1996
1996 ANNUAL REPORT AND FORM 10-K
[LOGO] FIRST BANK SYSTEM
FIRST BANK SYSTEM
CONTENTS
2 Letter to Shareholders
6 Business Line Reviews
18 Management's Discussion & Analysis
41 Consolidated Financial Statements
69 Five-Year Consolidated Financial Statements
71 Quarterly Consolidated Financial Data
76 Form 10-K
80 Executive Officers & Directors
81 FBS Locations
82 Corporate Data
FBS BANKING REGION
[U.S.MAP]
ABOUT THE COMPANY
- -----------------
First Bank System, Inc. (FBS), a regional, multistate bank holding company
headquartered in Minneapolis, Minnesota, offers a wide array of financial
products and services to individuals, businesses and institutions.
Through our bank subsidiaries, FBS serves customers principally in 11
Midwestern and Rocky Mountain states, where our banking franchise is a market
leader in most of the region's largest communities. Nationally, we're a leader
in corporate trust services and electronic credit card payment systems. And we
offer investment products that have ranked among the best available. We serve
our customers through multiple distribution channels including 359 banking and
15 nonbanking offices, a network of 3,235 automated teller machines (ATMs), and
centralized telephone service centers.
With 1996 return on average assets of 1.88 percent, return on average
common equity of 21.4 percent, and an efficiency ratio of 49.9 percent, all
before nonrecurring items, FBS ranks among the top-performing U.S. bank holding
companies.
Our commitment to creating shareholder value directs virtually every
decision we make. Focusing on five business lines has helped fulfill this
commitment. Our businesses are:
Retail Banking--consumer and small business banking, increasingly through
convenient, cost-effective channels including supermarkets and general
merchandise stores, ATMs, and FastLine(SM) 24-Hour Banking by telephone.
Payment Systems--consumer, corporate and purchasing cards, and merchant
processing.
Business Banking and Private Financial Services--credit and other financial
services to middle market companies, and integrated services in private banking,
trust and investments to ultra affluent customers.
Commercial Banking--credit products, treasury management, trust and other
financial services, primarily to large companies in the Twin Cities region.
Corporate Trust and Institutional Financial Services--bond indenture
trusteeship, paying agent, and custody services to corporate and municipal debt
issuers; 401(k) and other employee benefit programs; asset management; and
institutional investment products.
FBS is listed on the New York Stock Exchange under the ticker symbol FBS
and also may be found under FtBkSy.
Our home page on the World Wide Web is located at http://www.fbs.com.
FINANCIAL SUMMARY
Percent Change
(Dollars in Millions, Except Per Share Data) 1996 1995 1995-1996
- ------------------------------------------------------------------------------------------------------------------
Income before nonrecurring items $ 667.7 $ 568.1 17.5%
Nonrecurring items 72.1 - *
----------------------
Net income $ 739.8 $ 568.1 30.2
----------------------
PER COMMON SHARE
Primary income before nonrecurring items $ 4.81 $ 4.19 14.8
Nonrecurring items .53 - *
----------------------
Primary net income $ 5.34 $ 4.19 27.4
----------------------
Fully diluted income before nonrecurring items $ 4.74 $ 4.11 15.3
Nonrecurring items .51 - *
----------------------
Fully diluted net income $ 5.25 $ 4.11 27.7
----------------------
Earnings on a cash basis before nonrecurring items** $ 5.29 $ 4.53 16.8
Nonrecurring items .72 - *
----------------------
Earnings on a cash basis (fully diluted)** $ 6.01 $ 4.53 32.7
----------------------
Dividends paid $ 1.65 $ 1.45 13.8
Common shareholders' equity 22.63 20.59 9.9
----------------------
RETURN ON AVERAGE ASSETS
Income before nonrecurring items 1.88% 1.73% *
Nonrecurring items .21 - *
----------------------
Return on average assets 2.09% 1.73% *
----------------------
RETURN ON AVERAGE COMMON EQUITY
Income before nonrecurring items 21.4% 21.3% *
Nonrecurring items 2.4 - *
----------------------
Return on average common equity 23.8% 21.3% *
----------------------
Net interest margin (taxable-equivalent basis) 4.89% 4.91% *
Efficiency ratio before nonrecurring items 49.9 53.3 *
Efficiency ratio 51.0 53.9 *
AT YEAR END
Loans $27,128 $26,400 2.8%
Allowance for credit losses 517 474 9.1
Assets 36,489 33,874 7.7
Total shareholders' equity 3,053 2,725 12.0
Tangible common equity to total assets*** 6.7% 6.5% *
Tier 1 capital ratio 7.2 6.5 *
Total risk-based capital ratio 12.0 11.0 *
Leverage ratio 6.8 6.1 *
- ------------------------------------------------------------------------------------------------------------------
* Not meaningful.
** Calculated by adding amortization of goodwill and other intangible assets to
net income.
*** Defined as common equity less goodwill as a percentage of total assets less
goodwill.
Refer to Management's Discussion and Analysis on pages 24 and 25 for a
description of nonrecurring items.
[GRAPHS APPEAR HERE - SEE GRAPHICS APPENDIX]
First Bank System, Inc.
1
TO OUR SHAREHOLDERS
IT SEEMS ONE OF THE FEW CONSTANTS IN BANKING IS CHANGE. IN 1996 FIRST BANK
SYSTEM PROVED AGAIN THAT WE HAVE THE RESOURCES, KNOW-HOW AND DISCIPLINE TO ADAPT
TO OUR INDUSTRY'S CONTINUAL TRANSFORMATION--AND IN MANY INSTANCES, LEAD THE WAY.
Each day we are reshaping FBS to meet our customers' evolving needs and create
value for our shareholders. FBS's corporate culture thrives on change, and our
employees deserve thanks for another strong year. At the same time, we urge them
to strive for more.
We must build on the winning attitude that has served us well: staying
focused on meeting customer needs and creating value for you, the shareholder.
Shareholder value drives our management priorities and directs virtually every
decision we make.
[PHOTO OF JOHN F. GRUNDHOFER]
FINANCIAL RESULTS
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In 1996 FBS strengthened its position as one of the nation's top-performing
banking companies in terms of profitability and efficiency.
FBS stock has continued to outperform key market indices over the period
since 1990, when current management assumed control of the company. One hundred
dollars invested in FBS common stock at December 31, 1989, would have been worth
$529 at year-end 1996. That compares with $329 for the KBW 50 Bank Index and
$257 for the S&P 500 stock index. The KBW 50 Bank Index is a market-
capitalization-weighted total return index of 50 bank stocks published by Keefe,
Bruyette & Woods, Inc.
On a fully diluted basis and before nonrecurring items, earnings per common
share increased 15.3 percent to $4.74 in 1996 compared with the previous year.
Our goal is to sustain earnings per share growth of 12 to 15 percent over the
next several years (without accounting for possible acquisitions).
In terms of key financial ratios, FBS continues to rank among the
industry's best. Excluding nonrecurring items, our return on average assets of
1.88 percent in 1996 placed us first among our peer group of 23 regional bank
holding companies, and our return on average common equity of 21.4 percent for
the year placed us second among our peers.
Our relentless efforts to improve productivity also reached an important
milestone in 1996 when, for the first time, our ratio of expenses to revenues
(efficiency ratio) dropped below 50 percent. Our efficiency ratio of 49.9
percent
First Bank System, Inc.
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for the year and 49.2 percent for the fourth quarter placed us second in our
peer group. We plan to drive the ratio down to the mid-40s within the next few
years--we must in order to compete with nonbanks and their lower cost
structures. We believe that technology investment and revenue growth will make
this possible, as will our employees, who by second nature continually look for
ways to spend more wisely, eliminate waste, and work more productively.
FBS has been able to generate high returns while maintaining a low risk
profile. While we've seen some increase in consumer credit losses, we're in a
stronger position than many of our competitors. Our base in the Midwestern and
Rocky Mountain states, combined with our conservative lending practices,
continues to work in our favor.
Past performance does not guarantee future results. However, FBS's past
performance has set high expectations among our shareholders, managers and
employees. We plan to meet and exceed those expectations.
BUSINESS LINES
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First Bank System chooses to be in only those businesses that hold potential for
strong, sustainable profitability. In 1996 we streamlined our senior management
and realigned our organization into five business lines: Retail Banking, Payment
Systems, Business Banking and Private Financial Services, Commercial Banking,
and Corporate Trust and Institutional Financial Services.
FBS offers standard products and services supported by central operations.
At the same time, we provide more hands-on, custom service to customers who
demand it. Our organizational structure enables us to meet the unique needs of
diverse customer segments. Each business line seeks to leverage resources and
customer relationships across FBS.
RETAIL BANKING is our largest business. Two key technology initiatives are
changing the very nature of Retail Banking. First, we are successfully
encouraging customers to migrate to more cost-effective distribution channels
such as supermarket branches, automated teller machines, and FastLine(SM) 24-
Hour Banking. These channels offer customers the convenience of banking anytime,
anywhere. Second, our Relationship Management System (RMS), launched in 1995 and
expanded in 1996, generates detailed customer information that helps our people
provide better service and identify the best sales opportunities. Based on early
results, we expect RMS to provide opportunities to increase revenue and
profitability.
[GRAPH APPEARS HERE - SEE GRAPHICS APPENDIX]
PAYMENT SYSTEMS is our fastest-growing business and our largest source of
fee income. FBS is the leading issuer of VISA(R) Corporate and Purchasing Cards,
one of the leading issuers of VISA consumer cards, and among the top 10
processors of credit card transactions. State-of-the-art technology in the new
First Bank Service Center in Fargo, North Dakota, enhances our efficiency and
effectiveness in customer service and processing.
BUSINESS BANKING AND PRIVATE FINANCIAL SERVICES, which together contribute
roughly the same percentage of net income as Retail Banking, provide middle
market companies and ultra affluent customers with relationship-oriented
service. The management structure facilitates cross-selling between business and
individual clients. Many of the business owners and managers served by our
business bankers have needs for personal banking, personal trust, and investment
services offered through Private Financial Services. Our business bankers are
typically among the first to identify these opportunities, and now they are in a
better position to leverage their customer relationships. Both Business Banking
and Private Financial Services experienced good growth in 1996.
49.9% FOR THE FIRST TIME, OUR EFFICIENCY RATIO DROPPED BELOW 50 PERCENT
First Bank System, Inc.
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COMMERCIAL BANKING, which provides an array of financial services to large
corporate customers, is a mature and profitable business. Credit quality remains
strong. Commercial Banking is successfully deepening client relationships by
providing highly customized, complex financial services to increasingly
demanding clients.
CORPORATE TRUST improved its revenues and profitability with the completion
of our acquisition of BankAmerica's corporate trust business in early 1996. We
continued our growth by closing on our acquisition of Comerica, Inc.'s bond
indenture and paying agent business in January 1997. We have built the critical
mass needed to succeed in corporate trust, and we will continue to grow by
acquisition as other regional banks decide to exit this business.
INSTITUTIONAL FINANCIAL SERVICES had nearly $40 billion in assets under
management at year-end 1996, up 35 percent from 1995. Our strong-performing
asset management services helped grow the First American Funds portfolio, a
proprietary mutual fund family advised by our First Asset Management (FAM)
group, to more than $12 billion in assets in 1996, up 72 percent from a year
earlier. Our focus on defined contribution plans and the introduction of the no-
load First American Strategy Funds, advised by FAM, contributed to our strong
results in 1996. We expect continued growth if we can continue to deliver top
investment results and introduce new products and services that fill customer
needs.
CAPITAL MANAGEMENT
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Our success in generating earnings growth also contributes to one of our
greatest challenges: allocating capital. We challenge ourselves to allocate
capital for maximum shareholder benefit, as well as to maintain strong
protection for depositors and creditors.
FBS pursues four key strategies in managing capital:
. INVESTMENT IN CORE BUSINESSES--We invest in technology and other
resources so that our core businesses can serve customers better, improve
profitability, and increase revenues. The Relationship Management System (RMS)
and the First Bank Service Center in Fargo are just two examples of significant
investments that we expect will pay off handsomely over the long term. State-of-
the-art technology gives us a key competitive edge against banks and nonbanks
alike.
We also shift capital from businesses with deficient returns in order to
free capital for reinvestment in our strongest businesses. In February we
reached agreements to sell the mortgage servicing and mortgage loan production
business of our residential mortgage subsidiary, enabling
[GRAPH APPEARS HERE - SEE GRAPHICS APPENDIX]
1ST OUR RETURN ON AVERAGE ASSETS OF 1.88 PERCENT IN 1996 PLACED US FIRST AMONG
OUR PEER GROUP OF 23 REGIONAL BANK HOLDING COMPANIES.
First Bank System, Inc.
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further investment in our fee-based businesses and further lowering the risk
profile of FBS.
. ACQUISITIONS--We look for opportunities in existing markets and
adjacent markets where the economic benefits are highest, as well as niche
markets such as corporate trust. We will pursue only those acquisitions that we
believe will create shareholder value.
In February 1996 we closed on our acquisition of FirsTier Financial, Inc.,
creating the second-largest banking institution in Nebraska in terms of total
deposits, and making that state our third-largest market. We completed the
integration of FirsTier within three days, quickly taking out operating expenses
for the benefit of shareholders.
. STOCK REPURCHASES--In February 1996 the FBS Board of Directors
authorized the repurchase of up to 25 million common shares through December
1997. At year-end we had repurchased approximately 15 million of those shares.
. DIVIDEND INCREASES--On February 19, 1997, the FBS Board of Directors
increased the quarterly dividend rate to 46.50 cents from 41.25 cents per common
share, an increase of 12.7 percent. It was our sixth consecutive annual
increase.
While size is important to some aspects of our corporation, high
performance is what differentiates FBS in the marketplace. Our strategy is to
manage capital for the benefit of shareholders now and over the long term.
SHAREHOLDER FOCUS
- -----------------
Our commitment to creating shareholder value runs deep. Through an employee
stock purchase plan, all eligible employees have the opportunity to purchase FBS
stock at a discount and align their interests with our shareholders--to become
owners, and behave like them. A majority of employees own FBS stock through our
Capital Accumulation Plan, a 401(k) program.
Management, in particular, is aligned with shareholders' interests. Nearly
200 senior managers have targets to own the equivalent of 80 percent to 550
percent of their annual salaries in FBS stock. At year-end 1996, senior managers
owned more than $100 million in FBS stock.
At FBS, we are confident in our ability to capitalize on change. We are
successfully developing our franchise and creating shareholder value by meeting
customer needs, building strong core businesses, actively managing capital, and
delivering strong financial results.
In addition to our dedicated employees, our Directors have earned thanks
for another year of prudent guidance. I especially want to acknowledge two
Directors who will retire at our annual meeting on April 24, 1997: Marilyn
Carlson Nelson, our longest-serving Director, who joined the Board in 1978; and
Dr. James J. Renier, a Director for more than a decade.
Finally, thank you for expressing your confidence by investing in our
company. I look forward to writing you again in 1998 with news that we created
opportunities, overcame challenges, and built an even stronger First Bank
System.
/s/ John F. Grundhofer
John F. Grundhofer
Chairman, President and Chief Executive Officer
February 19, 1997
15.3% EARNINGS PER COMMON SHARE INCREASED 15.3 PERCENT OVER THE PREVIOUS YEAR ON
A FULLY DILUTED BASIS AND BEFORE NONRECURRING ITEMS.
First Bank System, Inc.
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RETAIL BANKING
[GRAPHIC APPEARS HERE -- SEE GRAPHICS APPENDIX]
BUSINESS DESCRIPTION
Retail Banking focuses on the broad consumer and small business markets. We
serve approximately 1.9 million households and 147,000 small businesses
throughout our 11-state banking region.
We built our business on quality products, effective sales and service, long-
term relationships, and physical presence in the markets we serve, and these
competitive advantages remain important. However, with the aid of technology we
increasingly serve our customers through more convenient and efficient
distribution channels. These channels include 32 branches in supermarkets and
general merchandise stores, 2,324 in-market ATMs, FastLine(SM) 24-Hour Banking
by telephone, and First FinanciaLine(SM) telemarketing.
Retail Banking provides financial services to small businesses with annual sales
under $5 million. Bankers throughout our branch system analyze customer needs
and recommend solutions. If customers have credit needs, the bankers assist with
documentation and then rely on a centralized underwriting center for credit
approval. FBS offers competitive pricing and 48-hour turnaround on standard
credit products, including real estate loans, working capital loans and lines of
credit under $350,000.
Perspectives
ACHIEVING OPERATIONAL EXCELLENCE
- --------------------------------
In their book The Discipline of Market Leaders, business strategists Michael
Treacy and Fred Wiersema write, "Operationally excellent companies deliver a
combination of quality, price and ease of purchase that no one else in their
market can match." Retail Banking is committed to operational excellence.
Investing in new technology is a prerequisite to achieving operational
excellence. Our state-of-the-art systems have enabled us to offer standardized
products and services, and centralize our back-office operations. Imaging
technology in retail loan processing makes our back office more efficient.
Customized software enhances customer sales and service in all our branches, as
well as in our central customer service and telemarketing facilities.
Advanced systems give our personal bankers, tellers, telebankers and telephone
service representatives comprehensive customer information files and the ability
to answer questions about virtually all consumer products. They also can
transfer balances, make payments on accounts, and approve consumers for a
variety of products--all with speed, accuracy and consistency.
Our centralized customer service, data processing, and operations units can
concentrate on improving productivity and service quality, while our branches
can focus on selling. In the branches, we have begun separating management of
sales and transactions so that we can focus on building a stronger sales
culture. We expect the transaction side of branch management to diminish over
time as more customers migrate to centrally managed alternative distribution
channels. At the same time, our branches will focus more on selling products and
services.
Having operations functions taken out of our branches has proven to be a
significantly lower-cost way of doing business. It's also left us with unneeded
space. So we're developing a new paradigm for our branch network. In the future,
we will have more, but smaller, branches. With our focus on in-market
acquisitions, we have closed or divested more than 170 branches on a pro forma
basis since 1991.
In 1996 we continued to reduce average branch size by leasing out excess space
and closing some of our larger offices. We also opened 18 smaller branches in
supermarkets and general merchandise stores. Long term, we will shed more of our
retail branch space with no or limited customer impact.
The branch of the future also will be redesigned to better reflect our
distribution strategy. We'll offer a variety of service levels by location,
ranging from full-service to fully automated, such as the prototype we opened in
Denver in 1996.
First Bank System, Inc.
6
BANKING ANYTIME, ANYWHERE
- -------------------------
Our research confirms that today's customers have less time to spend on banking
transactions. They are growing more comfortable with diverse ways of interacting
with the bank, and they expect us to provide convenience. Retail Banking has
developed multiple distribution channels so that customers can conduct their
financial business with us anytime, anywhere. In addition to providing superior
convenience to the customer, these channels provide transactions at lower cost
than at a traditional branch.
The telephone continues to be a cost-effective distribution channel for FBS.
Our telephone service centers fielded more than 46 million calls in 1996, and
about 72 percent of the calls were handled by our interactive voice response
(IVR) unit.
With advanced telephone technology, we are using telemarketing, together with
advertising and direct mail, to sell and retain a wide variety of consumer and
small business products. In 1996, our telemarketing efforts handled
approximately 676,000 inbound calls, and converted nearly 40 percent of those
calls to new product sales.
We have expanded our ATM network to ensure convenient customer access. We
provide support for 2,324 ATMs in our markets including the Fastbank(R), PEAK(R)
and MINIBANK networks. In addition, we process for 911 ATMs outside our existing
markets, generating transaction fee income.
72%
ABOUT 72 PERCENT OF THE CALLS FIELDED BY OUR TELEPHONE SERVICE CENTERS WERE
HANDLED BY OUR INTERACTIVE VOICE RESPONSE (IVR) UNIT.
The home computer is an emerging distribution channel for FBS. In 1996 FBS
joined IBM Corporation and 14 other banks as co-owners of Integrion Financial
Network, which will develop industry standards for PC and home banking. In 1997
we will launch the first of several home banking options, using MECA Software's
Managing Your Money(R) and leveraging our ownership in MECA. Our World Wide Web
site now includes e-mail access to FastLine and a variety of customer service
functions.
Customers can choose from a range of products and service terms to meet their
needs. Our new line of Chextra(R) Banking products, for example, provides
incentives for customers to maintain broader relationships with FBS or to use
nontraditional channels for some transactions. Monthly account maintenance fees
also are waived on certain accounts if the customer authorizes direct payroll
deposit or automatic payment of loans.
We realize that some customers may feel uncomfortable changing to alternative
distribution channels, so we continually look for ways to make change easy for
them. In 1996 we provided tens of thousands of demonstrations at branches to
teach customers how to use ATM and telephone banking technology, and sponsored a
vacation getaway and other incentives for participants.
continued
1996 HIGHLIGHTS
. Successfully integrated more than 60 banking offices in Nebraska and Iowa
within three days of closing acquisition of FirsTier Financial, Inc.
. Increased Chextra(R) POS sales nearly 55 percent.
. Increased retail investment sales 29 percent.
. Grew FBS total average home equity and second mortgage loans nearly
16 percent.
. Increased average small-business loans 23.5 percent.
ATM Banking
. Increased FBS deposit transactions at all ATMs 76 percent to 4.2 million.
. Acquired MINIBANK, a shared network including 473 ATMs, which provides
electronic payment systems services to small and midsized financial
institutions and retailers throughout Colorado and parts of Wyoming.
Telephone Banking
. Redirected customer telephone calls from 124 of our branches so that our
central telephone center now fields those calls. This process provides faster
resolution to customer service requests and allows branch staff to better
focus on customers in the branch and make outbound customer calls.
. Increased sales from telemarketing efforts by 49 percent.
First Bank System, Inc.
7
1996 HIGHLIGHTS
(Continued)
PRODUCT DEVELOPMENTS
. Introduced no-load First American Strategy Funds, "funds of funds" that are
advised by First Asset Management and which provide a one-stop option for
investors seeking income, growth and income, growth, or aggressive growth
portfolios.
. Introduced Easy First Equity Line, which allows customers to borrow $5,000 to
$25,000 against the value of their home equity without an appraisal.
. Introduced InvestLine, which allows employee stock purchase plan participants
to borrow against the stock held in their plan accounts.
. Introduced Mortgage Direct, a centralized telemarketing unit that originates
home mortgages by telephone through an 800 number and referrals from personal
bankers.
. Introduced Instant Approval for home equity and auto loans through First
FinanciaLine(SM). Customers now can receive credit decisions on the telephone
within minutes of applying for a loan.
. Initiated automated score-driven underwriting process for small-business
loans under $50,000, enabling us to provide faster, consistent credit
decisions while raising approval rates, reducing processing costs, and
maintaining high asset quality.
FOCUSING ON RELATIONSHIP MANAGEMENT
- -----------------------------------
Our new Relationship Management System (RMS) is designed to revolutionize the
way we sell, increasing revenue and profitability. This key technology
initiative, launched in 1995 with ongoing rollout through early 1997, generates
detailed customer information that helps our people provide better service and
identify the best sales opportunities.
RMS marks an important shift from account management to relationship
management. It uses predictive modeling to develop detailed relationship
strategies, and it links multiple account usage information to demographics and
analysis.
Unlike other database marketing efforts, RMS actually analyzes customer
account and behavior data--and initiates action. Consider the issue of overdrawn
accounts. RMS determines which overdrafts should be paid, based on a variety of
customer and account usage characteristics. When the system encounters a check
drawn on an account having insufficient funds, it decides whether to honor the
check--and actually executes its decision based on customer behavior and value
to the bank.
Initial results are promising. With RMS, loan approval rates have increased in
the branch and mail-in channels by 13 percent, with a 50 percent reduction in
manual credit overrides. When using RMS in the direct mail channel, customer
response rates were significantly improved. In addition, customers had a higher
rate of activation and utilization on the new credit lines when compared to
previous mailings.
By the end of first quarter 1997, RMS will be implemented across all FBS
retail banking channels, handling 20 decision-making and support routines. All
customer contact employees in our branches, telephone centers, and direct-mail
unit will have RMS tools for more effective sales and service.
RESULTS
BANKING MADE EASY
PORTER AND HARRIET EDDY LIKE TO STAY CURRENT WITH TECHNOLOGY, ESPECIALLY WHEN IT
SIMPLIFIES THEIR LIVES. SO THE JAMESTOWN, NORTH DAKOTA, COUPLE, IN THEIR LATE
60S, EAGERLY USE MANY CONVENIENT ELECTRONIC OR TELEPHONE BANKING OPTIONS
AVAILABLE FROM FIRST BANK.
A SEMI-RETIRED INSURANCE BROKER AND HOMEMAKER, MR. AND MRS. EDDY COLLECT THEIR
SOCIAL SECURITY BENEFITS BY DIRECT DEPOSIT. THEY HAVE A CHEXTRA(R)BANKING
ACCOUNT, INCLUDING A DEBIT CARD, WHICH ENABLES THEM TO BUY GROCERIES AND OTHER
GOODS AND SERVICES WITHOUT WRITING CHECKS. THEY CALL FASTLINE(SM) 24-HOUR
BANKING TO VERIFY BALANCES OR TRANSFER FUNDS. WHEN THEY DO VISIT THEIR LOCAL
FIRST BANK BRANCH, THEY TYPICALLY GO NO FURTHER THAN THE ATM LOBBY TO GET CASH
OR MAKE BUSINESS DEPOSITS.
IN 1996 THE EDDYS WERE AMONG THE FIRST TO SIGN UP FOR FASTLINE(SM) BILL PAY,
WHICH ENABLES THEM TO PAY MONTHLY BILLS BY TELEPHONE. THEY USED TO DRIVE AROUND
TOWN TO DELIVER PAYMENTS FOR RENT, UTILITIES, CREDIT CARDS, AND THE LIKE, OR
MAIL THEIR CHECKS AT THE POST OFFICE--EVEN DURING BITTERLY COLD AND SNOWY
WINTERS. WITH BILL PAY, THEY SAVE ON MILEAGE, STAMPS AND PERSONAL ENERGY. THEY
ALSO HAVE MORE TIME TO SPEND AT THE COUNTRY CLUB, WHERE THEY PAY THEIR
MEMBERSHIP DUES BY TELEPHONE.
First Bank System, Inc.
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PAYMENT SYSTEMS
[GRAPHIC APPEARS HERE -- SEE GRAPHICS APPENDIX]
BUSINESS DESCRIPTION
Payment Systems provides an array of innovative credit card products and
services to businesses and consumers. The business consists of three units.
CORPORATE PAYMENT SYSTEMS provides card products that help business and
government manage their expenses cost-effectively. Employees of Fortune 1000
companies use the First Bank VISA(R) Corporate Card, a non-revolving charge card
for travel and entertainment expenses. Large businesses use the First Bank VISA
Purchasing Card to simplify the procurement of high-volume, small-ticket items.
Government agencies use our I.M.P.A.C.(R) Card. Other products include the First
Bank VISA Relocation Card(SM), for costs associated with employee relocation.
CONSUMER PAYMENT SYSTEMS focuses on being the dominant card issuer in our
banking region and building valuable co-branding relationships. This strategy
leverages the distribution power of our co-branded partners and our branch
system, and is less dependent on direct mail. Both our Northwest Airlines and
Amway(R) co-brands continued to grow in volume and profitability in 1996, as did
our small business card products. First Bank also has card-accessible secured
lines of credit and an international prepaid travel card.
(CONTINUED NEXT PAGE)
Perspectives
CORPORATE AND PURCHASING CARDS: POISED FOR CONTINUED GROWTH
- -----------------------------------------------------------
Sales volume for First Bank VISA(R) Corporate and Purchasing Cards increased
nearly 50 percent in 1996, and our challenge is to perform an encore. It's a
challenge for which FBS is well-rehearsed.
In 1996 FBS continued to invest in technology for our Corporate Card program,
focusing on capabilities that enable our customers to reengineer their expense
reporting processes. For instance, we developed the ability to deliver First
Bank VISA transactions charged on the Corporate Card to a variety of automated
expense reporting applications. This capability allows our clients' employees to
complete their expense reports much more efficiently and accurately.
Our new strategic alliance with the Hessel Group for the First Bank Corporate
Relocation Card(SM) added unique expense tracking and tax reporting
capabilities. "DRTS-DIRECT" combines the unique benefits and features of the
Relocation Card and Hessel Group's Domestic Relocation Tracking System (DRTS), a
system that employers use to calculate tax assistance for relocating employees
and print tax documents, as well as to analyze and manage relocation costs.
23.8%
INCREASED NONINTEREST INCOME 23.8 PERCENT.
Corporate Payment Systems also completed development of a powerful data-mining
tool, FirstSource(SM), which provides both Corporate and Purchasing Card
customers the ability to perform complex, year-over-year, transaction-based
analysis.
First to market with the purchasing card, FBS is well ahead of our competitors
in establishing customer relationships and developing innovative product and
service features. Our 10-step process for selling and training customers on the
Purchasing Card concept is a key factor in our success, and we have significant
experience working with an array of clients. Our technical support, including a
proprietary management information system that can integrate into the client's
accounts payable function, adds value to each client relationship.
Innovative product and service features also help create loyal customers. One
popular benefit is FirstView, an integrated expense management reporting tool
that lets customers audit expenditures and relationships with merchants. We're
committed to developing additional tools to help our clients document, analyze
and manage their expenses.
A key niche for us in this market is I.M.P.A.C.(R), our government purchasing
card. The federal government, including the Department of Defense,
continued
First Bank System, Inc.
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BUSINESS DESCRIPTION
(continued)
MERCHANT BANKCARD SERVICES provides an in-house, single-source solution for
electronic transaction processing. We enable our merchant customers to
electronically authorize and capture transactions from bankcards, other credit
cards, and debit cards, as well as to authorize or guarantee checks at the point
of sale. FBS has built relationships with about a dozen "front-end"
authorization networks to provide terminal, electronic cash register (ECR), and
computer applications for virtually any industry. FBS has combined that front-
end flexibility with a proprietary "back-end" merchant accounting platform,
which is recognized as one of the best in the industry. The combination of
flexibility and capability have positioned Merchant Bankcard Services for growth
in an industry demonstrating intense competition from both bank and nonbank
processors.
ranks among our largest clients. The I.M.P.A.C. program has saved the government
millions of dollars through reduced paper flow and a streamlined purchase order
process. The sheer size of the federal government, the current administration's
emphasis on reengineering, and our successful track record bode well for
I.M.P.A.C.'s growth potential.
Private sector opportunities also are promising, as U.S. companies spend
approximately $400 billion annually on small-dollar purchases. We believe less
than 2 percent of this market has been tapped. Our first-entrant and
technological advantages will help us remain a high-quality, low-cost leader.
CONSUMER CARDS: BUILDING ON SUCCESS
- -----------------------------------
In 1996 Consumer Payment Systems focused on growing accounts, sales volume, and
overall profitability for existing portfolios. Our strategy is to pursue
relatively controlled growth by marketing through our branches, co-branding
partners, and other sources of new accounts. This strategy enables us to
maintain a strong credit discipline.
We continue to work with our partner Northwest Airlines to propel our First
Bank WorldPerks(R) VISA cards to new heights. In 1996 the number of WorldPerks
cards issued grew 20 percent to more than 550,000. In cooperation with Northwest
Airlines we also bolstered our First Bank WorldPerks VISA Business Card,
introduced in 1995. New accounts grew as we focused on selling and distributing
the card through our partner channels. For example, we promoted the card by
enclosing sales literature with plane tickets. Through this and other programs,
we grew sales volume on our VISA small business cards to the number-one position
nationally.
We also strengthened our seven-year-old Amway(R) VISA card with a
significant reintroduction. We dropped the annual fee, created a more attractive
Gold Card option, and developed a new application and collateral, among other
changes. New accounts grew due to these efforts.
FBS will continue to seek other co-branding opportunities with similar growth
and profitability potential. New programs will focus on partners with strong
brands and good consumer distribution potential. Both FBS and the brand partners
must meet our profitability goals.
Another ongoing initiative to build our credit card sales will be to leverage
First Bank's new Relationship Management System (RMS). Using RMS in a pilot
program, we identified prospects without credit cards and automatically
qualified them. A subsequent mailing resulted in twice the sales rate compared
to a control group.
Consumer Payment Systems will continue to leverage our branch and other
channels, which provide a cost-effective alternative to direct marketing
channels. Five years ago, we gained a majority of our new accounts through mass
mailings. Today, less than a third of our new accounts result from
direct mail.
First Bank System, Inc.
10
MERCHANT BANKCARD SERVICES: ENGINEERING FOR THE FUTURE
- ------------------------------------------------------
Merchant Bankcard Services offers products and prices that allow merchants to
concentrate on their businesses and to accept payments as efficiently as
possible. In 1996 Merchant Bankcard Services improved our ability to serve our
existing merchant base and attract new business both by enhancing our product
set and developing our staff. From a product standpoint, customers now can
access more and better point-of-sale applications, a greater number of point-of-
sale debit networks, improved check services, and many equipment
purchase/finance arrangements. Organizationally, we added marketing and
retention personnel, increased the size of our inside and outside sales forces,
and restructured our customer implementation and servicing organization.
Merchant Bankcard Services also is leveraging other parts of FBS through
ongoing cross-selling. In 1996 members of our dedicated sales force tested
cross-selling checking and business reserve line products, and bankers tested
cross-selling small merchant bankcard accounts. Our goal is to offer a package
of products and services that is more valuable to a merchant than individual
products or services.
BUILDING A TECHNOLOGICAL EDGE
- -----------------------------
In July 1996 FBS opened the doors to the First Bank Service Center in Fargo--and
to a future of efficiency, profitability and growth in Payment Systems.
The two-story, 150,000-square-foot facility is home to Payment Systems
Services, which includes customer service, research, and account initiation for
all FBS credit card products, as well as loan processing and servicing for our
indirect sales finance business. The facility consolidated operations from
Denver, Minneapolis, and Sioux Falls, South Dakota, resulting in more effective
line balancing, keeping staff productive on multiple tasks during peak and off-
peak hours.
The service center features state-of-the-art telephone technology for more
efficient and effective management. ACD switching, for example, enables us to
route calls to representatives based on their expertise. With up-to-the-minute
management information, we can provide better customer service.
At year end, approximately 700 employees were working in the service center.
The facility, with 1,200 work stations and a 35-acre site, is equipped for
growth.
RESULTS
COST SAVINGS IS IN THE CARDS
AS ELI LILLY AND COMPANY STRIVES TO MANAGE EXPENSES MORE COST-EFFECTIVELY, ITS
DEMAND FOR CARD PRODUCTS KEEPS GROWING. AND FBS PAYMENT SYSTEMS KEEPS PROVIDING
NEW CARD SOLUTIONS FOR THE INDIANAPOLIS-BASED PHARMACEUTICAL COMPANY AND ITS
SUBSIDIARIES.
LILLY BEGAN USING THE FIRST BANK VISA(R) CORPORATE TRAVEL CARD IN 1992, AND CARD
VOLUME HAS GROWN TREMENDOUSLY SINCE. IN 1996 THE COMPANY ADDED ELECTRONIC
EXPENSE REPORTING, ENABLING CARDHOLDERS TO SUBMIT AND RECONCILE TRAVEL EXPENSE
REPORTS WITHOUT TIME-CONSUMING AND COSTLY PAPERWORK.
LILLY ALSO HAS USED THE FIRST BANK VISA PURCHASING CARD SINCE 1992 TO STREAMLINE
ITS PROCUREMENT PROCESS AND REDUCE PROCESSING COSTS. THE PURCHASING CARD HAS
ENABLED LILLY TO CONSOLIDATE THOUSANDS OF Product Developments
IN 1997 THE COMPANY WILL EXPLORE USING AN ELECTRONIC SYSTEM THAT WOULD ALLOW
EMPLOYEES TO ORDER SUPPLIES FROM AN ON-LINE CATALOG USING PCS. THE FIRST BANK
VISA PURCHASING CARD WILL BE THE PREFERRED PAYMENT VEHICLE FOR THIS SYSTEM.
1996 Highlights
. Increased total revenue 12.8 percent.
. Increased noninterest income 23.8 percent.
Corporate Payment Systems
. Continued to be the largest issuer of VISA(R) Corporate and Purchasing Cards
in terms of number of cards and sales volume, and the leading issuer of
purchasing cards to the federal government.
. Increased Corporate and Purchasing Card relationships to more than 200 of the
Fortune 1000.
Consumer Payment Systems
. Continued to be among the nation's largest issuers of VISA credit cards.
. Ranked first within the VISA network in sales volume for small business
cards.
. Increased sales volume on our co-branded credit cards by more than 25
percent.
Merchant Bankcard Services
. Remained among the top 10 processors of VISA and MasterCard(R) transactions,
serving more than 55,000 merchant locations.
. Improved branch marketing efforts to more efficiently target regional
business, our most profitable niche.
First Bank System, Inc.
11
BUSINESS BANKING & PRIVATE FINANCIAL SERVICES
[GRAPH APPEARS HERE -- SEE GRAPHICS APPENDIX]
BUSINESS DESCRIPTION
Through Business Banking and Private Financial Services (PFS), FBS meets the
unique financial needs of nearly 21,600 middle market companies and
approximately 27,000 ultra affluent customers throughout our banking region. The
management structure enables us to leverage the synergistic potential between
business and individual customers so that we can fully serve these
relationships.
BUSINESS BANKING provides deposit, credit, treasury management, international,
and other financial products and services to middle market companies with annual
sales in excess of $5 million. Through 67 local offices, we serve customers in
industries where FBS has the intellectual capital and other resources to
adequately assess risk and provide innovative solutions with high-quality
products and excellent customer service.
PRIVATE FINANCIAL SERVICES serves the ultra affluent market with one-stop access
to investment management, personal trust, and private banking services. We
define the ultra affluent market to be the top 3 percent of households. PFS also
serves professional firms, family wealth groups, and executives of Business
Banking customers. We provide individualized service through 31 offices, all in
metropolitan areas.
Perspectives
SEIZING MARKET OPPORTUNITIES
- ----------------------------
Business Banking and Private Financial Services (PFS) experienced strong growth
in 1996, and prospects for the future are bright. Average loans increased 22
percent during the year to $7.28 billion, and loan commitments grew 23 percent
to more than $12.1 billion by year-end.
We also experienced tremendous growth in several niche businesses. Our asset-
based lending division, Republic Acceptance Corporation, achieved average annual
loan growth of 83 percent to end the year at approximately $155 million in
outstandings. Our leasing division, which specializes in both equipment and auto
lease financing, recorded average annual loan growth of nearly 46 percent to end
the year at $179 million in outstandings.
Business Banking and Private Financial Services benefit from growing economies
in our 11-state banking region. Facing increased competition from bank and
nonbank providers, we differentiate Business Banking through outstanding
relationship management. We stay close to our customers by understanding their
needs, providing high-quality products and services, and marketing aggressively.
22%
INCREASED AVERAGE LOANS 22 PERCENT TO $7.28 BILLION.
Competition for PFS also is growing, but the market itself is expanding
substantially. We expect the five-year compounded annual growth rate for
households with income of $150,000 or more to be 20 percent, compared to an
overall household growth rate of less than 2 percent. Furthermore, customer
surveys indicate the opportunity to capture a greater share of our customers'
credit outstandings and investment portfolios.
Improving customer satisfaction--so critical in a relationship-driven
business--is our top priority, and key to gaining a competitive advantage.
Toward this end, in 1997 we plan to increase customer calls, improve customer
service, and align incentive compensation to reflect improvement in customer
satisfaction.
LEVERAGING BUSINESS AND PERSONAL SYNERGIES
- ------------------------------------------
Business owners and executives welcome a high level of service from their
bankers, both for their business and personal needs. Our bankers have the
expertise to recognize both the business and personal financial requirements
of their customers.
Managing Business Banking and PFS together, we are better positioned to
leverage FBS resources to deliver integrated financial services to our business
and ultra affluent customers.
First Bank System, Inc.
12
In Business Banking, we strive to be close to the customer. Our relationship
managers make credit decisions and have direct accountability for profitability.
They're motivated to leverage local customer relationships. And they have more
time to spend with customers and prospects, because we centralized
administrative functions such as policy-making, procedures and training.
In PFS, we decentralized management to be more aligned with Business Banking.
PFS serves clients through teams consisting of managing directors and experts
from personal trust, private banking and investments. This team approach
provides greater expertise to our clients and helps address a wider array of
their financial needs. Team members report through their respective business
lines--functional reporting that underscores our commitment to maintaining
strong core competencies, while still providing fully integrated product and
service delivery.
PROVIDING SERVICE OPTIONS
- -------------------------
Private Financial Services remains relationship-driven. However, we are applying
technology where appropriate to serve customers more conveniently and
efficiently.
In personal trust, for example, we began segmenting our customers so that we
can provide the optimal delivery method to different customers based on their
needs. A personal trust customer with complex and diverse assets works with a
relationship manager, who assembles a team of experts who can deliver a high
degree of personal service. A customer with simpler needs, such as managing a
portfolio invested mainly in mutual funds, may choose to work directly with
Trust Customer Service instead of a relationship manager.
Trust Customer Service, opened in 1996, provides personal trust customers
convenient access to their accounts through an 800 number. Trained
representatives can handle most inquiries and transactions--from providing
account balances to managing investments to making distributions--in a timely
manner. About 30 percent of Trust Customer Service clients call on a monthly
basis.
Results
INTERNAL REFERRALS BENEFIT CLIENTS
TERRY L. SCHMIDT AND ROSE MANUFACTURING COMPANY ENJOY A SUCCESSFUL, LONG-TERM
RELATIONSHIP WITH COLORADO NATIONAL BANK (CNB), FIRST BANK SYSTEM'S COLORADO
AFFILIATE. SCHMIDT RECENTLY SOLD THE DENVER-BASED MANUFACTURING FIRM, WHICH
PRODUCES WORKPLACE SAFETY EQUIPMENT.
ROSE MANUFACTURING BECAME A CLIENT OF CNB'S BUSINESS BANKING GROUP NEARLY 20
YEARS AGO. AMONG OTHER SERVICES, CNB HAS PROVIDED THE COMPANY WITH A REVOLVING
LINE OF CREDIT FOR WORKING CAPITAL PURPOSES, AS WELL AS TERM DEBT TO FINANCE
EQUIPMENT PURCHASES. WHEN MR. SCHMIDT PLANNED TO SELL THE BUSINESS IN 1996, CNB
RISKED LOSING A LOYAL CLIENT.
HOWEVER, ROSE MANUFACTURING REMAINS A CNB CLIENT UNDER NEW OWNERSHIP. AND WHEN
MR. SCHMIDT'S BUSINESS BANKER LEARNED ABOUT THE PENDING TRANSACTION, SHE
REALIZED HE WOULD NEED FINANCIAL SERVICES RELATING TO THE PROCEEDS OF THE SALE.
SO SHE REFERRED HER CLIENT TO A BANKER IN PRIVATE FINANCIAL SERVICES (PFS).
AS THE SALE NEARED, MR. SCHMIDT MET WITH THE PFS BANKER, A TRUST OFFICER AND
CNB'S VICE CHAIRMAN. AS A RESULT, HE ESTABLISHED A TRUST ACCOUNT WITH CNB.
BY LEVERAGING SYNERGIES WITHIN BUSINESS BANKING AND PRIVATE FINANCIAL SERVICES,
MR. SCHMIDT BENEFITED FROM VALUABLE NEW SERVICES, AND CNB RETAINED TWO VALUED
RELATIONSHIPS.
1996 Highlights
. Successfully integrated more than 7,000 Business Banking customers and 3,500
Private Financial Services (PFS) customers in Nebraska and Iowa from
acquisitions of FirsTier Financial, Inc., First Bank of Omaha, and Southwest
Bank; completed FirsTier integration within three days of closing
acquisition.
. Increased average loans 22 percent to $7.28 billion, including FirsTier
acquisition.
. Grew loan commitments 23 percent to more than $12.1 billion.
. Improved net tangible return on equity to 35.5 percent from 32.3 percent.
. Lowered efficiency ratio on a cash basis to 37 percent from 42 percent.
. Opened new Wisconsin Business Banking office serving greater Appleton and
Green Bay, rapidly growing manufacturing and service markets.
. Grew assets under administration in PFS 58.4 percent to $24.41 billion,
including FirsTier acquisition.
First Bank System, Inc.
13
COMMERCIAL BANKING
[GRAPH APPEARS HERE -- SEE GRAPHICS APPENDIX]
BUSINESS DESCRIPTION
Commercial Banking provides credit and noncredit financial solutions to public
and private companies with annual revenues of $25 million or more.
We focus on middle market and national companies that are either headquartered
or maintain large operations in the Twin Cities region, where we are the market
leader. In addition, we serve corporations in selected national markets and
niche specialties such as asset-based lending, including agricultural credit,
business credit, leasing, and real estate lending. We also are one of the
nation's leading providers of credit and other financial services to mortgage
bankers. We provide structured finance expertise as well as noncredit products
and advisory services including treasury management, international banking,
corporate finance, and loan syndications.
Commercial Banking is relationship-driven, not transaction-based. A team of
delivery and support professionals led by a relationship manager works closely
with each client at multiple levels to link various products and services to
meet unique client needs.
RESULTS
PROVIDING VALUE THROUGH STRUCTURED FINANCE
NEEDING TO FINANCE CONSTRUCTION OF A MANUFACTURING FACILITY FOR ITS NEW SISTER
COMPANY, A MINNEAPOLIS-BASED COMMERCIAL BANKING CLIENT LOOKED NO FURTHER THAN
FBS. FACING CHALLENGING TIME CONSTRAINTS, OUR RELATIONSHIP MANAGERS STRUCTURED A
COMPLEX FINANCIAL PACKAGE TO BUILD THE MANUFACTURING FACILITY AND PROVIDE CREDIT
FOR WORKING CAPITAL REQUIREMENTS.
OUR ULTIMATE SOLUTION, USING AN ALL-FBS TEAM, INCLUDED ISSUING "LOWER-FLOATER"
INDUSTRIAL DEVELOPMENT BONDS TO REDUCE INTEREST COSTS. COMMERCIAL BANKING,
RESPONDING TO THE CRITICAL TIMING, PROVIDED A BRIDGE LOAN TO FUND INTERIM
CONSTRUCTION COSTS PRIOR TO ISSUING THE BONDS AND SUBSEQUENTLY ISSUED A LETTER
OF CREDIT TO FACILITATE THE SALE OF THE BONDS. FBS INVESTMENT SERVICES, INC.
SERVED AS THE PLACEMENT AND REMARKETING AGENT, AND FIRST TRUST PROVIDED TRUSTEE
SERVICES FOR THE BONDS. FINALLY, TREASURY MANAGEMENT SERVICES WERE IMPLEMENTED
TO TRANSACT PAYMENTS OF BOND PROCEEDS TO CONSTRUCTION VENDORS.
USING ALL FBS RESOURCES REDUCED COSTS AND INCREASED CONVENIENCE TO THE CLIENT.
MORE AND MORE, SITUATIONS DEMAND COMPLEX FINANCIAL SOLUTIONS. THIS EXPERIENCE
SHOWS HOW OUR RELATIONSHIP MANAGERS CAN MARSHAL EXPERTISE THROUGHOUT FBS TO
DELIVER VALUE TO OUR CLIENTS.
Perspectives
BUILDING CLIENT LOYALTY
- -----------------------
Like our industry as a whole, Commercial Banking is changing rapidly.
Competition is expanding from new sources every day, while our client base in
many industries faces accelerating consolidation. Companies demand more from
their banking partners, and they are placing their financial business with fewer
bank providers. Furthermore, the strengthening financial condition of many
companies translates into lower demand for funds and lower margins.
We can't control the competition. We can't control the economy. But we can
focus on our clients. To succeed, we must create loyal clients. A loyal client
is one who is highly satisfied with our partnership, who knows that we
understand the client's business, and who repeatedly comes to us for more. Our
strategy for fostering client loyalty is to distinguish ourselves from other
service providers by consistently exceeding our clients' expectations.
How do we know what exceeds clients' expectations? We asked them. We
identified three key banking practices that lead to client loyalty:
CLIENT FOCUS--focusing on client needs, communicating and listening to
clients, and generating innovative ideas and solutions.
SUPERB EXECUTION--providing products and services that our clients need, and
maintaining a commitment to excellence.
ESSENTIAL KNOWLEDGE--having business acumen, understanding our clients and
their industries, and being able to link client needs to our products and
services.
To improve client loyalty in 1996, we launched a rigorous sales initiative
that requires our relationship teams to continuously understand and identify
potential relationships between our clients' needs, market and industry factors,
and available financial solutions. The result of this "Client Ready Approach" is
a common sales method that develops customized financial solutions for clients
and generates revenue for FBS.
First Bank System, Inc.
14
MOVING TOWARD ALIGNMENT
- -----------------------
In building client loyalty, we know that people are the key to differentiation
in a relationship-driven business. The increasingly complex needs of our clients
require teams of committed delivery and support professionals working together
to provide effective solutions.
For these teams to be effective, team members must be aligned. In Commercial
Banking, we have chosen to focus our alignment efforts around five values that
guide us in our strategy to consistently exceed our clients' expectations. These
values are integrity, initiative, accountability, teamwork and innovation.
In 1996 we continued our commitment toward achieving a culture of aligned
values. Through a process that included a series of workshops, employees gained
a better understanding of Commercial Banking's values and the individual changes
necessary to achieve alignment with these values. Through self-assessment tools
and feedback from co-workers, employees also received data that provided a basis
for generating individual development plans focused on improving alignment.
We are confident that a culture of committed employees aligned with a shared
set of values will lead to increased client satisfaction and loyalty and will
continue to differentiate us in an increasingly competitive environment.
FOCUSING ON OPPORTUNITY
- -----------------------
In 1996 we continued to analyze product usage, profitability, and relationship
potential among our client base.
As our clients' businesses become more demanding, they require more
sophisticated financial solutions. And clients' needs vary. With the goal of
focusing our expertise for maximum client benefit, clients are strategically
linked with the most appropriate relationship team to handle their unique needs.
10%
INCREASED AVERAGE LOANS, EXCLUDING LOANS TO MORTGAGE BANKERS, BY MORE THAN 10
PERCENT TO $4.9 BILLION.
In addition to focusing appropriate resources on our clients, we also have
stepped up our efforts to win and retain the most complex relationships--which
are often the most profitable. Traditionally, banks have offered a standard line
of credit and noncredit products without regard for the particular needs of
their clients. In other words, banks were more focused on selling products than
providing effective solutions. Now, we have sophisticated professionals who have
the resources to deliver customized, innovative financial solutions to meet our
clients' most complex, challenging and unique needs.
1996 Highlights
. Increased average loans, excluding loans to mortgage bankers, by 10.2 percent
to $4.9 billion.
. Served as agent on transactions totaling $1.7 billion and co-agent on
transactions totaling $6.7 billion.
. Increased total FBS revenues from treasury management services by 12.1
percent including acquisitions.
. Maintained strong credit quality, with nonperforming assets of $41.1 million,
or .78 percent of loans plus other real estate owned.
. Improved efficiency ratio on a cash basis to 29.3 percent from 31.6 percent.
First Bank System, Inc.
15
CORPORATE TRUST & INSTITUTIONAL FINANCIAL SERVICES
[GRAPH APPEARS HERE -- SEE GRAPHICS APPENDIX]
BUSINESS DESCRIPTION
Corporate Trust and Institutional Financial Services share a trust accounting
system, fee billing unit, and the legal entity First Trust, but otherwise remain
distinct businesses.
Through CORPORATE TRUST, FBS is one of the nation's largest providers of
domestic corporate trust services. Corporate Trust provides trusteeship for
municipal, corporate, asset-backed and international bonds, as well as paying
agent, escrow agent, and document custodial services to debt issuers.
INSTITUTIONAL FINANCIAL SERVICES focuses on investment clients and products. The
business is organized into two groups: First Asset Management (FAM) and
Investment Services. FAM provides centralized investment management, delivery
and business support services for all FBS individual and institutional
investment products. These products include First American Funds (a proprietary
mutual fund family advised by FAM) and 401(k) products. Investment Services is
FBS's full-service broker/dealer providing a wide array of investment products
to individual investors, and underwriting, distribution and portfolio services
to institutional clients.
Perspectives
CORPORATE TRUST: POSITIONED TO LEAD
- -----------------------------------
In the corporate trust business, establishing economies of scale is necessary
for competing effectively. The advantage goes to companies with the means to
invest in efficient technology and offer a breadth of high-quality products and
services. Through recent acquisitions and internal growth, FBS has become one of
the largest providers of corporate trust services in the industry.
In 1996 we successfully completed the integration of BankAmerica's corporate
trust business, doubling our corporate trust revenue and profitability. We
continued our growth by announcing the acquisition of Comerica, Inc.'s bond
indenture and paying agent business. Having closed on the Comerica acquisition
in January 1997, FBS now serves more than 10,000 clients with 33,000 bond issues
in the areas of municipal, revenue, housing and corporate bond indenture
trusteeships.
FBS continues to explore acquisition opportunities for Corporate Trust, but
scale is just one reason we are well-positioned to succeed in this niche.
We are investing in the infrastructure needed to absorb future acquisitions
and grow our existing business. For example, we're upgrading systems for fee
billing and collection, account control, and bondholder accounting and service.
Our continuing emphasis on automation and standardization enhances our ability
to deliver the levels of accuracy, quality and timeliness that bondholders and
bond issuers demand.
Our strategy of maintaining local offices gives us a competitive edge in
retaining and expanding our client base, particularly for municipal bonds.
Through 13 full-service offices nationwide, we clearly have the size, experience
and resources to compete profitably and efficiently.
In addition, we are able to leverage management expertise throughout FBS in
areas such as acquisitions and cost control.
RESULTS
TOP-OF-THE-LINE SYSTEMS, SERVICE AND CLIENTS
THE CALIFORNIA HOUSING FINANCE AGENCY (CHFA) BECAME A FIRST TRUST CUSTOMER IN
1992, WHEN FBS ACQUIRED A MAJOR COMPETITOR'S CORPORATE TRUST PORTFOLIO. CHFA HAD
BEEN CONSIDERING CHANGING VENDORS TO PROVIDE TRUSTEE AND PAYING AGENT SERVICES,
AND AGREED TO STAY PUT IF FIRST TRUST COULD PROVIDE HIGH-QUALITY SERVICE AND
MAINTAIN A LOCAL PRESENCE. WE DID BOTH.
TODAY CHFA IS ONE OF CORPORATE TRUST'S LARGEST CLIENTS AND ONE OF THE LARGEST
BOND ISSUERS IN CALIFORNIA. THE AGENCY'S OUTSTANDING DEBT HAS GROWN NEARLY 40
PERCENT SINCE 1992. IN 1996 THE AGENCY ISSUED MORE THAN $1 BILLION IN NEW BONDS,
AS IT IMPROVED ITS EFFICIENCY AND PRODUCT DELIVERY.
FIRST TRUST HAS PROVED CAPABLE OF HANDLING THIS RAPIDLY GROWING, HIGH-PROFILE
CLIENT AND ITS COMPLEX BUSINESS. OUR CENTRALIZED TRUST ACCOUNTING SYSTEMS AND
OUR STAFF PROVIDE THE DEPENDABLE, HIGH-QUALITY SERVICE THE AGENCY NEEDS. WHEN
HANDS-ON, PERSONAL ATTENTION IS REQUIRED, A DEDICATED ACCOUNT TEAM IS NEARBY IN
OUR SAN FRANCISCO REGIONAL OFFICE, ONE OF 13 ACROSS THE COUNTRY.
First Bank System, Inc.
16
INSTITUTIONAL FINANCIAL SERVICES: PERFORMANCE PLUS
- --------------------------------------------------
72%
GREW PROPRIETARY FIRST AMERICAN MUTUAL FUND ASSETS 72 PERCENT TO $12.8 BILLION.
The goal of Institutional Financial Services is to satisfy customers, enabling
us to grow noninterest income by gathering assets. In 1996 our assets under
management increased 35 percent to $39.3 billion, and fee income grew 16 percent
to $85.8 million.
We are on target to meet our long-term objectives for size and revenue.
Furthermore, we are confident that we can continue to grow because we offer
sound investment products--both in performance and breadth--and because FBS has
solid market presence and distribution.
Strong, long-term performance is fueling our growth and is a key reason why
First American Funds, a proprietary mutual fund family advised by First Asset
Management (FAM), reached $12.8 billion in assets under management in 1996. At
year-end, Morningstar gave eight of these funds four-star ratings or higher for
three-year performance.
In 1996 we continued to expand our product offerings to meet the needs of a
wide range of investors. First American Strategy Funds, "funds of funds" that
invest primarily in shares of other First American funds, were introduced into
the no-load arena. The new funds, advised by FAM, provide a one-stop option for
investors seeking income, growth and income, growth, or aggressive growth
portfolios.
In retirement investments, FBS is seizing the opportunity related to the shift
of assets from defined benefit to defined contribution plans. First Select, our
new 401(k) plan for companies with 250 to 5,000 employees, promises to be a
successful vehicle for defined benefit plan conversion. It gives customers the
option to invest in First American Funds as well as in partner funds such as
Fidelity and Putnam. Our retirement products continue to grow largely on the
strength of referrals from FBS retail and business bankers.
401(K) SOLUTION FOR A GROWING COMPANY
WHEN THE RAMKOTA COMPANIES, INC., LAUNCHED ITS 401(K) PROGRAM IN 1989, IT
INSTINCTIVELY TURNED TO FIRST TRUST. THE SIOUX FALLS, S.D.-BASED COMPANY ALREADY
RELIED ON FIRST BANK FOR DEPOSIT AND CREDIT SERVICES, AS WELL AS CASH
MANAGEMENT, TRUST ADMINISTRATION, AND CREDIT CARDS.
AS RAMKOTA GREW RAPIDLY THROUGH ACQUISITIONS TO OWN AND MANAGE 38 HOTELS IN 13
STATES, ITS 401(K) PROGRAM GREW MORE COMPLEX. BY 1996 THE COMPANY SPONSORED 28
RETIREMENT PLANS--A CUMBERSOME, TIME-CONSUMING ADMINISTRATIVE BURDEN.
RECOGNIZING RAMKOTA'S NEEDS, FIRST TRUST RECOMMENDED CONSOLIDATING THE COMPANY'S
401(K) BENEFITS USING THE FIRST AMERICAN RETIREMENT PLAN. RAMKOTA AGREED,
SIGNIFICANTLY REDUCING ADMINISTRATIVE TASKS. IN ADDITION, RAMKOTA EMPLOYEES NOW
HAVE MORE COMPLETE, TIMELY ACCESS TO THEIR RETIREMENT ACCOUNTS. AN 800 NUMBER
ENABLES THEM TO CHECK DAILY BALANCES AND TRANSFER FUNDS BY PHONE 24 HOURS A DAY.
THEY RECEIVE STATEMENTS THAT ARE MORE DETAILED AND TIMELY THAN BEFORE. AND THEY
CAN CHOOSE FROM AMONG SEVERAL INVESTMENT OPTIONS FROM THE FIRST AMERICAN FUNDS
FAMILY.
EVEN WITH CONTINUED EXPANSION, RAMKOTA CAN EASILY ENROLL NEW EMPLOYEES IN THE
FIRST AMERICAN RETIREMENT PLAN WITHOUT ADDING NEW PLANS.
1996 Highlights
Corporate Trust
. Completed integration of BankAmerica's corporate trust business.
. Announced acquisition of bond indenture services business of Comerica, Inc.
. Grew principal outstanding 39 percent to $458 billion.
. Increased bond issues 83 percent to 33,000.
. Increased number of bondholders served by 77 percent to 995,000.
Institutional Financial Services
. Increased assets under management 35 percent to $39.3 billion.
. Grew proprietary First American mutual fund assets 72 percent to $12.8
billion.
. Increased small plan 401(k) plan assets under management 74 percent to $712.3
million.
. Attracted 121 new retirement plan sponsors, up 45 percent.
. Established nearly 39,000 new brokerage account relationships, a 16.5 percent
increase in new relationships.
. Increased brokerage investment sales revenue by 27 percent.
. Increased public finance and municipal underwriting volume by nearly $500
million, a 33 percent increase.
First Bank System, Inc.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
SUMMARY OF 1996 RESULTS First Bank System, Inc. (the "Company") earned a record
$740 million for the year 1996, up 30 percent from 1995 net income of $568
million. On a per fully diluted share basis, net income was $5.25 compared with
$4.11 in 1995, an increase of 28 percent. Return on average assets and return on
average common equity were 2.09 percent and 23.8 percent, compared with returns
of 1.73 percent and 21.3 percent in 1995.
Several nonrecurring items affected operating results for 1996. The impact
of these items was $72.1 million ($138.0 million on a pre-tax basis), or $.53
per share. Nonrecurring gains were: $190 million, net of expenses, received for
the termination of the First Interstate Bancorp ("First Interstate") merger
agreement; a $65 million refund of state income taxes, including interest; $45.8
million in gain on the sale of the Company's mortgage banking operations; and,
$15 million in net securities gains. Nonrecurring charges included: $31.3
million in merger and integration charges associated with the acquisitions of
FirsTier Financial, Inc. ("FirsTier") and the corporate trust business of
BankAmerica Corporation ("BankAmerica"); $38.6 million in branch distribution
resizing expenses; a $29.5 million valuation adjustment of cardholder and core
deposit intangibles; $10.1 million for a one-time employee bonus; $17.3 million
to acquire software and write-off other miscellaneous assets; and, a $51 million
one-time special assessment by the Federal Deposit Insurance Corporation
("FDIC") on deposits insured by the Savings Association Insurance Fund ("SAIF").
Operating earnings (net income excluding nonrecurring items) for 1996 were
$667.7 million, an increase of $99.6 million (18 percent) from 1995. On a per
fully diluted share basis, operating earnings were $4.74 in 1996, compared with
$4.11 in 1995. Return on average assets and return on average common equity,
excluding nonrecurring items, were 1.88 percent and 21.4 percent, compared with
returns of 1.73 percent and 21.3 percent in 1995. Excluding nonrecurring items,
the efficiency ratio (the ratio of expenses to revenues) improved to 49.9
percent in 1996 from 53.3 percent in 1995.
The strong 1996 results reflect growth in net interest and noninterest
income, controlled operating expenses, and effective capital management. Net
interest income on a taxable-equivalent basis was $1.6 billion, an increase of
$100 million (7 percent) from 1995. Noninterest income increased $117.8 million
(16 percent) from 1995, excluding nonrecurring items, primarily as a result of
growth in credit card, trust fees and service charges on deposit accounts.
Excluding nonrecurring items, 1996 noninterest expense increased $35.4 million
(3 percent) compared with 1995 primarily because of acquisitions. Compared with
noninterest expense for 1995, adjusted for acquisitions and divestitures,
noninterest expense declined $101 million (8 percent) in 1996.
Credit quality remained strong during 1996. Nonperforming assets totaled
$137.7 million at December 31, 1996, down $16 million (10 percent) from December
31, 1995. The ratio of allowance for credit losses to nonperforming loans
increased to 429 percent from 401 percent at December 31, 1995. See "Corporate
Risk Profile" for additional information.
ACQUISITION AND DIVESTITURE ACTIVITY On February 16, 1996, the Company completed
its acquisition of Omaha-based FirsTier for $717 million. Under the terms of the
purchase agreement, the Company exchanged .8829 shares of its common stock for
each common share of FirsTier, or a total of 16.5 million shares. FirsTier had
$3.7 billion in assets, $2.9 billion in deposits, and 63 offices in Nebraska and
Iowa. As a purchase transaction, the results of operations of FirsTier are
included in the Company's results from the date of acquisition.
During the fourth quarter of 1995 and first quarter of 1996 the Company
acquired the corporate trust business of BankAmerica. After the acquisition, the
Company became one of the nation's leading providers of domestic corporate trust
services.
During 1996 the Company sold its residential mortgage servicing and loan
production business to three parties. Bank of America fsb, a subsidiary of
BankAmerica, purchased approximately $14 billion in mortgage servicing rights.
Columbia National, Inc., of Maryland, and Knutson Mortgage Co., of Minnesota,
agreed to purchase the Company's loan production business. The Company will now
deliver mortgage loan products through bank branches and telemarketing. These
transactions resulted in a net gain of $45.8 million.
On January 31, 1997, the Company completed its acquisition of the bond
indenture services and paying agency business of Comerica Incorporated. This
business serves approximately 860 municipal and corporate clients with about
2,400 bond issues.
On January 24, 1996, First Interstate announced that it had terminated a
merger agreement with the Company and entered into a definitive agreement with
Wells Fargo & Company. Under the terms of a settlement agreement, the Company
received $125 million on January 24, 1996, and an additional $75 million paid
upon consummation of the merger of First Interstate and Wells Fargo & Company on
April 1, 1996.
Refer to Note C for additional information regarding acquisitions and
divestitures.
18 First Bank System, Inc.
TABLE 1 SELECTED FINANCIAL DATA
(Dollars in Millions, Except Per Share Data) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
CONDENSED INCOME STATEMENT:
Net interest income (taxable-equivalent basis)........................ $1,553.6 $1,454.0 $1,434.5 $1,355.9 $1,175.7
Provision for credit losses........................................... 136.0 115.0 123.6 133.1 191.7
----------------------------------------------------------
Net interest income after provision for credit losses............... 1,417.6 1,339.0 1,310.9 1,222.8 984.0
Securities gains (losses)............................................. 15.0 -- (115.0) .3 46.3
Other nonrecurring gains.............................................. 300.8 31.0 -- -- --
Other noninterest income.............................................. 869.9 752.1 673.9 618.6 567.4
Merger-related charges*............................................... 69.9 -- 125.3 72.2 110.4
Other nonrecurring charges............................................ 107.9 31.0 -- -- --
Other noninterest expense............................................. 1,210.3 1,174.9 1,224.1 1,192.5 1,135.9
----------------------------------------------------------
Income from continuing operations before
income taxes and cumulative effect of changes
in accounting principles........................................... 1,215.2 916.2 520.4 577.0 351.4
Taxable-equivalent adjustment......................................... 20.6 13.8 15.1 17.7 22.7
Income taxes.......................................................... 454.8 334.3 191.8 198.6 115.7
----------------------------------------------------------
Income from continuing operations before cumulative
effect of changes in accounting principles......................... 739.8 568.1 313.5 360.7 213.0
Income (loss) from discontinued operations............................ -- -- (8.5) 2.5 2.7
----------------------------------------------------------
Income before cumulative effect of changes
in accounting principles........................................... 739.8 568.1 305.0 363.2 215.7
Cumulative effect of changes in accounting principles................. -- -- -- -- 233.2
----------------------------------------------------------
Net income.......................................................... $ 739.8 $ 568.1 $ 305.0 $ 363.2 $ 448.9
----------------------------------------------------------
Return on average assets.............................................. 2.09% 1.73% .91% 1.13% 1.56%
Return on average assets before merger-related
and nonrecurring items and cumulative effect of
changes in accounting principles..................................... 1.88 1.73 1.35 1.27 .89
Return on average common equity....................................... 23.8 21.3 11.2 13.9 20.0
Return on average common equity before merger-related
and nonrecurring items and cumulative effect of
changes in accounting principles..................................... 21.4 21.3 17.0 15.8 10.8
Net interest margin................................................... 4.89 4.91 4.74 4.69 4.54
Efficiency ratio...................................................... 51.0 53.9 64.0 64.1 71.5
Efficiency ratio before merger-related and
nonrecurring items................................................... 49.9 53.3 58.1 60.4 65.2
PER COMMON SHARE:
Primary income from continuing operations
before cumulative effect of changes in
accounting principles................................................ $ 5.34 $ 4.19 $ 2.21 $ 2.46 $ 1.46
Income (loss) from discontinued operations.......................... -- -- (.06) .02 .02
Cumulative effect of changes in accounting principles............... -- -- -- -- 1.87
----------------------------------------------------------
Primary net income.................................................... $ 5.34 $ 4.19 $ 2.15 $ 2.48 $ 3.35
----------------------------------------------------------
Fully diluted income from continuing operations
before cumulative effect of changes in
accounting principles................................................ $ 5.25 $ 4.11 $ 2.20 $ 2.45 $ 1.45
Income (loss) from discontinued operations.......................... -- -- (.06) .02 .02
Cumulative effect of changes in accounting principles............... -- -- -- -- 1.79
----------------------------------------------------------
Fully diluted net income.............................................. $ 5.25 $ 4.11 $ 2.14 $ 2.47 $ 3.26
----------------------------------------------------------
Dividends paid**...................................................... $ 1.65 $ 1.45 $ 1.16 $ 1.00 $ .88
AVERAGE BALANCE SHEET DATA:
Loans................................................................. $ 26,806 $ 25,383 $ 23,863 $ 21,808 $ 19,108
Earning assets........................................................ 31,754 29,603 30,265 28,907 25,899
Assets................................................................ 35,477 32,886 33,545 32,191 28,837
Deposits.............................................................. 23,443 22,708 24,661 25,637 22,953
Long-term debt........................................................ 3,393 2,963 2,609 1,633 1,453
Common equity......................................................... 3,085 2,634 2,603 2,409 2,090
Total shareholders' equity............................................ 3,175 2,739 2,746 2,769 2,495
YEAR-END BALANCE SHEET DATA:
Loans................................................................. $ 27,128 $ 26,400 $ 24,556 $ 23,497 $ 20,692
Assets................................................................ 36,489 33,874 34,128 33,370 32,758
Deposits.............................................................. 24,379 22,514 24,256 26,386 26,395
Long-term debt........................................................ 3,553 3,201 2,981 2,070 1,151
Common equity......................................................... 3,053 2,622 2,494 2,466 2,354
Total shareholders' equity............................................ 3,053 2,725 2,612 2,744 2,745
- -----------------------------------------------------------------------------------------------------------------------------------
*Includes $26.4 relating to ORE in 1992, and $56.5 relating to severance in
1994.
**Dividends per share have not been restated for the Metropolitan Federal
Corporation ("MFC") or Colorado National Bankshares, Inc. ("CNB") mergers. MFC
paid common dividends of $25.1 million in 1994 ($.80 per share), $12.1 million
in 1993 ($.39 per share) and $7.7 million in 1992 ($.27 per share). CNB paid
common dividends of $3.2 million in 1992 ($.28 per share).
First Bank Systems, Inc. 19
TABLE 2 LINE OF BUSINESS FINANCIAL PERFORMANCE
Retail Payment Business Banking and
Banking Systems Private Financial Services
---------------------------------------------------------------------------------------------------
Percent Percent Percent
(Dollars in Millions) 1996 1995 Change 1996 1995 Change 1996 1995 Change
- ------------------------------------------------------------------------------------------------------------------------------------
CONDENSED INCOME STATEMENT:
Net interest income
(taxable-equivalent
basis)......................... $ 758.6 $ 712.1 6.5% $146.5 $155.8 (6.0)% $394.1 $330.0 19.4%
Provision for credit losses....... 20.2 19.5 3.6 92.0 74.8 23.0 13.4 11.0 21.8
Noninterest income................ 161.4 141.1 14.4 330.3 266.9 23.8 116.8 95.2 22.7
Noninterest expense............... 569.6 541.4 5.2 208.9 193.0 8.2 199.8 182.7 9.4
Income taxes and taxable-
equivalent adjustment........... 125.5 111.1 66.8 58.9 113.1 87.9
Income before nonrecurring -------------------- ---------------- ----------------- -----------
items............................ $ 204.7 $ 181.2 13.0 $109.1 $ 96.0 13.6 $184.6 $143.6 28.6
-------------------- ---------------- ----------------- -----------
Net nonrecurring items
(after-tax)......................
Net income.....................
AVERAGE BALANCE SHEET DATA:
Commercial loans.................. $ 442 $ 358 23.5 $1,148 $ 807 42.3 $6,695 $5,472 22.4
Consumer loans,
excluding residential
mortgage....................... 6,441 5,849 10.1 2,654 2,341 13.4 463 405 14.3
Residential mortgage loans........ 3,323 4,815 (31.0) -- -- -- 124 91 36.3
Assets............................ 13,151 13,932 (5.6) 4,632 3,854 20.2 9,615 7,837 22.7
Deposits.......................... 16,993 16,839 .9 40 40 -- 3,638 3,139 15.9
Common equity..................... 1,039 1,002 3.7 427 351 21.7 841 608 38.3
-------------------- ---------------- ----------------- -----------
Return on average assets.......... 1.56% 1.30% 2.36% 2.49% 1.92% 1.83%
Return on average common
equity ("ROCE").................. 19.7 18.1 25.6 27.4 22.0 23.6
Net tangible ROCE**............... 36.2 26.0 43.4 47.8 35.5 32.3
Efficiency ratio.................. 61.9 63.5 43.8 45.7 39.1 43.0
Efficiency ratio on a cash
basis**.......................... 59.2 61.4 41.8 43.2 36.9 41.9
- ------------------------------------------------------------------------------------------------------------------------------------
*Not meaningful.
**Calculated by excluding goodwill and other intangibles and the related
amortization.
Note:The Company's mortgage banking operations, which were sold in first
quarter 1996, and nonrecurring items are included in "Other."
LINE OF BUSINESS FINANCIAL REVIEW
Financial performance is measured by major lines of business, which include:
Retail Banking, Payment Systems, Business Banking and Private Financial
Services, Commercial Banking, and Corporate Trust and Institutional Financial
Services. Business line results are derived from the Company's business unit
profitability reporting system. Designations, assignments, and allocations may
change from time to time as management accounting systems are enhanced or
product lines change. During 1996 certain organization and methodology changes
were made and 1995 results are presented on a consistent basis.
RETAIL BANKING Retail Banking delivers products and services to the broad
consumer market and small-business through branch offices, telemarketing, direct
mail, and automated teller machines ("ATMs"). Net income was $204.7 million in
1996 compared with $181.2 million in 1995. Return on average assets increased to
1.56 percent from 1.30 percent in 1995. Net tangible return on average common
equity increased to 36.2 percent from 26.0 percent in the previous year.
The increase in net interest income resulted from growth in core commercial
and nonmortgage consumer loans and the February 1996 acquisition of FirsTier.
Noninterest income and expense were higher in 1996 compared with 1995,
reflecting the impact of acquisitions. The efficiency ratio on a cash basis
improved to 59.2 percent in 1996 from 61.4 percent a year ago.
PAYMENT SYSTEMS Payment Systems includes consumer and business credit cards,
corporate and purchasing card services, card-accessed secured and unsecured
lines of credit, ATM processing, and merchant processing. Net income increased
14 percent in 1996 to $109.1 million compared with $96.0 million in 1995. Return
on average assets was 2.36 percent, compared with 2.49 percent in 1995, and net
tangible return on average common equity was 43.4 percent compared with 47.8
percent in 1995.
First Bank Systems, Inc.
20
Corporate Trust and
Commercial Institutional Financial Consolidated
Banking Services Other Company
- ------------------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent
1996 1995 Change 1996 1995 Change 1996 1995 1996 1995 Change
- ------------------------------------------------------------------------------------------------------------------------------------
$209.2 $216.1 (3.2)% $ 39.4 $ 26.3 49.8% $ 5.8 $13.7 $1,553.6 $1,454.0 6.9%
10.4 9.7 7.2 -- -- -- -- (.1) 136.0 115.0 18.3
59.8 60.3 (.8) 196.9 140.6 40.0 4.7 48.0 869.9 752.1 15.7
79.9 88.3 (9.5) 142.7 109.4 30.4 9.4 60.1 1,210.3 1,174.9 3.0
68.0 67.8 35.6 21.8 .5 .6 409.5 348.1
- ------------------------------------- ------------------------ -------------------------------------
$110.7 $110.6 .1 $ 58.0 $ 35.7 62.5 .6 1.1 667.7 568.1 17.5
- ------------------------------------- ------------------------
72.1 -- 72.1 -- *
-------------------------------------
$72.7 $ 1.1 $739. 8 $568.1 30.2
-------------------------------------
$5,438 $4,978 9.2 $ -- $ -- $ -- $ -- $ 4 $ 13,723 $ 11,619 18.1
-- -- -- -- -- -- -- -- 9,558 8,595 11.2
-- -- -- -- -- -- 78 263 3,525 5,169 (31.8)
6,752 6,095 10.8 1,165 709 64.3 162 459 35,477 32,886 7.9
1,569 1,620 (3.1) 1,040 788 32.0 163 282 23,443 22,708 3.2
473 427 10.8 289 179 61.5 16 67 3,085 2,634 17.1
- ------------------------------------- ------------------------ -------------------------------------
* 1.64% 1.81% * * 1.88% 1.73%
23.4 25.9 20.1% 19.9% 21.4 21.3
24.4 27.2 36.6 28.8 35.2 30.7
29.7 31.9 60.4 65.5 49.9 53.3
29.3 31.6 52.5 60.3 46.8 50.7
- -----------------------------------------------------------------------------------------------------------------------------------
Fee-based noninterest income increased approximately 24 percent in 1996
compared with 1995. The increases were due to growth in the sales volume of the
Corporate Card, the Purchasing Card, the First Bank WorldPerks(R) VISA(R) card,
and the expansion of the ATM network. Net interest income decreased slightly due
to a change in the loan mix. Average commercial loans, which are primarily
noninterest-earning Corporate and Purchasing Card balances, comprised
approximately 30 percent of the portfolio in 1996, compared with approximately
26 percent in 1995. Noninterest expense increased 8 percent reflecting an
increase in sales volume. The efficiency ratio on a cash basis improved to 41.8
percent from 43.2 percent in 1995.
BUSINESS BANKING AND PRIVATE FINANCIAL SERVICES
Business Banking and Private Financial Services includes middle-market banking
services, private banking, and personal trust. Net income increased 29 percent
to $184.6 million compared with 1995. Return on average assets was 1.92 percent
compared with 1.83 percent in 1995, and net tangible return on average common
equity was 35.5 percent compared with 32.3 percent in 1995.
Net interest income increased 19 percent, reflecting 22 percent growth in
average loan balances including acquisitions. The 23 percent increase in
noninterest income in 1996 compared with 1995 resulted from acquisitions and a
more effective approach to charging for private financial services. Noninterest
expense increased in 1996 compared with 1995 reflecting the impact of
acquisitions. The efficiency ratio on a cash basis improved to 36.9 percent in
1996 from 41.9 percent in 1995.
COMMERCIAL BANKING Commercial Banking provides lending, treasury management, and
other financial services to middle-market, large corporate and mortgage banking
companies. Net income was $110.7 million, essentially unchanged from 1995.
Return on average assets was 1.64 percent compared with 1.81 percent in 1995,
and net tangible return on average common equity was 24.4 percent compared with
27.2 percent in 1995.
First Bank System, Inc. 21
Although average loans increased $460 million (9 percent) from 1995, net
interest income was lower primarily reflecting the impact of lending to the
cyclical mortgage banking sector. Noninterest income remained relatively flat in
1996 compared with 1995. The decrease in noninterest expense reflected the
benefits of increased operational efficiencies. The efficiency ratio on a cash
basis improved to 29.3 percent compared to 31.6 percent in 1995.
CORPORATE TRUST AND INSTITUTIONAL FINANCIAL SERVICES
Corporate Trust and Institutional Financial Services includes institutional and
corporate trust services, investment management services, and a full-service
brokerage company. Net income increased 63 percent to $58.0 million compared
with the prior year. The net tangible return on average common equity was 36.6
percent in 1996, compared with 28.8 percent in 1995.
Corporate Trust net income increased over 1995 primarily due to the
Company's strategy to grow its fee-based businesses including the full year
impact of the BankAmerica Corporate Trust business acquisition. Institutional
Financial Services net income increased reflecting growth in mutual fund
balances due to successful marketing promotions and the acquisition of FirsTier.
The efficiency ratio on a cash basis improved to 52.5 percent from 60.3 percent
in 1995, reflecting the effective integration of acquisitions, process re-
engineering efforts, and revenue growth.
STATEMENT OF INCOME ANALYSIS
NET INTEREST INCOME Net interest income on a taxable-equivalent basis was $1.55
billion in 1996 compared with $1.45 billion in 1995 and $1.43 billion in 1994.
The 1996 increase as compared with 1995 was attributable primarily to growth in
average loans. During 1996, $1.3 billion of residential mortgage loans were
securitized and reclassified to available-for-sale securities to enhance
liquidity and financial management flexibility. Excluding residential mortgage
loan balances, 1996 average loans were higher by approximately $3.1 billion than
1995, reflecting growth in core commercial and consumer loans, as well as the
February 1996 acquisition of FirsTier. Average securities were higher than 1995,
reflecting the transfer of securitized mortgage loan balances and the addition
of securities acquired with FirsTier, partially offset by maturities and sales.
Partially offsetting the impact of higher average loan balances was the
effect of a lower average yield on loans. The average yield on loans for 1996
was 8.75 percent, or 24 basis points lower than 8.99 percent in 1995 due to
declining interest rates over the past year. The improvement in net interest
income also reflected a decrease of 16 basis points on rates paid on interest-
bearing liabilities.
The improvement in net interest income from 1994 to 1995 reflected an
increase in the average yield on earning asset balances due to increases in
market interest rates during 1994 and the first quarter of 1995 and a shift in
the mix from securities and residential mortgage-related balances to other
higher yielding commercial and consumer loan balances. Solid loan growth
occurred in both nonmortgage consumer and commercial loans, offset primarily by
a decrease in the balance of residential mortgage loans. Excluding these
residential mortgage loan balances, average loans for the year increased by $2.5
billion from 1994, as demand for small business and middle-market loans, credit
cards, home equity, and other consumer loans remained strong.
TABLE 3 ANALYSIS OF NET INTEREST INCOME
(Dollars in Millions) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income (taxable-equivalent basis)...................... $1,553.6 $1,454.0 $1,434.5
-------------------------------------------------------
Average balances of earning assets supported by:
Interest-bearing liabilities....................................... $ 24,677 $23,527 $23,618
Noninterest-bearing liabilities.................................... 7,077 6,076 6,647
-------------------------------------------------------
Total earning assets.............................................. $ 31,754 $29,603 $30,265
-------------------------------------------------------
Average yields and weighted average rates (taxable-equivalent basis):
Earning assets yield............................................... 8.42% 8.64% 7.61%
Rate paid on interest-bearing liabilities.......................... 4.54 4.70 3.68
-------------------------------------------------------
Gross interest margin............................................... 3.88% 3.94% 3.93%
-------------------------------------------------------
Net interest margin................................................. 4.89% 4.91% 4.74%
-------------------------------------------------------
Net interest margin without taxable-equivalent increments........... 4.83% 4.87% 4.69%
- ---------------------------------------------------------------------------------------------------------------------------------
22 First Bank System, Inc.
TABLE 4 CHANGES IN RATE AND VOLUME
1996 Compared with 1995 1995 Compared with 1994
(In Millions) Volume Yield/Rate Total Volume Yield/Rate Total
- ----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in:
Interest income:
Loans.................................. $ 125.6 $ (60.5) $ 65.1 $ 127.6 $ 230.0 $ 357.6
Taxable securities..................... 7.9 7.5 15.4 (131.7) 29.9 (101.8)
Nontaxable securities.................. 25.8 (3.8) 22.0 (.5) (.6) (1.1)
Federal funds sold and
resale agreements..................... 11.9 (1.6) 10.3 (6.0) 5.7 (.3)
Other................................... 5.0 (2.3) 2.7 -- 1.4 1.4
----------------------------------------------------------------------------
Total................................. 176.2 (60.7) 115.5 (10.6) 266.4 255.8
Interest expense:
Savings deposits and time
deposits less than $100,000........... 2.1 (18.7) (16.6) (29.0) 146.2 117.2
Time deposits over $100,000............. (12.5) (4.5) (17.0) (19.9) 12.1 (7.8)
Short-term borrowings................... 48.2 (13.7) 34.5 41.8 43.0 84.8
Long-term debt.......................... 26.3 (13.6) 12.7 21.4 20.7 42.1
Company-obligated mandatorily
redeemable capital securities
of FBS Capital I...................... 2.3 -- 2.3 -- -- --
---------------------------------------------------------------------------
Total..................................... 66.4 (50.5) 15.9 14.3 222.0 236.3
---------------------------------------------------------------------------
Increase (decrease) in net
interest income........................... $ 109.8 $ (10.2) $ 99.6 $ (24.9) $ 44.4 $ 19.5
- ----------------------------------------------------------------------------------------------------------------------------
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.
Partially offsetting the 1995 increase in the average yield on earning
assets was an increase in the average rate paid on interest-bearing liabilities
as a result of increases in deposit rates and, to a lesser extent, a shift in
mix from deposits to borrowings in 1995 as compared to 1994. Average interest-
bearing deposits decreased reflecting the 1995 divestiture of $848 million of
deposits and consumers moving funds into alternative investment vehicles.
The net interest margin, on a taxable-equivalent basis, was 4.89 percent in
1996, essentially unchanged from 4.91 percent in 1995. The net interest margin
was 4.74 percent in 1994. The improvement in the net interest margin in 1995
over 1994 resulted from a shift in the mix of earning assets from securities and
lower-margin mortgage-related loans to higher yield consumer and commercial
loans.
PROVISION FOR CREDIT LOSSES The provision for credit losses was $136.0 million
in 1996, up $21.0 million from the provision of $115.0 million in 1995 and $12.4
million from the provision of $123.6 million in 1994. Net charge-offs increased
to $152.8 million in 1996 from $121.0 million in 1995 and 140.3 million in 1994.
These increases resulted from increased loan volumes, higher credit card net
charge-offs, and lower commercial loan net recoveries. The 1994 provision for
credit losses included a $16.5 million merger-related provision to provide for
the Company's plans and policies with respect to MFC's commercial and consumer
loan portfolios. Refer to "Corporate Risk Profile" for further information on
credit quality.
First Bank System, Inc. 23
TABLE 5 NONINTEREST INCOME
(Dollars in Millions) 1996 1995 1994
- ------------------------------------------------------------------------------
Credit card fees............................. $ 292.6 $232.7 $ 179.0
Trust fees................................... 230.7 175.3 159.2
Services charges on deposit accounts......... 141.5 123.7 127.3
Investment products fees and commissions..... 33.4 27.6 29.6
Trading account profits and commissions...... 13.0 11.1 9.3
Other........................................ 158.7 181.7 169.5
------------------------------
Subtotal.................................... 869.9 752.1 673.9
Termination fee, net......................... 190.0 -- --
State income tax refund...................... 65.0 -- --
Gain on sale of mortgage banking operations.. 45.8 -- --
Gain on sale of branches..................... -- 31.0 --
Securities gains (losses).................... 15.0 -- (115.0)
------------------------------
Nonrecurring gains (losses)................. 315.8 31.0 (115.0)
------------------------------
Total noninterest income................... $1,185.7 $783.1 $ 558.9
- -----------------------------------------------------------------------------
NONINTEREST INCOME Noninterest income was $1.19 billion in 1996, compared with
$783.1 million in 1995, an increase of $402.6 million (51 percent). Noninterest
income was $558.9 million in 1994. Nonrecurring gains included in noninterest
income in 1996 totaled $315.8 million, including a $190 million termination fee
received from the First Interstate transaction, net of $10 million in costs; a
$65 million state tax refund, including interest; a $45.8 million gain on the
sale of the Company's mortgage banking operations; and, $15 million in net
securities gains. Noninterest income in 1995 included a $31 million nonrecurring
gain on the sale of 63 branches. Included in 1994 noninterest income was a
$115.0 million nonrecurring loss primarily related to securities sold in January
1995 as a result of MFC's actions to reduce interest rate risk consistent with
prior regulatory requests and to align more closely the interest rate risk
profile of MFC with that of the Company.
Excluding nonrecurring items, noninterest income in 1996 was $869.9
million, a $117.8 million (16 percent) increase from 1995. Noninterest income in
1995, excluding nonrecurring items, increased $78.2 million (12 percent) from
1994. The improvements resulted primarily from continued growth in credit card
and trust fees. Credit card fees increased due to higher sales volumes for
Corporate and Purchasing Cards and the First Bank WorldPerks VISA card. Trust
fees were up primarily on growth attributable to the Company's corporate trust
acquisition strategy, including the acquisitions of the BankAmerica corporate
trust business and FirsTier completed in 1996, and core growth in personal and
institutional trust fees. Service charges on deposit accounts increased over
1995 primarily as a result of increased demand deposits and the acquisition of
FirsTier. Other noninterest income decreased in 1996 as compared to 1995,
reflecting the impact of the sale of the Company's mortgage banking operations,
and increased in 1995 as compared to 1994, due to increased ATM network
transaction volume.
First Bank System, Inc.
24
TABLE 6 NONINTEREST EXPENSE
(Dollars in Millions, Except Per Employee Data) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
Salaries**............................................................ $ 456.4 $ 441.0 $ 450.7
Employee benefits**................................................... 104.1 96.4 105.7
-----------------------------------------
Total personnel expense.............................................. 560.5 537.4 556.4
Goodwill and other intangible assets**................................ 77.0 57.1 50.4
Net occupancy......................................................... 98.5 98.6 103.8
Furniture and equipment............................................... 89.0 94.2 88.3
Other personnel costs................................................. 55.8 40.9 35.7
Professional services**............................................... 39.9 36.9 38.5
Advertising and marketing............................................. 35.4 32.0 35.5
Telephone............................................................. 27.3 25.1 25.9
Printing, stationery and supplies..................................... 23.4 22.4 23.0
Postage............................................................... 22.8 22.5 23.0
Third party data processing........................................... 21.8 17.8 20.3
FDIC insurance........................................................ 11.4 35.8 58.4
Other**............................................................... 147.5 154.2 164.9
-----------------------------------------
Subtotal............................................................. 1,210.3 1,174.9 1,224.1
SAIF special assessment............................................... 51.0 -- --
Merger-related........................................................ 31.3 -- 125.3
Branch distribution resizing.......................................... 38.6 -- --
Goodwill and other intangible assets valuation adjustment............. 29.5 -- --
Special employee bonus................................................ 10.1 -- --
Other................................................................. 17.3 31.0 --
-----------------------------------------
Nonrecurring charges................................................. 177.8 31.0 125.3
-----------------------------------------
Total noninterest expense........................................... $1,388.1 $1,205.9 $1,349.4
-----------------------------------------
Efficiency ratio*..................................................... 51.0% 53.9% 64.0%
Efficiency ratio before merger-related items and nonrecurring items... 49.9 53.3 58.1
Average number of full-time equivalent employees...................... 12,976 13,231 14,725
Personnel expense per employee**...................................... $ 43,195 $ 40,617 $ 37,786
- -----------------------------------------------------------------------------------------------------------------
* Computed as noninterest expense divided by the sum of net interest income on a
taxable-equivalent basis and noninterest income net of securities gains and
losses.
**Before effect of nonrecurring items.
NONINTEREST EXPENSE Noninterest expense was $1.39 billion in 1996, compared with
$1.21 billion in 1995, an increase of $182.2 million (15 percent), and $1.35
billion in 1994. Nonrecurring charges in 1996 totaled $177.8 million, including
merger and integration charges of $31.3 million for the acquisitions of FirsTier
and the BankAmerica corporate trust business and $38.6 million in branch
distribution resizing expenses; a $29.5 million valuation adjustment to reduce
the carrying value of credit card and core deposit intangibles to estimated fair
value; $10.1 million for a one-time $750 per-employee bonus to thank employees
for staying focused on customers and shareholder value during the bid for First
Interstate; $17.3 million to acquire credit card and revolving credit software
and to write-off other miscellaneous assets; and, a $51 million one-time special
assessment by the FDIC on SAIF deposits. Nonrecurring charges in 1995 included
the write-off of $23 million of unamortized software costs related to a change
in the Company's policy to expense software costs and an $8 million write-off of
other miscellaneous assets. Nonrecurring charges included in noninterest expense
in 1994 were merger and integration charges of $66.2 million and merger-related
severance charges of $56.5 million related to the MFC transaction. Refer to Note
K for further information on merger, integration and resizing charges.
First Bank System, Inc. 25
On a pro forma basis (adjusting for purchase acquisitions, divested
businesses and nonrecurring items), noninterest expense in 1996 declined $101.4
million (8 percent) compared with 1995, and 1995 decreased $80.9 million (6
percent) compared with 1994. These reductions were achieved as a result of
effective acquisition integration and ongoing expense control. Excluding
nonrecurring items, the Company's efficiency ratio improved to 49.9 percent in
1996 from 53.3 percent in 1995 and 58.1 percent in 1994. The Company's
efficiency ratio ranks second among its peer group. The keys to this high
productivity are a tight cost control culture throughout the organization and
the successful integration of acquisitions. Each acquisition has been integrated
at a progressively faster pace, enabling substantial cost reductions.
Total salaries and benefits, excluding nonrecurring charges, increased
$23.1 million (4 percent) to $560.5 million in 1996 compared with 1995,
reflecting recent acquisitions. Average full-time equivalent employees decreased
2 percent to 12,976 in 1996 from 13,231 in 1995. Salaries and employee benefits
expenses in 1995 were $537.4 million, down from 1994's total of $556.4 million,
reflecting a decrease in full-time equivalent employees.
Amortization of goodwill and other intangible assets, excluding the
valuation adjustment discussed above, was $77.0 million in 1996, $57.1 million
in 1995, and $50.4 million in 1994. The increases were primarily attributable to
the additional goodwill and intangible assets resulting from the corporate trust
business and bank acquisitions in 1994 through 1996.
The increase in other personnel expense for 1996 compared with 1995 related
to several technology projects currently in process.
FDIC insurance premiums were $11.4 million in 1996, $35.8 million in 1995,
and $58.4 million in 1994. The current year decrease from 1995 resulted from the
FDIC suspending the assessment of premiums on deposits covered by the Bank
Insuarance Fund ("BIF") effective January 1, 1996 and the receipt of a $2.6
million SAIF premium rebate. The decrease in 1995 from 1994 was due to a
reduction in the FDIC's assessment rate on BIF insured deposits from $.23 to
$.04 per $100, retroactive to June 1, 1995. In addition to the one-time special
assessment discussed above, starting in 1997 BIF-insured institutions are
required to assist in paying interest on the Financing Corp. ("FICO") bonds,
which financed the resolution of the thrift industry series. The FICO assessment
is approximately 1.3 basis points on BIF-insured deposits and 6.5 basis points
on SAIF-insured deposits. The first quarter 1997 FICO assessment is
approximately $1.4 million.
INCOME TAX EXPENSE The provision for income taxes was $454.8 million in 1996
compared with $334.3 million in 1995 and $191.8 million in 1994. The increases
in 1996 and 1995 were primarily due to an increasing level of taxable income.
At December 31, 1996, the Company's net deferred tax asset was essentially
unchanged at $216.2 million, compared with a net deferred tax asset of $216.3
million at December 31, 1995. In determining that realization of the deferred
tax 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 M.
DISCONTINUED OPERATIONS Because of regulatory restrictions on nonbanking
activities, the Company sold Edina Realty, Inc. ("Edina"), its real estate
brokerage subsidiary, on December 8, 1995. Edina's operations were reported in
the Consolidated Statement of Income as discontinued operations, with income and
expenses excluded from captions applicable to continuing operations. Edina's
assets, liabilities, and cash flows were not material to the Company's financial
statements. Edina's 1994 results included a $12.5 million accrual for the
settlement of two class action lawsuits against Edina, which was paid in 1995.
First Bank System, Inc.
26
TABLE 7 LOAN PORTFOLIO DISTRIBUTION
1996 1995 1994
- ------------------------------------------------------------------------------------------------------
Percent Percent Percent
At December 31 (Dollars in Millions) Amount of Total Amount of Total Amount of Total
- ------------------------------------------------------------------------------------------------------
COMMERCIAL:
Commercial $ 9,456 34.9% $ 8,271 31.3% $ 7,285 29.7%
Financial institutions 905 3.3 1,060 4.0 787 3.2
Real estate:
Commercial mortgage 3,090 11.4 2,784 10.6 2,454 10.0
Construction 654 2.4 403 1.5 330 1.3
-----------------------------------------------------------------
Total commercial 14,105 52.0 12,518 47.4 10,856 44.2
CONSUMER:
Residential mortgage 3,019 11.1 4,655 17.6 5,098 20.8
Residential mortgage held for sale 42 .2 257 1.0 197 .8
Home equity and second mortgage 3,263 12.0 2,805 10.6 2,453 10.0
Credit card 2,858 10.6 2,586 9.8 2,409 9.8
Automobile 1,991 7.3 1,821 6.9 1,770 7.2
Revolving credit 737 2.7 757 2.9 725 2.9
Installment 607 2.2 607 2.3 712 2.9
Student* 506 1.9 394 1.5 336 1.4
-----------------------------------------------------------------
Total consumer 13,023 48.0 13,882 52.6 13,700 55.8
-----------------------------------------------------------------
Total loans $ 27,128 100.0% $26,400 100.0% $24,556 100.0%
- -----------------------------------------------------------------------------------------------------
1993 1992
- ---------------------------------------------------------------------------------
Percent Percent
At December 31 (Dollars in Millions) Amount of Total Amount of Total
- ---------------------------------------------------------------------------------
COMMERCIAL:
Commercial $ 6,170 26.3% $ 5,781 27.9%
Financial institutions 2,004 8.5 1,132 5.5
Real estate:
Commercial mortgage 2,233 9.5 2,207 10.6
Construction 241 1.0 239 1.2
--------------------------------------------
Total commercial 10,648 45.3 9,359 45.2
CONSUMER:
Residential mortgage 5,125 21.8 4,641 22.5
Residential mortgage held for sale 1,149 4.9 856 4.1
Home equity and second mortgage 1,932 8.2 1,482 7.2
Credit card 1,757 7.5 1,782 8.6
Automobile 1,159 4.9 1,050 5.1
Revolving credit 695 3.0 605 2.9
Installment 772 3.3 671 3.2
Student* 260 1.1 246 1.2
--------------------------------------------
Total consumer 12,849 54.7 11,333 54.8
--------------------------------------------
Total loans $23,497 100.0% $20,692 100.0%
- ---------------------------------------------------------------------------------
* All or part of the student loan portfolio may be sold when the repayment
period begins.
BALANCE SHEET ANALYSIS
LOANS The Company's loan portfolio increased $728 million to $27.1 billion at
December 31, 1996, from $26.4 billion at December 31, 1995. Growth in most
commercial and consumer loan categories was partially offset by a decrease in
residential mortgage-related balances. This decrease reflects the securitization
of $1.3 billion of residential mortgage loans, which were reclassified to
available-for-sale securities during 1996. The securitization enhances liquidity
and financial management flexibility. Excluding residential mortgages, total
loans at December 31, 1996 were higher by approximately $2.6 billion than
December 31, 1995, reflecting growth in core commercial and consumer loans as
well as the acquisition of FirsTier. The Company's loan portfolio carries credit
risk, which may ultimately result in loan charge-offs. The Company manages this
risk through stringent, centralized credit policies and review procedures, as
well as diversification along geographic and customer lines. See "Corporate Risk
Profile" for a more detailed discussion of the management of credit risk
including the allowance for credit losses.
COMMERCIAL Commercial loans totaled $9.5 billion at year-end 1996, up $1.2
billion (14 percent), from year-end 1995. Year-end 1995 commercial loans were
$8.3 billion, up $1.0 billion (14 percent), from year-end 1994. The increase in
commercial loans was primarily attributable to acquisitions and growth in core
middle-market business lending.
At December 31, 1996, the significant industry groups based on commercial
loans outstanding were consumer cyclical products and services (20 percent),
consumer staple product and services (18 percent), and capital goods (15
percent). This diverse mix of industries is similar to 1995 and 1994.
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, Illinois,
Montana, North Dakota, South Dakota, Iowa, Kansas, Nebraska, and Wyoming.
FINANCIAL INSTITUTIONS The portfolio of loans to financial institutions was
relatively unchanged at $.9 billion at December 31, 1996, compared with $1.1
billion at December 31, 1995. The outstandings fluctuate due to the cyclical
nature of mortgage banking firms' loan volume.
The financial institutions group provides financing to institutions
headquartered throughout the United States. Many of these institutions originate
residential mortgages on a national basis. The Company secures these loans
primarily with loans secured by first liens on single family residences.
First Bank System, Inc. 27
TABLE 8 COMMERCIAL REAL ESTATE EXPOSURE BY PROPERTY TYPE AND GEOGRAPHY
Percentage of Total
at December 31
---------------------
PROPERTY TYPE 1996 1995
- ---------------------------------------------------------------------------------------------------
Retail..................................................................... 21.1% 19.0%
Mixed-use office........................................................... 17.4 16.5
Office building............................................................ 12.9 13.9
Multi-family............................................................... 11.4 14.7
Hotel/motel................................................................ 8.4 7.4
Single-family residential.................................................. 5.5 4.2
Land....................................................................... 3.2 2.3
Other, primarily owner-occupied............................................ 20.1 22.0
---------------------
100.0% 100.0%
- ----------------------------------------------------------------------------------------------------
GEOGRAPHY
- ----------------------------------------------------------------------------------------------------
Minnesota.................................................................. 27.8% 29.0%
Colorado................................................................... 15.7 18.2
Iowa, Kansas and Nebraska.................................................. 12.9 6.9
Montana, North Dakota, South Dakota and Wyoming............................ 12.0 14.3
Wisconsin and Illinois..................................................... 11.4 12.9
---------------------
Total FBS region......................................................... 79.8 81.3
West....................................................................... 8.9 7.8
Southeast.................................................................. 6.1 6.0
Southwest.................................................................. 2.2 2.2
Mid-Atlantic............................................................... 1.8 .8
Other Midwest.............................................................. 1.2 1.9
---------------------
100.0% 100.0%
- ---------------------------------------------------------------------------------------------------
COMMERCIAL REAL ESTATE The Company's portfolio of commercial real estate
mortgages and construction loans grew to $3.7 billion at December 31, 1996,
compared with $3.2 billion at December 31, 1995, primarily due to acquisitions.
Commercial mortgages outstanding were $3.1 billion at December 31, 1996,
compared with $2.8 billion at December 31, 1995. Real estate construction loans
outstanding at December 31, 1996, totaled $654 million compared with $403
million from year-end 1995. Table 8 shows the breakdown of these real estate
exposures by property type and geographic location. The Company maintains the
real estate construction 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 $33 million of
construction loans were transferred to the commercial mortgage portfolio in
1996.
At year-end 1996, real estate interests secured $125 million of tax-exempt
industrial development loans and $318 million of standby letters of credit. At
year-end 1995, these exposures totaled $128 million and $319 million,
respectively. The Company's commercial real estate mortgages and construction
loans had combined unfunded commitments of $406 million at December 31, 1996,
and $409 million at December 31, 1995.
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 $484 million at December 31, 1996, and $356 million at December 31,
1995.
First Bank System, Inc.
28
CONSUMER Total consumer loan outstandings decreased $859 million to $13.0
billion at December 31, 1996, from $13.9 billion at December 31, 1995. Excluding
a $1.85 billion (38 percent) decrease in residential mortgage loans, consumer
loans increased $992 million (11 percent).
Residential mortgage outstandings decreased to $3.1 billion at December 31,
1996, reflecting the securitization discussed above.
Home equity and second mortgages increased $458 million, primarily due to
successful marketing promotions and acquisitions. Credit cards grew $272 million
primarily as a result of higher sales volumes for the First Bank WorldPerks VISA
card.
Of total consumer balances outstanding, approximately 80 percent are to
customers located in the Company's operating region. See "Corporate Risk
Profile" for a discussion of the general economic conditions within the
Company's operating region.
SECURITIES At December 31, 1996, securities totaled $3.6 billion compared with
$3.3 billion at December 31, 1995, reflecting the securitization discussed above
and the addition of approximately $900 million of FirsTier securities, offset by
maturities and sales. Mortgage-backed securities, as a percentage of the total
securities portfolio, have also increased, reflecting the securitization
discussed above. The relative mix of the remainder of the securities portfolio
has not changed significantly from prior years.
SECURITIES PURCHASED AND SOLD UNDER RESALE AGREEMENTS The daily average
outstanding amount of securities purchased under resale agreements for 1996 was
$451 million compared with $241 million for 1995. The maximum 1996 month-end
outstanding amount was $795 million compared with $380 million for 1995. The
daily average outstanding amount of securities sold under resale agreements for
1996 was $473 million compared with $327 million for 1995. The maximum 1996
month-end outstanding amount was $819 million compared with $440 million in
1995. The Company maintains control of all securities underlying these
agreements.
TABLE 9 AVAILABLE-FOR-SALE SECURITIES PORTFOLIO AVERAGE MATURITY
At December 31, 1996 Average Contractual Maturity
- --------------------------------------------------------------------------------
U.S. Treasury................................................2 years, 11 months
Other U.S. agencies........................................... 1 year, 5 months
State and political...........................................11 years, 1 month
Other*........................................................5 years, 5 months
Total........................................................6 years, 5 months
- --------------------------------------------------------------------------------
* Excludes equity securities that 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 include mortgage-backed securities.
First Bank System, Inc. 29
TABLE 10 AVAILABLE-FOR-SALE SECURITIES PORTFOLIO AMORTIZED COST, FAIR VALUE AND
YIELD BY MATURITY DATE
Maturing: Within 1 Year 1-5 Years 5-10 Years
- ---------------------------------------------------------------------------------------------------------------------------
Amort- Amort- Amort-
At December 31, 1996 tizied Fair tizied Fair tizied Fair
(Dollars in Millions) Cost Value Yield Cost Value Yield Cost Value Yield
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Treasury................... $192.1 $192.8 6.77% $158.2 $157.4 5.49% $203.1 $194.7 5.51%
Mortgage-backed*................ -- -- -- -- -- -- -- -- --
Other U.S. agencies............. 31.5 31.5 5.57 4.5 4.4 5.77 5.5 5.4 5.57
State and political**........... 10.0 10.0 9.05 67.0 68.0 7.44 73.8 74.0 7.78
Other........................... 5.7 5.8 6.95 6.1 6.1 7.48 2.2 2.2 6.62
---------------------------------------------------------------------------------------
$239.3 $240.1 6.71% $235.8 $235.9 6.10% $284.6 $276.3 6.11%
- ---------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed
Maturing: Over 10 Years Securities Total
- ---------------------------------------------------------------------------------------------------------------------------
Amort- Amort- Amort-
At December 31, 1996 tizied Fair tizied Fair tizied Fair
(Dollars in Millions) Cost Value Yield Cost Value Yield Cost Value Yield
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Treasury................... $ -- $ -- --% $ -- $ -- --% $ 553.4 $ 544.9 5.94%
Mortgage-backed*................ -- -- -- 2,453.8 2,463.7 7.05 2,453.8 2,463.7 7.05
Other U.S. agencies............. .2 .2 10.24 -- -- -- 41.7 41.5 5.61
State and political**........... 315.1 313.3 8.06 -- -- -- 465.9 465.3 7.94
Other........................... 22.4 25.8 7.13*** -- -- -- 36.4 39.9 7.13***
---------------------------------------------------------------------------------------
$337.7 $339.3 8.05%*** $ 2,453.8 $2,463.7 7.05% $3,551.2 $3,555.3 6.98%
- ---------------------------------------------------------------------------------------------------------------------------
*Variable rate mortgage-backed securities represented 32% of the balance of
mortgage-backed securities.
**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.
***Average yield calculations exclude equity securities that have no stated
yield
DEPOSITS Noninterest-bearing deposits were $7.9 billion at December 31, 1996, up
from $6.4 billion at December 31, 1995. Interest-bearing deposits were $16.5
billion at December 31, 1996, up from $16.2 billion at December 31, 1995. The
increases were primarily due to the acquisitions of FirsTier and the corporate
trust business of BankAmerica.
BORROWINGS Short-term borrowings, which include federal funds purchased,
securities sold under agreements to repurchase and other short-term borrowings,
were $4.1 billion at December 31, 1996, down $288 million from $4.4 billion at
the end of 1995. The decrease was primarily due to a $796 million reduction in
federal funds purchased, partially offset by an increase in securities sold
under agreement to repurchase.
Long-term debt was $3.6 billion at December 31, 1996, up from $3.2 billion
at December 31, 1995. In March 1996, the Company placed $125 million in 6.875
percent subordinated debt in the form of 10-year noncallable notes. The Company
also issued $500 million in medium-term bank notes, with original maturities of
12 to 60 months, during 1996. These issuances were partially offset by a net
decrease of $94 million in Federal Home Loan Bank Advances and $174 million of
medium-term notes.
The Company issued $300 million of Company-obligated mandatorily redeemable
capital securities in November 1996. See "Capital Management" for further
information.
CORPORATE RISK PROFILE
OVERALL RISK PROFILE Managing risk is an essential part of successfully
operating a financial services company. The most prominent risk exposures are
credit quality, interest rate sensitivity, and liquidity. Credit quality risk is
the risk of not collecting interest and/or the principal balance of a loan or
investment when it is due. Interest rate risk is the potential reduction of net
interest income as the result of changes in interest rates. Rate movements can
affect the repricing of assets and liabilities differently, as well as their
market value. Liquidity risk is the possible inability to fund obligations to
depositors, investors and borrowers.
30 First Bank System, Inc.
CREDIT MANAGEMENT In 1996 the Company maintained its high level of credit
quality as nonperforming assets declined for the seventh consecutive year. The
ratio of nonperforming assets to loans plus other real estate declined to .51
percent at year-end from .58 percent and .94 percent at year-end 1995 and 1994,
respectively.
The Company's strategy for credit risk management includes stringent,
centralized credit policies, and standard underwriting criteria for specialized
lending categories, such as mortgage banking, real estate construction, and
consumer credit. The strategy also emphasizes diversification on both a
geographic and customer level, regular credit examinations, and quarterly
management reviews of large loans and loans experiencing deterioration of credit
quality. The Company strives to identify potential problem loans early, take any
necessary charge-off promptly, and maintain strong reserve levels. In the
Company's retail banking operations, a standard credit scoring system is used to
assess consumer credit risks and to price consumer products accordingly.
Commercial banking operations rely on a strong credit culture that combines
prudent credit policies and individual lender accountability. In addition, the
commercial lenders generally focus on middle-market companies within their
regions.
In evaluating its credit risk, the Company considers the loan portfolio
composition, the level of allowance coverage, and macroeconomic factors. Most
economic indicators in the Company's operating regions compare favorably with
national trends. Approximately 50 percent of the Company's loan portfolio
consists of credit to businesses and consumers in Minnesota and Colorado.
According to federal and state government agencies, unemployment rates in
Minnesota and Colorado were 3.5 percent and 3.7 percent, respectively, for the
month of December 1996, compared with the national unemployment rate of 5.3
percent. Through September 30, 1996, the national foreclosure rate was 1.00
percent, compared with .58 percent in Minnesota and .37 percent in Colorado.
The Company engages in non-lending activities that may give rise to credit
risk, including interest rate swap contracts for balance sheet hedging purposes,
foreign exchange transactions for customers, and the processing of credit card
transactions for merchants. These activities are subject to the same credit
review, analysis and approval processes as those applied to commercial loans.
For additional information on interest rate swaps, see "Interest Rate Risk
Management."
First Bank System, Inc. 31
TABLE 11 SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
(Dollars in Millions) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
Balance at beginning of year......................... $473.5 $474.7 $466.1 $483.8 $453.2
CHARGE-OFFS:
Commercial:
Commercial......................................... 43.5 25.9 57.1 53.5 87.6
Financial institutions............................. -- -- 1.1 6.5 --
Real estate:
Commercial mortgage............................... 12.1 15.3 34.4 59.8 48.7
Construction...................................... 1.0 .1 .2 .4 6.1
--------------------------------------------
Total commercial.................................. 56.6 41.3 92.8 120.2 142.4
Consumer:
Residential mortgage............................... 4.6 5.2 4.7 3.0 6.8
Credit card........................................ 100.1 85.6 78.5 71.6 85.5
Other.............................................. 91.7 77.0 50.8 44.4 50.5
--------------------------------------------
Total consumer.................................... 196.4 167.8 134.0 119.0 142.8
--------------------------------------------
Total............................................. 253.0 209.1 226.8 239.2 285.2
RECOVERIES:
Commercial:
Commercial......................................... 43.2 38.7 42.8 33.6 40.2
Financial institutions............................. -- .5 .4 7.0 --
Real estate:
Commercial mortgage............................... 22.0 15.6 17.7 11.7 6.3
Construction...................................... .6 .1 .9 1.3 1.9
--------------------------------------------
Total commercial.................................. 65.8 54.9 61.8 53.6 48.4
Consumer:
Residential mortgage............................... 1.0 .7 1.1 1.7 2.3
Credit card........................................ 10.5 10.9 9.1 9.7 8.0
Other.............................................. 22.9 21.6 14.5 11.9 12.8
--------------------------------------------
Total consumer.................................... 34.4 33.2 24.7 23.3 23.1
--------------------------------------------
Total............................................. 100.2 88.1 86.5 76.9 71.5
NET CHARGE-OFFS:
Commercial:
Commercial......................................... .3 (12.8) 14.3 19.9 47.4
Financial institutions............................. -- (.5) .7 (.5) --
Real estate:
Commercial mortgage............................... (9.9) (.3) 16.7 48.1 42.4
Construction...................................... .4 -- (.7) (.9) 4.2
--------------------------------------------
Total commercial.................................. (9.2) (13.6) 31.0 66.6 94.0
Consumer:
Residential mortgage............................... 3.6 4.5 3.6 1.3 4.5
Credit card........................................ 89.6 74.7 69.4 61.9 77.5
Other.............................................. 68.8 55.4 36.3 32.5 37.7
--------------------------------------------
Total consumer.................................... 162.0 134.6 109.3 95.7 119.7
--------------------------------------------
Total............................................. 152.8 121.0 140.3 162.3 213.7
Provision charged to operating expense............... 136.0 115.0 123.6 133.1 191.7
Additions related to acquisitions and other.......... 59.8 4.8 25.3 11.5 52.6
--------------------------------------------
Balance at end of year............................... $516.5 $473.5 $474.7 $466.1 $483.8
--------------------------------------------
Allowance as a percentage of period-end loans........ 1.90% 1.79% 1.93% 1.98% 2.34%
Allowance as a percentage of nonperforming loans..... 429 401 283 208 149
Allowance as a percentage of nonperforming assets.... 375 308 204 137 95
- ---------------------------------------------------------------------------------------------------
32 First Bank System, Inc.
TABLE 12 ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
Allocation Amount at December 31 Allocation as a Percent of Loans Outstanding
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in Millions) 1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL:
Commercial and financial
institutions...................... $ 85.2 $ 68.8 $ 78.8 $ 80.1 $105.9 .82% .74% .98% .98% 1.53%
Real estate:
Commercial mortgage.............. 15.4 20.2 32.7 59.8 69.9 .50 .73 1.33 2.68 3.17
Construction..................... 4.4 2.1 1.9 1.0 7.3 .67 .52 .58 .41 3.05
-------------------------------------------------------------------------------------------
Total commercial................. 105.0 91.1 113.4 140.9 183.1 .74 .73 1.04 1.32 1.96
CONSUMER:
Residential mortgage............... 7.2 7.8 10.6 13.8 14.9 .24 .16 .20 .22 .27
Credit card........................ 41.0 34.0 32.5 22.0 38.9 1.43 1.31 1.35 1.25 2.18
Other.............................. 41.6 41.1 40.5 28.4 33.5 .59 .64 .68 .59 .83
-------------------------------------------------------------------------------------------
Total consumer................... 89.8 82.9 83.6 64.2 87.3 .69 .60 .61 .50 .77
-------------------------------------------------------------------------------------------
Total allocated.................... 194.8 174.0 197.0 205.1 270.4 .72 .66 .80 .87 1.31
Unallocated portion................ 321.7 299.5 277.7 261.0 213.4 1.19 1.13 1.13 1.11 1.03
-------------------------------------------------------------------------------------------
Total allowance.................. $516.5 $473.5 $474.7 $466.1 $483.8 1.90% 1.79% 1.93% 1.98% 2.34%
- ---------------------------------------------------------------------------------------------------------------------------------
ANALYSIS AND ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES The allowance for credit
losses provides coverage for losses inherent in the Company's loan portfolio.
Management evaluates the allowance each quarter to determine that it is adequate
to cover inherent losses. The evaluation is based on continuing assessment of
problem loans and related off-balance sheet items, recent loss experience, and
other factors, including current and anticipated economic conditions.
Management has determined that the allowance for credit losses is adequate.
At December 31, 1996, the allowance was $516.5 million, or 1.90 percent of
loans. This compares with an allowance of $473.5 million, or 1.79 percent of
loans, at year-end 1995, and $474.7 million, or 1.93 percent of loans, at
December 31, 1994. The ratio of the allowance for credit losses to nonperforming
loans increased to 429 percent at December 31, 1996, compared with 401 percent
at year-end 1995 and 283 percent at year-end 1994.
Although the recent trend of slow, steady economic growth may contribute to
the continued improvement in the credit portfolio, economic stagnation or
reversals could increase the required level of the allowance for credit losses.
Management allocates part of the allowance to certain sectors based on
relative risk characteristics of the loan portfolio. Table 12 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. Consumer
allocations are based on an analysis of historical and expected delinquency and
charge-off statistics.
The unallocated portion of the allowance increased to $321.7 million at
year-end 1996 from $299.5 million and $277.7 million at December 31, 1995, and
1994. Although the allocation of the allowance is an important credit management
tool, the entire allowance for credit losses is available for the entire loan
portfolio.
ANALYSIS OF NET LOAN CHARGE-OFFS Net loan charge-offs increased $31.8 million to
$152.8 million, compared with $121.0 million in 1995. Commercial loan net
recoveries for 1996 were $9.2 million, compared with $13.6 million in 1995.
Consumer loan net charge-offs in 1996 were $27.4 million higher than in 1995,
reflecting higher average balances and higher loss ratios on unsecured consumer
debt, including credit cards. Net charge-offs were $140.3 million in 1994. The
ratio of consumer net charge-offs to average loans in 1996 was 1.24 percent, up
from .98 percent in 1995. The ratio of total net charge-offs to average loans
was .57 percent in 1996, compared with .48 percent in 1995.
First Bank System, Inc. 33
TABLE 13 NET CHARGE-OFFS AS A PERCENTAGE OF AVERAGE LOANS OUTSTANDING
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------
COMMERCIAL:
Commercial................................ --% (.16)% .21% .34% .86%
Financial institutions.................... -- (.06) .06 (.03) --
Real Estate:
Commercial mortgage...................... (.33) (.01) .71 2.17 1.96
Construction............................. .08 -- (.26) (.42) 1.56
---------------------------------------------
Total commercial......................... (.07) (.12) .29 .68 1.04
CONSUMER:
Residential mortgage...................... .10 .09 .06 .02 .10
Credit card............................... 3.38 3.89 3.38 3.57 4.53
Other..................................... 1.00 .89 .66 .74 1.03
---------------------------------------------
Total consumer........................... 1.24 .98 .82 .79 1.19
---------------------------------------------
Total.................................... .57% .48% .59% .74% 1.12%
- ---------------------------------------------------------------------------------------------
ANALYSIS OF NONPERFORMING ASSETS Nonperforming assets include nonaccrual loans,
restructured loans, other real estate and other nonperforming assets owned by
the Company. At December 31, 1996, nonperforming assets totaled $137.7 million,
down $16 million (10 percent) from $153.7 million at year-end 1995 and down
$94.6 million (41 percent) from $232.3 million at year-end 1994. During 1996 the
Company conformed its reporting practice for nonperforming loans to that of most
banks and has excluded restructured revolving consumer loans from nonperforming
loans. At December 31, 1995, nonperforming loans included $9.5 million of
revolving consumer loans. Revolving consumer loans are charged off at specific
delinquency dates (generally 150 days). The ratio of nonperforming assets to
loans plus other real estate improved to .51 percent at December 31, 1996,
compared with .58 percent at year-end 1995 and .94 percent at year-end 1994.
In 1996, the most significant reductions occurred in the following areas:
commercial mortgage, $11.5 million (27 percent); and other real estate, $19.7
million (59 percent).
Interest payments are currently received on approximately 50 percent of the
Company's nonperforming loans. The payments are typically applied against the
principal balance and not recorded as income.
Accruing loans 90 days or more past due totaled $49.6 million, compared
with $38.8 million at December 31, 1995, and $23.4 million at December 31, 1994.
These loans are not included in nonperforming assets and continue to accrue
interest because they are secured by collateral and/or are in the process of
collection and are reasonably expected to result in repayment or restoration to
current status. Consumer loans 30 days or more past due were 2.12 percent of the
total consumer portfolio at December 31, 1996 compared with 2.04 percent of the
total consumer portfolio at December 31, 1995. Consumer loans 90 days or more
past due totaled .63 percent of the consumer loan portfolio at December 31,
1996, compared with .62 percent at year-end 1995.
TABLE 14 DELINQUENT LOAN RATIOS*
At December 31
---------------------------------------------
90 days or more past due 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------
COMMERCIAL:
Commercial................................. .50% .32% .52% 1.05% 2.67%
Financial institutions..................... -- -- -- .04 .29
Real estate:
Commercial mortgage....................... 1.00 1.52 2.95 3.75 5.44
Construction.............................. 1.56 .37 .48 1.54 1.84
---------------------------------------------
Total commercial.......................... .63 .56 1.03 1.44 3.02
CONSUMER:
Residential mortgage....................... 1.28 .91 .93 1.03 .71
Credit card................................ .61 .73 .76 1.04 1.00
Other...................................... .35 .36 .20 .38 .39
---------------------------------------------
Total consumer............................ .63 .62 .58 .79 .64
---------------------------------------------
Total..................................... .63% .59% .78% 1.08% 1.72%
- ---------------------------------------------------------------------------------------------
*Ratios include nonperforming loans and are expressed as a percent of ending
loan balances.
34 First Bank System, Inc.
TABLE 15 NONPERFORMING ASSETS*
At December 31
-------------------------------------------------
(Dollars in Millions) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
COMMERCIAL:
Commercial...................................................... $ 44.5 $ 25.1 $ 36.5 $ 63.2 $146.6
Financial institutions.......................................... -- -- -- .9 3.3
Real estate:
Commercial mortgage............................................ 30.8 42.3 71.0 83.3 118.9
Construction................................................... 10.2 1.5 1.6 3.7 4.3
-------------------------------------------------
Total commercial............................................... 85.5 68.9 109.1 151.1 273.1
CONSUMER:
Residential mortgage............................................ 31.2 37.3 43.5 58.2 36.8
Credit card..................................................... -- 5.7 7.5 7.6 8.1
Other........................................................... 3.7 6.3 7.8 7.6 7.5
-------------------------------------------------
Total consumer................................................. 34.9 49.3 58.8 73.4 52.4
-------------------------------------------------
Total nonperforming loans...................................... 120.4 118.2 167.9 224.5 325.5
OTHER REAL ESTATE................................................ 13.5 33.2 64.0 115.9 181.3
OTHER NONPERFORMING ASSETS....................................... 3.8 2.3 .4 1.0 3.7
-------------------------------------------------
Total nonperforming assets..................................... $137.7 $153.7 $232.3 $341.4 $510.5
-------------------------------------------------
Accruing loans 90 days or more past due.......................... $ 49.6 $ 38.8 $ 23.4 $ 29.9 $ 29.4
Nonperforming loans to total loans............................... .44% .45% .68% .96% 1.57%
Nonperforming assets to total loans plus other real estate....... .51 .58 .94 1.45 2.45
Net interest lost on nonperforming loans......................... $ 6.8 $ 9.2 $ 11.0 $ 15.6 $ 18.1
- ---------------------------------------------------------------------------------------------------------------------
*Throughout this document, nonperforming assets and related ratios do not
include loans more than 90 days past due and still accruing.
INTEREST RATE RISK MANAGEMENT The Company's policy is to maintain a low interest
rate risk position. The Company limits the exposure of net interest income to
risks associated with interest rate movements through asset/liability management
strategies. The Company's Asset and Liability Management Committee ("ALCO") uses
three methods for measuring and managing interest rate risk: Net Interest Income
Simulation Modeling, Market Value/Duration Analysis, and Repricing Mismatch
Analysis. The Company is in compliance with Board-approved guidelines,
established by ALCO, relating to the above methods for measuring and managing
interest rate risk. These three methods are discussed in detail below.
NET INTEREST INCOME SIMULATION: The Company has developed a net interest income
simulation model to measure near-term (next 12 months) risk due to changes in
interest rates. The model is particularly useful because it incorporates
substantially all the Company's assets and liabilities and off-balance sheet
instruments, together with forecasted changes in the balance sheet mix and
assumptions that reflect the current interest rate environment. The balance
sheet changes are based on forecasted prepayments of loans and securities, loan
and deposit growth, and historical pricing spreads. The model is updated monthly
with the current balance sheet structure and the current forecast of expected
balance sheet changes. ALCO uses the model to simulate the effect of immediate
and sustained parallel shifts in the yield curve of 1 percent, 2 percent and 3
percent and flattening and steepening of the yield curve. ALCO also calculates
the sensitivity of the simulation results to changes in the key assumptions,
such as the Prime/LIBOR spread. The results from the simulation are reviewed by
ALCO monthly and are used to guide ALCO's hedging strategies. ALCO has
established guidelines, approved by the Company's Board of Directors, that limit
the estimated change in net interest income, over the succeeding 12 months to
approximately 3 percent of forecasted net interest income, assuming static
Prime/LIBOR spreads and modest changes in deposit pricing lags, given a 1
percent parallel change in interest rates.
MARKET VALUE/DURATION ANALYSIS: One of the limiting factors of the net interest
income simulation model is its dependence upon accurate forecasts of future
business activity and the resulting effect on balance sheet assets and
liabilities. As a result, its usefulness is greatly diminished for periods
beyond two years. The Company measures this longer-term component of interest
rate risk (referred to as market value or duration risk) by modeling the effect
of interest rate changes on the estimated discounted future cash flows of the
Company's current assets, liabilities and off-balance sheet instruments. The
amount of market value risk is subject to limits approved by the Company's Board
of Directors.
First Bank System, Inc. 35
REPRICING MISMATCH ANALYSIS: A traditional gap analysis provides a point-in-time
measurement of the relationship between the repricing amounts of the interest
rate sensitive assets and liabilities. While the analysis provides a useful
snapshot of interest rate risk, it does not capture all aspects of interest rate
risk. As a result, ALCO uses the repricing mismatch analysis primarily for
managing interest rate risk beyond one year and has established limits, approved
by the Company's Board of Directors, for the gap positions in the one- to three-
year time periods.
USE OF DERIVATIVES TO MANAGE INTEREST RATE RISK: While each of the interest rate
risk measurements has limitations, taken together they represent a comprehensive
view of the magnitude of the Company's interest rate risk over various time
intervals. The Company mitigates its interest rate risk by entering into off-
balance sheet transactions (primarily interest rate swaps), investing in fixed
rate assets or increasing variable rate liabilities. To a lesser degree, the
Company also uses interest rate caps and floors to hedge this risk. The Company
does not enter into derivative contracts for speculative purposes.
Interest rate swap agreements involve the exchange of fixed and floating
rate risk payments without the exchange of the underlying notional amount on
which the interest payments are calculated. As of December 31, 1996, the Company
received payments on $2.7 billion notional amount of interest rate swap
agreements, based on fixed interest rates, and made payments based on variable
interest rates. These swaps had an average fixed rate of 6.51 percent and an
average variable rate, which is tied to various LIBOR rates, of 5.59 percent.
The remaining maturity of these agreements ranges from 1 month to 10.7 years
with an average remaining maturity of 4.1 years. Swaps increased net interest
income for the years ended December 31, 1996, 1995, and 1994 by $28.5 million,
$20.5 million, and $62.3 million, respectively.
The Company also purchases interest rate caps and floors to minimize the
impact of fluctuating interest rates on earnings. Purchased caps can mitigate
the effects of rising interest
TABLE 16 INTEREST RATE SENSITIVITY GAP ANALYSIS
Repricing Maturities
---------------------------------------------------------------------
Less Than 3-6 6-12 1-5 More Than Non-Rate
At December 31, 1996 (In Millions) 3 Months Months Months Years 5 Years Sensitive Total
- -----------------------------------------------------------------------------------------------------------------
Assets:
Loans................................. $13,815 $1,532 $2,000 $7,086 $2,695 $ -- $27,128
Available-for-sale securities......... 733 163 420 1,030 1,195 14 3,555
Other earning assets.................. 1,157 5 11 98 43 -- 1,314
Nonearning assets..................... 941 4 130 365 1,518 1,534 4,492
---------------------------------------------------------------------
Total assets......................... $16,646 $1,704 $2,561 $8,579 $5,451 $ 1,548 $36,489
---------------------------------------------------------------------
Liabilities and Equity:
Deposits.............................. $ 9,572 $1,395 $1,364 $7,429 $4,611 $ 8 $24,379
Other purchased funds................. 4,076 -- -- 8 13 -- 4,097
Long-term debt........................ 1,558 228 67 583 1,117 -- 3,553
Company-obligated mandatorily redeemable
capital securities of FBS Capital I.. -- -- -- -- 300 -- 300
Other liabilities..................... -- -- 126 63 -- 918 1,107
Equity................................ -- -- -- -- -- 3,053 3,053
---------------------------------------------------------------------
Total liabilities and equity......... $15,206 $1,623 $1,557 $8,083 $6,041 $ 3,979 $36,489
---------------------------------------------------------------------
Effect of off-balance sheet
hedging instruments:
Receiving fixed....................... $ 150 $ -- $ 125 $1,456 $ 925 $ -- $ 2,656
Paying floating....................... (2,656) -- -- -- -- -- (2,656)
---------------------------------------------------------------------
Total effect of off-balance sheet
hedging instruments................. $(2,506) $ -- $ 125 $1,456 $ 925 $ -- $ --
----------------------------------------------------------------------
Repricing gap.......................... $(1,066) $ 81 $1,129 $1,952 $ 335 $(2,431) $ --
Cumulative repricing gap............... (1,066) (985) 144 2,096 2,431 --
- -----------------------------------------------------------------------------------------------------------------
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: Approximately 40 percent of regular savings, 30 percent
of interest-bearing checking, 50 percent of money market checking, and 60
percent of money market savings balances are reflected in the Less Than 3 Months
category, with the remainder placed in the 1-5 Years category. Approximately 69
percent of demand deposits and related nonearning asset accounts is allocated in
the More Than 5 Years category, 14 percent is allocated in the 1-5 Years
category with the remaining allocated in the Less Than 3 Months category.
36 First Bank System, Inc.
TABLE 17 INTEREST RATE SWAP HEDGING PORTFOLIO NOTIONAL BALANCES AND YIELDS BY
MATURITY DATE
At December 31, 1996 (Dollars in Millions)
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Receive Fixed Swaps* Notional Interest Rate Interest Rate
Maturity Date Amount Received Paid
- ----------------------------------------------------------------------------------------------------------------------------------
1997..................................................................................... $ 275 6.42% 5.55%
1998..................................................................................... 681 5.97 5.58
1999..................................................................................... 450 6.40 5.61
2000..................................................................................... 150 6.57 5.55
2001..................................................................................... 175 6.54 5.62
After 2001**............................................................................. 925 6.96 5.60
--------
Total.................................................................................... $ 2,656 6.51% 5.59%
- -----------------------------------------------------------------------------------------------------------------------------------
* At December 31, 1996, the Company had no hedging swaps in its portfolio that
required it to pay fixed-rate interest.
** Amount maturing after the year 2001 hedges fixed rate subordinated notes.
rates. Counterparties of these agreements pay the Company when certain short-
term rates rise above a specified point or strike level. The payment is based on
the difference in current rates and strike rates and the contract's notional
amount. The total notional amount of cap agreements purchased at December 31,
1996, was $100 million. To hedge against falling interest rates, the Company
uses interest rate floors. Floor counterparties pay the Company when specified
rates fall below the strike level. Like caps, the payment is based on the
difference in current rates and strike rates and the notional amount. The total
notional amount of floor agreements purchased as of December 31, 1996 was $1.25
billion. LIBOR-based floors totaled $950 million and Constant Maturity Treasury
floors totaled $300 million. The impact of caps and floors on net interest
income was not material for the years ended December 31, 1996, 1995 and 1994.
See Note N for further information on interest rate swaps, caps, and floors.
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 structuring the balance sheet to meet
these needs. It regularly reviews current and forecasted funding needs as well
as market conditions for issuing debt to wholesale investors. Based on this
information, ALCO supervises wholesale funding activity, as well as the
maintenance of contingent funding sources.
A majority of the Company's funding comes from retail deposits within its
operating region. While the Company has funded incremental balance sheet growth
with negotiated funds, its purchased funds index remained relatively low at 13.6
percent at December 31, 1996, compared with a peer group median of 19.2 percent
at September 30, 1996. The index is calculated as negotiated funding (which
includes FHLB borrowings, foreign branch time deposits, national federal funds
purchased, bank and thrift notes and medium-term notes) and repurchase
agreements, net of federal funds sold and resale agreements, divided by loans
and securities.
The Company's ability to raise negotiated funding at competitive prices is
influenced by rating agencies' views of the Company's credit quality, liquidity,
capital, and earnings. As of December 31, 1996, Moody's Investors Services,
Standard & Poors, and Thomson BankWatch rated the Company's senior debt as "A2,"
"A," and "A+," respectively. The strong debt ratings reflect the agencies'
recognition of the consistent financial performance of the Company and strength
of the balance sheet.
At the parent company, funding primarily consists of long-term debt and
equity. During 1996, long-term debt, including medium-term notes, decreased to
$1.2 billion from $1.3 billion at year-end 1995. The decrease was primarily due
to maturing medium-term notes.
The parent company issued $74 million of medium-term notes during 1996.
Total parent company debt maturing in 1997 is $187 million. These debt
obligations are expected to be met through medium-term note or subordinated debt
issuances, as well as from the approximately $343 million of parent company cash
and cash equivalents at December 31, 1996. It is the Company's practice to
maintain liquid assets at the parent company sufficient to fund its operating
cash needs, including debt repayment and common stock repurchases.
In 1995, four of the Company's bank subsidiaries established a $4 billion
bank note program. The Company's thrift subsidiary also established a $1 billion
thrift note program. Notes issued under these programs may mature within 30 days
to 15 years and bear fixed or floating interest rates. Proceeds from note sales
are used for general corporate purposes. At December 31, 1996, there was $2.6
billion outstanding under these programs. The thrift subsidiary also had $1.0
billion in long-term advances from the FHLB at December 31, 1996.
First Bank System, Inc. 37
TABLE 18 CAPITAL RATIOS
At December 31 (Dollars in Millions) 1996 1995 1994
- --------------------------------------------------------------------------
Tangible common equity*..................... $ 2,385 $2,184 $2,082
As a percent of assets................. 6.7% 6.5% 6.2%
Tier 1 capital**............................ $ 2,355 $1,989 $2,052
As a percent of risk-adjusted assets... 7.2% 6.5% 7.3%
Total risk-based capital**.................. $ 3,943 $3,367 $3,227
As a percent of risk-adjusted assets... 12.0% 11.0% 11.4%
Leverage ratio**............................ 6.8 6.1 6.2
- --------------------------------------------------------------------------
* Defined as common equity less goodwill.
** In accordance with regulatory guidelines, unrealized securities gains and
losses are excluded and Company-obligated mandatorily redeemable capital
securities of FBS Capital I are included in these calculations. In addition,
equity capital related to deferred tax assets is limited.
CAPITAL MANAGEMENT The Company is committed to managing capital for maximum
shareholder benefit and maintaining strong protection for depositors and
creditors. At December 31, 1996, tangible common equity (common equity less
goodwill) was $2.4 billion, or 6.7 percent of assets, compared with 6.5 percent
at year-end 1995 and 6.2 percent at year-end 1994. The tier 1 capital ratio
increased to 7.2 percent at December 31, 1996, compared with 6.5 percent at
December 31, 1995. This ratio was 7.3 percent at December 31, 1994. The total
risk-based capital ratio was 12.0 percent at December 31, 1996, compared with
11.0 percent at December 31, 1995 and 11.4 percent at December 31, 1994. The
leverage ratio increased to 6.8 percent at December 31, 1996, compared with 6.1
percent and 6.2 percent at December 31, 1995 and December 31, 1994,
respectively. The increase in the capital ratios reflects earnings retention as
well as the issuance of common stock to complete the FirsTier acquisition and
$300 million of Company-obligated mandatorily redeemable capital securities,
offset by common stock repurchases.
On February 21, 1996, the Board of Directors authorized the repurchase of
up to 25.4 million common shares through December 1997. This new authorization
replaced previous authorizations. Approximately 15.1 million shares have been
repurchased under this authorization as of December 31, 1996. Under previous
authorizations, the Company repurchased 11.9 million shares in 1995. During
1994, the Company repurchased approximately 6.3 million shares of its common
stock.
On November 26, 1996, the Company, through FBS Capital I trust, became the
first bank holding company to issue Company-obligated mandatorily redeemable
capital securities. The $300 million issue of the "trust preferred securities"
qualifies as tier 1 capital for bank holding companies and pays distributions
semi-annually at an annual rate of 8.09 percent.
On November 29, 1996, the Company called all remaining shares of its Series
1991A Convertible Preferred Stock. Series 1991A was 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. As a result, at
December 31, 1996, (the redemption date) all remaining shares had been converted
into common stock or redeemed.
In 1994, the Company redeemed $159.3 million of its preferred stock,
consisting of $89 million of Preferred Stock Series 1989A and $70.3 million of
Preferred Stock Series 1989B. In connection with the MFC acquisition, the entire
$12 million Series B Cumulative Perpetual Preferred Stock of MFC was redeemed on
January 24, 1995.
The measures used to assess capital include the capital ratios established
by the bank regulatory agencies, including the specific ratios for the "well
capitalized" designation. The Company manages various capital ratios to maintain
appropriate capital levels in accordance with Board-approved capital guidelines.
While the Company intends to maintain sufficient capital in each of its
bank/thrift subsidiaries to be "well capitalized" as defined by the regulatory
agencies, management ascribes the most significance to the tangible common
equity ratio.
DIVIDENDS During 1996, total dividends on common stock were $227.7 million
compared with $191.7 million in 1995 and $156.0 million in 1994. The Company has
raised its quarterly dividend rate in each of the past five years. On a per
share basis, dividends paid to common shareholders totaled $1.65 in 1996, $1.45
in 1995, and $1.16 in 1994. On February 19, 1997, the Board of Directors
increased the quarterly common dividend rate to $.465 from $.4125.
The Company's primary funding sources for common stock dividends are
dividends received from its bank and nonbank subsidiaries. Payment of dividends
to the Company by its depository subsidiaries is subject to ongoing review by
banking regulators and to various statutory limitations. For further
information, see Note R.
38 First Bank System, Inc.
TABLE 19 SUBSIDIARY CAPITAL RATIOS
At December 31, 1996
-------------------------------------------
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 AND THRIFT SUBSIDIARIES:
First Bank National Association (Minnesota)......... 7.0 11.4 7.3 $17,055
Colorado National Bank.............................. 7.2 11.5 6.2 6,894
First Bank, fsb..................................... * 15.5 7.7 4,937
First Bank National Association (Nebraska).......... 9.6 12.7 6.9 3,511
First Bank of South Dakota (National Association)... 8.3 12.6 7.9 1,940
First Bank Montana, National Association............ 7.7 12.0 8.7 1,181
First Bank (N.A.) (Wisconsin)....................... 7.7 12.1 8.4 1,156
First Bank National Association (Illinois).......... 10.6 13.7 7.0 928
Colorado National Bank Aspen........................ 31.1 32.4 16.9 52
First National Bank of East Grand Forks............. 23.4 26.5 14.2 38
- --------------------------------------------------------------------------------------------------
Note: These balances and ratios were prepared in accordance with regulatory
accounting principles as disclosed in the subsidiaries' regulatory reports.
*At December 31, 1996, First Bank, fsb, a thrift subsidiary of the Company, had
tangible capital of 7.7 percent, core capital of 11.2 percent and risk-based
capital of 15.5 percent as compared with Thrift regulatory minimums of 1.5
percent, 3.0 percent and 8.0 percent, respectively.
ACCOUNTING CHANGES
SFAS 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF" The Company adopted Statement of Financial Accounting
Standards No. ("SFAS") 121 on January 1, 1996, which requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
is not recoverable. During 1996, the Company recorded a $24.1 million adjustment
to the carrying value of certain bank premises following a decision to sell
several buildings in connection with the streamlining of the branch distribution
network. See Note K for further discussion.
SFAS 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" SFAS 123 establishes a new
fair value based accounting method for stock-based compensation plans. As
permitted by the Statement, the Company continues to apply the accounting
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," in determining net income. Refer to Note L for
the required pro forma disclosures of net income and earnings per share
calculated as if the fair value based method of accounting defined in SFAS 123
had been applied.
SFAS 125, "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES" SFAS 125 addresses whether the transfer of
financial assets should be accounted for as a sale and removed from the balance
sheet, or as a financing recognized as a borrowing. The Statement uses a
"financial components" approach which focuses on control to determine whether
the assets have been sold. If the entity has surrendered control over the
transferred assets, the transaction is considered a sale. Control is considered
surrendered only if the seller has no legal rights to the assets, even in
bankruptcy; the buyer has the right to pledge or exchange the assets; and the
seller does not maintain effective control over the assets through an agreement
to repurchase or redeem them. SFAS 125 is effective for transactions occurring
after December 31, 1996, and is to be applied prospectively, with earlier or
retroactive application not permitted. The adoption of SFAS 125 is not expected
to have a material impact on the Company.
IMPACT OF INFLATION
The assets and liabilities of a financial institution are primarily monetary in
nature. Therefore, future changes in prices do not affect the obligations to pay
or receive fixed and determinable amounts of money. 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.
First Bank System, Inc. 39
TABLE 20 FOURTH QUARTER SUMMARY
Three Months Ended
December 31
----------------
(Dollars in Millions, Except Per Share Data) 1996 1995
- --------------------------------------------------------------------------------
CONDENSED INCOME STATEMENT:
Net interest income (taxable-equivalent basis)........... $391.2 $363.7
Provision for credit losses.............................. 35.0 31.0
----------------
Net interest income after provision for credit losses... 356.2 332.7
Noninterest income....................................... 222.0 197.3
Noninterest expense...................................... 302.0 287.3
----------------
Income before income taxes.............................. 276.2 242.7
Taxable-equivalent adjustment............................ 5.0 3.4
Income taxes............................................. 99.8 88.6
----------------
Net income.............................................. $171.4 $150.7
----------------
Return on average assets................................. 1.92% 1.80%
Return on average common equity.......................... 22.1 22.4
Net interest margin (taxable-equivalent basis)........... 4.89 4.83
Efficiency ratio......................................... 49.2 51.2
PER SHARE DATA:
Net income (primary)..................................... $ 1.26 $ 1.14
Net income (fully diluted)............................... 1.24 1.12
Common dividends paid.................................... .4125 .3625
- --------------------------------------------------------------------------------
FOURTH QUARTER SUMMARY
In the fourth quarter of 1996, the Company reported net income of $171.4 million
($1.24 per fully diluted share) compared to $150.7 million ($1.12 per fully
diluted share) in the fourth quarter of 1995. The strong results for the fourth
quarter of 1996 reflected growth in net interest and noninterest income,
controlled operating expenses, and effective capital management.
Fourth quarter net interest income on a taxable-equivalent basis increased
$27.5 million (8 percent) to $391.2 million, compared with the fourth quarter of
1995. The increase was primarily attributable to growth in core commercial and
consumer loans, as well as the FirsTier acquisition. The net interest margin on
a taxable-equivalent basis increased to 4.89 percent, compared with 4.83 percent
a year ago, reflecting increases in loan fees and noninterest-bearing deposit
liabilities.
The provision for credit losses increased to $35.0 million in the fourth
quarter of 1996, compared with $31.0 million in the fourth quarter of 1995.
Noninterest income increased $24.7 million from the same quarter a year
ago, to $222.0 million. The improvement resulted primarily from growth in credit
card and trust fees and the addition of FirsTier and other acquisitions,
partially offset by the loss of revenues from the Company's mortgage banking
operations, which were sold in the first quarter of 1996. Credit card fees were
up as a result of higher sales volumes for Purchasing Card, Corporate Card and
the FBS WorldPerks VISA Card. Trust fees increased due to recent acquisitions
and core growth in personal and institutional trust revenues.
Fourth quarter noninterest expense in 1996 was $302.0 million, an increase
of $14.7 million from the fourth quarter of 1995. On a pro forma basis, adjusted
for acquisitions and divestitures, noninterest expense declined in the fourth
quarter by $16.8 million (5 percent), reflecting effective acquisition
integration and ongoing expense control. The efficiency ratio for the fourth
quarter of 1996 improved to 49.2 percent from 51.2 percent for the same quarter
last year.
40 First Bank System, Inc.
CONSOLIDATED BALANCE SHEET
At December 31 (In Millions, Except Shares) 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks......................................................................... $ 2,413 $ 1,837
Federal funds sold.............................................................................. 32 35
Securities purchased under agreements to resell................................................. 795 230
Trading account securities...................................................................... 146 86
Available-for-sale securities................................................................... 3,555 3,256
Loans........................................................................................... 27,128 26,400
Less allowance for credit losses............................................................... 517 474
-------------------------
Net loans...................................................................................... 26,611 25,926
Bank premises and equipment..................................................................... 404 413
Interest receivable............................................................................. 202 197
Customers' liability on acceptances............................................................. 169 223
Other assets.................................................................................... 2,162 1,671
-------------------------
Total assets............................................................................... $ 36,489 $33,874
-------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing............................................................................ $ 7,871 $ 6,357
Interest-bearing............................................................................... 16,508 16,157
-------------------------
Total deposits............................................................................. 24,379 22,514
Federal funds purchased......................................................................... 1,204 2,000
Securities sold under agreements to repurchase.................................................. 819 269
Other short-term funds borrowed................................................................. 2,074 2,116
Long-term debt.................................................................................. 3,553 3,201
Company-obligated mandatorily redeemable capital securities of FBS Capital I.................... 300 --
Acceptances outstanding......................................................................... 169 223
Other liabilities............................................................................... 938 826
-------------------------
Total liabilities.......................................................................... 33,436 31,149
Shareholders' equity:
Preferred stock................................................................................ -- 103
Common stock, par value $1.25 a share-authorized 200,000,000 shares;
issued: 1996 - 141,747,738 shares; 1995 - 135,632,324 shares................................. 177 170
Capital surplus................................................................................ 1,154 909
Retained earnings.............................................................................. 2,165 1,918
Unrealized gain on securities, net of tax...................................................... 3 23
Less cost of common stock in treasury: 1996 - 6,877,497 shares,
1995 - 8,297,756 shares...................................................................... (446) (398)
-------------------------
Total shareholders' equity................................................................. 3,053 2,725
-------------------------
Total liabilities and shareholders' equity................................................. $ 36,489 $33,874
- -----------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
First Bank System, Inc. 41
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31 (In Millions, Except Per-Share Data) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans........................................................................ $ 2,339.3 $ 2,273.4 $ 1,914.7
Securities:
Taxable..................................................................... 241.5 226.0 327.9
Exempt from federal income taxes............................................ 25.5 11.2 12.0
Other interest income........................................................ 47.6 34.6 33.5
---------------------------------------------
Total interest income................................................... 2,653.9 2,545.2 2,288.1
INTEREST EXPENSE
Deposits..................................................................... 673.1 706.7 597.3
Federal funds purchased and repurchase agreements............................ 122.4 118.1 103.1
Other short-term funds borrowed.............................................. 120.4 90.2 20.4
Long-term debt............................................................... 202.7 190.0 147.9
Company-obligated mandatorily redeemable capital securities of FBS Capital I. 2.3 -- --
---------------------------------------------
Total interest expense.................................................. 1,120.9 1,105.0 868.7
---------------------------------------------
Net interest income.......................................................... 1,533.0 1,440.2 1,419.4
Provision for credit losses.................................................. 136.0 115.0 123.6
---------------------------------------------
Net interest income after provision for credit losses........................ 1,397.0 1,325.2 1,295.8
NONINTEREST INCOME
Credit card fees............................................................. 292.6 232.7 179.0
Trust fees................................................................... 230.7 175.3 159.2
Service charges on deposit accounts.......................................... 141.5 123.7 127.3
Investment products fees and commissions..................................... 33.4 27.6 29.6
Securities gains (losses).................................................... 15.0 -- (115.0)
Termination fee.............................................................. 190.0 -- --
State income tax refund...................................................... 65.0 -- --
Gain on sale of mortgage banking operations.................................. 45.8 -- --
Gain on sale of branches..................................................... -- 31.0 --
Other........................................................................ 171.7 192.8 178.8
---------------------------------------------
Total noninterest income................................................ 1,185.7 783.1 558.9
NONINTEREST EXPENSE
Salaries..................................................................... 465.6 441.0 450.7
Employee benefits............................................................ 105.0 96.4 105.7
Goodwill and other intangible assets......................................... 106.5 57.1 50.4
Net occupancy................................................................ 98.5 98.6 103.8
Furniture and equipment...................................................... 89.0 94.2 88.3
Other personnel costs........................................................ 55.8 40.9 35.7
Professional services........................................................ 39.9 36.9 38.5
Advertising and marketing.................................................... 35.4 32.0 35.5
FDIC insurance............................................................... 11.4 35.8 58.4
SAIF special assessment...................................................... 51.0 -- --
Merger, integration, and resizing............................................ 69.9 -- 66.2
Merger-related severance..................................................... -- -- 56.5
Other........................................................................ 260.1 273.0 259.7
---------------------------------------------
Total noninterest expense............................................... 1,388.1 1,205.9 1,349.4
---------------------------------------------
Income from continuing operations before income taxes........................ 1,194.6 902.4 505.3
Applicable income taxes...................................................... 454.8 334.3 191.8
---------------------------------------------
Income from continuing operations............................................ 739.8 568.1 313.5
Loss from discontinued operations............................................ -- -- (8.5)
---------------------------------------------
Net income................................................................... $ 739.8 $ 568.1 $ 305.0
---------------------------------------------
Net income applicable to common equity....................................... $ 733.6 $ 560.6 $ 292.4
---------------------------------------------
EARNINGS PER COMMON SHARE
Average common and common equivalent shares.................................. 137,415,619 133,936,030 136,274,991
Income from continuing operations............................................ $ 5.34 $ 4.19 $ 2.21
Loss from discontinued operations............................................ -- -- (.06)
---------------------------------------------
Net income................................................................... $ 5.34 $ 4.19 $ 2.15
- ----------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
First Bank System, Inc.
42
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Unrealized
Common Gains/(Losses)
Shares Preferred Common Capital Retained on Securities, Treasury
(In Millions, Except Shares) Outstanding* Stock Stock Surplus Earnings Net of Tax Stock** Total
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1993................... 130,408,480 $ 278.1 $ 169.8 $ 852.2 $1,575.4 $ 38.0 $(169.4) $2,744.1
Net income.................................. 305.0 305.0
Dividends declared:
Preferred.................................. (12.6) (12.6)
Common..................................... (156.0) (156.0)
Purchase and retirement of treasury stock... (7,131,513) (4.6) (48.0) (70.1) (120.8) (243.5)
Repurchase of stock warrants................ (2.3) (2.3)
Issuance of common stock:
Acquisition of Boulevard Bancorp, Inc...... 6,227,649 1.9 54.9 149.4 206.2
Other acquisitions......................... 1,385,806 (13.9) 48.1 34.2
Dividend reinvestment...................... 185,890 .2 6.3 6.5
Stock option and stock purchase plans...... 2,068,922 1.0 7.7 (17.6) 42.7 33.8
Stock warrants exercised................... 687,175 .2 1.1 (10.4) 17.0 7.9
Redemption of preferred stock............... (160.0) (7.0) (167.0)
Change in unrealized gains/(losses)......... (144.4) (144.4)
------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1994................... 133,832,409 118.1 168.3 865.8 1,592.8 (106.4) (26.7) 2,611.9
Net income.................................. 568.1 568.1
Dividends declared:
Preferred.................................. (7.5) (7.5)
Common..................................... (191.7) (191.7)
Purchase of treasury stock.................. (11,944,405) (545.2) (545.2)
Issuance of common stock:
Acquisitions............................... 2,788,619 .3 4.3 (3.7) 104.7 105.6
Dividend reinvestment...................... 224,255 .5 9.3 9.8
Stock option and stock purchase plans...... 2,299,172 .9 38.7 (36.3) 54.6 57.9
Stock warrants exercised................... 42,039 (1.3) 1.6 .3
Redemption/conversion of preferred stock.... 92,479 (14.9) (2.2) 3.9 (13.2)
Change in unrealized gains/(losses)......... 128.9 128.9
------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995................... 127,334,568 103.2 169.5 909.3 1,918.2 22.5 (397.8) 2,724.9
Net income.................................. 739.8 739.8
Dividends declared:
Preferred.................................. (6.2) (6.2)
Common..................................... (227.7) (227.7)
Purchase and retirement of treasury stock... (15,120,587) (3.2) (151.4) (784.9) (939.5)
Issuance of common stock:
Acquisitions............................... 16,460,215 10.7 361.7 (44.4) 384.2 712.2
Dividend reinvestment...................... 193,621 .5 11.5 12.0
Stock option and stock purchase plans...... 2,440,730 .2 33.8 (96.6) 119.7 57.1
Redemption/conversion of preferred stock.... 3,561,694 (103.2) (118.2) 221.4 --
Change in unrealized gains/(losses)......... (20.0) (20.0)
------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996................... 134,870,241 $ -- $ 177.2 $1,153.9 $2,164.9 $ 2.5 $(445.9) $3,052.6
- ----------------------------------------------------------------------------------------------------------------------------------
*Defined as total common shares less common stock held in treasury.
**Ending treasury shares were 6,877,497 at December 31, 1996, 8,297,756 at
December 31, 1995, and 767,000 at December 31, 1994.
See Notes to Consolidated Financial Statements.
First Bank System, Inc. 43
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31 (In Millions) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income.................................................................................. $ 739.8 $ 568.1 $ 305.0
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses................................................................ 136.0 115.0 123.6
(Gains) losses on available-for-sale securities............................................ (15.0) -- 111.2
Depreciation and amortization of bank premises and equipment............................... 68.0 76.5 74.5
Provision for deferred income taxes........................................................ 10.0 73.3 (1.1)
Amortization of goodwill and other intangible assets....................................... 106.5 57.1 50.4
Merger, integration and resizing........................................................... 69.9 -- 122.7
Gain on sale of mortgage banking operations................................................ (45.8) -- --
Changes in operating assets and liabilities, excluding the effects of purchase acquisitions:
(Increase) decrease in trading account securities........................................ (59.6) 12.3 (22.6)
Decrease (increase) in loans held for sale............................................... 103.1 (100.6) 580.8
(Increase) decrease in accrued receivables............................................... (148.9) (29.4) 42.0
Increase (decrease) in accrued liabilities............................................... 41.9 (41.1) (11.7)
Other - net................................................................................ (24.0) (20.7) 14.5
--------------------------------------
Net cash provided by operating activities.............................................. 981.9 710.5 1,389.3
--------------------------------------
INVESTING ACTIVITIES
Net cash (used) provided by:
Interest-bearing deposits with banks....................................................... -- 29.3 63.3
Loans outstanding.......................................................................... (138.4) (1,487.9) (1,200.5)
Securities purchased under agreements to resell............................................ (525.2) 105.9 (30.5)
Available-for-sale securities:
Sales...................................................................................... 1,226.7 2,058.9 1,607.1
Maturities................................................................................. 1,059.6 527.5 1,083.7
Purchases.................................................................................. (420.8) (309.6) (1,143.2)
Investment securities:
Maturities................................................................................. -- -- 271.4
Purchases.................................................................................. -- -- (283.4)
Proceeds from sales of other real estate.................................................... 48.7 56.8 109.3
Proceeds from sales of bank premises and equipment.......................................... 20.1 54.1 8.2
Purchases of bank premises and equipment.................................................... (77.6) (55.6) (73.3)
Sales of loans.............................................................................. 77.4 97.5 1.7
Purchases of loans.......................................................................... (19.5) (4.6) (496.3)
Cash and cash equivalents of acquired subsidiaries.......................................... 116.5 55.4 74.5
Acquisitions, net of cash received.......................................................... (38.3) (117.5) (107.2)
Sales of subsidiary operations.............................................................. 162.1 11.7 --
Other - net................................................................................. (62.9) 6.6 10.2
--------------------------------------
Net cash provided (used) by investing activities....................................... 1,428.4 1,028.5 (105.0)
--------------------------------------
FINANCING ACTIVITIES
Net cash (used) provided by:
Deposits................................................................................... (903.7) (1,519.9) (4,135.6)
Federal funds purchased and securities sold under agreements to repurchase................. (430.6) (298.9) 1,340.4
Short-term borrowings...................................................................... (30.9) 1,447.6 226.2
Sales of deposits........................................................................... -- (858.0) --
Purchases of deposits....................................................................... -- -- 11.1
Long-term debt transactions:
Proceeds................................................................................... 964.8 954.6 1,877.8
Principal payments......................................................................... (632.9) (745.1) (1,027.7)
Issuance of Company-obligated mandatorily redeemable capital securities of FBS Capital I.... 300.0 -- --
Redemption of preferred stock............................................................... -- (13.2) (167.0)
Proceeds from dividend reinvestment, stock option, and stock purchase plans................. 69.1 67.7 40.3
Purchase of treasury stock and stock warrants............................................... (939.5) (545.2) (245.8)
Stock warrants exercised.................................................................... -- .3 7.9
Cash dividends.............................................................................. (233.9) (199.2) (168.6)
--------------------------------------
Net cash used by financing activities.................................................. (1,837.6) (1,709.3) (2,241.0)
--------------------------------------
Change in cash and cash equivalents.................................................... 572.7 29.7 (956.7)
Cash and cash equivalents at beginning of year.............................................. 1,871.6 1,841.9 2,798.6
--------------------------------------
Cash and cash equivalents at end of year............................................... $ 2,444.3 $ 1,871.6 $ 1,841.9
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
First Bank System, Inc.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A SIGNIFICANT ACCOUNTING POLICIES
First Bank System, Inc. (the "Company") is a regional multibank holding company
that provides banking and other financial services principally to domestic
markets. The Company has five primary businesses that operate principally in the
11 states of Minnesota, Colorado, Wisconsin, Illinois, Montana, North Dakota,
South Dakota, Iowa, Kansas, Nebraska, and Wyoming. Retail Banking delivers
products and services to the broad consumer market and small-business through
branch offices, telemarketing, direct mail, and automated teller machines
("ATMs"). Payment Systems includes consumer and business credit cards, corporate
and purchasing card services, card-accessed secured and unsecured lines of
credit, ATM processing and merchant processing. Business Banking and Private
Financial Services includes middle-market banking services, private banking and
personal trust. Commercial Banking provides lending, treasury management, and
other financial services to middle-market, large corporate, and mortgage banking
companies. Corporate Trust and Institutional Financial Services includes
institutional and corporate trust services, investment management services, and
a full-service brokerage company. Based on earnings, Retail Banking is the
largest business, followed by Business Banking and Private Financial Services,
Commercial Banking, Payment Systems, and Corporate Trust and Institutional
Financial Services.
BASIS OF PRESENTATION The consolidated financial statements include the accounts
of the Company and its subsidiaries. The consolidation eliminates all
significant intercompany accounts and transactions. Certain items in prior
periods have been reclassified to conform to the current presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual experience could differ from those estimates.
SECURITIES
TRADING ACCOUNT SECURITIES Debt and equity securities held for resale in
anticipation of short-term market movements are classified as trading account
securities and reported at fair value. Realized and unrealized gains or losses
are recorded in noninterest income.
AVAILABLE-FOR-SALE SECURITIES These securities are not trading account
securities but may be sold before maturity in response to changes in interest
rates, prepayment risk, and funding sources or terms, or to meet liquidity
needs. They are carried at fair value with unrealized net gains or losses
reported in shareholders' equity. When sold, the amortized cost of the specific
securities is used to compute the gain or loss.
LOANS
Loans are reported net of unearned income. Interest income is accrued on the
unpaid principal balances. Loan and commitment fees are deferred and recognized
over the loan and/or commitment period as yield adjustments.
ALLOWANCE FOR CREDIT LOSSES Management determines the adequacy of the allowance
based on evaluations of the loan portfolio and related off-balance sheet
commitments, recent loss experience, and other pertinent factors, including
economic conditions. This evaluation is inherently subjective as it requires
estimates, including amounts of future cash collections expected on nonaccrual
loans that may be susceptible to significant change. The allowance for credit
losses relating to impaired loans is based on the loans' observable market
price, the collateral for certain collateral-dependent loans, or the discounted
cash flows using the loans' effective interest rate. The allowance is increased
through provisions charged to operating earnings and reduced by net charge-offs.
NONACCRUAL LOANS Generally loans (including impaired loans) are placed on
nonaccrual status when the collection of interest or principal has become 90
days past due or is otherwise considered doubtful. When a loan is placed on
nonaccrual status, unpaid interest is reversed. Future interest payments are
generally applied against principal.
LEASES Certain subsidiaries engage in both direct and leveraged lease financing.
The net investment in direct financing leases is the sum of all minimum lease
payments and estimated residual values, less unearned income and investment tax
credits. Unearned income is added to interest income over the terms of the
leases to produce a level yield.
The investment in leveraged leases is the sum of all lease payments (less
nonrecourse debt payments) plus estimated residual values, less unearned income.
Unearned income is added to loan interest income over the positive years of the
net investment.
LOANS AND MORTGAGES HELD FOR SALE These loans are carried at the lower of cost
or market value as determined on an aggregate basis by type of loan.
OTHER REAL ESTATE Other real estate ("ORE"), which is included in other assets,
is property acquired through foreclosure or other proceedings. ORE is initially
recorded at fair value and
First Bank System, Inc.
45
carried at the lower of cost or fair value, less estimated selling costs. The
property is evaluated regularly and any decreases in the carrying amount are
included in noninterest expense.
DERIVATIVE FINANCIAL INSTRUMENTS
INTEREST RATE SWAPS AND CONTRACTS The Company uses interest rate swaps and
contracts (forwards, options, caps and floors) to manage its interest rate risk,
as a financial intermediary, and in its trading operations. The Company does not
enter into these contracts for speculative purposes. Income or expense on swaps
and contracts designated as hedges of assets, liabilities or commitments is
recorded as an adjustment to interest income or expense. If the swap or contract
is terminated, the gain or loss is deferred and amortized over the remaining
life of the underlying asset or liability. If the hedged instrument is disposed
of, the swap or contract agreement is marked to market with any resulting gain
or loss included with the gain or loss from the disposition. The initial
bid/offer spread on intermediated swaps is deferred and recognized in trading
account profits and commissions over the life of the agreement. Intermediated
swaps and all other interest rate contracts are marked to market and resulting
gains or losses are recorded in trading account profits and commissions.
OTHER SIGNIFICANT POLICIES
BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less
accumulated depreciation and amortized primarily on a straight-line method
basis.
Capital leases, less accumulated amortization, are included in bank premises
and equipment. The lease obligations are included in long-term debt. Capitalized
leases are amortized on a straight-line basis over the lease term and the
amortization is included in depreciation expense.
INTANGIBLE ASSETS Goodwill, the price paid over the book value of acquired
businesses, is included in other assets and is amortized over periods ranging up
to 25 years. Other intangible assets are amortized over their estimated useful
lives, which range from seven to fifteen 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 the purposes of reporting cash flows, cash
equivalents include cash and due from banks and federal funds sold.
STOCK-BASED COMPENSATION The Company grants stock options for a fixed number of
shares to employees with an exercise price equal to the fair value of the shares
at the date of grant. The Company accounts for stock option grants in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
accordingly recognizes no compensation expense for the stock option grants.
PER SHARE CALCULATIONS Primary earnings per share is computed by dividing net
income (less preferred stock dividends) by the average number of common shares
and dilutive common stock equivalents outstanding during the year. To compute
the dilutive effect of restricted common shares, 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.
NOTE B Accounting Changes
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset is not recoverable. During 1996, the Company
recorded a $24.1 million adjustment to the carrying value of certain bank
premises following a decision to sell several buildings in connection with the
streamlining of the branch distribution network. See Note K for further
discussion.
The Company also performed an evaluation of those intangible assets not
covered by SFAS 121 and recorded a charge of $29.5 million to reduce the
carrying value of credit card holder and core deposit intangibles to their fair
value. The Company performed this analysis of the fair value following its
reassessment of business alternatives for a segment of its credit card portfolio
and a change in the mix of deposits at certain acquired entities, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION SFAS 123, "Accounting for Stock-Based
Compensation," establishes a new fair value based accounting method for stock-
based compensation plans. As permitted by the Statement, the Company continues
to apply the accounting provisions of APB 25, "Accounting for Stock Issued to
Employees," in determining net income. Refer to Note L for the required pro
forma disclosures had SFAS 123 been applied.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES SFAS 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," addresses whether the
First Bank System, Inc.
46
transfer of financial assets should be accounted for as a sale and removed from
the balance sheet, or as a financing recognized as a borrowing. The Statement
uses a "financial components" approach which focuses on control to determine
whether assets have been sold. If the entity has surrendered control over the
transferred assets, the transaction is considered a sale. Control is considered
surrendered only if the seller has no legal right to the assets, even in
bankruptcy; the buyer has the right to pledge or exchange the assets; and the
seller does not maintain effective control over the assets through an agreement
to repurchase or redeem them. SFAS 125 is effective for transactions occurring
after December 31, 1996, and is to be applied prospectively, with earlier or
retroactive application not permitted. The adoption of SFAS 125 is not expected
to have a material effect on the Company.
NOTE C BUSINESS COMBINATIONS AND DIVESTITURES
FIRSTIER FINANCIAL, INC. On February 16, 1996, the Company issued 16.5 million
shares to complete its acquisition of Omaha-based FirsTier Financial, Inc.
("FirsTier"). FirsTier had $3.7 billion in assets, $2.9 billion in deposits, and
63 offices in Nebraska and Iowa. Under terms of the purchase agreement, the
Company exchanged .8829 shares of its common stock for each common share of
FirsTier. In addition, FirsTier's outstanding stock options were converted into
stock options for the Company's common stock.
The acquisition of FirsTier was accounted for under the purchase method of
accounting, and accordingly, the purchase price of $717 million was allocated to
assets acquired and liabilities assumed based on their fair market values at the
date of acquisition. The excess of the purchase price over the fair market
values of net assets acquired was recorded as goodwill. Goodwill of $286 million
will be amortized over an average of 24 years and core deposit intangibles of
$63 million will be amortized over the estimated lives of the deposits of
approximately 10 years. The results of operations of FirsTier have been included
in the Company's Consolidated Statement of Income since the date of acquisition.
The following pro forma operating results of the Company assume that the
FirsTier acquisition had occurred at the beginning of each period presented. In
addition to combining the historical results of operations of the two companies,
the pro forma results include adjustments for the estimated effect of purchase
accounting on the Company's results.
Year Ended December 31
-------------------------
(In Millions, Except Per-Share Amounts) 1996 1995
- --------------------------------------------------------------------------
Net interest income............................ $1,550.0 $1,556.6
Net income..................................... 737.6 587.3
Net income per share........................... 5.27 4.04
- --------------------------------------------------------------------------
The pro forma information may not be indicative of the results that actually
would have occurred if the combination had been in effect on the dates indicated
or which may be obtained in the future.
BANKAMERICA CORPORATE TRUST BUSINESS During the fourth quarter of 1995 and the
first quarter of 1996 the Company acquired the corporate trust business of
BankAmerica Corporation. After the acquisition, the Company became one of the
nation's leading providers of domestic corporate trust services.
SALE OF MORTGAGE BANKING OPERATIONS During 1996, the Company sold its servicing
and mortgage loan production business to three parties. Bank of America, fsb, a
subsidiary of BankAmerica Corporation, purchased approximately $14 billion in
mortgage servicing rights. Columbia National, Inc., of Maryland, and Knutson
Mortgage Co., of Minnesota, agreed to purchase Company's loan production
business. The Company will now deliver mortgage loan products through bank
branches and telemarketing. These transactions resulted in a net gain of $45.8
million.
FIRST INTERSTATE BANCORP On November 6, 1995, the Company and First Interstate
Bancorp ("First Interstate") announced that they had entered into a definitive
agreement whereby the Company would exchange 2.6 shares of its common stock for
each share of First Interstate common stock. On January 24, 1996, First
Interstate announced that it had terminated the merger agreement with the
Company and had entered into a definitive agreement with Wells Fargo & Company
("Wells Fargo"). Under the terms of a settlement agreement, the Company received
$125 million on January 24, 1996. The Company received an additional $75 million
on April 1, 1996, upon consummation of the merger of First Interstate and Wells
Fargo. In addition, all litigation among the parties related to the acquisition
of First Interstate has been settled. The Company incurred transaction costs of
approximately $10 million in connection with the proposed merger.
METROPOLITAN FINANCIAL CORPORATION On January 24, 1995, the Company issued 21.7
million shares to complete its merger with Metropolitan Financial Corporation
("MFC"). The regional financial services holding company, headquartered in
Minneapolis, Minnesota, had approximately $7.9 billion in assets and $5.5
billion in deposits. MFC's 211 offices were principally located in North Dakota,
Minnesota, Nebraska, Iowa, Kansas, South Dakota, Wisconsin, and Wyoming. The
Company used the pooling of interests method to account for the transaction.
Accordingly, the Company's financial statements for all periods have been
restated to include MFC's accounts and operations.
First Bank System, Inc.
47
OTHER ACQUISITIONS During 1995, the Company acquired several smaller financial
institutions in its existing markets, all of which further strengthen the
Company's retail banking franchise. These acquisitions, accounted for as
purchases, were not material to the financial condition or operating results of
the Company. These acquisitions include the November 1, 1995, acquisition of two
commercial bank holding companies - Midwestern Services, Inc. and Southwest
Holdings,Inc. - both of Omaha, Nebraska. Together, the two companies had total
assets of $424 million, total deposits of $380 million, and 12 branches in
Omaha. In addition, on March 16, 1995, the Company acquired First Western
Corporation, parent company of Western bank, with $317 million in assets,
$267 million in deposits, and nine branches in and around Sioux Falls, South
Dakota.
COMERICA CORPORATE TRUST BUSINESS On January 31, 1997, the Company completed its
acquisition of the bond indenture services and paying agency business of
Comerica Incorporated. This business serves approximately 860 municipal and
corporate clients with about 2,400 bond issues.
SALE OF EDINA REALTY, INC. On December 8, 1995, the Company sold Edina Realty,
Inc., its real estate brokerage subsidiary, to a local investor group. The
subsidiary was accounted for as discontinued operations. Edina's assets,
liabilities and cash flows were not material to the Company's financial
statements and were not segregated.
NOTE D RESTRICTIONS ON CASH AND DUE FROM BANKS
Bank subsidiaries are required to maintain minimum average reserve balances with
the Federal Reserve Bank. The amount of those reserve balances was approximately
$245 million at December 31, 1996.
NOTE E SECURITIES
The detail of the amortized cost, gross unrealized holding gains and losses, and
fair value of available-for-sale securities at December 31 was as follows:
1996 1995
---------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Amortized Holding Holding Fair Amortized Holding Holding Fair
(In Millions) Cost Gains Losses Value Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury......... $ 553 $ 1 $ (9) $ 545 $ 921 $ 8 $ (4) $ 925
Mortgage-backed....... 2,454 30 (20) 2,464 1,703 13 (23) 1,693
Other U.S. agencies... 42 -- (1) 41 157 1 (1) 157
State and political... 466 3 (4) 465 174 5 -- 179
Other................. 36 4 -- 40 265 38 (1) 302
---------------------------------------------------------------------------------------------------
Total.............. $3,551 $38 $(34) $3,555 $3,220 $65 $(29) $3,256
- --------------------------------------------------------------------------------------------------------------------------
Securities carried at $1.7 billion at December 31, 1996, and $1.2 billion at
December 31, 1995, were pledged to secure public, private and trust deposits and
for other purposes required by law. Securities carried at $1.0 billion at
December 31, 1996, and $1.3 billion at December 31, 1995, were pledged to secure
Federal Home Loan Bank advances. Securities sold under agreements to repurchase
were collateralized by securities and securities purchased under agreements to
resell with an amortized cost of $.8 billion and $.3 billion at December 31,
1996, and 1995, respectively.
Gross realized gains and losses are shown in the table below. Included in the
1994 gross realized losses is $111.2 million related to the sale of $1.6 billion
of securities as a result of MFC's actions to reduce interest rate risk
consistent with prior regulatory requests and to align more closely the interest
rate risk profile of MFC with that of the Company.
(In Millions) 1996 1995 1994
- -----------------------------------------------------------------------------------
Gross realized gains............................... $ 33.3 $ 1.7 $ 3.1
Gross realized losses.............................. (18.3) (1.7) (118.1)
------------------------------
Net realized gains (losses)...................... $ 15.0 $ -- $(115.0)
------------------------------
Income taxes (credit) on realized gains or losses.. $ 5.7 $ -- $ (43.7)
- -----------------------------------------------------------------------------------
For amortized cost, fair value and yield by maturity date of available-for-
sale securities outstanding as of December 31, 1996, see Table 10 on page 30
from which such information is incorporated by reference into these Notes to
Consolidated Financial Statements.
First Bank System, Inc.
48
NOTE F LOANS AND ALLOWANCE FOR CREDIT LOSSES
The composition of the loan portfolio at December 31 was as follows:
(In Millions) 1996 1995
- -------------------------------------------------------------------------------------------------------------------
COMMERCIAL:
Commercial................................................................................ $ 9,456 $8,271
Financial institutions.................................................................... 905 1,060
Real estate:
Commercial mortgage..................................................................... 3,090 2,784
Construction............................................................................ 654 403
----------------------
Total commercial...................................................................... 14,105 12,518
----------------------
CONSUMER:
Residential mortgage...................................................................... 3,019 4,655
Residential mortgage held for sale........................................................ 42 257
Home equity and second mortgage........................................................... 3,263 2,805
Credit card............................................................................... 2,858 2,586
Automobile................................................................................ 1,991 1,821
Revolving credit.......................................................................... 737 757
Installment............................................................................... 607 607
Student*.................................................................................. 506 394
----------------------
Total consumer........................................................................ 13,023 13,882
----------------------
Total loans........................................................................... $ 27,128 $26,400
- -------------------------------------------------------------------------------------------------------------------
* All or part of the student loan portfolio may be sold when the repayment
period begins.
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, 1996, and 1995. The aggregate dollar
amounts of these loans were $12.3 million and $13.1 million at December 31,
1996, and 1995, respectively. During 1996, additions totaled $43.8 million and
repayments totaled $44.6 million.
Nonaccrual and renegotiated loans totaled $120 million, $118 million, and $168
million at December 31, 1996, 1995, and 1994, respectively. At December 31,
1996, and 1995, the Company had $86 million, and $69 million, respectively, in
loans considered impaired under SFAS 114 included in its nonaccrual loans. The
carrying value of the impaired loans was less than or equal to the present value
of expected future cash flows and, accordingly, no allowance for credit losses
was specifically allocated to impaired loans. For the years ended December 31,
1996, 1995, and 1994, the average recorded investment in impaired loans was
approximately $78 million, $77 million, and $118 million, respectively. The
effect of nonaccrual and renegotiated loans on interest income was as follows:
Year ended December 31
-------------------------
(In Millions) 1996 1995 1994
- -------------------------------------------------------------------------
Interest income that would have been accrued
at original contractual rates................ $10.9 $11.5 $13.7
Amount recognized as interest income.......... 4.1 2.3 2.7
-------------------------
Forgone revenue............................... $ 6.8 $ 9.2 $11.0
- -------------------------------------------------------------------------
First Bank System, Inc.
49
Commitments to lend additional funds to customers whose loans were classified
as nonaccrual or renegotiated at December 31, 1996, totaled $45.0 million.
During 1996, there were no loans that were restructured at market interest rates
and returned to a fully performing status.
Activity in the allowance for credit losses was as follows:
(In Millions) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year............................................................... $ 473.5 $474.7 $466.1
Add:
Provision charged to operating expense................................................... 136.0 115.0 123.6
Deduct:
Loans charged off........................................................................ 253.0 209.1 226.8
Less recoveries of loans charged off..................................................... 100.2 88.1 86.5
----------------------------------
Net loans charged off.................................................................... 152.8 121.0 140.3
Additions from acquisitions and other...................................................... 59.8 4.8 25.3
----------------------------------
Balance at end of year..................................................................... $ 516.5 $473.5 $474.7
- -------------------------------------------------------------------------------------------------------------------------------
NOTE G BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31 consisted of the following:
(In Millions) 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Land....................................................................................... $ 72 $ 70
Buildings and improvements................................................................. 408 386
Furniture, fixtures and equipment.......................................................... 401 373
Capitalized building leases................................................................ 48 35
Capitalized equipment leases............................................................... 40 37
-----------------------
969 901
Less accumulated depreciation and amortization............................................. 565 488
-----------------------
Total................................................................................... $ 404 $ 413
- --------------------------------------------------------------------------------------------------------------------
First Bank System, Inc.
50
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) 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
FIRST BANK SYSTEM (Parent Company):
Fixed-rate subordinated notes:
6.625% due May 15, 2003.......................................................................... $ 100 $ 100
8.00% due July 2, 2004........................................................................... 125 125
7.625% due May 1, 2005........................................................................... 150 150
6.875% due September 15, 2007.................................................................... 250 250
Floating-rate subordinated notes - due November 30, 2010............................................ 107 107
Medium-term notes................................................................................... 406 580
Capitalized lease obligations and other............................................................. 32 14
-----------------------
1,170 1,326
SUBSIDIARIES:
Fixed-rate subordinated notes:
6.00% due October 15, 2003....................................................................... 100 100
7.55% due June 15, 2004.......................................................................... 100 100
8.35% due November 1, 2004....................................................................... 100 100
6.875% due April 1, 2006......................................................................... 125 --
Step-up subordinated notes - due August 15, 2005.................................................... 100 100
Federal Home Loan Bank advances..................................................................... 1,005 1,099
Bank notes.......................................................................................... 800 300
Capitalized lease obligations....................................................................... 39 35
Mortgage indebtedness and other..................................................................... 14 41
-----------------------
Total............................................................................................ $ 3,553 $3,201
- -----------------------------------------------------------------------------------------------------------------------------
The floating-rate subordinated notes due November 30, 2010, may be redeemed at
par at the Company's option. The annual interest rate for each quarterly period
is one-eighth of 1 percent above the London Interbank Offered Rate ("LIBOR") for
three-month Eurodollar deposits, subject to a minimum of 5.25 percent. At
December 31, 1996, the interest rate was 5.69 percent.
The step-up subordinated notes due August 15, 2005, are issued by the
Company's subsidiary bank, First Bank National Association (the "Bank"). 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.
The medium-term notes outstanding at December 31, 1996, mature from March 1997
through August 1999. The notes bear floating interest rates ranging from 5.67
percent to 5.82 percent. The weighted average interest rate at December 31,
1996, was 5.75 percent.
The Federal Home Loan Bank advances outstanding at December 31, 1996, mature
from January 1997 through March 2011. The advances bear fixed or floating
interest rates ranging from 4.93 percent to 7.34 percent. The weighted average
interest rate at December 31, 1996, was 5.72 percent.
The bank notes outstanding at December 31, 1996, mature from July 1997 through
March 2001. The notes bear fixed or floating interest rates ranging from 5.53
percent to 6.38 percent. The weighted average interest rate at December 31,
1996, was 5.72 percent.
Maturities of long-term debt outstanding at December 31, 1996 were:
Parent
(In Millions) Consolidated Company
- -----------------------------------------------------------------------------
1997............................................... $1,072 $ 187
1998............................................... 442 99
1999............................................... 327 125
2000............................................... 40 1
2001............................................... 105 2
Thereafter......................................... 1,567 756
-------------------
Total........................................... $3,553 $1,170
- -----------------------------------------------------------------------------
First Bank System, Inc.
51
NOTE I COMPANY-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF FBS
CAPITAL I
On November 26, 1996, FBS Capital I (the "Trust"), a Delaware business trust
wholly-owned by the Company, completed the sale of $300 million of 8.09 percent
Capital Securities (the "Capital Securities"). The Trust used the net proceeds
from the offering to purchase a like amount of 8.09 percent Junior Subordinated
Deferrable Interest Debentures (the "Debentures") of the Company. The Debentures
are the sole assets of the Trust and are eliminated, along with the related
income statement effects, in the consolidated financial statements. The Company
used the proceeds from the sale of the Debentures for general corporate
purposes.
The Capital Securities accrue and pay distributions semi-annually at an annual
rate of 8.09 percent of the stated liquidation amount of $1,000 per Capital
Security. The Company has fully and unconditionally guaranteed all of the
obligations of the Trust. The guarantee covers the semi-annual distributions and
payments on liquidation or redemption of the Capital Securities, but only to the
extent of funds held by the Trust.
The Capital Securities are mandatorily redeemable upon the maturity of the
Debentures, on November 15, 2026 or upon earlier redemption as provided in the
Indenture. The Company has the right to redeem the Debentures, in whole (but not
in part), on or after November 15, 2006, at a redemption price specified in the
Indenture plus any accrued but unpaid interest to the redemption date.
NOTE J SHAREHOLDERS' EQUITY
COMMON STOCK At December 31, 1996, the Company had 11,155,479 shares of common
stock reserved for future issuances under the Dividend Reinvestment Plan,
Employee Stock Purchase Plan, and the Stock Option Plans (see Note L).
On February 21, 1996, the Board of Directors authorized the repurchase of up
to 25.4 million shares through December 1997. Approximately 15.1 million shares
have been repurchased under the 1996 authorization. In addition, the Board of
Directors authorized the retirement of 2.6 million shares repurchased in the
second quarter of 1996. Under previous authorizations, the Company repurchased
11.9 million shares in 1995.
Approximately 5.8 million common shares sold through private placements in
July 1990 remain outstanding. Periodic stock purchase rights ("PSPRs") and risk
event warrants were also issued in such private placements. The PSPRs become
exercisable if the Company fails to pay quarterly dividends equal to at least
$.205 per share of common stock in any twelve-month period between July 1990 and
July 2000. Upon exercise, PSPR holders will receive cash or the Company's
common or preferred shares equal to the dividend shortfall. The risk event
warrants become exercisable when a change in control occurs and the value
received by common shareholders is less than $13.875 per share. If exercised,
the Company has the option to pay warrant holders the shortfall in cash, common
or preferred stock.
The Company's Dividend Reinvestment Plan provides for automatic reinvestment
of dividends and optional cash purchases of up to $5,000 worth of additional
shares per calendar quarter at market price.
PREFERRED STOCK The Company has six classes of cumulative preferred stock, with
10 million shares authorized. Since 1992, the Company has redeemed or called the
four classes of $1.00 par value cumulative preferred stock and redeemed both
classes of $.01 par value cumulative preferred stock.
On November 29, 1996, the Company called the remaining 1,543,025 shares of its
Series 1991A Cumulative Convertible Preferred Stock. As a result, at December
31, 1996, (the redemption date) all remaining shares had been redeemed or
converted into common stock. Prior to conversion, dividends on the Series 1991A
shares, which had a $1.00 par value, were 7.125 percent per year.
In January 1995, the Company redeemed for $27.00 per share in cash, plus
accumulated and unpaid dividends, 488,750 shares of Series B, $2.875 Cumulative
Perpetual Preferred Stock. Dividends on the Series B shares, which had a $.01
par value, were $2.875 per share prior to redemption.
NOTE K MERGER, INTEGRATION AND RESIZING CHARGES
The Company recorded merger, integration and resizing charges of $69.9 million
and $66.2 million in 1996 and 1994, respectively. Merger and integration charges
of $31.3 million recorded in 1996 were associated with the acquisitions of
FirsTier and the BankAmerica corporate trust business. Resizing charges of $38.6
million were associated with the Company's streamlining of the branch
distribution network and trust operations as the Company expands its alternative
distribution channels, including telemarketing, automated teller machines and
in-store branches. Merger and integration charges of $66.2 million recorded in
1994 related to the acquisition of MFC. The components of the charges are shown
below:
Year ended December 31
----------------------
(In Millions) 1996 1994
- -----------------------------------------------------------------
Systems conversions, required
customer communications and
professional services........... $29.7 $40.4
Premises writedowns.............. 26.0 19.6
Severance........................ 14.2 6.2
----------------------
Total merger, integration and
resizing charges.............. $69.9 $66.2
- -----------------------------------------------------------------
First Bank System, Inc.
52
Systems conversions, required customer communications and professional
services relate to preparation and mailing of numerous customer communications
for the acquisitions and conversion of customer accounts, printing and
distribution of training materials and policy and procedure manuals, outside
consulting fees, and similar expenses relating to the conversions and
integration of acquired branches and operations. Premises writedowns relate to
premise and equipment write-offs for redundant office space and branches. The
writedowns recorded in 1996 include valuation adjustments associated with the
planned sale of bank-owned properties as the Company consolidates and reduces
the space requirements of the branch facilities. Severance charges include the
cost of terminations, other benefits, and outplacement costs associated with the
elimination of employees primarily in branch offices and in centralized
corporate support and data processing functions. The following table presents a
summary of activity with respect to the Company's merger, integration and
resizing accrual:
Year Ended
December 31
(In Millions) 1996
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995........................................................................... $12.6
Provision charged to operating expense................................................................. 69.9
Cash outlays........................................................................................... (43.8)
Noncash writedowns..................................................................................... (26.0)
-----------
Balance at December 31, 1996........................................................................... $12.7
- -------------------------------------------------------------------------------------------------------------------
The Company expects that substantially all remaining costs will be paid in
early 1997. Additional noncash writedowns are not expected to be significant.
In December 1994, the Company recorded a $111.2 million loss on the sale of
$1.6 billion of securities in January 1995 as a result of MFC's actions to
reduce interest rate risk consistent with prior regulatory requests and to align
more closely the interest rate risk profile of MFC with that of the Company. The
Company also recorded additional provision for credit losses of $16.5 million
and a $56.5 million severance-related charge related to MFC's pre-existing
change in control plan. A provision for other real estate related reserves of
$2.6 million was also recorded to provide for the Company's strategy of
accelerated disposition of problem assets.
First Bank System, Inc.
53
NOTE L 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 amounts to its plans sufficient to meet the minimum
funding requirements of 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 the pension contribution is the projected
unit credit method.
Prior to their acquisition dates, employees of acquired companies were
covered by separate, noncontributory pension plans that provided benefits based
on years of service and compensation. As of December 31, 1996, the Company has
merged the acquired companies' plans into its own plan with the exception of the
MFC and FirsTier plans, which are expected to be merged in 1997. The funded
status and income statement effects of the MFC plan have been aggregated with
the Company's plan for all years in the table below and the FirsTier plan is
included in 1996.
(In Millions) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $306.6 million in 1996, $287.9 million in 1995, and
$265.4 million in 1994.......................................................... $(318.6) $(297.5) $(274.0)
---------------------------
Projected benefit obligation for service rendered to date.......................... $(331.3) $(312.3) $(280.3)
Plan assets at fair value, primarily listed stocks and U.S. bonds.................. 412.0 314.3 287.4
---------------------------
Excess of plan assets over projected benefit obligation............................ 80.7 2.0 7.1
Unrecognized net (gain) loss from past experience different from
that assumed and effects of changes in assumptions (33.3) 20.5 18.8
Unrecognized net asset at end of year (amortized over 15 years).................... (19.1) (23.1) (26.4)
---------------------------
Prepaid (accrued) pension cost included in other assets............................ $ 28.3 $ (.6) $ (.5)
- ----------------------------------------------------------------------------------------------------------------
The Company also maintains several unfunded, nonqualified, supplemental
executive retirement programs that provide additional defined pension benefits
for certain officers. The following table summarizes the status of these
supplemental plans.
(In Millions) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $14.7 million in 1996, $10.4 million in 1995, and
$5.7 million in 1994............................................................ $(15.3) $(11.1) $ (7.2)
Projected benefit obligation for service rendered to date.......................... $(23.8) $(16.8) $(11.2)
Plan assets at fair value.......................................................... -- -- --
------------------------
(Deficiency) of plan assets over projected benefit obligation...................... (23.8) (16.8) (11.2)
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions 2.5 5.2 1.9
Unrecognized net asset at end of year (amortized over 15 years).................... 1.1 1.3 1.3
------------------------
Accrued pension cost included in other liabilities................................. $(20.2) $(10.3) $ (8.0)
- ----------------------------------------------------------------------------------------------------------------
Net pension cost for all funded and unfunded plans is as follows:
Year Ended December 31 (In Millions) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Service cost-benefits earned during the period................................... $ 22.5 $ 17.7 $ 20.4
Interest cost on projected benefit obligation 25.7 24.6 21.8
Actual return on plan assets (73.3) (57.3) (10.9)
Net amortization and deferral.................................................... 38.9 26.1 (18.7)
------------------------
Net periodic pension benefit cost.................................................. $ 13.8 $ 11.1 $ 12.6
- ----------------------------------------------------------------------------------------------------------------
First Bank System, Inc.
54
The aggregate disclosures reflect the following weighted average
assumptions for the Company and acquired companies that sponsored plans.
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Weighted average discount rate in determining expense.............................. 7.0% 8.0% 7.0%
Weighted average discount rate in determining benefit obligations at year-end...... 7.5 7.0 8.0
Expected long-term rate of return.................................................. 9.5 9.5 9.5
Rate of increase in future compensation............................................ 5.6 5.6 5.6
- ----------------------------------------------------------------------------------------------------------------
OTHER POSTRETIREMENT PLANS In addition to providing pension benefits, the
Company provides certain health care and death benefits to retired employees.
Nearly all employees may become eligible for health care benefits at or after
age 55 if they have completed at least five years of service and their age plus
years of service is equal to or exceeds 65 while working for the Company.
The Company subsidizes the cost of coverage for employees who retire before
age 65 with at least 10 years of service. The amount of the subsidy is based on
the employee's age and service at the time of retirement and remains frozen
until the retiree reaches age 65. After age 65 the retiree assumes
responsibility for the full cost of the coverage.
The plan also contains other cost-sharing features such as deductibles and
coinsurance. The Company continues to subsidize the coverage for employees over
age 65 who retired before a plan change eliminated such subsidy.
The Company accrues the estimated cost of retiree benefit payments, other
than pensions, during the employees' active service and in prior years funded
the postretirement benefit costs as they were incurred. In 1996, the Company
funded the tax deductible portion of its outstanding liability. The following
table sets forth the plan's funded status recognized in the Company's balance
sheet and statement of income at December 31:
Year Ended December 31 (In Millions) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $(48.9) $(47.9) $(41.7)
Fully eligible active plan participants (2.6) (2.4) (3.6)
Other active plan participants.............................................. (11.7) (12.2) (11.3)
-------------------------
Total accumulated postretirement benefit obligation........................ (63.2) (62.5) (56.6)
Plan assets.................................................................. 7.1 -- --
-------------------------
Total unfunded accumulated postretirement benefit obligation............... (56.1) (62.5) (56.6)
Unrecognized net gain from past experience different from that assumed
and from changes in assumptions (9.5) (5.5) (10.1)
Unrecognized implementation obligation....................................... 4.0 4.2 4.4
-------------------------
Accrued postretirement benefit cost.......................................... $ (61.6) $ (63.8) $ (62.3)
-------------------------
Net periodic postretirement benefit cost includes the following components:
Service cost-benefits attributed to service during the period $ 1.3 $ 1.1 $ 1.4
Interest cost on accumulated postretirement benefit obligation 4.5 4.3 4.2
Net amortization and deferral............................................... .2 (.1) .3
-------------------------
Total postretirement benefit cost............................................ $ 6.0 $ 5.3 $ 5.9
- -----------------------------------------------------------------------------------------------------------------
First Bank System, Inc.
55
In 1996 the assumed annual rates of increase in the cost of health care
benefits for participants under 65 and 65 and older, were 9.1 percent and 6.0
percent, respectively. For 1997 the annual rate of increase assumptions are 8.1
percent and 5.5 percent, respectively. Both rates were assumed to decrease
gradually to 5.5 percent by 2004 and remain at that level thereafter. Trends in
health care costs have a significant effect on the amounts reported. For
example, increasing the health care cost trend rate assumptions by 1 percent
each year increases the accumulated postretirement benefit obligation as of
December 31, 1996, by $6.2 million. In addition, the aggregate of the service
and interest cost components of net periodic postretirement benefit cost for the
year then ended would increase by $.6 million.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5 percent as of December 31, 1996, and
7.0 percent as of December 31, 1995.
STOCK INCENTIVE AND PURCHASE PLANS The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") in accounting for its employee stock incentive and purchase plans.
Under APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of the grant, no
compensation expense is recognized. On the date exercised, the option proceeds
equal to the par value of the shares are credited to common stock and additional
proceeds are credited to capital surplus.
The 1984 Employee Stock Purchase Plan ("ESPP"), as amended in 1989, 1991
and 1996, permits all eligible employees with at least one year of service and
directors to purchase common stock. Plan participants can purchase stock for 85
percent to 100 percent of the fair market value, which is based on the price at
the beginning or the end of the purchase period, whichever is lower. Any
discount is determined by a committee of the Board of Directors. In 1996, the
purchase price was 85 percent of fair market value. The plan results in no
compensation expense to the Company.
In April, 1996, the Board of Directors approved the 1996 Stock Incentive
Plan ("1996 Plan") which amends and restates the 1991 Stock Incentive Plan and
1994 Stock Incentive Plan. Seventeen million shares are authorized and available
for granting awards under the 1996 Stock Incentive Plan (including five million
which were previously authorized under the 1991 Stock Incentive plan and five
million under the 1994 Stock Incentive Plan). The 1996 Plan, as amended, allows
for the granting of nonqualified stock options, incentive stock options, stock
appreciation rights ("SARs"), restricted stock or stock units ("RSUs"),
performance awards, and other stock-based awards at or above 100 percent of the
market price at the date of grant. The 1991 Stock Incentive Plan, as amended by
the 1996 Plan, also provides automatic grants of stock options to nonemployee
directors. The rights of restricted stock and RSU holders to transfer shares are
generally limited during the restriction period. At December 31, 1996, there
were 2,898,541 shares (subject to adjustment for forfeitures), available for
grant under the Plans.
Options granted are generally exercisable up to 10 years from the date of
grant and vest over three to five years. Restricted shares vest over three to
seven years. The vesting of certain options and restricted shares are subject to
acceleration based on the performance of the Company in comparison to the
performance of a predetermined group of regional banks. Compensation expense for
restricted stock is based on the market price of the Company stock at the time
of the grant and amortized on a straight-line basis over the vesting period. For
the performance-based restricted shares, compensation expense is amortized using
the estimated vesting period. Compensation expense related to the restricted
stock was $4.4 million, $3.4 million and $1.5 million in 1996, 1995, and 1994.
First Bank System, Inc.
56
The stock incentive plans of acquired companies were terminated at the
respective merger closing dates. Option holders under such plans received the
Company's common stock, or options to buy the Company's stock, based on the
conversion terms of the various merger agreements. The historical option
information presented below has been restated to reflect the options originally
granted under the acquired companies' plans.
Weighted Restricted
Options Average Price Shares
Outstanding Per Share Outstanding
- ------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1993........................................ 4,208,589 $19.47 261,296
Granted:
Stock options.......................................... 6,576,268 29.75 --
Restricted stock....................................... -- 192,732
Exercised................................................ (2,052,389) 20.33 --
Canceled/vested.......................................... (340,319) 28.61 (26,084)
-------------------------------------------------
DECEMBER 31, 1994........................................ 8,392,149 $26.70 427,944
Granted:
Stock options.......................................... 2,083,807 45.05 --
Restricted stock....................................... -- 149,806
Exercised................................................ (3,545,183) 27.48 --
Canceled/vested.......................................... (1,044,808) 16.43 (22,882)
-------------------------------------------------
DECEMBER 31, 1995........................................ 5,885,965 $34.33 554,868
Granted:
Stock options.......................................... 8,553,170 67.49 --
Restricted stock....................................... -- 114,898
FirsTier options converted............................... 270,164 29.42 --
Exercised................................................ (4,356,559) 36.37 --
Canceled/vested.......................................... (137,497) 50.69 (246,917)
-------------------------------------------------
DECEMBER 31, 1996........................................ 10,215,243 $60.99 422,849
- ------------------------------------------------------------------------------------------------------------
At December 31, 1996, 1995, and 1994 exercisable options were 2.7 million,
2.9 million, and 3.7 million, and had a weighted average price of $41.50,
$31.40, and $28.31. For options outstanding at December 31, 1996, the exercise
prices ranged from $8.41 to $73.00, with a weighted average remaining
contractual life of 8.5 years.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, "Accounting and Disclosure of Stock-Based Compensation"
and has been determined as if the Company had accounted for its employee stock
option and stock purchase plans ("options") under the fair value method of that
Statement. The fair value of the options was estimated at the grant date using a
Black-Scholes option pricing model. Option valuation models require the input of
highly subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
The following weighted average assumptions were used in the valuation
model: risk-free interest rates of 6.1 percent and 6.0 percent in 1996 and 1995;
dividend yield of 3.0 percent in both 1996 and 1995; stock price volatility
factors of .20 and .18 in 1996 and 1995; and, expected life of options of 4
years and 2 years in 1996 and 1995, respectively.
The pro forma disclosures include options granted in 1996 and 1995 and are
not likely to be representative of the pro forma disclosures for future years.
The estimated fair value of the options is amortized to expense over the
options' vesting period.
Year Ended December 31
----------------------
(In Millions, Except Per-Share Data) 1996 1995
- -------------------------------------------------------------------------------
Pro forma net income (primary)............................. $719.7 $553.6
Pro forma net income (fully diluted)....................... 725.9 561.1
Pro forma earning per share:
Primary.................................................. $5.24 $4.13
Fully diluted............................................ 5.15 4.06
- -------------------------------------------------------------------------------
First Bank System, Inc.
57
NOTE M INCOME TAXES
The components of income tax expense were:
(Dollars in Millions) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
FEDERAL:
Current tax........................................................................ $403.4 $234.7 $156.3
Deferred tax provision............................................................. 13.3 68.3 8.3
-----------------------
Federal income tax............................................................... 416.7 303.0 164.6
-----------------------
STATE:
Current tax........................................................................ 41.4 26.3 36.6
Deferred tax (credit) provision.................................................... (3.3) 5.0 (9.4)
-----------------------
State income tax................................................................. 38.1 31.3 27.2
-----------------------
Total income tax provision....................................................... $454.8 $334.3 $191.8
- ----------------------------------------------------------------------------------------------------------------
The reconciliation between income tax expense and the amount computed by
applying the statutory federal income tax rate was as follows:
(Dollars in Millions) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Tax at statutory rate (35%)........................................................ $418.1 $315.8 $176.9
State income tax, at statutory rates, net of federal tax benefit................... 24.8 20.4 17.7
Tax effect of:
Tax-exempt interest:
Loans........................................................................... (4.5) (5.1) (6.0)
Securities...................................................................... (8.9) (3.9) (4.1)
Amortization of goodwill......................................................... 29.7 12.4 10.3
Other items...................................................................... (4.4) (5.3) (3.0)
-----------------------
Applicable income taxes............................................................ $454.8 $334.3 $191.8
- ----------------------------------------------------------------------------------------------------------------
During 1996, the Company received a tax refund of $65 million, including
interest, from the State of Minnesota relating to the exemption of interest
income received on investments in U.S. government securities for the period 1979
to 1983.
At December 31, 1996, for income tax purposes, the Company had federal net
operating loss carryforwards of $29.5 million available, which expire in year
2009. In addition, the Company had state net operating loss carryforwards of
$43.7 million available, primarily in one taxing jurisdiction. These
carryforwards expire in years 2006 through 2008.
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
assets and liabilities as of December 31 were as follows:
(Dollars in Millions) 1996 1995
- -----------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Loan loss reserves.......................................................... $ 186.0 $ 162.2
Real estate and other asset basis differences............................... 78.3 48.1
Postretirement liability.................................................... 27.7 25.4
Deferred loan fees.......................................................... 21.9 9.1
Alternative minimum tax credit carryforward................................. 11.4 10.5
Federal operating loss carryforward......................................... 10.3 31.0
Contingent liabilities and other miscellaneous accruals..................... 69.3 85.2
-----------------------
Gross deferred tax assets................................................ 404.9 371.5
DEFERRED TAX LIABILITIES:
Leasing activities.......................................................... (77.4) (63.1)
Other investment basis differences.......................................... (17.8) (22.3)
Accelerated depreciation.................................................... (11.8) 5.0
Accrued severance, pension and retirement benefits.......................... (9.7) 8.8
Adjustment of available-for-sale securities to market value................. (1.5) (13.8)
Other deferred liabilities and reserves..................................... (68.3) (64.3)
-----------------------
Gross deferred tax liabilities........................................... (186.5) (149.7)
Deferred tax assets valuation reserve....................................... (2.2) (5.5)
-----------------------
NET DEFERRED TAX ASSETS..................................................... $ 216.2 $ 216.3
- -----------------------------------------------------------------------------------------------------
First Bank System, Inc.
58
Realization of the deferred tax asset over time is dependent upon the
Company generating sufficient taxable earnings in future periods. In determining
that realization of the deferred tax 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. The Company's valuation
allowance decreased $3.3 million from December 31, 1995, to December 31, 1996,
due to utilization of net operating losses.
NOTE N FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CREDIT
CONCENTRATIONS
In the normal course of business, the Company uses various off-balance sheet
financial instruments to meet the financing needs of its customers and to manage
its interest rate risk. These instruments carry varying degrees of credit,
interest rate or liquidity risk. The contract or notional amounts of these
financial instruments at December 31, 1996, and 1995, were as follows:
(Dollars in Millions) 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Commitments to extend credit:
Commercial............................................................................... $ 8,944 $7,240
Corporate and purchasing cards........................................................... 13,820 5,220
Consumer credit card..................................................................... 10,245 9,247
Other consumer........................................................................... 3,066 3,264
Letters of credit:
Standby.................................................................................. 1,447 1,412
Commercial............................................................................... 182 161
Interest rate swap contracts:
Hedges................................................................................... 2,656 2,839
Intermediated............................................................................ 174 169
Options contracts:
Hedge interest rate floors purchased..................................................... 1,250 1,250
Hedge interest rate caps purchased....................................................... 100 200
Intermediated interest rate and foreign exchange caps and floors purchased............... 122 126
Intermediated interest rate and foreign exchange caps and floors written................. 122 126
Liquidity support guarantees............................................................... 81 142
Forward contracts.......................................................................... 22 294
Commitments to sell loans.................................................................. 3 223
Mortgages sold with recourse............................................................... 114 242
Foreign currency commitments:
Commitments to purchase.................................................................. 870 792
Commitments to sell...................................................................... 867 785
- --------------------------------------------------------------------------------------------------------------------
First Bank System, Inc.
59
COMMITMENTS TO EXTEND CREDIT Commitments to extend credit are legally binding
and generally have fixed expiration dates or other termination clauses. The
contractual amount represents the Company's exposure to credit loss, in the
event of default by the borrower. The Company manages this credit risk by using
the same credit policies it applies to loans. Collateral is obtained to secure
commitments based on management's credit assessment of the borrower. The
collateral may include marketable securities, receivables, inventory, equipment,
and real estate. Since the Company expects many of the commitments to expire
without being drawn, total commitment amounts do not necessarily represent the
Company's future liquidity requirements. In addition, the commitments include
consumer credit lines that are cancelable upon notification to the consumer.
LETTERS OF CREDIT Standby letters of credit are conditional commitments the
Company issues to guarantee 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 or collection in connection with trade transactions.
In the event of a customer's nonperformance, the Company's credit loss exposure
is the same as in any extension of credit, up to the letter's contractual
amount. Management assesses the borrower's credit to determine the necessary
collateral, which may include marketable securities, real estate, accounts
receivable, and inventory. Since the conditions requiring the Company to fund
letters of credit may not occur, the Company expects its liquidity requirements
to be less than the total outstanding commitments.
INTEREST RATE OPTIONS AND SWAPS Interest rate swaps are contracts to exchange
fixed and floating rate interest payment obligations based on a notional
principal amount. The Company enters into swaps to hedge its balance sheet
against fluctuations in interest rates and as an intermediary for customers. At
December 31, 1996, and 1995, interest rate swaps totaling $2.7 billion and $2.8
billion, respectively, hedged commercial loans, medium-term notes, subordinated
debt, notes, wholesale certificates of deposit, deposit accounts, and savings
certificates.
The Company receives fixed rate interest and pays floating rate interest on
all hedges as of December 31, 1996. Activity with respect to interest rate swap
hedges was as follows:
(In Millions) 1996 1995 1994
- --------------------------------------------------------------------------------------
Notional amount outstanding at beginning of year...... $2,838.8 $2,673.8 $3,010.8
Additions............................................. 550.0 625.0 1,275.0
Maturities............................................ (433.0) (460.0) (824.1)
Terminations.......................................... (300.0) -- (787.9)
------------------------------
Notional amount outstanding at end of year.......... $2,655.8 $2,838.8 $2,673.8
- --------------------------------------------------------------------------------------
Weighted average interest rates paid.................. 5.59% 5.86% 6.09%
Weighted average interest rates received.............. 6.51 6.83 6.91
- --------------------------------------------------------------------------------------
For the hedging portfolio's notional balances and yields by maturity date
as of year-end 1996, see Table 17 on page 37. For a description of the Company's
objectives for using derivative financial instruments, refer to Interest Rate
Risk Management on pages 35 through 37. Such information is incorporated by
reference into these Notes to Consolidated Financial Statements.
Interest rate caps are also used to minimize the impact of fluctuating
interest rates on earnings. The total notional amount of cap agreements
purchased at December 31, 1996, was $100 million with a 3-month LIBOR strike
rate of 6.00 percent. The total notional amount of cap agreements purchased at
December 31, 1995, was $200 million with a 3-month LIBOR strike rate of 6.00
percent. The premium on caps is amortized over the life of the contract. The
impact of the caps on net interest income was not material for the years ended
December 31, 1996, 1995 and 1994.
At December 31, 1996, and 1995, LIBOR based interest rate floors totaling
$950 million with an average remaining maturity of 1.0 years and 2.0 years,
respectively, hedged floating rate commercial loans. The strike rate on these
LIBOR based floors ranged from 3.25 percent to 4.00 percent at December 31, 1996
and December 31, 1995. At December 31, 1996, and 1995, Constant Maturity
Treasury (CMT) interest rate floors totaling $300 million with an average
remaining maturity of 18 months and 9 months, respectively,
First Bank System, Inc.
60
hedged the repayment risk of fixed rate residential mortgage loans. The strike
rate on these CMT floors ranged from 5.60 percent to 5.70 percent at December
31, 1996, and from 6.25 percent to 6.36 percent at December 31, 1995.
In addition to utilizing swaps and options as part of its asset/liability
management strategy, the Company acts as an intermediary for swap and option
agreements on behalf of its customers. To reduce its market risk exposure, the
Company enters into generally matching or offsetting positions. The total
notional amount of customer swap agreements, including the offsetting positions,
was $174 million and $169 million at December 31, 1996, and 1995, respectively.
The total notional amount of customer option agreements, including the
offsetting positions, was $244 million and $252 million at December 31, 1996,
and 1995, 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
customer intermediated swaps and options, the Company records these gains and
losses as they occur in trading income. For swaps and options used as hedges,
the Company recognizes gains or losses by adjusting interest income or expense
over the terms of the hedge. The gain or loss on a terminated hedge is amortized
over the life of the original swap or the life of the hedged item, whichever is
shorter. The amortization of deferred gains and losses increased net interest
income by $2.2 million and $6.3 million during 1996, and 1995, respectively.
Unamortized deferred gains were $6.0 million at December 31, 1996. The Company
will amortize these net gains through the year 2000.
The credit risk related to interest rate swap and option agreements is that
counterparties may be unable to meet the contractual terms. The Company
estimates this risk by calculating the present value of the cost to replace all
outstanding contracts in a gain position at current market rates, reported on a
net basis by counterparty. At December 31, 1996, and 1995, the gain position of
these contracts, in the aggregate, was approximately $48 million and $124
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. Commercial lending officers perform credit analyses 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 that permit the Company to settle interest rate contracts with the
same counterparty on a net basis.
LIQUIDITY SUPPORT GUARANTEES Through liquidity support guarantees, the Company
agrees to provide market support for its customers' commercial paper or tax-
exempt bonds. These contracts are secured by notes receivable, bonds or private
insurance, guaranteeing payment of principal and interest on any unreimbursed
funds advanced. Since the conditions that require the Company to fund the
guarantees may not occur, total guarantee amounts do not necessarily represent
the Company's future funding obligation.
FORWARD CONTRACTS AND COMMITMENTS TO SELL MORTGAGE LOANS Forward contracts are
agreements 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, 1996,
and 1995, forward contracts outstanding were $22 million and $294 million,
respectively. At December 31, 1996, net unamortized deferred gains on the
forward agreements were not material. The Company manages its credit risk on
forward contracts, which arises from nonperformance by counterparties, through
credit approval and limit procedures. The Company is committed under agreements
to sell mortgage loans pursuant to master delivery commitments. The remaining
balance on those commitments was $3 million at December 31, 1996, and $223
million at December 31, 1995.
MORTGAGES SOLD WITH RECOURSE The Company is obligated under recourse provisions
related to the sale of certain residential mortgages. The contract amount of
these mortgages, excluding the Government National Mortgage Association ("GNMA")
agreements, was $114 million at December 31, 1996, and $172 million at December
31, 1995. Mortgages sold with recourse under sale/servicing agreements with GNMA
totaled $6 million at December 31, 1996, and $700 million at December 31, 1995.
The Company has secondary recourse obligations under these agreements, but the
liability is not material.
FOREIGN CURRENCY COMMITMENTS The Company uses foreign currency commitments to
help customers reduce the risks associated with changes in foreign currency
exchange rates. Through these contracts, the Company exchanges currencies at
specified rates on specified dates with various counterparties. The Company
minimizes the market and liquidity risks by taking offsetting positions. In
addition, the Company controls the market risks by limiting the net exposure
through policies, procedures, and monitoring. The Company manages its credit
risk, or potential risk of loss from default by a counterparty, through credit
limit approval and monitoring procedures. The aggregate replacement cost of
contracts in a gain position at December 31, 1996, was not significant.
CREDIT CONCENTRATIONS The Company primarily lends to borrowers in the 11 states
where it has banking offices. Approximately 80 percent of the Company's
commercial and financial institutions loans were made to borrowers in this
operating region representing a diverse range of industries. Collateral may
include marketable securities, accounts receivable, inventory, and equipment.
61
First Bank System, Inc.
For detail of the Company's real estate portfolio by property type and
geography as of December 31, 1996, and 1995, see Table 8 on page 28. This
information is incorporated by reference into these Notes to Consolidated
Financial Statements. Such loans are collateralized by the related property.
Approximately 80 percent of the total consumer portfolio consists of loans
to customers in the Company's operating region. Residential mortgages, home
equity, and auto loans are secured, but other consumer loans are generally not
secured. For detail of the Company's consumer loan portfolio referenced here,
see Table 7 on page 27 under the category "Consumer" as of December 31, 1996,
and 1995, which is incorporated by reference into these Notes to Consolidated
Financial Statements.
NOTE O FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Value of Financial Instruments," requires the
disclosure of the fair value, where practically estimable, of all financial
instruments, both on and off balance sheet. Financial instruments are generally
defined as cash, equity instruments or investments, and contractual obligations
to pay or receive cash or another financial instrument. The Statement indicates
that quoted market prices are the preferred means of estimating value. When
market quotes are unavailable, valuation techniques including discounted cash
flow calculations and pricing models or services should be used.
Due to the nature of its business and its customers' needs, the Company
offers a large number of financial instruments, most of which are not actively
traded. Accordingly, the Company uses several valuation techniques and
aggregation methods for valuing various products. The Company also uses various
assumptions, such as the discount rate and cash flow timing and amounts. As a
result, the fair value estimates can neither be substantiated by independent
market comparisons, nor realized by the immediate sale or settlement of the
financial instrument. Also, the estimates reflect a point in time and could
change significantly based on changes in economic factors, such as interest
rates. Furthermore, the required disclosures exclude the estimated values of
certain financial instruments and all nonfinancial instrument cash flows.
Finally, the fair value disclosure is not intended to estimate a market value of
the Company as a whole. A summary of the Company's valuation techniques and
assumptions follows.
CASH AND CASH EQUIVALENTS: The carrying value of cash, federal funds sold, and
securities under resale agreements was assumed to approximate fair value.
SECURITIES: Generally, trading securities and available-for-sale securities 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 and fixed rate loans, the
fair value of which was estimated using discounted cash flow analyses and other
valuation techniques. To calculate discounted cash flows, the loans were
aggregated into pools of similar types and expected repayment terms. The
expected cash flows were reduced for estimated historical prepayment experience.
Projected cash flows on nonaccrual loans were further reduced by the amount of
the estimated losses on the portfolio and discounted over an assumed average
remaining life of one to two years.
COMMERCIAL AND FINANCIAL INSTITUTIONS: The fixed rate loans in the commercial
and financial institutions portfolio (excluding nonaccrual loans) had a weighted
average interest rate of 8.1 percent in 1996 and 8.0 percent in 1995. The
weighted average maturity was 1.6 years in 1996 and 1.8 years in 1995. The
floating rate loans had a weighted average rate of 7.9 percent in 1996 and 8.2
percent in 1995. The high-grade corporate bond yield curve was used to arrive at
the discount rates applied to these loans.
COMMERCIAL REAL ESTATE AND CONSTRUCTION: The fixed rate portion of this
portfolio (excluding nonaccrual loans) had a weighted average interest rate of
8.9 percent in 1996 and 1995 and a weighted average contractual remaining
maturity of 4.2 years in 1996 and 1995. The floating rate loans (excluding
nonaccrual loans) had a weighted average interest rate of 8.4 percent in 1996
and 8.6 percent in 1995. The weighted average contractual remaining maturity was
4.4 years in 1996 and 3.6 years in 1995. The high-grade corporate bond yield
curve was used to arrive at the discount rates applied to these loans.
RESIDENTIAL FIRST MORTGAGES: These loans were segregated into pools of similar
coupons and maturities. The pools were matched to similar mortgage-backed
securities, and market quotes were obtained. The estimated value also reflects
the related fair value of mortgage servicing rights, which was calculated using
a discounted cash flow analysis. The fixed rate portion of this portfolio had a
weighted average interest rate of 7.8 percent in 1996 and 7.7 percent in 1995.
The weighted average contractual remaining maturity was 14.5 years in 1996 and
16.0 years in 1995.
CONSUMER INSTALLMENT: The fair value of the consumer installment portfolio was
based on an approach the Company uses in evaluating potential acquisitions.
Prepayment assumptions ranging from 20 to 25 percent were applied to scheduled
cash flows, based upon the Company's experience. On the fixed rate portion, the
weighted average rate was 9.3 percent in 1996 and 8.9 percent in 1995. The
weighted average contractual remaining maturity was 2.0 years in 1996 and 1.8
years in 1995. The floating rate portion of the consumer installment portfolio
had a weighted average interest rate of 8.2 percent in 1996 and 9.6 percent in
1995.
62 First Bank System, Inc.
REVOLVING HOME EQUITY LINES, SECOND MORTGAGES AND CONSUMER LINES: The fair value
of revolving home equity lines, second mortgages, and consumer lines was based
on the approach the Company uses in evaluating potential acquisitions of similar
portfolios. In 1996, estimated net income adjusted for account attrition was
discounted using an estimated cost of capital of 11.3 percent for secured lines
and loans and 14.1 percent for unsecured. In 1995, the estimated cost of capital
was 12.4 percent for secured and 14.4 percent for unsecured. The home equity
lines had a weighted average interest rate of 9.4 percent in 1996 and 10.0
percent in 1995, with a weighted average life of 4.1 years in 1996 and 5.0 years
in 1995. Fixed rate second mortgages had a weighted average interest rate of 9.8
percent in 1996 and 9.6 percent in 1995. The weighted average contractual
remaining maturity was 3.6 years in 1996 and 3.1 years in 1995. Retail credit
cards had a weighted average interest rate of 11.4 percent in 1996 and 12.6
percent in 1995, with an estimated weighted average life of 4.4 years in 1996
and 6.0 years in 1995. Other revolving lines had a weighted average interest
rate of 10.8 percent in 1996 and 12.6 percent in 1995, with an estimated
weighted average life of 6.6 years in 1996 and 7.8 years in 1995.
CORE DEPOSIT INTANGIBLE: Core deposits provide a stable, low-cost source of
funds that can be invested to earn a return that exceeds their cost. The fair
value of the Company's core deposit intangible was calculated using a discounted
cash flow model that estimates the present value of the difference between the
ongoing cost of the core deposits and 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.
DEPOSIT LIABILITIES: The fair value of demand deposits, savings accounts, and
certain money market deposits is equal to the amount payable on demand at year-
end. Fair values for fixed rate certificates of deposits were estimated using a
discounted cash flow analysis based on the discount rates of the high-grade
corporate bond yield curve. The weighted average interest rate for the
certificates of deposits was 5.7 percent in 1996 and 1995 and the weighted
average maturity was 1.1 years in 1996 and 1.2 years in 1995.
SHORT-TERM BORROWINGS: Federal funds purchased, borrowings under repurchase
agreements, and other short-term borrowings are at variable rates or have short-
term maturities. Their carrying value is assumed to approximate their fair
value.
LONG-TERM DEBT: Medium-term notes, Federal Home Loan Bank Advances, capital
lease obligations, and mortgage note obligations totaled $2,273 million in 1996
and $2,067 million in 1995. Their estimated fair value was determined using a
discounted cash flow analysis based on current market rates of similar maturity
debt securities to discount cash flows. The weighted average interest rate was
6.0 percent in 1996 and 1995, with a weighted average contractual remaining
maturity of 3.2 years in 1996 and 2.1 years in 1995. Other long-term debt
instruments were valued using available market quotes.
LOAN COMMITMENTS, LETTERS OF CREDIT AND GUARANTEES: The Company's commitments
have variable rates and do not expose the Company to interest rate risk. No
premium or discount was ascribed to the loan commitments because virtually all
funding would be at current market rates.
INTEREST RATE SWAPS, OPTIONS, FLOORS, AND CAPS: The interest rate options and
swap cash flows were estimated using a third party pricing model and discounted
based on appropriate LIBOR, Eurodollar future, and Treasury Note yield curves.
First Bank System, Inc. 63
The estimated fair values of the Company's financial instruments are shown in
the table below.
1996 1995
-----------------------------------------------
Carrying Fair Carrying Fair
(Dollars in Millions) Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and due from banks............................................... $ 2,413 $ 2,413 $ 1,837 $ 1,837
Federal funds sold and resale agreements.............................. 827 827 265 265
Trading account securities............................................ 146 146 86 86
Available-for-sale securities......................................... 3,555 3,555 3,256 3,256
Loans:
Commercial:
Commercial.......................................................... 9,456 9,731 8,271 8,523
Financial institutions.............................................. 905 833 1,060 1,015
Commercial real estate and construction............................. 3,744 4,023 3,187 3,531
Consumer:
Residential mortgage................................................ 3,019 3,009 4,655 4,742
Residential mortgage held for sale.................................. 42 42 257 257
Home equity and second mortgage..................................... 3,263 3,367 2,805 2,909
Credit card and revolving lines..................................... 3,595 3,759 3,343 3,586
Other consumer installment.......................................... 3,104 3,104 2,822 2,828
Allowance for credit losses.......................................... (517) -- (474) --
-----------------------------------------------
Total loans......................................................... 26,611 27,868 25,926 27,391
-----------------------------------------------
Total financial assets.............................................. 33,552 34,809 31,370 32,835
NONFINANCIAL ASSETS:
Core deposit intangible............................................... 108 383 77 269
Mortgage servicing portfolio.......................................... 2 3 40 148
-----------------------------------------------
Total............................................................... 33,662 $35,195 31,487 $33,252
----------- ----------
Other assets........................................................... 2,827 2,387
--------- ---------
Total Assets........................................................ $ 36,489 $33,874
--------- ---------
FINANCIAL LIABILITIES:
Deposits:
Noninterest-bearing.................................................. $ 7,871 $ 7,871 $ 6,357 $ 6,357
Interest-bearing checking and other savings.......................... 8,962 8,962 8,399 8,399
Savings certificates and certificates > $100,000..................... 7,546 7,507 7,758 7,799
-----------------------------------------------
Total deposits...................................................... 24,379 24,340 22,514 22,555
Federal funds purchased............................................... 1,204 1,204 2,000 2,000
Securities sold under agreements to repurchase........................ 819 819 269 274
Other short-term funds borrowed....................................... 2,074 2,074 2,116 2,116
Long-term debt........................................................ 3,553 3,596 3,201 3,267
Company-obligated mandatorily redeemable
capital securities of FBS Capital I.................................. 300 314 -- --
-----------------------------------------------
Total financial liabilities......................................... 32,329 $32,347 30,100 $30,212
----------- ----------
NONFINANCIAL LIABILITIES............................................... 1,107 1,049
SHAREHOLDERS' EQUITY................................................... 3,053 2,725
--------- ---------
Total Liabilities and Shareholders' Equity.......................... $ 36,489 $33,874
--------- ---------
Off-Balance Sheet Financial Instruments:
Unrecognized gain on interest rate swaps and options.................. N/A $ 22 N/A $ 101
Unrecognized loss on interest rate swaps and options.................. N/A -- N/A --
Loan commitments...................................................... N/A -- N/A --
Letters of credit..................................................... N/A -- N/A --
- ---------------------------------------------------------------------------------------------------------------------------
64 First Bank System, Inc.
NOTE P COMMITMENTS AND CONTINGENT LIABILITIES
Rental expense for operating leases amounted to $68.1 million in 1996, $61.2
million in 1995, and $77.5 million in 1994. Future minimum payments, net of
sublease rentals, under capitalized leases and noncancelable operating leases
with initial or remaining terms of one year or more, consisted of the following
at December 31, 1996:
Capitalized Operating
(In Millions) Leases Leases
- ------------------------------------------------------------------------
1997............................................. $ 13.2 $ 62.5
1998............................................. 6.2 57.1
1999............................................. 6.2 52.4
2000............................................. 6.2 46.5
2001............................................. 6.2 47.0
Thereafter....................................... 66.0 289.9
---------------------
Total minimum lease payments..................... 104.0 $555.4
-------
Less amount representing interest................ 51.2
--------
Present value of net minimum lease payments...... $ 52.8
- ------------------------------------------------------------------------
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 Pilsbury Center. The Bank and the Parent Company have long-term
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 the remaining space has been sublet through the year 2001. The unamortized
portion of the capitalized lease was $22.4 million at December 31, 1996 and
$22.7 million at December 31, 1995. Minimum annual payments required under the
leases are approximately $2.7 million.
Various legal proceedings are currently pending against the Company. Due to
their complex nature, it may be years before some matters are resolved. In the
opinion of management, the aggregate liability, if any, will not have a material
adverse affect on the Company's financial position, liquidity or results of
operations.
NOTE Q SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET - Time certificates of deposit in denominations of
$100,000 or more totaled $866 million and $900 million at December 31, 1996, and
1995, respectively.
CONSOLIDATED STATEMENT OF CASH FLOWS - Listed below are supplemental disclosures
to the Consolidated Statement of Cash Flows.
Year Ended December 31 (In Millions) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Income taxes paid............................................................. $ 316.1 $ 253.8 $ 155.6
Interest paid................................................................. 1,098.6 1,072.8 833.1
Net noncash transfers to foreclosed property.................................. 23.2 19.5 41.4
Change in unrealized gain (loss) on available-for-sale securities,
net of taxes of $12.2 in 1996, $79.2 in 1995 and $89.6 in 1994............... (20.0) 128.9 (144.4)
-------------------------------------
Cash acquisitions of businesses:
Fair value of noncash assets acquired........................................ $ 38.3 $ 120.2 $ 805.9
Liabilities assumed.......................................................... -- (2.7) (698.7)
-------------------------------------
Net......................................................................... $ 38.3 $ 117.5 $ 107.2
-------------------------------------
Stock acquisitions of businesses:
Fair value of noncash assets acquired........................................ $ 3,627.9 $ 746.9 $ 1,805.8
Net cash acquired............................................................ 116.5 55.4 74.5
Liabilities assumed.......................................................... (3,032.2) (696.7) (1,648.0)
-------------------------------------
Net value of common stock issued............................................ $ 712.2 $ 105.6 $ 232.3
- ---------------------------------------------------------------------------------------------------------------------
REGULATORY CAPITAL - The measures used to assess capital include the capital
ratios established by bank regulatory agencies, including the specific ratios
for the "well capitalized" designation. For a description of the regulatory
capital requirements and the actual ratios as of December 31, 1996 for the
Company and its bank and thrift subsidiaries, see Tables 18 and 19 from which
such information is incorporated by reference into these Notes to Consolidated
Financial Statements.
First Bank System, Inc. 65
NOTE R FIRST BANK SYSTEM, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEET
December 31 (In Millions) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Deposits with subsidiary banks, principally interest-bearing.............................. $ 343 $ 244
Available-for-sale securities............................................................. 60 209
Investments in:
Bank and thrift affiliates............................................................. 3,370 2,940
Nonbank affiliates..................................................................... 402 115
Advances to:
Bank and thrift affiliates............................................................. 528 372
Nonbank affiliates..................................................................... 102 61
Other assets.............................................................................. 277 382
-------------------------
Total assets......................................................................... $ 5,082 $ 4,323
-------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term funds borrowed................................................................. $ -- $ 21
Advances from subsidiaries................................................................ 334 40
Long-term debt............................................................................ 1,170 1,326
Company-obligated mandatorily redeemable capital securities of FBS Capital I.............. 300 --
Other liabilities......................................................................... 225 211
Shareholders' equity...................................................................... 3,053 2,725
------------------------
Total liabilities and shareholders' equity........................................... $ 5,082 $ 4,323
- --------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENT OF INCOME
Year Ended December 31 (In Millions) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
INCOME
Dividends from subsidiaries (including $526.1, $613.7
and $447.9 from bank and thrift subsidiaries)........................................... $ 572.9 $ 633.2 $ 480.9
Interest from subsidiaries................................................................ 51.9 40.3 19.0
Service and management fees from subsidiaries............................................. 92.0 88.2 103.4
Other income.............................................................................. 256.6 25.4 23.7
-----------------------------------
Total income.......................................................................... 973.4 787.1 627.0
EXPENSES
Interest on short-term funds borrowed..................................................... 3.7 3.0 2.8
Interest on long-term debt................................................................ 81.7 80.5 55.0
Interest on Company-obligated mandatorily redeemable capital securities of FBS Capital I.. 2.3 -- --
Operating expenses paid to subsidiaries................................................... 7.9 8.4 8.3
Other expenses............................................................................ 110.3 103.3 193.3
-----------------------------------
Total expenses........................................................................ 205.9 195.2 259.4
-----------------------------------
Income before income taxes and equity in undistributed income of subsidiaries............. 767.5 591.9 367.6
Income tax expense (credit)............................................................... 71.4 (20.2) (41.4)
-----------------------------------
Income of parent company.................................................................. 696.1 612.1 409.0
Equity (deficiency) in undistributed income of subsidiaries:
Bank and thrift affiliates.............................................................. 60.5 (44.4) (81.5)
Nonbank affiliates...................................................................... (16.8) .4 (22.5)
-----------------------------------
43.7 (44.0) (104.0)
-----------------------------------
Net income............................................................................ $ 739.8 $ 568.1 $ 305.0
- -------------------------------------------------------------------------------------------------------------------------------
First Bank System, Inc.
66
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31 (In Millions) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income................................................................................. $ 739.8 $ 568.1 $ 305.0
Adjustments to reconcile net income to net cash
provided by operating activities:
(Equity) deficiency in undistributed income of subsidiaries.............................. (43.7) 44.0 104.0
(Gains) losses on available-for-sale securities.......................................... (31.3) .4 .5
Decrease (increase) in accrued receivables, net.......................................... 119.2 (36.0) 46.1
Increase (decrease) in accrued liabilities, net.......................................... 19.4 (114.1) (21.4)
Amortization of goodwill and other intangibles........................................... 2.7 5.6 5.5
Deferred tax (credit) provision.......................................................... (9.3) 37.8 27.5
Provision for merger and integration..................................................... -- -- 72.8
Other - net.............................................................................. 34.0 (.2) (38.6)
-----------------------------------
Net cash provided by operating activities.............................................. 830.8 505.6 501.4
INVESTING ACTIVITIES
Securities transactions:
Sales and maturities..................................................................... 158.5 88.5 20.4
Purchases................................................................................ (2.7) (126.9) (47.1)
Investments in subsidiaries................................................................ (315.8) (121.9) (83.7)
Equity distributions from subsidiaries..................................................... 323.0 150.0 235.0
Net (increase) decrease in short-term advances to affiliates............................... (54.7) 52.3 (50.0)
Long-term advances made to affiliates...................................................... (150.0) (259.7) --
Principal collected on long-term advances made to affiliates............................... 10.0 25.2 .3
Other - net................................................................................ (11.1) 5.6 (31.6)
-----------------------------------
Net cash (used) provided by investing activities....................................... (42.8) (186.9) 43.3
FINANCING ACTIVITIES
Net decrease in short-term advances from subsidiaries...................................... (17.1) (27.7) (27.2)
Net (decrease) increase in short-term funds borrowed....................................... (12.1) 14.8 2.1
Proceeds from long-term advances from subsidiaries......................................... 309.3 -- --
Proceeds from long-term debt............................................................... 84.0 654.1 405.1
Principal payments on long-term debt....................................................... (248.9) (424.7) (145.1)
Issuance of Company-obligated mandatorily redeemable capital securities of FBS Capital I... 300.0 -- --
Redemption of preferred stock.............................................................. -- (13.2) (167.0)
Proceeds from dividend reinvestment, stock option, and
stock purchase plans..................................................................... 69.1 67.7 40.3
Purchase of treasury stock and stock warrants.............................................. (939.5) (545.2) (245.8)
Stock warrants exercised................................................................... -- .3 7.9
Cash dividends............................................................................. (233.9) (199.2) (168.6)
-----------------------------------
Net cash used by financing activities.................................................. (689.1) (473.1) (298.3)
-----------------------------------
Change in cash and cash equivalents.................................................... 98.9 (154.4) 246.4
Cash and cash equivalents at beginning of year............................................. 243.8 398.2 151.8
-----------------------------------
Cash and cash equivalents at end of year............................................... $ 342.7 $ 243.8 $ 398.2
- -------------------------------------------------------------------------------------------------------------------------------
Transfer of funds -- dividends, loans or advances -- from bank and thrift
subsidiaries to the Company is restricted. Federal law prohibits loans unless
they are secured and generally limits any loan to the Company or individual
affiliate to 10 percent of the bank's or thrift's equity. In aggregate, loans to
the Company and all affiliates cannot exceed 20 percent of the bank's or
thrift's equity.
Dividend payments to the Company by its subsidiary banks and thrift are
subject to regulatory review and statutory limitations and, in some instances,
regulatory approval. The approval of the Comptroller of the Currency is required
if total dividends 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 or if the bank's retained earnings are less
than zero. Furthermore, dividends are restricted by the Comptroller of the
Currency's minimum capital constraints for all national banks. Within these
guidelines, all bank subsidiaries have the ability to pay dividends without
prior regulatory approval except one bank, which bank represented three percent
of total assets at December 31, 1996.
First Bank, fsb (the "Thrift") is required to give the Office of Thrift
Supervision ("OTS") 30-day notice prior to declaration of a cash dividend to the
parent company. The Thrift's dividends to the parent company are generally
limited to earnings in the calendar year plus 50 percent of the surplus capital
(the percentage by which the Thrift's regulatory capital ratios exceed the
minimum capital ratios required by the OTS) at the beginning of the year. In
addition, dividends are restricted by the OTS's minimum capital constraints for
all thrifts.
First Bank System, Inc. 67
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
management'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 LLP, 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
LLP has full access to the Audit Committee and the Board of Directors.
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-Finance
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, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility 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
mis-statement. 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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Ernest & Young LLP
Minneapolis, Minnesota
January 9, 1997
68 First Bank System, Inc.
CONSOLIDATED BALANCE SHEET -- FIVE-YEAR SUMMARY
% Change
December 31 (Dollars In Millions) 1996 1995 1994 1993 1992 1995-1996
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks.......................... $ 2,413 $ 1,837 $ 1,707 $ 1,767 $ 2,011 31.4%
Federal funds sold and resale agreements......... 827 265 471 1,338 1,710 *
Interest-bearing deposits with banks............. -- -- 28 82 484 *
Trading account securities....................... 146 86 77 55 94 69.8
Securities held for sale......................... -- -- -- -- 295 *
Securities:
U.S. Treasury................................. 545 925 1,113 1,554 1,827 (41.1)
Mortgage-backed............................... 2,464 1,693 3,297 2,861 3,196 45.5
State and political........................... 465 179 181 196 188 *
U.S. agencies and other....................... 81 459 594 419 586 (82.4)
--------------------------------------------------------
Total securities............................ 3,555 3,256 5,185 5,030 5,797 9.2
Loans............................................ 27,128 26,400 24,556 23,497 20,692 2.8
Less allowance for credit losses.............. 517 474 475 466 484 9.1
--------------------------------------------------------
Net loans................................... 26,611 25,926 24,081 23,031 20,208 2.6
Other assets..................................... 2,937 2,504 2,579 2,067 2,159 17.3
--------------------------------------------------------
Total assets............................... $36,489 $33,874 $34,128 $33,370 $32,758 7.7%
--------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing........................... $ 7,871 $ 6,357 $ 5,933 $ 7,743 $ 6,243 23.8%
Interest-bearing.............................. 16,508 16,157 18,323 18,643 20,152 2.2
--------------------------------------------------------
Total deposits.............................. 24,379 22,514 24,256 26,386 26,395 8.3
Short-term borrowings............................ 4,097 4,385 3,226 1,334 1,540 (6.6)
Long-term debt................................... 3,553 3,201 2,981 2,070 1,151 11.0
Company-obligated mandatorily redeemable capital
securities of FBS Capital I................... 300 -- -- -- -- *
Other liabilities................................ 1,107 1,049 1,053 836 927 5.5
--------------------------------------------------------
Total liabilities........................... 33,436 31,149 31,516 30,626 30,013 7.3
Shareholders' equity............................. 3,053 2,725 2,612 2,744 2,745 12.0
--------------------------------------------------------
Total liabilities and shareholders' equity.. $36,489 $33,874 $34,128 $33,370 $32,758 7.7%
- -------------------------------------------------------------------------------------------------------------------------
*Not meaningful
First Bank System, Inc.
69
CONSOLIDATED STATEMENT OF INCOME -- FIVE-YEAR SUMMARY
% Change
Year Ended December 31 (In Millions) 1996 1995 1994 1993 1992 1995-1996
- --------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans....................................................... $2,339.3 $2,273.4 $1,914.7 $1,730.7 $1,687.2 2.9%
Securities:
Taxable................................................... 241.5 226.0 327.9 352.1 336.5 6.9
Exempt from federal income taxes.......................... 25.5 11.2 12.0 14.6 12.0 *
Other interest income....................................... 47.6 34.6 33.5 37.1 70.4 37.6
-------------------------------------------------
Total interest income..................................... 2,653.9 2,545.2 2,288.1 2,134.5 2,106.1 4.3
INTEREST EXPENSE
Deposits.................................................... 673.1 706.7 597.3 648.3 797.7 (4.8)
Federal funds purchased and repurchase agreements........... 122.4 118.1 103.1 31.8 37.1 3.6
Other short-term funds borrowed............................. 120.4 90.2 20.4 20.1 17.1 33.5
Long-term debt.............................................. 202.7 190.0 147.9 96.1 101.2 6.7
Company-obligated mandatorily redeemable
capital securities of FBS Capital I....................... 2.3 -- -- -- -- *
-------------------------------------------------
Total interest expense.................................... 1,120.9 1,105.0 868.7 796.3 953.1 1.4
-------------------------------------------------
Net interest income......................................... 1,533.0 1,440.2 1,419.4 1,338.2 1,153.0 6.4
Provision for credit losses (1994 and 1992 include $16.5
and $13.6, respectively, in merger-related provisions).... 136.0 115.0 123.6 133.1 191.7 18.3
-------------------------------------------------
Net interest income after provision for credit losses....... 1,397.0 1,325.2 1,295.8 1,205.1 961.3 5.4
NONINTEREST INCOME
Credit card fees............................................ 292.6 232.7 179.0 137.1 116.9 25.7
Trust fees.................................................. 230.7 175.3 159.2 146.1 127.8 31.6
Service charges on deposit accounts......................... 141.5 123.7 127.3 126.0 114.8 14.4
Investment products fees and commissions.................... 33.4 27.6 29.6 24.3 21.8 21.0
Securities gains (losses)................................... 15.0 -- (115.0) .3 46.3 *
Termination fee............................................. 190.0 -- -- -- -- *
State income tax refund..................................... 65.0 -- -- -- -- *
Gain on sale of mortgage banking operations................. 45.8 -- -- -- -- *
Gain on sale of branches.................................... -- 31.0 -- -- -- *
Other....................................................... 171.7 192.8 178.8 185.1 186.1 (10.9)
-------------------------------------------------
Total noninterest income.................................. 1,185.7 783.1 558.9 618.9 613.7 51.4
NONINTEREST EXPENSE
Salaries.................................................... 465.6 441.0 450.7 439.8 426.3 5.6
Employee benefits........................................... 105.0 96.4 105.7 99.1 94.9 8.9
Goodwill and other intangible assets........................ 106.5 57.1 50.4 41.3 34.0 86.5
Net occupancy............................................... 98.5 98.6 103.8 109.7 97.7 (.1)
Furniture and equipment..................................... 89.0 94.2 88.3 80.7 72.7 (5.5)
Other personnel costs....................................... 55.8 40.9 35.7 31.0 23.3 36.4
Professional services....................................... 39.9 36.9 38.5 41.5 43.8 8.1
Advertising and marketing................................... 35.4 32.0 35.5 25.6 26.7 10.6
FDIC insurance.............................................. 11.4 35.8 58.4 57.5 51.5 (68.2)
SAIF special assessment..................................... 51.0 -- -- -- -- *
Merger, integration, and resizing........................... 69.9 -- 66.2 72.2 84.0 *
Merger-related severance.................................... -- -- 56.5 -- -- *
Other (1992 includes $26.4 in merger-related other
real estate expense)...................................... 260.1 273.0 259.7 266.3 291.4 (4.7)
-------------------------------------------------
Total noninterest expense................................. 1,388.1 1,205.9 1,349.4 1,264.7 1,246.3 15.1
-------------------------------------------------
Income from continuing operations before income taxes
and cumulative effect of changes in accounting principles.. 1,194.6 902.4 505.3 559.3 328.7 32.4
Applicable income taxes..................................... 454.8 334.3 191.8 198.6 115.7 36.0
-------------------------------------------------
Income from continuing operations before cumulative
effect of changes in accounting principles................ 739.8 568.1 313.5 360.7 213.0 30.2
Income (loss) from discontinued operations.................. -- -- (8.5) 2.5 2.7 *
-------------------------------------------------
Income before cumulative effect of changes in
accounting principles..................................... 739.8 568.1 305.0 363.2 215.7 30.2
Cumulative effect of changes in accounting principles....... -- -- -- -- 233.2 *
-------------------------------------------------
Net income.................................................. $ 739.8 $ 568.1 $ 305.0 $ 363.2 $ 448.9 30.2%
-------------------------------------------------
Net income applicable to common equity...................... $ 733.6 $ 560.6 $ 292.4 $ 334.0 $ 417.3 30.9%
- --------------------------------------------------------------------------------------------------------------------------
*Not meaningful
First Bank System, Inc.
70
QUARTERLY CONSOLIDATED FINANCIAL DATA
1996 1995
-----------------------------------------------------------------------
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.................................................. $ 594.5 $ 588.1 $ 582.0 $ 574.7 $ 580.4 $ 573.8 $ 572.0 $ 547.2
Securities:
Taxable.............................................. 54.8 59.3 63.6 63.8 50.8 52.6 56.1 66.5
Exempt from federal income taxes..................... 6.4 6.8 7.4 4.9 2.8 2.8 2.8 2.8
Other interest income.................................. 12.3 12.4 11.7 11.2 8.2 8.3 9.0 9.1
----------------------------------------------------------------------
Total interest income................................ 668.0 666.6 664.7 654.6 642.2 637.5 639.9 625.6
INTEREST EXPENSE
Deposits............................................... 166.0 169.2 170.9 167.0 168.5 173.0 186.8 178.4
Federal funds purchased and repurchase agreements...... 31.8 31.6 27.6 31.4 30.5 24.8 31.9 30.9
Other short-term funds borrowed........................ 30.6 29.2 28.5 32.1 33.4 34.6 15.7 6.5
Long-term debt......................................... 51.1 50.7 51.4 49.5 49.5 48.0 46.0 46.5
Company-obligated mandatority redeemable capital
securities of FBS Capital I.......................... 2.3 -- -- -- -- -- -- --
----------------------------------------------------------------------
Total interest expense............................... 281.8 280.7 278.4 280.0 281.9 280.4 280.4 262.3
----------------------------------------------------------------------
Net interest income.................................... 386.2 385.9 386.3 374.6 360.3 357.1 359.5 363.3
Provision for credit losses............................ 35.0 35.0 35.0 31.0 31.0 31.0 27.0 26.0
----------------------------------------------------------------------
Net interest income after provision for credit losses.. 351.2 350.9 351.3 343.6 329.3 326.1 332.5 337.3
NONINTEREST INCOME
Credit card fees....................................... 76.8 79.5 73.5 62.8 61.7 62.7 56.7 51.6
Trust fees............................................. 58.9 57.1 58.5 56.2 47.8 42.8 43.0 41.7
Service charges on deposit accounts.................... 36.0 36.9 34.7 33.9 30.4 30.9 30.3 32.1
Investment products fees and commissions............... 8.8 7.4 8.7 8.5 7.6 7.8 6.7 5.5
Securities gains....................................... -- -- .4 14.6 -- -- -- --
Termination fee........................................ -- -- 75.0 115.0 -- -- -- --
State income tax refund................................ -- -- 65.0 -- -- -- -- --
Gain on sale of mortgage banking operations............ -- -- -- 45.8 -- -- -- --
Gain on sale of branches............................... -- -- -- -- -- 31.0 -- --
Other.................................................. 41.5 39.4 44.1 46.7 49.8 41.3 53.0 48.7
----------------------------------------------------------------------
Total noninterest income............................. 222.0 220.3 359.9 383.5 197.3 216.5 189.7 179.6
NONINTEREST EXPENSE
Salaries............................................... 114.3 113.4 114.5 123.4 111.1 108.0 109.8 112.1
Employee benefits...................................... 24.2 25.5 26.4 28.9 20.4 22.1 25.4 28.5
Goodwill and other intangible assets................... 19.6 19.6 19.9 47.4 14.9 13.9 14.2 14.1
Net occupancy.......................................... 24.3 24.2 24.2 25.8 24.3 24.3 24.3 25.7
Furniture and equipment................................ 22.0 21.1 22.1 23.8 22.4 23.5 24.8 23.5
Other personnel costs.................................. 15.4 16.7 14.0 9.7 12.5 11.0 9.8 7.6
Professional services.................................. 12.4 8.3 10.9 8.3 11.3 8.5 10.5 6.6
Advertising and marketing.............................. 9.3 9.1 10.2 6.8 8.1 8.4 9.2 6.3
FDIC insurance......................................... .8 3.5 3.6 3.5 5.6 2.8 13.8 13.6
SAIF special assessment................................ -- 51.0 -- -- -- -- -- --
Merger, integration, and resizing...................... -- -- -- 69.9 -- -- -- --
Other.................................................. 59.7 63.1 60.4 76.9 56.7 88.6 61.4 66.3
----------------------------------------------------------------------
Total noninterest expense............................ 302.0 355.5 306.2 424.4 287.3 311.1 303.2 304.3
----------------------------------------------------------------------
Income before income taxes............................. 271.2 215.7 405.0 302.7 239.3 231.5 219.0 212.6
Applicable income taxes................................ 99.8 78.2 150.9 125.9 88.6 85.8 81.1 78.8
----------------------------------------------------------------------
Net income............................................. $ 171.4 $ 137.5 $ 254.1 $ 176.8 $ 150.7 $ 145.7 $ 137.9 $ 133.8
----------------------------------------------------------------------
Net income applicable to common equity................. $ 170.1 $ 135.9 $ 252.5 $ 175.1 $ 148.8 $ 143.9 $ 136.0 $ 131.9
----------------------------------------------------------------------
Primary net income per common share.................... $ 1.26 $ .99 $ 1.81 $ 1.28 $ 1.14 $ 1.08 $ 1.00 $ .97
Fully diluted net income per common share.............. $ 1.24 $ .98 $ 1.78 $ 1.26 $ 1.12 $ 1.06 $ .99 $ .96
SELECTED AVERAGE BALANCES
Loans.................................................. $27,189 $26,771 $26,932 $26,329 $26,022 $25,536 $25,364 $24,592
Earning assets......................................... 31,840 31,698 32,105 31,371 29,904 29,480 29,559 29,466
Total assets........................................... 35,573 35,367 35,922 35,044 33,160 32,768 32,905 32,702
Deposits............................................... 23,276 23,410 24,041 23,047 21,995 22,107 23,181 23,575
Long-term debt......................................... 3,437 3,397 3,462 3,264 3,146 2,892 2,876 2,935
Common equity.......................................... 3,066 3,110 3,132 3,032 2,640 2,693 2,670 2,531
- -------------------------------------------------------------------------------------------------------------------------------
First Bank System, Inc.
71
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED
Year ended December 31 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Interest
Yields Yields
(Dollars In Millions) Balance Interest and Rates Balance Interest and Rates
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Securities:
U.S. Treasury........................................ $ 688 $ 42.5 6.18% $ 973 $ 60.6 6.23%
Mortgage-backed...................................... 2,636 183.3 6.95 1,989 135.5 6.81
State and political.................................. 462 40.3 8.72 176 18.6 10.57
U.S. agencies and other.............................. 234 14.3 6.11 474 28.3 5.97
---------------------- ----------------------
Total securities................................... 4,020 280.4 6.98 3,612 243.0 6.73
Unrealized loss on available-for-sale securities....... (12) (45)
--------- ---------
Net securities..................................... 4,008 3,567
Trading account securities............................. 94 5.1 5.43 92 5.0 5.43
Federal funds sold and resale agreements............... 503 26.5 5.27 280 16.2 5.79
Loans:
Commercial:
Commercial......................................... 9,264 735.0 7.93 8,013 687.8 8.58
Financial institutions............................. 943 39.0 4.14 774 31.7 4.10
Real estate:
Commercial mortgage............................. 3,001 268.0 8.93 2,474 223.4 9.03
Construction.................................... 515 46.1 8.95 358 33.7 9.41
---------------------- ----------------------
Total commercial................................ 13,723 1,088.1 7.93 11,619 976.6 8.41
Consumer:
Residential mortgage............................... 3,398 265.5 7.81 4,904 371.9 7.58
Residential mortgage held for sale................. 127 9.3 7.32 265 20.3 7.66
Home equity and second mortgage.................... 3,034 291.0 9.59 2,620 253.5 9.68
Credit card........................................ 2,654 300.6 11.33 2,341 290.5 12.41
Other.............................................. 3,870 391.9 10.13 3,634 368.5 10.14
---------------------- ----------------------
Total consumer.................................. 13,083 1,258.3 9.62 13,764 1,304.7 9.48
---------------------- ----------------------
Total loans..................................... 26,806 2,346.4 8.75 25,383 2,281.3 8.99
Allowance for credit losses.......................... 522 473
--------- ---------
Net loans.......................................... 26,284 24,910
Other earning assets................................... 331 16.1 4.86 236 13.5 5.72
---------------------- ----------------------
Total earning assets*........................... 31,754 2,674.5 8.42 29,603 2,559.0 8.64
Cash and due from banks................................ 1,815 1,664
Other assets........................................... 2,442 2,137
--------- ---------
Total assets.................................... $35,477 $32,886
--------- ---------
LIABILITIES and SHAREHOLDERS' EQUITY
Noninterest-bearing deposits........................... $ 6,466 $ 5,584
Interest-bearing deposits:
Interest checking.................................. 2,974 39.8 1.34 2,825 44.5 1.58
Money market accounts.............................. 4,277 153.5 3.59 3,858 145.3 3.77
Other savings accounts............................. 1,635 34.8 2.13 1,712 42.1 2.46
Savings certificates............................... 7,230 392.0 5.42 7,669 404.8 5.28
Certificates over $100,000......................... 861 53.0 6.16 1,060 70.0 6.60
---------------------- ----------------------
Total interest-bearing deposits................. 16,977 673.1 3.96 17,124 706.7 4.13
Short-term borrowings.................................. 4,278 242.8 5.68 3,440 208.3 6.06
Long-term debt......................................... 3,393 202.7 5.97 2,963 190.0 6.41
Company-obligated mandatorily redeemable
capital securities of FBS Capital I.................. 29 2.3 8.09 -- -- --
---------------------- ----------------------
Total interest-bearing liabilities.............. 24,677 1,120.9 4.54 23,527 1,105.0 4.70
Other liabilities...................................... 1,159 1,036
Preferred equity....................................... 90 105
Common equity.......................................... 3,092 2,664
Unrealized loss on available-for-sale
securities, net of tax............................... (7) (30)
--------- ---------
Total liabilities and shareholders' equity...... $35,477 $32,886
--------- ---------
Net interest income.................................... $1,553.6 $1,454.0
--------- ---------
Gross interest margin.................................. 3.88% 3.94%
-------- --------
Gross interest margin without taxable-equivalent
increments........................................... 3.82% 3.90%
-------- --------
PERCENT OF EARNING ASSETS
Interest income........................................ 8.42% 8.64%
Interest expense....................................... 3.53 3.73
-------- --------
Net interest margin................................ 4.89 4.91
-------- --------
Net interest margin without taxable-equivalent
increments.......................................... 4.83% 4.87%
- ------------------------------------------------------------------------------------------------------------------------------------
Interest and rates are presented on a fully taxable-equivalent basis under a tax
rate of 35 percent for 1996, 1995, 1994 and 1993 and 34 percent for 1992.
Interest income and rates on loans include loan fees. Nonaccrual loans are
included in average loan balances.
* Before deducting the allowance for credit losses and excluding the unrealized
loss on available-for-sale securities.
**Not meaningful
First Bank System, Inc.
72
YIELDS AND RATES
1994 1993 1992 1995-1996
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Interest Interest % Change
Yields Yields Yields Average
Balance Interest and Rates Balance Interest and Rates Balance Interest and Rates Balance
- ------------------------------------------------------------------------------------------------------------------------------------
$ 1,574 $ 82.8 5.26% $ 1,797 $ 101.5 5.65% $ 1,557 $ 98.2 6.31% (29.3)%
3,288 208.7 6.35 3,323 207.8 6.25 2,673 207.3 7.76 32.5
188 20.0 10.64 202 22.4 11.09 153 18.1 11.83 **
619 34.4 5.56 630 38.1 6.05 444 26.2 5.90 (50.6)
---------------------- ---------------------- ----------------------
5,669 345.9 6.10 5,952 369.8 6.21 4,827 349.8 7.25 11.3
(69) -- -- 73.3
--------- --------- ---------
5,600 5,952 4,827 12.4
73 3.4 4.66 117 4.7 4.02 137 6.5 4.74 2.2
405 16.5 4.07 755 22.3 2.95 1,318 45.1 3.42 79.6
6,832 506.6 7.42 5,804 403.6 6.95 5,490 407.1 7.42 15.6
1,146 30.1 2.63 1,534 42.5 2.77 1,096 40.8 3.72 21.8
2,365 202.2 8.55 2,213 190.5 8.61 2,164 194.5 8.99 21.3
268 21.4 7.99 213 15.5 7.28 270 20.4 7.56 43.9
---------------------- ---------------------- ----------------------
10,611 760.3 7.17 9,764 652.1 6.68 9,020 662.8 7.35 18.1
5,345 385.6 7.21 4,860 384.6 7.91 3,851 347.7 9.03 (30.7)
387 27.4 7.08 1,040 72.4 6.96 867 70.5 8.13 (52.1)
2,223 193.2 8.69 1,539 127.1 8.26 1,135 100.5 8.85 15.8
2,054 248.9 12.12 1,733 233.1 13.45 1,709 243.0 14.22 13.4
3,243 308.3 9.51 2,872 272.6 9.49 2,526 279.2 11.05 6.5
---------------------- ---------------------- ----------------------
13,252 1,163.4 8.78 12,044 1,089.8 9.05 10,088 1,040.9 10.32 (4.9)
---------------------- ---------------------- ----------------------
23,863 1,923.7 8.06 21,808 1,741.9 7.99 19,108 1,703.7 8.92 5.6
486 489 496 10.4
--------- --------- ---------
23,377 21,319 18,612 5.5
255 13.7 5.37 275 13.5 4.91 509 23.7 4.66 40.3
---------------------- ---------------------- ----------------------
30,265 2,303.2 7.61 28,907 2,152.2 7.45 25,899 2,128.8 8.22 7.3
1,749 1,786 1,558 9.1
2,086 1,987 1,876 14.3
--------- --------- ---------
$33,545 $32,191 $28,837 7.9
--------- --------- ---------
$ 6,310 $ 6,688 $ 5,000 15.8
2,940 44.4 1.51 2,789 45.2 1.62 2,553 59.5 2.33 5.3
4,035 110.2 2.73 4,077 106.8 2.62 3,980 129.4 3.25 10.9
2,245 49.5 2.20 2,157 49.2 2.28 1,666 59.0 3.54 (4.5)
7,750 315.4 4.07 8,297 357.4 4.31 7,836 426.0 5.44 (5.7)
1,381 77.8 5.63 1,629 89.7 5.51 1,918 123.8 6.45 (18.8)
---------------------- ---------------------- ----------------------
18,351 597.3 3.25 18,949 648.3 3.42 17,953 797.7 4.44 (.9)
2,658 123.5 4.65 1,307 51.9 3.97 1,179 54.2 4.60 24.4
2,609 147.9 5.67 1,633 96.1 5.88 1,453 101.2 6.96 14.5
-- -- -- -- -- -- -- -- -- **
---------------------- ---------------------- ----------------------
23,618 868.7 3.68 21,889 796.3 3.64 20,585 953.1 4.63 4.9
871 845 757 11.9
143 360 405 (14.3)
2,646 2,409 2,090 16.1
(43) -- -- 76.7
--------- --------- ---------
$33,545 $32,191 $28,837 7.9
--------- --------- --------- ---------
$1,434.5 $1,355.9 $1,175.7
--------- --------- ---------
3.93% 3.81% 3.59%
------- -------- --------
3.88% 3.75% 3.50%
------- -------- --------
7.61% 7.45% 8.22%
2.87 2.76 3.68
------- -------- --------
4.74 4.69 4.54
------- -------- --------
4.69% 4.63% 4.45%
- -------------------------------------------------------------------------------------------------------------------------
First Bank System, Inc. 73
SUPPLEMENTAL FINANCIAL DATA
EARNINGS PER SHARE SUMMARY
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
Primary income from continuing
operations before cumulative effect
of changes in accounting principles................... $5.34 $4.19 $2.21 $2.46 $1.46
Income (loss) from discontinued operations............... -- -- (.06) .02 .02
Cumulative effect of changes in accounting principles.... -- -- -- -- 1.87
----------------------------------------------------------------------
Primary net income....................................... $5.34 $4.19 $2.15 $2.48 $3.35
----------------------------------------------------------------------
Fully diluted income from continuing
operations before cumulative effect
of changes in accounting principles................... $5.25 $4.11 $2.20 $2.45 $1.45
Income (loss) from discontinued operations............... -- -- (.06) .02 .02
Cumulative effect of changes in accounting principles.... -- -- -- -- 1.79
----------------------------------------------------------------------
Fully diluted net income................................. $5.25 $4.11 $2.14 $2.47 $3.26
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
Return on average assets................................. 2.09% 1.73% .91% 1.13% 1.56%
Return on average common equity.......................... 23.8 21.3 11.2 13.9 20.0
Average total equity to average assets................... 8.9 8.3 8.2 8.6 8.7
Dividends per share to net income per share.............. 30.9 34.6 54.0 40.3 26.3
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER STATISTICS
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
Common shares outstanding - year end*.................... 134,870,241 127,334,568 133,832,409 130,408,480 131,568,900
Average common shares outstanding and
common stock equivalents:
Primary............................................... 137,415,619 133,936,030 136,274,991 134,588,664 124,670,657
Fully diluted......................................... 140,821,194 138,148,158 140,128,566 138,328,002 130,497,272
Number of shareholders - year-end**...................... 22,264 21,033 25,481 25,653 28,572
Average number of employees
(full-time equivalents)............................... 12,976 13,231 14,725 14,867 14,596
Common dividends paid (millions)......................... $227.7 $191.7 $156.0 $121.8 $80.8
- ----------------------------------------------------------------------------------------------------------------------------------
*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
1996 1995
------------------------------------------------------------------------------------
Sales Price Dividends Sales Price Dividends
---------------------- ------------------------
High Low Paid High Low Paid
- ------------------------------------------------------------------------------------------------------------------------------------
First quarter........................... $59.88 $46.00 $.4125 $40.50 $32.63 $.3625
Second quarter.......................... 63.75 56.25 .4125 44.63 38.88 .3625
Third quarter........................... 68.00 55.38 .4125 48.25 39.50 .3625
Fourth quarter.......................... 74.00 63.75 .4125 53.75 47.63 .3625
Closing price - December 31............. 68.25 49.63
- ------------------------------------------------------------------------------------------------------------------------------------
The common stock of First Bank System, Inc. is traded on the New York Stock
Exchange, under the ticker symbol, "FBS."
First Bank System, Inc.
74
COMMERCIAL LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
Maturing
-------------------------------------------
In 1 Year After 1 Year
At December 31, 1996 (In Millions) or Less Through 5 Years After 5 Years
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial.............................................................................. $ 7,088 $ 2,197 $ 171
Financial institutions.................................................................. 743 139 23
Real estate:
Commercial mortgage................................................................... 1,722 1,103 265
Construction.......................................................................... 595 43 16
-----------------------------------------
Total............................................................................... $10,148 $ 3,482 $ 475
- ------------------------------------------------------------------------------------------------------------------------------------
Due in Due After
One Year One Year Total
------------------------------------------
.....................................................................................
Loans at fixed interest rates........................................................... $ 1,395 $ 2,514 $ 3,909
Loans at variable interest rates........................................................ 8,753 1,443 10,196
------------------------------------------
Total............................................................................... $10,148 $ 3,957 $14,105
- ------------------------------------------------------------------------------------------------------------------------------------
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
Maturing
----------------------------------------------------------------------
Under Three Six to Over
Three to Six Twelve Twelve
(In Millions) Months Months Months Months Total
- ------------------------------------------------------------------------------------------------------------------------------------
1996................................................ $395 $144 $106 $221 $866
1995................................................ 349 124 164 263 900
1994................................................ 399 138 266 515 1,318
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM FUNDS BORROWED
Average Maximum Average Weighted
Daily Outstanding Interest Rate Average
Outstanding Amount Month-End Paid During Interest Rate
(In Millions) at Year-End Outstanding Balance the Year at Year-End
- -----------------------------------------------------------------------------------------------------------------------------------
1996
Federal funds purchased and securities sold
under agreements to repurchase................ $2,023 $2,145 $2,258 5.71% 5.63%
Other............................................ 2,074 2,133 2,700 5.64 5.57
------------------------------
Total......................................... $4,097 $4,278 4,703 5.68 5.60
------------------------------
1995
Federal funds purchased and securities sold
under agreements to repurchase................ $2,269 $1,969 $2,562 6.00% 5.11%
Other............................................ 2,116 1,471 2,554 6.13 5.77
------------------------------
Total......................................... $4,385 $3,440 4,763 6.06 5.43
------------------------------
1994
Federal funds purchased and securities sold
under agreements to repurchase................ $2,568 $2,264 $3,223 4.55% 5.49%
Other............................................ 658 394 864 5.18 5.72
------------------------------
Total......................................... $3,226 $2,658 3,680 4.65 5.53
- -----------------------------------------------------------------------------------------------------------------------------------
First Bank System, Inc. 75
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, 1996.
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 (and listed on
the New York Stock Exchange): Common Stock, Par Value $1.25.
Securities registered pursuant to Section 12(g) of the Act: Warrants to
Purchase Shares of Common Stock.
As of January 31, 1997, First Bank System, Inc. had 133,740,046 shares of
common stock outstanding. The aggregate market value of common stock held by
non-affiliates as of January 31, 1997, was approximately $10,007,000,000.
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.
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........................................................... 77
Distribution of Assets, Liabilities and
Stockholders' Equity; Interest Rates
and Interest Differential............................. 22-23, 72-73
Investment Portfolio.................................... 29-30, 48, 69
Loan Portfolio........................... 27-29, 31-34, 45, 49-50, 75
Summary of Loan Loss Experience......................... 23, 31-34, 50
Deposits................................................ 30, 72-73, 75
Return on Equity and Assets........................................ 74
Short-Term Borrowings.............................................. 75
ITEM 2 Properties......................................................... 78
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.......................... 38, 67, 76
ITEM 6 Selected Financial Data.......................................... 19
ITEM 7 Management's Discussion and
Analysis of Financial Condition and
Results of Operations......................................... 18-40
ITEM 8 Financial Statements and
Supplementary Data........................................... 71, 78
ITEM 9 Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure........................................... none
PART III
ITEM 10 Directors and Executive Officers
of the Registrant............................................... 80*
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.......................................... 78
*First Bank System's definitive proxy statement for the 1997 Annual Meeting of
Shareholders is incorporated herein by reference, other than the sections
entitled "Report of the Compensation and Human Resources Committee on Executive
Compensation" and "Comparative Stock Performance."
First Bank System, Inc.
76
GENERAL First Bank System, Inc. (the "Company") is a regional, multi-state bank
holding company headquartered in Minneapolis, Minnesota. The Company was
incorporated in Delaware in 1929 and owns more than 99 percent of the capital
stock of each of nine banks, a savings association and seven trust companies,
having 356 banking offices in Minnesota, Colorado, Wisconsin, Illinois, Montana,
North Dakota, South Dakota, Iowa, Kansas, Nebraska, and Wyoming. 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 $31 million to $11.1 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 treasury
management and receivable lockbox collection are provided for corporate
customers. Nine banks, a savings association, and seven 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 1996 averaged a total of
12,976 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 investment companies.
In recent years, competition 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 the prior approval of the Board before
acquiring more than 5 percent of the outstanding shares of another bank or bank
holding company, and must provide notice to, and in some situations obtain the
prior approval of, the Board in connection with the acquisition of more than 5
percent of the outstanding shares of a company engaged in a "bank-related"
business.
Under the Act, as amended by the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act"), the Company may acquire
banks throughout the United States, subject only to state or federal deposit
caps and state minimum-age requirements. Effective June 1, 1997, the Interstate
Act authorizes interstate branching by acquisition and consolidation in those
states that have not opted out by that date.
First Bank System, Inc.
77
National banks are subject to the supervision of, and are examined by, the
Comptroller of the Currency. All subsidiary banks of the Company are members of
the Federal Deposit Insurance Corporation ("FDIC"), 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 authorities include the allowance for credit losses,
investments, loans, mergers, issuance of securities, payment of dividends,
establishment of branches and other aspects of operations.
The Company's saving association subsidiary is subject to the supervision
of and is examined by the OTS. The savings association is a member of SAIF,
which is administered and is subject to examination by the FDIC. As a saving
association, the Company's subsidiary must meet the requirements of a qualified
thrift lender to avoid certain restrictions relating to dividends, branching and
certain new activities. As of December 31, 1996, the savings association was a
"qualified thrift lender." Similar to the Company's banking subsidiaries, the
savings association is also subject to regulation by the OTS in the areas of
credit losses, investments, loans, mergers, issuance of securities, payment of
dividends, establishment of branches, and other aspects of operations.
PROPERTIES The Company and its significant subsidiaries occupy their headquarter
offices under long-term leases. The Company also leases a freestanding
operations center in St. Paul and owns an operations center in Fargo, North
Dakota. At December 31, 1996, the Company's subsidiaries owned and operated a
total of 261 facilities and leased an additional 238 facilities, all of which
are well maintained. Additional information with respect to premises and
equipment is presented in Notes G and P.
EXHIBITS
Financial Statements Filed Page
- ------------------------------------------------------------------------------
First Bank System, Inc. and Subsidiaries
Consolidated Financial Statements 41
Notes to Consolidated Financial Statements 45
Report of Independent Auditors 68
Schedules to the consolidated financial statements required by Article 9 of
Regulation S-X are omitted since the required information is included in the
footnotes or is not applicable.
During the three months ended December 31, 1996, the Company did not file
any Current Reports on Form 8-K.
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 2.1 to Form 8-A/A-2 dated October 6, 1994.
/(1)/3B By-laws. Filed as Exhibit 3 to Form 10-Q for the quarter ended
September 30, 1996.
4A [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)/4B Certificate of Designation for First Bank System, Inc. Series
1990A Preferred Stock. Filed as Exhibit 4.4 to Amendment No. 1 to
Registration Statement on Form S-3, File No. 33-42650.
/(1)/4C Certificate of Designation for First Bank System, Inc. Series
1991A Convertible Preferred Stock. Filed as Exhibit 4.3 to
Registration Statement on Form S-4, File No. 33-50700.
/(1)/4D Warrant Agreement, dated as of October 2, 1995, between First Bank
System, Inc. and First Chicago Trust Company of New York, as
Warrant Agent, and Form of Warrant. Filed as Exhibits 4.18 and
4.19 to Registration Statement on Form S-3, File No. 33-61667.
4E Warrant Agreement, dated as of November 20, 1990, between
Metropolitan Financial Corporation and American Stock Transfer and
Trust Company, as Warrant Agent; Supplemental Warrant Agreement,
dated as of January 24, 1995, between First Bank System, Inc. and
American Stock Transfer and Trust Company, as Warrant Agent; and
Form of Warrant.
/(1)/10A 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, File No. 33-42650.
/(2)/10B First Bank System, Inc. 1987 Stock Option Plan.
(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.
First Bank System, Inc.
78
/(1)(2)/10C First Bank System, Inc. Nonqualified Supplemental Executive
Retirement Plan. Filed as Exhibit 10C to report on Form 10-Q for
quarter ended March 31, 1995.
/(2)/10D First Bank System, Inc. Executive Deferral Plan, as amended.
/(2)/10E First Bank System, Inc. Annual Incentive Plan, as amended.
/(2)/10F First Bank System, Inc. Independent Director Retirement and Death
Benefit Plan, as amended.
/(1)(2)/10G 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)(2)/10H First Bank System, Inc. 1995 Executive Incentive Plan. Filed as
Exhibit 10B to report on Form 10-Q for quarter ended March 31,
1995.
/(1)(2)/10I First Bank System, Inc. Restated Employee Stock Purchase Plan, as
amended. Filed as Exhibit 10B to report on Form 10-Q for quarter
ended September 30, 1996.
/(2)/10J Form of Change-in-Control Agreement between First Bank System,
Inc. and certain officers of the Company.
/(2)/10K First Bank System, Inc. 1996 Stock Incentive Plan, as amended.
/(2)/10L Agreement between First Bank System, Inc. and John F. Grundhofer
dated January 18, 1995, as amended.
/(2)/10M Description of First Bank System, Inc. Stock Option Loan Policy.
/(1)(2)/10N Consulting Agreement dated as of January 23, 1995, by and between
First Bank System, Inc. and Norman M. Jones. Filed as Exhibit 10T
to report on Form 10-K for fiscal year ended December 31, 1994.
/(1)/10O Agreement of Merger and Consolidation dated August 6, 1995 by and
between First Bank System, Inc. and FirsTier Financial, Inc. Filed
as Exhibit 2.1 to Registration Statement on Form S-4, File
No. 333-00299.
/(1)/10P Settlement Agreement, dated as of January 23, 1996, between First
Bank System, Inc., First Interstate Bancorp and Wells Fargo & Co.
Filed as Exhibit 2.1 to Form 8-K filed January 26, 1996.
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 Annual Report to Shareholders for the year ended December 31,
1996.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
Copies of the Exhibits will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the 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.
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
19, 1997, on its behalf by the undersigned thereunto duly authorized.
First Bank System, Inc.
By: 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 19, 1997, 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-Finance
SUSAN E. LESTER
Executive Vice President and Chief Financial Officer
(principal financial officer)
DAVID J. PARRIN
Senior Vice President and Controller
(principal accounting officer)
ARTHUR D. COLLINS, JR.
Director
PETER H. COORS
Director
ROGER L. HALE
Director
DELBERT W. JOHNSON
Director
NORMAN M. JONES
Director
RICHARD L. KNOWLTON
Director
JERRY W. LEVIN
Director
KENNETH A. MACKE
Director
MARILYN CARLSON NELSON
Director
EDWARD J. PHILLIPS
Director
JAMES J. RENIER
Director
S. WALTER RICHEY
Director
RICHARD L. ROBINSON
Director
RICHARD L. SCHALL
Director
WALTER SCOTT, JR.
Director
First Bank System, Inc.
79
EXECUTIVE OFFICERS
JOHN F. GRUNDHOFER
Mr. Grundhofer, 58, has been Chairman of the Board, President and Chief
Executive Officer of First Bank System since 1990.
PHILIP G. HEASLEY
Mr. Heasley, 47, has served as Vice Chairman since 1993. He is responsible for
Retail Banking, Payment Systems, and operations and technology. In February
1996, Mr. Heasley assumed responsibility for consumer and small business sales
and services carried out through bank branches in addition to his previous
responsibility for retail bank products.
RICHARD A. ZONA
Mr. Zona, 52, was named Vice Chairman-Finance in February 1996, and assumed
responsibility for Business Banking and Private Financial Services, and
Corporate Trust. Mr. Zona previously served as Vice Chairman and Chief Financial
Officer.
J. ROBERT HOFFMANN
Mr. Hoffmann, 51, has been Executive Vice President and Chief Credit Officer
since 1990.
SUSAN E. LESTER
Ms. Lester, 40, was named Executive Vice President and Chief Financial Officer
in February 1996. She had served as Executive Vice President, Finance, since
December 1995. From May 1994 to November 1995, Ms. Lester was Executive Vice
President and Chief Financial Officer of Shawmut National Corporation. Before
that, she served as Executive Vice President and Controller at First Bank
System.
LEE R. MITAU
Mr. Mitau, 48, was named Executive Vice President, General Counsel and Secretary
in 1995. Previously, he was a Senior Partner at Dorsey & Whitney LLP.
JOHN M. MURPHY, JR.
Mr. Murphy, 55, has been Chairman and Chief Investment Officer, First Trust
National Association, since 1990.
DANIEL C. ROHR
Mr. Rohr, 50, has served as Executive Vice President of Commercial Banking since
1990.
ROBERT H. SAYRE
Mr. Sayre, 57, has served as Executive Vice President of Human Resources since
1990.
JOHN R. DANIELSON
Mr. Danielson, 52, was named Senior Vice President of Investor and Corporate
Relations in 1996. He previously served as Senior Vice President of Investor
Relations.
DAVID P. GRANDSTRAND
Mr. Grandstrand, 41, was named Senior Vice President and Treasurer in 1996. He
previously served as Senior Vice President of Asset/Liability Management and
Funding, and Senior Vice President of Funding and Treasury Operations.
DAVID J. PARRIN
Mr. Parrin, 41, has been Senior Vice President and Controller since 1994.
Previously, he was a Partner at Ernst & Young LLP.
DIRECTORS
JOHN F. GRUNDHOFER
Chairman, President and Chief Executive Officer First Bank System, Inc.
Minneapolis, Minnesota
ARTHUR D. COLLINS, JR.
President and Chief Operating Officer Medtronic, Inc. Minneapolis, Minnesota
PETER H. COORS
Vice Chairman and Chief Executive Officer Coors Brewing Company Golden, Colorado
ROGER L. HALE
President and Chief Executive Officer TENNANT Company Minneapolis, Minnesota
DELBERT W. JOHNSON
Chairman and Chief Executive Officer Pioneer Metal Finishing Minneapolis,
Minnesota
NORMAN M. JONES
Chairman First Bank, fsb Minneapolis, Minnesota
RICHARD L. KNOWLTON
Chairman The Hormel Foundation Austin, Minnesota
JERRY W. LEVIN
Chairman Revlon, Inc. New York, New York Chairman The Coleman Company, Inc.
Golden, Colorado
KENNETH A. MACKE
General Partner Macke Partners Golden Valley, Minnesota
MARILYN CARLSON NELSON
Vice Chair Carlson Companies, Inc. Minneapolis, Minnesota
EDWARD J. PHILLIPS
Chairman and Chief Executive Officer Phillips Beverage Company Minneapolis,
Minnesota
JAMES J. RENIER
Retired Chairman and Chief Executive Officer Honeywell Inc. Minneapolis,
Minnesota
S. WALTER RICHEY
Chairman and Chief Executive Officer Meritex, Inc. Minneapolis, Minnesota
RICHARD L. ROBINSON
Chairman and Chief Executive Officer Robinson Dairy, Inc. Denver, Colorado
RICHARD L. SCHALL
Retired Vice Chairman Dayton Hudson Corporation Minneapolis, Minnesota
WALTER SCOTT, JR.
Chairman, President and Chief Executive Officer Peter Kiewit Sons', Inc. Omaha,
Nebraska
First Bank System, Inc.
80
FBS LOCATIONS*
MINNESOTA COLORADO Holton
Albert Lea Arvada Iola
Alexandria Aspen Lawrence (2)
Amboy Aurora (5) Manhattan
Apple Valley Boulder (2) Overland Park
Austin Breckenridge Prairie Village
Babbitt Broomfield Pratt
Blaine Canon City Topeka
Blooming Prairie Carbondale Wichita (4)
Bloomington (5) Colorado Springs (6)
Brainerd Denver (17) MONTANA
Brooklyn Park Englewood (3) Billings (2)
Burnsville (2) Evergreen Bozeman
Chanhassen Fort Collins (2) Butte
Chisago City Glenwood Springs Great Falls (3)
Cloquet Golden Havre
Columbia Heights Grand Junction (2) Helena
Coon Rapids Greeley Miles City
Cottage Grove Highlands Ranch Missoula (2)
Duluth (6) La Junta
Eagan (2) Lakewood (3) NEBRASKA
East Grand Forks Littleton (4) Beatrice
Eden Prairie (2) Longmont Bellevue (2)
Edina (4) Louisville Blair
Elk River Loveland Columbus
Fairmont Northglenn David City
Fergus Falls Parker Elkhorn
Forest Lake Pueblo (5) Fremont (2)
Golden Valley Westminster (2) Gering
Grand Rapids Wheat Ridge Grand Island (2)
Hibbing Hastings
Hopkins ILLINOIS Kearney (2)
Lamberton Chicago (4) La Vista
Little Canada Des Plaines (2) Lincoln (10)
Mankato (2) Downers Grove Millard
Maple Grove Norfolk (2)
Minneapolis (13) IOWA North Platte
Minnetonka (2) Altoona Omaha (22)
Monticello Ankeny Scottsbluff (3)
Moorhead Carlisle
New Prague Clear Lake NORTH DAKOTA
Oakdale Council Bluffs (4) Beulah
Owatonna Davenport Bismarck (4)
Pine City Des Moines (6) Devils Lake
Pine River Doon Dickinson
Plymouth (2) Hampton Fargo (5)
Princeton Iowa Falls Grafton
Prior Lake Knoxville Grand Forks (2)
Robbinsdale Mason City (3) Jamestown
Rochester (3) Nevada Langdon
Roseville Pella Lisbon
Sauk Rapids Red Oak Minot (2)
Shoreview Rock Valley Valley City
St. Anthony Wellman Wahpeton
St. Cloud (2) West Des Moines (2) Williston
St. Louis Park Williamsburg
St. Paul (7) SOUTH DAKOTA
Stillwater KANSAS Aberdeen
Virginia Andover Colton
Wayzata Augusta Hartford
West St. Paul Clay Center Mitchell
White Bear Lake (2) El Dorado Pierre
Willmar Emporia Rapid City (4)
Woodbury Eureka Sioux Falls (7)
Garden City
Gardner
WISCONSIN
Appleton
Brookfield
Brown Deer
Hudson
La Crosse
Milwaukee (2)
Onalaska
Wauwatosa
WYOMING
Casper
Cheyenne (2)
Cody
Evanston
Gillette
Green River
Lander
Laramie
Riverton
Rock Springs
Sheridan
Torrington
Worland
CORPORATE TRUST OFFICES
Billings, Montana
Chicago, Illinois
Denver, Colorado
Detroit, Michigan/**/
Lansing, Michigan/**/
Los Angeles, California
New York, New York
Phoenix, Arizona
Portland, Oregon
San Francisco, California
Seattle, Washington
Sioux Falls, South Dakota
St. Paul, Minnesota
REPUBLIC ACCEPTANCE
CORPORATION
Des Plaines, Illinois
Lakewood, Colorado
Milwaukee, Wisconsin
Minneapolis, Minnesota
Omaha, Nebraska/**/
St. Louis, Missouri
/*/ As of December 31, 1996, FBS
had 359 banking locations and 12
nonbank offices.
/**/ Added in 1997.
First Bank System, Inc. 81
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 10:00 a.m. on
Thursday, April 24, 1997.
COMMON STOCK TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York acts as transfer agent and registrar,
dividend paying agent, and dividend reinvestment plan agent for First Bank
System and maintains all shareholder records for the corporation. For
information about First Bank System stock, or if you have questions regarding
your stock certificates (including transfers), address or name changes, lost
dividend checks, lost stock certificates, or Form 1099s, please call First
Chicago's Shareholder Services Center at (800) 446-2617, weekdays, 8:00 a.m. to
10:00 p.m. EST, and Saturdays, 8:00 a.m. to 3:30 p.m. EST. The TDD telephone
number for the hearing impaired is (201) 222-4955.
First Chicago Trust Company of New York, P.O. Box 2500, Jersey City, New Jersey
07303-2500.
Telephone: (201) 324-0498
Fax: (201) 222-4892
Internet address: http://www.fctc.com
E-mail address: fctc@em.fcnbd.com
COMMON STOCK LISTING AND TRADING
First Bank System Common Stock is listed and traded on the New York Stock
Exchange under the ticker symbol FBS and also may be found under FtBkSy.
DIVIDENDS
First Bank System currently pays quarterly dividends on its Common Stock on or
about the 15th of March, June, September and December, subject to prior Board
approval. Shareholders may choose to have dividends electronically deposited
directly into their bank accounts. For enrollment information, please call First
Chicago at (800) 446-2617.
DIVIDEND REINVESTMENT PLAN
First Bank System shareholders can take advantage of a plan that provides
automatic reinvestment of dividends and/or optional cash purchases of additional
shares of FBS Common Stock up to $5,000 per calendar quarter. If you would like
more information, please contact First Chicago Trust Company of New York, P.O.
Box 2598, Jersey City, New Jersey 07303-2598, (800) 446-2617.
INVESTMENT COMMUNITY CONTACTS
John R. Danielson
Senior Vice President, Investor and Corporate Relations
(612) 973-2261
General Information, Investor and Corporate Relations
(612) 973-2263
First Bank System, Inc.
P.O. Box 522
Minneapolis, Minnesota 55480
FINANCIAL INFORMATION
FBS news and financial results are available by fax, mail and the internet.
FAX. To access our fax-on-demand service, call (800) 758-5804. When asked, enter
FBS's extension number, "312402." Enter "1" for the most current news release or
"2" for a menu of recent releases. Enter your fax and telephone numbers as
directed. The information will be faxed to you promptly.
MAIL. On your request we will mail to you our quarterly earnings news releases.
To be added to FBS's mailing list, please contact Investor and Corporate
Relations, First Bank System, First Bank Place, 601 Second Avenue South,
Minneapolis, Minnesota 55402-4302, (612) 973-2434.
INTERNET. For information about FBS, including news and financial results,
product information, and service locations, access FBS's home page on the World
Wide Web. The address is http://www.fbs.com.
For additional annual reports, quarterly financial data on Form 10-Q, or
information about the 1997 annual meeting of shareholders, please contact
Investor and Corporate Relations, First Bank System, First Bank Place, 601
Second Avenue South, Minneapolis, Minnesota 55402-4302, (612) 973-2434.
COMMUNITY ANNUAL REPORT
For information about FBS's community reinvestment activities, call FBS
Community Relations, (612) 973-2322.
First Bank System, Inc. and each of its subsidiaries is an Equal Opportunity
Employer and a Drug-Free Workplace.
82 First Bank System, Inc.
Design and Typography: Larsen Design Office, Inc.
Printing: Banta Direct Marketing Group: The Press
[LOGO] FIRST BANK SYSTEM
P.O. Box 522
Minneapolis, Minnesota
55480
http://www.fbs.com
FIRST BANK SYSTEM, INC.
1996 ANNUAL REPORT/10-K
GRAPHICS APPENDIX
Inside Front Cover
- ------------------
Map of the United States. The 11 Midwest and Rocky Mountain states (Minnesota,
Colorado, Illinois, Iowa, Kansas, Montana, Nebraska, North Dakota, South Dakota,
Wisconsin and Wyoming) in which FBS has retail banking offices are shaded.
Page 1
- ------
Graphs illustrate the following information:
Return on average common equity (percent)
1992: 12.6
1993: 15.8
1994: 17.6
1995: 21.3
1996: 21.4
Return on average assets (percent)
1992: 1.02
1993: 1.28
1994: 1.40
1995: 1.73
1996: 1.88
Earnings per share (dollars and fully diluted)
1992: 2.08
1993: 2:82
1994: 3.32
1995: 4.11
1996: 4.74
Efficiency ratio (percent)
1992: 65.2
1993: 60.4
1994: 58.1
1995: 53.3
1996: 49.9
Shareholders' equity to assets ratio (percent)
1992: 8.4
1993: 8.2
1994: 7.7
1995: 8.0
1996: 8.4
1
Allowance coverage of nonperforming loans ratio (percent)
1992: 149
1993: 208
1994: 283
1995: 401
1996: 429
Graphs before nonrecurring and merger-related items.
Page 2
- ------
Photo of John F. Grundhofer, chairman, president and chief executive officer
Page 3
- ------
Pie chart illustrating what business lines contribute to FBS operating earnings:
Retail Banking: 31 percent
Business Banking and Private Financial Services: 28 percent
Commercial Banking: 16 percent
Payment Systems: 16 percent
Corporate Trust and Institutional Financial Services: 9 percent
Page 4
- ------
Graph illustrates the following information: Seven-year total return*
Index: 12/31/89 = $100
FBS = FBS Common Stock
KBW 50 = Keefe, Bruyette & Woods 50 Bank Index
S&P 500 = Standard & Poor's Index of 500 Stocks
1989: FBS/100, S&P 500/100, KBW 50/100
1990: FBS/83, S&P 500/97, KBW 50/72
1991: FBS/159, S&P 500/126, KBW 50/114
1992: FBS/193, S&P 500/136, KBW 50/145
1993: FBS/217, S&P 500/150, KBW 50/153
1994: FBS/243, S&P 500/152, KBW 50/145
1995: FBS/375, S&P 500/209, KBW 50/232
1996: FBS/529, S&P 500/257, KBW 50/329
*Capital appreciation plus dividends
$100 invested in FBS common stock at December 31, 1989, would have been worth
$529 at year-end 1996. That compares with $329 for the KBW 50 Bank Index and
$257 for the S&P 500 stock index.
Page 6
- ------
Pie chart illustrating that Retail Banking accounts for 31 percent of FBS
operating earnings.
2
Page 9
- ------
Pie chart illustrating that Payment Systems accounts for 16 percent of FBS
operating earnings.
Page 12
- -------
Pie chart illustrating that Business Banking and Private Financial Services
accounts for 28 percent of FBS operating earnings.
Page 14
- -------
Pie chart illustrating that Commercial Banking accounts for 16 percent of FBS
operating earnings.
Page 16
- -------
Pie chart illustrating that Corporate Trust and Institutional Financial Services
accounts for 9 percent of FBS operating earnings.
3