quarter 1996 operating
earnings (net income excluding nonrecurring items) of $169.1 million, an
increase of $23.4 million, or 16 percent, from the third quarter of 1995. On a
per share basis, operating earnings were $1.22 in the third quarter of 1996,
compared with $1.08 in the third quarter of 1995. Return on average assets and
return on average common equity, excluding nonrecurring items, were 1.90 percent
and 21.4 percent, compared with returns of 1.76 percent and 21.2 percent in the
third quarter of 1995. Excluding nonrecurring items, the efficiency ratio (the
ratio of expenses to revenues) improved to 49.8 percent from 51.3 percent in the
third quarter of 1995.
Net income of $137.5 million in the third quarter of 1996 included a $51 million
($31.6 million, or $.23 per share on an after-tax basis) one-time special
assessment by the Federal Deposit Insurance Corporation ("FDIC") on deposits
insured by the Savings Association Insurance Fund ("SAIF"). On a per share
basis, net income was $.99 compared with $1.08 in the third quarter of 1995.
Return on average assets and return on average common equity were 1.55 percent
and 17.4 percent, compared with returns of 1.76 percent and 21.2 percent in the
third quarter of 1995.
Third quarter operating results reflected growth in net interest and noninterest
income, controlled operating expenses, and effective capital management. Net
interest income on a taxable-equivalent basis was $391.3 million, an increase of
$30.8 million (9 percent) from the third quarter of 1995. Noninterest income
increased $34.8 million (19 percent) from the third quarter of 1995, excluding
nonrecurring items, primarily as a result of growth in credit card and trust
fees. Excluding nonrecurring items, third quarter 1996 noninterest expense
increased $24.4 million (9 percent) compared with the same period in 1995
primarily because of acquisitions. Compared with noninterest expense for third
quarter 1995, adjusted to include acquisitions and exclude divestitures,
noninterest expense declined $11.6 million, or 4 percent, in the third quarter
of 1996.
Net income for the first nine months of 1996 was $568.4 million, or $4.08 per
share, compared with $417.4 million, or $3.05 per share, in 1995. Year-to-date
return on average assets and return on average common equity were 2.14 percent
and 24.4 percent compared with returns of 1.70 percent and 20.9 percent
year-to-date 1995.
Nonrecurring items totaled $72.1 million ($138.0 million on a pre-tax basis), or
$.52 per share for the first nine months of 1996. Nonrecurring gains were: $190
million, net of expenses, received for the termination of the First Interstate
Bancorp ("First Interstate") merger agreement; a $65 million refund of state
income taxes, including interest; $45.8 million in gain on the sale of the
Company's mortgage banking operations; and, $15 million in net securities gains.
In addition to the $51 million SAIF special assessment, nonrecurring charges
included: $31.3 million in merger and integration charges associated with the
acquisitions of FirsTier Financial, Inc. ("FirsTier") and the corporate trust
business of BankAmerica Corporation ("BankAmerica"); $38.6 million in branch
distribution resizing expenses; a $29.5 million valuation adjustment of
cardholder and core deposit intangibles; $10.1 million for a one-time employee
bonus; and, $17.3 million to acquire software and write off other miscellaneous
assets.
TABLE 1. Summary of Consolidated Income
THREE MONTHS ENDED NINE MONTHS ENDED
(TAXABLE-EQUIVALENT BASIS; SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 1996 1995 1996 1995
Interest income $ 672.0 $ 640.9 $ 2,001.5 $ 1,913.4
Interest expense 280.7 280.4 839.1 823.1
Net interest income 391.3 360.5 1,162.4 1,090.3
Provision for credit losses 35.0 31.0 101.0 84.0
Net interest income after provision for credit
losses 356.3 329.5 1,061.4 1,006.3
Nonrecurring gains -- 31.0 315.8 31.0
Other noninterest income 220.3 185.5 647.9 554.8
Nonrecurring charges 51.0 31.0 177.8 31.0
Other noninterest expense 304.5 280.1 908.3 887.6
Income before income taxes 221.1 234.9 939.0 673.5
Taxable-equivalent adjustment 5.4 3.4 15.6 10.4
Income taxes 78.2 85.8 355.0 245.7
Net income $ 137.5 $ 145.7 $ 568.4 $ 417.4
Return on average assets 1.55% 1.76% 2.14% 1.70%
Return on average common equity 17.4 21.2 24.4 20.9
Net interest margin 4.91 4.85 4.89 4.94
Efficiency ratio 58.1 53.9 51.4 54.8
Efficiency ratio before nonrecurring items 49.8 51.3 50.2 54.0
Per Common Share:
Net income $ .99 $ 1.08 $ 4.08 $ 3.05
Dividends paid .4125 .3625 1.2375 1.0875
Excluding nonrecurring items, operating earnings for the first nine months of
1996 were $496.3 million, an increase of $78.9 million (19 percent) compared
with 1995. On a per share basis, operating earnings were $3.56 in the first nine
months compared with $3.05 in 1995, a 17 percent increase. On the same basis,
year-to-date return on average assets was 1.87 percent, up from 1.70 percent in
1995; return on average common equity was 21.2 percent, up from 20.9 percent in
1995; and the efficiency ratio was 50.2 percent, down from 54.0 percent in 1995.
Credit quality remained strong in the third quarter of 1996. Nonperforming
assets totaled $145.7 million at September 30, 1996, down $8.0 million (5
percent) and $21.2 million (13 percent) from December 31, 1995 and September 30,
1995. The ratio of the allowance for credit losses to nonperforming loans at
quarter-end was 431 percent compared with 401 percent at the end of 1995 and 400
percent at September 30, 1995. See "Analysis of Nonperforming Assets" for
additional information.
Operating results reflect acquisition and divestiture activity. On February 16,
1996, the Company completed its acquisition of Omaha-based FirsTier, which had
$3.7 billion in assets, $2.9 billion in deposits, and 63 offices in Nebraska and
Iowa. In the first quarter of 1996, the Company sold its servicing and mortgage
loan production business, and during the fourth quarter of 1995 and the first
quarter of 1996, the Company completed its acquisition of the corporate trust
business of BankAmerica.
On September 26, 1996, the Company announced that it will acquire the bond
indenture services and paying agency business of Comerica Incorporated. This
business serves approximately 860 municipal and corporate clients with about
2,400 bond issues. The transaction is expected to close in the first quarter of
1997.
LINE OF BUSINESS FINANCIAL REVIEW
Financial performance is measured by major lines of business, which include:
Retail Banking, Payment Systems, Business Banking and Private Financial
Services, Commercial Banking, and Corporate Trust and Institutional Financial
Services. Business line results are derived from the Company's business unit
profitability reporting system. Designations, assignments, and allocations may
change from time to time as management accounting systems are enhanced or
product lines change. During 1996 certain organization and methodology changes
were made and 1995 results are presented on a consistent basis.
RETAIL BANKING -- Retail Banking delivers products and services to the broad
consumer market and small-business through branch offices, telemarketing, direct
mail, and automated teller machines ("ATMs"). Net income was $49.4 million and
$149.8 million in the third quarter and first nine months of 1996 compared with
$49.0 million and $135.7 million in the same periods in 1995. Third quarter and
year-to-date 1996 return on average assets increased to 1.50 percent and 1.51
percent from 1.39 percent and 1.29 percent in the same periods in 1995. Third
quarter and year-to-date return on equity was 20.0 percent and 20.4 percent
compared with 20.3 percent and 19.7 percent in the same periods in 1995.
The increase in net interest income resulted from growth in core commercial and
nonmortgage consumer loans and the February 1996 acquisition of FirsTier. The
provision for credit losses increased to $17.1 million in the first nine months
of 1996, compared with $11.9 million in 1995. Growth in average loans, excluding
residential mortgage loan balances, and higher consumer loan charge-offs
contributed to the increase. Noninterest income and expense were higher in 1996
compared with 1995, reflecting the impact of acquisitions.
PAYMENT SYSTEMS -- Payment Systems includes consumer and business credit cards,
corporate and purchasing card services, card-accessed secured and unsecured
lines of credit, ATM processing, and merchant processing. Net earnings increased
22 percent in the third quarter and 28 percent in the first nine months of 1996
compared with the same periods in 1995. Third quarter return on assets was 2.54
percent, essentially unchanged from third quarter 1995, and return on equity was
27.5 percent compared with 27.9 percent in 1995. Year-to-date return on assets
and return on equity were 2.40 percent and 25.9 percent compared with returns of
2.25 percent and 24.5 percent in 1995.
Fee-based noninterest income increased approximately 25 percent in the third
quarter and the first nine months of 1996 compared with the same periods in
1995. The increases were due to growth in the sales volume of the Corporate
Card, the Purchasing Card, the First Bank WorldPerks(r) VISA(r) card, and the
expansion of the ATM network. Net interest income decreased slightly due to a
change in the loan mix. Average commercial loans, which are primarily
noninterest-earning Corporate and Purchasing Card balances, comprised
approximately 30 percent of the portfolio during the third quarter and first
nine months of 1996, compared with approximately 25 percent in the same periods
of 1995. Noninterest expense was relatively flat, despite an increase in sales
volume, reflecting ongoing expense control and the recognition of initial
investment expenses in 1995 associated with the expansion of the ATM network.
The efficiency ratio improved to 42.4 percent in the third quarter and 44.1
percent in the first nine months of 1996 from 46.7 percent and 49.0 percent in
the same periods of 1995.
TABLE 2. Line of Business Financial Performance
CORPORATE TRUST
BUSINESS BANKING AND
AND INSTITUTIONAL
RETAIL PRIVATE FINANCIAL COMMERCIAL FINANCIAL
BANKING PAYMENT SYSTEMS SERVICES BANKING SERVICES
THREE MONTHS ENDED SEPTEMBER 30,
(DOLLARS IN MILLIONS) 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995
CONDENSED INCOME STATEMENT:
Net interest income
(taxable-equivalent basis) $191.2 $177.2 $35.5 $37.2 $100.9 $82.1 $52.8 $53.3 $10.3 $6.0
Provision for credit losses 5.7 8.2 23.3 17.6 3.4 2.8 2.5 2.4 -- --
Noninterest income 40.1 36.8 89.6 70.9 28.4 23.1 13.6 13.3 48.6 33.7
Noninterest expense 146.1 126.5 53.0 50.5 51.0 43.0 18.5 21.3 35.1 24.7
Income taxes and
taxable-equivalent adjustment 30.1 30.3 18.5 15.2 28.4 22.6 17.2 16.3 9.0 5.7
Income before nonrecurring items $49.4 $49.0 $30.3 $24.8 $46.5 $36.8 $28.2 $26.6 $14.8 $9.3
AVERAGE BALANCE SHEET DATA:
Commercial loans $462 $382 $1,208 $848 $6,794 $5,521 $5,303 $4,896 $-- $--
Consumer loans 9,698 10,682 2,708 2,347 596 498 -- -- -- --
Assets 13,063 13,943 4,737 3,886 9,719 7,781 6,642 5,936 1,177 672
Deposits 16,998 16,371 37 41 3,679 3,037 1,590 1,588 1,045 737
Common equity 982 959 439 353 933 724 465 416 290 170
Return on average assets 1.50% 1.39% 2.54% 2.53% 1.90% 1.88% 1.69% 1.78% * *
Return on average common
equity ("ROCE") 20.0 20.3 27.5 27.9 19.8 20.2 24.1 25.4 20.3% 21.7%
ROCE on a cash basis** 22.6 22.2 29.3 30.9 21.1 20.9 24.4 25.6 26.9 26.7%
Efficiency ratio 63.2 59.1 42.4 46.7 39.4 40.9 27.9 32.0 59.6 62.2
Efficiency ratio on a cash basis** 60.3 57.0 40.7 44.3 37.1 39.7 27.4 31.5 51.6 56.9
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995 1996 1995 1996 1995 1996 1995 1996 1995
CONDENSED INCOME STATEMENT:
Net interest income
(taxable-equivalent basis) $568.6 $531.7 $111.9 $117.4 $293.4 $247.2 $156.0 $164.9 $26.9 $19.5
Provision for credit losses 17.1 11.9 66.1 56.8 10.0 8.1 7.7 7.2 -- --
Noninterest income 120.0 105.9 240.9 194.9 87.2 71.2 46.2 46.0 148.9 99.5
Noninterest expense 429.7 406.5 155.5 152.9 148.0 134.2 58.9 68.5 107.2 78.9
Income taxes and
taxable-equivalent adjustment 92.0 83.5 49.9 38.9 84.7 67.0 51.6 51.4 26.1 15.3
Income before nonrecurring items $149.8 $135.7 $81.3 $63.7 $137.9 $109.1 $84.0 $83.8 $42.5 $24.8
AVERAGE BALANCE SHEET DATA:
Commercial loans $437 $347 $1,084 $759 $6,673 $5,408 $5,370 $4,909 $-- $--
Consumer loans 9,822 10,688 2,602 2,311 586 495 -- -- -- --
Assets 13,231 14,058 4,516 3,786 9,601 7,772 6,723 6,031 1,157 700
Deposits 17,138 17,053 42 37 3,593 3,154 1,560 1,651 951 775
Common equity 981 920 420 347 911 703 471 422 288 172
Return on average assets 1.51% 1.29% 2.40% 2.25% 1.92% 1.88% 1.67% 1.86% * *
Return on average common
equity ("ROCE") 20.4 19.7 25.9 24.5 20.2 20.7 23.8 26.5 19.7% 19.3%
ROCE on a cash basis** 23.0 21.7 28.3 27.5 21.4 21.4 24.1 26.7 26.4 24.2
Efficiency ratio 62.4 63.8 44.1 49.0 38.9 42.1 29.1 32.5 61.0 66.3
Efficiency ratio on a cash basis** 59.6 61.6 42.0 46.5 36.8 41.0 28.7 32.1 53.0 61.0
* Not meaningful
** Calculated by excluding amortization of goodwill and other intangible
assets.
Note: Preferred dividends and nonrecurring items are not allocated to the
business lines. The Company's mortgage banking operations, which were sold
in first quarter 1996, are not reflected in the table.
BUSINESS BANKING AND PRIVATE FINANCIAL SERVICES -- Business Banking and Private
Financial Services includes middle-market banking services, private banking, and
personal trust. Third quarter and year-to-date 1996 net income increased 25
percent compared with the same periods in 1995. Third quarter return on assets
was 1.90 percent compared with 1.88 percent in 1995, and return on equity was
19.8 percent compared with 20.2 percent in 1995. Year-to-date performance ratios
showed similar trends.
Net interest income in the third quarter and year-to-date increased consistent
with a 23 percent growth in average loan balances as well as acquisitions. The
23 percent increase in noninterest income in the third quarter and first nine
months of 1996 compared with 1995 resulted from acquisitions and a more
effective approach to charging for private financial services. Noninterest
expense increased in 1996 compared with 1995 reflecting the impact of
acquisitions. The efficiency ratio improved to 39.4 percent in the third quarter
and 38.9 percent in the first nine months of 1996 from 40.9 percent and 42.1
percent in the same periods in 1995.
COMMERCIAL BANKING -- Commercial Banking provides lending, treasury management,
and other financial services to middle-market, large corporate and mortgage
banking companies. Net earnings increased 6 percent in the third quarter and
remained relatively flat in the first nine months of 1996. Third quarter return
on assets was 1.69 percent compared with 1.78 percent in 1995, and return on
equity was 24.1 percent compared with 25.4 percent in 1995. Year-to-date return
on assets was 1.67 percent compared with 1.86 percent in 1995, and return on
equity was 23.8 percent compared with 26.5 percent in 1995.
Although third quarter and year-to-date average loans increased $407 million, or
8 percent, and $461 million, or 9 percent, from the same periods in 1995, net
interest income decreased reflecting lower interest recoveries and narrowing
spreads in this highly competitive sector. Noninterest income remained
relatively flat in the third quarter and first nine months of 1996 compared with
the same periods in 1995. The decrease in noninterest expense for both the third
quarter and first nine months of 1996, compared to the same periods in 1995,
reflected the benefits of increased operational efficiencies. The efficiency
ratio improved to 27.9 percent in the third quarter and 29.1 percent in the
first nine months of 1996 compared to 32.0 percent and 32.5 percent in the same
periods in 1995.
CORPORATE TRUST AND INSTITUTIONAL FINANCIAL SERVICES -- Corporate Trust and
Institutional Financial Services includes institutional and corporate trust
services, investment management services, and a full-service brokerage company.
Earnings increased 59 percent in the third quarter and 71 percent in the first
nine months of 1996 compared with the same periods in the prior year. The return
on average equity was 20.3 percent in the third quarter and 19.7 percent in the
first nine months of 1996, compared with 21.7 percent and 19.3 percent in the
same periods in 1995.
Net earnings increased over 1995 primarily due to the Company's strategy to grow
its fee-based businesses. The efficiency ratio improved to 59.6 percent in the
third quarter and 61.0 percent in the first nine months of 1996 from 62.2
percent in the third quarter and 66.3 percent in the first nine months of 1995,
reflecting the effective integration of acquisitions, process re-engineering
efforts, and revenue growth.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME -- Net interest income on a taxable-equivalent basis was
$391.3 million in the third quarter of 1996, an increase of $30.8 million (9
percent) from the third quarter of 1995, and $1.2 billion in the first nine
months of 1996, an increase of $72 million (7 percent) from the same period in
1995. The increases were attributable primarily to growth in average loans in
the third quarter and first nine months of 1996, compared with the same periods
in 1995. In the first quarter of 1996, $1.3 billion of residential mortgage
loans were securitized and reclassified to available-for-sale securities to
enhance liquidity and financial management flexibility. Excluding residential
mortgage loan balances, average loans for both the third quarter and first nine
months of 1996 were higher by approximately $3.1 billion than the same periods
in 1995, reflecting growth in core commercial and consumer loans, as well as the
February 1996 acquisition of FirsTier. Average securities for the third quarter
and first nine months of 1996 were higher than the respective 1995 periods,
reflecting the transfer of securitized mortgage loan balances in the first
quarter of 1996 and the addition of securities acquired with FirsTier, offset by
maturities and sales.
Partially offsetting the impact of higher average loan balances in the third
quarter and first nine months of 1996, compared with the same periods of 1995,
was the effect of a lower average yield on loans. The average yield on loans for
both the third quarter and first nine months of 1996 was 8.76 percent compared
with 8.95 percent and 9.03 percent in 1995. The decrease was due to declining
market interest rates over the past year. The net interest margin in the third
quarter and first nine months of 1996 was essentially unchanged at 4.91 percent
and 4.89 percent compared with 4.85 percent and 4.94 percent in 1995.
TABLE 3. Analysis of Net Interest Income
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
(DOLLARS IN MILLIONS) 1996 1995 1996 1995
Net interest income (taxable-equivalent basis) $391.3 $360.5 $1,162.4 $1,090.3
Average balances of earning assets supported by:
Interest-bearing liabilities $24,519 $23,336 $24,717 $23,522
Noninterest-bearing liabilities 7,179 6,144 7,008 5,979
Total earning assets $31,698 $29,480 $31,725 $29,501
Average yields and weighted average rates (taxable-equivalent basis):
Earning assets yield 8.43% 8.63% 8.43% 8.67%
Rate paid on interest-bearing liabilities 4.55 4.77 4.53 4.68
Gross interest margin 3.88% 3.86% 3.90% 3.99%
Net interest margin 4.91% 4.85% 4.89% 4.94%
Net interest margin without taxable-equivalent increments 4.84% 4.81% 4.83% 4.89%
PROVISION FOR CREDIT LOSSES -- The provision for credit losses was $35.0 million
in the third quarter of 1996, up $4.0 million compared with $31 million in 1995.
The provision for the first nine months of 1996 increased $17.0 million to $101
million from the first nine months of 1995. These increases resulted from
increased loan volumes, higher credit card net charge-offs, and lower commercial
loan recoveries. Refer to "Corporate Risk Management" for further information on
the credit quality.
NONINTEREST INCOME -- Third quarter noninterest income was $220.3 million,
compared with $216.5 million in the third quarter of 1995, and $963.7 million
year-to-date 1996 compared with $585.8 million in 1995. Nonrecurring gains
included in noninterest income in the first nine months of 1996 totaled $315.8
million, including a $190 million termination fee received from the First
Interstate transaction, net of $10 million in costs; a $65 million state tax
refund, including interest; a $45.8 million gain on the sale of the Company's
mortgage banking operations; and, $15 million in net securities gains.
Noninterest income in 1995 included a $31 million nonrecurring gain on the sale
of 63 branches.
Excluding nonrecurring items, noninterest income was $220.3 million, a 19
percent increase from the third quarter of 1995 and $647.9 million for the first
nine months of 1996, a 17 percent increase from the first nine months of 1995.
The improvement in both periods resulted primarily from growth in credit card
and trust fees and the addition of FirsTier and other acquisitions, offset in
part by the loss of mortgage banking revenues. Credit card fees increased due to
higher sales volumes for Corporate and Purchasing Cards and the First Bank
WorldPerks VISA card. Trust fees were up with the acquisition of the corporate
trust business of BankAmerica, the acquisition of FirsTier and core growth in
personal and institutional trust revenues. Service charges on deposits increased
primarily as a result of increased demand deposits and the acquisition of
FirsTier. Other noninterest income decreased, reflecting the impact of the sale
of the Company's mortgage banking operations discussed above.
TABLE 4. Noninterest Income
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
(DOLLARS IN MILLIONS) 1996 1995 1996 1995
Credit card fees $79.5 $62.7 $215.8 $171.0
Trust fees 57.1 42.8 171.8 127.5
Service charges on deposit accounts 36.9 30.9 105.5 93.3
Investment products fees and commissions 7.4 7.8 24.6 20.0
Trading account profits and commissions 3.2 2.4 9.7 8.0
Securities gains -- -- 15.0 --
Termination fee, net -- -- 190.0 --
State income tax refund -- -- 65.0 --
Gain on sale of mortgage banking operations -- -- 45.8 --
Gain on sale of branches -- 31.0 -- 31.0
Other 36.2 38.9 120.5 135.0
Total noninterest income $220.3 $216.5 $963.7 $585.8
TABLE 5. Noninterest Expense
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
(DOLLARS IN MILLIONS, EXCEPT PER EMPLOYEE DATA) 1996 1995 1996 1995
Salaries $113.4 $108.0 $351.3 $329.9
Employee benefits 25.5 22.1 80.8 76.0
Total personnel expense 138.9 130.1 432.1 405.9
Goodwill and other intangible assets 19.6 13.9 86.9 42.2
Net occupancy 24.2 24.3 74.2 74.3
Furniture and equipment 21.1 23.5 67.0 71.8
Other personnel costs 16.7 11.0 40.4 28.4
Professional services 8.3 8.5 27.5 25.6
Advertising and marketing 9.1 8.4 26.1 23.9
Telephone 7.3 6.1 20.0 18.2
Printing, stationery and supplies 5.8 5.4 17.7 16.0
Postage 5.7 5.4 17.4 17.0
Third party data processing 5.3 4.2 16.0 12.9
FDIC insurance 3.5 2.8 10.6 30.2
SAIF special assessment 51.0 -- 51.0 --
Merger, integration, and resizing -- -- 69.9 --
Other 39.0 67.5 129.3 152.2
Total noninterest expense $355.5 $311.1 $1,086.1 $918.6
Efficiency ratio* 58.1% 53.9% 51.4% 54.8%
Efficiency ratio before nonrecurring items 49.8 51.3 50.2 54.0
Average number of employees (full-time equivalents) 12,889 12,894 13,092 13,335
Annualized personnel expense per employee $43,107 $40,360 $44,007 $40,585
*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.
NONINTEREST EXPENSE -- Third quarter noninterest expense was $355.5 million
compared with $311.1 million in the third quarter of 1995, and $1.1 billion in
the first nine months of 1996 compared with $918.6 million in 1995. Nonrecurring
charges in the third quarter of 1996 included a $51 million one-time special
assessment by the FDIC on SAIF deposits. Nonrecurring charges in the first nine
months of 1996 totaled $177.8 million, including merger, integration and
resizing charges of $31.3 million for the acquisitions of FirsTier and the
BankAmerica corporate trust business and $38.6 million in branch distribution
resizing expenses; a $29.5 million valuation adjustment to reduce the carrying
value of credit card and core deposit intangibles to estimated fair value; $10.1
million for a one-time, $750 per-employee bonus to thank employees for staying
focused on customers and shareholder value during the bid for First Interstate;
$17.3 million to acquire credit card and revolving credit software and to write
off other miscellaneous assets; and, the $51 million SAIF deposits special
assessment. Nonrecurring charges in the third quarter and first nine months of
1995 included the write-off of $23 million of unamortized software costs related
to a change in the Company's policy to expense software costs and an $8 million
write-off of other miscellaneous assets. Refer to Note H for further information
on merger, integration and resizing charges.
On a pro forma basis (including acquired companies and excluding divested
businesses and nonrecurring items), noninterest expense declined $11.6 million
(4 percent) in the current quarter and $91 million (9 percent) year-to-date.
These reductions were achieved as a result of effective acquisition integration
and ongoing expense control. Year-to-date 1996 noninterest expense also
benefited from a reduction in FDIC premiums. Excluding nonrecurring items, the
Company's efficiency ratio improved to 49.8 percent in the third quarter and
50.2 percent in the first nine months of 1996, from 51.3 percent and 54.0
percent in the same periods in 1995.
Total salaries and benefits, excluding nonrecurring charges, increased $8.8
million (7 percent) and $16.1 million (4 percent) for the third quarter and
first nine months of 1996 compared with the same periods in 1995, reflecting
recent acquisitions. Average full-time equivalent employees remained relatively
unchanged at 12,889 in 1996 compared with 12,894 in 1995.
Compared with the same periods in 1995, amortization of goodwill and intangibles
for the third quarter and first nine months of 1996, excluding the valuation
adjustment discussed above, increased as a result of FirsTier and the
BankAmerica corporate trust business acquisitions. The increases in other
personnel expense related to several technology projects currently in process.
FDIC insurance premiums were lower in the first nine months of 1996 compared
with the same period last year because the FDIC suspended the assessment of
premiums on deposits covered by the Bank Insurance Fund ("BIF"). Third quarter
1995 included a $10 million premium rebate on BIF deposits for the period from
June 1, 1995 to September 30, 1995. In addition to the one-time special
assessment, BIF-insured institutions are required to assist paying interest on
the Financing Corp. ("FICO") bonds, which financed the resolution of the thrift
industry series. The FICO assessment will be 1.3 basis points of deposits for
BIF-insured institutions and 6.4 basis points of deposits for SAIF-insured
institutions starting in 1997 or $1.5 million per quarter based upon September
30, 1996 deposits. The FDIC plans to refund a portion of the fourth quarter 1996
premiums, or about $3 million for the Company.
PROVISION FOR INCOME TAXES -- The provision for income taxes was $78.2 million
in the third quarter and $355.0 million in the first nine months of 1996,
compared with $85.8 million and $245.7 million in the same periods of 1995. The
third quarter 1996 provision reflects the impact of the nonrecurring special
assessment discussed above, offset partially by a higher level of operating
earnings. The year-to-date increase was primarily the result of a higher level
of taxable income and the nonrecurring items discussed above.
BALANCE SHEET ANALYSIS
LOANS -- The Company's loan portfolio increased $637 million to $27.0 billion at
September 30, 1996, from $26.4 billion at December 31, 1995. Growth in most
commercial and consumer loan categories was partially offset by a decrease in
residential mortgage-related balances. This decrease reflects the securitization
of $1.3 billion of residential mortgage loans, which were reclassified to
available-for-sale securities in the first quarter of 1996. The securitization
enhances liquidity and financial management flexibility. Excluding residential
mortgages, average loans for both the third quarter and first nine months of
1996 were higher than the same periods in 1995 by approximately $3.1 billion,
reflecting growth in core commercial and consumer loans as well as the
acquisition of FirsTier.
SECURITIES -- At September 30, 1996, securities totaled $3.8 billion compared
with $3.3 billion at December 31, 1995, reflecting the securitization discussed
above and the addition of approximately $900 million of FirsTier securities,
offset by maturities and sales.
DEPOSITS -- Noninterest-bearing deposits were $8.1 billion at September 30,
1996, up from $6.4 billion at December 31, 1995. Interest-bearing deposits were
$16.9 billion at September 30, 1996, up from $16.2 billion at December 31, 1995.
The increases were primarily due to the acquisitions of FirsTier and the
corporate trust business of BankAmerica.
BORROWINGS -- Long-term debt was $3.4 billion at September 30, 1996, up from
$3.2 billion at December 31, 1995. In March 1996, the Company placed $125
million in 6.875 percent subordinated debt in the form of 10-year noncallable
notes. The Company also issued $300 million in medium-term bank notes during the
first quarter of 1996. These issuances were partially offset by a net decrease
of $170 million in Federal Home Loan Bank Advances and Holding Company
Medium-term notes.
CORPORATE RISK MANAGEMENT
CREDIT MANAGEMENT -- The Company's strategy for credit risk management includes
stringent, centralized credit policies, and standard underwriting criteria for
specialized lending categories, such as mortgage banking, real estate
construction, and consumer credit. The strategy also emphasizes diversification
on both a geographic and customer level, regular credit examinations, and
quarterly management reviews of large loans and loans experiencing deterioration
of credit quality. The Company strives to identify potential problem loans
early, take any necessary charge-offs promptly, and maintain strong reserve
levels. In the Company's retail banking operations, a standard credit scoring
system is used to assess consumer credit risks and to price consumer products
accordingly. Commercial banking operations rely on a strong credit culture that
combines prudent credit policies and individual lender accountability. In
addition, the commercial lenders generally focus on middle-market companies
within their regions.
In evaluating its credit risk, the Company considers the loan portfolio
composition, the level of allowance coverage, and macroeconomic factors. Most
economic indicators in the Company's primary operating region, which includes
Minnesota, Colorado, Montana, North Dakota, South Dakota, Wisconsin, Iowa,
Kansas, Nebraska, Wyoming, and Illinois, compare favorably with national trends.
Approximately 80 percent of the loan portfolio consists of extensions of credit
to customers in this operating region.
TABLE 6. Summary of Allowance for Credit Losses
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
(DOLLARS IN MILLIONS) 1996 1995 1996 1995
Balance at beginning of period $ 529.1 $ 467.5 $ 473.5 $ 474.7
CHARGE-OFFS:
Commercial:
Commercial 12.4 7.5 31.5 19.4
Financial institutions -- -- -- --
Real estate:
Commercial mortgage .2 3.5 11.9 13.6
Construction -- .1 1.0 .1
Total commercial 12.6 11.1 44.4 33.1
Consumer:
Residential mortgage 1.3 1.3 3.4 4.1
Credit card 24.9 20.4 71.9 65.3
Other 23.0 19.9 68.2 55.7
Total consumer 49.2 41.6 143.5 125.1
Total 61.8 52.7 187.9 158.2
RECOVERIES:
Commercial:
Commercial 7.2 9.1 32.5 28.2
Financial institutions -- .3 -- .5
Real estate:
Commercial mortgage 4.6 4.6 18.9 11.2
Construction -- -- -- .1
Total commercial 11.8 14.0 51.4 40.0
Consumer:
Residential mortgage .2 -- .7 .4
Credit card 2.2 2.8 7.5 8.5
Other 4.9 5.9 16.1 17.3
Total consumer 7.3 8.7 24.3 26.2
Total 19.1 22.7 75.7 66.2
NET CHARGE-OFFS:
Commercial:
Commercial 5.2 (1.6) (1.0) (8.8)
Financial institutions -- (.3) -- (.5)
Real estate:
Commercial mortgage (4.4) (1.1) (7.0) 2.4
Construction -- .1 1.0 --
Total commercial .8 (2.9) (7.0) (6.9)
Consumer:
Residential mortgage 1.1 1.3 2.7 3.7
Credit card 22.7 17.6 64.4 56.8
Other 18.1 14.0 52.1 38.4
Total consumer 41.9 32.9 119.2 98.9
Total 42.7 30.0 112.2 92.0
Provision charged to operating expense 35.0 31.0 101.0 84.0
Additions related to acquisitions -- -- 59.1 1.8
Balance at end of period $ 521.4 $ 468.5 $ 521.4 $ 468.5
Allowance as a percentage of period-end loans 1.93% 1.81%
Allowance as a percentage of nonperforming loans 431 400
Allowance as a percentage of nonperforming assets 358 281
TABLE 7. Net Charge-offs as a Percentage of Average Loans Outstanding
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
1996 1995 1996 1995
COMMERCIAL:
Commercial .22% (.08)% (.01)% (.15)%
Financial institutions -- (.15) -- (.09)
Real Estate:
Commercial mortgage (.58) (.18) (.31) .13
Construction -- .12 .28 --
Total commercial .02 (.10) (.07) (.08)
CONSUMER:
Residential mortgage .13 .10 .10 .09
Credit card 3.33 2.98 3.31 3.29
Other 1.04 .88 1.02 .83
Total consumer 1.28 .94 1.21 .96
Total .63% .47% .56% .49%
ANALYSIS OF NET CHARGE-OFFS AND ALLOWANCE FOR CREDIT LOSSES -- Net loan
charge-offs totaled $42.7 million and $112.2 million in the third quarter and
first nine months of 1996, up from $30.0 million and $92.0 million in the same
periods in 1995. Commercial loan net charge-offs for the quarter were $.8
million compared with net recoveries of $2.9 million for the third quarter of
1995. Commercial loan net recoveries were $7.0 million for the first nine months
of 1996 compared with $6.9 million for the same period in 1995. Third quarter
and year-to-date consumer loan net charge-offs increased $9.0 million (27
percent) from the third quarter of 1995 and $20.3 million (21 percent) from
year-to-date 1995 reflecting higher average nonmortgage loan balances and higher
loss ratios. Excluding first mortgage loans, the annualized ratio of consumer
net charge-offs to average loans in the third quarter of 1996 was 1.68 percent,
essentially flat with the ratio in the second quarter of 1996, but up from 1.44
percent in the same period of last year. The ratio of total net charge-offs to
average loans was .63 percent in the third quarter of 1996 compared with .47
percent in the third quarter of 1995.
TABLE 8. Nonperforming Assets*
SEPTEMBER 30 DECEMBER 31
(DOLLARS IN MILLIONS) 1996 1995
COMMERCIAL:
Commercial $38.7 $25.1
Real estate:
Commercial mortgage 31.4 42.3
Construction 10.6 1.5
Total commercial 80.7 68.9
CONSUMER:
Residential mortgage 37.3 37.3
Credit card -- 5.7
Other 3.0 6.3
Total consumer 40.3 49.3
Total nonperforming loans 121.0 118.2
OTHER REAL ESTATE 19.4 33.2
OTHER NONPERFORMING ASSETS 5.3 2.3
Total nonperforming assets $145.7 $153.7
Nonperforming loans to total loans .45% .45%
Nonperforming assets to total loans plus other real
estate .54 .58
*Throughout this document, nonperforming assets and related ratios do not
include loans more than 90 days past due and still accruing interest.
TABLE 9. Delinquent Loans
SEPTEMBER 30 DECEMBER 31
(DOLLARS IN MILLIONS) 1996 1995
Accruing loans 30 days or more past due $343.3 $335.2
Accruing loans 90 days or more past due 43.3 38.8
DELINQUENCY RATIOS*:
Total commercial:
30 days or more past due 1.32% 1.36%
90 days or more past due .59 .56
Total consumer:
30 days or more past due 2.15 2.04
90 days or more past due .62 .62
Total loans:
30 days or more past due 1.72 1.72
90 days or more past due .61 .59
*Ratios include nonperforming loans and are expressed as a percent of ending
loan balances.
ANALYSIS OF NONPERFORMING ASSETS -- Nonperforming assets include nonaccrual
loans, restructured loans, other real estate and other nonperforming assets
owned by the Company. At September 30, 1996, nonperforming assets totaled $145.7
million, down $8.0 million (5 percent) from the balance at December 31, 1995.
During the third quarter of 1996, the Company conformed its reporting practice
for nonperforming loans to that of most banks and has excluded restructured
revolving consumer loans from nonperforming loans. At December 31, 1995,
nonperforming loans included $9.5 million of revolving consumer loans. Revolving
consumer loans are charged off at specific delinquency dates (generally 120
days). The ratio of nonperforming assets to loans and other real estate was .54
percent at September 30, 1996, down from .58 percent at December 31, 1995.
Accruing loans 90 days or more past due totaled $43.3 million compared with
$38.8 million at December 31, 1995. These loans are not included in
nonperforming assets and continue to accrue interest because they are secured by
collateral and/or are in the process of collection and are reasonably expected
to result in repayment or restoration to current status. Consumer loans 30 days
or more past due were 2.15 percent of the total consumer loan portfolio at
September 30, 1996 compared with 2.04 percent of the total consumer portfolio at
December 31, 1995. The percentage of consumer loans 90 days or more past due of
the total consumer loan portfolio totaled .62 percent at September 30, 1996,
unchanged from year-end 1995.
INTEREST RATE RISK MANAGEMENT -- The Company's policy is to maintain a low
interest rate risk position. The Company limits the exposure of net interest
income to risks associated with interest rate movements through asset/liability
management strategies. The Company's Asset and Liability Management Committee
("ALCO") uses three methods for measuring and managing interest rate risk: Net
Interest Income Simulation Modeling, Market Value/Duration Analysis, and Static
Gap Analysis.
Net Interest Income Simulation: The Company has developed a net interest income
simulation model to measure near-term (under one year) risk due to changes in
interest rates. The model is particularly useful because it incorporates
substantially all the Company's assets and liabilities and off-balance sheet
instruments, together with forecasted changes in the balance sheet mix and
assumptions that reflect the current interest rate environment. The balance
sheet changes are based on forecasted prepayments of loans and securities, loan
and deposit growth, and historical pricing spreads. The model is updated monthly
with the current balance sheet structure and the current forecast of expected
balance sheet changes. ALCO uses the model to simulate the effect of immediate
and sustained parallel shifts in the current yield curve of 1 percent, 2 percent
and 3 percent. ALCO also calculates the sensitivity of the simulation results to
changes in the key assumptions, such as the Prime/LIBOR spread. The results from
the simulation are reviewed by ALCO monthly and are used to guide ALCO's hedging
strategies. ALCO has established guidelines, approved by the Company's Board of
Directors, that limit the estimated change in net interest income, assuming
modest changes in Prime/LIBOR spreads and deposit pricing lags, over the
succeeding 12 months to approximately 3 percent of forecasted net interest
income, given a 1 percent change in interest rates.
Market Value/Duration Analysis: One of the limiting factors of the net interest
income simulation model is its dependence upon accurate forecasts of future
business activity and the resulting effect on balance sheet assets and
liabilities. As a result, its usefulness is greatly diminished for periods
beyond two years. The Company measures this longer-term component of interest
rate risk (referred to as market value or duration risk) by modeling the effect
of interest changes on the estimated discounted future cash flows of the
Company's current assets, liabilities and off-balance sheet instruments.
Static Gap Analysis: A traditional gap analysis provides a point-in-time
measurement of the relationship between the repricing amounts of the interest
rate sensitive assets and liabilities. While the analysis provides a useful
snapshot of interest rate risk, it does not capture all aspects of interest rate
risk. As a result, ALCO uses the gap analysis primarily for managing interest
rate risk beyond one year and has established guidelines, approved by the
Company's Board of Directors, for the gap position in the one- to three-year
time periods.
While each of the interest rate risk measurements has limitations, taken
together they represent a comprehensive view of the magnitude of the Company's
interest rate risk over various time intervals. The Company uses a variety of
balance sheet and off-balance sheet financial instruments ("derivatives") to
manage its interest rate risk. The Company manages the forecasted net interest
income at risk by entering into off-balance sheet transactions (primarily
interest rate swaps), investing in fixed rate assets or increasing variable rate
liabilities. To a lesser degree, the Company also uses interest rate caps and
floors to hedge this risk. The Company does not enter into derivative contracts
for speculative purposes.
As of September 30, 1996, 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 6.59 percent and an average variable rate, which is tied to various LIBOR
rates, of 5.51 percent. The maturity of these agreements ranges from one month
to 11 years with an average remaining maturity of 4.27 years. Swaps increased
net interest income for third quarter 1996 by $6.3 million and $5.6 million in
1995, and year-to-date 1996 by $22.2 million and $14.8 million in 1995.
TABLE 10. Interest Rate Swap Hedging Portfolio Notional Balances and
Yields by Maturity Date
AT SEPTEMBER 30, 1996 (DOLLARS IN MILLIONS)
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RECEIVE FIXED SWAPS* NOTIONAL INTEREST RATE INTEREST RATE
MATURITY DATE AMOUNT RECEIVED PAID
1996 (remaining three months) $133 7.54% 5.48%
1997 275 6.42 5.48
1998 581 6.03 5.51
1999 450 6.40 5.46
2000 150 6.57 5.50
After 2000** 1,100 6.89 5.54
Total $2,689 6.59% 5.51%
*At September 30, 1996, the Company did not have any hedging swaps in its
portfolio that required it to pay fixed-rate interest.
**Of the total amount maturing after the year 2000 $925 million hedges fixed
rate subordinate notes.
TABLE 11. Capital Ratios
SEPTEMBER 30 DECEMBER 31
(DOLLARS IN MILLIONS) 1996 1995
Tangible common equity* $2,416 $2,184
As a percent of assets 6.7% 6.5%
Tier 1 capital** $2,185 $1,989
As a percent of risk-adjusted assets 6.7% 6.5%
Total risk-based capital** $3,685 $3,367
As a percent of risk-adjusted assets 11.4% 11.0%
Leverage ratio** 6.4 6.1
*Defined as common equity less goodwill.
**In accordance with regulatory guidelines, unrealized securities gains and
losses are excluded from these calculations.
The Company also purchases interest rate caps and floors to minimize the impact
of fluctuating interest rates on earnings. The total notional amount of cap
agreements purchased at September 30, 1996, was $100 million. The impact of caps
on net interest income was not material for year-to-date periods in 1996 and
1995. To hedge against falling interest rates, the Company uses interest rate
floors which had a total notional amount purchased at September 30, 1996 of
$1.15 billion. LIBOR-based floors totaled $950 million and Constant Maturity
Treasury floors totaled $200 million. The impact of floors on net interest
income was not material for year-to-date 1996 and 1995.
CAPITAL MANAGEMENT -- The Company is committed to managing capital for maximum
shareholder benefit and maintaining strong protection for depositors and
creditors. At September 30, 1996, tangible common equity was $2.4 billion, or
6.7 percent of assets, compared with 6.5 percent of assets at December 31, 1995.
The total risk-based capital ratio increased to 11.4 percent at September 30,
1996, from 11.0 percent at December 31, 1995. The increase in the capital ratios
reflects earnings retention as well as the issuance of common stock to complete
the FirsTier acquisition, offset by common stock repurchases.
On February 21, 1996, the Board of Directors authorized the repurchase of up to
25 million common shares through December 1997. This new authorization replaces
previous authorizations. Approximately 11.1 million shares have been repurchased
under the 1996 authorization as of September 30, 1996. In addition, the Board of
Directors authorized the retirement of 2.6 million shares repurchased in the
second quarter of 1996. Under previous authorizations, the Company repurchased
11.9 million shares in 1995.
ACCOUNTING CHANGES
SFAS 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF" -- The Company adopted Statement of
Financial Accounting Standards No. ("SFAS") 121 on January 1, 1996, 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 is not recoverable. In the first quarter of 1996,
the Company recorded a $25.6 million adjustment to the carrying value of certain
bank premises following a decision to sell several buildings in connection with
the streamlining of the branch distribution network. See Note H for further
discussion.
SFAS 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" -- SFAS 123 provides an
alternative to Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees, in accounting for stock-based compensation issued
to employees. The Statement allows for a fair value based accounting method for
stock options and similar equity instruments. Companies that continue to account
for such arrangements under APB Opinion No. 25 must disclose the pro forma
effect of its fair value based accounting for those arrangements on net income
and earnings per share. These disclosure requirements are effective in 1996's
year-end financial statements. The Company continues to account for such
arrangements in accordance with APB Opinion No. 25.
SFAS 125, "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES" -- SFAS 125 addresses whether the transfer of
financial assets should be accounted for as a sale and removed from the balance
sheet, or as a financing recognized as a borrowing. The Statement uses a
"financial components" approach which focuses on control to determine whether
the assets have been sold. If the entity has surrendered control over the
transferred assets, the transaction is considered a sale. Control is considered
surrendered only if the seller has no legal rights to the assets, even in
bankruptcy; the buyer has the right to pledge or exchange the assets; and the
seller does not maintain effective control over the assets through an agreement
to repurchase or redeem them. SFAS 125 is effective for transactions occurring
after December 31, 1996, and is to be applied prospectively, with earlier or
retroactive application not permitted. The adoption of SFAS 125 is not expected
to have a material impact on the Company.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30 DECEMBER 31
(IN MILLIONS, EXCEPT SHARES) 1996 1995
(UNAUDITED)
ASSETS
Cash and due from banks $2,990 $1,837
Federal funds sold 62 35
Securities purchased under agreements to resell 566 230
Trading account securities 76 86
Available-for-sale securities 3,778 3,256
Loans 27,037 26,400
Less allowance for credit losses 521 474
Net loans 26,516 25,926
Bank premises and equipment 408 413
Interest receivable 203 197
Customers' liability on acceptances 210 223
Other assets 2,034 1,671
Total assets $36,843 $33,874
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $8,094 $6,357
Interest-bearing 16,914 16,157
Total deposits 25,008 22,514
Federal funds purchased 961 2,000
Securities sold under agreements to repurchase 590 269
Other short-term funds borrowed 2,390 2,116
Long-term debt 3,443 3,201
Acceptances outstanding 210 223
Other liabilities 1,060 826
Total liabilities 33,662 31,149
Shareholders' equity:
Preferred stock 87 103
Common stock, par value $1.25 a share - authorized 200,000,000 shares;
issued: 9/30/96 - 141,747,738 shares; 12/31/95 - 135,632,324 shares 177 170
Capital surplus 1,145 909
Retained earnings 2,170 1,918
Unrealized gain (loss) on securities, net of tax (17) 23
Less cost of common stock in treasury:
9/30/96 - 6,300,788 shares; 12/31/95 - 8,297,756 shares (381) (398)
Total shareholders' equity 3,181 2,725
Total liabilities and shareholders' equity $36,843 $33,874
CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
(IN MILLIONS, EXCEPT PER-SHARE DATA) SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
(UNAUDITED) 1996 1995 1996 1995
INTEREST INCOME
Loans $588.1 $573.8 $1,744.8 $1,693.0
Securities:
Taxable 59.3 52.6 186.7 175.2
Exempt from federal income taxes 6.8 2.8 19.1 8.4
Other interest income 12.4 8.3 35.3 26.4
Total interest income 666.6 637.5 1,985.9 1,903.0
INTEREST EXPENSE
Deposits 169.2 173.0 507.1 538.2
Federal funds purchased and repurchase agreements 31.6 24.8 90.6 87.6
Other short-term funds borrowed 29.2 34.6 89.8 56.8
Long-term debt 50.7 48.0 151.6 140.5
Total interest expense 280.7 280.4 839.1 823.1
Net interest income 385.9 357.1 1,146.8 1,079.9
Provision for credit losses 35.0 31.0 101.0 84.0
Net interest income after provision for credit
losses 350.9 326.1 1,045.8 995.9
NONINTEREST INCOME
Credit card fees 79.5 62.7 215.8 171.0
Trust fees 57.1 42.8 171.8 127.5
Service charges on deposit accounts 36.9 30.9 105.5 93.3
Investment products fees and commissions 7.4 7.8 24.6 20.0
Securities gains -- -- 15.0 --
Termination fee -- -- 190.0 --
State income tax refund -- -- 65.0 --
Gain on sale of mortgage banking operations -- -- 45.8 --
Gain on sale of branches -- 31.0 -- 31.0
Other 39.4 41.3 130.2 143.0
Total noninterest income 220.3 216.5 963.7 585.8
NONINTEREST EXPENSE
Salaries 113.4 108.0 351.3 329.9
Employee benefits 25.5 22.1 80.8 76.0
Goodwill and other intangible assets 19.6 13.9 86.9 42.2
Other personnel costs 16.7 11.0 40.4 28.4
FDIC insurance 3.5 2.8 10.6 30.2
SAIF special assessment 51.0 -- 51.0 --
Merger, integration, and resizing -- -- 69.9 --
Other 125.8 153.3 395.2 411.9
Total noninterest expense 355.5 311.1 1,086.1 918.6
Income before income taxes 215.7 231.5 923.4 663.1
Applicable income taxes 78.2 85.8 355.0 245.7
Net income $137.5 $145.7 $568.4 $ 417.4
Net income applicable to common equity $135.9 $143.9 $563.5 $ 411.8
EARNINGS PER COMMON SHARE
Average common and common equivalent shares 137,679,789 133,648,942 138,122,270 135,007,519
Net income $.99 $1.08 $4.08 $3.05
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
UNREALIZED
COMMON GAINS/(LOSSES)
(IN MILLIONS, EXCEPT SHARES) SHARES PREFERRED COMMON CAPITAL RETAINED ON SECURITIES, TREASURY
(UNAUDITED) OUTSTANDING* STOCK STOCK SURPLUS EARNINGS NET OF TAXES STOCK** TOTAL
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 417.4 417.4
Dividends declared:
Preferred (5.6) (5.6)
Common (145.2) (145.2)
Purchase of treasury stock (7,991,505) (341.8) (341.8)
Issuance of common stock:
Acquisitions 1,619,998 .3 4.3 52.4 57.0
Dividend reinvestment 169,590 .3 6.8 7.1
Stock option and stock
purchase plans 1,725,303 .9 29.2 (20.1) 35.1 45.1
Stock warrants exercised 34,404 (1.0) 1.2 .2
Redemption/conversion of
preferred stock 39,164 (13.3) (1.3) 1.5 (13.1)
Change in unrealized
gains/(losses) 103.2 103.2
BALANCE SEPTEMBER 30, 1995 129,429,363 $104.8 $169.5 $899.6 $1,837.0 $(3.2) $(271.5) $2,736.2
BALANCE DECEMBER 31, 1995 127,334,568 $103.2 $169.5 $909.3 $1,918.2 $22.5 $(397.8) $2,724.9
Net income 568.4 568.4
Dividends declared:
Preferred (4.9) (4.9)
Common (172.5) (172.5)
Purchase and retirement of
treasury stock (11,092,711) (3.2) (151.4) (508.0) (662.6)
Issuance of common stock:
Acquisitions 16,460,215 10.7 361.7 (44.4) 384.2 712.2
Dividend reinvestment 154,765 .3 9.1 9.4
Stock option and stock
purchase plans 2,041,052 .2 25.5 (78.7) 99.1 46.1
Conversion of preferred stock 549,061 (15.9) (16.1) 32.0 --
Change in unrealized gains/(losses) (39.6) (39.6)
BALANCE SEPTEMBER 30, 1996 135,446,950 $87.3 $177.2 $1,145.4 $2,170.0 $(17.1) $(381.4) $3,181.4
*Defined as total common shares less common stock held in treasury.
**Ending treasury shares were 6,300,788 at September 30, 1996; 8,297,756 at
December 31, 1995; 6,202,961 at September 30, 1995; and 767,000 at December 31,
1994.
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
(UNAUDITED, IN MILLIONS) 1996 1995
OPERATING ACTIVITIES
Net cash provided by operating activities $1,097.7 $515.6
INVESTING ACTIVITIES
Net cash provided (used) by:
Interest-bearing deposits with banks -- 29.1
Loans outstanding 41.9 (996.1)
Securities purchased under agreements to resell (296.2) 103.6
Available-for-sale securities:
Sales 1,225.7 1,978.1
Maturities 801.3 411.3
Purchases (416.3) (296.6)
Proceeds from sales of other real estate 38.0 34.6
Net purchases of bank premises and equipment (43.1) (4.1)
Cash and cash equivalents of acquired subsidiaries 116.5 16.3
Acquisitions, net of cash received (37.9) --
Sale of mortgage banking operations 162.1 --
Other - net (54.3) 2.5
Net cash provided by investing activities 1,537.7 1,278.7
FINANCING ACTIVITIES
Net cash (used) provided by:
Deposits (274.1) (2,624.4)
Federal funds purchased and securities sold under
agreements to repurchase (903.0) (965.9)
Short-term borrowings 284.6 1,885.2
Long-term debt transactions:
Proceeds 649.3 700.6
Principal payments (427.8) (564.6)
Redemption of preferred stock -- (13.1)
Proceeds from issuance of common stock 55.5 52.4
Purchase of treasury stock (662.6) (341.8)
Cash dividends (177.4) (150.8)
Net cash used by financing activities (1,455.5) (2,022.4)
Change in cash and cash equivalents 1,179.9 (228.1)
Cash and cash equivalents at beginning of period 1,871.6 1,841.9
Cash and cash equivalents at end of period $3,051.5 $1,613.8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 1995. Certain amounts in prior periods have been reclassified
to conform to the current presentation.
NOTE B. Accounting Changes
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF -- Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. ("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 is not recoverable. In the first quarter of 1996,
the Company recorded a $25.6 million adjustment to the carrying value of certain
bank premises following a decision to sell several buildings in connection with
the streamlining of the branch distribution network. See Note H for further
discussion.
The Company also performed an evaluation of those intangible assets not covered
by SFAS 121 and recorded a first quarter charge of $29.5 million to reduce the
carrying value of credit card holder and core deposit intangibles to their fair
value. The Company performed this analysis of the fair value following its
reassessment of business alternatives for a segment of its credit card portfolio
and a change in the mix of deposits at certain acquired entities, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION -- SFAS 123, "Accounting for Stock-Based
Compensation," establishes a new fair value based accounting method for
stock-based compensation plans. Companies may continue to apply the accounting
provisions of APB 25, "Accounting for Stock Issued to Employees," in determining
net income; however, they must make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting defined in
SFAS 123 had been applied. These disclosure requirements are effective beginning
in 1996's year-end financial statements. The Company continues to account for
such arrangements in accordance with APB Opinion No. 25.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES -- SFAS 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," addresses whether the transfer of
financial assets should be accounted for as a sale and removed from the balance
sheet, or as a financing recognized as a borrowing. The Statement uses a
"financial components" approach which focuses on control to determine whether
assets have been sold. If the entity has surrendered control over the
transferred assets, the transaction is considered a sale. Control is considered
surrendered only if the seller has no legal right to the assets, even in
bankruptcy; the buyer has the right to pledge or exchange the assets; and the
seller does not maintain effective control over the assets through an agreement
to repurchase or redeem them. SFAS 125 is effective for transactions occurring
after December 31, 1996, and is to be applied prospectively, with earlier or
retroactive application not permitted. The adoption of SFAS 125 is not expected
to have a material effect on the Company.
NOTE C. Business Combinations and Divestitures
FIRSTIER FINANCIAL, INC. -- On February 16, 1996, the Company issued 16.5
million shares to complete its acquisition of Omaha-based FirsTier Financial,
Inc. ("FirsTier"). FirsTier had $3.7 billion in assets, $2.9 billion in
deposits, and 63 offices in Nebraska and Iowa. Under terms of the purchase
agreement, the Company exchanged .8829 shares of its common stock for each
common share of FirsTier. In addition, FirsTier's outstanding stock options were
converted into stock options for the Company's common stock.
The acquisition of FirsTier was accounted for under the purchase method of
accounting, and accordingly, the purchase price of $717 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. Goodwill of $289 million
will be amortized over approximately 25 years and core deposit intangibles of
$63 million will be amortized over the estimated lives of the deposits of
approximately 10 years. The results of operations of FirsTier 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
FirsTier 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.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1996 1995
Net interest income $385.9 $386.0 $1,161.5 $1.165.4
Net income 137.5 153.6 566.2 437.1
Net income per share .99 1.06 4.01 3.00
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.
BANKAMERICA CORPORATE TRUST BUSINESS -- On August 22, 1995, the Company
announced that it had signed a definitive agreement to acquire the corporate
trust business of BankAmerica Corporation. After the acquisition, the Company
became the nation's leading provider of domestic corporate trust services as
measured by revenues. Approximately 80 percent of the transaction was completed
in December 1995 with the remainder completed in the first quarter of 1996.
SALE OF MORTGAGE BANKING OPERATIONS -- In the first quarter of 1996, the Company
sold its servicing and mortgage loan production business to three parties. Bank
of America, fsb, a subsidiary of BankAmerica Corporation, purchased
approximately $14 billion in mortgage servicing rights. Columbia National, Inc.,
of Maryland, and Knutson Mortgage Co., of Minnesota, agreed to purchase the
Company's loan production business. The Company will now deliver mortgage loan
products through bank branches and telemarketing. These transactions resulted in
a net gain of $45.8 million.
FIRST INTERSTATE BANCORP -- On November 6, 1995, the Company and First
Interstate Bancorp ("First Interstate") announced that they had entered into a
definitive agreement whereby the Company would exchange 2.6 shares of its common
stock for each share of First Interstate common stock. On January 24, 1996,
First Interstate announced that it had terminated the merger agreement with the
Company and had entered into a definitive agreement with Wells Fargo & Company
("Wells Fargo"). Under the terms of a settlement agreement, the Company received
$125 million on January 24, 1996. The Company received an additional $75 million
on April 1, 1996, upon consummation of the merger of First Interstate and Wells
Fargo. In addition, all litigation among the parties related to the acquisition
of First Interstate has been settled. The Company incurred transaction costs of
approximately $10 million in connection with the proposed merger.
COMERICA CORPORATE TRUST BUSINESS -- On September 26, 1996, the Company
announced that it had signed a definitive agreement to acquire the bond
indenture services and paying agency business of Comerica Incorporated. This
business serves approximately 860 municipal and corporate clients with about
2,400 bond issues. The transaction is expected to close in the first quarter of
1997.
NOTE D. Securities
The detail of the amortized cost and fair value of available-for-sale securities
consisted of the following:
SEPTEMBER 30, 1996 DECEMBER 31, 1995
AMORTIZED FAIR AMORTIZED FAIR
(IN MILLIONS) COST VALUE COST VALUE
U.S. Treasury $634 $623 $921 $925
Mortgage-backed securities 2,577 2,563 1,703 1,693
Other U.S. agencies 60 60 157 157
State and political 496 491 174 179
Other 39 41 265 302
Total $3,806 $3,778 $3,220 $3,256
NOTE E. Loans
The composition of the loan portfolio was as follows:
SEPTEMBER 30 DECEMBER 31
(IN MILLIONS) 1996 1995
COMMERCIAL:
Commercial $9,682 $8,271
Financial institutions 756 1,060
Real estate:
Commercial mortgage 3,034 2,784
Construction 582 403
Total commercial 14,054 12,518
CONSUMER:
Residential mortgage 3,164 4,655
Residential mortgage held for sale 47 257
Home equity and second mortgage 3,144 2,805
Credit card 2,769 2,586
Automobile 2,013 1,821
Revolving credit 736 757
Installment 621 607
Student * 489 394
Total consumer 12,983 13,882
Total loans $27,037 $26,400
* All or part of the student loan portfolio may be sold when the repayment
period begins.
At September 30, 1996, the Company had $81 million in loans considered impaired
under SFAS 114 included in nonaccrual loans. Of this amount, $64 million was
valued using the fair value of the loans' collateral, $1 million using the
present value of expected future cash flows and $16 million was below the
Company's threshold for valuing individual loans. Based on the results of this
valuation, no allowance for credit losses was specifically allocated to impaired
loans. For the quarter ended September 30, 1996, the average recorded investment
in impaired loans was approximately $79 million. No interest income was
recognized on 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:
SEPTEMBER 30 DECEMBER 31
(IN MILLIONS) 1996 1995
Fixed-rate subordinated notes:
6.625% due May 15, 2003 $100 $100
6.00% due October 15, 2003 100 100
7.55% due June 15, 2004 100 100
8.00% due July 2, 2004 125 125
8.35% due November 1, 2004 100 100
7.625% due May 1, 2005 150 150
6.875% due April 1, 2006 125 --
6.875% due September 15, 2007 250 250
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 (4.91% to 7.34%) - maturities to March 2011 996 1,099
Medium-term notes (5.38% to 5.64%) - maturities to August 1999 513 580
Bank notes (5.47% to 6.38%) - maturities to March 2001 600 300
Other 77 90
Total $3,443 $3,201
NOTE G. Shareholders' Equity
On February 21, 1996, the Board of Directors authorized the repurchase of up to
25 million common shares through December 1997. This authorization replaces
previous authorizations. Approximately 11.1 million shares have been repurchased
under this authorization as of September 30, 1996. In addition, the Board of
Directors authorized the retirement of 2.6 million shares repurchased in the
second quarter of 1996. Under previous authorizations, the Company repurchased
11.9 million shares in 1995.
NOTE H. Merger, Integration and Resizing Charges
In the first quarter of 1996, the Company recorded merger, integration and
resizing charges of $69.9 million. Merger and integration charges of $31.3
million were associated with the acquisitions of FirsTier and the BankAmerica
corporate trust business. Resizing charges of $38.6 million were associated with
the Company's streamlining of the branch distribution network and trust
operations as the Company expands its alternative distribution channels,
including telemarketing, automated teller machines and in-store branches. The
components of the charges are shown below:
NINE
MONTHS ENDED
SEPTEMBER 30
(IN MILLIONS) 1996
Systems conversions, required customer communications and professional services $29.7
Premise writedowns 26.0
Severance 14.2
Total merger, integration and resizing charges $69.9
System conversions, required customer communications and professional services
relate to preparation and mailing of numerous customer communications for the
acquisitions and conversion of customer accounts, printing and distribution of
training materials and policy and procedure manuals, outside consulting fees,
and similar expenses related to the conversion and integration of acquired
branches and operations. Premise writedowns include a valuation adjustment of
$25.6 million associated with the planned sale of bank-owned properties as the
Company consolidates and reduces the space requirements of branch facilities.
The Company is presently marketing these bank-owned facilities and expects to
complete the sales of the properties over the next three to six months.
Severance charges include the cost of terminations, other benefits, and
outplacement costs associated with the elimination of employees primarily in
branch offices and in centralized corporate support and data processing
functions.
The following table presents a summary of activity with respect to the Company's
merger, integration and resizing accrual:
NINE
MONTHS ENDED
SEPTEMBER 30
(IN MILLIONS) 1996
BALANCE AT DECEMBER 31, 1995 $12.6
Provision charged to operating expense 69.9
Cash outlays (36.3)
Noncash writedowns (26.0)
Balance at September 30, 1996 $20.2
The Company expects that substantially all remaining costs will be paid by the
end of the 1996 or early 1997. Additional noncash writedowns are not expected to
be significant.
NOTE I. Income Taxes
The components of income tax expense were:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
(IN MILLIONS) 1996 1995 1996 1995
FEDERAL:
Current tax $72.0 $65.0 $311.8 $169.9
Deferred tax provision (credit) (1.3) 11.8 12.3 51.8
Federal income tax 70.7 76.8 324.1 221.7
STATE:
Current tax 8.0 11.3 32.0 18.2
Deferred tax provision (credit) (.5) (2.3) (1.1) 5.8
State income tax 7.5 9.0 30.9 24.0
Total income tax provision $78.2 $85.8 $355.0 $245.7
The reconciliation between income tax expense and the amount computed by
applying the statutory federal income tax rate was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
(IN MILLIONS) 1996 1995 1996 1995
Tax at statutory rate (35%) $75.5 $81.0 $323.2 $232.1
State income tax, net of federal tax benefit 4.9 5.8 20.1 15.6
Tax effect of:
Tax-exempt interest:
Loans (1.1) (1.3) (3.5) (3.9)
Securities (2.4) (.9) (6.7) (2.9)
Amortization of goodwill 4.3 3.0 25.3 9.1
Other items (3.0) (1.8) (3.4) (4.3)
Applicable income taxes $78.2 $85.8 $355.0 $245.7
During the second quarter, the Company received a tax refund of $65 million,
including interest, from the State of Minnesota relating to the exemption of
interest income received on investments in U.S. government securities for the
period 1979 to 1983.
The Company's net deferred tax asset was $245.9 million at September 30, 1996,
and $216.3 million at December 31, 1995.
NOTE J. Commitments, Contingent Liabilities and Off-Balance Sheet Financial
Instruments
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the normal course of business, the Company uses various financial instruments
with off-balance sheet risk to meet the financing needs of its customers and to
manage its interest rate risk. These instruments carry varying degrees of
credit, interest rate or liquidity risk. The contract or notional amounts of
these financial instruments were as follows:
SEPTEMBER 30 DECEMBER 31
(IN MILLIONS) 1996 1995
Commitments to extend credit:
Commercial $8,406 $7,240
Corporate and purchasing cards 12,292 5,220
Consumer credit card 10,318 9,247
Other consumer 3,307 3,264
Letters of credit:
Standby 1,391 1,412
Commercial 222 161
Interest rate swap contracts:
Hedges 2,689 2,839
Intermediated 146 169
Options contracts:
Hedge interest rate floors purchased 1,150 1,250
Hedge interest rate caps purchased 100 200
Intermediated interest rate and foreign exchange caps and floors purchased 127 126
Intermediated interest rate and foreign exchange caps and floors written 127 126
Liquidity support guarantees 100 142
Forward contracts 38 294
Commitments to sell loans 5 223
Mortgages sold with recourse 118 242
Foreign currency commitments:
Commitments to purchase 1,054 792
Commitments to sell 1,050 785
Activity for the nine months ended September 30, 1996, with respect to interest
rate swaps which the Company uses to hedge commercial loans, subordinated debt,
bank notes, certificates of deposit, deposit accounts, and savings certificates
was as follows:
(IN MILLIONS)
Notional amount outstanding at December 31, 1995 $2,839
Additions 450
Maturities (300)
Terminations (300)
Notional amount outstanding at September 30, 1996 $2,689
Weighted average interest rates paid 5.51%
Weighted average interest rates received 6.59%
The Company receives fixed rates and pays floating rates on all swap hedges as
of September 30, 1996. Net unamortized deferred gains, which amortize through
the year 2000, were $.7 million at September 30, 1996.
At September 30, 1996 and December 31, 1995, LIBOR based interest rate floors
totaling $950 million with a remaining maturity of 1.23 years and 2.00 years,
respectively, hedged floating rate commercial loans. The strike rate on these
LIBOR based floors ranged from 3.25 percent to 4.00 percent at September 30,
1996 and December 31, 1995. Constant Maturity Treasury (CMT) interest rate
floors totaling $200 million with an average remaining maturity of 7 months at
September 30, 1996 and $300 million with an average remaining maturity of 9
months at December 31, 1995, hedged the reinvestment risk of fixed rate
residential mortgage loans. The strike rate on these CMT floors ranged from 5.70
percent to 6.36 percent at September 30, 1996 and from 6.25 percent to 6.36
percent at December 31, 1995. The total notional amount of interest rate caps
purchased was $100 million with an average strike level at 6.00 percent at
September 30, 1996 and $200 million with an average strike level at 6.00 percent
at December 31, 1995.
NOTE K. Supplemental Information to the Consolidated Financial Statements
CONSOLIDATED BALANCE SHEET -- Time certificates of deposit in denominations of
$100,000 or more totaled $866 million and $900 million at September 30, 1996,
and December 31, 1995,respectively.
CONSOLIDATED STATEMENT OF CASH FLOWS -- Listed below are supplemental
disclosures to the Consolidated Statement of Cash Flows.
NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
(IN MILLIONS) 1996 1995
Income taxes paid $ 251.6 $ 168.4
Interest paid 817.6 785.2
Net noncash transfers to foreclosed property 19.2 15.8
Change in unrealized gain (loss) on available-for-sale
securities, net of taxes of $24.3 in
1996 and $63.5 in 1995 (39.6) 103.2
Cash acquisitions of businesses:
Fair value of noncash assets acquired $ 37.9 $ --
Liabilities assumed -- --
Net $ 37.9 $ --
Stock acquisitions of businesses:
Fair value of noncash assets acquired $ 3,627.9 $ 329.3
Net cash acquired 116.5 16.3
Liabilities assumed (3,032.2) (288.6)
Net value of common stock issued $ 712.2 $ 57.0
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
FOR THE THREE MONTHS ENDED SEPTEMBER 30
1996 1995
Yields Yields % Change
(In Millions) and and Average
(Unaudited) Balance Interest Rates Balance Interest Rates Balance
ASSETS
Securities:
U.S. Treasury $620 $9.6 6.16% $919 $14.6 6.30% (32.5)%
Mortgage-backed 2,677 46.8 6.95 1,831 31.1 6.74 46.2
State and political subdivisions 498 10.7 8.55 173 4.5 10.32 187.9
U.S. agencies and other 182 2.7 5.90 433 6.6 6.05 (58.0)
Total securities 3,977 69.8 6.98 3,356 56.8 6.71 18.5
Unrealized loss on available-for-sale securities (46) (13)
Net securities 3,931 3,343
Trading account securities 86 1.2 5.55 87 1.2 5.47 (1.1)
Federal funds sold and resale agreements 511 6.9 5.37 263 3.8 5.73 94.3
Loans:
Commercial:
Commercial 9,382 188.2 7.98 8,091 173.5 8.51 16.0
Financial institutions 834 7.8 3.72 814 8.7 4.24 2.5
Real estate:
Commercial mortgage 3,035 67.6 8.86 2,406 55.4 9.14 26.1
Construction 517 11.3 8.70 340 8.1 9.45 52.1
Total commercial 13,768 274.9 7.94 11,651 245.7 8.37 18.2
Consumer:
Residential mortgage 3,262 63.6 7.76 4,841 92.0 7.54 (32.6)
Residential mortgage held for sale 86 1.7 7.86 358 6.8 7.54 (76.0)
Home equity and second mortgage 3,084 73.9 9.53 2,679 65.8 9.74 15.1
Credit card 2,708 76.7 11.27 2,347 73.4 12.41 15.4
Other 3,863 98.9 10.19 3,660 92.2 9.99 5.5
Total consumer 13,003 314.8 9.63 13,885 330.2 9.43 (6.4)
Total loans 26,771 589.7 8.76 25,536 575.9 8.95 4.8
Allowance for credit losses 530 469 13.0
Net loans 26,241 25,067 4.7
Other earning assets 353 4.4 4.96 238 3.2 5.33 48.3
Total earning assets* 31,698 672.0 8.43 29,480 640.9 8.63 7.5
Cash and due from banks 1,801 1,659 8.6
Other assets 2,444 2,111 15.8
Total assets $35,367 $32,768 7.9%
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $6,463 $5,591 15.6%
Interest-bearing deposits:
Interest checking 2,882 9.5 1.31 2,728 10.1 1.47 5.6
Money market accounts 4,343 39.2 3.59 3,871 36.9 3.78 12.2
Other savings accounts 1,637 8.7 2.11 1,633 9.7 2.36 0.2
Savings certificates 7,257 99.0 5.43 7,256 98.9 5.41 --
Certificates over $100,000 828 12.8 6.15 1,028 17.4 6.72 (19.5)
Total interest-bearing deposits 16,947 169.2 3.97 16,516 173.0 4.16 2.6
Short-term borrowings 4,175 60.8 5.79 3,928 59.4 6.00 6.3
Long-term debt 3,397 50.7 5.94 2,892 48.0 6.58 17.5
Total interest-bearing liabilities 24,519 280.7 4.55 23,336 280.4 4.77 5.1
Other liabilities 1,187 1,043 13.8
Preferred equity 88 105 (16.2)
Common equity 3,139 2,701 16.2
Unrealized loss on available-for-sale
securities, net of taxes (29) (8) 262.5
Total liabilities and shareholders' equity $35,367 $32,768 7.9%
Net interest income $391.3 $360.5
Gross interest margin 3.88% 3.86%
Gross interest margin without taxable-
equivalent increments 3.82% 3.81%
Net interest margin 4.91% 4.85%
Net interest margin without taxable-
equivalent increments 4.84% 4.81%
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.
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
FOR THE NINE MONTHS ENDED SEPTEMBER 30
1996 1995
Yields Yields % Change
(In Millions) and and Average
(Unaudited) Balance Interest Rates Balance Interest Rates Balance
ASSETS
Securities:
U.S. Treasury $720 $33.5 6.22% $990 $46.0 6.21% (27.3)%
Mortgage-backed 2,673 139.4 6.97 2,069 105.8 6.84 29.2
State and political subdivisions 456 30.1 8.82 175 13.9 10.62 160.6
U.S. agencies and other 281 12.9 6.13 490 22.2 6.06 (42.7)
Total securities 4,130 215.9 6.98 3,724 187.9 6.75 10.9
Unrealized loss on available-for-sale securities (16) (66)
Net securities 4,114 3,658
Trading account securities 95 3.8 5.34 87 3.5 5.38 9.2
Federal funds sold and resale agreements 494 19.5 5.27 289 12.8 5.92 70.9
Loans:
Commercial:
Commercial 9,154 546.2 7.97 7,920 515.3 8.70 15.6
Financial institutions 948 29.8 4.20 727 22.2 4.08 30.4
Real estate:
Commercial mortgage 2,988 200.8 8.98 2,426 163.8 9.03 23.2
Construction 475 32.0 9.00 353 25.0 9.47 34.6
Total commercial 13,565 808.8 7.96 11,426 726.3 8.50 18.7
Consumer:
Residential mortgage 3,503 204.4 7.79 4,970 281.9 7.58 (29.5)
Residential mortgage held for sale 155 8.6 7.41 248 14.3 7.71 (37.5)
Home equity and second mortgage 2,973 213.4 9.59 2,571 185.7 9.66 15.6
Credit card 2,602 223.1 11.45 2,311 216.9 12.55 12.6
Other 3,880 291.9 10.05 3,641 274.0 10.06 6.6
Total consumer 13,113 941.4 9.59 13,741 972.8 9.47 (4.6)
Total loans 26,678 1,750.2 8.76 25,167 1,699.1 9.03 6.0
Allowance for credit losses 523 473 10.6
Net loans 26,155 24,694 5.9
Other earning assets 328 12.1 4.93 234 10.1 5.77 40.2
Total earning assets* 31,725 2,001.5 8.43 29,501 1,913.4 8.67 7.5
Cash and due from banks 1,791 1,681 6.5
Other assets 2,467 2,151 14.7
Total assets $35,444 $32,794 8.1%
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $6,396 $5,512 16.0%
Interest-bearing deposits:
Interest checking 3,017 30.3 1.34 2,849 34.3 1.61 5.9
Money market accounts 4,229 112.9 3.57 3,846 108.7 3.78 10.0
Other savings accounts 1,656 26.5 2.14 1,753 32.7 2.49 (5.5)
Savings certificates 7,320 296.8 5.42 7,899 308.6 5.22 (7.3)
Certificates over $100,000 881 40.6 6.16 1,089 53.9 6.62 (19.1)
Total interest-bearing deposits 17,103 507.1 3.96 17,436 538.2 4.13 (1.9)
Short-term borrowings 4,236 180.4 5.69 3,185 144.4 6.06 33.0
Long-term debt 3,378 151.6 5.99 2,901 140.5 6.48 16.4
Total interest-bearing liabilities 24,717 839.1 4.53 23,522 823.1 4.68 5.1
Other liabilities 1,147 1,022 12.2
Preferred equity 93 106 (12.3)
Common equity 3,101 2,676 15.9
Unrealized loss on available-for-sale
securities, net of taxes (10) (44) 77.3
Total liabilities and shareholders' equity $35,444 $32,794 8.1%
Net interest income $1,162.4 $1,090.3
Gross interest margin 3.90% 3.99%
Gross interest margin without taxable-
equivalent increments 3.83% 3.94%
Net interest margin 4.89% 4.94%
Net interest margin without taxable-
equivalent increments 4.83% 4.89%
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
3 Bylaws of First Bank System, Inc., as amended*
10A First Bank System, Inc. 1996 Stock Incentive Plan, as amended*
10B First Bank System, Inc. Restated Employee Stock Purchase 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 September 30, 1996, the Company did not file
any Current Reports on Form 8-K.
* 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 and Controller
(Chief Accounting Officer and Duly
Authorized Officer)
DATE: November 13, 1996
[LOGO] FIRST BANK SYSTEM
P.O. BOX 522
MINNEAPOLIS, MINNESOTA
55480
SHAREHOLDER INQUIRIES
FINANCIAL INFORMATION
FBS news and financial results are available by fax, mail, or internet.
Fax. To access FBS's fax-on-demand service, call 1-800-758-5804. When asked,
enter FBS's extension number, "312402." Enter "1" for the most current news
release or "2" for a menu of recent releases. Enter your fax and phone numbers
as directed. The information will be faxed to you immediately.
Mail. If you don't have access to a fax machine or prefer not to use FBS's
fax-on-demand service, we will, on request, mail to you our quarterly earnings
news release. To be added to FBS's mailing list, please contact Investor &
Corporate Relations, First Bank System, First Bank Place, Minneapolis,
Minnesota, 55402, (612) 973-2434.
Internet. For information about FBS, including news releases, product
information, and a list of service locations, access FBS's home page on the
world wide web. The address is www.fbs.com.
For further information, contact John Danielson, Senior Vice President, (612)
973-2261.
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
2598, Jersey City, New Jersey 07303-2598, (800) 446-2617.