FORM 10-Q/MARCH 31, 1997
[LOGO] FIRST BANK SYSTEM
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1997
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 41-0255900
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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).
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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, 1997
Common Stock, $1.25 Par Value 133,483,136 shares
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FINANCIAL SUMMARY
Three Months Ended March 31
---------------------------
(Dollars in Millions, Except Per Share Data) 1997 1996
- --------------------------------------------------------------------------------------------
Income before nonrecurring items .................. $ 171.8 $ 160.1
Nonrecurring items ................................ -- 16.7
---------------------------------
Net income ........................................ $ 171.8 $ 176.8
=================================
PER COMMON SHARE
Primary income before nonrecurring items .......... $ 1.27 $ 1.16
Nonrecurring items ................................ -- .12
---------------------------------
Primary net income ................................ $ 1.27 $ 1.28
=================================
Fully diluted income before nonrecurring items .... $ 1.27 $ 1.14
Nonrecurring items ................................ -- .12
---------------------------------
Fully diluted net income .......................... $ 1.27 $ 1.26
=================================
Earnings on a cash basis before nonrecurring items* $ 1.41 $ 1.26
Nonrecurring items ................................ -- .33
---------------------------------
Earnings on a cash basis (fully diluted)* ......... $ 1.41 $ 1.59
=================================
Dividends paid .................................... $ .4650 $ .4125
Common shareholders' equity ....................... 22.51 22.92
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RETURN ON AVERAGE ASSETS
Income before nonrecurring items .................. 2.00% 1.84%
Nonrecurring items ................................ -- .19
---------------------------------
Return on average assets .......................... 2.00% 2.03%
=================================
RETURN ON AVERAGE COMMON EQUITY
Income before nonrecurring items .................. 23.1% 21.0%
Nonrecurring items ................................ -- 2.2
---------------------------------
Return on average common equity ................... 23.1% 23.2%
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Net interest margin (taxable-equivalent basis) .... 4.98% 4.86%
Efficiency ratio before nonrecurring items ........ 48.5 50.7
Efficiency ratio .................................. 48.5 56.7
=================================
March 31 December 31
1997 1996
---------------------------------
PERIOD END
Loans ............................................. $ 27,173 $ 27,128
Allowance for credit losses ....................... 512 517
Assets ............................................ 36,000 36,489
Total shareholders' equity ........................ 3,001 3,053
Tangible common equity to total assets** .......... 6.6% 6.7%
Tier 1 capital ratio .............................. 7.2 7.2
Total risk-based capital ratio .................... 12.0 12.0
Leverage ratio .................................... 6.9 6.8
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* Calculated by adding amortization of goodwill and other intangible assets
to net income.
** Defined as common equity less goodwill as a percentage of total assets less
goodwill.
Refer to Management's Discussion and Analysis 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)................................................................................ 15
PART II -- OTHER INFORMATION
Submission of Matters to a Vote of Security Holders (Item 4)................................................. 27
Exhibits and Reports on Form 8-K (Item 6).................................................................... 27
Signature.................................................................................................... 27
Exhibit 2 -- Agreement and Plan of Merger, dated as of March 19, 1997, and Stock Option Agreements, dated as
of March 20, 1997, by and between First Bank System, Inc. and U. S. Bancorp. Previously filed
as Exhibits 2, 99.1 and 99.2 to Form 8-K filed March 20, 1997 and incorporated herein by
reference....................................................................................... 27
Exhibit 10A -- First Bank System, Inc. Executive Incentive Plan, as amended.................................. ***
Exhibit 10B -- First Bank System, Inc. Nonqualified Supplemental Executive Retirement Plan, as amended....... ***
Exhibit 10C -- First Bank System, Inc. Executive Deferral Plan, as amended................................... ***
Exhibit 10D -- First Bank System, Inc. Independent Director Retirement and Death Benefit Plan, as amended.... ***
Exhibit 10E -- First Bank System, Inc. Deferred Compensation Plan for Directors, as amended.................. ***
Exhibit 11 -- Computation of Primary and Fully Diluted Net Income Per Common Share........................... 29
Exhibit 12 -- Computation of Ratio of Earnings to Fixed Charges.............................................. 30
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 first quarter 1997 operating
earnings (net income excluding nonrecurring items) of $171.8 million compared
with $160.1 million in the first quarter of 1996. On a fully diluted per share
basis, operating earnings were $1.27 in the first quarter of 1997, compared with
$1.14 in the first quarter of 1996, an increase of 11 percent. Return on average
assets and return on average common equity, excluding nonrecurring items, were
2.00 percent and 23.1 percent, respectively, in the first quarter of 1997,
compared with returns of 1.84 percent and 21.0 percent in the first quarter of
1996. Excluding nonrecurring items, the efficiency ratio (the ratio of expenses
to revenues) improved to 48.5 percent in the first quarter of 1997 from 50.7
percent in the first quarter of 1996.
Operating earnings for the first quarter of 1997 reflected growth in net
interest and noninterest income, lower operating expenses, and effective capital
management. Net interest income on a taxable-equivalent basis was $384.8
million, an increase of $5.5 million from the first quarter of 1996. Noninterest
income, excluding nonrecurring items, increased $17.7 million (9 percent) from
the first quarter of 1996, despite the loss of revenue from the first quarter
1996 sale of the Company's mortgage banking operations. The increase was
primarily the result of growth in credit card fee revenue and trust fees.
Excluding nonrecurring items, first quarter noninterest expense decreased $1.6
million from the first quarter of 1996, reflecting both the successful
integration of recent acquisitions and the continued emphasis on cost control.
Several nonrecurring items affected operating results in the first quarter
of 1996. The impact of these items increased net income $16.7 million ($48.6
million on a pretax basis) or $.12 per share. Nonrecurring pretax gains included
$115 million, net of expenses, received for the termination of the First
Interstate Bancorp merger agreement; a $45.8 million gain on the sale of the
Company's mortgage banking operations; and, $14.6 million in net securities
gains. Nonrecurring pretax 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 miscellaneous assets. Including these nonrecurring items, net income
was $176.8 million in the first quarter of 1996, or $1.26 per share on a fully
diluted basis.
Credit quality remained strong in the first quarter of 1997. Nonperforming
assets totaled $134.6 million at March 31, 1997, down $3.1 million (2 percent)
from December 31, 1996, and $22.5 million (14 percent) from March 31, 1996. The
ratio of the allowance for credit losses to nonperforming loans at quarter-end
was 446 percent compared with 429 percent at the end of 1996 and 461 percent at
March 31, 1996.
TABLE 1 SUMMARY OF CONSOLIDATED INCOME
Three Months Ended
---------------------------
(Taxable-Equivalent Basis; March 31 March 31
Dollars In Millions, Except Per Share Data) 1997 1996
- -----------------------------------------------------------------------------------------
Interest income ....................................... $ 661.0 $ 659.3
Interest expense ...................................... 276.2 280.0
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Net interest income ................................. 384.8 379.3
Provision for credit losses ........................... 37.0 31.0
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Net interest income after provision for credit losses 347.8 348.3
Nonrecurring income ................................... -- 175.4
Other noninterest income .............................. 225.8 208.1
Nonrecurring charges .................................. -- 126.8
Other noninterest expense ............................. 296.0 297.6
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Income before income taxes .......................... 277.6 307.4
Taxable-equivalent adjustment ......................... 4.8 4.7
Income taxes .......................................... 101.0 125.9
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Net income .......................................... $ 171.8 $ 176.8
===========================
Return on average assets .............................. 2.00% 2.03%
Return on average common equity ....................... 23.1 23.2
Net interest margin ................................... 4.98 4.86
Efficiency ratio ...................................... 48.5 56.7
Efficiency ratio before nonrecurring items ............ 48.5 50.7
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Per Common Share:
Net income ............................................ $ 1.27 $ 1.28
Dividends paid ........................................ .4650 .4125
=========================================================================================
Operating results reflect acquisition and divestiture activity. On January
31, 1997, the Company completed its acquisition of the bond indenture services
and paying agency business of Comerica Incorporated ("Comerica"). This business
serves approximately 860 municipal and corporate clients with 2,400 bond issues.
On February 27, 1997, the Company securitized and sold $420 million of
corporate charge card receivables. The five-year, fixed-rate securities were
sold through the First Bank Corporate Card Master Trust, a special purpose
entity.
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
residential mortgage servicing and 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 March 20, 1997, the Company and U. S. Bancorp ("USBC") announced that
they had entered into a definitive agreement for the Company to acquire USBC.
The Company will exchange .755 shares of its common stock for each share of USBC
common stock. The combined institution, which will use the U. S. Bancorp name,
will have approximately $70 billion in assets, and serve 3.9 million households
through 995 branches and 4,565 automated teller machines ("ATMs") in 17
contiguous states. The transaction, which will qualify as a tax-free
reorganization and be accounted for as a pooling-of-interests, is subject to
shareholder and regulatory approvals and is expected to close in the third
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 first quarter 1997 certain organization and
methodology changes were made and 1996 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 ATMs. Net income was $58.7 million in the first quarter of 1997
compared with $55.7 million in the same period of 1996. First quarter return on
assets increased to 1.91 percent from 1.73 percent in the same quarter a year
ago.
TABLE 2 LINE OF BUSINESS FINANCIAL PERFORMANCE
Retail Payment Business Banking and
Banking Systems Private Financial Services
----------------------------- --------------------------- ---------------------------
For the Three Months Ended March 31 Percent Percent Percent
(Dollars in Millions) 1997 1996 Change 1997 1996 Change 1997 1996 Change
- ------------------------------------------------------------------------------------------------------------------------------------
CONDENSED INCOME STATEMENT:
Net interest income
(taxable-equivalent basis) .................. $ 192.7 $ 192.4 .2% $ 35.9 $ 38.0 (5.5)% $95.1 88.4 7.6%
Provision for credit losses .................. 4.1 6.2 (33.9) 27.0 19.2 40.6 3.3 3.0 10.0
Noninterest income ........................... 39.1 40.0 (2.3) 85.9 68.7 25.0 33.5 27.8 20.5
Noninterest expense .......................... 132.8 136.4 (2.6) 54.2 49.0 10.6 52.8 45.9 15.0
Income taxes and
taxable-equivalent adjustment 36.2 34.1 15.5 14.8 27.6 25.7
---------------- -------------- ---------------
Income before nonrecurring items ............. $ 58.7 $ 55.7 5.4 $ 25.1 $ 23.7 5.9 $ 44.9 $ 41.6 7.9
================ ============== ===============
Net nonrecurring items (after-tax) ...........
Net income .................................
AVERAGE BALANCE SHEET DATA:
Commercial loans ............................. $ 561 $ 482 16.4 $1,130 $ 935 20.9 $6,993 $6,403 9.2
Consumer loans, excluding
residential mortgage ........................ 6,671 6,254 6.7 2,776 2,500 11.0 474 442 7.2
Residential mortgage loans ................... 2,873 3,762 (23.6) -- -- -- 122 109 11.9
Assets ....................................... 12,440 12,941 (3.9) 4,685 4,324 8.3 9,896 9,293 6.5
Deposits ..................................... 16,089 16,942 (5.0) 35 44 (20.5) 3,720 3,336 11.5
Common equity ................................ 961 1,034 (7.1) 354 344 2.9 918 847 8.4
---------------- --------------- ---------------
Return on average assets ..................... 1.91% 1.73% 2.17% 2.20% 1.84% 1.80%
Return on average common equity ("ROCE") ..... 24.8 21.7 28.8 27.7 19.8 19.8
Net tangible ROCE** .......................... 46.5 38.1 46.7 44.3 37.3 32.3
Efficiency ratio ............................. 57.3 58.7 44.5 45.9 41.1 39.5
Efficiency ratio on a cash basis** ........... 54.5 56.2 42.7 43.3 38.7 38.0
==================================================================================================================================
* Not meaningful
** Calculated by excluding goodwill and other intangibles and the related
amortization.
Note: The Company's mortgage banking operations, which were sold in first
quarter 1996, and nonrecurring items are included in "Other".
Net tangible return on average common equity increased to 46.5 percent compared
with 38.1 percent in the first quarter of the prior year.
Net interest and noninterest income remained relatively flat in the first
quarter of 1997 as compared to the same period in the prior year, reflecting
growth in core commercial and consumer assets offset by runoff in the
residential mortgage loan portfolio. First quarter 1997 noninterest expense
decreased 3 percent to $132.8 million from the first quarter of 1996, reflecting
the benefits of continued streamlining of branch operations, as well as the
integration of recent business combinations. The efficiency ratio on a cash
basis improved to 54.5 percent in the first quarter of 1997 compared with 56.2
percent in the first quarter of 1996.
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 income increased 6
percent in the first quarter of 1997 to $25.1 million compared with $23.7
million in the first quarter of 1996. Return on average assets was 2.17 percent,
compared with 2.20 percent in the first quarter of 1996, and net tangible return
on average common equity was 46.7 percent compared with 44.3 percent for the
same quarter in the previous year.
Fee-based noninterest income increased 25 percent in the first quarter of
1997 compared with the same period in 1996. The increases were due to growth in
the sales volume of the Corporate Card, the Purchasing Card, and the FBS
WorldPerks(R) VISA(R) card. Net interest income decreased due to the change in
the loan mix. Average commercial loans, which are primarily noninterest earning
Corporate and Purchasing Card balances, comprised approximately 29 percent of
the portfolio during the first quarter of 1997 compared with 27 percent in first
quarter of 1996. The increase in the provision for credit losses reflects higher
net charge-offs on credit card loans. Noninterest expense increased due to
higher variable transaction costs related to increased sales volume. The
efficiency ratio on a cash basis improved to 42.7 percent in the first quarter
of 1997 from 43.3 percent in the first quarter of 1996.
BUSINESS BANKING AND PRIVATE FINANCIAL SERVICES -- Business Banking and Private
Financial Services includes middle-market banking services, private banking, and
personal trust. Net income increased 8 percent to $44.9 million compared with
the first quarter of 1996. Return on average assets was 1.84 percent compared
with 1.80 percent in the first quarter of 1996, and net tangible return on
average common equity was 37.3 percent compared with 32.3 percent in the first
quarter of the prior year.
(CONTINUED WIDE TABLE 2 FROM ABOVE)
Corporate Trust and
Commercial Institutional Financial Consolidated
Banking Services Other Company
- --------------------------------- ----------------------------- ------------------ ------------------------------
Percent Percent Percent
1997 1996 Change 1997 1996 Change 1997 1996 1997 1996 Change
- -----------------------------------------------------------------------------------------------------------------
$ 50.3 $ 49.3 2.0% $ 10.8 $ 7.9 36.7% $ -- $ 3.3 $ 384.8 $ 379.3 1.5%
2.6 2.6 -- -- -- -- -- -- 37.0 31.0 19.4
15.1 17.5 (13.7) 52.2 49.6 5.2 -- 4.5 225.8 208.1 8.5
19.4 19.4 -- 36.8 35.0 5.1 -- 11.9 296.0 297.6 (.5)
16.5 17.1 10.0 8.6 -- (1.6) 105.8 98.7
---------------- -------------- --------------- -------------------
$ 26.9 $ 27.7 (2.9) $ 16.2 $ 13.9 16.5 -- (2.5) 171.8 160.1 7.3
================ ==============
-- 16.7 -- 16.7
--------------- -------------------
$ -- $ 14.2 $ 171.8 $ 176.8 (2.8)
=============== ===================
$ 5,308 $ 5,223 1.6 $ -- $ -- -- $ -- $ -- $13,992 $13,043 7.3
-- -- -- -- -- -- -- -- 9,921 9,196 7.9
-- -- -- -- -- -- -- 219 2,995 4,090 (26.8)
6,718 6,921 (2.9) 1,179 1,172 .6 -- 393 34,918 35,044 (.4)
1,526 1,504 1.5 1,212 892 35.9 -- 329 22,582 23,047 (2.0)
470 484 (2.9) 308 283 8.8 -- 40 3,011 3,032 (.7)
---------------- -------------- --------------- -------------------
1.62% 1.61% * * 2.00% 1.84%
23.2 23.0 21.3% 19.8% 23.1 21.0
24.2 24.0 40.9 39.1 38.5 33.6
29.7 29.0 58.4 60.9 48.5 50.7
29.2 28.6 50.5 53.2 45.2 47.6
=================================================================================================================
Net interest income increased 8 percent, reflecting growth in average loans
balances. The 21 percent increase in noninterest income resulted primarily from
acquisitions. Noninterest expense increased in the first quarter of 1997,
compared to the same period of 1996, reflecting the impact of acquisitions. The
efficiency ratio on a cash basis was 38.7 percent, compared with 38.0 percent in
the first quarter of 1996.
COMMERCIAL BANKING -- Commercial Banking provides lending, treasury management,
and other financial services to middle-market, large corporate and mortgage
banking companies. First quarter 1997 net income was $26.9 million, compared
with $27.7 million in the first quarter of 1996. First quarter 1997 return on
average assets was 1.62 percent compared with 1.61 percent in the first quarter
of 1996. Net tangible return on average common equity was 24.2 percent in the
first quarter of 1997 compared with 24.0 percent in the first quarter of 1996.
First quarter 1997 noninterest income decreased 14 percent from the first
quarter of 1996. However, excluding a $3.1 millon gain on the sale of assets in
the first quarter of 1996, noninterest income increased 5 percent from the first
quarter of 1996. The efficiency ratio on a cash basis remained low at 29.2
percent in the first quarter of 1997 compared with 28.6 percent in the first
quarter of 1996.
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.
Net income increased 17 percent to $16.2 million in the first quarter of 1997
compared with the same period in the prior year. The net tangible return on
average common equity was 40.9 percent in the first quarter of 1997 compared
with 39.1 percent in the first quarter of 1996.
Net interest income increased 37 percent in the first quarter of 1997
compared with the first quarter of 1996, reflecting the acquisitions of the
corporate trust businesses of BankAmerica and Comerica Incorporated. The
efficiency ratio on a cash basis improved to 50.5 percent in the first quarter
compared with 53.2 percent in the first quarter of 1996, reflecting the
effective integration of acquisitions, process re-engineering efforts, and
revenue growth.
TABLE 3 ANALYSIS OF NET INTEREST INCOME
Three Months Ended
--------------------
March 31 March 31
(Dollars In Millions) 1997 1996
- --------------------------------------------------------------------------------
Net interest income (taxable-equivalent basis) .......... $ 384.8 $ 379.3
====================
Average balances of earning assets supported by:
Interest-bearing liabilities .......................... $24,468 $24,661
Noninterest-bearing liabilities ....................... 6,885 6,710
--------------------
Total earning assets ................................ $31,353 $31,371
====================
Average yields and weighted average rates (taxable-
equivalent basis):
Earning assets yield ................................... 8.55% 8.45%
Rate paid on interest-bearing liabilities .............. 4.58 4.57
--------------------
Gross interest margin ................................... 3.97% 3.88%
====================
Net interest margin ..................................... 4.98% 4.86%
====================
Net interest margin without taxable-equivalent increments 4.92% 4.80%
================================================================================
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME Net interest income on a taxable-equivalent basis was $384.8
million in the first quarter of 1997, an increase of $5.5 million from the first
quarter of 1996. The improvement was primarily attributable to an increase in
loan fees, the corporate card securitization and a more favorable mix of earning
assets, including an increase in average loans of $579 million (2 percent) from
the first quarter of 1996. Excluding mortgage-related loan balances and the
effect of the February 1997 corporate card securitization, average loans for the
first quarter were higher by $2.0 billion (10 percent) than the first quarter of
1996. This increase reflected growth in core commercial and consumer loans, as
well as the February 1996 FirsTier acquisition. Average securities decreased
$682 million reflecting both maturities and sales.
The average cost of interest-bearing liabilities in the first quarter of
1997 was essentially unchanged from that of the first quarter of last year.
Average interest-bearing deposits and short-term borrowings decreased $1.1
billion (5 percent) compared with 1996, while average long-term debt and trust
preferred securities increased $916 million. The decline in average deposit
balances reflects consumers moving funds into alternative investment vehicles.
The change in the mix of interest-bearing liabilities was offset by an overall
decrease in market interest rates in the first quarter of 1997 from the first
quarter of 1996.
The net interest margin in the first quarter of 1997 was 4.98 percent,
compared with 4.86 percent in the first quarter of 1996, reflecting increases in
loan fees, the corporate card securitization and a favorable asset mix.
PROVISION FOR CREDIT LOSSES The provision for credit losses was $37.0 million in
the first quarter of 1997, up $6.0 million (19 percent) from the first quarter
of 1996. Net charge-offs totaled $41.3 million, up $7.8 million (23 percent)
from the same quarter a year ago and up $.7 million (2 percent) from the fourth
quarter of 1996. These increases resulted from increased loan volumes and higher
consumer net charge-offs. Refer to "Corporate Risk Management" for further
information on credit quality.
NONINTEREST INCOME First quarter 1997 noninterest income was $225.8 million, an
increase of $17.7 million before nonrecurring items, from the first quarter of
1996. The improvement resulted primarily from growth in trust fees and credit
card fee revenue and the addition of FirsTier, partially offset by the loss of
revenues from the Company's mortgage banking operations, which were sold in the
first quarter of 1996.
TABLE 4 NONINTEREST INCOME
Three Months Ended
--------------------
March 31 March 31
(Dollars In Millions) 1997 1996
- -------------------------------------------------------------------------------
Credit card fee revenue ............................ $ 77.3 $ 62.8
Trust fees ......................................... 66.0 56.2
Service charges on deposit accounts ................ 36.4 33.9
Investment products fees and commissions ........... 8.6 8.5
Trading account profits and commissions ............ 3.1 2.7
Other .............................................. 34.4 44.0
-------------------
Subtotal ......................................... 225.8 208.1
Termination fee, net ............................... -- 115.0
Gain on sale of mortgage banking operations ........ -- 45.8
Securities gains ................................... -- 14.6
-------------------
Nonrecurring gains ............................... -- 175.4
-------------------
Total noninterest income ....................... $225.8 $383.5
===============================================================================
Credit card fee revenue increased $14.5 million (23 percent) from the first
quarter of 1996 as a result of higher sales volumes for Purchasing and Corporate
cards and the First Bank WorldPerks VISA card. Trust fees were up over the first
quarter of 1996 by $9.8 million (17 percent) due to core growth in personal,
corporate and institutional trust businesses and acquisitions. Service charges
on deposit accounts increased $2.5 million (7 percent) over the first quarter of
1996, reflecting the acquisition of FirsTier. Other noninterest income decreased
$9.2 million (20 percent) from the first quarter of 1996 primarily due to the
divestiture of the Company's mortgage banking operations.
Noninterest income in first quarter 1996 included nonrecurring gains of
$175.4 million, including $115 million, net of expenses, received from the
termination of the First Interstate Bancorp merger agreement; a $45.8 million
gain on the sale of the Company's mortgage banking operations; and $14.6 million
in net securities gains.
NONINTEREST EXPENSE First quarter 1997 noninterest expense was $296.0 million, a
decrease of $1.6 million, before nonrecurring items, from the first quarter of
1996. The reduction in operating expenses was achieved as a result of effective
acquisition integration and ongoing expense control. Excluding nonrecurring
items, the Company's efficiency ratio improved to 48.5 percent for the quarter
from 50.7 percent for the same quarter a year ago.
Total salaries and benefits expense for the first quarter of 1997,
excluding nonrecurring charges, remained relatively flat at $141.4 million,
compared with $142.2 million for the first quarter of 1996. Average full-time
equivalent employees decreased 5 percent, to 12,548 in the first quarter of
1997, from 13,246 in the first quarter of 1996. Amortization of goodwill and
intangibles for the first quarter of 1997, excluding nonrecurring items,
increased $1.9 million (11 percent), over the first quarter of last year, as a
result of acquisitions. FDIC insurance expense was lower by $2.1 million in the
first quarter of 1997 as a result of a rate reduction.
Nonrecurring charges recorded in the first quarter of 1996 totaled $126.8
million, including: merger and integration charges of $31.3 million for the
acquisitions of FirsTier and the BankAmerica corporate trust business; $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 their 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 Bancorp; and, $17.3
million to acquire credit card and revolving credit software and write-off
miscellaneous assets.
TABLE 5 NONINTEREST EXPENSE
Three Months Ended
-------------------
March 31 March 31
(Dollars in Millions, Except Per Employee Data) 1997 1996
- ------------------------------------------------------------------------------
Salaries** .............................................. $ 114.9 $ 114.2
Employee benefits** ..................................... 26.5 28.0
------------------
Total personnel expense ............................ 141.4 142.2
Net occupancy ........................................... 25.0 25.8
Furniture and equipment ................................. 21.7 23.8
Goodwill and other intangible assets** .................. 19.8 17.9
Other personnel costs ................................... 10.0 9.7
Professional services** ................................. 10.0 8.3
Advertising and marketing ............................... 8.5 6.8
Telephone ............................................... 5.9 5.8
Third party data processing ............................. 5.7 5.4
Postage ................................................. 5.6 6.2
Printing, stationery and supplies ....................... 5.1 6.0
FDIC insurance .......................................... 1.4 3.5
Other** ................................................. 35.9 36.2
------------------
Subtotal ........................................... 296.0 297.6
Merger-related .......................................... -- 31.3
Branch distribution resizing ............................ -- 38.6
Goodwill and other intangible assets valuation adjustment -- 29.5
Special employee bonus .................................. -- 10.1
Other ................................................... -- 17.3
------------------
Nonrecurring charges ............................... -- 126.8
------------------
Total noninterest expense ..................... $ 296.0 $ 424.4
==================
Efficiency ratio* ....................................... 48.5% 56.7%
Efficiency ratio before nonrecurring items .............. 48.5 50.7
Average number of full-time equivalent employees ........ 12,548 13,246
Annualized personnel expense per employee** ............. $45,075 $42,941
==============================================================================
* Computed as noninterest expense divided by the sum of net interest income
on a taxable-equivalent basis and noninterest income net of securities
gains and losses.
** Before effect of nonrecurring items.
PROVISION FOR INCOME TAXES The provision for income taxes was $101.0 million in
the first quarter of 1997, compared with $125.9 million in the first quarter of
1996. The decrease was primarily the result of a lower level of taxable income
in the first quarter of 1997, compared to the same quarter last year, due to
several nonrecurring items occurring in the first quarter of 1996, as discussed
above.
BALANCE SHEET ANALYSIS
LOANS The Company's loan portfolio was $27.2 billion at March 31, 1997 compared
with $27.1 billion at December 31, 1996. The Company's portfolio of commercial
loans totaled $14.4 billion at March 31, 1997, up $285 million from December 31,
1996, despite $420 million of corporate charge card receivables securitized and
sold in the first quarter of 1997. The increase was primarily attributable to
growth in large corporate, middle-market business and agricultural-related
business lending. Total consumer loan outstandings were $12.8 billion at March
31, 1997, compared with $13.0 billion at December 31, 1996, reflecting lower
residential mortgage-related and credit card balances.
SECURITIES At March 31, 1997, securities were $3.4 billion compared with $3.6
billion at December 31, 1996, reflecting both maturities and sales during the
first quarter of 1997.
DEPOSITS Noninterest-bearing deposits were $7.3 billion at March 31, 1997,
compared with $7.9 billion at December 31, 1996. Interest-bearing deposits
totaled $16.2 billion at March 31, 1997, compared with $16.5 billion at December
31, 1996. The decreases in these balances generally reflect customers moving
funds into alternative investment vehicles.
BORROWINGS Short-term borrowings, which include federal funds purchased,
securities sold under agreements to repurchase and other short-term borrowings,
were $3.8 billion at March 31, 1997, down slightly from $4.1 billion at year-end
1996. The decrease was primarily due to the net maturity of $380 million of
short-term bank notes during the first quarter of 1997.
Long-term debt was $4.3 billion at March 31, 1997, up from $3.6 billion at
December 31, 1996. The Company issued $846 million of medium-term debt and bank
notes during the first quarter of 1997. The effect of these issuances was
partially offset by the first quarter 1997 maturity of approximately $90 million
of Federal Home Loan Bank Advances and $50 million of 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 its 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, Nebraska, North Dakota, Montana, South Dakota, Illinois,
Wisconsin, Iowa, Kansas, and Wyoming, compare favorably with national trends.
Approximately 80 percent of the Company's loan portfolio consists of credit to
businesses and consumers in this operating region.
ANALYSIS OF NET CHARGE-OFFS AND ALLOWANCE FOR CREDIT LOSSES Net loan charge-offs
totaled $41.3 million in the first quarter of 1997 and $33.5 million in the
first quarter of 1996. Commercial loan net recoveries for the quarter were $6.8
million compared with $3.5 million in the first quarter of 1996. Consumer loan
net charge-offs increased $11.1 million from the first quarter of 1996,
reflecting higher average nonmortgage loan balances and higher loss ratios in
several categories, including fraud and bankruptcies. Consumer loans 30 days or
more past due declined to 1.87 percent of the portfolio at March 31, 1997,
compared with 2.12 percent at December 31, 1996. The ratio of total net
charge-offs to average loans was .62 percent in the first quarter of 1997
compared with .51 percent in the first quarter of 1996.
TABLE 6 NET CHARGE-OFFS AS A PERCENTAGE OF AVERAGE LOANS OUTSTANDING
Three Months Ended
------------------
March 31 March 31
1997 1996
- ------------------------------------------------------------------------------
COMMERCIAL:
Commercial ......................................... .02% (.12)%
Real estate:
Commercial mortgage .............................. (1.12) (.12)
Construction ..................................... .73 --
---------------
Total commercial ................................. (.20) (.11)
CONSUMER:
Residential mortgage ............................... .07 .08
Credit card ........................................ 3.86 3.01
Other .............................................. 1.20 1.05
---------------
Total consumer ................................... 1.51 1.12
---------------
Total ............................................ .62% .51%
==============================================================================
TABLE 7 SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
Three Months Ended
---------------------
March 31 March 31
(Dollars In Millions) 1997 1996
- -------------------------------------------------------------------------------
Balance at beginning of period ......................... $516.5 $473.5
CHARGE-OFFS:
Commercial:
Commercial ..................................... 5.3 5.7
Real estate:
Commercial mortgage ........................ .8 5.5
Construction ............................... 1.2 --
-------------------
Total commercial ........................... 7.3 11.2
Consumer:
Residential mortgage ........................... .6 1.0
Credit card .................................... 29.6 21.2
Other .......................................... 26.7 23.1
-------------------
Total consumer ............................. 56.9 45.3
-------------------
Total ...................................... 64.2 56.5
RECOVERIES:
Commercial:
Commercial ..................................... 4.8 8.3
Real estate:
Commercial mortgage ........................ 9.3 6.4
Construction ............................... -- --
-------------------
Total commercial ........................... 14.1 14.7
Consumer:
Residential mortgage ........................... .1 .2
Credit card .................................... 3.2 2.5
Other .......................................... 5.5 5.6
-------------------
Total consumer ............................. 8.8 8.3
-------------------
Total ...................................... 22.9 23.0
NET CHARGE-OFFS:
Commercial:
Commercial ..................................... .5 (2.6)
Real estate:
Commercial mortgage ........................ (8.5) (.9)
Construction ............................... 1.2 --
-------------------
Total commercial ........................... (6.8) (3.5)
Consumer:
Residential mortgage ........................... .5 .8
Credit card .................................... 26.4 18.7
Other .......................................... 21.2 17.5
-------------------
Total consumer ............................. 48.1 37.0
-------------------
Total ...................................... 41.3 33.5
Provision charged to operating expense ................. 37.0 31.0
Additions related to acquisitions and other ............ -- 59.1
-------------------
Balance at end of period ............................... $512.2 $530.1
===================
Allowance as a percentage of period-end loans .......... 1.88% 1.97%
Allowance as a percentage of nonperforming loans ....... 446 461
Allowance as a percentage of nonperforming assets ...... 381 337
===============================================================================
TABLE 8 DELINQUENT LOAN RATIOS*
March 31 December 31
90 days or more past due 1997 1996
- -----------------------------------------------------------------------------
COMMERCIAL:
Commercial ................................... .39% .50%
Real estate:
Commercial mortgage ....................... .94 1.00
Construction .............................. 1.74 1.56
-------------------
Total commercial .......................... .54 .63
CONSUMER:
Residential mortgage ......................... 1.25 1.28
Credit card .................................. .58 .61
Other ........................................ .36 .35
-------------------
Total consumer ........................... .61 .63
-------------------
Total .................................... .58% .63%
=============================================================================
* Ratios include nonperforming loans and are expressed as a percent of ending
loan balances.
ANALYSIS OF NONPERFORMING ASSETS Nonperforming assets include all nonaccrual
loans, restructured loans, other real estate and other nonperforming assets
owned by the Company. At March 31, 1997, nonperforming assets totaled $134.6
million, down $3.1 million (2 percent) from December 31, 1996 and $22.5 million
(14 percent) from March 31, 1996. The ratio of nonperforming assets to loans and
other real estate was .50 percent at March 31, 1997, down slightly from .51
percent at December 31, 1996, and .58 percent at March 31, 1996. Accruing loans
90 days or more past due totaled $41.5 million at March 31, 1997, compared with
$49.6 million at December 31, 1996. 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 1.87 percent of the consumer loan portfolio at March 31,
1997, compared with 2.12 percent at December 31, 1996. The percentage of
consumer loans 90 days or more past due of the total consumer loan portfolio
totaled .61 percent at March 31, 1997, compared with .63 percent at December 31,
1996.
TABLE 9 NONPERFORMING ASSETS*
March 31 December 31
(Dollars In Millions) 1997 1996
- -------------------------------------------------------------------------------
COMMERCIAL:
Commercial .......................................... $ 36.2 $ 44.5
Real estate:
Commercial mortgage ............................. 28.7 30.8
Construction .................................... 11.8 10.2
-------------------
Total commercial ................................ 76.7 85.5
CONSUMER:
Residential mortgage ................................ 33.1 31.2
Other ............................................... 5.1 3.7
-------------------
Total consumer .................................. 38.2 34.9
-------------------
Total nonperforming loans ....................... 114.9 120.4
OTHER REAL ESTATE ........................................ 14.5 13.5
OTHER NONPERFORMING ASSETS ............................... 5.2 3.8
-------------------
Total nonperforming assets ...................... $134.6 $137.7
===================
Accruing loans 90 days or more past due .................. $ 41.5 $ 49.6
Nonperforming loans to total loans ....................... .42% .44%
Nonperforming assets to total loans plus other real estate .50 .51
===============================================================================
* Throughout this document, nonperforming assets and related ratios do not
include loans more than 90 days past due and still accruing.
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 Repricing Mismatch
Analysis. The Company is in compliance with Board-approved guidelines,
established by ALCO, relating to the above methods for measuring and managing
interest rate risk.
NET INTEREST INCOME SIMULATION: The Company has developed a net interest income
simulation model to measure near-term (next 12 months) 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 yield curve of 1 percent, 2 percent and 3
percent as well as the effect of immediate and sustained flattening and
steepening of the yield curve. 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 over the succeeding 12 months to 2 percent of forecasted net
interest income, assuming static Prime/LIBOR spreads and modest changes in
deposit pricing lags, 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 one to 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 rate changes on the estimated discounted future cash
flows of the Company's assets, liabilities and off-balance sheet instruments.
The amount of market value risk is subject to limits approved by the Company's
Board of Directors.
REPRICING MISMATCH 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 repricing mismatch analysis primarily for
managing interest rate risk beyond one year and has established limits, approved
by the Company's Board of Directors, for gap positions in the one- to three-year
time periods.
USE OF DERIVATIVES TO MANAGE INTEREST RATE RISK: While each of the interest rate
risk measurements has limitations, taken together they represent a comprehensive
view of the magnitude of the Company's interest rate risk over various time
intervals. The Company manages its interest rate risk by entering into
off-balance sheet transactions (primarily interest rate swaps), investing in
fixed rate assets or issuing variable rate liabilities. To a lesser degree, the
Company also uses interest rate caps and floors to hedge this risk. The Company
does not enter into derivative contracts for speculative purposes.
TABLE 10 INTEREST RATE SWAP HEDGING PORTFOLIO NOTIONAL BALANCES AND YIELDS BY
MATURITY DATE
At March 31, 1997 (Dollars in Millions)
- ----------------------------------------------------------------------------
Weighted Weighted
Average Average
Receive Fixed Swaps* Notional Interest Rate Interest Rate
Maturity Date Amount Received Paid
- ----------------------------------------------------------------------------
1997 (remaining nine months) . $ 125 7.45% 5.47%
1998 ......................... 681 5.97 5.49
1999 ......................... 530 6.42 5.52
2000 ......................... 175 6.59 5.50
2001 ......................... 205 6.56 5.46
After 2001** ................. 955 6.95 5.51
------
Total ........................ $2,671 6.57% 5.50%
============================================================================
* At March 31, 1997, the Company had no hedging swaps in its portfolio that
required it to pay fixed-rate interest.
** Of the amount maturing after the year 2001, $925 million hedges fixed-rate
subordinated notes.
As of March 31, 1997, 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 6.57 percent and an average variable rate, which is tied to
various LIBOR rates, of 5.50 percent. The remaining maturity of these agreements
ranges from four months to 10.5 years with an average remaining maturity of 4.07
years. Swaps increased net interest income for the quarters ended March 31, 1997
and 1996 by $6.4 million and $7.9 million, respectively.
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 as of March 31, 1997, was $100 million. To hedge
against falling interest rates, the Company uses interest rate floors. The total
notional amount of floor agreements purchased as of March 31, 1997, was $1.1
billion. LIBOR-based floors totaled $800 million and Constant Maturity Treasury
floors totaled $300 million. The impact of caps and floors on net interest
income was not material for the quarters ended March 31, 1997 and 1996.
CAPITAL MANAGEMENT At March 31, 1997, total tangible common equity was $2.3
billion, or 6.6 percent of assets, compared with 6.7 percent at December 31,
1996. Tier 1 and total risk-based capital ratios were 7.2 percent and 12.0
percent at March 31, 1997, and December 31, 1996. The March 31, 1997 leverage
ratio increased to 6.9 percent from 6.8 percent at year-end 1996.
On February 21, 1996, the Board of Directors authorized the repurchase of
up to 25.4 million common shares through December 1997. The Company purchased
17.0 million shares under this authorization, including 1.9 million in the first
quarter of 1997. The Board of Directors rescinded this authorization on March
19, 1997, due to the announcement of the USBC acquisition.
ACCOUNTING CHANGES
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS Effective January 1,
1997, the Company adopted Statement of Financial Accounting Standards No.
("SFAS") 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The Statement uses a "financial components"
approach which focuses on control to determine whether 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. If control is retained, the transaction is then considered to be a
financing. The adoption of SFAS 125 did not have a material effect on the
Company. SFAS 125 has been amended (SFAS 127), deferring for one year its
adoption in the accounting for securities lending, repurchase agreements and
other secured financing transactions. The eventual adoption of SFAS 125 relating
to these transaction types is not expected to have a material effect on the
Company.
TABLE 11 CAPITAL RATIOS
March 31 December 31
(Dollars in Millions) 1997 1996
- ----------------------------------------------------------------------------
Tangible common equity* .......................... $2,342 $2,385
As a percent of assets ........................ 6.6% 6.7%
Tier 1 capital ................................... $2,326 $2,355
As a percent of risk-adjusted assets .......... 7.2% 7.2%
Total risk-based capital ......................... $3,898 $3,943
As a percent of risk-adjusted assets .......... 12.0% 12.0%
Leverage ratio ................................... 6.9 6.8
============================================================================
* Defined as common equity less goodwill.
EARNINGS PER SHARE SFAS 128, "Earnings per Share," supercedes APB Opinion 15
"Earnings per Share," by replacing the method currently used to compute earnings
per share with basic and diluted earnings per share. Under the new requirements,
the dilutive effect of stock options will be excluded from the calculation of
basic earnings per share. Diluted earnings per share will be calculated
similarly to the current fully diluted earnings per share. SFAS 128 is effective
for periods ending after December 15, 1997, with earlier application prohibited.
After the effective date, all prior period earnings per share data presented
shall be restated to conform to the provisions of this statement. The adoption
of SFAS 128 is not expected to have a material impact on the calculation of
earnings per share.
DERIVATIVE FINANCIAL INSTRUMENTS "Disclosure of Accounting Policies for
Derivative Financial Instruments," a final rule issued by the Securities and
Exchange Commission, is intended to clarify and expand existing disclosure
requirements for derivative financial instruments, other financial instruments
and derivative commodity instruments. Specifically, the rule requires
descriptions of accounting policies for derivatives and quantitative and
qualitative information about market risk for derivatives that is to be
presented outside of the financial statements. These disclosure requirements are
effective with the 1997 year-end financial statements.
CONSOLIDATED BALANCE SHEET
March 31 December 31
(In Millions, Except Shares) 1997 1996
- -------------------------------------------------------------------------------
(Unaudited)
ASSETS
Cash and due from banks ............................... $ 2,483 $ 2,413
Federal funds sold .................................... 54 32
Securities purchased under agreements to resell ....... 531 795
Trading account securities ............................ 105 146
Available-for-sale securities ......................... 3,373 3,555
Loans ................................................. 27,173 27,128
Less allowance for credit losses ................... 512 517
---------------------
Net loans .......................................... 26,661 26,611
Bank premises and equipment ........................... 393 404
Interest receivable ................................... 200 202
Customers' liability on acceptances ................... 188 169
Other assets .......................................... 2,012 2,162
---------------------
Total assets ................................... $36,000 $36,489
=====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing ................................ $ 7,254 $ 7,871
Interest-bearing ................................... 16,169 16,508
---------------------
Total deposits ................................. 23,423 24,379
Federal funds purchased ............................... 1,498 1,204
Securities sold under agreements to repurchase ........ 534 819
Other short-term funds borrowed ....................... 1,762 2,074
Long-term debt ........................................ 4,257 3,553
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely the
junior subordinated debentures of FBS ................ 300 300
Acceptances outstanding ............................... 188 169
Other liabilities ..................................... 1,037 938
---------------------
Total liabilities .............................. 32,999 33,436
Shareholders' equity:
Common stock, par value $1.25 a share-authorized
200,000,000 shares; issued: 3/31/97 and 12/31/96
-- 141,747,738 shares ............................. 177 177
Capital surplus .................................... 1,162 1,154
Retained earnings .................................. 2,256 2,165
Unrealized (loss) gain on securities, net of tax ... (26) 3
Less cost of common stock in treasury:
3/31/97 -- 8,411,715 shares; 12/31/96 --
6,877,497 shares .................................. (568) (446)
---------------------
Total shareholders' equity ..................... 3,001 3,053
---------------------
Total liabilities and shareholders' equity ..... $36,000 $36,489
===============================================================================
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended
----------------------
(In Millions, Except Per-Share Data) March 31 March 31
(Unaudited) 1997 1996
- -------------------------------------------------------------------------------
INTEREST INCOME
Loans ............................................ $586.2 $574.7
Securities:
Taxable ....................................... 51.4 63.8
Exempt from federal income taxes .............. 6.0 4.9
Other interest income ............................ 12.6 11.2
-------------------------
Total interest income .................. 656.2 654.6
INTEREST EXPENSE
Deposits ......................................... 158.6 167.0
Federal funds purchased and repurchase agreements 31.0 31.4
Other short-term funds borrowed .................. 23.9 32.1
Long-term debt ................................... 56.6 49.5
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely the
junior subordinated debentures of FBS ........... 6.1 --
-------------------------
Total interest expense ................. 276.2 280.0
-------------------------
Net interest income .............................. 380.0 374.6
Provision for credit losses ...................... 37.0 31.0
-------------------------
Net interest income after provision for credit
losses .......................................... 343.0 343.6
NONINTEREST INCOME
Credit card fee revenue .......................... 77.3 62.8
Trust fees ....................................... 66.0 56.2
Service charges on deposit accounts .............. 36.4 33.9
Securities gains ................................. -- 14.6
Termination fee .................................. -- 115.0
Gain on sale of mortgage banking operations ...... -- 45.8
Other ............................................ 46.1 55.2
-------------------------
Total noninterest income ............... 225.8 383.5
NONINTEREST EXPENSE
Salaries ......................................... 114.9 123.4
Employee benefits ................................ 26.5 28.9
Net occupancy .................................... 25.0 25.8
Furniture and equipment .......................... 21.7 23.8
Goodwill and other intangible assets ............. 19.8 47.4
Other personnel costs ............................ 10.0 9.7
Professional services ............................ 10.0 8.3
Merger, integration, and resizing ................ -- 69.9
Other ............................................ 68.1 87.2
-------------------------
Total noninterest expense .............. 296.0 424.4
-------------------------
Income before income taxes ....................... 272.8 302.7
Applicable income taxes .......................... 101.0 125.9
-------------------------
Net income ....................................... $171.8 $176.8
=========================
Net income applicable to common equity ........... $171.8 $175.1
=========================
EARNINGS PER COMMON SHARE
Average common and common equivalent shares ...... 135,525,339 137,020,911
Net income ....................................... $1.27 $1.28
===============================================================================
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 Tax Stock** Total
- -----------------------------------------------------------------------------------------------------------------------------------
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 .................... 176.8 176.8
Dividends declared:
Preferred ................ (1.7) (1.7)
Common ................... (59.5) (59.5)
Purchase of treasury stock .... (3,713,727) (217.0) (217.0)
Issuance of common stock:
Acquisitions ............. 16,460,215 10.7 361.7 (44.4) 384.2 712.2
Dividend reinvestment .... 53,514 3.1 3.1
Stock option and stock
purchase plans .......... 694,819 .2 4.4 (13.1) 23.2 14.7
Conversion of preferred stock . 253,306 (7.3) (7.4) 14.7 --
Change in unrealized
gains/(losses) ............... (24.0) (24.0)
-------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1996 ........ 141,082,695 $ 95.9 $180.4 $1,275.4 $1,968.9 $ (1.5) $(189.6) $3,329.5
===================================================================================================================================
BALANCE DECEMBER 31, 1996 ..... 134,870,241 $ -- $177.2 $1,153.9 $2,164.9 $ 2.5 $(445.9) $3,052.6
Net income .................... 171.8 171.8
Common dividends declared ..... (62.0) (62.0)
Purchase of treasury stock .... (1,914,700) (142.0) (142.0)
Issuance of common stock:
Dividend reinvestment .... 42,051 .5 2.8 3.3
Stock option and stock
purchase plans .......... 338,431 7.8 (19.2) 17.3 5.9
Change in unrealized
gains/(losses) ............... (28.6) (28.6)
-------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1997 ........ 133,336,023 $ -- $177.2 $1,162.2 $2,255.5 $(26.1) $(567.8) $3,001.0
===================================================================================================================================
* Defined as total common shares less common stock held in treasury.
** Ending treasury shares were 8,411,715 at March 31, 1997; 6,877,497 at
December 31, 1996; 3,277,809 at March 31, 1996; and 8,297,756 at
December 31, 1995.
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended
---------------------
March 31 March 31
(Unaudited, In Millions) 1997 1996
- -------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net cash provided by operating activities .... $ 537.8 $ 189.6
---------------------
INVESTING ACTIVITIES
Net cash (used) provided by:
Loans outstanding ................................... (472.3) 483.4
Securities purchased under agreements to resell ..... 264.3 (285.3)
Available-for-sale securities:
Sales ............................................... 288.5 921.4
Maturities .......................................... 172.6 432.7
Purchases ........................................... (325.8) (371.1)
Proceeds from sales of other real estate ............... 4.9 6.1
Net purchases of bank premises and equipment ........... (7.0) (16.7)
Securitization of corporate charge card balances ....... 418.1 --
Cash and cash equivalents of acquired subsidiaries ..... -- 116.5
Acquisitions, net of cash received ..................... (23.3) (31.2)
Sales of subsidiary operations ......................... -- 53.5
Other -- net ........................................... (14.6) (42.6)
---------------------
Net cash provided by investing activities .... 305.4 1,266.7
---------------------
FINANCING ACTIVITIES
Net cash (used) provided by:
Deposits ............................................ (956.1) (936.2)
Federal funds purchased and securities sold
under agreements to repurchase ..................... 9.7 (260.9)
Short-term borrowings ............................... (312.8) (86.8)
Long-term debt transactions:
Proceeds ............................................ 846.6 499.0
Principal payments .................................. (142.9) (205.7)
Proceeds from issuance of common stock ................. 9.2 17.8
Purchase of treasury stock ............................. (142.0) (217.0)
Cash dividends ......................................... (62.0) (61.2)
---------------------
Net cash used by financing activities ........ (750.3) (1,251.0)
---------------------
Change in cash and cash equivalents .......... 92.9 205.3
Cash and cash equivalents at beginning of period ....... 2,444.3 1,871.6
---------------------
Cash and cash equivalents at end of period ... $2,537.2 $2,076.9
===============================================================================
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, 1996. Certain amounts in prior periods have been reclassified
to conform to the current presentation.
NOTE B ACCOUNTING CHANGES
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES Effective January 1, 1997, the Company adopted Statement of
Financial Accounting Standards No. ("SFAS") 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The Statement
uses a "financial components" approach which focuses on control to determine
whether assets have been sold. If the entity has surrendered control over the
transferred assets, the transaction is considered a sale. Control is considered
surrendered only if the seller has no legal right to the assets, even in
bankruptcy; the buyer has the right to pledge or exchange the assets; and the
seller does not maintain effective control over the assets through an agreement
to repurchase or redeem them. If control is retained, the transaction is then
considered a financing. The adoption of SFAS 125 did not have a material effect
on the Company. SFAS 125 has been amended (SFAS 127), deferring for one year its
adoption in the accounting for securities lending, repurchase agreements and
other secured financing transactions. The eventual adoption of SFAS 125 relating
to these transaction types is not expected to have a material effect on the
Company.
EARNINGS PER SHARE SFAS 128, "Earnings per Share," supercedes APB Opinion 15,
"Earnings per Share," by replacing the method currently used to compute earnings
per share with basic and diluted earnings per share. Under the new requirements,
the dilutive effect of stock options will be excluded from the calculation of
basic earnings per share. Diluted earnings per share will be calculated
similarly to the current fully diluted earnings per share. SFAS 128 is effective
for periods ending after December 15, 1997, with earlier application prohibited.
After the effective date, all prior period earnings per share data presented
shall be restated to conform to the provisions of this statement. The adoption
of SFAS 128 is not expected to have a material impact on the calculation of
earnings per share.
DERIVATIVE FINANCIAL INSTRUMENTS "Disclosure of Accounting Policies for
Derivative Financial Instruments," a final rule issued by the Securities and
Exchange Commission, is intended to clarify and expand existing disclosure
requirements for derivative financial instruments, other financial instruments
and derivative commodity instruments. Specifically, the rule requires
descriptions of accounting policies for derivatives and quantitative and
qualitative information about market risk for derivatives that is to be
presented outside of the financial statements. These disclosure requirements are
effective with the 1997 year-end financial statements.
NOTE C BUSINESS COMBINATIONS AND DIVESTITURES
U. S. BANCORP On March 20, 1997, the Company and U. S. Bancorp ("USBC")
announced that they had entered into a definitive agreement whereby the Company
will exchange .755 shares of its common stock for each share of USBC common
stock. The combined institution, which will use the U. S. Bancorp name, will
have approximately $70 billion in assets, and serve 3.9 million households
through 995 branches and 4,565 ATM's in 17 contiguous states. The transaction,
which will qualify as a tax-free reorganization and be accounted for as a
pooling-of-interests, is subject to shareholder and regulatory approvals and is
expected to close in the third quarter of 1997.
COMERICA CORPORATE TRUST BUSINESS On January 31, 1997, the Company completed its
acquisition of the bond indenture services and paying agency business of
Comerica Incorporated. This business serves approximately 860 municipal and
corporate clients with about 2,400 bond issues.
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 $286 million
will be amortized over an average of 24 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
(In Millions, Except Per-Share Amounts) March 31, 1996
- -------------------------------------------------------------------------------
Net interest income ............................ $389.3
Net income ..................................... 174.6
Net income per share ........................... 1.22
- -------------------------------------------------------------------------------
The pro forma information may not be indicative of the results that
actually would have occurred if the combination had been in effect on the dates
indicated or which may be obtained in the future.
NOTE D SECURITIES
The detail of the amortized cost and fair value of available-for-sale
securities consisted of the following:
March 31, 1997 December 31, 1996
------------------- ---------------------
Amortized Fair Amortized Fair
(In Millions) Cost Value Cost Value
- --------------------------------------------------------------------------------
U.S. Treasury ...................... $ 355 $ 342 $ 553 $ 545
Mortgage-backed .................... 2,539 2,511 2,454 2,464
Other U.S. agencies ................ 30 30 42 41
State and political ................ 459 455 466 465
Other .............................. 32 35 36 40
--------------------------------------
Total ..................... $3,415 $3,373 $3,551 $3,555
================================================================================
NOTE E LOANS
The composition of the loan portfolio was as follows:
March 31 December 31
(In Millions) 1997 1996
- -----------------------------------------------------------------------------
COMMERCIAL:
Commercial ..................................... $ 9,720 $ 9,456
Financial institutions ......................... 928 905
Real estate:
Commercial mortgage ......................... 3,062 3,090
Construction ................................ 680 654
---------------------
Total commercial ........................ 14,390 14,105
---------------------
CONSUMER:
Residential mortgage ........................... 2,906 3,019
Residential mortgage held for sale ............. 43 42
Home equity and second mortgage ................ 3,295 3,263
Credit card .................................... 2,647 2,858
Automobile ..................................... 1,985 1,991
Revolving credit ............................... 747 737
Installment .................................... 607 607
Student* ....................................... 553 506
---------------------
Total consumer .......................... 12,783 13,023
---------------------
Total loans ............................. $27,173 $27,128
=============================================================================
* All or part of the student loan portfolio may be sold when the
repayment period begins.
At March 31, 1997, the Company had $77 million in loans considered impaired
under SFAS 114 included in its nonaccrual loans. The carrying value of the
impaired loans was less 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, 1997, the average
recorded investment in impaired loans was approximately $81 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) 1997 1996
- -----------------------------------------------------------------------------
Fixed-rate subordinated notes (6.00% to
8.35%) - maturities to September 2007 ............. $1,050 $1,050
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
(4.93% to 7.34%) - maturities to
March 2011 ....................................... 915 1,005
Medium-term notes (5.45% to 5.67%)
- maturities to January 2001 ...................... 577 406
Bank notes (5.36% to 6.38%) - maturities
to March 2001 ..................................... 1,425 800
Other ............................................... 83 85
--------------------
Total ...................................... $4,257 $3,553
=============================================================================
NOTE G COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY THE JUNIOR SUBORDINATED DEBENTURES OF
FBS
On November 26, 1996, FBS Capital I (the "Trust"), a Delaware business trust
wholly owned by the Company, completed the sale of $300 million of 8.09 percent
Preferred Securities (the "Preferred Securities"). The Trust used the net
proceeds from the offering to purchase $309 million aggregate principle amount
of 8.09 percent Junior Subordinated Deferrable Interest Debentures (the
"Debentures") of the Company. The Debentures are the sole assets of the Trust
and are eliminated, along with the related income statement effects, in the
consolidated financial statements. The Company used the proceeds from the sale
of the Debentures for general corporate purposes.
The Preferred Securities accrue and pay distributions semi-annually at an
annual rate of 8.09 percent of the stated liquidation amount of $1,000 per
Preferred Security. The Company's obligations under the Debentures and related
documents, taken together, constitute a full and unconditional guarantee by the
Company of the obligations of the Trust. The guarantee covers the semi-annual
distributions and payments on liquidation or redemption of the Preferred
Securities, but only to the extent of funds held by the Trust.
The Preferred Securities are mandatorily redeemable upon the maturity of
the Debentures, on November 15, 2026, or upon earlier redemption as provided in
the Indenture. The Company has the right to redeem the Debentures, in whole (but
not in part), on or after November 15, 2006, at a redemption price specified in
the Indenture plus any accrued but unpaid interest to the redemption date.
NOTE H SHAREHOLDERS' EQUITY
On February 21, 1996, the Board of Directors authorized the repurchase of up to
25.4 million common shares through December 1997. The Company purchased 17.0
million shares under this authorization, including 1.9 million in the first
quarter of 1997. The Board of Directors rescinded this authorization on March
19, 1997, due to the announcement of the U. S. Bancorp acquisition. Refer to
Note C for further information about the U. S. Bancorp acquisition.
NOTE I 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.
NOTE J INCOME TAXES
The components of income tax expense were:
Three Months Ended
---------------------
March 31 March 31
(In Millions) 1997 1996
- -----------------------------------------------------------------------------
FEDERAL:
Current tax ......................................... $ 80.1 $115.9
Deferred tax provision .............................. 10.3 1.8
-------------------
Federal income tax .............................. 90.4 117.7
STATE:
Current tax ......................................... 8.9 8.4
Deferred tax provision (credit) ..................... 1.7 (.2)
-------------------
State income tax ................................ 10.6 8.2
-------------------
Total income tax provision ...................... $101.0 $125.9
=============================================================================
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) 1997 1996
- -----------------------------------------------------------------------------
Tax at statutory rate (35%) ......................... $ 95.5 $105.9
State income tax, at statutory rates,
net of federal tax benefit ......................... 6.9 5.3
Tax effect of:
Tax-exempt interest:
Loans ...................................... (1.0) (1.2)
Securities ................................. (2.1) (1.7)
Amortization of goodwill ........................ 4.6 16.5
Other items ..................................... (2.9) 1.1
--------------------
Applicable income taxes ............................. $101.0 $125.9
=============================================================================
The Company's net deferred tax asset was $221.7 million at March 31, 1997, and
$216.2 million at December 31, 1996.
NOTE K COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS
In the normal course of business, the Company uses various off-balance sheet
financial instruments 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:
March 31 December 31
(In Millions) 1997 1996
- ------------------------------------------------------------------------------
Commitments to extend credit:
Commercial ...................................... $ 8,899 $ 8,944
Corporate and purchasing cards .................. 14,927 13,820
Consumer credit card ............................ 10,443 10,245
Other consumer .................................. 3,116 3,066
Letters of credit:
Standby ......................................... 1,510 1,447
Commercial ...................................... 264 182
Interest rate swap contracts:
Hedges .......................................... 2,671 2,656
Intermediated ................................... 194 174
Options contracts:
Hedge interest rate floors purchased ............ 1,100 1,250
Hedge interest rate caps purchased .............. 100 100
Intermediated interest rate and foreign
exchange caps and floors purchased ............ 116 122
Intermediated interest rate and foreign
exchange caps and floors written .............. 116 122
Liquidity support guarantees ........................ 81 81
Forward contracts ................................... 29 22
Commitments to sell loans ........................... 4 3
Mortgages sold with recourse ........................ 110 114
Foreign currency commitments:
Commitments to purchase ......................... 845 870
Commitments to sell ............................. 844 867
==============================================================================
Activity for the three months ended March 31, 1997, with respect to
interest rate swaps which the Company uses to hedge subordinated debt, bank
notes, certificates of deposit, deposit accounts, and savings certificates was
as follows:
(In Millions)
- ------------------------------------------------------------------------------
Notional amount outstanding at December 31, 1996 .................. $2,656
Additions ......................................................... 165
Maturities ........................................................ (150)
------
Notional amount outstanding at March 31, 1997 ................ $2,671
==============================================================================
Weighted average interest rates paid .............................. 5.50%
Weighted average interest rates received .......................... 6.57%
==============================================================================
The Company received fixed rate interest and paid floating rate interest on
all swap hedges as of March 31, 1997. Net unamortized deferred gains, which
amortize through the year 2000, were $5.7 million at March 31, 1997.
LIBOR-based interest rate floors totaling $800 million with an average
remaining maturity of 11 months at March 31, 1997, and $950 million with an
average remaining maturity of 12 months at December 31, 1996, hedged floating
rate commercial loans. The strike rate on these LIBOR-based floors ranged from
3.25 percent to 4.00 percent at March 31, 1997, and December 31, 1996. Constant
Maturity Treasury (CMT) interest rate floors totaling $300 million with an
average remaining maturity of 16 months at March 31, 1997, and 18 months at
December 31, 1996, hedged the pre-payment risk of fixed rate residential
mortgage loans. The strike rate on these CMT floors ranged from 5.60 percent to
5.70 percent at March 31, 1997, and December 31, 1996. The total notional amount
of interest rate cap agreements purchased was $100 million with a 3-month LIBOR
strike rate of 6.00 percent at March 31, 1997, and December 31, 1996.
NOTE L SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET -- Time certificates of deposit in denominations of
$100,000 or more totaled $853 million and $866 million at March 31, 1997, and
December 31, 1996, respectively.
CONSOLIDATED STATEMENT OF CASH FLOWS -- Listed below are supplemental
disclosures to the Consolidated Statement of Cash Flows.
Three Months Ended
----------------------
March 31 March 31
(In Millions) 1997 1996
- ------------------------------------------------------------------------------
Income taxes paid ................................. $ 7.9 $ 43.5
Interest paid ..................................... 296.2 270.2
Net noncash transfers to foreclosed
property ......................................... 4.3 9.7
Change in unrealized gain (loss) on
available-for-sale securities, net
of taxes of $17.5 in 1997 and $14.7
in 1996 .......................................... (28.6) (24.0)
======================
Cash acquisitions of businesses:
Fair value of noncash assets acquired ......... $ 23.3 $ 31.2
Liabilities assumed ........................... -- --
----------------------
Net ....................................... $ 23.3 $ 31.2
======================
Stock acquisitions of businesses:
Fair value of noncash assets acquired ......... $ -- $3,627.9
Net cash acquired ............................. -- 116.5
Liabilities assumed ........................... -- (3,032.2)
----------------------
Net value of common stock issued .......... $ -- $ 712.2
==============================================================================
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
For the Three Months Ended March 31
1997 1996
- -------------------------------------------------------------------------- ---------------------------- ------------------------
Yields Yields %Change
(Dollars in Millions) and and Average
(Unaudited) Balance Interest Rates Balance Interest Rates Balance
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Securities:
U.S. Treasury ...................... $ 441 $ 6.4 5.89% $ 896 $14.0 6.28% (50.8)%
Mortgage-backed .................... 2,502 43.6 7.07 2,514 43.3 6.93 (.5)
State and political ................ 460 9.6 8.46 344 7.9 9.24 33.7
U.S. agencies and other ............ 65 1.0 6.24 396 6.1 6.20 (83.6)
------------------- --------------------
Total securities ................ 3,468 60.6 7.09 4,150 71.3 6.91 (16.4)
Unrealized (loss) gain on
available-for-sale securities ....... (11) 33 **
------- -------
Net securities ................ 3,457 4,183 (17.4)
Trading account securities ........... 91 1.3 5.79 108 1.3 4.84 (15.7)
Federal funds sold and resale
agreements .......................... 534 7.1 5.39 490 6.4 5.25 9.0
Loans:
Commercial:
Commercial ....................... 9,444 186.2 8.00 8,667 174.0 8.07 9.0
Financial institutions ........... 803 8.9 4.49 1,029 11.7 4.57 (22.0)
Real estate:
Commercial mortgage .............. 3,075 67.1 8.85 2,904 66.2 9.17 5.9
Construction ..................... 670 14.4 8.72 443 10.4 9.44 51.2
------------------- --------------------
Total commercial ................. 13,992 276.6 8.02 13,043 262.3 8.09 7.3
Consumer:
Residential mortgage ............. 2,963 58.2 7.97 3,870 74.1 7.70 (23.4)
Residential mortgage held for sale 32 .6 7.60 220 4.0 7.31 (85.5)
Home equity and second mortgage .. 3,270 77.1 9.56 2,879 68.8 9.61 13.6
Credit card ...................... 2,776 77.3 11.29 2,500 73.3 11.79 11.0
Other ............................ 3,875 98.0 10.26 3,817 94.3 9.94 1.5
------------------- --------------------
Total consumer ................ 12,916 311.2 9.77 13,286 314.5 9.52 (2.8)
------------------- --------------------
Total loans ................... 26,908 587.8 8.86 26,329 576.8 8.81 2.2
Allowance for credit losses ........ 517 501 3.2
------- -------
Net loans ........................ 26,391 25,828 2.2
Other earning assets ............... 352 4.2 4.84 294 3.5 4.79 19.7
-------------------- --------------------
Total earning assets* ......... 31,353 661.0 8.55 31,371 659.3 8.45 (.1)
Cash and due from banks ............ 1,760 1,725 2.0
Other assets ....................... 2,333 2,416 (3.4)
------- -------
Total assets .................. $34,918 $35,044 (.4)%
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits ....... $ 6,306 $ 6,148 2.6%
Interest-bearing deposits:
Interest checking ................ 2,868 9.3 1.32 3,000 10.2 1.37 (4.4)
Money market accounts ............ 4,414 39.9 3.67 4,078 36.3 3.58 8.2
Other savings accounts ........... 1,555 8.1 2.11 1,648 8.9 2.17 (5.6)
Savings certificates ............. 6,628 89.3 5.46 7,272 97.6 5.40 (8.9)
Certificates over $100,000 ....... 811 12.0 6.00 901 14.0 6.25 (10.0)
------------------- --------------------
Total interest-bearing deposits 16,276 158.6 3.95 16,899 167.0 3.97 (3.7)
Short-term borrowings ................ 4,012 54.9 5.55 4,498 63.5 5.68 (10.8)
Long-term debt ....................... 3,880 56.6 5.92 3,264 49.5 6.10 18.9
Company-obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely the
junior subordinated debentures of FBS 300 6.1 8.09 -- -- -- **
------------------- --------------------
Total interest-bearing
liabilities ................. 24,468 276.2 4.58 24,661 280.0 4.57 (.8)
Other liabilities .................... 1,133 1,102 2.8
Preferred equity ..................... -- 101 **
Common equity ........................ 3,018 3,012 .2
Unrealized (loss) gain on
available-for-sale securities, net
of tax .............................. (7) 20 **
------- -------
Total liabilities and
shareholders' equity ........ $34,918 $35,044 (.4)%
======= ======= =====
Net interest income .................. $384.8 $379.3
====== ======
Gross interest margin ................ 3.97% 3.88%
===== =====
Gross interest margin without
taxable-equivalent increments ....... 3.91% 3.82%
===== =====
Net interest margin .................. 4.98% 4.86%
===== =====
Net interest margin without
taxable-equivalent increments ....... 4.92% 4.80%
==================================================================================================================
Interest and rates are presented on a fully taxable-equivalent basis under a tax
rate of 35 percent.
Interest income and rates on loans include loan fees. Nonaccrual loans are
included in average loan balances.
* Before deducting the allowance for credit losses and excluding the
unrealized gain (loss) on available-for-sale securities.
** Not meaningful
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- The 68th Annual
Meeting of Shareholders of First Bank System, Inc. was held on Thursday, April
24, 1997, at the Minneapolis Convention Center. John F. Grundhofer, Chairman,
President and Chief Executive Officer, presided.
The holders of 118,099,501 shares of common stock, 88.5 percent of the
133,422,201 outstanding shares entitled to vote as of the record date, were
represented at the meeting in person or by proxy. The candidates for election as
Class II Directors listed in the proxy statement were elected to serve
three-year terms expiring at the 2000 annual shareholders' meeting. The proposal
to ratify the appointment of Ernst & Young LLP as the Company's independent
auditors for the year ending December 31, 1997, was approved. The proposal to
amend the Company's Executive Incentive Plan to change the maximum payment a
participant may receive thereunder was approved. The tabulation for each nominee
for office and each proposal is listed in the table below.
SUMMARY OF MATTERS VOTED UPON BY SHAREHOLDERS
Number of Shares
----------------------------------------------------------
For Withheld
----------- ---------
Election of Class II Directors:
Peter H. Coors 117,010,391 1,089,110
Norman M. Jones 117,042,948 1,056,553
S. Walter Richey 117,043,373 1,056,128
Richard L. Robinson 117,033,084 1,066,417
Walter Scott, Jr. 116,901,276 1,198,225
For Against Abstain Non-Vote
----------- ---------- --------- --------
Other Matters:
Ratification of appointment of
Ernst & Young LLP as independent
auditors 117,255,887 249,538 594,076 0
Amendment to Executive Incentive Plan 110,717,502 5,853,958 1,528,041 0
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
2 Agreement and Plan of Merger, dated as of March 19, 1997, and
Stock Option Agreements, dated as of March 20, 1997, by and
between First Bank System, Inc. and U. S. Bancorp. Previously
filed as Exhibits 2, 99.1 and 99.2 to Form 8-K filed March 20,
1997 and incorporated herein by reference
10A First Bank System, Inc. Executive Incentive Plan, as amended*
10B First Bank System, Inc. Nonqualified Supplemental Executive
Retirement Plan, as amended*
10C First Bank System, Inc. Executive Deferral Plan, as amended*
10D First Bank System, Inc. Independent Director Retirement and
Death Benefit Plan, as amended*
10E First Bank System, Inc. Deferred Compensation Plan for
Directors, 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*
* Copies of this exhibit will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the exhibit.
(b) REPORTS ON FORM 8-K
During the three months ended March 31, 1997, the Company filed the following
Current Reports on Form 8-K.
Form 8-K filed March 20, 1997, relating to the announcement of the
Company's agreement to acquire U. S. Bancorp, and the analyst
presentation made in connection with the announcement.
Form 8-K filed March 20, 1997, which includes the merger and stock
option agreements between the Company and U. S. Bancorp.
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.
By: /s/ David J. Parrin
David J. Parrin
Senior Vice President and
Controller (Chief Accounting
Officer and Duly Authorized Officer)
DATE: May 14, 1997
[LOGO] FIRST BANK SYSTEM ---------------
First Class
P.O. Box 522 U.S. Postage
Minneapolis, Minnesota PAID
55480 Permit No. 2440
Minneapolis, MN
http://www.fbs.com ---------------
SHAREHOLDER INQUIRIES
COMMON STOCK TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York acts as transfer agent and registrar,
dividend paying agent, and dividend reinvestment plan agent for First Bank
System ("FBS") and maintains all shareholder records for the corporation. For
information about First Bank System stock, or if you have questions regarding
your stock certificates (including transfers), address or name changes, lost
dividend checks, lost stock certificates, or Form 1099s, please call First
Chicago's Shareholder Services Center at (800) 446-2617, weekdays, 8:00 a.m. to
10:00 p.m. EST, and Saturdays, 8:00 a.m. to 3:30 p.m. EST. The TDD telephone
number for the hearing impaired is (201) 222-4955.
First Chicago Trust Company of New York, P.O. Box 2500, Jersey City, New Jersey
07303-2500.
Telephone: (201) 324-0498
Fax: (201) 222-4892
Internet address: http://www.fctc.com
E-mail address: fctc@em.fcnbd.com
COMMON STOCK LISTING AND TRADING
First Bank System Common Stock is listed and traded on the New York Stock
Exchange under the ticker symbol FBS and also may be found under FtBkSy.
DIVIDENDS
First Bank System currently pays quarterly dividends on its Common Stock on or
about the 15th of March, June, September and December, subject to prior Board
approval. Shareholders may choose to have dividends electronically deposited
directly into their bank accounts. For enrollment information, please call First
Chicago at (800) 446-2617.
DIVIDEND REINVESTMENT PLAN
First Bank System shareholders can take advantage of a plan that provides
automatic reinvestment of dividends and/or optional cash purchases of additional
shares of FBS Common Stock up to $5,000 per calendar quarter. If you would like
more information, please contact First Chicago Trust Company of New York, P.O.
Box 2598, Jersey City, New Jersey 07303-2598, (800) 446-2617.
INVESTMENT COMMUNITY CONTACTS
John R. Danielson
Senior Vice President, Investor and Corporate Relations
(612) 973-2261
General Information, Investor and Corporate Relations
(612) 973-2263
First Bank System, Inc.
P.O. Box 522
Minneapolis, MN 55480
FINANCIAL INFORMATION
FBS news and financial results are available by fax, mail and the internet.
FAX. To access our fax-on-demand service, call (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 telephone numbers as
directed. The information will be faxed to you promptly.
MAIL. On your request we will mail to you our quarterly earnings news releases.
To be added to FBS's mailing list, please contact Investor and Corporate
Relations, First Bank System, First Bank Place, 601 Second Avenue South,
Minneapolis, Minnesota 55402-4302, (612) 973-2434.
INTERNET. For information about FBS, including news and financial results,
product information, and service locations, access FBS's home page on the World
Wide Web. The address is http://www.fbs.com.