FORM 10-K COVER PAGE - SEE PAGE 79
FIRST BANK SYSTEM
1993 INTEGRATED ANNUAL REPORT / FORM 10-K
-COVER-
ABOUT THE COMPANY
First Bank System, Inc. is a regional bank holding company primarily serving
Minnesota, Colorado, Montana, North Dakota, South Dakota, and Wisconsin through
181 banking locations and 24 offices of additional nonbank subsidiaries.
Headquartered in Minneapolis with $26.4 billion in assets, First Bank System has
three core businesses: Retail and Community Banking, Commercial Banking, and the
Trust and Investment Group.
1 Financial Summary
2 Letter to Shareholders
4 FBS Priorities
6 Retail & Community Banking
8 Commercial Banking
10 Trust & Investment Group
12 Management's Discussion & Analysis
19 Statement of Income Analysis
25 Corporate Risk Profile
39 Fourth Quarter Results
40 Consolidated Financial Statements
44 Notes to Consolidated Financial Statements
70 Report of Management & Report of Independent Auditors
71 Five-Year Consolidated Financial Statements
73 Quarterly Consolidated Financial Data
74 Five-Year Consolidated Daily Average Balance Sheet & Related Yields & Rates
79 Form 10-K
83 Executive Officers & Directors
84 FBS Locations
85 Corporate Data
Graphs illustrate the following information:
1990 1991 1992 1993
- ----------------------------------------------------------------------------------
Return on Average Common Equity* 2.7 13.1 12.0 16.4
(Percent)
Earnings Per Share* 0.36 1.79 1.96 2.83
(Dollars)
Shareholders' Equity to
Assets Ratio 6.5 7.8 8.7 8.5
(Percent)
<FN>
*Before merger-related charges and/or the cumulative effect of accounting
changes in 1992 and 1993.
(Inside Front Cover)
FINANCIAL SUMMARY
% CHANGE
(Dollars in Millions, Except Per Share Amounts) 1993 1992 1992-1993
- ----------------------------------------------------------------------------------------------------
FOR THE YEAR
Income before Cumulative Effect of Accounting
Changes and Merger-related Charges . . . . . . $ 348.0 $ 236.3 47.3
Merger-related Charges . . . . . . . . . . . . . (50.0) (81.8) 38.9
Cumulative Effect of Accounting Changes. . . . . -- 157.3 **
--------------------------
Net Income . . . . . . . . . . . . . . . . . . . $ 298.0 $ 311.8 (4.4)
--------------------------
--------------------------
PER COMMON SHARE
Income before Cumulative Effect of
Accounting Changes and Merger-related Charges $ 2.83 $ 1.96 44.4
Merger-related Charges . . . . . . . . . . . . . (.44) (.78) 43.6
Cumulative Effect of Accounting Changes. . . . . -- 1.49 **
--------------------------
Net Income . . . . . . . . . . . . . . . . . . . $ 2.39 $ 2.67 (10.5)
--------------------------
--------------------------
Dividends Paid . . . . . . . . . . . . . . . . . $ 1.00 $ .88 13.6
Common Shareholders' Equity . . . . . . . . . . $ 18.09 $ 17.09 5.9
-----------------------------------------
RETURN ON AVERAGE ASSETS before
Cumulative Effect of Accounting Changes and
Merger-related Charges . . . . . . . . . . . . 1.36% 1.00% **
Merger-related Charges . . . . . . . . . . . . . (.19) (.35) **
Cumulative Effect of Accounting Changes. . . . . -- .67 **
--------------------------
Return on Average Assets . . . . . . . . . . . . 1.17% 1.32% **
--------------------------
--------------------------
RETURN ON AVERAGE COMMON EQUITY before
Cumulative Effect of Accounting Changes and
Merger-related Charges . . . . . . . . . . . . 16.4% 12.0% **
Merger-related Charges . . . . . . . . . . . . . (2.6) (4.7) **
Cumulative Effect of Accounting Changes. . . . . -- 9.1 **
--------------------------
Return on Average Common Equity . . . . . . . . 13.8% 16.4% **
--------------------------
--------------------------
Net Interest Margin . . . . . . . . . . . . . . 5.07% 4.85% **
Efficiency Ratio before Merger-related Charges 59.8% 64.7% **
AT YEAR END
Loans. . . . . . . . . . . . . . . . . . . . . . $18,779 $17,076 10.0
Allowance for Credit Losses . . . . . . . . . . 423 448 (5.6)
Assets . . . . . . . . . . . . . . . . . . . . . 26,385 26,625 (.9)
Deposits . . . . . . . . . . . . . . . . . . . . 21,031 21,188 (.7)
Total Shareholders' Equity . . . . . . . . . . . 2,245 2,318 (3.1)
Common Equity to Total Assets. . . . . . . . . . 7.5% 7.3% **
Shareholders' Equity to Total Assets . . . . . . 8.5 8.7 **
Tier 1 Capital Ratio . . . . . . . . . . . . . . 9.2 9.5 **
Total Risk-based Capital . . . . . . . . . . . . 13.3 12.6 **
<FN>
** NOT MEANINGFUL
Graphs illustrate the following information:
1990 1991 1992 1993
- ----------------------------------------------------------------------------------
Return on Average Assets* 0.22 0.90 1.00 1.36
(Percent)
Efficiency Ratio* 75.1 67.8 64.7 59.8
(Percent)
Allowance Coverage Ratio
of Nonperforming Loans 104 142 179 269
(Percent)
<FN>
*Before merger-related charges and/or the cumulative effect of accounting
changes in 1992 and 1993.
1
LETTER TO SHAREHOLDERS
"THE WINNERS WILL BE BANKS THAT CAN CREATE SHAREHOLDER VALUE BY FULLY
INTEGRATING ACQUISITIONS AND CONTINUOUSLY IMPROVING PRODUCTIVITY AND CUSTOMER
SATISFACTION."
A year ago First Bank System set three goals: realize the value of acquisitions
through integration, grow core businesses, and maintain a fortress balance
sheet. We've done exactly that. And in the process, we've achieved strong
earnings, announced significant stock repurchase plans, and raised our common
stock dividend.
Our financial performance is approaching the highest levels of the banking
industry. Our goal remains to become one of the nation's best banks, in terms of
market share and long-term profitability. We'll accomplish this by building
high-performing banking franchises where we can create and sustain market
leadership -- a mission we believe will lead to greater shareholder value.
As the banking industry continues its rapid consolidation, the winners will
be banks that can create shareholder value by fully integrating acquisitions and
by continuously improving productivity and customer satisfaction.
ACQUISITION INTEGRATION - Our strong performance reflects significant changes in
our operations. Last year we integrated virtually all of our existing operations
and five acquisitions -- totaling nearly one-third of our $26.4 billion in
assets -- into one organization designed around markets and individual
customers. All of this was accomplished on time with minimal disruption in
customer service and while achieving our financial objectives.
We now have more complete and easily accessible customer data. Our customers
can walk into any of our nearly 200 locations and our bankers can instantly view
the entire customer banking relationship on a computer screen. This allows for
more effective cross-selling and better positions FBS for interstate branching.
Centralizing our operations has helped make us a low-cost producer, which we
believe is absolutely essential for future success. Our efficiency ratio, the
measure of expenses to revenues, improved to 59.8 percent from 64.7 percent a
year ago. FBS now ranks among the nation's most efficient banking organizations.
Our ability to increase productivity and our proven integration model are
valuable assets. FBS has integrated its last three major acquisitions at a
progressively faster pace -- the integration of Colorado National Bankshares was
completed in just two months -- enabling each transaction to contribute to
earnings in its first full year.
CORE BUSINESS GROWTH - Leading market shares in attractive, healthy communities
and a pervasive sales and service culture also bode well for growth. We
continued to strengthen our regional banking franchise, which is our engine for
earnings, through both internal growth and acquisitions. All three of our core
businesses -- Retail and Community Banking,
Table entitled "Managing Capital for Shareholder Value"
16 percent common dividend increase, announced 2/94.
$159 million preferred stock redemption, announced 1/94.
$200 million common stock repurchase in conjunction with Boulevard Bancorp
acquisition, announced 9/93.
$125 million preferred stock repurchase, announced 9/93.
11 percent common dividend increase, announced 2/93
$75 million common stock repurchase in conjunction with Bank Shares Inc.
acquisition, announced 1/93.
2
Commercial Banking, and the Trust and Investment Group -- has solid earnings
gains in 1993.
Despite a sluggish economy last year, both net interest income and fee
income grew. Total loans were up substantially as the result of a strong home
equity loan promotion, aggressive small and middle-market business lending,
and loans to mortgage bankers, a commercial banking niche. We also are
encouraged by the performance of several products with great growth
potential, such as our mutual funds and Visa Corporate and Procurement Cards.
We completed or announced eight acquisitions. The completion of the
previously announced acquisition of Colorado National Bankshares, Inc. made us
the largest banking organization in Colorado. We announced plans to acquire
J.P. Morgan's domestic corporate trust business, and announced deals that will
strengthen our retail banking market shares in Duluth and Mankato, Minnesota,
and Bismarck, North Dakota. In January the Federal Reserve Board approved our
acquisition of Boulevard Bancorp, which will mark our entry into the
attractive Chicago market.
FORTRESS BALANCE SHEET - Meanwhile, we maintained a fortress balance sheet.
Credit quality continued to improve last year while our reserve coverage for
nonperforming loans far exceeded the industry average. Our capital ratios
remain strong, giving us flexibility in pursuing an aggressive acquisition
strategy and in repurchasing common and preferred stock. During 1993 we
announced plans to repurchase $275 million of common stock and $125 million of
preferred stock. In January we announced our intention to call an additional
$159 million of preferred stock. As a result of our successful acquisition
integration and strengthened capital position, our debt and preferred stock
ratings were upgraded by Standard & Poor's Corp. in August and by Moody's
Investors Services in January 1994.
FBS'S GOALS - While our 1993 accomplishments are gratifying, much work lies
ahead. We will continue to grow our core businesses, be ever vigilant on cost
control and asset quality, and approach acquisitions conservatively as to
location and price.
All of these efforts will continue to be guided by a disciplined commitment
to shareholder value. We further sharpened our shareholder focus this past
year by more closely tying the personal fortunes of our top 180 managers to
the success of FBS. We are strongly encouraging these senior managers to own
approximately one to five times their salaries in FBS stock within five years.
This target for management stock ownership is among the most aggressive in the
banking industry.
Achieving our performance objectives will help us realize our vision of
becoming one of the nation's best banks. Our strategy for getting there isn't
flashy -- we're simply focusing on the basics of our business. Superior
management of the fundamentals is what distinguishes the truly great banks
from the rest of the industry. We believe it also is the surest way to reward
our shareholders.
/s/ John F. Grundhofer
JOHN F. GRUNDHOFER
Chairman, President and
Chief Executive Officer
February 16, 1994
"WE FURTHER SHARPENED OUR SHAREHOLDER FOCUS THIS PAST YEAR BY MORE CLOSELY
TYING THE PERSONAL FORTUNES OF OUR TOP 180 MANAGERS TO THE SUCCESS OF FIRST
BANK SYSTEM."
3
FIRST BANK SYSTEM
PRIORITIES
"WE BELIEVE STICKING TO THE BASICS OF OUR BUSINESS IS THE RIGHT COURSE FOR
CREATING SHAREHOLDER VALUE"
What distinguishes the nation's best banks from the pack? Superb management of
banking fundamentals: core business focus, cost control, asset quality, and
disciplined acquisitions. At First Bank System, we believe sticking to the
basics of our business is the right course for creating shareholder value. These
fundamentals are FBS's priorities for the years ahead.
CORE BUSINESS STRENGTH --> FBS focuses on three core businesses that are the
company's traditional strengths: Retail and Community Banking, Commercial
Banking, and the Trust and Investment Group. In each of these businesses, our
goal is to attain the leading share in the markets we serve.
We already have strong market positions in five of the six states in
which we do business. As measured by deposits, we have the lead market shares
in the Twin Cities and Denver. This gives us the critical mass to be an
efficient, highly profitable retailer of financial services.
Our markets are attractive and healthy. They exceed the U.S. averages
for employment growth, housing starts, household growth, and median income. In
fact, 12 FBS markets, including Minneapolis/St. Paul and Denver, recently
ranked in the top quartile of MONEY magazine's "Best Places to Live." All but
one of our locations ranked in the top half.
EFFICIENCY --> One of our long-term goals is to reduce noninterest expenses to
just over half of every dollar of revenue. We believe we can improve our
efficiency ratio of 59.8 percent -- down from nearly 80 percent four years ago -
- - to the mid 50s within two years, and ultimately to the low 50s. Most of the
improvement to date has resulted from centralizing our back office,
standardizing products, and investing in technology.
While we see further benefits from technology, most of our future
improvement will come from constantly reengineering our operations to improve
productivity, customer service, and our cross-sell ratio.
Another big part of our efficiency efforts is the culture at FBS.
Everyone understands the importance of controlling costs. Individual incentives
have helped create a new culture in which the pursuit of cost reductions is
relentless.
Table entitled, "Recent Acquisitions"
J. P. Morgan Corporate Trust, New York/National, closing in the second quarter
of 1994.
Assets: N/A
First Financial Investors, Inc., Minnesota, closing in the second quarter of
1994.
Assets: $200 million.
United Bank of Bismarck, North Dakota, closing the second quarter of 1994.
Assets: $123 million.
Boulevard Bancorp, Illinois, closing in the first quarter of 1994. Assets:
$1,600 million.
American Bankshares of Mankato, Minnesota, closing in the first quarter of 1994.
Assets: $116 million.
Republic Acceptance Corporation, Minnesota, closed in the second quarter of
1993.
Assets: $39 million.
Colorado National Bankshares, Inc., Colorado, closed in the second quarter of
1993.
Assets: $3,000 million.
U.S. Bancorp Bond Indenture, Washington/Oregon, closed in the first quarter of
1993.
Assets: N/A
Bank Shares Inc., Minnesota, closed in the fourth quarter of 1992. Assets:
$2,100 million.
Western Capital Investment Corp., Colorado, closed in the fourth quarter of
1992.
Assets: $2,500 million.
4
Table entitled, "FBS Leading Market Shares," based on June 30, 1993 data.
Minnesota, 23 percent deposit share, rank: first.
Twin Cities, 30 percent deposit share, rank: first.
Colorado, 19 percent deposit share, rank: first.
Denver, 21 percent deposit share, rank: first.
Montana, 14 percent deposit share, rank: first.
South Dakota, 5 percent deposit share excluding credit card banks, rank:
second.
North Dakota, 9 percent deposit share, rank: third.
ACQUISITION & INTEGRATION --> Our acquisition strategy is to build shareholder
value by leveraging existing strengths and further improving our productivity.
All seven FBS acquisitions in the past two years have increased shareholder
value. All are integrally related to our three core businesses and all
strengthened existing market shares.
We've achieved substantial cost reductions quickly. We've realized
annualized savings of more than $100 million from integrating the acquisitions
of Bank Shares Inc., Western Capital Investment Corp., and Colorado National
Bankshares.
Part of our integration strategy is to create a highly efficient
branching system that is convenient for our customers. Our 181 branches have an
average of more than $100 million in deposits. FBS has the third highest
deposits per branch among 27 regional banks. Our automated teller machines
outnumber our branches by more than four to one, compared to a median of 1.3
times for our peers.
We'll continue to pursue a disciplined acquisition strategy to create
shareholder value.
ASSET QUALITY --> FBS has grown its loan portfolio over the past three years
while significantly improving asset quality. Our 1.20 percent ratio of
nonperforming assets to loans plus other real estate owned is well below the
industry average. We also have one of the strongest reserve coverage ratios, at
269 percent of nonperforming loans. Equally important, net charge-offs declined
26 percent last year.
The improvement is the result of a stronger economy and better credit
management throughout FBS. In our commercial bank, a disciplined credit culture
characterized by individual lender accountability and prudent credit policies
and processes has significantly reduced problem loans. Consumer credit quality
has been strengthened through more powerful statistical credit evaluation models
and aggressive credit line management. Consumer credit control and efficiency
improvements include an automated decision-making system and a sophisticated
delinquent loan collection system.
CAPITAL STRENGTH --> FBS has one of the highest shareholders' equity-to-assets
ratios of the 27 regional banks in our peer group. Our strong capital base
enables us to pursue acquisitions while maintaining solid protection for
depositors and creditors.
To effectively manage our capital, last year FBS announced $400 million
in common and preferred stock repurchases, including 6.5 million shares related
to the acquisition of Boulevard Bancorp. In January FBS announced its intention
to call an additional $159 million of preferred stock.
A more detailed explanation of these priorities and our financial
performance is found in Management's Discussion and Analysis starting on page
12.
"WE'VE REALIZED ANNUALIZED SAVINGS OF MORE THAN $100 MILLION FROM INTEGRATING
RECENT ACQUISITIONS."
5
RETAIL & COMMUNITY
BANKING
- --------------------------------------------------------------------------------
COMMUNITY BANKING
BUSINESS DESCRIPTION
FBS serves more than 1.3 million consumers and small and middle-market
businesses in six states through 181 banking locations, 1,021 automated teller
machines, and 24-hour FastLine telephone service. Our core customers -- those
with checking accounts -- have an average of 3.2 accounts with FBS.
1993 HIGHLIGHTS
- - Integrated operations of all existing and acquired banks. - Created a $7
billion bank in Colorado, the state's largest. - Strengthened Minnesota and
North Dakota presence through acquisitions and announced Illinois entry. - Grew
consumer loans 10 percent and business loans 13 percent. - Implemented market
segmentation strategy. - Sold $313 million in mutual funds through our retail
bank, including $103 million in our First American mutual funds.
- --------------------------------------------------------------------------------
MORTGAGE BANKING
BUSINESS DESCRIPTION
FBS Mortgage is one of the largest residential mortgage lender in our six-state
region. Home loan origination totaled $6.8 billion in 1993. At year end, our
mortgage servicing portfolio was $11.3 billion.
1993 HIGHLIGHTS
- - Increased home loan origination volume 51 percent over 1992. - Expanded
affordable lending activities: FBS provided $594 million in loans to 8,800 low-
and moderate-income families. - Exited the correspondent mortgage loan business.
- - Reduced our servicing delinquency performance to nearly half the national
average. - Cut loan servicing costs to 12 percent below the average for our peer
banks. - Developed and tested a new laptop computer loan origination program and
continued to develop artificial intelligence underwriting software.
- --------------------------------------------------------------------------------
PAYMENT SYSTEMS
BUSINESS DESCRIPTION
FBS is the largest issuer of Visa Corporate and Procurement Cards, as well as a
leading issuer of Visa Business Cards. These products help companies and
governments of all sizes manage their purchasing. We also have 1.8 million Visa
consumer credit cards outstanding. FBS is the nation's fifth largest processor
of Visa and MasterCard transactions, serving approximately 60,000 merchants. Our
card products are distributed through more than 2,700 agent banking locations
and other outlets. FBS also processes transactions for 1,500 agent and Fastbank
automated teller machines (ATMs).
1993 HIGHLIGHTS
- - Increased Visa sales to $6 billion and became the ninth largest Visa card
issuer nationally. - Signed more than 100 Corporate Payment Systems accounts,
increasing FBS's Fortune 100 relationships to 42 and Fortune 500 relationships
to more than 100. - Increased Visa Procurement Card sales volume 91 percent,
giving FBS the largest share of this emerging national market. - Increased ATM
processing volume 10 percent to 61 million transactions and grew merchant
processing volume 36 percent to $10.2 billion. - In January 1994 we were awarded
the WorldPerks Visa Card program from Northwest Airlines.
Graphs illustrate the following information:
Pie chart shows that the Retail and Community Banking Group accounts for 61
percent of FBS's net income.
1991 1992 1993
- ------------------------------------------------------------
Efficiency Ratio* 72.4 69.1 63.6
(Percent)
Net Interest Income 741 816 907
(in Millions)
<FN>
*Before merger-related charges and/or the cumulative effect of accounting
changes in 1992 and 1993.
6
LOOKING AHEAD
- --------------------------------------------------------------------------------
FOCUS ON CONSUMERS: MARKET SEGMENTATION --> FBS is sharpening its focus on
customers through market segmentation. Segmentation is based on the concept that
consumers can be grouped by similar behaviors -- in our case, the way they
acquire and use financial products and services. We have identified seven
categories into which FBS customers are grouped: Affluent, Emerging Affluent,
Savings/Planners, Empty Nesters, Basic Banking, Growing Needs, and Mass Market.
Every branch strives to meet the needs of the market segments most prevalent in
its trade area.
We believe this strategy will make FBS a more powerful marketer. Based
on the needs of these segments, branches are designing promotions, determining
staffing, identifying merchandising opportunities, and even fine-tuning the
layout of our banking offices.
We measure our progress in each branch by its efficiency ratio, revenue
per full-time employee, and revenue per square foot. Next year we'll compare
the performance of branches targeting the same market segments. The "best
practices" of the top branches will be implemented across FBS.
BUSINESS BANKING: GROWING MARKET SHARE --> We grew our small and middle-market
business loan portfolio 13 percent last year, largely by outselling the
competition. We expanded our business banking hubs, which service larger
companies, to put more of our bankers closer to the customer. In addition, our
Mainstreet Loan Centers now serve every FBS market, providing standardized
commercial bank products and 48-hour loan request turnaround for businesses with
annual sales under $1 million. Expanding our capabilities geographically
leveraged our main competitive advantages: size, a wide range of business
products, and lending expertise.
INTEGRATION: UNIFYING FBS --> Low-cost producers will be the banking industry's
winners. Last year FBS completed five major systems conversions. FBS now has one
set of systems supporting virtually all of its products in every location, a
unified communications network, and centralized processing for every bank
customer transaction.
Standard products and seamless technology are an excellent foundation
for cost control and superior account relationship management. We now have more
complete and easily accessible customer data and can more quickly deliver new or
enhanced products at attractive prices. We also can more effectively cross-sell
our products and services.
In the year ahead, we will continue the integration of Rocky Mountain
BankCard System into our credit card operations. Integration has made FBS more
productive. That's good for our customers, employees and, ultimately, our
shareholders.
CORPORATE PAYMENT SYSTEMS: A RAPID GROWTH MARKET --> FBS is the nation's largest
issuer of Visa Corporate and Procurement Cards, and a leading issuer of Visa
Business Cards. We're a dominant force in business travel planning through
marketing agreements with 15 of the nation's 25 largest travel agencies. These
agreements have made FBS the payment system of choice for more than 100 Fortune
500 companies.
We see tremendous opportunity for growth. For example, only a fifth of
U.S. companies currently use corporate cards. And card issuers have barely
scratched the $300 billion annual market for procurement cards, which are used
by select employees to purchase goods and services. FBS is committed to
remaining a leader in corporate charge cards. Our goal is to have two million
corporate cards and 400,000 procurement cards in circulation by the year 2000.
Graphs illustrate the following information:
(in Millions) 1991 1992 1993
- -------------------------------------------------------------
Net Income* 95 133 211
Noninterest Income 318 322 329
<FN>
*Before merger-related charges and/or the cumulative effect of accounting
changes in 1992 and 1993.
7
COMMERCIAL BANKING
- --------------------------------------------------------------------------------
COMMERCIAL LENDING
BUSINESS DESCRIPTION
FBS's Commercial Banking Group takes and manages credit risk and markets
competitively priced products to businesses in our markets with annual revenues
greater than $25 million.
1993 HIGHLIGHTS
- - Strengthened our position as the leading commercial lender in the Twin Cities,
despite reduced demand for larger corporate commercial credit industry-wide. -
Reduced nonperforming assets 44 percent to $87 million.
- --------------------------------------------------------------------------------
MORTGAGE BANKING SERVICES
BUSINESS DESCRIPTION
FBS is among the nation's largest providers of credit and other financial
services to mortgage bankers.
1993 HIGHLIGHTS
- - Achieved a 60 percent increase in loan commitments. - Grew our customer base
14 percent. - Strengthened client relationships by providing cash management and
custodial services tailored for the industry; two-thirds of Mortgage Banking
Services' customers also use FBS for other financial services.
- --------------------------------------------------------------------------------
REAL ESTATE LENDING
BUSINESS DESCRIPTION
FBS provides credit and other financial products and services to select real
estate developers for the development, renovation, expansion, acquisition or
refinance of their real estate projects.
1993 HIGHLIGHTS
- - Assembled a strong team of real estate professionals to provide expertise to
our clients. - Established major relationships with premier developers of
regional malls, community centers, and industrial and residential projects.
- --------------------------------------------------------------------------------
CASH MANAGEMENT
BUSINESS DESCRIPTION
FBS, one of the region's largest cash management services providers, helps
companies achieve effective treasury operations by offering a full range of
depository, disbursement, collection, and information services.
1993 HIGHLIGHTS
- - Implemented product enhancements that were "firsts" in our markets, including
a PC-based batch wire transfer system and image technology in wholesale lockbox
processing. - Became the first bank in our markets to provide on-line
availability of ACH Notifications of Change and Return Items. - Delivered
identical products across all FBS markets through centralization of product
management and operations.
- --------------------------------------------------------------------------------
CORPORATE PRODUCTS
BUSINESS DESCRIPTION
FBS provides value-added services to businesses, including foreign exchange,
trade finance, corporate finance, and loan syndication.
1993 HIGHLIGHTS
- - Achieved record year in foreign exchange revenue and profitability. - Expanded
correspondent banking relationships in emerging international markets to
facilitate our clients' trade flows. - Successfully underwrote and syndicated
several large financings for regional middle-market companies.
Graphs illustrate the following information:
Pie chart shows that the Commercial Banking Group accounts for 28 percent of
FBS's net income.
1991 1992 1993
- ------------------------------------------------------------
Efficiency Ratio* 39.1 37.4 34.6
(Percent)
Net Interest Income 182 183 212
(in Millions)
<FN>
*Before merger-related charges and/or the cumulative effect of accounting
changes in 1992 and 1993.
8
LOOKING AHEAD
- --------------------------------------------------------------------------------
COMMERCIAL LENDING: BUILDING RELATIONSHIPS --> More and more corporations today
choose banks for their intellectual as well as their financial capital. Clients
expect their bankers to be knowledgeable, creative financial advisors. FBS is
committed to becoming the "bank of choice" for middle-market and large
corporations in the markets we serve. Our goal is to deliver the highest quality
products and services at competitive prices.
We're attracting and retaining the best people, and dedicating ourselves
to learning our clients' businesses. We take a proactive approach to meeting
customer needs through a broad range of credit and noncredit products and
services. These efforts are resulting in more satisfied clients and stronger
account relationships.
TRAINING & TECHNOLOGY: GIVING BANKERS THE RIGHT TOOLS --> To be the best
financial resource for our clients, FBS is investing in its people and in
technology. The goal is to enable Relationship Managers to provide the best
financial advice by understanding the client's business and the financial
markets. We continue to invest in our people through development programs
focusing on meeting client needs through innovative credit, corporate finance,
and product expertise. Technology also enables us to be more productive. We have
a computer network that provides immediate access to client information and
quick access to outside information sources. Giving our bankers the right tools
has led to better customer service and improved credit quality.
CASH MANAGEMENT: TECHNOLOGICALLY ADVANCED, SUPERIOR PRODUCTS --> FBS is one of
the region's largest cash management service providers. We have special
expertise in retailing. In the Twin Cities, for example, two-thirds of major
retailers use our automated central cash vault for deposit processing and cash
ordering. Standard product offerings and processes across FBS position us to
leverage and expand this customer base throughout our region.
Our Minnesota, Colorado and Montana controlled disbursement points have
emerged as among the most effective in the country. We will emphasize
enhancements to our electronic products to anticipate changes in niche markets
and key industry segments, such as health care. We also will continue to
exercise influence at the national level in such organizations as the National
Automated Clearing House Association (NACHA) and the Bankers' Electronic Data
Interchange (EDI) Council to help shape the future of our nation's payment
systems.
Quality products and economies of scale, along with highly skilled
people, have made cash management a strong source of fee income and an
effective tool for broadening customer relationships.
Graphs illustrate the following information:
(in Millions) 1991 1992 1993
- ------------------------------------------------------------
Net Income* 50 76 98
Noninterest Income 56 56 60
<FN>
*Before merger-related charges and/or the cumulative effect of accounting
changes in 1992 and 1993.
9
TRUST & INVESTMENT
GROUP
- --------------------------------------------------------------------------------
CORPORATE TRUST
BUSINESS DESCRIPTION
FBS is one of the nation's 10 largest providers of trusteeship, paying agency,
and custody services to debt issuers. We have 13 offices nationwide and $115
billion in administered assets.
1993 HIGHLIGHTS
- - Announced acquisition of J.P. Morgan & Co.'s domestic corporate trust
business. - Completed acquisition of U.S. Bancorp trust offices in Washington
and Oregon. - Created a new arbitrage rebate product, a mortgage assignment
services product, and a government securities mutual fund. - Expanded Los
Angeles office and opened an office in Frederick, Maryland.
- --------------------------------------------------------------------------------
INVESTMENT MANAGEMENT
BUSINESS DESCRIPTION
FBS provides asset management services to individuals and institutions through
common, collective and mutual funds and individual portfolios. Assets under
management: $22 billion.
1993 HIGHLIGHTS
- - Tripled mutual fund assets to $2.9 billion through new sales and collective
fund conversions. - Achieved superior investment performance; most of our common
and mutual funds outperformed their market indices. - Introduced three special
equity common funds focusing on emerging growth, technology, and health care.
- --------------------------------------------------------------------------------
INVESTMENT SERVICES
BUSINESS DESCRIPTION
FBS's retail brokerage company distributes municipal and government bonds,
equities, mutual funds, and annuities to correspondent banks, corporations,
public agencies, and individuals.
1993 HIGHLIGHTS
- - Launched retail bank sales of proprietary mutual funds, attracting more than
$100 million in assets. - Introduced new variable-rate annuity product. -
Continued our position as one of Minnesota's largest underwriters and
distributors of municipal bonds. - Increased our investment sales force from 12
to 130 people in bank branches across FBS.
- --------------------------------------------------------------------------------
PERSONAL TRUST
BUSINESS DESCRIPTION
FBS provides a wide range of investment advisory, administrative, and fiduciary
services for individuals, families and charitable institutions.
1993 HIGHLIGHTS
- - Completed the integration of CNB and BSI acquisitions. - Redesigned account
statements to provide customers with easier-to-read information.
- --------------------------------------------------------------------------------
INSTITUTIONAL TRUST
BUSINESS DESCRIPTION
FBS provides trustee, investment management, and custodial services,primarily
for employee benefit plans.
1993 HIGHLIGHTS
- - Successfully initiated alliance with The Wyatt Co. to provide recordkeeping
for large defined contribution plans. - Launched our Diamond Retirement Program,
a full-service 401(k) plan product for businesses with 25 to 250 employees. -
Converted 100 defined contribution plans representing nearly $100 million in
assets, to the Diamond Retirement Program.
Graphs illustrate the following information:
Pie chart shows that the Trust & Investment Group accounts for 11 percent of
FBS's net income.
1991 1992 1993
- ------------------------------------------------------------
Efficiency Ratio* 76.8 72.8 69.7
(Percent)
Net Interest Income 18 19 32
(in Millions)
<FN>
*Before merger-related charges and/or the cumulative effect of accounting
changes in 1992 and 1993.
10
LOOKING AHEAD
- --------------------------------------------------------------------------------
MANAGED ASSETS: A PLAN FOR GROWTH --> Critical to our success is the ability to
grow managed assets. At the core of our business, managed assets provide not
only a continuing source of fee income but also the opportunity to expand
existing long-term relationships. Our goal is to become the preeminent asset
manager in our region. We already have solid personal trust relationships that
span generations and institutional trust relationships with small to large
corporate retirement plan sponsors and major endowments and foundations. And our
retail brokerage company is a leading municipal bond dealer and a key part of
the mutual fund distribution system in our retail banks.
Our strategy for growing assets is twofold: focus on existing customers
and offer high quality, competitive products. We have an excellent opportunity
to better penetrate our base of approximately 1.3 million retail and commercial
banking customers. We're also focusing our distribution efforts on deepening our
relationships with existing trust customers. To achieve these objectives, we've
created referral incentives across FBS and substantially increased our sales
force.
Another critical element is offering the right products. Last year we
introduced new products and tailored existing products for retail distribution,
including our First American mutual funds, a variable-rate annuity, and our
Diamond Retirement Program. These and other financial products are purchased on
the expectation of superior investment performance and quality service. At FBS,
we have a compelling story to tell. Last year, most of our 34 mutual funds and
common funds outperformed their benchmark indices, some by significant margins.
With $22 billion in assets under management, we have the size and diversity to
provide a range of investment styles to meet the financial objectives of our
customers.
In 1994 we will continue to expand our investment products and services
through the introduction of six new mutual funds, including an international
fund, a technology fund, and two tax-free municipal funds. We also plan to offer
a new asset allocation product, as well as to broaden our 401(k) plan product
line and seek to expand our distribution channels through acquisitions and
alliances.
CORPORATE TRUST: AN INDUSTRY LEADER --> FBS will be one of the nation's five
largest providers of bond indenture services following the completion in the
second quarter of our previously announced acquisition of J.P. Morgan & Co.'s
domestic corporate trust business. The acquisition will increase our corporate
trust business by more than 40 percent, adding 650 clients with 3,800 bond
issues, and establish a significant New York presence for FBS.
Excluding acquisitions, we grew trust fees 16 percent last year as the
result of aggressive marketing and new product introductions. In southern
California, for example, we've hired top talent and taken market share from
competitors. We also expanded our geographic presence through the acquisition of
U.S. Bancorp corporate trust units in Seattle and Portland, Oregon, the
expansion of our Los Angeles office, and the opening of a new office in
Frederick, Maryland.
The market for corporate trust services is consolidating and FBS is
committed to growing its already large market share. We have the economies of
scale required for strong profitability, and we have invested in the technology
needed for continued delivery of superior products. In 1994 we will introduce a
new bondholder recordkeeping system. We will continue to expand our sales force
and to develop derivative products for targeted market niches.
Graphs illustrate the following information:
(in Millions) 1991 1992 1993
- ------------------------------------------------------------
Net Income* 20 28 40
Noninterest Income 124 157 181
<FN>
*Before merger-related charges and/or the cumulative effect of accounting
changes in 1992 and 1993.
11
OVERVIEW DISCUSSION
EARNINGS SUMMARY --> First Bank System, Inc. (the "Company") reported net
earnings in 1993 of $298.0 million ($2.39 per share). Net income in 1993
included merger-related charges of $50.0 million ($0.44 per share), on an
after-tax basis, recorded in connection with the acquisition of Colorado
National Bankshares, Inc. ("CNB"). Net income for 1992 of $311.8 million
($2.67 per share) included merger-related charges of $81.8 million ($0.78
per share), on an after-tax basis, related to the acquisition of Western
Capital Investment Corporation ("WCIC") and Bank Shares Incorporated
("BSI"), in addition to $157.3 million of income related to the cumulative
effect of changes in accounting principles. Net income of $207.1 million
was reported in 1991.
Excluding merger-related charges, 1993 income totaled $348.0 million
($2.83 per share), an increase of $111.7 million, or 47.3 percent, compared
with 1992 income of $236.3 million ($1.96 per share), before merger-related
charges and cumulative effect of accounting changes.
Net interest income on a taxable-equivalent basis for 1993 increased
$132.8 million, or 13.0 percent, from the prior year. Net interest margin
on a taxable-equivalent basis increased to 5.07 percent, up from 4.85
percent in the prior year. Net interest income improved during the past
year as a result of increases in average earning assets of $1.7 billion, or
8.2 percent, and average noninterest-bearing deposits of $1.6 billion, or
33.4 percent.
The provision for credit losses was $125.2 million in 1993 compared
with provisions of $183.4 million in 1992 and $202.2 million in 1991. The
reduction in the provision was due to improved credit quality during 1993
and a merger-related provision for credit losses of $13.6 million included
in the 1992 amount.
Noninterest income was $569.6 million in 1993, compared with $535.7
million in 1992, an increase of $33.9 million, or 6.3 percent. Noninterest
income was $497.7 million in 1991. Trust fees, credit card fees, and
service charges increased $45.4 million, or 12.9 percent, from 1992. From
1991 to 1992, these fees increased by $46.0 million, or 15.0 percent.
Total noninterest expense in 1993 was $1,100.5 million compared to
$1,114.3 in 1992. Merger-related charges of $72.2 million relating to the
CNB acquisition were recorded in the second quarter of 1993. The charges
relate to reorganization and restructuring costs, system conversions,
customer communications, closing of redundant facilities, and other
consolidation costs. Included in noninterest expense for 1992 were similar
merger-related charges of $110.4 million associated with the acquisitions
of WCIC and BSI. Excluding merger-related charges, noninterest expense for
1993 was $1,028.3 million, an increase of $24.4 million, or 2.4 percent,
over 1992.
The efficiency ratio, the measure of operating expenses to net
revenue, improved to 59.8 percent in 1993 from 64.7 percent in 1992,
excluding merger-related charges.
Return on average common equity decreased from 16.4 percent in 1992 to
13.8 percent in 1993 and return on average assets decreased from 1.32
percent to 1.17 percent over the same period. Excluding merger-related
charges and the cumulative effect of accounting changes, return on average
common equity increased from 12.0 percent in 1992 to 16.4 percent in 1993
and return on average assets increased from 1.00 percent to 1.36 percent
for the same periods.
Nonperforming assets at December 31, 1993, totaled $226.0 million,
down $186.1 million, or 45.2 percent, from the total at December 31, 1992.
Of this decrease, $90.8 million related to a decrease in other real estate,
principally due to sales of properties. The ratio of the allowance for
credit losses to nonperforming loans was 268.5 percent at December 31,
1993, compared with 179.1 percent at December 31, 1992.
Results for 1993 and 1992 have been restated to reflect the
acquisition of CNB, a $3.0 billion bank holding company, on May 28, 1993,
which was accounted for using the pooling-of-interests method. The
Company's results for 1992 also were restated to give effect to the
December 18, 1992, acquisition of WCIC, a $2.5 billion bank holding
company, which was accounted for using the pooling-of-interests method.
Results for 1993 include the results of BSI, a $2.1 billion bank holding
company, which was acquired on December 31, 1992. The BSI acquisition was
accounted for using the purchase method, and, accordingly, had no effect on
1992 earnings.
12
TABLE 1 --> SELECTED FINANCIAL DATA
(Dollars in Millions, Except Per Share Amounts) 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------------
CONDENSED INCOME STATEMENT:
Net interest income (taxable-equivalent basis) . . . . . . . . . . . . . . . $1,150.6 $1,017.8 $ 941.2 $ 872.7 $ 898.8
Provision for credit losses. . . . . . . . . . . . . . . . . . . . . . . . . 125.2 183.4 202.2 215.4 335.8
-------------------------------------------------------
Net interest income after provision for credit losses. . . . . . . . . . . 1,025.4 834.4 739.0 657.3 563.0
Investment securities gains. . . . . . . . . . . . . . . . . . . . . . . . . .3 1.9 8.9 3.6 17.6
Other noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . 569.3 533.8 488.8 434.0 467.5
Merger-related charges (including $26.4 related to ORE in 1992). . . . . . . 72.2 110.4 - - -
Other noninterest expense. . . . . . . . . . . . . . . . . . . . . . . . . . 1,028.3 1,003.9 969.3 981.0 1,091.1
-------------------------------------------------------
Income (loss) before income taxes and cumulative effect
of changes in accounting principles. . . . . . . . . . . . . . . . . . . 494.5 255.8 267.4 113.9 (43.0)
Taxable-equivalent adjustment. . . . . . . . . . . . . . . . . . . . . . . . 17.7 22.7 34.4 48.1 63.6
Income taxes (credit). . . . . . . . . . . . . . . . . . . . . . . . . . . . 178.8 78.6 25.9 8.5 (19.8)
-------------------------------------------------------
Income (loss) before cumulative effect of changes in accounting principles 298.0 154.5 207.1 57.3 (86.8)
Cumulative effect of changes in accounting principles. . . . . . . . . . . . - 157.3 - - -
-------------------------------------------------------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 298.0 $ 311.8 $ 207.1 $ 57.3 $ (86.8)
-------------------------------------------------------
-------------------------------------------------------
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . 1.17% 1.32% 0.90% 0.22% (0.30)%
Return on average common equity. . . . . . . . . . . . . . . . . . . . . . . 13.8 16.4 13.1 2.7 (7.9)
Net interest margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.07 4.85 4.50 3.70 3.45
Efficiency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64.0 71.8 67.8 75.1 79.9
Efficiency ratio, excluding merger-related charges . . . . . . . . . . . . . 59.8 64.7 67.8 75.1 79.9
PER SHARE DATA:
Primary income before cumulative effect of accounting changes. . . . . . . . $ 2.39 $ 1.18 $ 1.79 $ .36 $ (1.23)
Cumulative effect of accounting changes. . . . . . . . . . . . . . . . . . - 1.49 - - -
-------------------------------------------------------
Primary net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.39 $ 2.67 $ 1.79 $ .36 $ (1.23)
-------------------------------------------------------
-------------------------------------------------------
Fully diluted income before cumulative effect of accounting changes. . . . . $ 2.38 $ 1.21 $ 1.78 $ .36 $ (1.23)
Cumulative effect of accounting changes. . . . . . . . . . . . . . . . . . - 1.43 - - -
-------------------------------------------------------
Fully diluted net income (loss). . . . . . . . . . . . . . . . . . . . . . $ 2.38 $ 2.64 $ 1.78 $ .36 $ (1.23)
-------------------------------------------------------
-------------------------------------------------------
Common dividends paid* . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.00 $ .88 $ .82 $ .82 $ 1.44
-------------------------------------------------------
AVERAGE BALANCE SHEET DATA:
Total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,756 $ 16,257 $ 16,341 $ 18,104 $ 20,158
Total earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,695 20,983 20,916 23,597 26,045
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,575 23,592 23,075 25,856 28,609
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,347 18,774 18,215 19,564 20,615
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 913 927 1,214 1,652 1,797
Common equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,957 1,720 1,402 1,246 1,342
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 2,305 2,099 1,684 1,510 1,573
YEAR-END BALANCE SHEET DATA:
Total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,779 $ 17,076 $ 16,365 $ 16,829 $ 19,546
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,385 26,625 23,851 24,804 27,229
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,031 21,188 19,145 19,378 20,436
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,015 822 948 1,506 1,733
Common equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,979 1,939 1,474 1,336 1,176
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 2,245 2,318 1,852 1,600 1,440
-------------------------------------------------------
<FN>
* DIVIDENDS PER SHARE HAVE NOT BEEN RESTATED FOR THE WCIC OR CNB MERGERS. CNB
PAID COMMON DIVIDENDS OF $3.2 MILLION IN 1992 ($.28 PER CNB SHARE), AND
$1.8 MILLION IN 1991, 1990, AND 1989 ($.16 PER CNB SHARE). WCIC DID NOT PAY
DIVIDENDS IN THE YEARS SHOWN.
13
In 1992, the Company adopted Statement of Financial Accounting
Standards No. ("SFAS") 109, "Accounting for Income Taxes." The cumulative
effect of this accounting change as of January 1, 1992, was $188.9 million.
The Company also adopted SFAS 106, "Employer's Accounting for
Postretirement Benefits Other than Pensions," which resulted in a
cumulative effect of accounting change of $31.6 million as of January 1,
1992. For further information on accounting changes, see Note B of Notes to
Consolidated Financial Statements on page 46.
DEVELOPMENTS DURING 1993
The Company's goals for 1993 were to complete the integration of recent
acquisitions in order to maximize their earnings potential, to grow the
Company's three core businesses, and to maintain a fortress balance sheet.
As discussed below, significant progress was made in 1993 to accomplish
these objectives.
On May 28, 1993, the Company completed the acquisition of CNB,
formerly the largest independent commercial bank holding company in
Colorado, with $3.0 billion in assets, $2.5 billion in deposits and $271
million in common equity, resulting in the issuance of approximately 20.6
million shares. As a result, the Company now has the leading market share
in Colorado. The transaction was accounted for using the pooling-of-
interests method. At closing, the Company recorded merger and restructuring
charges totaling $72.2 million ($50.0 million on an after-tax basis).
The integrations of CNB, WCIC and BSI were substantially completed in
1993. Annualized cost savings due to system conversions, centralization and
consolidation of operations, and related personnel reductions aggregated
more than $100 million in the fourth quarter of 1993. Pro forma for the BSI
acquisition, average full-time equivalent employees were reduced by 9
percent.
Reflecting the success of the Company's integration efforts,
consistent increases in quarterly earnings, excluding merger-related
charges, were achieved in 1993, with net income growing 48 percent from
$64.7 million in the fourth quarter of 1992 to $95.9 million in the fourth
quarter of 1993.
During 1993, the Company announced agreements to purchase three
institutions in markets in which the Company has an existing presence,
serving to strengthen the Company's retail banking market shares in these
communities. American Bancshares of Mankato, with approximately $116
million in assets, is the holding company for American National Bank,
located in Mankato, Minnesota. First Financial Investors, Inc., with
approximately $200 million in assets, is the holding company for St. Louis
Bank for Savings, FSB, located in Duluth, Minnesota. United Bank of
Bismarck, with approximately $123 million in assets is located in Bismarck,
North Dakota. The American Bancshares of Mankato acquisition is expected to
close in the first quarter of 1994, while the First Financial Investors,
Inc. and United Bank of Bismarck acquisitions are expected to close in the
second quarter of 1994.
Also in 1993, the Company announced its intention to enter the
attractive Chicago market through the acquisition of Boulevard Bancorp,
Inc., a commercial bank holding company with $1.6 billion in assets, $1.2
billion in deposits, and $114 million in shareholders' equity. The Company
expects to issue approximately 6.5 million common shares for Boulevard's
outstanding common stock and existing stock options and warrants. The
acquisition will be accounted for under the purchase method of accounting
and is expected to close in the first quarter of 1994.
Finally, in January 1994, the Company announced that it had signed an
agreement to acquire the domestic corporate trust business of J. P. Morgan
& Co., Incorporated. This business unit provides trust services for
approximately 650 clients with 3,800 bond issues in the areas of municipal,
revenue, housing, and corporate bond indenture trusteeships.
Critical to future profitability and growth, the Company continued to
improve asset quality and coverage ratios while maintaining a strong ratio
of common equity to total assets.
The ratio of nonperforming assets to total loans plus other real
estate improved to 1.20 percent at December 31, 1993, compared with 2.39
percent at December 31, 1992, and 3.31 percent at December 31, 1991. The
allowance for credit losses increased to 268.5 percent of nonperforming
loans at December 31, 1993, compared with 179.1 percent at December 31,
1992, and 141.6 percent at December 31, 1991.
The ratio of common equity to total assets increased slightly at
December 31, 1993, to 7.5 percent from 7.3 percent at December 31, 1992.
The Company's strong capital position has enabled it to announce several
stock repurchase programs during 1993. In connection with the Boulevard
acquisition, the Company plans to buy back common shares approximately
equal to the number of common shares to be issued to effect the
transaction. The repurchase of these shares began in October 1993. As of
December 31, 1993, approximately 3.9 million shares with a cost of $121.4
million have been repurchased.
14
In January 1993, the Company announced a $75 million common stock
repurchase program. Repurchased shares were to replace a portion of the
shares issued in connection with the BSI acquisition, to provide for
issuances under the Employee Stock Purchase and the Dividend Reinvestment
Plans, and to be used for other corporate purposes. As of December 31,
1993, 2.3 million shares, with a cost of $65.7 million, had been
repurchased.
In September 1993, the Company announced plans to repurchase $125
million of its preferred stock. As part of this program, the $100 million
Series 1983A Adjustable Rate Cumulative Preferred Stock was redeemed. An
additional $15.2 million of Preferred Stock Series 1991A and 1989B has been
repurchased through December 31, 1993. The remaining $9.8 million of
authorized repurchases may be effected from time to time.
On January 19, 1994, the Board of Directors authorized the redemption
of $159.3 million of the Company's preferred stock, consisting of $89
million of Preferred Stock Series 1989A and $70.3 million of Preferred
Stock Series 1989B.
LINE OF BUSINESS FINANCIAL REVIEW
Each of the Company's three business lines - Retail and Community
Banking, Commercial Banking, and the Trust and Investment Group -
contributed to the strong financial performance in 1993. Compared to 1992
results, all achieved earnings increases of more than 25 percent and
significant productivity improvements, before merger-related expenses, as
measured by their efficiency ratios.
TABLE 2 --> LINE OF BUSINESS FINANCIAL PERFORMANCE
Retail and Community Commercial Trust and Investment Consolidated
Banking Banking Group Company
--------------------------------------------------------------------------
(Dollars in Millions) 1993 1992 1993 1992 1993 1992 1993 1992
--------------------------------------------------------------------------
CONDENSED INCOME STATEMENT:
Net interest income (taxable-equivalent basis) . $ 906.7 $ 815.7 $ 212.3 $ 183.3 $ 31.6 $ 18.8 $1,150.6 $1,017.8
Provision for credit losses* . . . . . . . . . . 106.4 137.6 18.8 28.6 - 3.6 125.2 169.8
Noninterest income . . . . . . . . . . . . . . . 328.5 322.1 60.2 56.3 180.9 157.3 569.6 535.7
Noninterest expense* . . . . . . . . . . . . . . 785.9 786.1 94.3 89.6 148.1 128.2 1,028.3 1,003.9
--------------------------------------------------------------------------
Income before income taxes*. . . . . . . . . . 342.9 214.1 159.4 121.4 64.4 44.3 566.7 379.8
Income taxes and taxable-equivalent
adjustment . . . . . . . . . . . . . . . . . . 132.3 80.8 61.5 45.9 24.9 16.8 218.7 143.5
--------------------------------------------------------------------------
Income before cumulative effect of
changes in accounting principles
and merger-related charges . . . . . . . . . . $ 210.6 $ 133.3 $ 97.9 $ 75.5 $ 39.5 $ 27.5 348.0 236.3
-------------------------------------------------------
-------------------------------------------------------
Merger-related charges (after tax) . . . . . . . (50.0) (81.8)
Cumulative effect of accounting changes. . . . . - 157.3
------------------
Net income . . . . . . . . . . . . . . . . . $ 298.0 $ 311.8
------------------
Return on average assets*. . . . . . . . . . . . 1.13% 0.78% 1.58% 1.25% ** ** 1.36% 1.00%
Return on average common equity* . . . . . . . . 15.2 11.1 22.5 17.8 29.5% 27.8% 16.4 12.0
Efficiency ratio*. . . . . . . . . . . . . . . . 63.6 69.1 34.6 37.4 69.7 72.8 59.8 64.7
--------------------------------------------------------------------------
--------------------------------------------------------------------------
AVERAGE BALANCE SHEET DATA:
Total commercial loans . . . . . . . . . . . . . $ 4,784 $ 4,233 $ 4,545 $ 4,498 $ - $ - $ 9,329 $ 8,731
--------------------------------------------------------------------------
Credit card loans. . . . . . . . . . . . . . . . 1,733 1,709 - - - - 1,733 1,709
Residential mortgage loans . . . . . . . . . . . 3,505 2,851 - - - - 3,505 2,851
Other consumer loans . . . . . . . . . . . . . . 3,189 2,966 - - - - 3,189 2,966
--------------------------------------------------------------------------
Total consumer loans . . . . . . . . . . . . 8,427 7,526 - - - - 8,427 7,526
Total assets . . . . . . . . . . . . . . . . . . 18,615 17,015 6,209 6,055 751 522 25,575 23,592
Deposits . . . . . . . . . . . . . . . . . . . 16,748 16,121 2,682 1,962 917 691 20,347 18,774
Common equity. . . . . . . . . . . . . . . . . . 1,388 1,197 435 424 134 99 1,957 1,720
--------------------------------------------------------------------------
<FN>
* EXCLUDING MERGER-RELATED CHARGES AND THE CUMULATIVE EFFECT OF ACCOUNTING
CHANGES
** NOT MEANINGFUL
NOTE: PREFERRED DIVIDENDS ARE NOT ALLOCATED TO THE BUSINESS LINES.
15
Business line results are derived from the Company's business unit
profitability reporting system which specifically attributes most assets,
deposits and income statement items to a business line. The Company's
internal Funds Transfer Pricing system allocates a standard cost of funds
used or credit for funds provided to all assets and liabilities using a
matched funding concept. Expenses which directly support business line
operations are allocated based on a standard unit cost and actual volume
measurements. Expenses which indirectly support the business line
operations as well as those which primarily support the holding company are
allocated based on the ratio of the business line's noninterest expense to
total noninterest expense. Income taxes have been calculated based upon the
Company's consolidated effective tax rate.
Capital is allocated within the business unit profitability system
based upon credit, operational and business risks. The asset and liability
components of the balance sheet are assigned risk factors ranging from .50
percent for deposits to 100 percent for goodwill. Asset components subject
to credit risk are assigned risk factors based upon historic loss
experience after taking into consideration changes in business practice
which may introduce more or less risk into the portfolio. Certain lines of
business, such as the Trust and Investment Group, which have no significant
balance sheet components, are assigned capital after taking into
consideration operational risk, capital levels of independent organizations
operating similar businesses and regulatory minimums.
RETAIL AND COMMUNITY BANKING --> Retail and Community Banking, which
includes consumer, small and middle market business banking services,
residential mortgage lending, and consumer and corporate credit card and
payment systems processing, achieved strong revenue growth while containing
costs. Net income increased 58.0 percent to $210.6 million in 1993. Return
on assets increased to 1.13 percent from .78 percent in 1992. Return on
equity increased to 15.2 percent from 11.1 percent for the previous year.
Net interest income increased $91.0 million, or 11.2 percent, from
1992 while fee-based noninterest income increased $6.4 million, or 2.0
percent. The increases are attributable to strong home equity loan
promotions, aggressive small and middle market business lending, and growth
in the mutual funds and Corporate Payment System products, partially offset
by net charges of $28 million related to loan servicing assets at FBS
Mortgage Corporation. Compared to 1992, the provision for credit losses
decreased $31.2 million, or 22.7 percent to $106.4 million in 1993,
reflecting improved credit quality.
Noninterest expense was $785.9 million in 1993 compared with $786.1
million in 1992. The efficiency ratio improved to 63.6 percent in 1993 from
69.1 percent in 1992.
COMMERCIAL BANKING --> Commercial Banking, which provides lending, cash
management, and other financial services to middle market, large corporate
and mortgage banking companies, contributed net earnings of $97.9 million
in 1993, a 29.7 percent increase over 1992. Return on assets rose to 1.58
percent from 1.25 percent in 1992. Similarly, return on equity increased to
22.5 percent in 1993 from 17.8 percent in the previous year.
Net interest income increased to $212.3 million in 1993 from $183.3
million in 1992 while noninterest income increased 6.9 percent to $60.2
million in 1993, reflecting increased secured credit financings to mortgage
banking firms accompanied by increases in noninterest-bearing deposits. The
provision for credit losses declined 34.3 percent to $18.8 million from
$28.6 million in 1992, reflecting improved credit quality.
Noninterest expense increased to $94.3 million in 1993 from $89.6
million in 1992 due to increased personnel expense associated with the BSI
acquisition. The efficiency ratio improved to 34.6 percent in 1993 from
37.4 percent in 1992.
16
TRUST AND INVESTMENT GROUP --> The Trust and Investment Group, which
includes personal, institutional and corporate trust services, investment
management services, and a full-service brokerage company, reported net
income of $39.5 million in 1993, a 43.6 percent increase over 1992. The
return on average equity improved to 29.5 percent in 1993 from 27.8 percent
in 1992. Much of the gain resulted from stronger noninterest income, which
was $180.9 million for the year, up 15.0 percent over 1992. Trust fees for
1993 reflect income from BSI and the corporate trust business units
purchased from U.S. Bancorp in March 1993 and Bankers Trust Company of
California in July 1992. Assets under management totaled $21.6 billion at
year-end 1993, up from $19.1 billion at the previous year-end. Net interest
income increased 68.1 percent to $31.6 million for the year reflecting an
increase in average deposits.
Noninterest expense increased to $148.1 million in 1993 from $128.2
million in 1992 reflecting costs associated with the BSI, U.S. Bancorp and
Bankers Trust Company of California acquisitions; however, the efficiency
ratio improved to 69.7 percent in 1993 from 72.8 percent in 1992.
BALANCE SHEET SUMMARY
Total assets at December 31, 1993, were $26.4 billion, essentially
unchanged from the $26.6 billion at the end of 1992.
Total loans increased $1.7 billion, or 10.0 percent, to $18.8 billion
at December 31, 1993. The largest increase was in the financial
institutions portfolio which increased $872 million, or 77.0 percent, to
$2.0 billion at year-end 1993 from $1.1 billion at December 31, 1992. The
increase resulted from the cyclical activity in the Company's secured loans
to mortgage banking firms, including a $700 million low margin extension of
credit which is fully secured by short-term U.S. Treasury securities and
which is expected to be outstanding through the third quarter of 1994.
Total deposits at December 31, 1993, remained relatively constant at
$21.0 billion compared with $21.2 billion at December 31, 1992. However,
noninterest-bearing deposits at December 31, 1993, increased $1.5 billion,
or 24.6 percent, primarily due to increased escrow balances related to the
secured lending to mortgage banking firms discussed above. Offsetting this
increase, total interest-bearing deposits decreased $1.6 billion, or 10.8
percent, from the previous year-end primarily due to a $1.3 billion, or
22.7 percent, decline in savings certificates.
The level of other sources of short-term funds, including federal
funds purchased, securities sold under agreements to repurchase and other
short-term funds borrowed, decreased $116 million, or 8.0 percent, to $1.3
billion, from the end of 1992 to the end of 1993. Long-term debt increased
23.5 percent to $1.0 billion over the same time period due to three $100
million subordinated debt issuances. The Company's funding requirements are
met with customer deposits, short-term funds, and long-term debt. Since
1991 funding from the Company's operating region has represented over 90
percent of the Company's total funding. The relative stability and lower
cost of regional funding versus national wholesale funding have contributed
to the Company's strengthened balance sheet and improved profitability. For
further information regarding the Company's funding, see the Liquidity
Management and Balance Sheet Analysis sections on pages 36 and 37.
CAPITAL MANAGEMENT
The Company's capital position has remained strong over the past three
years, as indicated by Table 3 on page 18. The capital levels reflect
earnings retention partially reduced by the repurchases of $115.2 million
of preferred stock and $187.1 million of common stock. See the Developments
During 1993 section starting on page 14 for further information on the
stock repurchases.
At December 31, 1993, total shareholders' equity was $2.245 billion,
or 8.5 percent of assets, compared with 8.7 percent at year-end 1992 and
7.8 percent at year-end 1991.
17
TABLE 3 --> CAPITAL RATIOS
At December 31 (Dollars in Millions) 1993 1992 1991
- --------------------------------------------------------------------------------
Common equity . . . . . . . . . . . . . . . $1,979 $1,939 $1,474
As a percent of assets. . . . . . . . . . 7.5% 7.3% 6.2%
Tangible common equity* . . . . . . . . . . $1,811 $1,764 $1,357
As a percent of assets. . . . . . . . . . 6.9% 6.7% 5.7%
Total shareholders' equity. . . . . . . . . $2,245 $2,318 $1,853
As a percent of assets. . . . . . . . . . 8.5%** 8.7% 7.8%
Tier 1 capital. . . . . . . . . . . . . . . $1,971 $2,008 $1,698
As a percent of risk-adjusted assets. . . 9.2%** 9.5% 8.3%
Total risk-based capital . . . . . . . . . $2,863 $2,669 $2,308
As a percent of risk-adjusted assets. . . 13.3%** 12.6% 11.3%
Leverage ratio. . . . . . . . . . . . . . . 7.6** 7.8 7.3
-------------------------------
<FN>
*DEFINED AS COMMON EQUITY LESS GOODWILL.
**ON A PRO FORMA BASIS REFLECTING THE ANNOUNCED CALL OF $159.3 MILLION OF
PREFERRED STOCK TO BEGIN APRIL 1, 1994, TOTAL SHAREHOLDERS' EQUITY RATIO IS
7.9%, TIER 1 CAPITAL RATIO IS 8.4%, TOTAL RISK-BASED CAPITAL RATIO IS
12.6%, AND THE LEVERAGE RATIO IS 7.0%.
Common shareholders' equity at December 31, 1993, was $1.979 billion, or
$18.09 per share, compared with $1.939 billion, or $17.09 per share, at
year-end 1992 and $1.474 billion, or $14.41 per share, at year-end 1991.
The common equity-to-assets ratio increased 20 basis points from year-end
1992 to 7.5 percent at December 31, 1993. The common equity-to-assets ratio
increased 110 basis points to 7.3 percent at year-end 1992 from 6.2 percent
at year-end 1991.
The Company's risk-based capital ratios, which take into account the
different credit risks of its various assets, reflect the Company's capital
strength. Tier 1 and total risk-based capital ratios were 9.2 percent and
13.3 percent, respectively, on December 31, 1993, compared with 9.5 percent
and 12.6 percent at December 31, 1992, and 8.3 percent and 11.3 percent at
December 31, 1991. The decrease in the Tier 1 ratio from 1992 to 1993 was
due to the recent preferred stock and common stock repurchases discussed in
the Developments During 1993 section starting on page 14. The increase in
the total risk-based capital ratio was the result of $300 million of
subordinated note issuances in 1993 partially offset by the stock
repurchases. The improvement from 1991 occurred as a result of earnings
retention, including the equity capital created by the adoption of SFAS
109, the issuance of $125 million of 12-year subordinated notes in 1992 and
the issuance in late 1991, net of subsequent repurchases, of $104 million
of Convertible Preferred Stock. As required by the regulatory agencies,
equity capital of $34 million created by the adoption of SFAS 115 was
deducted from the risk-based capital calculations at December 31, 1993, and
equity capital created by the adoption of SFAS 109 was subject to
limitations for inclusion in risk-based capital at December 31, 1992. For
further information on accounting changes, see Note B of Notes to
Consolidated Financial Statements on page 46.
At December 31, 1993, the Company's leverage ratio, the ratio of
Tier 1 capital to total quarterly average assets, was 7.6 percent compared
with 7.8 percent and 7.3 percent at December 31, 1992, and 1991,
respectively. BSI quarterly average assets were included in the computation
of the December 31, 1992, ratio for comparative purposes.
Under the Federal Deposit Insurance Corporation Improvement Act, a
bank is typically defined as "well capitalized" if it maintains a Tier 1
capital ratio of at least 6.0 percent, a total risk-based capital ratio of
at least 10.0 percent and a leverage ratio of at least 5.0 percent.
Generally, it is the Company's intention to maintain sufficient capital in
each of its bank subsidiaries to permit them to maintain a "well
capitalized" designation. As shown by Table 4 on page 19, all of the
Company's bank subsidiaries met the "well capitalized" designation at
December 31, 1993.
18
TABLE 4 --> BANK SUBSIDIARY CAPITAL RATIOS
AT DECEMBER 31, 1993
-----------------------------------------
Total
Tier 1 Risk-based Total
(Dollars in Millions) Capital Capital Leverage Assets
---------------------------------------------------------------------------------------------
REGULATORY CAPITAL REQUIREMENTS:
Minimum . . . . . . . . . . . . . . . . . . . . . . . 4.0% 8.0% 3.0%
Well-capitalized. . . . . . . . . . . . . . . . . . . 6.0 10.0 5.0
BANK SUBSIDIARIES:
First Bank National Association (Minnesota) . . . . . 8.6 11.4 7.3 $15,803
Colorado National Bank. . . . . . . . . . . . . . . . 13.2 15.3 8.4 7,164
First Bank Montana, National Association. . . . . . . 9.5 11.5 8.0 1,302
First Bank (N.A.) (Wisconsin) . . . . . . . . . . . . 7.7 10.3 7.7 1,135
First Bank of South Dakota (National Association) . . 7.7 12.5 7.4 1,024
First Bank of North Dakota, National Association. . . 8.4 11.8 7.6 814
Colorado National Bank Aspen. . . . . . . . . . . . . 19.3 20.6 12.1 64
First Bank Washington . . . . . . . . . . . . . . . . 21.0 22.3 10.3 59
First National Bank of East Grand Forks . . . . . . . 14.0 16.7 8.8 47
-----------------------------------------
<FN>
NOTE: THESE BALANCES AND RATIOS WERE PREPARED IN ACCORDANCE WITH REGULATORY
ACCOUNTING PRINCIPLES AS DISCLOSED IN THE BANKS' CALL REPORTS.
During 1993, total dividends on common stock were $109.7 million
compared with $73.1 million in 1992 and $65.6 million in 1991. On a per
share basis, dividends paid to common shareholders totaled $1.00 in 1993,
$.88 in 1992, and $.82 in 1991. The quarterly dividend paid to common
shareholders was increased in the second quarter of 1992 from the previous
level of $.205 per share to $.225 per share. In the first quarter of 1993,
the quarterly dividend on common shares was increased to $.25 per share.
The primary sources of funds for the dividends paid by the Company to
its shareholders are dividends received from its bank and nonbank
subsidiaries. Payment of dividends to the Company by its subsidiary banks
is subject to ongoing review by banking regulators and to various statutory
limitations. For further information, see Note Q of Notes to Consolidated
Financial Statements on page 67.
STATEMENT OF INCOME ANALYSIS
NET INTEREST INCOME - Net interest income on a taxable-equivalent basis was
$1,150.6 million in 1993 compared with $1,017.8 million in 1992 and $941.2
million in 1991. The improvement in net interest income from 1992 reflects
increases in average earning assets of $1.7 billion, or 8.2 percent, and
average noninterest-bearing deposits of $1.6 billion, or 33.4 percent. The
increases in earning assets and noninterest bearing deposits were largely a
result of the BSI acquisition, higher production in residential mortgage
banking and increases in secured loans to mortgage banking firms. The
improvement in net interest income from 1991 to 1992 reflects a change in
the mix of the Company's loan portfolio towards higher-yielding consumer
loans and an increase in average core deposits, including an increase in
average noninterest-bearing deposits of $.9 billion, or 24.0 percent. The
decline in nonperforming assets also contributed to the growth in net
interest income in both years.
19
TABLE 5 --> ANALYSIS OF NET INTEREST INCOME
(Dollars in Millions) 1993 1992 1991
------------------------------------------------------------------------------------------------
Net interest income (taxable-equivalent basis). . . . . . . . $1,150.6 $1,017.8 $ 941.2
----------------------------------
----------------------------------
Average balances of earning assets supported by:
Interest-bearing liabilities. . . . . . . . . . . . . . . . $ 16,114 $ 15,997 $16,934
Noninterest-bearing liabilities . . . . . . . . . . . . . . 6,581 4,986 3,982
----------------------------------
Total earning assets. . . . . . . . . . . . . . . . . . . $ 22,695 $ 20,983 $20,916
----------------------------------
----------------------------------
Average yields and weighted average rates
(taxable-equivalent basis):
Earning assets yield. . . . . . . . . . . . . . . . . . . . 7.40% 8.12% 9.54%
Rate paid on interest-bearing liabilities . . . . . . . . . 3.28 4.29 6.23
----------------------------------
Gross interest margin . . . . . . . . . . . . . . . . . . . . 4.12% 3.83% 3.31%
----------------------------------
----------------------------------
Net interest margin . . . . . . . . . . . . . . . . . . . . . 5.07% 4.85% 4.50%
----------------------------------
----------------------------------
Net interest margin without taxable-equivalent increments . . 4.99% 4.74% 4.34%
----------------------------------
----------------------------------
The net interest margin, on a taxable-equivalent basis, was 5.07
percent in 1993, an increase of 22 basis points from 4.85 percent in 1992
and 57 basis points from 4.50 percent in 1991. The improvement in net
interest margin over the last two years can be attributed to two factors
having approximately equal effects on the Company's ratios. The Company's
balance sheet mix has changed, including a decrease in lower yielding
short-term investments and a shift in the loan portfolio mix toward
consumer loans, as a result of the BSI acquisition and promotional
campaigns for the Company's home equity product. In addition, cyclical
factors have resulted in lower interest rates, increasing the level of
noninterest-bearing deposits and allowing for wider spreads between prime
rates and short-term funding costs. If spreads between prime rates and
funding costs were to decline, the Company's net interest margin would
contract. For example, if the prime rate were to drop by 50 basis points
without a corresponding decrease in funding costs, the Company's net
interest income would be expected to decline by approximately $35 million,
or 3.0 percent, on an annual basis, assuming no change in earning asset
levels.
TABLE 6 --> CHANGES IN RATE AND VOLUME
1993 COMPARED WITH 1992 1992 COMPARED WITH 1991
----------------------------------------------------------
Yield/ Yield/
(In Millions) Volume Rate Total Volume Rate Total
-------------------------------------------------------------------------------------------------
Increase (decrease) in:
Interest income:
Loans . . . . . . . . . . . . . $126.0 $(151.5) $ (25.5) $ (8.1) $(205.5) $(213.6)
Taxable securities. . . . . . . 59.2 (27.4) 31.8 6.7 (42.5) (35.8)
Nontaxable securities . . . . . 3.2 (.3) 2.9 (10.6) 1.2 (9.4)
Federal funds sold and
resale agreements . . . . . . (16.8) (5.7) (22.5) (2.7) (34.1) (36.8)
Other . . . . . . . . . . . . . (10.2) (1.0) (11.2) 10.0 (6.8) 3.2
----------------------------------------------------------
Total . . . . . . . . . . . . 161.4 (185.9) (24.5) (4.7) (287.7) (292.4)
Interest expense:
Savings deposits and time
deposits less than $100,000 . 9.2 (123.9) (114.7) 28.2 (254.5) (226.3)
Time deposits over $100,000 . . (17.6) (12.7) (30.3) (57.1) (20.7) (77.8)
Short-term borrowings . . . . . 7.1 (7.7) (.6) (14.8) (15.9) (30.7)
Long-term debt. . . . . . . . . (1.0) (10.7) (11.7) (21.7) (12.5) (34.2)
----------------------------------------------------------
Total . . . . . . . . . . . . (2.3) (155.0) (157.3) (65.4) (303.6) (369.0)
----------------------------------------------------------
Increase (decrease) in net
interest income . . . . . . . $163.7 $ (30.9) $ 132.8 $ 60.7 $ 15.9 $ 76.6
----------------------------------------------------------
----------------------------------------------------------
<FN>
THIS TABLE SHOWS THE COMPONENTS OF THE CHANGE IN NET INTEREST INCOME BY
VOLUME AND RATE ON A TAXABLE-EQUIVALENT BASIS. THE EFFECT OF CHANGES IN
RATES ON VOLUME CHANGES IS ALLOCATED BASED ON THE PERCENTAGE RELATIONSHIP
OF CHANGES IN VOLUME AND CHANGES IN RATE. THIS TABLE DOES NOT TAKE INTO
ACCOUNT THE LEVEL OF NONINTEREST-BEARING FUNDING, NOR DOES IT FULLY REFLECT
CHANGES IN THE MIX OF ASSETS AND LIABILITIES.
20
PROVISION FOR CREDIT LOSSES --> The provision for credit losses was $125.2
million in 1993, down $58.2 million from the provision of $183.4 million in
1992 and down $77.0 million from the provision of $202.2 million in 1991.
The decrease in the provision is directly related to improved credit
quality. Nonperforming assets declined from $412.1 million at December 31,
1992, to $226.0 million at December 31, 1993. Net charge-offs were $150.0
million in 1993, down from $203.1 million in 1992 and $242.3 million in
1991. Included in the 1992 provision for credit losses is a merger-related
provision of $13.6 million related principally to the Company's valuation
of WCIC's $70 million mobile home loan portfolio.
The allowance for credit losses was $423.2 million at December 31,
1993, compared with $448.0 million at December 31, 1992, and $426.9 million
at December 31, 1991. Reserve coverage remained strong as the ratio of the
allowance for credit losses to nonperforming loans increased to 268.5
percent at year-end 1993, compared with 179.1 percent and 141.6 percent at
year-end 1992 and 1991, respectively. Refer to "Credit Management" on page
25 for additional information on the Company's credit quality.
NONINTEREST INCOME --> Noninterest income was $569.6 million in 1993,
compared with $535.7 million in 1992, an increase of $33.9 million, or 6.3
percent. Noninterest income was $497.7 million in 1991. Trust fees, credit
card fees, and service charges increased $45.4 million, or 12.9 percent,
from 1992. From 1991 to 1992, these fees increased by $46.0 million, or
15.0 percent.
Trust fees in 1993 were $146.1 million, up $18.3 million, or 14.3
percent, from $127.8 million in 1992. Trust fees for 1993 reflect income
from BSI and the corporate trust business units purchased from U.S. Bancorp
in March of 1993, and Bankers Trust Company of California in July of 1992.
Trust fees in 1992 increased $12.3 million, or 10.6 percent, from $115.5
million in 1991. The increase in trust fees from 1991 reflects the Bankers
Trust Company of California acquisition as well as a new pricing structure
that was introduced in the third quarter of 1991. Trust assets under
management were $21.6 billion at December 31, 1993, compared with $19.1
billion in 1992 and $16.7 billion in 1991.
Credit card fees were up $20.2 million, or 17.3 percent, from $116.9
million in 1992. Credit card fees totaled $94.4 million in 1991. Most of
the 1993 increase in credit card fees is attributable to increased volumes
for the Company's Corporate Card product. In 1992, the increase was due to
increased volume including fees from portfolios acquired in the second half
of 1991.
Service charges on deposit accounts increased to $115.3 million in
1993 from $108.4 million in 1992 and $97.2 million in 1991. The increase
during 1993 reflects further product standardization and full integration
of acquisitions while 1992's increase reflects a reduction in fee waivers,
changes in deposit mix, product standardization, and rate increases.
Insurance commissions were $20.9 million in 1993 compared with $27.3
million in 1992 and $27.2 million in 1991. In December 1992, the Company
sold its Montana insurance agencies, and during the first quarter of 1993,
the Company sold its Twin Cities insurance agency. Gains on sales of the
insurance agencies were not significant. As part of its ongoing analysis of
its business lines, the Company concluded that it would be more successful
in creating value for its shareholders by focusing its retail and community
banking efforts on other opportunities.
Trading account profits were $10.1 million in 1993, down slightly from
$10.5 million in 1992 and $10.2 million in 1991. Sales of investment
securities resulted in net gains of $.3 million in 1993, $1.9 million in
1992 and $8.9 million in 1991.
TABLE 7 --> NONINTEREST INCOME
(Dollars in Millions) 1993 1992 1991
---------------------------------------------------------------------------
Trust fees. . . . . . . . . . . . . . . . . . $146.1 $127.8 $115.5
Credit card fees. . . . . . . . . . . . . . . 137.1 116.9 94.4
Services charges on deposit accounts. . . . . 115.3 108.4 97.2
Insurance commissions . . . . . . . . . . . . 20.9 27.3 27.2
Trading account profits and commissions . . . 10.1 10.5 10.2
Investment securities gains . . . . . . . . . .3 1.9 8.9
Other . . . . . . . . . . . . . . . . . . . . 139.8 142.9 144.3
-----------------------------
Total noninterest income. . . . . . . . . . $569.6 $535.7 $497.7
-----------------------------
-----------------------------
21
Other noninterest income decreased from $142.9 million in 1992 to
$139.8 million in 1993, or 2.2 percent. The decline reflects approximately
$28 million in net charges related to the accelerated amortization of
mortgage loan servicing rights due to prepayments in the Company's mortgage
servicing portfolio, partially offset by $11 million in one-time gains from
the sale of assets. The Company reviews the valuation of its mortgage
servicing rights assets quarterly. The valuation incorporates current
dealer expectations of mortgage prepayment speeds. At December 31, 1993,
the Company's mortgage servicing related assets consisted of $52.7 million
of purchased mortgage servicing rights and $17.2 million of excess service
fee receivables. Other noninterest income totaled $144.3 million in 1991.
Nonrecurring items totaling $10.0 million were recorded by WCIC in 1991,
including a $2.5 million IRS recovery and a $7.5 million reversal of a
legal judgment.
NONINTEREST EXPENSE --> Noninterest expense was $1,100.5 million, a
decrease of $13.8 million, or 1.2 percent, from 1992. Included in 1993
noninterest expense are merger, integration and restructuring charges
totaling $72.2 million relating to the CNB acquisition. Noninterest
expense in 1992 included merger-related charges of $110.4 million
associated with the acquisition of WCIC and BSI. These accruals were made
to reflect the Company's intent to dispose of problem assets and to provide
for anticipated reorganization and restructuring costs.
Excluding the effects of the merger-related provisions, noninterest
expense for the year increased $24.4 million, or 2.4 percent, from $1,003.9
million to $1,028.3 million. Noninterest expense totaled $969.3 million in
1991. Excluding merger-related charges, the efficiency ratio, as shown in
Table 8 below, improved to 59.8 percent in 1993 from 64.7 percent in 1992
and 67.8 percent in 1991.
TABLE 8 --> NONINTEREST EXPENSE
(Dollars in Millions, Except Per Employee Data) 1993 1992 1991
----------------------------------------------------------------------------------------------------
Salaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 389.1 $ 388.7 $ 371.7
Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . 86.3 85.5 79.3
-----------------------------
Total personnel expense . . . . . . . . . . . . . . . . . . . . . . 475.4 474.2 451.0
Net occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93.4 87.9 84.0
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . 72.7 67.2 64.8
FDIC insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 46.4 42.2 38.5
Professional services . . . . . . . . . . . . . . . . . . . . . . . . 36.7 38.7 37.8
Amortization of goodwill and other intangible assets. . . . . . . . . 30.6 25.2 21.6
Other personnel costs . . . . . . . . . . . . . . . . . . . . . . . . 27.5 20.2 17.8
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.0 28.3 28.3
Printing, stationery and supplies . . . . . . . . . . . . . . . . . . 21.9 21.0 21.1
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.5 20.0 21.8
Postage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.4 19.1 18.1
Telephone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.7 16.5 14.3
Other real estate (includes $26.4 merger-related charge in 1992). . . 2.2 41.2 29.9
Merger, integration and restructuring . . . . . . . . . . . . . . . . 72.2 84.0 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135.9 128.6 120.3
-----------------------------
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . $1,100.5 $1,114.3 $ 969.3
-----------------------------
-----------------------------
Efficiency ratio* . . . . . . . . . . . . . . . . . . . . . . . . . . 64.0% 71.8% 67.8%
Efficiency ratio, excluding merger-related charges. . . . . . . . . . 59.8 64.7 67.8
Average number of full-time equivalent employees**. . . . . . . . . . 12,300 12,553 12,742
Personnel expense per employee. . . . . . . . . . . . . . . . . . . . $ 38,650 $ 37,776 $ 35,395
-----------------------------
-----------------------------
<FN>
* COMPUTED AS NONINTEREST EXPENSE DIVIDED BY THE SUM OF NET INTEREST INCOME
ON A TAXABLE-EQUIVALENT BASIS AND NONINTEREST INCOME NET OF INVESTMENT
SECURITIES GAINS.
** 950 FULL-TIME EQUIVALENT EMPLOYEES RELATED TO THE BSI ACQUISITION WERE
ADDED ON DECEMBER 31, 1992.
22
Noninterest expense in 1993 increased due to the December 31, 1992,
acquisition of BSI, which was accounted for under the purchase method of
accounting. Compared with noninterest expense for 1992, including the
operations of BSI on a pro forma basis and excluding merger-related
charges, noninterest expense for 1993 declined $76.7 million, or 6.9
percent. This decline reflects the successful integration of recent
acquisitions. The systems of CNB were converted in July of 1993; the WCIC
and BSI conversions were completed in March and May of 1993, respectively.
The Company now has one set of systems supporting virtually all of its
products in every location, a unified communications network, and
centralized processing for every customer transaction. The increase in
expenses in 1992 from 1991 levels reflects additional operating costs due
to the acquisition of Siouxland Bank Holding Company in June 1992, First
Trust California in July 1992 and several acquisitions completed in the
last half of 1991, as well as expenses related to a new headquarters
building.
Salaries and employee benefits expenses in 1993 were $475.4 million,
up only slightly from 1992's expense of $474.2 million. Including BSI on a
pro forma basis in 1992, salaries and benefits expense in 1993 decreased
$36.3 million, or 7.1 percent. In 1991, salaries and employee benefits
expenses were $451.0 million. The increase in salaries and employee
benefits expenses of $23.2 million from 1991 to 1992 was due in large part
to the mid-year 1992 acquisitions and to higher personnel costs at CNB,
including $3.6 million of severance.
Net occupancy and furniture and equipment expenses totaling $166.1
million in 1993 increased $11.0 million, or 7.1 percent, from 1992. This
increase included costs associated with acquisitions and recent investments
in technology. In 1992, net occupancy and furniture and equipment expenses
increased $6.3 million, or 4.2 percent, from $148.8 million in 1991
primarily due to costs related to the Company's move to a new headquarters
building.
FDIC insurance premiums totaled $46.4 million for the year ended
December 31, 1993, compared with $42.2 million and $38.5 million for the
years ended December 31, 1992, and 1991, respectively. The increase in
premiums of $4.2 million, or 10.0 percent, during 1993 resulted from
generally higher deposit levels, including the BSI acquisition. FDIC
insurance premiums increased $3.7 million during 1992 primarily due to the
1991 increase in the rate charged on deposits and higher deposit levels. In
1993, the FDIC adopted a risk-based assessment system to replace the
previous flat-rate system. Under this system, substantially all of the
Company's deposits were subject to the lowest rate, $.23 per $100 of
domestic deposits, at year-end 1993.
Professional services expenses in 1993 were $36.7 million, down
slightly from $38.7 million in 1992 and $37.8 million in 1991. Included in
professional services expense is the cost of examinations by the Office of
the Comptroller of the Currency which increased during 1993.
The 1993 increase in amortization of goodwill and other intangible
assets of $5.4 million was primarily attributable to the additional
goodwill and intangible assets resulting from the BSI and the corporate
trust unit acquisitions. Other personnel costs increased $7.3 million, or
36.1 percent, primarily due to the increased use of temporary labor during
the integration of various acquisitions. During 1992, other personnel costs
increased $2.4 million as a result of mid-year 1992 acquisitions.
Other real estate ("ORE") expense totaled $2.2 million in 1993 down
significantly from $41.2 million in 1992 and $29.9 million in 1991,
primarily due to lower levels of ORE and the absence of one-time charges
related to acquisitions. Included in the 1992 ORE expense was a
merger-related charge of $26.4 million resulting from the Company's change
in estimate in the value of ORE owned by WCIC, based on the Company's
intention to dispose of the assets in an accelerated manner relative to
WCIC's previous actions.
Merger-related charges of $72.2 million relating to the CNB
acquisition were recorded in 1993. The charges, including $29.7 million in
conversion and customer communications costs, $22.8 million in severance,
$14.3 million in premises and equipment write-downs, and $5.4 million in
other restructuring costs, relate to the closing of redundant facilities
and consolidation of operations. Merger-related charges of $84.0 million
relating primarily to the acquisition of WCIC were recorded in 1992. The
charges included $31.2 million in premises and equipment write-downs, $12.6
million in securities and interest rate swap write-downs, and $40.2 million
in severance, system conversions, and customer communications costs.
23
INCOME TAX EXPENSE --> The provision for income taxes was $178.8 million in
1993 compared with $78.6 million in 1992 and $25.9 million in 1991. The
increase in 1993 compared to 1992 was primarily a result of the higher
level of taxable income along with a continued decline in tax-exempt
interest income. The Omnibus Budget Reconciliation Act of 1993 was signed
into law during the year and, among other changes, required a one percent
increase in the corporate income tax rate effective January 1, 1993. The
provision for 1993 reflects this increase, offset by the favorable effect
of recording the related increase in deferred tax assets. The net effect on
the annual provision for income taxes was not significant. The increase in
the 1992 income tax provision compared to 1991 was attributable to the
Company's adoption of SFAS 109, "Accounting for Income Taxes," in 1992. As
required by the Statement, the Company recorded deferred tax assets related
to the unrecognized benefit of income tax carryforwards. Years prior to
1992 were not restated, and the 1991 provision included the recognition of
tax benefits of $36.7 million, resulting from the use of operating loss
carryforwards.
At December 31, 1993, the Company's net deferred tax asset was $160.0
million, net of valuation allowances of $19.6 million, compared with a net
deferred tax asset of $224.0 million, net of valuation allowances of $20.1
million, at December 31, 1992. Realization of this asset over time is
dependent upon the Company generating earnings in future periods. In
determining that realization of the asset was more likely than not, the
Company gave consideration to a number of factors, including its recent
earnings history, its expectations for earnings in the future and, where
applicable, the expiration dates associated with tax carryforwards. For
further information on income taxes, refer to Note L on page 58.
ACCOUNTING CHANGES
The Company adopted the provisions of SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities," as of December 31, 1993. SFAS
115 requires that investments in debt securities and equity securities with
readily determinable fair values be classified into three categories which
then establishes the appropriate accounting treatment. The accounting for
two of the categories, trading securities and held-to-maturity securities,
is essentially the same as prior practice. The new category, available-for-
sale securities, is accounted for at fair value with unrealized holding
gains or losses reported in shareholders' equity. At December 31, 1993, the
Company's entire $3.3 billion investment portfolio has been classified as
available for sale. As a result, the net unrealized gain associated with
these securities of $34.0 million, net of tax, has been included in
shareholders' equity.
The Company adopted SFAS 112, "Employers' Accounting for
Postemployment Benefits," in 1993. This Statement requires accrual of costs
associated with postemployment benefits (principally disability-related
benefits) provided to former or inactive employees after employment but
before retirement if certain conditions are met. The effect of adopting
SFAS 112 was insignificant to the Company's financial statements.
In 1992, in addition to the adoption of SFAS 109 as discussed above,
the Company adopted SFAS 106, "Employer's Accounting for Postretirement
Benefits Other than Pensions." This Statement requires the accrual of costs
associated with postretirement benefits, and permits either immediate
recognition of the accumulated obligation or amortization of the obligation
over a 20-year period. The Company elected the immediate recognition method
and the accrual of the accumulated obligation as of January 1, 1992, of
$31.6 million, net of related tax benefits of $20.5 million, is reported as
a cumulative effect of change in accounting principle.
The Company has not yet adopted SFAS 114, "Accounting by Creditors for
Impairment of a Loan." This Statement requires creditors to establish a
valuation allowance when it is probable that all the principal and interest
due under the contractual terms of a loan will not be collected. The
impairment is measured based on the present value of expected future cash
flows based on the effective interest rate of the loan, observable market
price or fair value of a collateral dependent loan. This differs from the
Company's current policy in that it requires establishing a valuation
allowance for uncollectible interest in addition to the uncollectible
principal amounts of impaired loans. The adoption of the Statement is
required for fiscal years beginning after December 15, 1994. The adoption
of SFAS 114 is not expected to have a material effect on the Company. For
further information on accounting changes, see Note B on page 46.
24
CORPORATE RISK PROFILE
OVERALL RISK PROFILE --> Managing risk is an essential part of the
operation of a financial services institution. The most prominent risk
exposures are credit quality, interest rate sensitivity, and liquidity
risk. Credit quality risk involves the risk of either not collecting
interest when it is due or not receiving the principal balance of the loan
or investment when it matures or otherwise is due. Interest rate
sensitivity risk is the risk of reduced net interest income because of
differences in the repricing characteristics of assets and liabilities, as
well as the change in the market value of assets and liabilities as
interest rates fluctuate. Liquidity risk is the risk that the Company will
not be able to fund its obligations and is largely a function of how
effectively the Company manages its other risks.
CREDIT MANAGEMENT --> Continued progress has been made during 1993 in
achieving the Company's credit quality objectives. Nonperforming assets
declined during 1993, reflecting many factors including the Company's
efforts to promptly resolve problem assets, the reduced risk profile of the
loan portfolio, and improved economic conditions in the Company's lending
area. The ratio of nonperforming assets to loans plus Other Real Estate
declined from 2.39 percent at year-end 1992 to 1.20 percent at year-end
1993. The risk reduction in the portfolio reflects the Company's focus on
middle market lending in its region and a shift toward more consumer
lending. Consistent with the Company's strategy, middle market and consumer
loan portfolios were enhanced by the acquisitions made during 1993 and
1992. The ratio of the allowance for credit losses to nonperforming loans
increased to 268.5 percent, providing strong reserve coverage. This
coverage ratio was 179.1 percent at year-end 1992 and 141.6 percent at
year-end 1991.
In evaluating credit risk, the Company takes into consideration the
composition of its loan portfolio, its level of allowance coverage,
macroeconomic concerns such as the level of debt outstanding in the public
and private sectors, the effects of domestic and international economic
conditions, regional economic conditions, and other issues.
The Company operates principally in Minnesota, Colorado, Montana,
Wisconsin, North Dakota and South Dakota. Most economic indicators in the
Company's operating regions compare favorably with national indicators.
Approximately 60 percent of the Company's loan portfolio consists of
extensions of credit to companies and consumers in Minnesota and Colorado.
According to federal and state government agencies, unemployment rates in
Minnesota and Colorado were 4.4 percent and 4.1 percent, respectively,
compared to the national unemployment rate of 6.4 percent at December 31,
1993. Nationally, retail sales improved by 6.1 percent during 1993 while
Minnesota and Colorado experienced retail sales increases of 11.4 percent
and 11.5 percent, respectively. At September 30, 1993, the national
foreclosure rate was 1.01 percent compared with .70 percent in Minnesota
and .47 percent in Colorado.
The Company's credit management process includes centralized credit
policy and administration functions and standardized underwriting criteria
for specialized lending categories, such as mortgage banking, real estate
construction, and consumer credit. The Company's credit management process
is supported by regular examinations conducted by the credit administration
function. Large loans and all loans experiencing deterioration of credit
quality are reviewed quarterly by management. A standardized credit scoring
system is used to assess consumer credit risks and to price consumer
products relative to their assigned risk rating.
The Company engages in various non-lending activities which may give
rise to credit risk, including interest rate swap contracts, foreign
exchange transactions for the benefit of customers, and the processing of
credit card transactions for merchants' activities. These activities are
subject to the same credit review, analysis and approval processes as those
applied to commercial loans. For additional information on the Company's
interest rate swap positions see "Interest Rate Risk Management" on page
33.
25
LOAN PORTFOLIO REVIEW --> One of the ways the Company manages its credit
risk is by ensuring that its loan portfolio is diversified by industry
classification, size and type of loan. Table 9 below shows the Company's
loan distribution at the end of each of the last five years.
The increase in the Company's loan portfolio of $1.7 billion, or 10.0
percent, from year-end 1992 to year-end 1993 can be attributed to the
commercial, financial institutions and home equity and second mortgage
portfolios. The loan portfolio increased 4.3 percent from 1991 to 1992 due
to the acquisition of BSI.
COMMERCIAL --> Commercial loans account for 31.2 percent of total loans at
December 31, 1993, compared with 31.0 percent and 33.5 percent at year-end
1992 and 1991, respectively. Commercial loans totaled $5.9 billion at
year-end 1993, up from $5.3 billion and $5.5 billion at year-end 1992 and
1991, respectively. The increase in commercial loans includes growth in the
Corporate Payment System program which issues Visa Corporate, Business and
Procurement cards to businesses, and in small and middle market business
lending.
Within the commercial category, several industry groups are
represented. Service industries, including both business and consumer
services, totaled 32 percent of the portfolio. Consumer product
manufacturers totaled 27 percent and wholesalers totaled 20 percent of
amounts outstanding at December 31, 1993.
The geographical distribution of the commercial portfolio is
concentrated in the Company's operating region, with approximately 80
percent of amounts outstanding to borrowers located in Minnesota, Colorado,
Wisconsin, Montana, North Dakota, and South Dakota.
TABLE 9 --> LOAN PORTFOLIO DISTRIBUTION
1993 1992 1991 1990 1989
----------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
At December 31 (Dollars in Millions) Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
- --------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL:
Commercial . . . . . . . . . . . . . $ 5,856 31.2% $ 5,288 31.0% $ 5,478 33.5% $ 6,432 38.2% $ 7,864 40.3%
Financial institutions . . . . . . . 2,004 10.7 1,132 6.6 1,001 6.1 568 3.4 582 3.0
Real estate:
Commercial mortgage. . . . . . . . 1,495 8.0 1,539 9.0 1,445 8.8 1,438 8.5 1,376 7.0
Construction . . . . . . . . . . . 231 1.2 234 1.4 295 1.8 358 2.1 559 2.9
HLTs . . . . . . . . . . . . . . 183 1.0 284 1.7 334 2.0 577 3.4 1,102 5.6
Agricultural . . . . . . . . . . . . 123 .6 131 .8 138 .9 170 1.0 193 1.0
Lease financing. . . . . . . . . . . 197 1.0 256 1.5 226 1.4 296 1.8 363 1.9
----------------------------------------------------------------------------------------
Total commercial . . . . . . . . 10,089 53.7 8,864 52.0 8,917 54.5 9,839 58.4 12,039 61.7
CONSUMER:
Residential mortgage . . . . . . . . 2,422 12.9 2,568 15.0 2,006 12.3 1,967 11.7 2,827 14.4
Residential mortgage held for sale . 1,088 5.8 705 4.1 758 4.6 643 3.8 557 2.8
Home equity and second mortgage* . . 1,755 9.3 1,362 8.0 992 6.1 884 5.3 524 2.7
Credit card. . . . . . . . . . . . . 1,757 9.4 1,782 10.5 1,709 10.4 1,232 7.3 1,139 5.8
Revolving credit . . . . . . . . . . 690 3.7 600 3.5 573 3.5 350 2.1 254 1.3
Automobile . . . . . . . . . . . . . 342 1.8 519 3.0 726 4.4 1,124 6.7 1,383 7.1
Installment. . . . . . . . . . . . . 376 2.0 430 2.5 444 2.7 572 3.4 630 3.2
Student loans held for sale. . . . . 260 1.4 246 1.4 240 1.5 218 1.3 193 1.0
----------------------------------------------------------------------------------------
Total consumer . . . . . . . . . . 8,690 46.3 8,212 48.0 7,448 45.5 6,990 41.6 7,507 38.3
----------------------------------------------------------------------------------------
Total loans. . . . . . . . . . . . $18,779 100.0% $17,076 100.0% $16,365 100.0% $16,829 100.0% $19,546 100.0%
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
<FN>
*BALANCE OF SECOND MORTGAGES INCLUDED IN RESIDENTIAL MORTGAGES AT DECEMBER 31,
1989.
26
At December 31, 1993, commercial loans totaling $35.1 million were
included in nonperforming assets, down $42.4 million, or 54.7 percent, from
a year ago. Net charge-offs of commercial loans were $10.6 million in 1993,
or .29 percent of the average outstanding balance, declining from $22.2
million, or .84 percent of the average outstanding balance, in 1992.
FINANCIAL INSTITUTIONS --> The portfolio of loans to financial institutions
totaled $2.0 billion at December 31, 1993, compared with $1.1 billion at
December 31, 1992, and $1.0 billion at December 31, 1991. The increases are
primarily attributable to a $700 million low margin extension of credit to
one mortgage banking customer, which is fully secured by short-term U.S.
Treasury securities, and which is expected to be outstanding through the
third quarter of 1994. In addition, other cyclical activity in the
Company's secured loans to mortgage banking firms has increased.
The financial institutions group provides financing to customer
institutions headquartered throughout the United States. Many of these
institutions originate residential mortgages on a national basis. The
Company primarily secures these loans with first liens on single family
residences.
At December 31, 1993, loans to financial institutions totaling $.9
million were included in nonperforming assets, down $2.4 million, or 72.7
percent, from a year ago. In 1993 net recoveries on loans to financial
institutions were $.5 million. In 1992, there were no charge-offs or
recoveries while in 1991, there were $2.0 million in net charge-offs.
COMMERCIAL REAL ESTATE LENDING --> The Company's portfolio of commercial
real estate mortgages and construction loans totaled $1.7 billion at
December 31, 1993, compared with $1.8 billion at December 31, 1992.
Commercial mortgages outstanding were $1.5 billion at December 31,
1993, and 1992. Real estate construction loans outstanding at December 31,
1993, totaled $231 million compared with $234 million from year-end 1992.
The Company maintains the real estate construction loan designation until
the project is producing sufficient cash flow to service traditional
mortgage financing, at which time the loan is transferred to the commercial
mortgage portfolio. Approximately $21 million of construction loans were
transferred to the commercial mortgage portfolio in 1993.
The Company's commercial real estate mortgages and construction loans
had combined unfunded commitments of $206 million at December 31, 1993, and
$145 million at December 31, 1992. At year-end 1993, tax-exempt industrial
development loans and commitments totaling $218 million and standby letters
of credit totaling $301 million were secured by real estate interests. At
year-end 1992, these exposures totaled $320 million and $279 million,
respectively. Table 10 on page 28 shows the breakdown of commercial real
estate exposures by property type and geographic location.
Approximately 70 percent of Company's real estate exposures either are
not dependent upon real estate for debt service (i.e., owner-occupied
properties) or are secured by properties with positive cash flows.
Commercial real estate loans of $39.1 million are included in
nonperforming assets at December 31, 1993, compared with $67.8 million at
December 31, 1992. Total real estate loans (including other real
estate-owned) on nonperforming status declined to $106.5 million at
year-end 1993 from $226.0 million a year ago.
During 1993, net charge-offs of commercial real estate loans totaled
$44.3 million, or 2.58 percent of the average balance outstanding, which
was comparable to the $43.9 million of net charge-offs, or 2.49 percent of
the average balance outstanding, in 1992.
27
TABLE 10 --> COMMERCIAL REAL ESTATE EXPOSURE BY PROPERTY TYPE AND GEOGRAPHY
Percentage of Total
at December 31
---------------------------
PROPERTY TYPE 1993 1992
---------------------------------------------------------------------------
Mixed-use office. . . . . . . . . . . . . . . . 18.0% 15.0%
Retail. . . . . . . . . . . . . . . . . . . . . 15.0 14.8
Office building . . . . . . . . . . . . . . . . 14.6 17.0
Multi-family. . . . . . . . . . . . . . . . . . 11.3 18.0
Hotel/motel . . . . . . . . . . . . . . . . . . 6.0 4.8
Single-family residential . . . . . . . . . . . 5.4 1.9
Land. . . . . . . . . . . . . . . . . . . . . . 2.5 2.2
Other, primarily owner-occupied . . . . . . . . 27.2 26.3
---------------------------
100.0% 100.0%
---------------------------
---------------------------
GEOGRAPHY
---------------------------------------------------------------------------
Minnesota . . . . . . . . . . . . . . . . . . . 32.5% 37.3%
Colorado. . . . . . . . . . . . . . . . . . . . 28.0 23.1
Wisconsin . . . . . . . . . . . . . . . . . . . 12.8 10.2
Montana, North Dakota and South Dakota. . . . . 11.8 10.6
---------------------------
Total FBS region. . . . . . . . . . . . . . . 85.1 81.2
Other Midwest . . . . . . . . . . . . . . . . . 4.5 7.0
West. . . . . . . . . . . . . . . . . . . . . . 3.7 4.0
Southwest . . . . . . . . . . . . . . . . . . . 3.5 3.9
Southeast . . . . . . . . . . . . . . . . . . . 3.0 3.4
Mid-Atlantic. . . . . . . . . . . . . . . . . . .2 .5
---------------------------
100.0% 100.0%
---------------------------
---------------------------
Other real estate-owned totaled $67.4 million at December 31, 1993.
These properties are valued at estimated market value, and year-end 1993
book value represents approximately 40 percent of the aggregate original
investment. Of total real estate-owned at December 31, 1993, 28 percent was
located in Colorado, 21 percent was located in Minnesota, and 14 percent
was located in Wisconsin. At December 31, 1993, other real estate-owned was
comprised of various property types including office building (29 percent),
other commercial real estate (28 percent), and single-family residential
(18 percent). In-substance foreclosures make up approximately 50 percent of
the other real estate-owned balance at year-end 1993. In-substance
foreclosures are properties held as collateral over which the Company
possesses economic control, due to the borrower's inability to repay the
related loan or rebuild equity in the property. The Company does not
possess legal title to these properties.
The Company also finances the operations of real estate developers and
other entities with operations related to real estate. These loans are not
secured directly by real estate and are subject to terms and conditions
similar to commercial loans. These loans are included in the commercial
category and totaled $286 million at December 31, 1993, and $289 million at
December 31, 1992.
HIGHLY LEVERAGED TRANSACTIONS --> The Company's exposure to commercial
loans involving the buyout, recapitalization or acquisition of an existing
business, called highly leveraged transactions ("HLTs"), continues to
diminish. At December 31, 1993, the Company had HLT outstandings totaling
$183 million and was committed under definitive agreements to lend an
additional amount of approximately $50 million. This exposure has decreased
approximately 37.9 percent from a year ago and 58.0 percent from two years
ago. Total exposure was $375 million at December 31, 1992, and $555 million
at December 31, 1991.
At December 31, 1993, HLT outstandings totaling $20.1 million were
included in nonperforming assets, down significantly from $64.4 million at
December 31, 1992. The decrease consisted primarily of one credit totaling
$37.5 million which was paid in full in 1993. Net charge-offs of HLTs
totaled $5.6 million during 1993, down from $24.0 million in 1992.
28
CONSUMER LENDING --> Consistent with the Company's strategy, growth in
retail lending is of continuing importance to the Company. Consumer loan
outstandings were $8.7 billion at December 31, 1993, up from $8.2 billion
at year-end 1992 and $7.4 billion at year-end 1991. This increase occurred
primarily in residential mortgages held for sale and home equity loans,
offset partially by declines in residential mortgages and auto loans.
Credit card loans remained relatively constant at $1.8 billion.
Consumer lending is based primarily in the Company's operating region
of Minnesota, Colorado, Montana, North Dakota, South Dakota, and Wisconsin.
Of total consumer balances outstanding, approximately 70 percent are to
customers located in the Company's operating region. See page 25 for a
discussion of the general economic conditions within the Company's
operating region.
The relatively low interest rate environment in 1993 resulted in
increased activity in the Company's residential mortgage loan portfolio.
Residential mortgage outstandings decreased $146 million, or 5.7 percent,
to $2.4 billion, reflecting prepayments related to refinancings at lower
interest rates. Residential mortgages held for sale increased $383 million,
or 54.3 percent, due to increased loan production. Loan production was
approximately $6.8 billion in 1993, a 51 percent increase over 1992.
Included in 1993 loan production was $3.1 billion related to purchases of
loans from correspondents. The Company recently announced its decision to
exit this market, and as a result, 1994 loan production is expected to
decline. The effect of this decision on net income is not expected to be
material. The $393 million increase in home equity and second mortgage
outstandings during 1993 reflects growth due to successful promotional
campaigns.
The credit card portfolio remained relatively constant at $1.8 billion
at year-end 1993 and 1992. Revolving credit loans increased 15 percent to
$690 million at December 31, 1993, primarily due to the growth achieved
through direct mail marketing. During 1993, automobile loans decreased $177
million, or 34.1 percent, to $342 million and installment loans decreased
$54 million, or 12.6 percent, to $376 million. The decreases reflect a
shift in the loan mix to home equity and second mortgages which have
certain tax advantages for consumers. At December 31, 1993, student loans
totaled $260 million, up slightly from the prior year. Table 9 on page 26
shows the breakdown of the Company's consumer loan portfolio by type of
loan.
Consumer loans 30 days or more past due were 2.3 percent of the total
consumer portfolio at December 31, 1993, compared with 2.1 percent at
December 31, 1992. Consumer loans 90 days or more past due at December 31,
1993, totaled 1.0 percent of the total consumer loan portfolio, compared to
.7 percent at December 31, 1992. The increases were due to the purchase of
$24.0 million, or .3 percent of the total consumer portfolio, of delinquent
residential mortgages in connection with a sale of mortgage loan servicing
rights. These loans are supported by government-sponsored mortgage
insurance.
Net charge-offs of consumer loans decreased $27.4 million to $86.1
million during 1993. The decrease is due primarily to a decrease of credit
card net charge-offs of $15.6 million for the year ended 1993. Credit card
net charge-offs as a percent of average outstandings decreased during 1993
to 3.57 percent from 4.53 percent in 1992 and 4.17 percent in 1991. The
Company acquired portfolios totaling $395 million in 1991 which generally
had higher credit loss experience than the Company's pre-existing
portfolio. As these portfolios have been integrated into the Company's
credit processes, their performance has improved.
ANALYSIS AND ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES --> The allowance
for credit losses is maintained to provide for credit losses inherent in
the Company's loan portfolio and related off-balance sheet commitments. The
allowance is increased by the provision for credit losses and decreased by
net charge-offs. Management has determined that the allowance for credit
losses is adequate based on a continuing evaluation of the loan portfolio
and off-balance sheet commitments, economic conditions and expectations,
historical experience, and the risk evaluation of individual credits.
Although the recent trend of slow steady economic growth may contribute to
the continued improvement in the credit portfolio, prolonged stagnation or
reversals in the economy could cause an increase in the required level of
the allowance for credit losses.
29
TABLE 11 --> SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
(Dollars in Millions) 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------
Balance at beginning of period . . . . . . . . . . . . $448.0 $426.9 $454.0 $480.0 $506.3
CHARGE-OFFS:
Commercial:
Commercial . . . . . . . . . . . . . . . . . . . . 40.1 56.6 89.4 92.7 220.1
Financial institutions . . . . . . . . . . . . . . 6.5 - 2.0 3.0 17.1
Real estate:
Commercial mortgage. . . . . . . . . . . . . . . 55.5 45.6 72.0 66.3 49.4
Construction . . . . . . . . . . . . . . . . . . .4 6.1 6.3 32.0 30.8
HLTs . . . . . . . . . . . . . . . . . . . . . . . 8.0 27.0 11.5 15.9 36.8
Agricultural . . . . . . . . . . . . . . . . . . . .3 .6 1.9 2.0 .8
Lease financing. . . . . . . . . . . . . . . . . . 5.1 1.6 2.0 2.1 1.0
----------------------------------------
Total commercial . . . . . . . . . . . . . . . 115.9 137.5 185.1 214.0 356.0
Consumer:
Residential mortgage . . . . . . . . . . . . . . . 1.9 5.1 5.1 6.9 8.0
Credit card. . . . . . . . . . . . . . . . . . . . 71.6 85.5 68.4 43.7 29.8
Other. . . . . . . . . . . . . . . . . . . . . . . 35.6 45.6 47.1 37.2 29.0
----------------------------------------
Total consumer . . . . . . . . . . . . . . . . 109.1 136.2 120.6 87.8 66.8
----------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . 225.0 273.7 305.7 301.8 422.8
RECOVERIES:
Commercial:
Commercial . . . . . . . . . . . . . . . . . . . . 29.5 34.4 25.5 28.0 21.1
Financial institutions . . . . . . . . . . . . . . 7.0 - - .7 3.5
Real estate:
Commercial mortgage. . . . . . . . . . . . . . . 10.3 5.9 11.7 4.2 3.4
Construction . . . . . . . . . . . . . . . . . . 1.3 1.9 1.2 4.7 9.2
HLTs . . . . . . . . . . . . . . . . . . . . . . . 2.4 3.0 5.3 3.1 -
Agricultural . . . . . . . . . . . . . . . . . . . .9 .8 1.0 2.1 3.2
Lease financing. . . . . . . . . . . . . . . . . . .6 1.9 1.1 .3 .6
----------------------------------------
Total commercial . . . . . . . . . . . . . . . 52.0 47.9 45.8 43.1 41.0
Consumer:
Residential mortgage . . . . . . . . . . . . . . . 1.4 2.1 1.6 2.0 1.2
Credit card. . . . . . . . . . . . . . . . . . . . 9.7 8.0 6.0 4.3 2.1
Other. . . . . . . . . . . . . . . . . . . . . . . 11.9 12.6 10.0 10.5 8.4
----------------------------------------
Total consumer . . . . . . . . . . . . . . . . 23.0 22.7 17.6 16.8 11.7
----------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . 75.0 70.6 63.4 59.9 52.7
NET CHARGE-OFFS:
Commercial:
Commercial . . . . . . . . . . . . . . . . . . . . 10.6 22.2 63.9 64.7 199.0
Financial institutions . . . . . . . . . . . . . . (.5) - 2.0 2.3 13.6
Real estate:
Commercial mortgage. . . . . . . . . . . . . . . 45.2 39.7 60.3 62.1 46.0
Construction . . . . . . . . . . . . . . . . . . (.9) 4.2 5.1 27.3 21.6
HLTs . . . . . . . . . . . . . . . . . . . . . . . 5.6 24.0 6.2 12.8 36.8
Agricultural . . . . . . . . . . . . . . . . . . . (.6) (.2) .9 (.1) (2.4)
Lease financing. . . . . . . . . . . . . . . . . . 4.5 (.3) .9 1.8 .4
----------------------------------------
Total commercial . . . . . . . . . . . . . . . 63.9 89.6 139.3 170.9 315.0
Consumer:
Residential mortgage . . . . . . . . . . . . . . . .5 3.0 3.5 4.9 6.8
Credit card. . . . . . . . . . . . . . . . . . . . 61.9 77.5 62.4 39.4 27.7
Other. . . . . . . . . . . . . . . . . . . . . . . 23.7 33.0 37.1 26.7 20.6
----------------------------------------
Total consumer . . . . . . . . . . . . . . . . 86.1 113.5 103.0 71.0 55.1
----------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . 150.0 203.1 242.3 241.9 370.1
Provision charged to operating expense . . . . . . . . 125.2 183.4 202.2 215.4 335.8
Additions related to acquisitions. . . . . . . . . . . - 40.8 13.0 .5 8.0
----------------------------------------
Balance at end of period . . . . . . . . . . . . . . . $423.2 $448.0 $426.9 $454.0 $480.0
----------------------------------------
----------------------------------------
Allowance as a percentage of period-end loans. . . . . 2.25% 2.62% 2.61% 2.70% 2.46%
Allowance as a percentage of nonperforming loans . . . 268.5 179.1 141.6 103.7 108.5
----------------------------------------
30
At December 31, 1993, the allowance for credit losses was $423.2
million, or 2.25 percent of loans. This compares with an allowance of
$448.0 million, or 2.62 percent of loans, at year-end 1992 and $426.9
million, or 2.61 percent of loans, at December 31, 1991. The allowance
increased to 268.5 percent of nonperforming loans at December 31, 1993,
compared with 179.1 percent at December 31, 1992, and 141.6 percent at
December 31, 1991.
Components of the allowance have been allocated to certain industry
sectors based on management's assessment of the relative risk
characteristics of the loan portfolio. Table 12 below shows the allocation
of the allowance for credit losses by loan category. Commercial allocations
are based on a quarterly review of individual loans outstanding and binding
commitments to lend, including standby letters of credit, that have been
identified by management as having higher than normal risk of collection.
Consumer allocations are based on an analysis of historical and expected
delinquency and charge-off statistics. The increase in the allocation for
other consumer loans in 1992 was related to the mobile home portfolio
acquired as part of the WCIC acquisition.
Management reviews the adequacy of the allowance each quarter based on
the status of problem loans and related off-balance sheet commitments,
recent loss experience and other pertinent factors, including current and
anticipated economic conditions. As a result of these assessments,
management determines whether an additional allowance above specified
allocations should be provided for the inherent loss in loans concentrated
in certain industries.
The unallocated allowance increased to $254.9 million at year-end 1993
from $202.7 million and $150.1 million at December 31, 1992, and 1991,
respectively. Generally, the increase in the unallocated allowance over the
past two years reflects the trend of improving credit quality in the
portfolio. Although the allocation of the allowance is an important tool in
credit management, the entire allowance for credit losses is available for
the entire loan portfolio.
TABLE 12 --> ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
Allocation Amount At December 31 Allocation as a Percent of Loans Outstanding
--------------------------------------------------------------------------------------
(Dollars in Millions) 1993 1992 1991 1990 1989 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL:
Commercial, financial institutions
and lease financing. . . . . . . . $ 70.2 $ 82.5 $101.4 $132.3 $125.0 .87% 1.24% 1.51% 1.81% 1.42%
Real Estate:
Commercial mortgage. . . . . . . . 36.8 52.8 77.2 127.5 50.1 2.46 3.43 5.34 8.87 3.64
Construction . . . . . . . . . . . 1.0 7.3 5.3 3.6 12.4 .43 3.12 1.80 1.01 2.22
HLTs . . . . . . . . . . . . . . . . 9.0 21.8 23.1 31.5 52.0 4.92 7.68 6.92 5.46 4.72
Agricultural . . . . . . . . . . . . .6 1.2 1.2 1.6 1.7 .49 .92 .87 .94 .88
--------------------------------------------------------------------------------------
Total commercial . . . . . . . . . 117.6 165.6 208.2 296.5 241.2 1.17 1.87 2.33 3.01 2.00
CONSUMER:
Residential mortgage . . . . . . . . 11.9 13.0 13.9 12.1 7.6 .34 .40 .50 .46 .22
Credit card. . . . . . . . . . . . . 22.0 38.9 39.7 31.0 23.0 1.25 2.18 2.32 2.52 2.02
Other. . . . . . . . . . . . . . . . 16.8 27.8 15.0 24.1 15.2 .49 .88 .50 .77 .51
--------------------------------------------------------------------------------------
Total consumer . . . . . . . . . . 50.7 79.7 68.6 67.2 45.8 .58 .97 .92 .96 .61
--------------------------------------------------------------------------------------
Total allocated. . . . . . . . . . . 168.3 245.3 276.8 363.7 287.0 .90 1.44 1.69 2.16 1.47
Unallocated portion. . . . . . . . . 254.9 202.7 150.1 90.3 193.0 1.36 1.18 .92 .54 .99
--------------------------------------------------------------------------------------
Total allowance. . . . . . . . . . $423.2 $448.0 $426.9 $454.0 $480.0 2.25% 2.62% 2.61% 2.70% 2.46%
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
31
ANALYSIS OF NET LOAN CHARGE-OFFS --> As shown in Table 11 on page 30, net
loan charge-offs decreased $53.1 million to $150.0 million from the $203.1
million reported in 1992 primarily due to decreases in commercial, HLT, and
consumer net charge-offs. Net charge-offs were $242.3 million in 1991. Net
charge-offs as a percentage of average loans outstanding by industry are
shown in Table 13 below.
The 1993 net charge-offs reflect gross charge-offs of $225.0 million
offset by $75.0 million of recoveries of previously charged-off loans.
TABLE 13 --> NET CHARGE-OFFS AS A PERCENTAGE OF AVERAGE LOANS OUTSTANDING
BY INDUSTRY
1993 1992 1991 1990 1989
--------------------------------------------------------------------------
COMMERCIAL:
Commercial. . . . . . . . . .29% .84% 1.11% .98% 2.33%
Financial institutions. . . (.03) - .28 .41 5.02
Real Estate:
Commercial mortgage . . . 2.99 2.64 4.34 4.84 3.74
Construction. . . . . . . (.43) 1.63 1.55 5.87 3.81
Agricultural. . . . . . . . (.31) (.11) .51 (.06) (1.24)
Lease financing . . . . . . 2.05 (.15) .36 .56 .12
---- ---- ---- ---- -----
Total commercial. . . . . .68 1.03 1.51 1.60 2.47
CONSUMER:
Residential mortgage. . . . .01 .11 .13 .13 .18
Credit card . . . . . . . . 3.57 4.53 4.17 3.61 3.11
Other . . . . . . . . . . . .74 1.11 1.26 1.01 .74
---- ---- ---- ---- -----
Total consumer. . . . . . 1.02 1.51 1.44 .96 .74
---- ---- ---- ---- -----
Total . . . . . . . . . . .84% 1.25% 1.48% 1.34% 1.84%
---- ---- ---- ---- -----
---- ---- ---- ---- -----
ANALYSIS OF NONPERFORMING ASSETS --> Nonperforming assets include all
nonaccrual loans, restructured loans, other real estate and other
nonperforming assets owned by the Company. At December 31, 1993,
nonperforming assets totaled $226.0 million, a decrease of $186.1 million,
or 45.2 percent, from year-end 1992. The most significant reduction
occurred in other real estate, which declined $90.8 million, or 57.4
percent, primarily due to sales of properties. Commercial nonperforming
loans declined $42.4 million, or 54.7 percent, during the year. The
decrease in HLT nonperforming loans was related to one credit totaling
$37.5 million which was repaid in 1993. Residential mortgage nonperforming
loans increased to $44.8 million at December 31, 1993, from $20.5 million
at December 31, 1992, due to the purchase of $24.0 million of delinquent
residential mortgages in connection with a sale of mortgage loan servicing
rights. These loans are supported by government-sponsored mortgage
insurance, and the Company does not anticipate any significant losses
related to these loans. At December 31, 1992, nonperforming assets were
$412.1 million, down $137.6 million, or 25.0 percent, from year-end 1991.
The decrease during 1992 was due to sales of properties and merger-related
and other market valuation write-downs, net of $27.4 million added with the
BSI acquisition.
32
TABLE 14 --> NONPERFORMING ASSETS
At December 31
-------------------------------------------
(Dollars in Millions) 1993 1992 1991 1990 1989
--------------------------------------------------------------------------------------------
Nonaccrual loans. . . . . . . . . . . . . . . . $157.6 $246.7 $284.8 $412.1 $388.4
Restructured loans. . . . . . . . . . . . . . . - 3.5 16.7 25.7 53.9
-------------------------------------------
Nonperforming loans . . . . . . . . . . . . . 157.6 250.2 301.5 437.8 442.3
Other real estate . . . . . . . . . . . . . . . 67.4 158.2 229.9 207.1 168.0
Other nonperforming assets. . . . . . . . . . . 1.0 3.7 18.3 20.3 38.8
-------------------------------------------
Nonperforming assets. . . . . . . . . . . . . $226.0 $412.1 $549.7 $665.2 $649.1
-------------------------------------------
-------------------------------------------
Accruing loans 90 days or more past due . . . . $ 31.2 $ 30.2 $ 43.4 $ 33.0 $ 47.4
Nonperforming loans to total loans. . . . . . . .84% 1.47% 1.84% 2.60% 2.26%
Nonperforming assets to total
loans plus other real estate. . . . . . . . . 1.20 2.39 3.31 3.90 3.29
Net interest lost on nonperforming loans. . . . $ 10.2 $ 13.8 $ 22.3 $ 31.1 $ 26.5
-------------------------------------------
The ratio of nonperforming assets to loans plus other real estate
improved to 1.20 percent at December 31, 1993, compared with 2.39 percent
at year-end 1992 and 3.31 percent at year-end 1991.
Interest payments are currently being received on approximately 40
percent of the Company's nonperforming assets. The payments are typically
applied against principal and not recorded as income.
Accruing loans 90 days or more past due at December 31, 1993, totaled
$31.2 million, compared with $30.2 million at December 31, 1992, and $43.4
million at December 31, 1991.
TABLE 15 --> NONPERFORMING ASSETS BY INDUSTRY
At December 31 1993 COMPARED WITH 1992
----------------------------------------------
(Dollars in Millions) 1993 1992 Amount Percent
----------------------------------------------------------------------------------
COMMERCIAL:
Commercial $ 35.1 $ 77.5 $ (42.4) (54.7)%
Financial institutions .9 3.3 (2.4) (72.7)
Real estate:
Commercial mortgage 36.9 63.5 (26.6) (41.9)
Construction 2.2 4.3 (2.1) (48.8)
HLTs 20.1 64.4 (44.3) (68.8)
Agricultural .4 1.1 (.7) (63.6)
Lease financing 6.7 2.3 4.4 191.3
---------------- -------
Total commercial 102.3 216.4 (114.1) (52.7)
CONSUMER:
Residential mortgage 44.8 20.5 24.3 118.5
Credit card 10.3 9.5 .8 8.4
Other .2 3.8 (3.6) (94.7)
---------------- -------
Total consumer 55.3 33.8 21.5 63.6
---------------- -------
Total nonperforming loans 157.6 250.2 (92.6) (37.0)
OTHER REAL ESTATE 67.4 158.2 (90.8) (57.4)
OTHER NONPERFORMING ASSETS 1.0 3.7 (2.7) (73.0)
---------------- -------
Total nonperforming assets $226.0 $412.1 $(186.1) (45.2)%
---------------- ------- -----
---------------- ------- -----
INTEREST RATE RISK MANAGEMENT --> The Company's principle objective for
interest rate risk management is to control exposure of net interest income
to risks associated with interest rate movements. Interest rate risk is
measured and reported to the Company's Asset and Liability Management
Committee ("ALCO") through the use of traditional gap analysis, which
measures the difference between assets and liabilities that reprice in a
given time period, and simulation modeling, which produces projections of
net interest income under various interest rate scenarios and balance sheet
strategies.
33
TABLE 16 --> INTEREST RATE SENSITIVITY GAP ANALYSIS
REPRICING MATURITIES
-------------------------------------------------------------------------
Less Than 3-6 6-12 1-5 More Than Non-Rate
At December 31, 1993 (In Millions) 3 Months Months Months Years 5 Years Sensitive Total
- -------------------------------------------------------------------------------------------------------------------------
Assets:
Loans. . . . . . . . . . . . . . . . . . . . . $10,619 $ 892 $2,055 $3,652 $ 807 $ 754 $18,779
Available-for-sale securities. . . . . . . . . 626 183 822 971 662 55 3,319
Other earning assets . . . . . . . . . . . . . 1,393 - - - - - 1,393
Nonearning assets. . . . . . . . . . . . . . . - - 100 - 47 2,747 2,894
-------------------------------------------------------------------------
Total assets . . . . . . . . . . . . . . . . $12,638 $1,075 $2,977 $4,623 $1,516 $ 3,556 $26,385
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Equity:
Deposits . . . . . . . . . . . . . . . . . . . $ 8,145 $1,002 $1,955 $5,130 $ 25 $ 4,774 $21,031
Other purchased funds. . . . . . . . . . . . . 1,291 3 2 7 31 - 1,334
Long-term debt . . . . . . . . . . . . . . . . 189 6 9 301 510 - 1,015
Other liabilities. . . . . . . . . . . . . . . 9 - - - - 751 760
Equity . . . . . . . . . . . . . . . . . . . . - - - - 84 2,161 2,245
-------------------------------------------------------------------------
Total liabilities and equity . . . . . . . . $ 9,634 $1,011 $1,966 $5,438 $ 650 $ 7,686 $26,385
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Effect of off-balance sheet hedging instruments:
Receiving fixed. . . . . . . . . . . . . . . . $ 219 $ 210 $ 195 $1,662 $ 525 $ - $ 2,811
Paying floating. . . . . . . . . . . . . . . . (2,771) (40) - - - - (2,811)
-------------------------------------------------------------------------
Total effect of off-balance sheet
hedging instruments. . . . . . . . . . . . $(2,552) $ 170 $ 195 $1,662 $ 525 $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Repricing gap. . . . . . . . . . . . . . . . . . $ 452 $ 234 $1,206 $ 847 $1,391 $(4,130) $ -
Cumulative repricing gap . . . . . . . . . . . . 452 686 1,892 2,739 4,130 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
<FN>
THIS TABLE ESTIMATES THE REPRICING MATURITIES OF THE COMPANY'S ASSETS,
LIABILITIES AND HEDGING INSTRUMENTS BASED UPON THE COMPANY'S ASSESSMENT OF THE
REPRICING CHARACTERISTICS OF CONTRACTUAL AND NON-CONTRACTUAL INSTRUMENTS.
NON-CONTRACTUAL DEPOSIT LIABILITIES ARE ALLOCATED AMONG THE VARIOUS MATURITY
CATEGORIES AS FOLLOWS: FIFTY PERCENT OF REGULAR SAVINGS, INTEREST-BEARING
CHECKING, AND MONEY MARKET CHECKING AND SEVENTY-TWO PERCENT OF MONEY MARKET
SAVINGS ARE REFLECTED IN THE LESS THAN 3 MONTHS CATEGORY, WITH THE REMAINING
PORTIONS PLACED IN THE 1-5 YEARS CATEGORY. TWENTY-FOUR PERCENT OF TOTAL
NONINTEREST BEARING DEPOSITS ARE REFLECTED IN THE LESS THAN 3 MONTHS CATEGORY,
WITH THE REMAINDER PLACED IN THE NON-RATE SENSITIVE CATEGORY.
Table 16 above shows the Company's interest rate repricing gap position at
several repricing maturities. As of December 31, 1993, the Company had a
cumulative positive repricing gap position at one year of $1.9 billion,
indicating that more assets than liabilities reprice within that period.
This analysis is useful as a point-in-time measurement of interest rate
risk. However, the gap analysis is unable to capture prepayment risk, the
changing relationships between asset rates and liability rates of similar
maturity (basis risk), option risk represented by interest rate caps and
floors, and timing lags in adjusting certain assets and liabilities that
have varying sensitivities to market interest rates. As a result,
management places a greater reliance on simulation modeling to measure and
manage interest rate risk.
It is the Company's policy to maintain a low interest rate risk
position by limiting the amount of forecasted net interest income at risk
under a steady 200 basis point fluctuation in interest rates over a
12-month period. Forecasted results are sensitive to many assumptions,
including estimates of the timing of changes in rates which are determined
by reference to market indices, such as prime or LIBOR, relative to each
other and relative to rates which are determined by the Company subject to
competitive factors. The Company assumes that the timing of these changes
in rates will follow historic patterns, adjusted as necessary for current
competitive factors and market conditions. The Company's current business
mix results in more assets than liabilities repricing in a one year time
frame. The Company invests in fixed rate assets or will receive fixed rates
on interest rate swaps as a hedge to maintain acceptable interest rate risk
levels.
34
Interest rate swap agreements involve the exchange of fixed and
floating rate interest payments without the exchange of the underlying
notional amount on which the interest payments are calculated. The Company
has entered into interest rate swap agreements that hedge specific assets
and liabilities to manage the impact of fluctuating interest rates on
earnings.
As of December 31, 1993, the Company receives payments on $2.8 billion
notional amount of interest rate swap agreements, based on fixed interest
rates, and makes payments based on variable interest rates. These swaps
have an average fixed rate of 6.98 percent and an average variable rate,
which is tied to various LIBOR rates, of 3.32 percent. The maturity of
these agreements ranges from one month to 11 years with an average
remaining maturity of 3.5 years.
Swaps contributed to the Company's net interest margin by reducing
interest expense as interest income on floating rate assets declined. For
the years ended December 31, 1993, 1992 and 1991, swaps decreased pre-tax
interest expense by $88.8 million, $80.6 million, and $42.0 million,
respectively.
TABLE 17 --> INTEREST RATE SWAP HEDGING PORTFOLIO NOTIONAL BALANCES AND
YIELDS BY MATURITY DATE
At December 31, 1993 (Dollars in Millions)
------------------------------------------------------------------------
Weighted
Average
Receive Fixed Swaps Notional Interest Rate
Maturity Date Amount Received
------------------------------------------------------------------------
1994. . . . . . . . . . . . . . . . . . . . $ 624 6.37%
1995. . . . . . . . . . . . . . . . . . . . 677 7.04
1996. . . . . . . . . . . . . . . . . . . . 629 7.95
1997. . . . . . . . . . . . . . . . . . . . 150 6.52
1998. . . . . . . . . . . . . . . . . . . . 206 7.12
After 1998. . . . . . . . . . . . . . . . . 525 6.56
--------
Total . . . . . . . . . . . . . . . . . . . $2,811 6.98
-------- ------
--------
<FN>
AT DECEMBER 31, 1993, THE COMPANY DID NOT HAVE ANY SWAPS WHICH PAID FIXED
RATE INTEREST IN ITS PORTFOLIO.
Interest rate caps and floors are similarly used by the Company to
minimize the impact of fluctuating interest rates on earnings. By
purchasing floors, the Company will be paid by its interest rate floor
counterparties the difference between a certain short-term rate and the
strike level of the agreement should the short-term rate fall below the
strike level. The total notional amount of floor agreements purchased as of
December 31, 1993, was $950 million with an average strike level of 3-month
LIBOR at 3.5 percent and an average remaining maturity of 4.0 years. Floors
increased interest income by $.6 million for the year ended December 31,
1993. Further information on interest rate swaps and options can be found
in Note M on page 60.
Another objective of the interest rate risk measurement and management
process is to quantify the sensitivity of the market value of the Company's
balance sheet components and off-balance sheet commitments to changes in
interest rates.
In December 1991, the Financial Accounting Standards Board issued
Statement No. 107, "Disclosures about Fair Value of Financial Instruments."
This Statement requires the disclosure of the fair value of all financial
instruments for which it is practicable to estimate that value. Financial
instruments are generally defined as cash, equity instruments or
investments and contractual obligations to pay or receive cash or other
financial instruments. In defining fair value, the Statement indicates
quoted market prices are the preferred means of estimating the value of a
specific instrument but in the cases where market quotes are not available,
fair values should be determined using various valuation techniques such as
discounted cash flow calculations or by using pricing models or services.
35
Due to the nature of its business and the financing needs of its customers,
the Company is involved with a large number of financial instruments, the
majority of which are not actively traded. Accordingly, the Company has
used various valuation techniques to estimate the fair value of its
financial instruments. For further information on fair values of financial
instruments refer to Note N on page 63.
LIQUIDITY MANAGEMENT --> The objective of liquidity management is to ensure
the continuous availability of funds to meet the demands of depositors,
investors and borrowers. ALCO is responsible for managing these needs while
achieving the Company's financial objectives. ALCO meets regularly to
review funding capacity, current and forecasted loan demand and investment
opportunities. With this information, ALCO supervises the funding needs and
excess funding positions, as well as the maintenance of contingent funding
sources, to achieve a balance sheet structure that provides sufficient
liquidity.
The Company relies on four major sources of funding: regional
deposits, intermediate- and long-term debt, capital funds and, to a much
lesser extent, money market borrowings.
As a result of the Company's strategic focus on traditional retail and
commercial banking services, the Company has reduced its reliance on
higher-cost negotiated funding and has continued to pursue more stable
retail funding opportunities. Negotiated funding, which includes term
certificates of deposit, foreign branch time deposits, national federal
funds purchased and medium-term notes, totaled $.7 billion at year-end
1993, down from $.8 billion at year-end 1992 and $1.1 billion at year-end
1991. Since 1991 funding from the Company's operating region has
consistently represented over 90 percent of the Company's total funding.
Holding company assets totaled $3.1 billion at December 31, 1993,
compared with $3.2 billion at December 31, 1992, and $2.6 billion at
December 31, 1991. The increase in holding company assets during 1992
relates primarily to the acquisitions which were made during the year.
The funding for the holding company consists primarily of long-term
debt and equity, while funding for the Company's bank subsidiaries consists
primarily of customer deposits. During 1993, holding company long-term
debt, including medium-term notes, decreased slightly to $745 million from
$749 million at year-end 1992. The Company issued $100 million in
subordinated debt in the form of 10-year noncallable notes. The notes were
priced at 6.625 percent to yield 75 basis points over the 10-year Treasury
note. First Bank National Association (FBNA), the Company's lead bank,
completed two $100 million subordinated debt issuances in 1993. The first
was in the form of 12-year subordinated notes which carry a rate of 6.25
percent until the call date, August 15, 2000, and thereafter, have a rate
of 7.30 percent, if not called. The second issuance was in the form of
10-year noncallable notes, priced at 6.00 percent. The Company also issued
$125 million in subordinated debt in 1992 in the form of 12-year
noncallable notes which were priced at 8.0 percent to yield 85 basis points
over the 10-year Treasury note. It is the Company's operating practice to
maintain liquid assets at the holding company sufficient to fund its
operating cash needs including debt repayment.
Long-term debt maturing in 1994 is approximately $146 million. These
debt obligations will be met through medium-term note or subordinated debt
issuance, as well as with the approximately $140 million of holding company
cash and cash equivalents on hand at December 31, 1993.
During 1993, the Company redeemed at par all of the $93 million of
outstanding floating rate subordinated capital notes due in 1997.
The sustained improvement in the Company's credit quality, liquidity,
capital, and earnings has been recognized by several rating agencies which
have upgraded the debt of First Bank System during the past several months.
In January 1994, Moody's Investors Service raised the Company's senior debt
rating to "A2" from "A3." Other Moody's ratings were raised as well. In
August 1993, Standard & Poors upgraded the Company's senior debt to "A"
from "A-". At December 31, 1993, Thomson BankWatch rated the Company's
senior debt "A+".
36
BALANCE SHEET ANALYSIS
Average loans totaled $17.8 billion in 1993, up $1.5 billion, or 9.2
percent, from the prior year. The increases occurred primarily in the
financial institutions and consumer loan portfolios. The increase in the
financial institutions portfolio was due primarily to a $700 million low
margin extension of credit which is fully secured by short-term U.S.
Treasury securities, and which is expected to be outstanding through the
third quarter of 1994. The increase in consumer loans was primarily due to
an increase in residential mortgages held for sale and home equity loans
and the BSI acquisition, offset partially by declines in residential
mortgages and auto loans. For a discussion of credit quality and the
composition of the loan portfolio, see the Credit Management section
beginning on page 25.
Average securities increased to $4.0 billion in 1993 from $3.0 billion
in 1992 as a result of the BSI acquisition. An increase in average U.S.
agencies and other securities was partially offset by a decrease in average
U.S. Treasury securities.
The Company adopted the provisions of SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities," as of December 31,
1993. Under this Statement, securities are classified as held-to-maturity
if the Company has the intent and ability to hold the securities to
maturity. Securities that the Company may sell as part of its
asset/liability strategy or which may be sold in response to changes in
interest rates, resultant prepayment risk and other factors are classified
as available-for-sale. As a result of adopting this Statement, the entire
$3.3 billion investment portfolio has been classified as available for sale
with $34.0 million, net of tax, being recorded as an unrealized gain in
shareholders' equity at December 31, 1993. Investment securities totaling
$3.9 billion were held as long-term investments and $284 million were held
for sale at December 31, 1992.
During 1993, the Company sold $223 million in investment securities
which had been designated as held for sale at year-end 1992. Also during
1993, $112 million of securities which had been designated as held for sale
at the time of the CNB acquisition were sold. During 1992, the Company sold
approximately $325 million of U.S. government agency mortgage-backed
securities and $51 million of fixed rate, senior-support, pass-through
certificates in response to increased prepayments experienced during the
year. Net gains associated with these sales totaled $1.8 million. During
1991, WCIC sold or designated as held for sale, all of its portfolio of
Federal National Mortgage Association and Federal Home Loan Mortgage
Corporation fixed-rate mortgage-backed securities. Gains on the sale of
this portfolio totaled $6.1 million in 1991. Also in 1991, CNB sold $43.2
million of state and political securities and $15.2 million of U.S.
Treasury securities for a net gain of $1.9 million.
Trading account assets are purchased for resale to customers. Trading
account assets consist primarily of securities of the U.S. Treasury and its
agencies, state and political subdivisions, and short-term obligations of
banks. Other short-term earning assets consist of federal funds sold,
reverse repurchase agreements and deposits with banks. Trading account and
other short-term earning assets averaged $1.0 billion in 1993 compared with
$1.8 billion in 1992.
TABLE 18 --> AVAILABLE-FOR-SALE SECURITIES PORTFOLIO AVERAGE MATURITY
At December 31, 1993 Average Maturity
-----------------------------------------------------------------
U.S. Treasury . . . . . . . . . . . . . . . 2 years, 7 months
Other U.S. Agencies . . . . . . . . . . . . 2 years, 5 months
State and Political . . . . . . . . . . . . 15 years, 3 months
Other*. . . . . . . . . . . . . . . . . . . 4 years, 10 months
Total . . . . . . . . . . . . . . . . . . 4 years
--------------------
--------------------
<FN>
*EXCLUDES EQUITY SECURITIES WHICH HAVE NO STATED MATURITY.
THE AVERAGE EFFECTIVE LIFE OF THE HOLDINGS IS EXPECTED TO BE LESS THAN THE
AVERAGE CONTRACTUAL MATURITIES SHOWN IN THE TABLE BECAUSE BORROWERS MAY
HAVE THE RIGHT TO CALL OR PREPAY OBLIGATIONS WITH OR WITHOUT CALL OR
PREPAYMENT PENALTIES. THE TABLE ABOVE DOES NOT REFLECT THE AVERAGE
CONTRACTUAL MATURITY OF MORTGAGE-BACKED SECURITIES.
37
TABLE 19 --> AVAILABLE-FOR-SALE SECURITIES PORTFOLIO AMORTIZED COST, FAIR VALUE
AND YIELD BY MATURITY DATE
MATURING: WITHIN 1 YEAR 1-5 YEARS 5-10 YEARS
- ------------------------------------------------------------------------------------------------------------------
Amor- Amor- Amor-
At December 31, 1993 tized Fair tized Fair tized Fair
(Dollars in Millions) Cost Value Yield Cost Value Yield Cost Value Yield
- ------------------------------------------------------------------------------------------------------------------
U.S. Treasury $819.9 $827.4 5.22% $498.9 $513.7 5.89% $208.3 $199.7 5.22%
Mortgage-backed
securities* - - - - - - - - -
Other U.S. Agencies 7.6 7.8 8.07 42.9 43.5 5.53 - - -
State and Political*** 3.9 4.0 10.13 17.6 17.9 10.26 41.1 44.0 8.92
Other 5.2 5.2 3.98 95.6 96.8 4.39 29.7 30.4 5.49
---------------------------------------------------------------------------------------
$836.6 $844.4 5.26% $655.0 $671.9 5.76% $279.1 $274.1 5.79%
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
MORTGAGE-BACKED
MATURING: OVER 10 YEARS SECURITIES TOTAL
- ------------------------------------------------------------------------------------------------------------------
Amor- Amor- Amor-
tized Fair tized Fair tized Fair
Cost Value Yield Cost Value Yield Cost Value Yield
- ------------------------------------------------------------------------------------------------------------------
U.S. Treasury $ - $ - -% $ - $ - -% $1,527.1 $1,540.8 5.44%
Mortgage-backed
securities* - - - 1,286.1 1,299.9 6.05 1,286.1 1,299.9 6.05
Other U.S. Agencies .4 .4 10.26 - - - 50.9 51.7 5.94
State and Political*** 121.4 130.5 11.47 - - - 184.0 196.4 10.76
Other 85.7 97.9 6.94** - - - 216.2 230.3 4.86**
---------------------------------------------------------------------------------------
$207.5 $228.8 10.97%** $1,286.1 $1,299.9 6.05% $3,264.3 $3,319.1 5.97%**
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
<FN>
* ADJUSTABLE RATE MORTGAGE SECURITIES (ARMS) REPRESENT 40% OF THE BALANCE OF
MORTGAGE-BACKED SECURITIES.
** EXCLUDES EQUITY SECURITIES WHICH HAVE NO STATED YIELD.
*** YIELDS ON STATE AND POLITICAL OBLIGATIONS THAT ARE NOT SUBJECT TO FEDERAL
INCOME TAX HAVE BEEN ADJUSTED TO TAXABLE-EQUIVALENT USING A 35% TAX RATE.
Noninterest-bearing deposits averaged $6.4 billion in 1993, up $1.6
billion from the 1992 average of $4.8 billion. The increase in
noninterest-bearing deposits resulted from the higher levels of loans to
mortgage banking firms which generate higher noninterest-bearing deposits,
the BSI acquisition and generally higher levels of core deposits.
Average interest-bearing deposits include certificates of deposit,
savings certificates, money market checking, and savings products. These
deposits averaged $13.9 billion in 1993 compared with $14.0 billion in
1992.
Short-term borrowings, which include federal funds purchased,
securities sold under agreements to repurchase and other short-term
borrowings, averaged $1.3 billion in 1993, or $164 million more than in the
prior year.
Intermediate- and long-term debt averaged $913 million in 1993
essentially unchanged from $927 million in 1992. During 1993, the Company
placed three $100 million subordinated debt issuances.
Medium-term notes outstanding totaled $248 million at December 31,
1993, compared with $258 million at December 31, 1992. During 1993, the
Company issued $140 million of medium-term notes with maturities of nine
months to two years of which $50 million had maturities of less than one
year. Maturities and retirement of medium-term notes during 1993 totaled
$150 million. Federal Home Loan Bank advances of $165 million at December
31, 1991, relating to WCIC, were retired during 1992.
IMPACT OF INFLATION
The assets and liabilities of a financial institution are primarily
monetary in nature. As such, they represent obligations to pay or receive
fixed and determinable amounts of money which are not affected by future
changes in prices. During periods of inflation, monetary assets lose value
in terms of purchasing power while monetary liabilities have corresponding
purchasing power gains. Since banks generally have an excess of monetary
assets over monetary liabilities, inflation will, in theory, cause a loss
of purchasing power in the value of shareholders' equity. However, the
concept of purchasing power is not an adequate indicator of the effect of
inflation on banks because it does not take into account changes in
interest rates, which are a more important determinant of bank earnings.
Other sections of the Management's Discussion and Analysis provide the
information necessary for an understanding of the Company's ability to
react to changing interest rates.
38
TABLE 20 --> FOURTH QUARTER SUMMARY
Three Months Ended
December 31
------------------
(Dollars in Millions) 1993 1992
--------------------------------------------------------------------------------------------------
CONDENSED INCOME STATEMENT:
Net interest income (taxable-equivalent basis). . . . . . . . . . . . . . . . $293.3 $263.3
Provision for credit losses (1992 includes $13.6 merger-related charges). . . 27.0 52.9
-----------------
Net interest income after provision for credit losses . . . . . . . . . . 266.3 210.4
Investment securities gains . . . . . . . . . . . . . . . . . . . . . . . . . -- .1
Other noninterest income. . . . . . . . . . . . . . . . . . . . . . . . . . . 145.9 137.0
Merger-related charges (including $26.4 related to ORE) . . . . . . . . . . . -- 110.4
Other noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . 255.3 258.6
-----------------
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . 156.9 (21.5)
Taxable-equivalent adjustment . . . . . . . . . . . . . . . . . . . . . . . . 3.7 4.4
Income taxes (credit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57.3 (8.8)
-----------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 95.9 $(17.1)
-----------------
-----------------
Return on average assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 1.45% (.28)%
Return on average common equity . . . . . . . . . . . . . . . . . . . . . . . 18.3 (5.4)
Net interest margin (taxable-equivalent basis). . . . . . . . . . . . . . . . 5.00 4.91
Efficiency ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58.1 92.2
Efficiency ratio, excluding merger-related charges. . . . . . . . . . . . . . 58.1 64.6
PER SHARE DATA:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .81 $ (.23)
Common dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 .225
-----------------
FOURTH QUARTER SUMMARY
In the fourth quarter of 1993, the Company reported net income of $95.9
million, or $.81 per share, compared to a net loss of $17.1 million, or
$.23 per share in the fourth quarter of 1992. The fourth quarter loss in
1992 was due to the $81.8 million, or $.77 per share, of after-tax
merger-related charges associated with the WCIC and BSI acquisitions.
Excluding merger-related charges, fourth quarter net income would have been
$64.7 million, or $.54 per share.
Net interest income on a taxable-equivalent basis was $293.3 million
in the fourth quarter of 1993, an increase of $30.0 million, or 11.4
percent, from the fourth quarter of 1992. The net interest margin on a
taxable-equivalent basis was 5.00 percent compared with 4.91 percent a year
ago. Total average earning assets were $23.3 billion during the fourth
quarter of 1993, up $2.0 billion from the level of $21.3 billion in the
same period of 1992.
The provision for credit losses was $27.0 million in the fourth
quarter of 1993 compared with $52.9 million in the fourth quarter of 1992.
Included in the 1992 fourth quarter provision for credit losses was a
merger-related provision of $13.6 million related to the WCIC acquisition.
See the Provision for Credit Losses section on page 21 and the Credit
Management section on page 25 for further information regarding the
provision, net charge-offs and the allowance for credit losses.
Noninterest income was $145.9 million in the fourth quarter of 1993,
an increase of $8.8 million, or 6.4 percent, from the same quarter a year
ago. The increase reflects higher trust fees, service charges, and credit
card fees.
Fourth quarter noninterest expense in 1993 was $255.3 million, a
decrease of $113.7 million, from the fourth quarter of 1992. Included in
noninterest expense in the fourth quarter of 1992 were merger-related
charges of $110.4 million associated with the acquisition of WCIC and BSI.
These merger-related charges were comprised of a $26.4 million loss on
other real estate and $84.0 million in merger, integration and
restructuring expenses. Compared with noninterest expense for the fourth
quarter of 1992, including the operations of BSI on a pro forma basis and
excluding merger-related charges, noninterest expense for the quarter
declined by $28.3 million, or 10.0 percent. Excluding merger-related
charges, the efficiency ratio improved to 58.1 percent from 64.6 percent in
the fourth quarter of 1992.
39
CONSOLIDATED BALANCE SHEET
At December 31 (In Millions, Except Shares) 1993 1992
ASSETS
Cash and due from banks. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,682 $ 1,916
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,032 1,498
Securities purchased under agreements to resell. . . . . . . . . . . . . . 306 212
Interest-bearing deposits with banks . . . . . . . . . . . . . . . . . . . - 327
Trading account securities . . . . . . . . . . . . . . . . . . . . . . . . 55 94
Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . 3,319 284
Investment securities (market value: 1992 - $3,955) . . . . . . . . . . . - 3,912
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,779 17,076
Less allowance for credit losses. . . . . . . . . . . . . . . . . . . . . 423 448
-------------------------
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,356 16,628
Bank premises and equipment. . . . . . . . . . . . . . . . . . . . . . . . 382 414
Interest receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 148
Customers liability on acceptances . . . . . . . . . . . . . . . . . . . . 186 183
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 938 1,009
--------------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,385 $26,625
--------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,489 $ 6,011
Interest-bearing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,542 15,177
--------------------------
Total deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,031 21,188
Federal funds purchased. . . . . . . . . . . . . . . . . . . . . . . . . . 553 674
Securities sold under agreements to repurchase . . . . . . . . . . . . . . 369 448
Other short-term funds borrowed. . . . . . . . . . . . . . . . . . . . . . 412 328
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,015 822
Acceptances outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . 186 183
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 574 664
--------------------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,140 24,307
Shareholders' equity:
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266 379
Common stock, par value $1.25 a share-authorized 150,000,000 shares;
issued: 1993 - 114,793,547 shares; 1992 - 113,450,425 shares . . . . . . 144 141
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 676 658
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,328 1,140
Less cost of common stock in treasury: 1993 - 5,391,883 shares . . . . . (169) -
--------------------------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . 2,245 2,318
--------------------------
Total liabilities and shareholders' equity . . . . . . . . . . . . . . $26,385 $26,625
--------------------------
--------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
40
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31 (In Millions, Except Per-Share Data) 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,398.6 $1,418.8 $1,624.3
Investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218.2 186.4 221.1
Exempt from federal income taxes. . . . . . . . . . . . . . . . . . . . . . 14.6 12.0 19.1
Trading account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 6.4 11.8
Federal funds sold and resale agreements . . . . . . . . . . . . . . . . . . 23.7 46.2 83.0
Deposits with banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 11.5 2.7
------------------------------------------------
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . 1,661.8 1,681.3 1,962.0
INTEREST EXPENSE
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423.7 568.7 872.8
Federal funds purchased and repurchase agreements. . . . . . . . . . . . . . 31.8 37.1 57.9
Other short-term funds borrowed. . . . . . . . . . . . . . . . . . . . . . . 19.0 14.3 24.2
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54.4 66.1 100.3
------------------------------------------------
Total interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . 528.9 686.2 1,055.2
------------------------------------------------
Net interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,132.9 995.1 906.8
Provision for credit losses. . . . . . . . . . . . . . . . . . . . . . . . . 125.2 183.4 202.2
------------------------------------------------
Net interest income after provision for credit losses. . . . . . . . . . . . 1,007.7 811.7 704.6
NONINTEREST INCOME
Trust fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146.1 127.8 115.5
Credit card fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137.1 116.9 94.4
Service charges on deposit accounts. . . . . . . . . . . . . . . . . . . . . 115.3 108.4 97.2
Insurance commissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.9 27.3 27.2
Trading account profits and commissions. . . . . . . . . . . . . . . . . . . 10.1 10.5 10.2
Investment securities gains. . . . . . . . . . . . . . . . . . . . . . . . . .3 1.9 8.9
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139.8 142.9 144.3
------------------------------------------------
Total noninterest income. . . . . . . . . . . . . . . . . . . . . . . . . 569.6 535.7 497.7
NONINTEREST EXPENSE
Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389.1 388.7 371.7
Employee benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86.3 85.5 79.3
Net occupancy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93.4 87.9 84.0
Furniture and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . 72.7 67.2 64.8
FDIC insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46.4 42.2 38.5
Professional services. . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.7 38.7 37.8
Amortization of goodwill and other intangible assets . . . . . . . . . . . . 30.6 25.2 21.6
Other personnel costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.5 20.2 17.8
Data processing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.0 28.3 28.3
Other real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 41.2 29.9
Merger, integration and restructuring. . . . . . . . . . . . . . . . . . . . 72.2 84.0 -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216.4 205.2 195.6
------------------------------------------------
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . 1,100.5 1,114.3 969.3
------------------------------------------------
Income before income taxes and cumulative effect of
changes in accounting principles . . . . . . . . . . . . . . . . . . . . . 476.8 233.1 233.0
Applicable income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 178.8 78.6 25.9
------------------------------------------------
Income before cumulative effect of changes in accounting principles. . . . . 298.0 154.5 207.1
Cumulative effect of changes in accounting principles. . . . . . . . . . . . - 157.3 -
------------------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 298.0 $ 311.8 $ 207.1
------------------------------------------------
------------------------------------------------
Net income applicable to common equity . . . . . . . . . . . . . . . . . . . $ 270.2 $ 281.6 $ 183.4
------------------------------------------------
------------------------------------------------
EARNINGS PER COMMON SHARE
Average common and common equivalent shares. . . . . . . . . . . . . . . . . 113,075,429 105,361,022 102,533,284
Income before cumulative effect of changes in accounting principles . . . . $ 2.39 $ 1.18 $ 1.79
Cumulative effect of changes in accounting principles . . . . . . . . . . . - 1.49 -
------------------------------------------------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.39 $ 2.67 $ 1.79
------------------------------------------------
------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
41
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common
Shares Preferred Common Capital Retained Treasury
(In Millions, Except Shares) Outstanding* Stock Stock Surplus Earnings Stock** Total
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1990. . . . . . . . . . . . 101,079,861 $ 264.0 $126.7 $403.1 $ 810.4 $(4.3) $1,599.9
Net income . . . . . . . . . . . . . . . . . . . 207.1 207.1
Dividends declared:
Preferred . . . . . . . . . . . . . . . . . . . (23.7) (23.7)
Common. . . . . . . . . . . . . . . . . . . . . (65.6) (65.6)
Issuance of preferred stock (2,290,000 shares) . 114.5 (2.8) 111.7
Issuance of common stock:
Dividend reinvestment . . . . . . . . . . . . . 610,673 .7 10.4 11.1
Stock option and stock purchase plans . . . . . 846,333 1.1 6.9 8.0
Market appreciation in equity securities portfolio 3.6 3.6
-----------------------------------------------------------------------------
BALANCE DECEMBER 31, 1991. . . . . . . . . . . . 102,536,867 378.5 128.5 417.6 931.8 (4.3) 1,852.1
Net income . . . . . . . . . . . . . . . . . . . 311.8 311.8
Dividends declared:
Preferred . . . . . . . . . . . . . . . . . . . (30.2) (30.2)
Common. . . . . . . . . . . . . . . . . . . . . (73.1) (73.1)
Retirement of stock acquired in mergers. . . . . (290,129) (.4) (5.9) (6.3)
Issuance of common stock:
Acquisition of Bank Shares Incorporated . . . . 8,163,265 10.2 200.3 .7 211.2
Acquisition of Siouxland Bank Holding Company . 994,117 1.2 20.6 21.8
Dividend reinvestment . . . . . . . . . . . . . 508,397 .5 7.8 2.0 10.3
Stock option and stock purchase plans . . . . . 1,537,908 1.8 17.3 1.6 20.7
-----------------------------------------------------------------------------
BALANCE DECEMBER 31, 1992. . . . . . . . . . . . 113,450,425 378.5 141.8 657.7 1,140.3 -- 2,318.3
Net income . . . . . . . . . . . . . . . . . . . 298.0 298.0
Dividends declared:
Preferred . . . . . . . . . . . . . . . . . . . (27.8) (27.8)
Common. . . . . . . . . . . . . . . . . . . . . (109.7) (109.7)
Repurchase of common stock for treasury. . . . . (6,181,290) (187.1) (187.1)
Issuance of common stock:
Dividend reinvestment . . . . . . . . . . . . . 227,287 .3 6.4 6.7
Stock option and stock purchase plans . . . . . 1,905,242 1.7 18.4 (3.6) 11.3 27.8
Redemption of preferred stock. . . . . . . . . . (112.6) (2.6) (115.2)
Unrealized gain on available-for-sale securities 34.0 34.0
-----------------------------------------------------------------------------
BALANCE DECEMBER 31, 1993. . . . . . . . . . . . 109,401,664 $ 265.9 $143.5 $676.4 $1,328.6 $(169.4) $2,245.0
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
<FN>
* DEFINED AS TOTAL COMMON SHARES LESS COMMON STOCK HELD IN TREASURY.
**ENDING TREASURY SHARES WERE 5,391,883 AT DECEMBER 31, 1993, AND 253,920 AT
DECEMBER 31, 1991, AND DECEMBER 31, 1990.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
42
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31 (In Millions) 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 298.0 $ 311.8 $ 207.1
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125.2 183.4 202.2
Provision for merger, integration and restructuring . . . . . . . . . . . . . . . . . . . . . . 72.2 84.0 -
Provision for deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64.0 22.2 5.1
Depreciation and amortization of bank premises and equipment. . . . . . . . . . . . . . . . . . 58.4 48.6 42.6
Amortization and write-downs of loan servicing related intangibles. . . . . . . . . . . . . . . 55.5 14.3 5.5
Amortization of goodwill and other intangible assets. . . . . . . . . . . . . . . . . . . . . . 30.6 25.2 21.6
Write-downs of other real estate owned. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.1 47.5 32.2
Cumulative effect of accounting changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (157.3) -
Changes in operating assets and liabilities, excluding the effects of purchase acquisitions:
Decrease (increase) in trading account securities. . . . . . . . . . . . . . . . . . . . . . . 39.3 57.2 (15.5)
Increase in loans held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (379.8) (191.4) (132.3)
Decrease in securities held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429.9 183.4 42.8
(Increase) decrease in accrued receivables . . . . . . . . . . . . . . . . . . . . . . . . . . (10.2) 23.3 (6.9)
(Decrease) increase in accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . (152.3) 1.0 (64.2)
Other - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (81.6) 15.0 (57.6)
----------------------------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . 567.3 668.2 282.6
INVESTING ACTIVITIES
Net cash provided (used) by:
Interest-bearing deposits with banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322.5 85.7 (352.2)
Loans outstanding of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,428.3) 160.8 1,104.1
Securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . (93.4) (76.7) 114.1
Investment securities transactions:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46.8 35.5 794.2
Maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,235.5 970.7 686.6
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (889.4) (1,555.5) (1,010.0)
Proceeds from sales/repayments of other real estate owned. . . . . . . . . . . . . . . . . . . . 99.5 95.8 85.5
Proceeds from sales of bank premises and equipment . . . . . . . . . . . . . . . . . . . . . . . 31.5 9.7 5.6
Purchases of bank premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . (111.6) (99.3) (53.3)
Purchases of loans, including related intangibles of $43.6 in 1991 . . . . . . . . . . . . . . . (32.6) (56.8) (690.4)
Cash and cash equivalents of acquired subsidiaries . . . . . . . . . . . . . . . . . . . . . . . - 197.1 -
Business acquisitions, net of cash received. . . . . . . . . . . . . . . . . . . . . . . . . . . (3.0) 67.4 (241.8)
Sale of unconsolidated subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.8 - -
Other - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26.3) 33.2 47.7
------------------------------
Net cash provided (used) by investing activities. . . . . . . . . . . . . . . . . . . . . . . (836.0) (132.4) 490.1
FINANCING ACTIVITIES
Net cash provided (used) by:
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (68.6) 138.8 (233.0)
Federal funds purchased and securities sold under agreements to repurchase. . . . . . . . . . . (198.9) 12.5 (367.7)
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57.0 (32.5) 32.7
Long-term debt transactions:
Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440.0 160.8 179.6
Principal payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (256.2) (294.2) (737.6)
Issuance (redemption) of preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . (115.2) - 111.7
Proceeds from dividend reinvestment, stock option, and stock purchase plans. . . . . . . . . . . 34.5 30.2 19.0
Repurchase of common stock for treasury. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (187.1) - -
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (137.5) (103.3) (89.3)
-----------------------------
Net cash used by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (432.0) (87.7) (1,084.6)
-----------------------------
Change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (700.7) 448.1 (311.9)
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . 3,414.2 2,966.1 3,278.0
------------------------------
Cash and cash equivalents at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . $2,713.5 $3,414.2 $2,966.1
------------------------------
------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
First Bank System, Inc. ("The Company") is a regional, multi-bank holding
company which provides bank and bank-related services principally to
domestic markets, through its subsidiaries.
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain
amounts in prior periods have been reclassified to conform to the current
presentation.
TRADING ACCOUNT SECURITIES - Debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are
classified as trading account securities and are reported at fair value.
Gains or losses on sales of trading account securities, adjustments to fair
values, and other noninterest income are included in trading account
profits and commissions.
AVAILABLE-FOR-SALE SECURITIES - Securities that are not trading account
securities and which may be sold before maturity in response to changes in
interest rates or prepayment risk, or due to liquidity needs or changes in
funding sources or terms, are classified as available-for-sale. These
securities are carried at fair value, with unrealized holding gains or
losses, net of tax, reported in shareholders' equity. When securities are
sold, the amortized cost of the specific securities sold is used to compute
the gain or loss on sale.
INVESTMENT SECURITIES - Included in held-to-maturity securities are those
securities which management has the positive intent and ability to hold to
maturity. These securities are stated at cost, as adjusted for accretion of
discounts or amortization of premiums, computed by the interest method. The
adjusted cost of the specific security sold is used to compute the gains or
losses on the sale.
LOANS - Loans are reported net of any unearned discount. Interest income is
accrued on loan balances outstanding. Loan and commitment fees are deferred
and recognized over the loan and/or commitment period as yield adjustments.
Loans are reviewed regularly by management and are generally placed on
nonaccrual status when the collection of interest or principal has become
90 days past due or collection is otherwise considered doubtful. When a
loan is placed on nonaccrual status, previously recorded accrued but
uncollected interest is reversed against current period interest income.
Interest payments received on nonaccrual loans are generally applied
against principal.
Certain subsidiaries engage in both direct and leveraged lease
financing. The net investment in direct financing leases consists of the
sum of all minimum lease payments and estimated residual values, less
unearned income and investment tax credit. Unearned income is earned and
included in loan interest income over the terms of the leases to produce a
constant rate of return on the net investment.
The investment in leveraged leases consists of the sum of all lease
payments (less the portion applicable to principal and interest on
nonrecourse debt) plus estimated residual values, less unearned income.
Unearned income is earned and included in loan interest income over the
positive years of the net investment.
Loans and mortgages held for sale are carried at the lower of cost or
market value as determined on an aggregate basis by type of loan.
ALLOWANCE FOR CREDIT LOSSES - Management determines the adequacy of the
allowance based on a continuous evaluation of the loan portfolio and
related off-balance sheet commitments, recent loss experience, and other
pertinent factors, including current and anticipated economic conditions.
The allowance is increased by provisions charged to operating expense and
reduced by net charge-offs.
44
MORTGAGE BANKING - Acquisition costs of purchased mortgage servicing rights
and excess mortgage servicing fee receivables are capitalized and amortized
on an accelerated basis over the estimated period of net servicing revenue.
On a quarterly basis the Company reviews the carrying value of its mortgage
servicing rights and fees based on historical prepayment experience and
expectations of future prepayment activity, and if appropriate, reduces the
carrying value to estimated realizable value, calculated on a discounted
basis.
INTEREST RATE SWAPS - The Company engages in interest rate swap
transactions to manage its interest rate risk and as a financial
intermediary. Income or expense on swaps designated as hedges of assets,
liabilities or commitments is recorded as an adjustment to interest income
or expense. If the instrument being hedged is disposed of, the swap
agreement is marked to market with any resulting gain or loss being
included with the gain or loss from the disposition. If the interest rate
swap is terminated, the gain or loss is deferred and amortized over the
remaining life of the specific asset or liability it was hedging. The
initial bid/offer spread on intermediated swaps is deferred and recognized
in trading account profits and commissions over the life of the agreements.
Intermediated swaps are marked to market and the resultant gain or loss is
recorded currently in trading account profits and commissions.
INTEREST RATE CONTRACTS - The Company uses interest rate futures, forwards,
options, caps, and floors for managing its interest rate risk, as a
financial intermediary and in its trading operations. For interest rate
contracts which meet the criteria for hedge accounting treatment, gains or
losses due to changes in the market value of the contracts are deferred
initially and amortized over the period of interest rate risk exposure as
adjustments to interest income or expense. Gains or losses related to the
termination of these financial instruments or disposal of the asset or
liability being hedged are treated in the same manner as interest rate
swaps. Gains or losses on all other interest rate contracts are included in
income as part of trading account profits and commissions.
BANK PREMISES AND EQUIPMENT - Bank premises and equipment are stated at
cost less accumulated depreciation and amortization computed primarily on
the straight line method based on estimated useful lives.
Capitalized leases, less accumulated amortization, are included in bank
premises and equipment, and the lease obligations are included in long-term
debt. Capitalized leases are amortized on the straight line method over the
lease term and the amortization is included in depreciation expense.
OTHER REAL ESTATE - Other real estate (ORE), which is included in other
assets, represents properties acquired through foreclosure, in substance
foreclosure or other proceedings. Upon classification as ORE, any excess of
the loan receivable over the fair value of the collateral is charged to the
allowance for credit losses. Property is evaluated regularly to ensure that
the recorded amount is supported by the current fair value. In addition,
annual appraisals are conducted. Subsequent to classification as ORE, the
asset is carried at the lower of cost or fair value, less estimated selling
costs. Changes in the carrying amount of the asset are either recorded in a
valuation allowance or charged directly to expense.
INTANGIBLE ASSETS - The excess of cost over net assets of businesses
acquired is included in other assets and is amortized over periods ranging
up to 25 years. At December 31, 1993, goodwill totaled $168.0 million, net
of accumulated amortization of $48.4 million. Other intangible assets, net
of accumulated amortization, include purchased mortgage servicing rights of
$52.7 million, cardholder relationships of $35.7 million, core deposits of
$41.3 million and other intangibles of $26.5 million at December 31, 1993.
These assets are amortized over their estimated useful lives ranging from
seven to ten years using straight line and accelerated methods, as
appropriate.
INCOME TAXES - Deferred taxes are recorded to reflect the tax consequences
on future years of differences between the tax bases of assets and
liabilities and the financial reporting amounts at each year end.
STATEMENT OF CASH FLOWS - For purposes of reporting cash flows, cash
equivalents are those amounts included in cash and due from banks and
federal funds sold.
45
PER SHARE CALCULATIONS - Primary earnings per share are computed by
dividing income applicable to common stock (net income less preferred stock
dividends and the pro rata effect of the assumed exercise of risk event
warrants) by the weighted average number of shares of common stock and
dilutive common stock equivalents outstanding during the period. To compute
the dilutive effect of restricted common shares issued under the 1991 Stock
Incentive Plan, the treasury stock method is applied to the unvested
portion of the shares granted and the related unamortized expense. Fully
diluted earnings per share computations assume the conversion of the Series
1991A preferred stock during the period that the stock was outstanding,
unless the effect is anti-dilutive.
NOTE B - ACCOUNTING CHANGES
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES -
Effective December 31, 1993, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") 115, "Accounting for
Certain Investments in Debt and Equity Securities." Generally, SFAS 115
requires that investments in debt securities and equity securities with
readily determinable fair values be classified into three categories which
then establishes the accounting requirements. The accounting for two of the
categories, trading securities and held-to-maturity securities, is
essentially the same as prior practice. The new category,
available-for-sale securities, is accounted for at fair value with
unrealized holding gains or losses being reported in shareholders' equity.
As a result of adopting this statement, $3.3 billion of investment
securities have been classified as available for sale with $34.0 million,
net of tax, being recorded as an unrealized gain in shareholders' equity.
ACCOUNTING FOR POSTEMPLOYMENT BENEFITS - The Company adopted the provisions
of SFAS 112, "Employers' Accounting for Postemployment Benefits," as of
December 31, 1993. This Statement requires accrual of costs associated with
postemployment benefits (principally disability-related benefits) provided
to former or inactive employees after employment but before retirement if
certain conditions are met. The effect of adopting SFAS 112 was not
material.
ACCOUNTING FOR INCOME TAXES - In 1992, the Company adopted the provisions
of SFAS 109, "Accounting for Income Taxes," which superseded SFAS 96, the
basis of the Company's accounting for income taxes prior to the change. The
Company elected not to restate prior years' financial statements. The
effect of adopting SFAS 109 as of January 1, 1992, has been reflected in
the income statement as a cumulative effect of an accounting change.
SFAS 109 requires companies to record a deferred tax asset related to
the unrecognized benefit of income tax carryforwards. SFAS 96 precluded
such accounting and required the benefits to be recorded in income as the
carryforwards were utilized. In connection with the adoption of SFAS 109,
the Company evaluated the available evidence supporting the realization of
the deferred tax assets and determined that it was more likely than not
that the assets will be realized. Accordingly, the Company recorded
deferred tax assets related to the unrecognized benefit of income tax
carryforwards. The cumulative effect of this accounting change on years
prior to 1992 was an increase of $213.9 million in the Company's deferred
tax assets and $188.9 million in net income. SFAS 109 was adopted
retroactive to the beginning of 1992, and results for the first three
quarters of that year were restated to reflect increased tax expense.
ACCOUNTING FOR POSTRETIREMENT BENEFITS - The Company adopted SFAS 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions," in
the fourth quarter of 1992. This Statement requires the accrual of costs
associated with such benefits (principally postretirement health care
benefits) during the years that the employee renders the required services.
The Company elected to recognize the entire amount of the accumulated
postretirement benefit obligation related to prior years as a one-time
charge reflected as a cumulative effect of an accounting change. At the
time of adoption on January 1, 1992, this obligation was $52.1 million,
before tax benefits of $20.5 million. Similar to SFAS 109, the first three
quarters of 1992 have been restated to reflect the adoption of SFAS 106.
46
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN - The Financial Accounting
Standards Board recently issued SFAS 114, "Accounting by Creditors for
Impairment of a Loan," which requires creditors to establish a valuation
allowance when it is probable that all the principal and interest due under
the contractual terms of a loan will not be collected. The impairment is
measured based on the present value of expected future cash flows based on
the loans' effective interest rate, observable market price or fair value
of a collateral dependent loan. This differs from the Company's current
policy in that it requires establishing a valuation allowance for
uncollectible interest in addition to the principal amounts of impaired
loans. The adoption of this Statement is required for fiscal years
beginning after December 15, 1994. The adoption of SFAS 114 is not expected
to have a material effect on the Company.
Note C - BUSINESS COMBINATIONS AND PENDING ACQUISITIONS
Effective May 28, 1993, the Company completed the acquisition of Colorado
National Bankshares, Inc. ("CNB"), formerly the largest independent
commercial bank holding company in Colorado with $3.0 billion in assets,
$2.5 billion in deposits and $271 million in common equity, resulting in
approximately 20.6 million shares of the Company's common stock being
issued for all the outstanding common stock of CNB.
Effective December 18, 1992, Western Capital Investment Corporation
("WCIC"), a $2.5 billion financial institution headquartered in Denver,
Colorado, merged with a wholly-owned subsidiary of the Company, resulting
in 5.3 million shares of the Company's common stock being issued for all
the outstanding common shares of WCIC.
Both the CNB and WCIC acquisitions were accounted for using the
pooling-of-interests method of accounting. Accordingly, the Company's
financial statements have been restated for all periods prior to the
acquisitions to include the accounts and operations of CNB and WCIC.
Operating results of the Company and CNB for the three months ended
March 31, 1993, and the years ended December 31, 1992, and 1991 prior to
restatement were:
Three Months Ended
March 31, Year Ended December 31,
----------------------------------------
(In Millions) 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------
THE COMPANY
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . $233.3 $846.3 $762.3
Cumulative effect of changes in accounting principles . . . . . . . . . - 151.9 -
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63.7 276.0 196.3
CNB
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . 39.9 148.8 144.5
Cumulative effect of changes in accounting principles . . . . . . . . . - 5.4 -
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.8 35.8 10.8
COMBINED
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . 273.2 995.1 906.8
Cumulative effect of changes in accounting principles . . . . . . . . . - 157.3 -
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77.5 311.8 207.1
On December 31, 1992, the Company acquired Bank Shares Incorporated
("BSI"), a bank holding company headquartered in Minneapolis, Minnesota, in
a stock-for-stock exchange in which the Company issued 8.2 million shares
of common stock for all outstanding shares of BSI common stock.
The acquisition of BSI was accounted for under the purchase method of
accounting, and accordingly, the purchase price of $211.2 million was
allocated to assets acquired and liabilities assumed based on their fair
market values at the date of acquisition. The excess of the purchase price
over the fair market values of net assets acquired was recorded as
goodwill. Core deposit intangibles of $34 million are being amortized over
the estimated lives of the deposits of approximately 10 years, and goodwill
of $68.7 million is being amortized over 25 years. The total assets
acquired and liabilities assumed at the time of acquisition were $2.1
billion and $1.9 billion, respectively. The results of operations of BSI
have been included in the Company's Consolidated Statement of Income only
for the year ended December 31, 1993.
47
The following pro forma operating results of the Company assume that
the BSI 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. 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.
Years Ended December 31,
-------------------------
(In Millions, Except Per-Share Amounts) 1992 1991
------------------------------------------------------------------------------------------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . $1,069.9 $975.0
Cumulative effect of changes in accounting principles . . . . . . 157.3 --
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . 293.1 214.1
Net income per share. . . . . . . . . . . . . . . . . . . . . . . 2.29 1.72
-------------------------
-------------------------
On September 29, 1993, the Company announced that it had signed a
purchase agreement to acquire Boulevard Bancorp Inc., a Chicago commercial
bank holding company with $1.6 billion in assets, $1.2 billion in deposits,
and $114 million in shareholders' equity. The value of the Company's common
stock to be issued in connection with the merger including the fair value
of Boulevard's stock options and warrants is approximately $202.3 million.
This acquisition will be accounted for under the purchase method of
accounting, and accordingly, the purchase price will be allocated to the
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 will be recorded as goodwill. The
transaction is subject to shareholder and regulatory approval and is
expected to close in the first quarter of 1994.
In connection with the Boulevard acquisition, the Company announced it
would buy back existing shares of its common stock approximately equal to
the number of shares to be issued at the time of closing of the Boulevard
acquisition (approximately 6.5 million). The repurchase of these shares
began in October 1993 and may continue up to 90 days following the closing
of the Boulevard acquisition. As of December 31, 1993, approximately 3.9
million shares with a cost of $121.4 million have been repurchased.
As of December 31, 1993, the Company has signed agreements with
respect to four pending acquisitions which are not material to the
Company's financial position or operating results, including American
Bancshares of Mankato, a commercial bank holding company headquartered in
Mankato, Minnesota, with approximately $116 million in assets; First
Financial Investors, Inc., a savings bank holding company headquartered in
Duluth, Minnesota, with approximately $200 million in assets; and United
Bank of Bismarck, a commercial bank headquartered in Bismarck, North
Dakota, with approximately $123 million in assets. The Company has agreed
to purchase the domestic corporate trust business of J.P. Morgan & Co.,
Incorporated. This business unit provides trust services for approximately
650 clients with 3,800 bond issues. These transactions are expected to
close during the first half of 1994.
During 1992 and 1993, three additional transactions were completed to
support the strategic direction of the Company. These included Siouxland
Bank Holding Company, a $174 million institution headquartered in Fargo,
North Dakota, acquired in June 1992; the corporate trust business of
Bankers Trust Company of California, acquired in July 1992; and the
corporate trust business of two U.S. Bancorp subsidiaries in Washington and
Oregon, acquired in March 1993.
48
NOTE D - RESTRICTIONS ON CASH AND DUE FROM BANKS
Bank subsidiaries are required to maintain average reserve balances with
the Federal Reserve Bank. The amount of those reserve balances averaged
$519 million for the quarter ended December 31, 1993.
NOTE E - SECURITIES
The detail of the amortized cost, gross unrealized holding gains and
losses, and fair value of securities at December 31 was as follows:
1993 1992
--------------------------------------------- -------------------------------------------------
Gross Gross
Unrealized Unrealized Gross Gross Gross
Amortized Holding Holding Fair Amortized Unrealized Unrealized Market
(In Millions) Cost Gains Losses Value Cost Appreciation Depreciation Value
--------------------------------------------------------------------------------------------------------------------
U.S. Treasury . . . $1,527 $25 $(11) $1,541 $1,816 $31 $(2) $1,845
Mortgage-backed
securities . . . . 1,286 18 (4) 1,300 1,583 8 (4) 1,587
Other U.S.
agencies . . . . . 51 1 -- 52 61 -- -- 61
State and
political . . . . 184 12 -- 196 188 9 -- 197
Other . . . . . . . 216 16 (2) 230 264 1 -- 265
-----------------------------------------------------------------------------------------------
Total. . . . . . $3,264 $72 $(17) $3,319 $3,912 $49 $(6) $3,955
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
As described in Note B of the Notes to Consolidated Financial
Statements, the Company adopted SFAS 115 at December 31, 1993, and at that
date, all of the Company's investment securities were classified as
available for sale. At December 31, 1992, investment securities with
amortized cost totaling $3,912 million were held as long-term investments,
and securities held for sale totaling $284 million were carried at lower of
cost or market.
Securities carried at $.8 billion at December 31, 1993, and $1.3
billion at December 31, 1992, were pledged to secure public and trust
deposits and for other purposes required by law. Securities sold under
agreements to repurchase were collateralized by securities with an
amortized cost of $.4 billion and $.5 billion at December 31, 1993, and
1992, respectively.
Gross realized gains and losses on investment securities were as
follows:
(In Millions) 1993 1992 1991*
----------------------------------------------------------------------
Gross realized gains. . . . . . . . $ 3.3 $1.9 $10.1
Gross realized losses . . . . . . . (3.0) -- ( 1.2)
--------------------------------
Net realized gains . . . . . . . . $ .3 $1.9 $ 8.9
--------------------------------
--------------------------------
<FN>
*SEE NOTE J "MERGER, INTEGRATION AND RESTRUCTURING PROVISIONS" ON PAGE 54.
For amortized cost, fair value and yield by maturity date of
securities outstanding as of December 31, 1993, see Table 19 on page 38
from which such information is incorporated by reference into these Notes
to Consolidated Financial Statements.
49
NOTE F - LOANS AND ALLOWANCE FOR CREDIT LOSSES
The composition of the loan portfolio at December 31 was as follows:
(In Millions) 1993 1992
------------------------------------------------------------------
COMMERCIAL:
Commercial . . . . . . . . . . . . . . . $ 5,856 $ 5,288
Financial institutions . . . . . . . . . 2,004 1,132
Real estate:
Commercial mortgage . . . . . . . . . . 1,495 1,539
Construction. . . . . . . . . . . . . . 231 234
HLTs . . . . . . . . . . . . . . . . . . 183 284
Agricultural . . . . . . . . . . . . . . 123 131
Lease financing. . . . . . . . . . . . . 197 256
--------------------
Total commercial loans . . . . . . . . 10,089 8,864
--------------------
CONSUMER:
Residential mortgage . . . . . . . . . . 2,422 2,568
Residential mortgages held for sale. . . 1,088 705
Home equity and second mortgage. . . . . 1,755 1,362
Credit card. . . . . . . . . . . . . . . 1,757 1,782
Revolving credit . . . . . . . . . . . . 690 600
Automobile . . . . . . . . . . . . . . . 342 519
Installment. . . . . . . . . . . . . . . 376 430
Student loans held for sale. . . . . . . 260 246
--------------------
Total consumer loans . . . . . . . . . 8,690 8,212
--------------------
Total loans. . . . . . . . . . . . . . $18,779 $17,076
--------------------
--------------------
Certain directors and executive officers of the Company, including
their immediate families, companies in which they are principal owners, and
trusts in which they are involved, are loan customers of the Company and
its subsidiaries. These loans were made in the ordinary course of business
at the subsidiaries' normal credit terms, including interest rate and
collateralization, and were all current as to their terms at December 31,
1993, and 1992. The aggregate dollar amounts of these loans were $18.8
million and $12.5 million at December 31, 1993, and 1992, respectively.
During 1993, additions totaled $118.0 million and repayments totaled $111.7
million.
Nonaccrual and renegotiated loans totaled $158 million, $250 million,
and $302 million at December 31, 1993, 1992, and 1991, respectively. The
effect of nonaccrual and renegotiated loans on interest income was as
follows:
(In Millions) 1993 1992 1991
------------------------------------------------------------------------
Interest income that would have been accrued
at original contractual rates. . . . . . . . . $13.6 $21.6 $31.1
Amount recognized as interest income. . . . . . 3.4 7.8 8.8
------------------------
Foregone revenue $10.2 $13.8 $22.3
------------------------
------------------------
Commitments to lend additional funds to customers whose loans were
classified as nonaccrual or renegotiated at December 31, 1993, totaled $9.4
million.
During 1993, there were no loans that were restructured at market
interest rates and returned to a fully performing status.
50
Activity in the allowance for credit losses was as follows:
(In Millions) 1993 1992 1991
-----------------------------------------------------------------------
Balance at beginning of year. . . . . . . . $448.0 $426.9 $454.0
Add:
Provision charged to operating expense . . 125.2 183.4 202.2
Deduct:
Loans charged off. . . . . . . . . . . . . 225.0 273.7 305.7
Less recoveries of loans charged off . . . 75.0 70.6 63.4
--------------------------
Net loans charged off. . . . . . . . . . . 150.0 203.1 242.3
Other*. . . . . . . . . . . . . . . . . . . -- 40.8 13.0
--------------------------
Balance at end of year. . . . . . . . . . . $423.2 $448.0 $426.9
--------------------------
--------------------------
<FN>
*REPRESENTS NET ALLOWANCE ADDITIONS FROM ACQUISITIONS AND FOREIGN CURRENCY
TRANSLATION ADJUSTMENTS.
NOTE G - BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31 consisted of the following:
(In Millions) 1993 1992
-----------------------------------------------------------------------
Land. . . . . . . . . . . . . . . . . . . . . . . $ 73 $ 82
Buildings and improvements. . . . . . . . . . . . 332 334
Furniture, fixtures and equipment . . . . . . . . 366 369
Capitalized building leases . . . . . . . . . . . 33 33
Capitalized equipment leases. . . . . . . . . . . 31 22
----------------
835 840
Less accumulated depreciation and amortization. . 453 426
----------------
Total. . . . . . . . . . . . . . . . . . . . . . $382 $414
----------------
----------------
NOTE H - LONG-TERM DEBT
Long-term debt (debt with original maturities of more than one year) at
December 31 consisted of the following:
(In Millions) 1993 1992
------------------------------------------------------------------------------------------------
FIRST BANK SYSTEM (parent company):
Floating-rate subordinated capital notes - due November 29, 1996. . . . . . . $ 150 $150
Floating-rate subordinated capital notes - due May 30, 1997 . . . . . . . . . -- 93
Fixed-rate 6.625% subordinated notes - due May 15, 2003 . . . . . . . . . . . 100 --
Fixed-rate 8.00% subordinated notes - due July 2, 2004. . . . . . . . . . . . 125 125
Floating-rate subordinated notes - due November 30, 2010. . . . . . . . . . . 107 107
Medium-term notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248 258
Capitalized lease obligations . . . . . . . . . . . . . . . . . . . . . . . . 14 14
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2
----------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 745 749
SUBSIDIARIES:
Fixed-rate 6.00% subordinated notes - due October 15, 2003. . . . . . . . . . 100 --
Step-up subordinated notes - due August 15, 2005. . . . . . . . . . . . . . . 100 --
Capitalized lease obligations . . . . . . . . . . . . . . . . . . . . . . . . 39 39
Mortgage indebtedness and notes . . . . . . . . . . . . . . . . . . . . . . . 31 34
----------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,015 $822
----------------
----------------
51
The floating-rate subordinated capital notes due November 29, 1996,
are currently redeemable at the option of the Company (with Federal Reserve
Bank approval). If the option is not exercised, the notes will be exchanged
at maturity for capital securities of the Company whose market value will
equal the principal amount of the notes. The interest rate per annum is
one-eighth of one percent above the London interbank offered rate ("LIBOR")
for three-month Eurodollar deposits subject to a minimum of 5.25 percent.
At December 31, 1993, the interest rate was 5.25 percent.
The floating-rate subordinated notes due November 30, 2010, may be
redeemed at par at the option of the Company. The interest rate per annum
for each quarterly period is one-eighth of one percent above LIBOR for
three-month Eurodollar deposits subject to a minimum of 5.25 percent. At
December 31, 1993, the interest rate was 5.25 percent.
The step-up subordinated notes due August 15, 2005, are issued by the
Company's subsidiary bank, First Bank National Association. The interest
rate on these notes is 6.25 percent through August 14, 2000, and 7.30
percent thereafter. The notes have a one-time call feature at the option of
the Bank on August 15, 2000.
Notes issued under the Company's medium-term note program may mature
from 9 months to 15 years and bear fixed or floating interest rates. The
notes outstanding at December 31, 1993, mature from January 1994 to April
1996 and have rates of 3.33 percent to 9.91 percent. The weighted average
interest rate at December 31, 1993, is 6.32 percent.
Maturities of long-term debt outstanding at December 31, 1993, were:
Parent
(In Millions) Consolidated Company
---------------------------------------------------------------------
1994. . . . . . . . . . . . . . . . . . . . . $ 146 $139
1995. . . . . . . . . . . . . . . . . . . . . 96 89
1996. . . . . . . . . . . . . . . . . . . . . 179 171
1997. . . . . . . . . . . . . . . . . . . . . 2 --
1998. . . . . . . . . . . . . . . . . . . . . 2 --
Thereafter. . . . . . . . . . . . . . . . . . 590 346
---------------------
Total . . . . . . . . . . . . . . . . . . . $1,015 $745
---------------------
---------------------
NOTE I - SHAREHOLDERS' EQUITY
COMMON STOCK - At December 31, 1993, the Company has reserved 6,824,562
shares of its common stock for future issuances under the Dividend
Reinvestment Plan, Employee Stock Purchase Plan, and the Stock Option Plans
(see Note K on page 55). Additionally, 3,952,000 shares of common stock
have been reserved for issuance upon conversion of the Series 1991A
Convertible Preferred Stock, described below under "Preferred Stock."
In January 1994 the Board of Directors approved a new Stock Incentive
Plan which authorizes the issuance of up to 5,000,000 shares of the
Company's common stock. This plan extends through January 2004. The terms
of the new plan are substantially the same as the existing 1991 Stock
Incentive Plan.
During 1992 and 1993 the Company completed four significant
acquisitions in which common shares aggregating 35.0 million were issued in
exchange for the stock of the acquired banks. (See Note C on page 47.)
In connection with the Boulevard acquisition, the Company announced it
would buy back shares of its common stock approximately equal to the number
of shares to be issued to effect the transaction, or approximately 6.5
million shares. The repurchase of these shares began in October 1993. As of
December 31, 1993, approximately 3.9 million common shares with a cost of
$121.4 million have been repurchased.
In January 1993 the Company announced a $75 million common stock
repurchase program. Repurchased shares were to replace a portion of the
shares issued in connection with the BSI acquisition, to provide for
issuances under the Employee Stock Purchase Plan and the Dividend
Reinvestment Plan and to be used for other corporate purposes. As of
December 31, 1993, approximately 2.3 million shares with a cost of $65.7
million have been repurchased.
52
The Company has outstanding 12.6 million common shares sold in a
private placement on July 18, 1990, which had accompanying periodic stock
purchase rights (PSPRs) and risk event warrants. The PSPRs become
exercisable upon the event of a dividend shortfall, which will be deemed to
exist if the company does not pay an annual dividend equal to at least $.82
per share during any of the 10 years following closing. Upon exercise, the
holders of the PSPRs will receive value equal to the dividend shortfall in
the form of shares of the Company's common or preferred stock, or the PSPRs
may be redeemed for cash.
The risk event warrants become exercisable (i) when a change in
control, as defined, occurs and the value received by common shareholders
is less than $13.875 per share, or (ii) on July 18, 2000, if the common
stock market price is less than $13.875 per share; however, this exercise
provision terminates at any time after July 18, 1995, if the common stock
market price exceeds $20.82 per share for 30 consecutive trading days and
tangible book value exceeds $16.32 per share. If the risk event warrants
become exercisable in either event, the holders of the warrants will
receive value equal to any shortfall in the form of common or preferred
stock or cash at the option of the Company.
The Company's Dividend Reinvestment Plan provides for automatic
reinvestment of dividends and for optional cash purchases of additional
shares at market price of up to $5,000 per quarter.
PREFERRED STOCK - The company has four classes of cumulative preferred
stock with par values of $1.00 per share and 10,000,000 shares authorized.
During 1993 the Company announced intentions to repurchase $125 million of
its preferred stock. As of December 31, 1993, approximately $115.2 million
has been repurchased. On January 19, 1994, the Board of Directors
authorized the redemption of an additional $159.3 million of the Company's
preferred stock, consisting of $89 million of Preferred Stock Series 1989A
and $70.3 million of Preferred Stock Series 1989B.
Series 1983A which had 1,000,000 shares outstanding at December 31,
1992, was redeemed by the Company in 1993 at its stated value of $100 per
share.
Series 1989A has 3,560,000 shares outstanding, redeemable at the
option of the Company on or after April 1, 1994, through March 31, 1995, at
$26.313 per share, through April 1, 1999, at prices declining to its stated
value of $25 per share, and thereafter at $25 per share. Dividends are at a
rate of 10.5 percent per annum.
Series 1989B has 1,405,000 shares outstanding, redeemable at the
option of the Company on or after April 1, 1994, through March 31, 1999, at
$51.50 per share, and thereafter at its stated value of $50 per share.
During 1993, approximately 95,000 shares were repurchased by the Company.
Dividends are adjusted quarterly at a rate of the highest of three U.S.
Treasury rates plus .50 percent, but no lower than 7 percent and no greater
than 14 percent per annum. The average dividend rates on such shares for
the years ended December 31, 1993, 1992, and 1991 were 7.41 percent, 8.24
percent, and 8.93 percent, respectively.
Series 1991A Convertible Preferred Stock, issued in November 1991, has
2,133,600 shares outstanding, redeemable at the option of the Company on or
after January 1, 1996, at $52.1375 per share, and thereafter at prices
declining to its stated value of $50 per share on or after July 1, 2002.
During 1993, approximately 156,400 shares were repurchased by the Company.
Dividends are at a rate of 7.125 percent per annum. Series 1991A
Convertible Preferred Stock is convertible at the option of the holder at
any time into common stock of the Company at the rate of 1.7256 shares of
common stock for each share of preferred stock, which is equivalent to a
conversion price of $28.975 per share of common stock.
Shares of all the Company's preferred stock issuances rank prior to
common stock as to dividends and liquidation and have no voting rights
except (i) in the event of certain dividend arrearages (in which event,
holders of shares of the preferred stock will be entitled to elect two
additional directors to the Company's Board of Directors to serve until
such dividend arrearages have been eliminated), and (ii) on matters that
would have an adverse effect upon a series of the preferred stock,
including the issuance of additional shares of preferred stock or shares of
any other preferred stock ranking on a parity with the preferred stock.
53
PREFERRED STOCK PURCHASE RIGHTS - In December 1988 the Company declared a
dividend of one preferred stock purchase right ("Right") for each
outstanding share of common stock based on the shareholders of record on
January 4, 1989. One Right has also been issued with respect to each share
of common stock issued since January 4, 1989. The Rights are designed to
help management obtain fair and equal treatment for all shareholders in the
event of a potential takeover.
Each Right initially entitles the registered holder to purchase from
the Company one one-hundredth of a share of Series A Junior Participating
Preferred stock, par value $1, of the Company at a price of $80, subject to
adjustment.
In the event that any person or group acquires 20 percent or more of
the Company's common stock outstanding, each Right (other than any Right
held by the acquiring person or group) will thereafter entitle the holder
to receive upon exercise shares of the Company's common stock having a
market value of two times the purchase price.
In the event that the Company is acquired in a merger or other
business combination transaction or 50 percent or more of its consolidated
assets or earning power is sold, each Right will thereafter entitle the
holder to receive upon exercise shares of common stock of the acquiring
company having a market value of two times the purchase price.
The Rights will not be exercisable and will be transferable with and
only with the common stock until 10 days after (i) a public announcement
that a person or group has acquired 20 percent or more of the Company's
common stock outstanding, or (ii) a public announcement or commencement of
a tender or exchange offer that would result in a person or group acquiring
20 percent or more of the common stock.
The Rights expire on January 4, 1999, unless they are redeemed by the
Company at a price of $.01 per Right prior to the acquisition by a person
or group of 20 percent of the Company's common stock outstanding. Pursuant
to an amendment adopted by the Board of Directors, the Rights also will
expire on the date that is 24 months after the first date upon which the
Company can generally be acquired by bank holding companies, principally
located in at least 15 of the 20 states that as of September 30, 1992, had
the largest amount of bank deposits.
Until the Right is exercised, the Right holder will have no rights as
a stockholder of the Company, including the right to vote or to receive
dividends.
NOTE J - MERGER, INTEGRATION AND RESTRUCTURING PROVISIONS
In the second quarter of 1993, the Company recorded merger, integration and
restructuring charges totaling $72.2 million relating to the acquisition of
CNB. Charges of $29.7 million were recorded to provide for anticipated
reorganization and restructuring costs, system conversions, and customer
communication. Premises and equipment write-downs of $14.3 million relate
to redundant main office and branch facilities. Other charges, totaling
$28.2 million, primarily involve severance.
In the fourth quarter of 1992, the Company recorded merger,
integration and restructuring charges totaling $84.0 million relating
primarily to the acquisition of WCIC. Premises and equipment write-downs of
$31.2 million related to the closing of redundant main office and branch
facilities. Securities and interest rate swap write-downs of $12.6 million
reflected the Company's intention to dispose of certain mortgage-backed
securities and swaps. Other charges, totaling $40.2 million, primarily
involved severance, system conversions, and customer communications costs.
In September 1989 the Company announced plans to restructure
operations of certain businesses. The plans included a workforce reduction
of approximately 10 to 15 percent, the closing of certain loan production
offices, the downsizing of other operations and a reduction of earning
assets of approximately 10 percent. A provision of $37.5 million was
recorded in the third quarter of 1989 for costs of the restructuring.
During 1990 the Company terminated its asset purchase agreement with Banks
of Iowa, which agreed to repurchase its Class B common shares held by the
Company. The $9.5 million gain on the sale of the common shares was
credited to the restructuring reserve. During 1991, securities of state and
political subdivision were sold as part of the continued reduction in
earning assets. Gains on the sales of these securities, which totaled $7.8
million, were credited to the restructuring reserve. By year-end 1991, the
restructuring was substantially complete. As of December 31, 1991, the
related restructuring reserve had been fully utilized for severance and
related workforce reduction expenses as well as for costs of office
closings, operations downsizing, and earning asset reductions.
54
NOTE K - EMPLOYEE BENEFITS
PENSION PLAN - Pension benefits are provided to substantially all employees
based on years of service and employees' compensation while employed with
the Company. Employees are fully vested after five years of service.
The Company's funding policy is to contribute actuarially determined
amounts to the plan sufficient to meet the minimum funding requirements set
forth in the Employee Retirement Income Security Act of 1974, plus such
additional amounts as the Company determines to be appropriate. The
actuarial cost method used to compute pension cost is the projected unit
credit method.
Prior to May 28, 1993, when they became participants in the Company's
plan, the former CNB employees were covered by a separate, noncontributory
pension plan that provided a defined benefit based on an employee's years
of service and compensation during employment with CNB. The Company is
currently in the process of merging the former CNB plan with its existing
plan.
The following table sets forth the aggregate funded status and the net
amounts recognized in the Company's balance sheet and statement of income
for the two plans at December 31:
(Dollars in Millions) 1993 1992 1991
----------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $251.9 million in 1993, $213.8 million in 1992, and
$196.4 million in 1991. . . . . . . . . . . . . . . . . . . . . . . . . $(260.2) $(220.2) $(202.2)
---------------------------------------
---------------------------------------
Projected benefit obligation for service rendered to date . . . . . . . . $(288.2) $(247.8) $(231.0)
Plan assets at fair value, primarily listed stocks and U.S. bonds . . . . 260.6 247.0 252.3
---------------------------------------
Excess (deficiency) of plan assets over projected
benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . (27.6) (0.8) 21.3
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions . . . . . . . . . . . 38.1 14.3 1.0
Unrecognized net asset at end of year (amortized over 15 years) . . . . . (27.5) (26.8) (31.3)
---------------------------------------
Accrued pension cost included in other liabilities. . . . . . . . . . . . $ (17.0) $ (13.3) $ (9.0)
---------------------------------------
---------------------------------------
Net pension costs included in the following components:
Service cost-benefits earned during the period . . . . . . . . . . . . . $ 17.2 $ 14.9 $ 12.7
Interest cost on projected benefit obligation. . . . . . . . . . . . . . 20.8 20.9 20.6
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . (29.2) (18.0) (32.8)
Net amortization and deferral. . . . . . . . . . . . . . . . . . . . . . 2.4 (8.8) 6.2
---------------------------------------
Net periodic pension benefit cost . . . . . . . . . . . . . . . . . . . . $ 11.2 $ 9.0 $ 6.7
---------------------------------------
---------------------------------------
For the periods ended December 31, 1992, and 1991, the plans were
valued separately, and each plan independently determined its assumptions.
The aggregate disclosures, therefore, reflect the following weighted
average assumptions.
FBS CNB
---------------------------------------------
1993 1992 1991 1992 1991
-------------------------------------------------------------------------------------------
Weighted average discount rate. . . . . . . . 7.0% 8.0% 9.0% 9.0% 9.0%
Expected long-term rate of return . . . . . . 10.0 10.0 10.0 9.0 9.0
Rate of increase in future compensation . . . 6.0 6.0 7.0 5.6 5.0
--------------------------------------------
OTHER POSTRETIREMENT PLANS - In addition to providing pension benefits, the
Company provides certain health care and life insurance benefits to retired
employees. Substantially all of the Company's employees may become eligible
for these benefits at or after age 55 with at least five years of service
and age plus years of service equal to or greater than 65 while working for
the Company. In years prior to 1992, the cost of retiree health care
benefits was recognized as expense as claims were paid. These costs totaled
approximately $4.5 million for 1991.
Effective January 1, 1993, the Company revised the provisions of the
existing retiree health care plan. Under the terms of the new plan, the
Company will subsidize the cost of coverage for employees who retire
55
before age 65 with at least 10 years of service. The dollar amount of the
subsidy will be based on the employee's age and service at the time of
retirement, and will remain frozen until the retiree reaches age 65. After
age 65 the retiree will assume responsibility for the full cost of
coverage. The new plan also contains other cost-sharing features such as
deductibles and coinsurance. The Company will continue to subsidize the
cost of coverage for employees who retired before 1993, and will subsidize
the cost for certain employees who retire before 1995. Those subsidies, as
well as the retirees' contributions, will be adjusted periodically.
Effective January 1, 1992, the company adopted SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," for its
retiree benefit plans. Under SFAS 106, the Company is required to accrue
the estimated cost of retiree benefit payments, other than pensions, during
employees' active service periods.
The Company elected to recognize the effect of this change in
accounting on the immediate recognition basis. The cumulative effect as of
January 1, 1992, of adopting SFAS 106 was the recognition of accrued
postretirement health care costs totaling $52.1 million. After related tax
benefits of $20.5 million, net income for 1992 was reduced by $31.6
million.
The Company currently intends to fund the postretirement benefit costs
as they are incurred. The following table sets forth the plan's funded
status recognized in the Company's balance sheet and statement of income at
December 31:
(In Millions) 1993 1992
----------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(48.5) $(44.4)
Fully eligible active plan participants. . . . . . . . . . . . . . . . . . . . . . . . . (3.4) (3.0)
Other active plan participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12.5) (12.2)
----------------------
Total unfunded accumulated postretirement benefit obligation. . . . . . . . . . . . . . (64.4) (59.6)
Unrecognized net loss from past experience different from that assumed and
from changes in assumptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 3.2
Unrecognized implementation obligation. . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 2.4
Accrued postretirement benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . $(56.6) $(54.0)
----------------------
----------------------
Net periodic postretirement benefit cost included the following components:
Service cost - benefits attributed to service during the period . . . . . . . . . . . . . 1.3 .9
Interest cost on accumulated postretirement benefit obligation. . . . . . . . . . . . . . 4.7 4.9
Net amortization and deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 .2
---------------------
Total postretirement benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6.2 $ 6.0
---------------------
---------------------
For measurement purposes, 12.9 percent and 8.5 percent annual rates of
increase in the per capita cost of covered health care benefits for
participants under age 65 and aged 65 and over, respectively, were assumed
for 1993. For 1994 the annual rates of increase were assumed to be 12.0
percent and 8.0 percent, respectively. Both rates were assumed to decrease
gradually to 4.5 percent by 2003 and remain at that level thereafter. The
health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost
trend rates by 1 percentage point in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1993, by
$6.8 million and the aggregate of the service and interest cost components
of net periodic postretirement benefit cost for the year then ended by $.7
million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0 percent as of December 31, 1993,
and 8.0 percent as of December 31, 1992.
STOCK PURCHASE PLAN - The 1984 Employee Stock Purchase Plan, as amended in
1989 and 1991, permits all eligible employees (those employed for one year
with the Company) and directors to purchase common stock. The plan provides
for a purchase price of 85 percent to 100 percent (as determined by a
committee of the Board of Directors for each purchase period) of the fair
market value at the beginning or the end of the purchase period, whichever
is lower. For the current option period ending June 30, 1994, the Committee
approved an option price of 85 percent of fair market value. The Plan
results in no expense to the Company.
STOCK INCENTIVE PLAN - In April 1991 shareholders approved the 1991 Stock
Incentive Plan, which authorizes the issuance of up to 3,000,000 shares of
the Company's common stock. The Plan extends
56
through April 2001. The Plan allows for the granting of nonqualified stock
options, incentive stock options, stock appreciation rights (SARs),
restricted stock or stock units (RSUs), performance awards, dividend
equivalents, and other stock-based awards at or above 100 percent of the
market price at the date of grant. Awards may provide that upon their
exercise, the holder will receive shares of common stock or cash as
determined by a committee of the Board of Directors (Committee).
Restrictions on the restricted shares and RSUs generally limit the holders'
rights to transfer the shares during the restriction period determined by
the Committee. At December 31, 1993, there were 1,230,217 shares available,
subject to adjustment for forfeitures, for grant under the Plan.
Restricted shares granted under the 1991 Plan vest over periods of
three to seven years, with the vesting of certain shares being subject to
acceleration based on the performance of the Company in comparison to the
performance of a predetermined group of regional banks. Compensation
expense related to these shares is determined at the time of grant based on
the market price of the Company's stock and is amortized on a straight line
basis over the vesting period. For the performance-based restricted shares,
compensation expense is being amortized using the midpoint of the vesting
period.
The Company made stock grants under the 1991 Plan of 1,780 shares in
1993 and 2,725 shares in 1992, based on the terms of an employee
performance recognition program. There are no restrictions on these shares.
Compensation expense is recognized at the date of grant based on the market
price of the Company's stock.
Options granted under the 1991 Plan and predecessor plans are
generally exercisable up to 10 years from the date of grant. On the date
exercised, the option proceeds are credited to the common stock account to
the extent of par value of the shares issued and the excess is credited to
capital surplus.
In January 1994 the Board of Directors approved a new Stock Incentive
Plan which authorizes the issuance of up to 5,000,000 shares of the
Company's common stock. This plan extends through January 2004. The terms
of the new plan are substantially the same as the 1991 Stock Incentive
Plan.
The option information presented below has been restated to reflect
the effects of the adjusted options under the WCIC and CNB Plans. The
number and exercise price (option price) of options and restricted shares
granted under these plans were as follows:
Additional Shares Outstanding
Available Under Outstanding Restricted Option/Market
Incentive Plan Options Shares Price Per Share
--------------------------------------------------------------------------------------------------------
DECEMBER 31, 1990 . . . . . . 2,689,000 2,587,620 - $ 2.71 -30.125
--------------
--------------
Granted:
Stock Options. . . . . . . . 1,489,544 - 8.41 -24.625
Restricted Stock . . . . . . - 4,800 18.375-20.25
Exercised . . . . . . . . . . (2,194) - 13.125-20.75
Cancelled . . . . . . . . . . (486,372) - 11.73 -30.125
-------------------------------------------------
DECEMBER 31, 1991*. . . . . . 4,166,357 3,588,598 4,800 2.71 -30.125
--------------
--------------
GRANTED:
Stock Options. . . . . . . . 852,616 - 23.50 -27.25
Restricted Stock . . . . . . - 166,583 24.50 -27.25
Exercised . . . . . . . . . . (661,338) - 2.71 -25.885
Cancelled (111,963) - 8.41 -30.125
-------------------------------------------------
DECEMBER 31, 1992*. . . . . . 2,178,975 3,667,913 171,383 2.71 -30.125
--------------
--------------
Granted:
Stock Options. . . . . . . . 837,041 - 28.625 -33.75
Restricted Stock . . . . . . - 105,300 28.25 -33.25
Exercised . . . . . . . . . . (1,791,654) - 2.71 -30.125
Cancelled/Vested. . . . . . . (54,883) (15,387) 8.41 -33.75
-------------------------------------------------
DECEMBER 31, 1993*. . . . . . 1,230,217 2,658,417 261,296 $ 8.41 -33.75
-------------- -------------------------------------------------
-------------- -------------------------------------------------
<FN>
*AT DECEMBER 31, 1993, 1992 AND 1991, OPTIONS FOR 1,184,308, 2,359,958 AND
1,511,350 SHARES, RESPECTIVELY, WERE EXERCISABLE.
In January 1994, the Board of Directors granted 5.2 million stock
options from the 1991 and 1994 Stock Incentive Plans with an exercise price
of $29.75, which vest over periods of up to five years, subject to
acceleration based on the performance of the Company.
57
NOTE L - INCOME TAXES
The components of income tax expense were:
(Dollars in Millions) 1993 1992 1991
-----------------------------------------------------------------------------------------------------
FEDERAL:
Current tax . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 89.7 $38.7 $ 9.3
Deferred tax provision. . . . . . . . . . . . . . . . . . . . . . 59.3 21.4 1.8
Provision for acquired tax benefits offset against goodwill . . . - - 6.1
----------------------------------
Federal income tax . . . . . . . . . . . . . . . . . . . . . . . 149.0 60.1 17.2
----------------------------------
STATE:
Current tax . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.1 17.7 5.4
Deferred tax provision. . . . . . . . . . . . . . . . . . . . . . 4.7 0.8 3.3
----------------------------------
State income tax . . . . . . . . . . . . . . . . . . . . . . . . 29.8 18.5 8.7
----------------------------------
Total income tax provision . . . . . . . . . . . . . . . . . . . $178.8 $78.6 $25.9
----------------------------------
----------------------------------
The reconciliation between income tax expense and the amount computed
by applying the statutory federal income tax rate was as follows:
(Dollars in Millions) 1993 1992 1991
-------------------------------------------------------------------------------------------------------
Tax at statutory rate (35% in 1993, 34% in 1992 and 1991) . . . . . . $166.9 $ 80.4 $ 80.5
State income tax, at statutory rates, net of federal tax benefit . . 19.4 12.1 10.3
Tax effect of:
Tax-exempt interest:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7.6) (10.9) (16.4)
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.4) (4.2) (6.4)
Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . 7.3 3.7 3.7
Federal and State net operating and capital loss carryforwards . . . - - (36.7)
Effects of statutory bad debt deduction . . . . . . . . . . . . . . - - (5.3)
Other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.8) (2.5) (3.8)
-------------------------------
Applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . $178.8 $ 78.6 $ 25.9
-------------------------------
-------------------------------
At December 31, 1993, for income tax purposes, the Company had the
following carryforwards available:
Expiration
(Dollars in Millions) Amount Dates
-------------------------------------------------------------------------------------------------------------
Net operating loss carryforwards available:
Federal regular tax operating loss carryforwards. . . . . . . . . . . $ 2.2 2002
3.8 2003
14.5 2006
------
$20.5
------
------
Alternative minimum tax credit carryforward. . . . . . . . . . . . . . . . $40.5 Unlimited
---------------------------
---------------------------
In addition, the Company has state net operating loss carryforwards of $356
million, primarily in one taxing jurisdiction. These carryforwards expire in
years 2001-2008.
58
Deferred income tax assets and liabilities reflect the tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for the same items for income
tax reporting purposes. Significant components of the Company's deferred tax
liabilities and assets as of December 31, 1993, and 1992, are as follows:
(Dollars in Millions) 1993 1992
- -------------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Loan loss reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 151.0 $ 137.9
Federal operating loss carryforward. . . . . . . . . . . . . . . . . . . . . . . . . 7.2 87.4
State operating loss carryforward . . . . . . . . . . . . . . . . . . . . . . . . . 18.1 16.9
Alternative minimum tax credit carryforward . . . . . . . . . . . . . . . . . . . . 40.5 35.7
Accrued severance, pension and retirement benefits . . . . . . . . . . . . . . . . . 9.9 35.4
Real estate and other asset basis differences . . . . . . . . . . . . . . . . . . . 50.2 47.6
Deferred gain on sale of buildings . . . . . . . . . . . . . . . . . . . . . . . . . 12.5 16.8
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.5 15.5
Contingent liabilities and other miscellaneous accruals . . . . . . . . . . . . . . 50.2 37.1
--------------------
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 352.1 430.3
DEFERRED TAX LIABILITIES:
Leasing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (46.9) (63.6)
Deferred gains and other investment basis differences . . . . . . . . . . . . . . . (26.5) (38.5)
Adjustment of available-for-sale securities to market value. . . . . . . . . . . . . (20.9) -
Accelerated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.9) (10.1)
Other deferred liabilities and reserves . . . . . . . . . . . . . . . . . . . . . . (73.3) (74.0)
--------------------
Gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . (172.5) (186.2)
Deferred tax assets valuation reserve . . . . . . . . . . . . . . . . . . . . . . . (19.6) (20.1)
--------------------
Net deferred tax assets: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 160.0 $ 224.0
--------------------
--------------------
As discussed in Note B, effective January 1, 1992, the Company adopted the
provisions of SFAS 109. This resulted in the recognition of $213.9 million of
deferred tax assets at January 1, 1992, of which $188.9 million was included in
the 1992 results of operations as a cumulative effect of an accounting change
and $25.0 million pertaining to carryforwards resulting from purchase business
combinations was reflected as a reduction of goodwill.
The realization of the Company's tax assets is dependent on the Company's
ability to generate taxable income in future periods. The Company has evaluated
the available evidence supporting the realization of its deferred tax assets and
determined it is more likely than not that the assets will be realized. In
support of this evaluation, the Company reviewed the level of taxable income
generated in the last three years. These calculations are included in the table
below. Assuming the Company maintained the level of book taxable income
(excluding nonrecurring charges) generated in 1993 the Company would realize its
net tax assets in the next year. In addition, the Company's five-year plan
indicates a pretax earnings trend that supports, after taking into account
reversals of applicable temporary differences, the assumption that the deferred
tax assets will be realized.
59
(Dollars in Millions) 1993 1992 1991
- -----------------------------------------------------------------------------------------------------
Income before tax and cumulative effect of accounting changes. . . . . $ 476.8 $ 233.1 $ 233.0
Nonrecurring charges related to mergers. . . . . . . . . . . . . . . 72.2 124.0 -
----------------------------
Income before tax and nonrecurring charges . . . . . . . . . . . . . . 549.0 357.1 233.0
Differences between income before tax and taxable income:
Tax-exempt income, net of nondeductible interest . . . . . . . . . . (33.9) (50.8) (71.2)
Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . 20.8 10.7 9.0
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.9 7.6 8.0
Provision for loans and other real estate losses . . . . . . . . . . (24.7) (88.3) (40.4)
Leasing activities . . . . . . . . . . . . . . . . . . . . . . . . . 39.6 35.2 47.2
Other permanent and temporary differences . . . . . . . . . . . . . (15.2) 1.0 (6.6)
State income taxes . . . . . . . . . . . . . . . . . . . . . . . . . (25.1) (16.0) (5.1)
----------------------------
Total federal taxable income before carryforwards . . . . . . . . . . 524.4 256.5 173.9
Capital loss carryforward utilized . . . . . . . . . . . . . . . . . . (10.7) (14.9) (4.4)
Net operating loss carryforward utilized . . . . . . . . . . . . . . . (177.4) $(188.3) (144.0)
----------------------------
Total federal taxable income per tax return . . . . . . . . . . . . . $ 336.3 $ 53.3 $ 25.5
----------------------------
----------------------------
NOTE M --> FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CREDIT
CONCENTRATIONS
The Company uses various financial instruments that have off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to manage its interest rate risk. These instruments involve,
to varying degrees, elements of credit, interest rate, or liquidity risk.
The contract or notional amounts of these financial instruments at December
31, 1993, and 1992 were as follows:
(In Millions) 1993 1992
- ---------------------------------------------------------------------------
Commitments to extend credit:
Commercial . . . . . . . . . . . . . . . . . . . . . . . $5,714 $4,938
Corporate Payment System . . . . . . . . . . . . . . . . 1,744 1,487
Consumer credit card . . . . . . . . . . . . . . . . . . 5,208 4,210
Other consumer . . . . . . . . . . . . . . . . . . . . . 2,391 2,408
Letters of credit:
Standby. . . . . . . . . . . . . . . . . . . . . . . . . 1,208 1,204
Commercial . . . . . . . . . . . . . . . . . . . . . . . 135 122
Interest rate swap contracts:
Hedge. . . . . . . . . . . . . . . . . . . . . . . . . . 2,811 2,660
Intermediated. . . . . . . . . . . . . . . . . . . . . . 199 241
Interest rate options contracts:
Hedge interest rate floors purchased . . . . . . . . . . 950 -
Intermediated interest rate caps and floors purchased. . 198 188
Intermediated interest rate caps and floors written. . . 198 183
Liquidity support guarantees . . . . . . . . . . . . . . . 157 229
Futures and forward contracts. . . . . . . . . . . . . . . 1,352 771
Residential mortgages sold with recourse . . . . . . . . . 198 445
Commitments to sell mortgage loans . . . . . . . . . . . . 132 376
Foreign currency commitments:
Commitments to purchase. . . . . . . . . . . . . . . . . 1,101 459
Commitments to sell. . . . . . . . . . . . . . . . . . . 1,100 473
----------------
----------------
COMMITMENTS TO EXTEND CREDIT --> Commitments to extend credit are legally
binding and generally have fixed expiration dates or other termination
clauses. The contractual amount of the commitments represents the Company's
exposure to credit loss on commitments to extend credit, in the event of
nonperformance by the counterparty. The Company monitors its credit risk
for commitments to extend credit by applying the same credit policies in
making commitments as it does for loans, including obtaining collateral to
secure commitments based on management's credit assessment of the
counterparty. Collateral held varies, but may include marketable
securities, receivables, inventory, equipment, and real estate. Since the
Company expects many of the commitments will expire without being
60
drawn upon, total commitment amounts do not necessarily represent the
Company's future liquidity requirements. In addition, the commitments to
extend consumer credit include various consumer credit line products that
are cancellable upon notification.
LETTERS OF CREDIT --> Standby letters of credit are conditional commitments
issued by the Company guaranteeing the performance of a customer to a third
party. The guarantees frequently support public and private borrowing
arrangements, including commercial paper issuances, bond financings, and
other similar transactions. The Company issues commercial letters of credit
on behalf of customers to ensure payment of amounts owed or collection of
amounts receivable in connection with trade transactions. The Company's
credit loss exposure in the event of counterparty nonperformance is the
letter of credit contractual amount and is the same exposure involved in
extending loans. Management assesses the counterparty's credit to determine
the collateral obtained to support the letters of credit. Collateral held
varies, but may include marketable securities, real estate, accounts
receivable and inventory. Since the conditions requiring the Company to
fund letters of credit may not materialize, the Company expects the letters
of credit liquidity requirements to be less than the total outstanding
commitments.
INTEREST RATE OPTIONS AND SWAPS --> Interest rate swaps involve the
contractual exchange of fixed and floating rate interest payment
obligations based on a notional principal amount. The Company enters into
interest rate swap contracts to hedge its balance sheet for risk caused by
fluctuations in interest rates, to improve the liquidity of the Company
without adversely affecting the rate sensitivity and as an intermediary for
customers. At December 31, 1993, and 1992, interest rate swaps totaling
$2.8 billion and $2.7 billion, respectively, hedged medium-term notes,
subordinated debt, deposit notes, long-term certificates of deposit,
deposit accounts, and savings certificates.
Activity with respect to interest rate swap hedges was as follows:
(Dollars in Millions) 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
Notional amount outstanding at beginning of year . . . . . . . . . . . $2,659.8 $2,009.7 $1,833.7
Additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400.0 1,161.0 1,230.0
Maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (225.8) (279.1) (601.5)
Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23.2) (231.8) (452.5)
---------------------------------------
Notional amount outstanding at end of year . . . . . . . . . . . . . $2,810.8 $2,659.8 $2,009.7
---------------------------------------
---------------------------------------
For interest rate swaps designated as hedges, the weighted average
interest rates to be paid were 3.32 percent and 3.55 percent at December
31, 1993, and 1992, respectively. At these same dates, the weighted average
interest rates to be received were 6.98 percent and 7.13 percent. FBS is a
receiver of fixed and payer of floating on all hedges as of December 31,
1993.
For notional balances and yields by maturity date of the interest rate
swap hedging portfolio as of December 31, 1993, see Table 17 on page 35
from which such information is incorporated by reference into these Notes
to Consolidated Financial Statements.
At December 31, 1993, interest rate floors totaling $950 million with an
average remaining maturity of 4.0 years hedged floating rate commercial
loans. No interest rate floors designated as hedges were outstanding at
December 31, 1992. For interest rate floors designated as hedges, the
weighted average 3-month LIBOR strike was 3.50 percent, compared with a
corresponding market index of 3.31 percent.
In addition to using swaps and options as part of the Company's
asset/liability management strategy, the Company also acts as intermediary
for swap and option agreements on behalf of its customers. To reduce its
exposure to interest rate and market risks related to these agreements, the
Company enters into offsetting positions. The total notional amount of
customer swap agreements, including the offsetting positions, was $199
million and $241 million at December 31, 1993, and 1992, respectively. The
total notional amount of customer option agreements, including the
offsetting positions, was $396 million and $371 million at December 31,
1993, and 1992, respectively.
Interest rate swap and option contracts will result in gains and losses
subsequent to the date of the contract, due to interest rate movements. For
intermediated swaps, the Company records these gains and losses as they
occur in trading income. For swaps used as hedges, the Company recognizes
the gains or losses as an adjustment to the interest income or expense on
the hedged item over the terms of the hedge. The Company amortizes the gain
or loss on terminated hedges over the original life of the hedge if the
hedged item remains outstanding. The amortization of deferred gains and
losses
61
increased interest expense by $.9 million during 1993, and decreased
interest expense by $3.3 million and $2.2 million in 1992 and 1991,
respectively. Unamortized deferred losses net of gains, were $3.4 million
at December 31, 1993. The Company will amortize these losses and gains
through the year 2000.
Interest rate swap and option agreements contain credit risk in the
event counterparties are unable to meet the terms of their contracts. The
Company estimates the credit risk for interest rate swap and option
contracts by calculating the present value of the cost to replace all
outstanding contracts in a gain position at current market rates, excluding
counterparty contract gains and losses reported on a net basis. At December
31, 1993, and 1992, the gain position of these contracts, in the aggregate,
was approximately $172 million and $149 million, respectively.
The Company manages the credit risk of its interest rate swap and
option contracts through credit approvals, limits, bilateral collateral
agreements and monitoring procedures. Independent commercial bankers
perform credit analysis to establish counterparty limits. Senior management
approves counterparty limits and periodically reviews the limits to monitor
compliance. In addition, the Company reduces the assumed counterparty
credit risk through master netting agreements, which permit the Company to
settle interest rate contracts with the same counterparty on a net basis.
LIQUIDITY SUPPORT GUARANTEES --> Liquidity support guarantees are
contracts whereby the Company agrees to provide a liquidity facility to
support commercial paper issued by its customers. The contracts are secured
by notes receivable, bonds, and private insurance, guaranteeing payment of
principal and interest on any funds advanced. Since the conditions that
require the Company to fund the guarantees may not materialize, total
guarantee amounts do not necessarily represent the Company's future funding
obligation.
FORWARD CONTRACTS AND COMMITMENTS TO SELL MORTGAGE LOANS --> Futures and
forward contracts are contracts for the delayed delivery of securities or
cash settlement money market instruments. The Company enters into these
contracts to hedge the interest rate risk of its mortgage loans held for
sale. At December 31, 1993, and 1992, forward contracts outstanding were
$1,352 million and $771 million, respectively. At December 31, 1993, net
unamortized deferred gains on the forward agreements were $5.2 million. The
Company manages its credit risk on forward contracts, which would arise in
the event of nonperformance by counterparties, through credit approval and
limit procedures.
The Company is committed under agreements, which are not expected to
result in loss to the Company, to sell mortgage loans pursuant to master
delivery commitments, and the remaining balance on those commitments was
$132 million at December 31, 1993, and $376 million at December 31, 1992.
MORTGAGES SOLD WITH RECOURSE --> Various recourse provisions, relating to
residential and multi-family mortgages sold with recourse, obligate the
Company for $194 million at December 31, 1993, and $445 million at December
31, 1992. All of the loans sold are collateralized by real estate mortgages
and a portion of the loans sold are supported by either
government-sponsored or private mortgage insurance.
FOREIGN CURRENCY COMMITMENTS --> Commitments to purchase and sell foreign
currency primarily consist of contracts to exchange currencies at specified
exchange rates on specified dates with various counterparties, which
enables customers to transfer or reduce the risks associated with changes
in foreign currency exchange rates. The Company minimizes the market and
liquidity risks created by changes in currency exchange rates by taking
offsetting positions. In addition, the Company controls the market risks
associated with these contracts by limiting the net exposure through
policies, procedures and monitoring. The Company manages its credit risk,
or potential risk of loss from contract nonperformance by a counterparty,
through credit limit approval and monitoring procedures. The aggregate
replacement cost of contracts in a gain position at December 31, 1993, was
not significant.
CREDIT CONCENTRATIONS --> The Company concentrates its lending to borrowers
in the region where the Company has banking offices and lends to borrowers
in a wide variety of industries.
Approximately 70 percent of the Company's commercial and financial
portfolio is outstanding to borrowers located in the Company's operating
region of Minnesota, Colorado, Wisconsin, Montana, North Dakota, and South
Dakota. Collateral held may include marketable securities, accounts
receivable, inventory and equipment.
For detail of the Company's real estate portfolio by project type and
geography as of December 31, 1993, and 1992, see Table 10 on page 28 which
is incorporated by reference into these Notes to Financial Statements. Such
loans are collateralized by the related property.
62
For detail of the Company's consumer loan portfolio by loan type see
Table 9 on page 26 under the category "Consumer" as of December 31, 1993,
and 1992, which is incorporated by reference into these Notes to Financial
Statements. Approximately 70 percent of the total consumer portfolio
outstanding at December 31, 1993, is to customers located in the Company's
operating region. Residential mortgages, home equity, and auto loans are
secured, but other consumer loan types are generally not secured.
NOTE N --> FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Value of Financial Instruments," requires
the disclosure of the fair value of all financial instruments for which it
is practicable to estimate that value. Financial instruments are generally
defined as cash, equity instruments or investments, and contractual
obligations to pay or receive cash or another financial instrument. In
defining fair value, the Statement indicates quoted market prices are the
preferred means of estimating the value of a specific instrument but in the
cases where market quotes are not available, fair values should be
determined using various valuation techniques such as discounted cash flow
calculations or by using pricing models or services.
Due to the nature of its business and the financing needs of its
customers, the Company is involved with a large number of financial
instruments, the majority of which are not actively traded. Accordingly,
the Company has used various valuation techniques to estimate the fair
value of its financial instruments. These techniques are significantly
affected by the assumptions used, including the discount rate, the
estimated timing and amount of cash flows, and the aggregation methods for
valuing similar products. In this regard, the resulting fair value
estimates cannot be substantiated by comparison to independent markets, and
in a majority of the cases, could not be realized by the immediate sale or
settlement of the instrument. Also, the estimates reflect a point in time
valuation that could change significantly based on changes in outside
economic factors, such as the general level of interest rates. Finally, the
required disclosures exclude the estimated values of certain financial
instruments and all nonfinancial instrument cash flows and are not intended
to provide or estimate a market value of the Company. The following
assumptions were used by the Company in estimating the fair value of the
specific financial instruments.
CASH AND CASH EQUIVALENTS --> Cash and cash equivalents have no interest
rate or credit risk component, thus their carrying value was assumed to
approximate fair value.
SECURITIES --> Generally, these items were valued using available market
quotes. In some instances, for securities that are not widely traded,
market quotes for comparable securities were used.
LOANS --> The loan portfolio consists of both variable rate and fixed rate
loans. The fair value for performing commercial variable rate loans, most
of which reprice within the next three months or are subject to immediate
repricing, were assumed to equal carrying value. For all nonaccrual loans,
the projected cash flows were reduced by the amount of estimated losses and
discounted over an assumed average remaining life of one to two years. The
fair value of fixed rate loans was estimated using discounted cash flow
analyses, as described below.
COMMERCIAL AND FINANCIAL INSTITUTIONS: In order to apply a discounted cash
flow analysis, loans were aggregated into "pools" of similar types and
expected repayment terms. The discount rates applied to the pools were
based on the current rates for loans with similar maturities and credit
risks. Current loan rates include a component for credit risk which has
proven to be adequate, in the aggregate, for future loan losses. The
expected cash flows were reduced for estimated historical prepayment
experience. The fixed rate loans in the commercial and financial
institutions portfolio had a weighted average rate of 7.5 percent in 1993
and 8.1 percent in 1992 and a weighted average maturity of 1.7 years in
1993 and 3.1 years in 1992. The average discount rate used to value these
loans was 6.6 percent in 1993 and 7.3 percent in 1992.
COMMERCIAL REAL ESTATE AND CONSTRUCTION: Commercial real estate and
construction loans were valued using a discounted cash flow analysis. The
fixed rate portion of this portfolio (excluding nonaccruals) had a weighted
average interest rate of 9.0 percent in 1993 and 9.4 percent in 1992 and a
weighted average remaining maturity of 4.2 years in 1993 and 4.4 years in
1992. The average discount rate used to value these loans was 9.6 percent
in 1993 and 10.0 percent in 1992.
RESIDENTIAL FIRST MORTGAGES: Residential first mortgage loans were
segregated into pools of similar coupons and maturities. These "pools" were
then matched to similar mortgage backed securities and
63
market quotes were obtained. In addition, the fair value of the mortgage
servicing rights related to these mortgages was estimated using a
discounted cash flow analysis and included in the fair value. The fixed
rate portion of this portfolio had a weighted average interest rate of 8.1
percent in 1993 and 8.7 percent in 1992 with an estimated weighted average
contractual remaining maturity of 14.2 years in 1993 and 15 years in 1992.
SECOND MORTGAGES AND CONSUMER INSTALLMENT: Fair values for second
mortgages and consumer installment loans were estimated using a discounted
cash flow analysis. The loans' values were computed using current loan
rates for similar loans. Prepayment assumptions ranging from 20-25 percent
were applied to scheduled cash flows, based upon the Company's experience
with these assets. The fixed rate portion of the consumer installment loans
had a weighted average rate of 9.2 percent in 1993 and 11.0 percent in 1992
and a weighted average remaining maturity of 1.4 years in 1993 and 1.3
years in 1992. The weighted average discount rate used was 7.5 percent in
1993 and 9.4 percent in 1992. The fixed rate portion of the second mortgage
loans had a weighted average interest rate of 9.0 percent in 1993 and 10.5
percent in 1992 and a weighted average remaining term of 2.3 years in 1993
and 2.4 years in 1992. The weighted average discount rate applied to second
mortgage loans was 7.3 percent in 1993 and 8.7 percent in 1992.
REVOLVING HOME EQUITY AND CONSUMER LINES: The fair value of revolving
lines was based on terms of the existing loans and included the estimated
value of the customer relationship. This approach is similar to that used
by the Company to evaluate potential acquisitions of portfolios of this
type. Estimated net interest income, noninterest income, expenses and
account attrition were discounted on an after-tax basis using an estimated
cost of capital of 13.7 percent in 1993 and 12.0 percent in 1992. The home
equity lines had a weighted average interest rate of 7.8 percent in 1993
and 7.9 percent in 1992 and a weighted average life of 5.3 years in 1993
and 8.6 years in 1992. Credit card loans had a weighted average rate of
15.4 percent in 1993 and 15.5 percent in 1992, and an estimated average
life of 7.3 years in 1993 and 4.4 years in 1992. Other revolving lines had
a weighted average interest rate of 10.6 percent in 1993 and 10.8 percent
in 1992 and a weighted average life of 7.6 years in 1993 and 5.9 years in
1992.
DEPOSIT LIABILITIES --> The fair value of demand deposits, savings
accounts, and certain money market deposits is defined by SFAS 107 to be
equal to the amount payable on demand at the date of the financial
statements. (See core deposit intangible below.) Fair values for fixed rate
certificates of deposits were estimated using a discounted cash flow
analysis using the current certificate of deposit yield curve to establish
discount rates. The weighted average interest rate for the certificate of
deposits was 5.3 percent in 1993 and 5.7 percent in 1992 and the weighted
average maturity was 1.0 year in 1993 and 1.2 years in 1992. The weighted
average discount rate was 3.4 percent in 1993 and 3.9 percent in 1992.
SHORT-TERM BORROWINGS --> Federal funds purchased, borrowings under
repurchase agreements, and other short-term borrowings are at variable
rates or have short-term maturities and their carrying value is assumed to
approximate their fair value.
LONG-TERM DEBT --> Medium-term notes and mortgage note obligations totaling
$123 million in 1993 and $346 million in 1992 were valued with a discounted
cash flow analysis using current market rates of similar maturity debt
securities to discount cash flows. The weighted average interest rate was
9.4 percent in 1993 and 9.5 percent in 1992 and the weighted average
maturity was .7 years in 1993 and 2.6 years in 1992. Other long-term debt
instruments were valued using available market quotes.
LOAN COMMITMENTS, LETTERS OF CREDIT AND GUARANTEES --> The substantial
majority of the Company's commitments have variable rates and do not expose
the Company to interest rate risk. No premium or discount was ascribed to
loan commitments because when funded, virtually all funding will be at
current market rates.
INTEREST RATE SWAPS, OPTIONS, FLOORS AND CAPS --> The interest rate swap
cash flows were estimated using a third party pricing model and discounted
based on appropriate LIBOR, Euro dollar future and Treasury yield curves.
Interest rate options were valued using an option pricing model.
CORE DEPOSIT INTANGIBLE --> Core deposits provide a stable, low-cost source
of funds which can be invested to earn a return greater than the cost of
servicing the deposits. (See deposit liabilities above.) The fair value of
the Company's core deposits was estimated using a discounted cash flow
model
64
which estimates the present value of the difference between the ongoing
cost of the core deposits and the cost of alternative funds at current
market rates. This is the same method the Company uses in calculating the
value of the core deposit intangible of an acquired bank. Under this method
the Company's core deposit intangible had an estimated fair value of $220
million as of December 31, 1993.
The estimated fair values of the Company's financial instruments are
shown in the table below:
1993 1992
-------------------------------------------------------------------------------
Valued at
Valued at Other Than Total
Carrying Carrying Carrying Fair Carrying Fair
(Dollars in Millions) Amount Amount Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and due from banks. . . . . . . . . . . . . $ 1,682 $ -- $ 1,682 $ 1,682 $ 1,916 $ 1,916
Federal funds sold and resale agreements . . . . 1,338 -- 1,338 1,338 1,710 1,711
Interest-bearing deposits with banks . . . . . . -- -- -- -- 327 327
Trading securities . . . . . . . . . . . . . . . 55 -- 55 55 94 94
Available-for-sale securities. . . . . . . . . . 3,319 -- 3,319 3,319 284 284
Held-to-maturity securities. . . . . . . . . . . -- -- -- -- 3,912 3,955
Loans:
Commercial . . . . . . . . . . . . . . . . . . . 4,491 1,671 6,162 6,225 5,703 5,695
Financial institutions . . . . . . . . . . . . . 1,972 32 2,004 2,004 1,132 1,132
Commercial real estate and construction. . . . . 1,005 721 1,726 1,703 1,773 1,731
Lease financing. . . . . . . . . . . . . . . . . -- 197 197 192 256 255
Consumer:
Residential mortgage . . . . . . . . . . . . . 57 2,365 2,422 2,480 2,568 2,618
Mortgages held for sale. . . . . . . . . . . . -- 1,088 1,088 1,105 705 705
Home equity and second mortgage. . . . . . . . 300 1,455 1,755 1,801 1,362 1,409
Credit card and revolving lines. . . . . . . . 89 2,358 2,447 2,668 2,382 2,614
Installment and other. . . . . . . . . . . . . 163 555 718 729 949 952
Student. . . . . . . . . . . . . . . . . . . . -- 260 260 262 246 247
Allowance for credit losses. . . . . . . . . . . -- (423) (423) -- (448)
-------------------------------------------------------------------------------
Total loans. . . . . . . . . . . . . . . . . 8,077 10,279 18,356 19,169 16,628 $17,358
-------------------------------------------------------------------------------
Total financial assets . . . . . . . . . . . 14,471 10,279 24,750 25,563 24,871 $25,645
NONFINANCIAL ASSETS:
Core deposit intangible. . . . . . . . . . . . . . -- 41 41 220 49 412
Mortgage servicing portfolio . . . . . . . . . . . -- 53 53 80 72 104
-------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . . . $14,471 $10,373 24,844 $25,863 24,992 $26,161
------------------------ ------------ ------------
------------------------ ------------ ------------
Other assets . . . . . . . . . . . . . . . . . . . 1,541 1,633
--------- ----------
Total Assets . . . . . . . . . . . . . . . . $26,385 $26,625
--------- ----------
--------- ----------
FINANCIAL LIABILITIES:
Deposits:
Noninterest-bearing demand and other . . . . . $ 7,489 $ -- $ 7,489 $ 7,489 $ 6,011 $ 6,011
Interest-bearing savings and checking. . . . . 8,115 -- 8,115 8,115 8,211 8,211
Savings and jumbo certificates . . . . . . . . 21 5,406 5,427 5,526 6,966 7,247
-------------------------------------------------------------------------------
Total deposits . . . . . . . . . . . . . . . . 15,625 5,406 21,031 21,130 21,188 21,469
Federal funds purchased. . . . . . . . . . . . . 553 -- 553 553 674 674
Securities sold under agreements to repurchase . 325 44 369 378 448 458
Other short-term funds borrowed. . . . . . . . . 412 -- 412 412 328 328
Long-term debt . . . . . . . . . . . . . . . . . 210 805 1,015 1,036 822 823
-------------------------------------------------------------------------------
Total financial liabilities. . . . . . . . . $17,125 $ 6,255 23,380 $23,509 23,460 $23,752
------------------------ ------------ ------------
------------------------ ------------ ------------
NONFINANCIAL LIABILITIES . . . . . . . . . . . . . 760 847
SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . 2,245 2,318
--------- ----------
Total Liabilities and Shareholders' Equity . . . . $26,385 $26,625
--------- ----------
--------- ----------
Unrecognized Financial Instruments:
Unrecognized gain on interest rate swaps and options N/A $ 123 N/A $ 104
Loan commitments . . . . . . . . . . . . . . . . N/A -- N/A (4)
Letters of credit. . . . . . . . . . . . . . . . N/A -- N/A --
-------------------------------------------------------------------------------
65
NOTE O --> COMMITMENTS AND CONTINGENT LIABILITIES
Rental expense for operating leases amounted to $72.1 million in 1993,
$66.4 million in 1992 and $65.9 million in 1991.
Future minimum payments, by year and net of sublease rentals, under
capitalized leases and noncancellable operating leases with initial or
remaining terms of one year or more, consisted of the following at
December 31, 1993:
Capitalized Operating
(In Millions) Leases Leases
- --------------------------------------------------------------------------
1994. . . . . . . . . . . . . . . . . . . . . . . $ 11.0 $ 47.6
1995. . . . . . . . . . . . . . . . . . . . . . . 11.0 46.1
1996. . . . . . . . . . . . . . . . . . . . . . . 11.0 40.3
1997. . . . . . . . . . . . . . . . . . . . . . . 4.2 39.1
1998. . . . . . . . . . . . . . . . . . . . . . . 4.1 38.0
Thereafter. . . . . . . . . . . . . . . . . . . . 62.2 421.0
-----------------------
Total minimum lease payments. . . . . . . . . . . 103.5 $632.1
----------
----------
Less amount representing interest . . . . . . . . 50.7
---------
Present value of net minimum lease payments . . . $ 52.8
---------
---------
The Company currently occupies approximately 640,000 square feet in
First Bank Place, located in Minneapolis, under a 10-year lease. The
Company has eight five-year options to renew the lease. Minimum rental
payments are approximately $12.5 million annually.
In November 1992 the Company took possession of a 368,000 square foot
facility in St. Paul. The lease term extends for 21 years, commencing
November 1991, with two five-year renewal options. Minimum rental payments
are approximately $4.2 million annually.
A wholly-owned subsidiary of First Bank National Association ("the
Bank") is a partner in a joint venture that owns and operates a twin-tower
office complex known as Pillsbury Center. The Bank and the Parent Company
have long-term lease agreements to occupy space in one of the towers.
Approximately two-thirds of the space has been sublet for the remaining
life of the long-term lease obligation and, except for two floors which are
occupied by the Company, the remaining space has been sublet through the
year 2001. The unamortized portion of the capitalized lease was $23.3
million at December 31, 1993, and $23.6 million at December 31, 1992.
Minimum annual payments required under the leases are approximately $2.7
million.
Various legal proceedings are currently pending against the Company.
Due to the complex nature of some of these actions and proceedings, it may
be a number of years before such matters ultimately are resolved. In the
opinion of management, the aggregate liability, if any, will not have a
material adverse effect on the Company's financial position.
66
NOTE P --> SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET --> Time certificates of deposit in
denominations of $100,000 or more totaled $1,061 million and $1,374 million
at December 31, 1993, and 1992, respectively.
CONSOLIDATED STATEMENT OF CASH FLOWS --> Listed below are supplemental
disclosures to the Consolidated Statement of Cash Flows.
Year Ended December 31 (In Millions) 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $114.2 $ 53.5 $ 5.3
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 567.1 716.6 1,121.2
Net noncash transfers to foreclosed property . . . . . . . . . . . . . . . 26.8 71.6 140.5
Noncash merger-related transfers to securities held for sale . . . . . . . 181.6 - -
Unrealized gain on available-for-sale securities, net of taxes of $20.9. . 34.0 - -
Cash acquisition of businesses:
Fair value of noncash assets acquired. . . . . . . . . . . . . . . . . . 40.8 26.0 242.7
Liabilities assumed. . . . . . . . . . . . . . . . . . . . . . . . . . . (37.8) (93.4) (0.9)
------------------------------------
Net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.0 $ (67.4) $ 241.8
------------------------------------
------------------------------------
Stock acquisition of BSI and Siouxland, and related subsidiaries:
Fair value of noncash assets acquired. . . . . . . . . . . . . . . . . . $ 2,096.0
Net cash acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . 197.1
Liabilities assumed. . . . . . . . . . . . . . . . . . . . . . . . . . . (2,060.1)
---------
Net value of common stock issued . . . . . . . . . . . . . . . . . . . $ 233.0
---------
---------
NOTE Q --> FIRST BANK SYSTEM, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEET
December 31 (In Millions) 1993 1992
- ----------------------------------------------------------------------------------------------------
ASSETS
Deposits with banks, principally interest-bearing (including
$139 and $119 with subsidiaries) . . . . . . . . . . . . . . . . . . . . $ 140 $ 120
Available-for-sale securities. . . . . . . . . . . . . . . . . . . . . . . 121 -
Investment securities (market value: $99). . . . . . . . . . . . . . . . . - 96
Investments in:
Bank affiliates and bank holding companies . . . . . . . . . . . . . . . 2,315 2,256
Nonbank affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 64
Trust affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 44
Advances to:
Bank affiliates and bank holding companies . . . . . . . . . . . . . . . 141 255
Nonbank affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 115
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233 256
--------------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,137 $3,206
--------------------
--------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term funds borrowed. . . . . . . . . . . . . . . . . . . . . . . . . $ 4 $ 2
Advances from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . 54 11
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 745 749
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 126
Shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,245 2,318
--------------------
Total liabilities and shareholders' equity . . . . . . . . . . . . . . $3,137 $3,206
--------------------
--------------------
67
CONDENSED STATEMENT OF INCOME
Year Ended December 31 (In Millions) 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------
INCOME
Dividends from subsidiaries (including $357.4, $152.0 and $87.5
from bank and bank holding company subsidiaries). . . . . . . . . . . . . $361.4 $158.9 $ 94.1
Interest from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . 20.4 24.8 41.2
Service and management fees from subsidiaries. . . . . . . . . . . . . . . 69.3 64.9 71.3
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.3 16.4 28.5
-------------------------
Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 471.4 265.0 235.1
EXPENSES
Interest on short-term funds borrowed. . . . . . . . . . . . . . . . . . . 2.4 .6 10.1
Interest on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 44.0 46.6 69.2
Operating expenses paid to subsidiaries. . . . . . . . . . . . . . . . . . 7.0 7.0 11.6
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97.1 75.2 59.8
-------------------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150.5 129.4 150.7
-------------------------
Income before income taxes, cumulative effect of changes
in accounting principles and equity in undistributed income
of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320.9 135.6 84.4
Income taxes (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . (14.3) 47.0 13.0
-------------------------
Income before cumulative effect of changes in accounting principles
and equity in undistributed income of subsidiaries. . . . . . . . . . . . 335.2 88.6 71.4
Cumulative effect of changes in accounting principles. . . . . . . . . . . - 40.3 -
-------------------------
Income of parent company . . . . . . . . . . . . . . . . . . . . . . . . . 335.2 128.9 71.4
Equity (deficiency) in undistributed income of subsidiaries:
Bank affiliates and bank holding companies. . . . . . . . . . . . . . . . (47.9) 165.2 149.0
Nonbank affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0 14.3 (14.2)
Trust affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7 3.4 .9
-------------------------
(37.2) 182.9 135.7
-------------------------
Net income $298.0 $311.8 $207.1
-------------------------
-------------------------
68
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31 (In Millions) 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 298.0 $ 311.8 $ 207.1
Adjustments to reconcile net income to net cash
provided by operating activities:
Deficiency (equity) in undistributed income of subsidiaries
before cumulative effect of accounting changes . . . . . . . . . . . . . 37.2 (182.9) (135.7)
Cumulative effect of accounting changes . . . . . . . . . . . . . . . . . - (40.3) -
Increase in accrued receivables, net. . . . . . . . . . . . . . . . . . . (5.7) .2 8.4
Increase (decrease) in accrued liabilities, net . . . . . . . . . . . . . (30.7) 68.5 (5.3)
Amortization of goodwill and other intangibles. . . . . . . . . . . . . . 5.4 4.9 5.9
Deferred tax provision. . . . . . . . . . . . . . . . . . . . . . . . . . 13.4 (7.6) 1.9
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31.7) 8.4 (9.3)
-------------------------
Net cash provided by operating activities. . . . . . . . . . . . . . . . 285.9 163.0 73.0
INVESTING ACTIVITIES
Proceeds from sales and maturities of investment securities. . . . . . . . 22.5 26.9 18.0
Purchases of investment securities . . . . . . . . . . . . . . . . . . . . (61.3) (45.5) (75.2)
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . (43.2) (158.7) (21.4)
Net decrease in short-term advances to affiliates. . . . . . . . . . . . . 54.2 21.9 257.1
Long-term advances made to affiliates. . . . . . . . . . . . . . . . . . . (22.4) (40.0) (10.0)
Principal collected on long-term advances made to affiliates . . . . . . . 126.0 .8 188.5
Other - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.3 16.6 (83.8)
-------------------------
Net cash provided (used) by investing activities . . . . . . . . . . . . 99.1 (178.0) 273.2
FINANCING ACTIVITIES
Net increase in short-term funds borrowed. . . . . . . . . . . . . . . . . 44.5 10.7 11.3
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . 240.0 125.8 160.9
Principal payments on long-term debt . . . . . . . . . . . . . . . . . . . (244.7) (88.0) (603.3)
Issuance (redemption) of preferred stock . . . . . . . . . . . . . . . . . (115.2) - 111.7
Proceeds from dividend reinvestment, stock option, and
stock purchase plans. . . . . . . . . . . . . . . . . . . . . . . . . . . 34.5 19.2 16.3
Issuance (repurchase) of treasury shares . . . . . . . . . . . . . . . . . (187.1) 2.8 -
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (137.5) (100.1) (87.5)
-------------------------
Net cash used by financing activities. . . . . . . . . . . . . . . . . . (365.5) (29.6) (390.6)
-------------------------
Change in cash and cash equivalents. . . . . . . . . . . . . . . . . . . 19.5 (44.6) (44.4)
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . 120.0 164.6 209.0
-------------------------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . $ 139.5 $ 120.0 $ 164.6
-------------------------
-------------------------
Certain restrictions exist regarding the extent to which bank
subsidiaries may transfer funds to the Company in the form of dividends,
loans or advances. Federal law prevents the Company and its nonbank
susbsidiaries from borrowing from bank subsidiaries unless the loans are
secured by various types of collateral. These secured loans that may be
made by bank subsidiaries to the Company or any individual affiliate are
generally limited to 10 percent of the bank's equity and 20 percent of the
bank's equity for loans to all affiliates and the Company in the aggregate.
Payment of dividends to the Company by its subsidiary banks is subject to
ongoing review by banking regulators and is subject to various statutory
limitations and in certain circumstances requires approval by banking
regulatory agencies. The approval of the Comptroller of the Currency is
required if total dividends declared by a national bank in any calendar
year exceed the bank's net profits (as defined) for that year combined with
its retained net profits for the preceding two calendar years. These
permissible dividends are further limited by the minimum capital
constraints imposed on all national banks by the Comptroller of the
Currency. All subsidiaries have the ability to pay dividends without prior
regulatory approval except one bank which bank represented less than one
percent of total assets at December 31, 1993.
69
REPORT OF MANAGEMENT
The financial statements of First Bank System, Inc. were prepared by management,
which is responsible for their integrity and objectivity. The statements have
been prepared in conformity with generally accepted accounting principles
appropriate in the circumstances and include amounts that are based on manage-
ment's best estimates and judgment. All financial information throughout the
annual report is consistent with that in the financial statements.
The Company maintains accounting and internal control systems that are
believed to provide reasonable assurance that assets are safeguarded and
transactions are properly authorized and recorded. To monitor compliance, the
Company carries out an extensive audit program. This program includes a review
for compliance with written policies and procedures and a comprehensive review
of the adequacy and effectiveness of internal control systems. However, there
are limits inherent in all systems of internal accounting control and management
recognizes that errors or irregularities may occur. Based on the recognition
that the costs of such systems should not exceed the benefits to be derived,
management believes the Company's system provides an appropriate cost/benefit
balance.
The Company's independent auditors, Ernst & Young, have been engaged to
render an opinion on the financial statements and to assist in carrying out the
audit program described above. Their opinion on the financial statements is
based on procedures performed in accordance with generally accepted auditing
standards, including tests of the accounting records to the extent necessary to
allow them to report on the fairness of the financial statements. Ernst & Young
has full access to the Audit Committee.
The management of the Company is committed to and has always maintained and
enforced a philosophy of high ethical standards in the conduct of its business.
Written policies covering conflicts of interest and other subjects are
formulated in a Code of Ethics which is uniformly applicable to all officers and
employees of the Company.
/s/ JOHN F. GRUNDHOFER
JOHN F. GRUNDHOFER
Chairman, President and Chief Executive Officer
/s/ RICHARD A. ZONA
RICHARD A. ZONA
Vice Chairman and Chief Financial Officer
/s/ SUSAN E. LESTER
SUSAN E. LESTER
Executive Vice President and Controller
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
First Bank System, Inc.
We have audited the accompanying consolidated balance sheets of First Bank
System, Inc. and subsidiaries as of December 31, 1993 and 1992, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1993. These financial
statements are the responsibility of the Company's management. Our respon-
sibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First Bank
System, Inc. and subsidiaries at December 31,1993 and 1992, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31,1993, in conformity with generally accepted
accounting principles.
As discussed in Note B to the consolidated financial statements, in 1993
First Bank System, Inc. changed its method of accounting for certain investments
in debt and equity securities.
Minneapolis, Minnesota
January 13,1994
70
CONSOLIDATED BALANCE SHEET--FIVE-YEAR SUMMARY
% CHANGE
December 31 (In Millions) 1993 1992 1991 1990 1989 1992-1993
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks. . . . . . . . . . . . . . $ 1,682 $ 1,916 $ 1,593 $ 1,922 $ 1,744 (12.2)%
Federal funds sold and resale agreements . . . . . 1,338 1,710 1,509 1,602 609 (21.8)
Interest-bearing deposits with banks . . . . . . . -- 327 410 58 47 **
Trading account securities . . . . . . . . . . . . 55 94 151 136 192 (41.5)
Securities held for sale . . . . . . . . . . . . . -- 284 336 -- 425 **
Securities:*
U.S. Treasury. . . . . . . . . . . . . . . . . . 1,541 1,816 1,155 964 943 (15.1)
Mortgage-backed securities . . . . . . . . . . . 1,300 1,583 1,165 1,577 1,656 (17.9)
State and political subdivisions . . . . . . . . 196 188 166 445 530 4.3
U.S. agencies and other. . . . . . . . . . . . . 282 325 19 420 493 (13.2)
----------------------------------------------
Total securities . . . . . . . . . . . . . . . 3,319 3,912 2,505 3,406 3,622 (15.2)
Loans. . . . . . . . . . . . . . . . . . . . . . . 18,779 17,076 16,365 16,829 19,546 10.0
Less allowance for credit losses . . . . . . . . 423 448 427 454 480 (5.6)
----------------------------------------------
Net loans. . . . . . . . . . . . . . . . . . . 18,356 16,628 15,938 16,375 19,066 10.4
Other assets . . . . . . . . . . . . . . . . . . . 1,635 1,754 1,409 1,305 1,524 (6.8)
----------------------------------------------
Total assets . . . . . . . . . . . . . . . . $26,385 $26,625 $23,851 $24,804 $27,229 (.9)%
----------------------------------------------
----------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing. . . . . . . . . . . . . . . $ 7,489 $ 6,011 $ 4,723 $ 4,295 $ 4,078 24.6%
Interest-bearing . . . . . . . . . . . . . . . . 13,542 15,177 14,422 15,083 16,358 (10.8)
----------------------------------------------
Total deposits . . . . . . . . . . . . . . . 21,031 21,188 19,145 19,378 20,436 (.7)
Short-term borrowings. . . . . . . . . . . . . . . 1,334 1,450 1,303 1,651 2,800 (8.0)
Long-term debt . . . . . . . . . . . . . . . . . . 1,015 822 948 1,506 1,733 23.5
Other liabilities. . . . . . . . . . . . . . . . . 760 847 603 669 820 (10.3)
----------------------------------------------
Total liabilities. . . . . . . . . . . . . . 24,140 24,307 21,999 23,204 25,789 (.7)
Shareholders' equity . . . . . . . . . . . . . . . 2,245 2,318 1,852 1,600 1,440 (3.1)
----------------------------------------------
Total liabilities and shareholders' equity . $26,385 $26,625 $23,851 $24,804 $27,229 (.9)%
----------------------------------------------
----------------------------------------------
<FN>
*AVAILABLE-FOR-SALE IN 1993
**NOT MEANINGFUL
71
CONSOLIDATED STATEMENT OF INCOME---FIVE-YEAR SUMMARY
% CHANGE
Year Ended December 31 (In Millions) 1993 1992 1991 1990 1989 1992-1993
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,398.6 $1,418.8 $1,624.3 $1,922.2 $2,206.3 (1.4)%
Investment securities:
Taxable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 218.2 186.4 221.1 274.3 348.4 17.1
Exempt from federal income taxes . . . . . . . . . . . . . . . 14.6 12.0 19.1 34.9 35.9 21.7
Trading account. . . . . . . . . . . . . . . . . . . . . . . . . 4.6 6.4 11.8 15.6 24.3 (28.1)
Federal funds sold and resale agreements . . . . . . . . . . . . 23.7 46.2 83.0 120.3 82.0 (48.7)
Deposits with banks. . . . . . . . . . . . . . . . . . . . . . . 2.1 11.5 2.7 10.5 13.0 (81.7)
------------------------------------------------- -----------
Total interest income. . . . . . . . . . . . . . . . . . . . . 1,661.8 1,681.3 1,962.0 2,377.8 2,709.9 (1.2)
INTEREST EXPENSE
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423.7 568.7 872.8 1,191.4 1,363.1 (25.5)
Federal funds purchased and repurchase agreements. . . . . . . . 31.8 37.1 57.9 139.0 199.3 (14.3)
Other short-term funds borrowed. . . . . . . . . . . . . . . . . 19.0 14.3 24.2 70.6 134.9 32.9
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 54.4 66.1 100.3 152.2 177.4 (17.7)
------------------------------------------------- -----------
Total interest expense . . . . . . . . . . . . . . . . . . . . 528.9 686.2 1,055.2 1,553.2 1,874.7 (22.9)
------------------------------------------------- -----------
Net interest income. . . . . . . . . . . . . . . . . . . . . . . 1,132.9 995.1 906.8 824.6 835.2 13.8
Provision for credit losses (1992 includes $13.6 merger-related) 125.2 183.4 202.2 215.4 335.8 (31.7)
------------------------------------------------- -----------
Net interest income after provision for credit losses. . . . . . 1,007.7 811.7 704.6 609.2 499.4 24.1
NONINTEREST INCOME
Trust fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 146.1 127.8 115.5 108.1 100.4 14.3
Credit card fees . . . . . . . . . . . . . . . . . . . . . . . . 137.1 116.9 94.4 71.6 67.5 17.3
Service charges on deposit accounts. . . . . . . . . . . . . . . 115.3 108.4 97.2 91.8 78.3 6.4
Insurance commissions. . . . . . . . . . . . . . . . . . . . . . 20.9 27.3 27.2 29.6 26.7 (23.4)
Trading account profits and commissions. . . . . . . . . . . . . 10.1 10.5 10.2 9.6 23.0 (3.8)
Investment securities gains. . . . . . . . . . . . . . . . . . . .3 1.9 8.9 3.6 17.6 (84.2)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139.8 142.9 144.3 123.3 171.6 (2.2)
------------------------------------------------- -----------
Total noninterest income . . . . . . . . . . . . . . . . . . . 569.6 535.7 497.7 437.6 485.1 6.3
NONINTEREST EXPENSE
Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389.1 388.7 371.7 391.8 416.5 .1
Employee benefits. . . . . . . . . . . . . . . . . . . . . . . . 86.3 85.5 79.3 77.3 78.6 .9
Net occupancy. . . . . . . . . . . . . . . . . . . . . . . . . . 93.4 87.9 84.0 83.3 89.8 6.3
Furniture and equipment. . . . . . . . . . . . . . . . . . . . . 72.7 67.2 64.8 67.8 70.8 8.2
FDIC insurance . . . . . . . . . . . . . . . . . . . . . . . . . 46.4 42.2 38.5 25.2 18.9 10.0
Professional services. . . . . . . . . . . . . . . . . . . . . . 36.7 38.7 37.8 36.8 38.5 (5.2)
Amortization of goodwill and other intangible assets . . . . . . 30.6 25.2 21.6 14.7 13.8 21.4
Other personnel costs. . . . . . . . . . . . . . . . . . . . . . 27.5 20.2 17.8 11.6 18.3 36.1
Data processing. . . . . . . . . . . . . . . . . . . . . . . . . 27.0 28.3 28.3 21.8 23.1 (4.6)
Other real estate (1992 includes $26.4 merger-related) . . . . . 2.2 41.2 29.9 42.4 49.1 (94.7)
Merger, integration and restructuring. . . . . . . . . . . . . . 72.2 84.0 -- -- 37.5 (14.0)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216.4 205.2 195.6 208.3 236.2 5.5
-------------------------------------------------
Total noninterest expense. . . . . . . . . . . . . . . . . . . . 1,100.5 1,114.3 969.3 981.0 1,091.1 (1.2)
-------------------------------------------------
Income (loss) before income taxes and cumulative effect
of changes in accounting principles. . . . . . . . . . . . . . 476.8 233.1 233.0 65.8 (106.6) 104.5
Applicable income taxes (credit) . . . . . . . . . . . . . . . . 178.8 78.6 25.9 8.5 (19.8) 127.5
-------------------------------------------------
Income (loss) before cumulative effect
of changes in accounting principles. . . . . . . . . . . . . . 298.0 154.5 207.1 57.3 (86.8) 92.9
Cumulative effect of changes in accounting principles. . . . . . -- 157.3 -- -- -- *
------------------------------------------------- -----------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . $ 298.0 $ 311.8 $ 207.1 $ 57.3 $ (86.8) (4.4)%
------------------------------------------------- -----------
------------------------------------------------- -----------
Net income (loss) applicable to common equity. . . . . . . . . . $ 270.2 $ 281.6 $ 183.4 $ 33.6 $ (106.2) (4.0)%
------------------------------------------------- -----------
------------------------------------------------- -----------
<FN>
*NOT MEANINGFUL
72
QUARTERLY CONSOLIDATED FINANCIAL DATA
1993 1992
-----------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
(In Millions, Except Per Share Data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans. . . . . . . . . . . . . . . . . . $ 352.6 $ 353.9 $ 348.6 $ 343.5 $ 342.0 $ 346.7 $ 363.6 $ 366.5
Investment securities:
Taxable. . . . . . . . . . . . . . . . 46.9 52.9 58.4 60.0 48.7 45.0 43.9 48.8
Exempt from federal income taxes . . . 4.7 3.2 3.3 3.4 2.2 3.2 3.3 3.3
Trading account. . . . . . . . . . . . . 1.1 1.3 1.2 1.0 1.2 1.5 1.7 2.0
Federal funds sold and
resale agreements. . . . . . . . . . . 5.7 3.5 5.9 8.6 10.5 12.8 11.9 11.0
Deposits with banks. . . . . . . . . . . -- .1 -- 2.0 2.8 1.2 3.2 4.3
-----------------------------------------------------------------------------------------
Total interest income. . . . . . . 411.0 414.9 417.4 418.5 407.4 410.4 427.6 435.9
INTEREST EXPENSE
Deposits . . . . . . . . . . . . . . . . 94.0 102.1 107.0 120.6 116.2 134.0 150.7 167.8
Federal funds purchased and
repurchase agreements. . . . . . . . . 7.6 9.0 7.5 7.7 12.3 8.0 10.0 6.8
Other short-term funds borrowed. . . . . 4.9 5.1 5.1 3.9 5.1 3.4 2.8 3.0
Long-term debt . . . . . . . . . . . . . 14.9 13.4 13.0 13.1 14.9 17.0 16.6 17.6
-----------------------------------------------------------------------------------------
Total interest expense . . . . . . 121.4 129.6 132.6 145.3 148.5 162.4 180.1 195.2
-----------------------------------------------------------------------------------------
Net interest income. . . . . . . . . . . 289.6 285.3 284.8 273.2 258.9 248.0 247.5 240.7
Provision for credit losses. . . . . . . 27.0 27.0 33.1 38.1 52.9 41.0 43.1 46.4
-----------------------------------------------------------------------------------------
Net interest income after provision
for credit losses. . . . . . . . . . . 262.6 258.3 251.7 235.1 206.0 207.0 204.4 194.3
NONINTEREST INCOME
Trust fees . . . . . . . . . . . . . . . 37.5 36.6 36.5 35.5 32.2 32.7 31.5 31.4
Credit card fees . . . . . . . . . . . . 37.5 36.6 34.5 28.5 31.9 30.7 28.7 25.6
Service charges on deposit accounts. . . 28.4 28.6 28.0 30.3 27.6 27.1 26.2 27.5
Insurance commissions. . . . . . . . . . 5.3 5.8 4.5 5.3 6.6 7.1 6.7 6.9
Trading account profits and commissions. 2.2 2.4 2.9 2.6 2.6 2.4 3.2 2.3
Investment securities gains. . . . . . . -- -- -- .3 .1 1.8 -- --
Other. . . . . . . . . . . . . . . . . . 35.0 32.0 34.1 38.7 36.1 34.8 36.2 35.8
-----------------------------------------------------------------------------------------
Total noninterest income . . . . . 145.9 142.0 140.5 141.2 137.1 136.6 132.5 129.5
NONINTEREST EXPENSE
Salaries . . . . . . . . . . . . . . . . 95.0 97.3 97.3 99.5 101.6 97.5 96.4 93.2
Employee benefits. . . . . . . . . . . . 19.6 20.0 21.9 24.8 20.1 20.4 22.4 22.6
Net occupancy. . . . . . . . . . . . . . 22.8 22.8 23.2 24.6 21.8 22.3 21.7 22.1
Furniture and equipment. . . . . . . . . 19.2 17.8 18.5 17.2 17.5 16.3 16.1 17.3
FDIC insurance . . . . . . . . . . . . . 11.5 11.4 11.7 11.8 10.4 10.3 10.5 11.0
Professional services. . . . . . . . . . 10.7 9.1 8.6 8.3 10.5 10.0 10.0 8.2
Other real estate. . . . . . . . . . . . (.1) 2.2 .9 (.8) 27.3 4.7 4.9 4.3
Merger, integration and restructuring. . -- -- 72.2 -- 84.0 -- -- --
Other. . . . . . . . . . . . . . . . . . 76.6 75.1 77.7 72.1 75.8 69.5 67.1 66.5
-----------------------------------------------------------------------------------------
Total noninterest expense. . . . . 255.3 255.7 332.0 257.5 369.0 251.0 249.1 245.2
-----------------------------------------------------------------------------------------
Income (loss) before income taxes
and cumulative effect of changes
in accounting principles . . . . . . . 153.2 144.6 60.2 118.8 (25.9) 92.6 87.8 78.6
Applicable income taxes (credit) . . . . 57.3 53.5 26.7 41.3 (8.8) 32.0 29.3 26.1
-----------------------------------------------------------------------------------------
Income (loss) before cumulative
effect of changes in accounting
principles . . . . . . . . . . . . . . 95.9 91.1 33.5 77.5 (17.1) 60.6 58.5 52.5
Cumulative effect of changes in
accounting principles. . . . . . . . . -- -- -- -- -- -- -- 157.3
-----------------------------------------------------------------------------------------
Net income (loss). . . . . . . . . . . . $ 95.9 $ 91.1 $ 33.5 $ 77.5 $ (17.1) $ 60.6 $ 58.5 $ 209.8
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Net income (loss) applicable
to common equity . . . . . . . . . . . $ 90.4 $ 83.7 $ 26.1 $ 70.0 $ (24.5) $ 53.0 $ 50.9 $ 202.2
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Earnings (loss) per common share . . . . $ .81 $ .74 $ .23 $ .61 $ (.23) $ .50 $ .49 $ 1.94
SELECTED AVERAGE BALANCES
Loans. . . . . . . . . . . . . . . . . . $18,819 $18,188 $17,292 $16,685 $16,309 $16,053 $16,393 $16,158
Earning assets . . . . . . . . . . . . . 23,270 22,710 22,455 22,267 21,337 20,880 20,856 20,711
Total assets . . . . . . . . . . . . . . 26,266 25,554 25,347 25,053 24,019 23,460 23,468 23,353
Deposits . . . . . . . . . . . . . . . . 20,930 20,248 20,284 19,916 18,999 18,542 18,777 18,627
Long-term debt . . . . . . . . . . . . . 1,072 916 847 817 881 971 903 945
Common equity. . . . . . . . . . . . . . 1,957 1,974 1,949 1,936 1,792 1,746 1,688 1,646
-----------------------------------------------------------------------------------------
THE FOURTH QUARTER OF 1992 INCLUDED $110.4 MILLION IN MERGER-RELATED CHARGES AND
$13.6 MILLION IN THE PROVISION FOR CREDIT LOSSES IN CONNECTION WITH THE WESTERN
CAPITAL INVESTMENT CORPORATION AND BANK SHARES INCORPORATED ACQUISITIONS. THE
SECOND QUARTER OF 1993 INCLUDED $72.2 MILLION IN MERGER-RELATED CHARGES IN
CONNECTION WITH THE COLORADO NATIONAL BANKSHARES, INC. ACQUISITION.
73
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
Five Year Summary of Consolidated Operations 1993 1992 1992-1993
- --------------------------------------------------------------------------------------------------------------------------------
Interest Interest
Yields Yields %Change
(In Millions) Balance Interest and Rates Balance Interest and Rates Average Balance
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Securities:
U.S. Treasury. . . . . . . . . . . . . . . $ 1,778 $ 100.7 5.66% $ 1,529 $ 97.1 6.35% 16.3%
Mortgage-backed securities . . . . . . . . 1,486 85.1 5.73 953 70.0 7.35 55.9
State & political subdivisions . . . . . . 192 22.1 11.51 152 18.1 11.91 26.3
U.S. agencies and other. . . . . . . . . . 516 31.3 6.07 324 19.3 5.96 59.3
----------------- ----------------
Total securities . . . . . . . . . . . . 3,972 239.2 6.02 2,958 204.5 6.91 34.3
Trading account securities . . . . . . . . . 117 4.7 4.02 137 6.5 4.74 (14.6)
Deposits with banks. . . . . . . . . . . . . 56 2.1 3.75 294 11.5 3.91 (81.0)
Federal funds sold and resale agreements . . 794 23.7 2.98 1,337 46.2 3.46 (40.6)
Loans:
Commercial:
Commercial . . . . . . . . . . . . . . . 5,665 404.6 7.14 5,487 421.9 7.69 3.2
Financial institutions . . . . . . . . . 1,534 42.5 2.77 1,096 40.8 3.72 40.0
Real estate:
Commercial mortgage. . . . . . . . . . 1,511 125.1 8.28 1,502 128.8 8.58 .6
Construction . . . . . . . . . . . . . 207 15.3 7.39 258 20.2 7.83 (19.8)
Agricultural . . . . . . . . . . . . . . 192 13.1 6.82 182 13.6 7.47 5.5
Lease financing. . . . . . . . . . . . . 220 15.8 7.18 206 16.4 7.96 6.8
----------------- ----------------
Total commercial . . . . . . . . . . . 9,329 616.4 6.61 8,731 641.7 7.35 6.8
Consumer:
Residential mortgage . . . . . . . . . . 3,505 267.9 7.64 2,851 242.0 8.49 22.9
Credit card. . . . . . . . . . . . . . . 1,733 233.1 13.45 1,709 243.0 14.22 1.4
Other. . . . . . . . . . . . . . . . . . 3,189 292.4 9.17 2,966 308.6 10.40 7.5
----------------- ----------------
Total consumer . . . . . . . . . . . . 8,427 793.4 9.42 7,526 793.6 10.54 12.0
----------------- ----------------
Total loans. . . . . . . . . . . . . . 17,756 1,409.8 7.94 16,257 1,435.3 8.83 9.2
Allowance for credit losses. . . . . . . . 447 467 (4.3)
------- ------
Net loans. . . . . . . . . . . . . . . . 17,309 15,790 9.6
----------------- ----------------
Total earning assets*. . . . . . . . . 22,695 1,679.5 7.40 20,983 1,704.0 8.12 8.2
Cash and due from banks. . . . . . . . . . . 1,720 1,510 13.9
Other assets . . . . . . . . . . . . . . . . 1,607 1,566 2.6
------- ------
Total assets . . . . . . . . . . . . . $25,575 $23,592 8.4%
------- ------
------- ------
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits . . . . . . . $ 6,416 $ 4,810 33.4%
Interest-bearing deposits:
Interest checking. . . . . . . . . . . . 2,454 38.6 1.57 2,198 51.7 2.35 11.6
Money market accounts. . . . . . . . . . 3,923 102.9 2.62 3,874 124.5 3.21 1.3
Other savings accounts . . . . . . . . . 1,411 30.2 2.14 1,132 34.2 3.02 24.6
Savings certificates . . . . . . . . . . 4,957 182.6 3.68 5,292 258.6 4.89 (6.3)
Certificates over $100,000 . . . . . . . 1,186 69.4 5.85 1,468 99.7 6.79 (19.2)
----------------- ----------------
Total interest-bearing deposits. . . . 13,931 423.7 3.04 13,964 568.7 4.07 (.2)
Short-term borrowings. . . . . . . . . . . . 1,270 50.8 4.00 1,106 51.4 4.65 14.8
Long-term debt . . . . . . . . . . . . . . . 913 54.4 5.96 927 66.1 7.13 (1.5)
----------------- ----------------
Total interest-bearing liabilities . . 16,114 528.9 3.28 15,997 686.2 4.29 .7
Other liabilities. . . . . . . . . . . . . . 740 686 7.9
Preferred equity . . . . . . . . . . . . . . 348 379 (8.2)
Common equity. . . . . . . . . . . . . . . . 1,957 1,720 13.8
------- ------
Total liabilities and
shareholders' equity . . . . . . . . $25,575 $23,592 8.4%
------- ------ ----
------- ------
Net interest income. . . . . . . . . . . . . $1,150.6 $1,017.8
------- -------
------- -------
Gross interest margin. . . . . . . . . . . . 4.12% 3.83%
---- ----
---- ----
Gross interest margin without taxable-
equivalent increments. . . . . . . . . . . 4.04% 3.72%
---- ----
---- ----
PERCENT OF EARNING ASSETS
Interest income. . . . . . . . . . . . . . . 7.40% 8.12%
Interest expense . . . . . . . . . . . . . . 2.33 3.27
---- ----
Net interest margin. . . . . . . . . . . 5.07 4.85
Provision for credit losses. . . . . . . . . .55 .87
---- ----
Net interest margin after provision
for credit losses. . . . . . . . . . . 4.52 3.98
Noninterest income . . . . . . . . . . . . . 2.51 2.56
Noninterest expense. . . . . . . . . . . . . 4.85 5.32
---- ----
Income (loss) before income taxes and
cumulative effect of changes in
accounting principles. . . . . . . . . 2.18 1.22
Income taxes and taxable-equivalent
adjustment . . . . . . . . . . . . . . . . .87 .48
---- ----
Income (loss) before cumulative effect
of changes in accounting principles. . 1.31 .74
Cumulative effect of changes in accounting
principles . . . . . . . . . . . . . . . . -- .75
---- ----
Net income (loss). . . . . . . . . . . . . . 1.31% 1.49%
---- ----
---- ----
Net interest margin without taxable-
equivalent increments. . . . . . . . . . . 4.99% 4.74%
---- ----
---- ----
<FN>
INTEREST AND RATES ARE PRESENTED ON A FULLY TAXABLE-EQUIVALENT BASIS UNDER A TAX RATE OF 35 PERCENT FOR 1993 AND 34 PERCENT FOR
1992, 1991, 1990, AND 1989.
INTEREST INCOME AND RATES ON LOANS INCLUDE LOAN FEES. NONACCRUAL LOANS ARE INCLUDED IN AVERAGE LOAN BALANCES.
*BEFORE DEDUCTING THE ALLOWANCE FOR CREDIT LOSSES
74
Five Year Summary of Consolidated Operations 1991 1990
- --------------------------------------------------------------------------------------------------------------------------------
Interest Interest
Yields Yields
(In Millions) Balance Interest and Rates Balance Interest and Rates
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Securities:
U.S. Treasury. . . . . . . . . . . . . . . . . . . . . . . . . $ 995 $ 77.8 7.82% $ 970 $ 77.9 8.03%
Mortgage-backed securities . . . . . . . . . . . . . . . . . . 1,312 117.2 8.93 1,576 155.6 9.87
State & political subdivisions . . . . . . . . . . . . . . . . 241 27.5 11.41 581 62.2 10.71
U.S. agencies and other. . . . . . . . . . . . . . . . . . . . 423 27.2 6.43 582 30.9 5.31
----------------- ----------------
Total securities . . . . . . . . . . . . . . . . . . . . . . 2,971 249.7 8.40 3,709 326.6 8.81
Trading account securities . . . . . . . . . . . . . . . . . . . 176 12.1 6.88 185 15.8 8.54
Deposits with banks. . . . . . . . . . . . . . . . . . . . . . . 44 2.7 6.14 132 10.5 7.95
Federal funds sold and resale agreements . . . . . . . . . . . . 1,384 83.0 6.00 1,467 120.3 8.20
Loans:
Commercial:
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . 6,343 600.3 9.46 7,869 844.1 10.73
Financial institutions . . . . . . . . . . . . . . . . . . . 710 31.2 4.39 562 33.6 5.98
Real estate:
Commercial mortgage. . . . . . . . . . . . . . . . . . . . 1,391 135.1 9.71 1,283 133.2 10.38
Construction . . . . . . . . . . . . . . . . . . . . . . . 328 30.5 9.30 465 46.1 9.91
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . 177 17.3 9.77 181 20.4 11.27
Lease financing. . . . . . . . . . . . . . . . . . . . . . . 253 20.9 8.26 324 26.9 8.30
----------------- ----------------
Total commercial . . . . . . . . . . . . . . . . . . . . . 9,202 835.3 9.08 10,684 1,104.3 10.34
Consumer:
Residential mortgage . . . . . . . . . . . . . . . . . . . . 2,697 247.0 9.16 3,676 371.6 10.11
Credit card. . . . . . . . . . . . . . . . . . . . . . . . . 1,495 217.3 14.54 1,091 174.1 15.96
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,947 349.3 11.85 2,653 302.7 11.41
----------------- ----------------
Total consumer . . . . . . . . . . . . . . . . . . . . . . 7,139 813.6 11.40 7,420 848.4 11.43
----------------- ----------------
Total loans. . . . . . . . . . . . . . . . . . . . . . . . 16,341 1,648.9 10.09 18,104 1,952.7 10.79
Allowance for credit losses. . . . . . . . . . . . . . . . . . 455 478
------- ------
Net loans. . . . . . . . . . . . . . . . . . . . . . . . . . 15,886 17,626
----------------- ----------------
Total earning assets*. . . . . . . . . . . . . . . . . . . 20,916 1,996.4 9.54 23,597 2,425.9 10.28
Cash and due from banks. . . . . . . . . . . . . . . . . . . . . 1,333 1,383
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 1,281 1,354
------- ------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $23,075 $25,856
------- ------
------- ------
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . $ 3,879 $ 3,578
Interest-bearing deposits:
Interest checking. . . . . . . . . . . . . . . . . . . . . . 1,897 57.5 3.03 1,748 84.7 4.85
Money market accounts. . . . . . . . . . . . . . . . . . . . 3,607 194.3 5.39 3,297 226.0 6.85
Other savings accounts . . . . . . . . . . . . . . . . . . . 988 47.8 4.84 1,018 52.0 5.11
Savings certificates . . . . . . . . . . . . . . . . . . . . 5,504 402.1 7.31 5,548 445.7 8.03
Certificates over $100,000 . . . . . . . . . . . . . . . . . 2,340 171.1 7.31 4,375 383.0 8.75
----------------- ----------------
Total interest-bearing deposits. . . . . . . . . . . . . . 14,336 872.8 6.09 15,986 1,194.4 7.45
Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . 1,384 82.1 5.93 2,507 209.6 8.36
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 1,214 100.3 8.26 1,652 152.2 9.21
----------------- ----------------
Total interest-bearing liabilities . . . . . . . . . . . . 16,934 1,055.2 6.23 20,145 1,553.2 7.71
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . 578 623
Preferred equity . . . . . . . . . . . . . . . . . . . . . . . . 282 264
Common equity. . . . . . . . . . . . . . . . . . . . . . . . . . 1,402 1,246
------- ------
Total liabilities and shareholders' equity . . . . . . . . $23,075 $25,856
------- ------
------- ------
Net interest income. . . . . . . . . . . . . . . . . . . . . . . $ 941.2 $ 872.7
------- -------
------- -------
Gross interest margin. . . . . . . . . . . . . . . . . . . . . . 3.31% 2.57%
---- ----
---- ----
Gross interest margin without taxable-equivalent increments. . . 3.15% 2.37%
---- ----
---- ----
PERCENT OF EARNING ASSETS
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . 9.54% 10.28%
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 5.04 6.58
---- ----
Net interest margin. . . . . . . . . . . . . . . . . . . . . 4.50 3.70
Provision for credit losses. . . . . . . . . . . . . . . . . . . .97 .91
---- ----
Net interest margin after provision for credit losses. . . . 3.53 2.79
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . 2.38 1.85
Noninterest expense. . . . . . . . . . . . . . . . . . . . . . . 4.63 4.16
---- ----
Income (loss) before income taxes and
cumulative effect of changes in accounting principles. . . 1.28 .48
Income taxes and taxable-equivalent adjustment . . . . . . . . . .29 .24
---- ----
Income (loss) before cumulative effect of
changes in accounting principles . . . . . . . . . . . . . .99 .24
Cumulative effect of changes in accounting principles. . . . . . -- --
---- ----
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . .99% .24%
---- ----
---- ----
Net interest margin without taxable-equivalent increments. . . . 4.34% 3.49%
---- ----
---- ----
Five Year Summary of Consolidated Operations 1989
- -------------------------------------------------------------------------------------------------
Interest
Yields
(In Millions) Balance Interest and Rates
- -------------------------------------------------------------------------------------------------
ASSETS
Securities:
U.S. Treasury. . . . . . . . . . . . . . . . . . . . . . . . . $ 950 $ 75.3 7.93%
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . 2,022 187.8 9.29
State & political subdivisions . . . . . . . . . . . . . . . . 836 81.0 9.69
U.S. agencies and other. . . . . . . . . . . . . . . . . . . . 761 57.9 7.61
-----------------
Total securities . . . . . . . . . . . . . . . . . . . . . . 4,569 402.0 8.80
Trading account securities . . . . . . . . . . . . . . . . . . . 284 26.1 9.19
Deposits with banks. . . . . . . . . . . . . . . . . . . . . . . 147 13.0 8.84
Federal funds sold and resale agreements . . . . . . . . . . . . 887 81.9 9.23
Loans:
Commercial:
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . 10,124 1,147.6 11.34
Financial institutions . . . . . . . . . . . . . . . . . . . 271 15.1 5.57
Real estate:
Commercial mortgage. . . . . . . . . . . . . . . . . . . . 1,231 134.8 10.95
Construction . . . . . . . . . . . . . . . . . . . . . . . 567 60.5 10.67
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . 193 23.0 11.92
Lease financing. . . . . . . . . . . . . . . . . . . . . . . 346 30.0 8.67
-----------------
Total commercial . . . . . . . . . . . . . . . . . . . . . 12,732 1,411.0 11.08
Consumer:
Residential mortgage . . . . . . . . . . . . . . . . . . . . 3,756 376.9 10.03
Credit card. . . . . . . . . . . . . . . . . . . . . . . . . 891 143.7 16.13
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,779 318.9 11.48
-----------------
Total consumer . . . . . . . . . . . . . . . . . . . . . . 7,426 839.5 11.30
-----------------
Total loans. . . . . . . . . . . . . . . . . . . . . . . . 20,158 2,250.5 11.16
Allowance for credit losses. . . . . . . . . . . . . . . . . . 495
-------
Net loans. . . . . . . . . . . . . . . . . . . . . . . . . . 19,663
-----------------
Total earning assets*. . . . . . . . . . . . . . . . . . . 26,045 2,773.5 10.65
Cash and due from banks. . . . . . . . . . . . . . . . . . . . . 1,393
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 1,666
-------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $28,609
-------
-------
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . $ 3,547
Interest-bearing deposits:
Interest checking. . . . . . . . . . . . . . . . . . . . . . 1,694 86.3 5.09
Money market accounts. . . . . . . . . . . . . . . . . . . . 2,868 207.6 7.24
Other savings accounts . . . . . . . . . . . . . . . . . . . 1,059 55.5 5.24
Savings certificates . . . . . . . . . . . . . . . . . . . . 4,884 399.9 8.19
Certificates over $100,000 . . . . . . . . . . . . . . . . . 6,563 613.8 9.35
-----------------
Total interest-bearing deposits. . . . . . . . . . . . . . 17,068 1,363.1 7.99
Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . 3,682 334.2 9.08
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 1,797 177.4 9.87
-----------------
Total interest-bearing liabilities . . . . . . . . . . . . 22,547 1,874.7 8.31
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . 942
Preferred equity . . . . . . . . . . . . . . . . . . . . . . . . 231
Common equity. . . . . . . . . . . . . . . . . . . . . . . . . . 1,342
Total liabilities and shareholders' equity . . . . . . . . $28,609
-------
-------
Net interest income. . . . . . . . . . . . . . . . . . . . . . . $ 898.8
-------
-------
Gross interest margin. . . . . . . . . . . . . . . . . . . . . . 2.34%
----
----
Gross interest margin without taxable-equivalent increments. . . 2.09%
----
----
PERCENT OF EARNING ASSETS
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . 10.65%
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 7.20
----
Net interest margin. . . . . . . . . . . . . . . . . . . . . 3.45
Provision for credit losses. . . . . . . . . . . . . . . . . . . 1.29
----
Net interest margin after provision for credit losses. . . . 2.16
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . 1.87
Noninterest expense. . . . . . . . . . . . . . . . . . . . . . . 4.19
----
Income (loss) before income taxes and
cumulative effect of changes in accounting principles. . . (.16)
Income taxes and taxable-equivalent adjustment . . . . . . . . . .17
----
Income (loss) before cumulative effect of
changes in accounting principles . . . . . . . . . . . . . (.33)
Cumulative effect of changes in accounting principles. . . . . . -
----
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . (.33)%
----
----
Net interest margin without taxable-equivalent increments. . . . 3.20%
----
----
75
SUPPLEMENTAL FINANCIAL DATA
EARNINGS PER SHARE SUMMARY
1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------------
Primary net income before cumulative effect
of accounting changes. . . . . . . . . . . . . . . . . . . $2.39 $1.18 $1.79 $.36 $(1.23)
Cumulative effect of accounting changes. . . . . . . . . . . -- 1.49 -- -- --
---------------------------------------------------------------------
Primary net income (loss). . . . . . . . . . . . . . . . . . $2.39 $2.67 $1.79 $.36 $(1.23)
---------------------------------------------------------------------
---------------------------------------------------------------------
Fully diluted net income before cumulative effect
of accounting changes. . . . . . . . . . . . . . . . . . . $2.38 $1.21 $1.78 $.36 $(1.23)
Cumulative effect of accounting changes. . . . . . . . . . . -- 1.43 -- -- --
---------------------------------------------------------------------
Fully diluted net income (loss). . . . . . . . . . . . . . . $2.38 $2.64 $1.78 $.36 $(1.23)
---------------------------------------------------------------------
---------------------------------------------------------------------
RATIOS
1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------------
Return on average assets . . . . . . . . . . . . . . . . . . 1.17% 1.32% .90% .22% (.30)%
Return on average common shareholders' equity . . . . . . . 13.8 16.4 13.1 2.8 (7.9)
Average total equity to average assets . . . . . . . . . . . 9.0 8.9 7.3 5.8 5.5
Dividends per share to net income per share. . . . . . . . . 41.8 33.0 45.8 * *
---------------------------------------------------------------------
<FN>
*Not meaningful
OTHER STATISTICS
1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------------
Common shares outstanding - year end*. . . . . . . . . . . . 109,401,664 113,450,425 102,536,867 101,079,861 86,951,051
Average common shares outstanding and
common stock equivalents:
Primary. . . . . . . . . . . . . . . . . . . . . . . . . . 113,075,429 105,361,022 102,533,284 93,302,380 86,072,698
Fully diluted. . . . . . . . . . . . . . . . . . . . . . . 116,794,358 109,671,248 103,668,953 93,302,380 86,072,698
Number of shareholders - year-end**. . . . . . . . . . . . . 22,100 25,625 23,977 25,484 23,273
Average number of employees (full-time equivalents). . . . . 12,300 12,553 12,742 13,626 14,749
Common dividends paid (millions) . . . . . . . . . . . . . . $109.7 $73.1 $65.6 $58.8 $90.6
---------------------------------------------------------------------
<FN>
*Defined as total common shares less common stock held in
treasury.
**Based on number of common stock shareholders of record
STOCK PRICE RANGE AND DIVIDENDS
1993 1992
-------------------------------------------------------------------
Sales Price Sales Price
------------------- Dividends -------------------- Dividends
High Low Paid High Low Paid
- -----------------------------------------------------------------------------------------------------------------------------------
First quarter. . . . . . . . . . . . . . . . . . . . . . . . $32.00 $27.13 $.25 $28.38 $23.63 $.205
Second quarter . . . . . . . . . . . . . . . . . . . . . . . 34.00 25.88 .25 28.25 24.00 .225
Third quarter. . . . . . . . . . . . . . . . . . . . . . . . 33.63 29.50 .25 27.75 23.13 .225
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . 34.13 28.00 .25 28.50 24.00 .225
Closing price - December 31. . . . . . . . . . . . . . . . . 30.75 28.125
---------------------------------------------------------------------
The common stock of First Bank System, Inc. is traded on the New York Stock
Exchange.
76
COMMERCIAL LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
Maturing
----------------------------------------------
In 1 Year After 1 Year
At December 31, 1993 (In Millions) or Less Through 5 Years After 5 Years
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,008 $ 913 $ 118
Financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,882 121 1
Real estate:
Commercial mortgage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 806 512 177
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 19 7
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 4 --
Lease financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 127 11
----------------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,079 $1,696 $ 314
----------------------------------------------
----------------------------------------------
Due in Due After
One Year One Year Total
- -----------------------------------------------------------------------------------------------------------------------------------
Loans at fixed interest rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,160 $ 934 $ 2,094
Loans at variable interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . 6,919 1,076 7,995
----------------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,079 $2,010 $10,089
----------------------------------------------
----------------------------------------------
THE MATURITIES OF LOANS SHOWN ABOVE ARE BASED ON REMAINING SCHEDULED REPAYMENTS.
TIME CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS IN DENOMINATIONS OF
$100,000 OR MORE AT DECEMBER 31
Under Three Six to Over
Three to Six Twelve Twelve
(In Millions) Months Months Months Months Total
- -----------------------------------------------------------------------------------------------------------------------------------
1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . $370 $148 $209 $334 $1,061
1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . 462 171 200 541 1,374
1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . 927 199 199 625 1,950
77
SHORT-TERM FUNDS BORROWED
Average Maximum Average Weighted
Daily Outstanding Interest Rate Average
Outstanding Amount Month-Ending Paid During Interest Rate
(In Millions) at Year-End Outstanding Balance the Year at Year-End
- -----------------------------------------------------------------------------------------------------------------------------------
1993
Federal funds purchased and securities sold under
agreements to repurchase . . . . . . . . . . . . . . . . $ 922 $ 990 $1,388 3.21% 3.15%
Commercial paper . . . . . . . . . . . . . . . . . . . . . -- -- -- -- --
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 412 280 412 6.79 2.87
--------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . $1,334 $1,270 1,642 4.00 3.07
--------------------------
--------------------------
1992
Federal funds purchased and securities sold under
agreements to repurchase . . . . . . . . . . . . . . . . $1,122 $ 842 $1,140 4.41% 3.39%
Commercial paper . . . . . . . . . . . . . . . . . . . . . -- -- -- -- --
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 328 264 396 5.42 3.09
--------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . $1,450 $1,106 1,479 4.65 3.27
--------------------------
--------------------------
1991
Federal funds purchased and securities sold under
agreements to repurchase . . . . . . . . . . . . . . . . $ 955 $1,048 $1,255 5.52% 4.61%
Commercial paper . . . . . . . . . . . . . . . . . . . . . -- 20 28 5.00 --
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 348 316 470 7.34 3.88
--------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . $1,303 $1,384 1,696 5.93 4.40
-------------------------- ----------------------------------------
-------------------------- ----------------------------------------
78
ANNUAL REPORT ON FORM 10-K
Securities and Exchange Commission
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31,1993.
Commission File Number 1-6880
FIRST BANK SYSTEM, INC.
Incorporated in the State of Delaware
IRS Employer Identification #41-0255900
Address: 601 Second Avenue South
Minneapolis, Minnesota 55402-4302
Telephone: (612) 973-1111
Securities registered pursuant to Section 12(b) of the Act (all registered on
the New York Stock Exchange): Common Stock, Par Value $1.25; 10.50 percent
Preferred Stock, Series 1989A; $3.5625 Cumulative Convertible Preferred Stock,
Series 1991A; Preferred Share Purchase Rights.
As of January 31,1994, First Bank System, Inc. had 115,470,984 shares of
common stock outstanding. The aggregate market value of common stock held by
non-affiliates as of January 31, 1994, was $3,542,287,104.
First Bank System, Inc. (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months and (2) has been subject to such filing requirements for the past 90
days.
No disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is contained in the Company's definitive proxy statement incorporated by
reference herein.
This Annual Report and Form 10-K incorporates into a single document the
requirements of the accounting profession and the Securities and Exchange
Commission. Only those sections of the Annual Report referenced in the
following cross-reference index are incorporated in the Form 10-K.
Cross-Reference Page
- ------------------------------------------------------------------------------
PART I
ITEM 1 Business
General . . . . . . . . . . . . . . . . . . . . . . . . . . . .80
Distribution of Assets, Liabilities and
Stockholders' Equity; Interest Rates
and Interest Differential . . . . . . . . . . . . .19-20, 74-75
Investment Portfolio. . . . . . . . . . . . . . . . . . 37-38, 71
Loan Portfolio. . . . . . . . . . . . . . . . . 21, 25-33, 50, 77
Summary of Loan Loss Experience . . . . . . . . . . . . .21,25-33
Deposits. . . . . . . . . . . . . . . . . . . . . . . . 74-75, 77
Return on Equity and Assets . . . . . . . . . . . . . . . . . .76
Short-Term Borrowings . . . . . . . . . . . . . . . . . . . . .78
ITEM 2 Properties. . . . . . . . . . . . . . . . . . . . . . . . . . .80
ITEM 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . .none
ITEM 4 Submission of Matters to a Vote of Security Holders . . . . .none
PART II
ITEM 5 Market for the Registrant's Common
Equity and Related Stockholder Matters. . . . . . . .19, 69, 76
ITEM 6 Selected Financial Data . . . . . . . . . . . . . . . . . . . .13
ITEM 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 12-39
ITEM 8 Financial Statements and Supplemental Data. . . . . . . . .73, 81
ITEM 9 Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosures . . . . . . . . . . . . . . . . . . .none
PART III
ITEM 10 Directors and Executive Officers of the Registrant. . . . . . .83
ITEM 11 Executive Compensation. . . . . . . . . . . . . . . . . . . . . *
ITEM 12 Security Ownership of Certain
Beneficial Owners and Management. . . . . . . . . . . . . . . *
ITEM 13 Certain Relationships and Related Transactions. . . . . . . . . *
PART IV
ITEM 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K . . . . . . . . . . . . . . . . . . .81
*FIRST BANK SYSTEM'S DEFINITIVE PROXY STATEMENT FOR THE 1994 ANNUAL MEETING OF
SHAREHOLDERS IS INCORPORATED HEREIN BY REFERENCE, OTHER THAN THE SECTIONS
ENTITLED "REPORT OF THE ORGANIZATION COMMITTEE ON EXECUTIVE COMPENSATION" AND
"PERFORMANCE GRAPH."
79
GENERAL --> First Bank System, Inc. (the "Company") is a regional, multi-state
bank holding company headquartered in the Twin Cities of Minneapolis and
St. Paul, Minnesota. The Company was incorporated in Delaware in 1929 and owns
more than 97 percent of the capital stock of each of the nine commercial banks
and four trust companies, having 181 banking offices in Minnesota, Colorado,
Montana, North Dakota, South Dakota, Washington, and Wisconsin. The Company
also has various nonbank subsidiaries engaged in financial services principally
in the Upper Midwest.
The banks are engaged in general commercial banking business principally in
domestic markets. They range in size from $42 million to $12.3 billion in
deposits and provide a wide variety of services to individuals, businesses,
industry, institutional organizations, governmental entities and other financial
institutions. Depository services include checking accounts, savings accounts
and time certificate contracts. Ancillary services such as cash management and
receivable lockbox collection are provided for corporate customers. Nine
subsidiary banks and four trust companies provide a full range of fiduciary
activities for individuals, estates, foundations, business corporations, and
charitable organizations.
The Company provides banking services through its subsidiary banks to both
domestic and foreign customers and correspondent banks. These services include
consumer banking, commercial lending, financing of import/export trade, foreign
exchange, and investment services.
The Company, through its subsidiaries, also provides services in mortgage
banking, trust, commercial and agricultural finance, data processing, leasing,
and brokerage services.
On a full-time equivalent basis, employment during 1993 averaged a total of
12,300 employees.
COMPETITION --> The commercial banking business is highly competitive.
Subsidiary banks compete with other commercial banks and with other financial
institutions, including savings and loan associations, mutual savings banks,
finance companies, mortgage banking companies, credit unions, and mutual funds.
In recent years, competition also has increased from institutions not subject to
the same regulatory restrictions as domestic banks and bank holding companies.
GOVERNMENT POLICIES --> The operations of the Company's various operating units
are affected by state and federal legislative changes and by policies of various
regulatory authorities, including those of the several states in which they
operate, the United States and foreign governments. These policies include, for
example, statutory maximum legal lending rates, domestic monetary policies of
the Board of Governors of the Federal Reserve System, United States fiscal
policy, international currency regulations and monetary policies, and capital
adequacy and liquidity constraints imposed by bank regulatory agencies.
SUPERVISION AND REGULATION --> The Company is a registered bank holding company
under the Bank Holding Company Act of 1956 (the "Act") and is subject to the
supervision of, and regulation by, the Board of Governors of the Federal Reserve
System (the "Board").
Under the Act, a bank holding company may engage in banking, managing or
controlling banks, furnishing or performing services for banks it controls, and
conducting activities that the Board has determined to be closely related to
banking. The Company must obtain approval of the Board before acquiring control
of a bank or by acquiring more than 5 percent of the outstanding voting shares
of a company engaged in a "bank-related" business. Under the Act and state
laws, the Company is subject to certain restrictions as to states in which the
Company can acquire a bank.
National banks are subject to the supervision of, and are examined by, the
Comptroller of the Currency. State banks are subject to the supervision of the
regulatory authorities of the states in which they are located. All subsidiary
banks of the Company are members of the Federal Deposit Insurance Corporation,
and as such, are subject to examination thereby. In practice, the primary
federal regulator makes regular examinations of each subsidiary bank subject to
its regulatory review or participates in joint examinations with other federal
regulators. Areas subject to regulation by federal and state authorities
include the allowance for credit losses, investment, loans, mergers, issuance of
securities, payment of dividends, establishment of branches and other aspects of
operations.
PROPERTIES --> At December 31,1993, the Company's subsidiaries owned and
operated a total of 138 facilities while leasing an additional 148 facilities,
all of which are well maintained.
The Company's largest facilities are located in Minneapolis, St. Paul, and
Denver. In Minneapolis, First Bank National Association and the Company's
corporate offices occupy parts of four buildings. Thirty-one floors of First
Bank Place and two floors of Pillsbury Center are leased. The Company also
occupies nine floors in the Marquette bank building and five floors in the
Concourse building, both of which are owned by the Company. In St. Paul, the
Company leases an Operations Center as well as one-third of the First National
Bank Building and four floors in the First Trust Center. In Denver, Colorado
National Bank occupies approximately 70 percent of the Colorado National Bank
Building and three percent of the Park Central Building, both of which are owned
by subsidiaries of Colorado National Bank.
Additional information with respect to premises and equipment is presented
in Notes G and 0 of Notes to Consolidated Financial Statements.
80
EXHIBITS
Financial Statements Filed Page
- ----------------------------------------------------------------
First Bank System, Inc. and Subsidiaries
Consolidated Financial Statements. . . . . . . . . . . . 40
Notes to Consolidated Financial Statements . . . . . . . 44
Report of Independent Auditors . . . . . . . . . . . . . 70
Schedules to the consolidated financial statements required by Article 9 of
Regulation S-X are omitted since the required infor-
mation is included in the footnotes or is not applicable.
During the three months ended December 31, 1993, the Company filed a report
on Form 8-K on October 13,1993, relating to the announcement of the Company's
intention to purchase Boulevard Bancorp, Inc.
The following Exhibit Index lists the Exhibits to Annual Report on Form
10-K.
(1)3A Restated Certificate of Incorporation, as amended. Filed
as Exhibit 3A to report on Form 10-K for fiscal year ended
December 31,1989.
3B By-laws.
4 [Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K,
copies of instruments defining the rights of holders of
long-term debt are not filed. First Bank System, Inc.
agrees to furnish a copy thereof to the Securities and
Exchange Commission upon request.]
(1)1OA Agreement of Merger and Consolidation dated November 8,1992,
by and among First Bank System, Inc., Central
Bancorporation, Inc. and Colorado National Bankshares, Inc.
Filed as Exhibit 2.1 to 8-K Report filed November 13,1992.
(1)10B Stock Purchase Agreements dated as of May 30, 1990, among
Corporate Partners, L.P.; Corporate Offshore Partners, L.P.;
The State Board of Administration of Florida and First Bank
System, Inc. and related documents. Filed as Exhibits 4.8-
4.15 to Registration Statement on Form S-3 filed on
September 10, 1991.
(1)(2)10C First Bank System, Inc. 1987 Stock Option Plan. Filed as
Exhibit 10E to report on Form 10-K for fiscal year ended
December 31,1991.
(1)(2)10D First Bank System, Inc. Nonqualified Supplemental Executive
Retirement Plan. Filed as Exhibit 1OF to report on Form 10-
K for fiscal year ended December 31,1991.
(1)(2)10E First Bank System, Inc. Executive Deferral Plan. Filed as
Exhibit lOG to report on Form 10-K for fiscal year ended
December 31,1991.
(1)(2)10F First Bank System, Inc. Annual Incentive Plan. Filed as
Exhibit 10H to report on Form 10-K for fiscal year ended
December 31,1992.
(1)(2)10G First Bank System, Inc. Independent Director Retirement and
Death Benefit Plan. Filed as Exhibit 10I to report on Form
10-K for fiscal year ended December 31,1992.
(1)(2)10H First Bank System, Inc. Deferred Compensation Plan for
Directors. Filed as Exhibit 10J to report on Form 10-K for
fiscal year ended December 31,1992.
(1)10I Rights Agreement dated as of December 21,1988, between First
Bank System, Inc. and Morgan Shareholder Services Trust
Company. Filed as Exhibit 1 to 8-K Report filed January
5,1989.
(1)(2)10J First Bank System, Inc. Restated Employee Stock Purchase
Plan. Filed as Exhibit 10L to report on Form 10-K for
fiscal year ended December 31,1991.
(1)(2)10K Form of Change-in-Control Agreement between First Bank
System, Inc. and certain officers of the Company. Filed as
Exhibit 10M to report on Form 1O-K for fiscal year ended
December 31, 1991.
(1)(2)10L First Bank System, Inc. 1991 Stock Incentive Plan. Filed as
Exhibit A to Definitive Proxy Statement of Annual Meeting of
Shareholders on April 24,1991.
(2)10M First Bank System, Inc. 1994 Stock Incentive Plan.
(1)(2)10N Agreement between First Bank System, Inc. and John F.
Grundhofer dated December 30,1992. Filed as Exhibit 10O to
report on Form 10-K for fiscal year ended December 31,1992.
(2)10O Deferred Income Agreement between First Bank System, Inc.
and John F. Grundhofer dated November 1, 1993.
(2)10P Description of First Bank System, Inc. Stock Option Loan
Policy.
11 Statement re: Computation of Primary and Fully Diluted Net
Income per Common Share.
12 Statement re: Computation of Ratio of Earnings to Fixed
Charges.
13 Integrated Annual Report / Form 10-K to Shareholders for
the year ended December 31,1993 (See cover page).
21 Subsidiaries of the Registrant.
23 Consent of Ernst& Young.
Copies of the Exhibits will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the Financial Statement Schedule and
Exhibits.
(1) Exhibit has heretofore been filed with the Securities and Exchange
Commission and is incorporated herein as an exhibit by reference.
(2) Items that are management contracts or compensatory plans or arrangements
required to be filed as an exhibit pursuant to Item 14(c) of this
Form 10-K.
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on February
16,1994, on its behalf by the undersigned thereunto duly authorized.
First Bank System, Inc.
John F. Grundhofer
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on February 16,1994, by the following persons on behalf of
the registrant and in the capacities indicated.
JOHN F. GRUNDHOFER
Chairman, President, Chief Executive Officer, and Director
(principal executive officer)
RICHARD A. ZONA
Vice Chairman and Chief Financial Officer
(principal financial officer)
SUSAN E. LESTER
Executive Vice President and Controller
(principal accounting officer)
ROGER L HALE
Director
DELBERT W. JOHNSON
Director
JOHN H. KAREKEN
Director
RICHARD L. KNOWLTON
Director
KENNETH A. MACKE
Director
THOMAS F. MADISON
Director
MARILYN C. NELSON
Director
WILL F. NICHOLSON, JR.
Director
NICHOLAS R. PETRY
Director
EDWARD J. PHILLIPS
Director
JAMES J. RENIER
Director
S. WALTER RICHEY
DIRECTOR
RICHARD L ROBINSON
Director
LYLE E. SCHROEDER
Director
82
EXECUTIVE OFFICERS
JOHN F. GRUNDHOFER
Mr. Grundhofer, 55, has been Chairman of the Board, President and Chief
Executive Officer of First Bank System since 1990. Previously, he served as
Vice Chairman and Senior Executive Officer for Southern California, Wells Fargo
Bank N.A.
WILLIAM F. FARLEY
Mr. Farley, 49, has been Vice Chairman of First Bank System since 1990. His
previous positions include: Partner, Headrick& Farley and President, First Bank
National Association.
PHILIP G. HEASLEY
Mr. Heasley, 44, was named Vice Chairman in 1993 and continues to serve as
President of the Retail Product Group. His previous positions include:
Executive Vice President and President of the Retail Product Group and Senior
Vice President, Consumer Business, Electronic Banking Division.
RICHARD A. ZONE
Mr. Zona, 49, has served as Vice Chairman since 1990 and Chief Financial Officer
since 1989. He was previously a Partner at Ernst & Young,
J. ROBERT HOFFMANN
Mr. Hoffmann, 48, has been Executive Vice President and Chief Credit Officer
since 1990. He previously served as Executive Vice President, Credit
Administration at First Bank National Association.
JOHN M. MURPHY, JR.
Mr. Murphy, 52, has been Chairman and Chief Investment Officer, First Trust
National Association, since 1990. Before that he was Managing Director, First
Asset Management, a division of First Bank National Association.
DANIEL C. ROHR
Mr. Rohr, 47, has served as Executive Vice President of the Commercial Banking
Group since 1990. Previously, he was Executive Vice President and Chief Credit
Officer at Columbia Savings & Loan Association.
ROBERT H. SAYRE
Mr. Sayre, 54, has served as Executive Vice President of Human Resources since
1990. Previously, he was Executive Director at Russell Reynolds Associates,
Inc.
MICHAEL J. O'ROURKE
Mr. O'Rourke, 49, has been Executive Vice President, Secretary and General
Counsel since 1991. Previously, he was Senior Vice President, Secretary and
General Counsel.
SUSAN E. LESTER
Ms. Lester, 37, was named Executive Vice President in 1993, in addition to her
duties as Controller. Previously, she was Senior Vice President and Controller.
DAVID R. EDSTAM
Mr. Edstam, 46, has been Senior Vice President and Treasurer since 1989.
ELIZABETH A. MALKERSON
Ms. Malkerson, 44, has been Senior Vice President of Corporate Relations since
1990. Her previous position was Vice President of External Affairs.
DIRECTORS
COLEMAN BLOOMFIELD
Chairman and Chief Executive Officer
Minnesota Mutual Life Insurance Co.
St. Paul, Minnesota
JOHN F. GRUNDHOFER
Chairman, President and Chief Executive Officer
First Bank System, Inc.
Minneapolis, Minnesota
ROGER L. HALE
President and Chief Executive Officer
TENNANT
Minneapolis, Minnesota
*DELBERT W. JOHNSON
President
Pioneer Metal Finishing, Inc.
Minneapolis, Minnesota
JOHN H. KAREKEN
Professor of Banking and Finance
Curtis L. Carlson School of Management
University of Minnesota
Minneapolis, Minnesota
RICHARD L KNOWLTON
Chairman of the Board
Hormel Foods Corporation
Austin, Minnesota
KENNETH A. MACKE
Chairman and Chief Executive Officer
Dayton Hudson Corporation
Minneapolis, Minnesota
THOMAS F. MADISON
Retired President
U.S. West Communications-Markets
Minneapolis, Minnesota
MARILYN C. NELSON
Vice Chairman and Director
Carlson Holdings, Inc.
Minneapolis, Minnesota
WILL F. NICHOLSON, JR.
Chairman, President and Chief Executive Officer
Colorado National Bankshares, Inc.
Denver, Colorado
NICHOLAS R. PETRY
President
The Petry Company
Denver, Colorado
EDWARD J. PHILLIPS
Chairman and Chief Executive Officer
Phillips Beverage Company
Minneapolis, Minnesota
JAMES J. RENIER
Retired Chairman of the Board and Chief Executive Officer
Honeywell Inc.
Minneapolis, Minnesota
S. WALTER RICHEY
President and Chief Executive Officer
Space Center Company
St. Paul, Minnesota
RICHARD L. ROBINSON
Chairman and Chief Executive Officer
Robinson Dairy, Inc.
Denver, Colorado
RICHARD L. SCHALL
Retired Vice Chairman of the Board
Dayton Hudson Corporation
Minneapolis, Minnesota
LYLE E. SCHROEDER
President and Chief Executive Officer
Sioux Valley Hospital
Sioux Falls, South Dakota
*ELECTED TO THE BOARD OF DIRECTORS
EFFECTIVE JANUARY 19, 1994
83
FBS LOCATIONS
First Bank System, Inc. primarily serves
Minnesota, Colorado, Montana, North Dakota,
South Dakota, and Wisconsin through 181
banking locations and 24 additional offices
of nonbank subsidiaries.
[GRAPHICS; MAP]
- FBS Retail and commercial banking
- Corporate Trust offices
- Republic Acceptance offices
MINNESOTA COLORADO SOUTH DAKOTA
Albert Lea Arvada (2) Aberdeen
Alexandria Aspen Rapid City (3)
Anoka (2) Aurora (4) Sioux Falls (4)
Apple Valley Boulder (2)
Austin Broomfield WISCONSIN
Babbitt Canon City
Blaine Colorado Springs(6) Brookfield
Bloomington (4) Denver (18) Brown Deer
Brainerd Englewood (3) La Crosse
Brooklyn Park Evergreen Milwaukee
Burnsville (2) Fort Collins (2) Onalaska
Cloquet Glenwood Springs
Columbia Heights Golden CORPORATE TRUST OFFICES
Cottage Grove Grand Junction
Duluth (3) Greeley Billings, MT
Eagan La Junta Boston, MA
East Grand Forks Lakewood (4) Chicago, IL
Eden Prairie (2) Littleton (4) Denver, CO
Edina (3) Longmont Duluth, MN
Fairmont Loveland Fargo, ND
Forest Lake Northglenn Frederick, MD
Hibbing Pueblo (4) Los Angeles, CA
Hopkins Westminster (2) Milwaukee, WI
Little Canada Wheatridge Portland, OR
Mankato (2) San Francisco, CA
Minneapolis (13) MONTANA Seattle, WA
Minnetonka (2) St. Paul, MN
Oakdale Billings (2)
Owatonna Bozeman REPUBLIC ACCEPTANCE CORP.
Plymouth (2) Butte OFFICES
Ramsey Great Falls (3)
Robbinsdale Havre Kansas City, MO
Rochester (3) Helena Milwaukee, WI
Shoreview Miles City Minneapolis, MN
St. Anthony Missoula (2) St. Louis, MO
St. Cloud
St. Louis Park NORTH DAKOTA
St. Paul (6)
Virginia Bismarck (2)
Wayzata Fargo (4)
West St. Paul Grand Forks (2)
White Bear Lake (2) Jamestown
Willmar Minot (2)
Woodbury
84
CORPORATE DATA
EXECUTIVE OFFICES
First Bank Place
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
(612) 973-1111
ANNUAL MEETING
The annual meeting of shareholders will be held at the Minneapolis Convention
Center, 1301 Second Avenue South, Minneapolis, Minnesota 55403, at 2 p.m. on
Thursday, April 28,1994.
SECURITIES INFORMATION
First Bank System Common Stock is traded on the New York Stock Exchange under
the ticker symbol FBS and also may be found under the listing FtBkSy. The
transfer agent and registrar for First Bank System is First Chicago Trust
Company of New York, P.O. Box 2500, Jersey City, New Jersey 07303-2500.
DIVIDEND REINVESTMENT
First Bank System shareholders can take advantage of a plan that provides
automatic reinvestment of dividends and/or optional cash purchases of additional
shares at market price of up to $5,000 per quarter. If you would like more
information, contact First Chicago Trust Company of New York, P.O. Box 13531,
Newark, New Jersey 07188-0001, (800) 446-2617.
INVESTMENT COMMUNITY CONTACTS
John R. Danielson
Senior Vice President, Investor Relations
(612) 973-2261
Karin E. Glasgow
Assistant Vice President, Investor Relations
(612) 973-2264
General Information, Investor Relations
(612) 973-2263
First Bank System, Inc.
P.O. Box 522
Minneapolis, Minnesota 55480
A limited number of spiral-bound 1993 Annual Reports are available for the
investment community. Please write or call Investor Relations to obtain a copy.
COMMUNITY RESPONSIBILITY REPORT
For information about FBS's community reinvestment activities, call FBS
Community Relations, (612) 973-2433.
For additional annual reports or information about the 1994 annual meeting of
shareholders, please contact Corporate Relations, First Bank System, First Bank
Place, Minneapolis, Minnesota 55402, (612) 973-2434.
First Bank System is an Equal Employment Opportunity/Affirmative Action
employer.
85
APPENDIX OF GRAPHIC MATERIAL
Cross Reference to
Narrative
Location in Description in
Annual Report Description Form 10-K
- -------------------------------------------------------------------------------------------------------
Inside Front Graphics illustrating Return on Average Common Equity, Inside Front Cover
Cover Earnings Per Share and Shareholders' Equity to Assets Ratio for
years 1990 through 1993
Page 1 Graphics illustrating Return on Average Assets, Efficiency Ratio Page 1
and Allowance Coverage Ratio of Nonperforming Loans for
years 1990 through 1993
Page 2 Graphic table entitled "Managing Capital for Shareholder Page 2
Value" summarizing various capital related transactions
Page 4 Graphic table listing the recent acquisitions Page 4
Page 5 Graphic table summarizing the deposit market shares of FBS in Page 5
various locations
Page 6 Pie chart reflecting that the Retail & Community Banking Page 6
Group accounts for 61 percent of FBS' net income
Page 6 and 7 Graphs illustrating the Retail & Community Banking Group Page 6 and 7
Efficiency Ratio, Net Interest Income, Net Income, and
Noninterest Income for years 1991 through 1993
Page 8 Pie chart reflecting that the Commercial Banking Group Page 8
accounts for 28 percent of FBS' Net Income
Page 8 and 9 Graphs illustrating the Commercial Banking Group Efficiency Page 8 and 9
Ratio, Net Interest Income, Net Income, and Noninterest Income
for the years 1991 through 1993
Page 10 Pie chart reflecting that the Trust & Investment Group accounts Page 10
for 11 percent of FBS' Net Income
Page 10 and 11 Graphs illustrating the Trust & Investment Group Efficiency Page 10 and 11
Ratio, Net Interest Income, Net Income, and Noninterest Income
for years 1991 through 1993
86