<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): MARCH 3, 1995
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FIRST BANK SYSTEM, INC.
-----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 1-6880 41-0255900
-------- ------ ----------
(State or other jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
601 SECOND AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55402
- ----------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 612-973-1111
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NOT APPLICABLE
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(Former name or former address, if changed since last report)
<PAGE>
Item 5. Other Events
------------
On January 24, 1995, First Bank System, Inc. (the Company) completed
its acquisition of Metropolitan Financial Corporation. Accordingly, the
Company's consolidated financial statements and the related
Management's Discussion and Analysis of Financial Condition and Results
of Operations (Annual Report) have been restated to give retroactive
effect to the merger using the pooling of interests method of
accounting. The Company is hereby filing with the Securities and
Exchange Commissions a copy of the restated consolidated financial
statements and MD&A.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
------------------------------------------------------------------
c.) Exhibits (all filed herewith)
Exhibit 23 Consent of Ernst & Young LLP
Exhibit 99 1994 Restated Consolidated Financial Statements
and Management's Discussion and Analysis.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST BANK SYSTEM, INC.
Date: March 3, 1995 By /s/ David J. Parrin
------------- ---------------------
David J. Parrin
Senior Vice President & Controller
INDEX TO EXHIBITS
Document Sequential Page Number
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23 Consent of Ernst & Young LLP 3
99 1994 Restated Consolidated Financial Statements
and Management's Discussion and Analysis. 4 - 77
-2-
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements Number
2-89224, Number 33-16242, Number 33-42333, Number 33-55932, Number 33-42334,
Number 33-52835, Number 33-52959, and Number 33-53395 all on Form S-8,
Registration Statements Number 33-38268, Number 33-33508, Number 33-39303,
Number 33-47785, Number 33-51407, Number 33-57169, Number 33-55485 and Number
33-52495 all on Form S-3, and Registration Statement Number 33-56955 on Form S-4
of First Bank System, Inc. and in the related Prospectuses of our report dated
January 24, 1995, with respect to the supplemental consolidated financial
statements of First Bank System, Inc. included in the Current Report (Form 8-K)
dated March 3, 1995.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 3, 1995
<PAGE>
EXHIBIT 99
[LOGO OF FIRST BANK SYSTEM]
FIRST BANK SYSTEM 1994 RESTATED ANNUAL REPORT
-COVER-
<PAGE>
Locations
[MAP OF UNITED STATES APPEARS ON THIS PAGE]
ABOUT THE COMPANY
First Bank System, Inc., (FBS) is a regional bank holding company serving 11
Midwestern and Rocky Mountain states through more than 300 locations.
Headquartered in Minneapolis, FBS is the 26th largest U.S. commercial bank
holding company with $34.1 billion in assets. Our market capitalization is now
over $5 billion, placing us among the top 20 U.S. banks. This reflects our
January 24, 1995, acquisition of Metropolitan Financial Corporation (MFC).
FBS has four core businesses and a culture that is focused on creating value
for shareholders. Our banking franchise has leading market shares in most of our
region's major markets. We are a leader in electronic payment systems, as the
nation's largest issuer of Visa Corporate and Purchasing Cards, and as the
seventh largest processor of Visa and MasterCard transactions. Our Commercial
Bank's focus on building strong client relationships has translated into
attractive returns for shareholders. We are among the 10 largest providers of
corporate trust services and our investment management services are growing
rapidly. These attributes have made us one of the nation's top-performing banks.
FBS is listed on the New York Stock Exchange under the ticker symbols FBS and
FtBkSy.
Management's Discussion and Analysis 2
Line of Business Financial Review 5
Statement of Income Analysis 7
Balance Sheet Analysis 12
Corporate Risk Profile 17
Consolidated Financial Statements 29
Notes to Consolidated Financial Statements 33
Report of Independent Auditors 60
Five-Year Consolidated Financial Statements 61
Quarterly Consolidated Financial Data 63
Supplemental Financial Data 66
Exhibits 11 and 12 69
Corporate Data Inside back cover
[INSIDE FRONT COVER]
<PAGE>
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
(Dollars in Millions, Except Per Share Amounts) 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
FOR THE YEAR
Income from continuing operations before merger-related items......... $ 470.4 $ 410.7
Merger-related items.................................................. (156.9) (50.0)
Discontinued operations............................................... (8.5) 2.5
-------------------------
Net income............................................................ $ 305.0 $ 363.2
-------------------------
PER COMMON SHARE
Income from continuing operations before merger-related items......... $ 3.36 $ 2.83
Merger-related items.................................................. (1.15) (0.37)
Discontinued operations............................................... (0.06) 0.02
-------------------------
Net income............................................................ $ 2.15 $ 2.48
-------------------------
Dividends paid........................................................ $ 1.16 $ 1.00
Common shareholders' equity........................................... $ 18.63 $ 18.91
-------------------------
RETURN ON AVERAGE ASSETS
Income from continuing operations before merger-related items......... 1.40% 1.28%
Merger-related items.................................................. (0.47) (0.16)
Discontinued operations............................................... (0.02) 0.01
-------------------------
Return on average assets.............................................. 0.91% 1.13%
RETURN ON AVERAGE COMMON EQUITY
Income from continuing operations before merger-related items......... 17.6% 15.8%
Merger-related items.................................................. (6.0) (2.0)
Discontinued operations............................................... (0.4) 0.1
-------------------------
Return on average common equity....................................... 11.2% 13.9%
Net interest margin................................................... 4.74% 4.69%
Efficiency ratio before merger-related charges........................ 58.1% 60.4%
Efficiency ratio...................................................... 64.0% 64.1%
AT YEAR END
Loans................................................................. $24,550 $23,491
Allowance for credit losses........................................... 475 466
Assets................................................................ 34,128 33,370
Total shareholders' equity............................................ 2,612 2,744
Common equity to total assets......................................... 7.3% 7.4%
Shareholders' equity to total assets.................................. 7.7 8.2
Tier 1 capital ratio.................................................. 7.3 9.4
Total risk-based capital ratio........................................ 11.4 13.4
-------------------------
</TABLE>
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview Discussion
-------------------
First Bank System, Inc. ("the Company") completed its
acquisition of Metropolitan Financial Corporation ("MFC"), a
$7.9 billion regional financial holding company headquartered
in Minneapolis, Minnesota, on January 24, 1995. The
transaction is being accounted for as a pooling of interests.
Accordingly, the accompanying supplemental consolidated
financial information reflects the results of operations of
the two companies on a combined basis for all periods
presented.
EARNINGS SUMMARY - In the past three years, the Company
completed three significant acquisitions accounted for as
pooling of interests. Excluding merger-related charges and
accounting changes, the Company achieved consistent increases
in ongoing earnings from operations since 1992. Earnings from
ongoing operations in 1994 totaled $470.4 million ($3.36 per
share), an increase of $59.7 million, or 14.5 percent,
compared with 1993 income on a similar basis of $410.7
million ($2.83 per share). Income before merger-related
effects for 1993 increased $113.2 million, or 38.1 percent,
compared with 1992 income on a similar basis of $297.5
million ($2.13 per share). Excluding the merger-related
effects, return on average common equity was 17.6 percent and
return on average assets was 1.40 in 1994 compared with 15.8
percent and 1.28 percent in 1993. On the same basis, the
efficiency ratio improved to 58.1 percent in 1994 from 60.4
percent in 1993.
The improvement in 1994 earnings from ongoing operations
reflects increases in net interest income on a taxable-
equivalent basis of $78.6 million, or 5.8 percent, and
noninterest income of $51.2 million, or 8.3 percent, together
with a reduction in provision for credit losses of $26.0
million, or 19.5 percent, and controlled noninterest expense
growth of $31.6 million, or 2.6 percent. Compared with
noninterest expense for 1993, adjusted to include the
operations of Boulevard Bancorp, Inc., Rocky Mountain
Financial Corporation, and the acquired corporate trust unit
of J. P. Morgan and Co., Incorporated, on a pro forma basis,
noninterest expense declined $41.0 million, or 3.2 percent.
For further information on the specific components of the
1994 operating results, see the "Statement of Income
Analysis" on page 7.
Reported net income for 1994 was $305.0 million ($2.15 per
share), a decrease of $58.2 million from 1993 net income of
$363.2 million ($2.48 per share). Return on average common
equity decreased to 11.2 percent in 1994 from 13.9 percent in
1993 and return on average assets decreased to .91 percent
from 1.13 percent for the same periods. As discussed, the
decrease in net income in 1994 is due to merger-related
charges. The Company recorded after-tax merger-related
charges of $87.9 million ($.64 per share) for the MFC
transaction, an after-tax loss of $69.0 million ($.51 per
share) on the sale of MFC's securities, and an $8.5 million
($.06 per share) loss from MFC's subsidiary, Edina Realty,
which is a discontinued operation. Net income for 1993 of
$363.2 million ($2.48 per share) included after-tax merger-
related charges of $50.0 million ($.37 per share) for the
acquisition of Colorado National Bankshares, Inc. ("CNB").
Net income for 1992 of $448.9 million ($3.35 per share)
included after-tax merger-related charges of $81.8 million
($.66 per share) related to the acquisitions of Western
Capital Investment Corporation ("WCIC") and Bank Shares
Incorporated ("BSI"), in addition to $233.2 million of income
related to the cumulative effect of changes in accounting
principles.
Nonperforming assets dropped to $232.3 million at December
31, 1994, a decrease of $109.1 million, or 32.0 percent, from
December 31, 1993, despite the addition of $29.3 million in
nonperforming assets from the acquisition of Boulevard
Bancorp, Inc. in the first quarter of 1994. The ratio of the
allowance for credit losses to nonperforming loans continues
to indicate very strong reserve coverage, increasing to 293
percent, from 213 percent at December 31, 1993.
2 First Bank System, Inc. and Subsidiaries
<PAGE>
<TABLE>
<CAPTION>
TABLE 1. Selected Financial Data
(Dollars in Millions, Except Per Share Amounts) 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONDENSED INCOME STATEMENT:
Net interest income (taxable-equivalent basis)...................... $1,434.5 $1,355.9 $1,175.7 $1,049.2 $ 949.2
Provision for credit losses......................................... 123.6 133.1 191.7 210.2 219.7
-----------------------------------------------------
Net interest income after provision for credit losses.............. 1,310.9 1,222.8 984.0 839.0 729.5
Securities gains (losses)........................................... (115.0) .3 46.3 42.3 10.2
Other noninterest income............................................ 673.9 618.6 567.4 514.7 461.9
Merger-related charges*............................................. 125.3 72.2 110.4 - -
Other noninterest expense........................................... 1,224.1 1,192.5 1,135.9 1,067.9 1,063.0
-----------------------------------------------------
Income from continuing operations before income taxes
and cumulative effect of changes in accounting principles......... 520.4 577.0 351.4 328.1 138.6
Taxable-equivalent adjustment....................................... 15.1 17.7 22.7 34.4 48.1
Income taxes........................................................ 191.8 198.6 115.7 30.3 6.5
-----------------------------------------------------
Income from continuing operations before cumulative
effect of changes in accounting principles........................ 313.5 360.7 213.0 263.4 84.0
Income (loss) from discontinued operations.......................... (8.5) 2.5 2.7 1.1 .6
-----------------------------------------------------
Income before cumulative effect of changes
in accounting principles.......................................... 305.0 363.2 215.7 264.5 84.6
Cumulative effect of changes in accounting principles............... - - 233.2 - 1.0
-----------------------------------------------------
Net income......................................................... $ 305.0 $ 363.2 $ 448.9 $ 264.5 $ 85.6
-----------------------------------------------------
Return on average assets............................................ .91% 1.13% 1.56% .96% .29%
Return on average common equity..................................... 11.2 13.9 20.0 14.8 4.2
Net interest margin................................................. 4.74 4.69 4.54 4.16 3.47
Efficiency ratio.................................................... 64.0 64.1 71.5 68.3 75.3
Efficiency ratio, excluding merger-related charges.................. 58.1 60.4 65.2 68.3 75.3
PER SHARE DATA:
Primary income from continuing operations before
cumulative effect of accounting changes............................ $ 2.21 $ 2.46 $ 1.46 $ 2.00 $ .53
Income (loss) from discontinued operations......................... (.06) .02 .02 .01 .01
Cumulative effect of accounting changes............................ - - 1.87 - .01
-----------------------------------------------------
Primary net income.................................................. $ 2.15 $ 2.48 $ 3.35 $ 2.01 $ .55
-----------------------------------------------------
Fully diluted income from continuing operations
before cumulative effect of accounting changes..................... $ 2.20 $ 2.45 $ 1.45 $ 1.92 $ .51
Income (loss) from discontinued operations......................... (.06) .02 .02 .01 .01
Cumulative effect of accounting changes............................ - - 1.79 - .01
-----------------------------------------------------
Fully diluted net income............................................ $ 2.14 $ 2.47 $ 3.26 $ 1.93 $ .53
-----------------------------------------------------
Common dividends paid**............................................. $ 1.16 $ 1.00 $ .88 $ .82 $ .82
-----------------------------------------------------
AVERAGE BALANCE SHEET DATA:
Total loans......................................................... $ 23,857 $ 21,802 $ 19,079 $ 18,485 $ 19,848
Total earning assets................................................ 30,259 28,901 25,870 25,249 27,369
Total assets........................................................ 33,545 32,191 28,837 27,675 29,886
Total deposits...................................................... 24,661 25,637 22,953 21,934 22,436
Long-term debt...................................................... 2,312 1,523 1,279 1,552 2,167
Common equity....................................................... 2,603 2,409 2,090 1,596 1,385
Total shareholders' equity.......................................... 2,746 2,769 2,495 1,936 1,707
YEAR-END BALANCE SHEET DATA:
Total loans......................................................... $ 24,550 $ 23,491 $ 20,663 $ 18,734 $ 18,845
Total assets........................................................ 34,128 33,370 32,758 28,508 29,339
Total deposits...................................................... 24,256 26,386 26,395 22,969 22,772
Long-term debt...................................................... 2,684 1,905 1,141 1,261 1,886
Common equity....................................................... 2,494 2,466 2,354 1,694 1,504
Total shareholders' equity.......................................... 2,612 2,744 2,745 2,131 1,826
-----------------------------------------------------
</TABLE>
*Includes $2.6 and $26.4 relating to ORE in 1994 and 1992,
respectively.
**Dividends per share have not been restated for the MFC, WCIC, or CNB mergers.
MFC paid common dividends of $25.1 million in 1994 ($.80 per share), $12.1
million in 1993 ($.39 per share), $7.7 million in 1992 ($.27 per share),
$4.2 million in 1991 ($.19 per share), and $3.1 million in 1990 ($.17 per
share). CNB paid common dividends of $3.2 million in 1992 ($.28 per CNB
share), and $1.8 million in 1991 and 1990 ($.16 per CNB share). WCIC did not
pay dividends in the years shown.
First Bank System, Inc. and Subsidiaries 3
<PAGE>
ACQUISITIONS -- On January 24, 1995, the Company issued
approximately 21.7 million shares to complete its merger with
MFC. At December 31, 1994, MFC had $7.9 billion in assets,
$5.5 billion in deposits, and 211 offices principally in
North Dakota, Minnesota, Nebraska, Iowa, Kansas, South
Dakota, Wisconsin, and Wyoming. Subsequent to the merger, the
Company entered into agreements to sell 63 former MFC branch
locations with $961 million of deposit relationships. Because
of regulatory restrictions on nonbanking activities, the
Company expects that within two years of the closing of the
merger, it will sell Edina Realty, Inc., MFC's real estate
brokerage subsidiary. Accordingly, the operations of Edina
Realty, Inc. have been accounted for as discontinued
operations in the accompanying financial statements.
On September 2, 1994, the Company completed the acquisition
of the domestic corporate trust business of J. P. Morgan and
Co. Incorporated ("J. P. Morgan"). This business unit
provides trust services for approximately 650 clients with
3,800 bond issues in the areas of municipal, revenue,
housing, and corporate bond indenture trusteeships.
On March 25, 1994, the Company completed the acquisition of
Boulevard Bancorp, Inc. ("Boulevard"), a commercial bank
holding company based in Chicago, Illinois, with $1.6 billion
in assets and $1.2 billion in deposits. The Company exchanged
approximately 6.2 million shares of its common stock for all
of the outstanding common stock of Boulevard and accounted
for the transaction as a purchase. The Company also
repurchased existing shares of its common stock approximately
equal to the number of shares issued at the time of closing
of the Boulevard acquisition.
4 First Bank System, Inc. and Subsidiaries
<PAGE>
The Company completed the acquisition of five additional
institutions and announced the planned acquisition of a sixth
in markets in which the Company has an existing presence,
serving to strengthen the Company's retail banking market
shares in these communities. On October 18, 1994, the Company
announced an agreement to acquire First Western Corporation
("FWC"), a $323 million bank holding company based in Sioux
Falls, South Dakota. FWC owns Western Bank, which has nine
branches in South Dakota. The acquisition received regulatory
approvals in January 1995 and is expected to close in the
first quarter of 1995. On February 28, 1994, the Company
completed the acquisition of American Bancshares of Mankato,
a $116 million bank holding company. On March 25, 1994, the
Company completed the acquisition of Rocky Mountain Financial
Corporation ("Rocky Mountain"), a $537 million thrift holding
company. On April 29, 1994, the Company completed the
acquisition of First Financial Investors, Inc., which had
approximately $200 million in assets. The United Bank of
Bismarck acquisition, with approximately $121 million in
assets, closed on September 9, 1994. Green Mountain
Bancorporation, Inc., located in Lakewood, Colorado, with
approximately $35 million in assets, was acquired on
September 30, 1994. For further information regarding
acquisitions, refer to Note C on page 35.
Line of Business Financial Review
---------------------------------
Each of the Company's four business lines -- Retail and
Community Banking, Payment Systems, Commercial Banking, and
Trust and Investment Group -- contributed to the strong
financial performance in 1994. Compared with 1993 results,
before merger-related expenses, earnings increases for the
four business lines were 28.6 percent, 32.7 percent, 7.9
percent, and 3.6 percent, respectively. Each business line
made significant productivity improvements, as measured by
its efficiency ratio, and includes the operating results of
Boulevard since its acquisition date. Financial results for
MFC, which are expected to be primarily in the Retail and
Community Banking business line, will be fully integrated
into the Company's business line financial reporting system
in the first quarter of 1995.
The Company's business unit profitability reporting system
derives business line results by specifically attributing
most assets, deposits and income statement items to a
business line. The Company's internal Funds Transfer Pricing
system allocates a standard cost for funds used or credit for
funds provided to all business line assets and liabilities
using a matched funding concept. Expenses that directly
support business line operations are charged to the business
lines based on a standard unit cost and actual volume
measurements. Expenses that indirectly support the business
line operations, as well as the expenses of those departments
that primarily support the holding company, are allocated
based on the ratio of the business line's noninterest expense
to total consolidated noninterest expense. The Company
calculates business line income taxes based upon the
consolidated effective tax rate.
The business unit profitability system allocates capital
based upon credit, operational and business risks. Asset
components subject to credit risk are assigned risk factors
based upon historic loss experience after taking into
consideration changes in business practice that may
introduce more or less risk into the portfolio. Capital is
assigned to certain lines of business, such as the Trust and
Investment Group, which have no significant balance sheet
components, after taking into consideration operational risk,
capital levels of independent organizations operating similar
businesses and regulatory minimum requirements. Management
accounting system enhancements or product line changes may
affect designations, assignments, and allocations from time
to time. During 1994 certain methodologies were changed, and
accordingly, results for 1993 have been restated to conform
to the current presentation basis.
RETAIL AND COMMUNITY BANKING -- Retail and Community Banking,
which includes consumer, small business and middle market
banking services, and residential mortgage lending, achieved
strong revenue growth while containing costs. Net income
increased 28.6 percent to $177.0 million in 1994, with a
return on assets of 1.15 percent compared with .88 percent in
1993. Return on equity increased to 14.9 percent from 12.7
percent for the previous year.
First Bank System, Inc. and Subsidiaries 5
<PAGE>
TABLE 2. Line of Business Financial Performance
<TABLE>
<CAPTION>
Retail and Trust and Metropolitan
Community Payment Commercial Investment Financial Consolidated
Banking Systems Banking Group Corporation Company
--------------------------------------------------------------------------------------------
(Dollars in Millions) 1994 1993 1994 1993 1994 1993 1994 1993 1994 1993 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONDENSED INCOME STATEMENT:
Net interest income
(taxable-equivalent basis)............. $ 780.5 $ 743.9 $184.7 $147.7 $218.5 $227.3 $ 26.2 $ 31.7 $224.6 $205.3 $1,434.5 $1,355.9
Provision for credit losses*............ 20.6 42.8 69.4 61.9 3.0 20.5 -- -- 14.1 7.9 107.1 133.1
Noninterest income*..................... 187.1 179.1 195.7 157.2 59.5 60.3 185.7 173.0 42.1 49.3 670.1 618.9
Noninterest expense*.................... 655.3 656.3 158.5 129.2 89.1 97.0 150.2 145.8 171.0 164.2 1,224.1 1,192.5
Income taxes and taxable-
equivalent adjustment.................. 114.7 86.3 59.9 44.0 73.1 65.6 24.3 22.8 31.0 19.8 303.0 238.5
--------------------------------------------------------------------------------------------
Income from continuing operations
before securities losses and
merger-related charges................. $ 177.0 $ 137.6 $ 92.6 $ 69.8 $112.8 $104.5 $ 37.4 $ 36.1 $ 50.6 $ 62.7 470.4 410.7
==========================================================================
Securities losses, merger-related
charges and discontinued operations
(after tax)............................ 165.4 47.5
------------------
Net income............................ $ 305.0 $ 363.2
==================
AVERAGE BALANCE SHEET DATA:
Commercial loans........................ $ 4,755 $ 4,172 $ 505 $ 255 $4,842 $4,902 $ -- $ -- $ 503 $ 429 $10,605 $ 9,758
Consumer loans.......................... 6,406 6,694 2,054 1,733 -- -- -- -- 4,792 3,617 13,252 12,044
Assets.................................. 15,417 15,676 3,274 2,649 6,233 6,516 838 734 7,783 6,616 33,545 32,191
Deposits................................ 15,905 16,720 26 16 2,299 2,692 912 919 5,519 5,290 24,661 25,637
Common equity........................... 1,191 1,087 320 283 437 456 173 131 482 452 2,603 2,409
--------------------------------------------------------------------------------------------
Return on average assets*............... 1.15% .88% 2.83% 2.63% 1.81% 1.60% ** ** .65% .95% 1.40% 1.28%
Return on average common equity*........ 14.9 12.7 28.9 24.7 25.8 22.9 21.6% 27.6% 10.5 13.9 17.6 15.8
Efficiency ratio*....................... 67.7 71.1 41.7 42.4 32.1 33.7 70.9 71.2 64.1 64.5 58.1 60.4
============================================================================================
</TABLE>
*Excluding securities losses, merger-related charges and discontinued
operations
**Not meaningful
Note: Preferred dividends are not allocated to the business lines.
Both revenue growth and cost savings contributed to the
improved earnings. The increases in net interest income and
noninterest income are attributable to strong home equity
loan promotions, aggressive small- and middle-market business
lending, and growth in mutual fund sales. The decline in
average consumer loans reflects the run off of residential
mortgage loans of $204 million and the reduction in
residential mortgages held for sale of $595 million. The
decrease in the provision for credit losses reflects improved
credit quality. Noninterest expense decreased slightly,
despite the acquisition of Boulevard in the first quarter of
1994. The efficiency ratio improved to 67.7 percent in 1994
from 71.1 percent in 1993.
PAYMENT SYSTEMS - Payment Systems, which includes consumer
credit card, corporate and purchasing card services, card-
accessed secured and unsecured lines of credit, ATM
processing, and merchant processing, achieved net earnings of
$92.6 million in 1994, up 32.7 percent over 1993. Return on
assets increased to 2.83 percent from 2.63 percent in 1993.
Return on equity increased to 28.9 percent from 24.7 percent
for the previous year.
The strong growth in earnings is due to higher net interest
income and noninterest income, partially offset by increases
in the provision for credit losses and noninterest expense.
The increases in net interest income and fee-based
noninterest income are attributable to growth in the
Corporate Card, the Purchasing Card, the Northwest Airlines
WorldPerks(R) credit card, and merchant processing. The
increase in the provision for credit losses reflects growth
in the loan portfolios and an acceleration of the timing of
charge-offs for fraud losses on credit card and other
consumer loan balances. Noninterest expense increased due to
the overall growth in the sales volumes and number of
products offered by this business line. Payment Systems
continues to be cost effective as measured by its efficiency
ratios of 41.7 percent in 1994 and 42.4 percent in 1993.
6 First Bank System, Inc. and Subsidiaries
- -
<PAGE>
COMMERCIAL BANKING - Commercial Banking, which provides
lending, treasury management, and other financial services to
middle market, large corporate, and mortgage banking
companies, contributed net earnings of $112.8 million in
1994, a 7.9 percent increase over 1993. Return on assets rose
to 1.81 percent in 1994 from 1.60 percent in 1993. Similarly,
return on equity increased to 25.8 percent in 1994 from 22.9
percent in the previous year.
The earnings increase reflects continuing improvement in
credit quality and further reduction of noninterest expense.
Commercial Banking's average loans, excluding loans to
mortgage banking companies, increased $319 million, or 9.0
percent, from 1993. The efficiency ratio improved to 32.1
percent compared with 33.7 percent in 1993.
TRUST AND INVESTMENT GROUP - Net income for the Trust and
Investment Group, which includes personal, institutional and
corporate trust services, investment management services, and
a full-service brokerage company, increased 3.6 percent to
$37.4 million in 1994. The return on average equity declined
to 21.6 percent in 1994 from 27.6 percent in 1993 due to
additional equity assigned to the business line for 1994
acquisitions.
Much of the gain resulted from stronger noninterest income,
which increased primarily due to growth in corporate trust,
investment sales, and management fees. Assets under
management totaled $24.6 billion at year-end 1994, up from
$21.7 billion at the previous year-end. Net interest income
decreased, reflecting a reduction in balances from mortgage
custody accounts. The increase in noninterest expense
reflects costs associated with recent acquisitions; however,
the efficiency ratio improved to 70.9 percent in 1994 from
71.2 percent in 1993.
METROPOLITAN FINANCIAL CORPORATION - MFC contributed net
earnings before merger-related items of $50.6 million in 1994
compared with $62.7 million in 1993. Return on assets
decreased to .65 percent in 1994 compared with .95 percent in
1993. Return on equity decreased to 10.5 percent from 13.9
percent in 1993.
Net interest income improved over 1993 primarily due to
increases in the residential mortgage and consumer loan
portfolios from originations, acquisitions of financial
institutions and wholesale loan purchases. The increase in
the provision for credit losses reflects the $1.2 billion
growth in the 1994 average consumer loan portfolio over 1993.
Noninterest income was down due to gains of $16.3 million
recorded in 1993 related to the sale of mortgage assets.
Noninterest expense increased primarily due to acquisitions
completed during 1994 and 1993. In 1994, MFC accrued $16
million for the settlement of two class action lawsuits
against MFC and its subsidiaries, Edina Realty, Inc. and
Equity Title Services, Inc. Approximately $12.5 million of
the settlement is included in Edina Realty, Inc.'s 1994
results which are reflected as discontinued operations. The
efficiency ratio improved slightly to 64.1 percent in 1994
from 64.5 percent in 1993. Income taxes increased in 1994,
primarily due to the reversal of a $10.9 million tax
valuation reserve in 1993.
Statement of Income Analysis
----------------------------
NET INTEREST INCOME - Net interest income on a taxable-
equivalent basis was $1.43 billion in 1994, compared with
$1.36 billion in 1993 and $1.18 billion in 1992. The
improvement in net interest income primarily reflects
increases in average loan balances and average loan yields
and decreases in average rates paid on deposits, partially
offset by increases in the average balances of short-term
borrowings and long-term debt. The average yield on loans
increased slightly as increasing average rates on the
variable rate portions of the portfolio was offset by a
decline in the average rate of residential mortgage loans.
Average loans totaled $23.9 billion in 1994, an increase of
$2.1 billion, or 9.4 percent, from 1993, reflecting
significant growth in both consumer and commercial loans,
partially offset by decreases in the balance of loans to
mortgage bankers and residential first mortgage loans held
for sale. Excluding these first mortgage-related balances,
average loans for the year increased by $3.1 billion, or 16.1
percent, from 1993, reflecting increases in credit cards,
home equity loans, and consumer lines of credit, as well as
small business and middle-market commercial loans, including
loans acquired with Boulevard. The average balance of
interest-bearing liabilities in 1994 increased $1.7 billion,
or 7.9 percent, over 1993, as short-term borrowings replaced
noninterest-bearing deposits related to loans to mortgage
bankers.
The improvement in net interest income from 1992 to 1993
reflects increases in average earning assets of $3.0 billion,
or 11.7 percent, and average noninterest-bearing deposits of
$1.7 billion, or 33.8 percent. The increases in average
earning assets and noninterest-bearing deposits were largely
a result of four acquisitions with assets totaling $3.9
billion, higher production in residential mortgage banking
and increases in secured loans to mortgage banking companies.
The decline in nonperforming assets also contributed to the
growth in net interest income in both years.
First Bank System, Inc. and Subsidiaries 7
<PAGE>
TABLE 3. Analysis of Net Interest Income
<TABLE>
<CAPTION>
(Dollars in Millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income (taxable-equivalent basis)......................... $1,434.5 $1,355.9 $1,175.7
================================
Average balances of earning assets supported by:
Interest-bearing liabilities......................................... $ 23,618 $ 21,889 $ 20,585
Noninterest-bearing liabilities...................................... 6,641 7,012 5,285
--------------------------------
Total earning assets............................................... $ 30,259 $ 28,901 $ 25,870
================================
Average yields and weighted average rates (taxable-equivalent basis):
Earning assets yield................................................. 7.61% 7.45% 8.23%
Rate paid on interest-bearing liabilities............................ 3.68 3.64 4.63
--------------------------------
Gross interest margin.................................................. 3.93% 3.81% 3.60%
================================
Net interest margin.................................................... 4.74% 4.69% 4.54%
================================
Net interest margin without taxable-equivalent increments.............. 4.69% 4.63% 4.46%
================================
</TABLE>
The net interest margin, on a taxable-equivalent basis, was
4.74 percent in 1994, compared with 4.69 percent in 1993 and
4.54 percent in 1992. The improvement in the net interest
margin in 1994 over 1993 resulted from a shift in the mix of
loans from lower-margin mortgage-related loans to higher
yield consumer and commercial loans. The improvement from
1992 to 1993 is attributable to two factors having
approximately equal effects on the Company's ratios. The
Company's balance sheet mix changed, including a decrease in
lower yielding short-term investments and a shift in the loan
portfolio mix toward consumer loans, as a result of the BSI
acquisition, and promotional campaigns for the Company's home
equity product. In addition, cyclical economic factors
resulted in lower interest rates, increasing the level of
noninterest-bearing deposits and allowing for wider spreads
between prime rates and short-term funding costs.
TABLE 4. Changes in Rate and Volume
<TABLE>
<CAPTION>
1994 COMPARED WITH 1993 1993 COMPARED WITH 1992
--------------------------------------------------------
(In Millions) Volume Yield/Rate Total Volume Yield/Rate Total
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in:
Interest income:
Loans............................. $165.6 $ 16.2 $181.8 $228.5 $(190.3) $ 38.2
Taxable securities................ (15.9) (5.0) (20.9) 70.8 (53.7) 17.1
Nontaxable securities............. (1.9) (1.1) (3.0) 3.2 (.3) 2.9
Federal funds sold and
resale agreements................ (12.5) 6.7 (5.8) (17.3) (5.5) (22.8)
Other............................. (3.2) 2.1 (1.1) (11.8) (.2) (12.0)
---------------------------------------------------------
Total........................... 132.1 18.9 151.0 273.4 (250.0) 23.4
Interest expense:
Savings deposits and time
deposits less than $100,000...... (11.1) (28.0) (39.1) 50.8 (166.1) (115.3)
Time deposits over $100,000....... (13.9) 2.0 (11.9) (17.2) (16.9) (34.1)
Short-term borrowings............. 71.5 9.8 81.3 3.1 (12.8) (9.7)
Long-term debt.................... 45.1 (3.0) 42.1 15.4 (13.1) 2.3
---------------------------------------------------------
Total........................... 91.6 (19.2) 72.4 52.1 (208.9) (156.8)
---------------------------------------------------------
Increase (decrease) in net
interest income.................. $ 40.5 $ 38.1 $ 78.6 $221.3 $ (41.1) $ 180.2
=========================================================
</TABLE>
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.
8 First Bank System, Inc. and Subsidiaries
- -
<PAGE>
PROVISION FOR CREDIT LOSSES - The provision for credit losses
was $123.6 million in 1994, down $9.5 million from $133.1
million in 1993, and $68.1 million from $191.7 million in
1992. Improved credit quality caused the decrease in the
provision. Nonperforming assets declined to $232.3 million at
December 31, 1994, from $341.4 million at December 31, 1993,
and $510.5 million at December 31, 1992. Net charge-offs
declined to $140.3 million in 1994 from $162.3 million in
1993, and $213.7 million in 1992. The 1994 provision for
credit losses decreased despite a $16.5 million merger-
related provision recorded to provide for FBS' plans and
policies with respect to MFC's commercial and consumer loan
portfolios and increased consumer loan production at MFC.
Included in the 1992 provision for credit losses is a merger-
related provision of $13.6 million related principally to the
Company's valuation of WCIC's $70 million mobile home loan
portfolio.
NONINTEREST INCOME - Noninterest income was $558.9 million in
1994, compared with $618.9 million in 1993, a decrease of
$60.0 million, or 9.7 percent. Included in 1994 noninterest
income is a $111.2 million loss related to securities sold in
January 1995 as a result of MFC's December 1994 board-
approved plan to reduce its interest rate risk consistent
with prior regulatory requests and to align more closely the
interest rate risk profile of MFC with that of FBS. Excluding
this loss on securities, noninterest income in 1994 increased
$51.2 million, or 8.3 percent, from 1993 primarily due to
higher credit card and trust fees. Noninterest income in 1993
increased $5.2 million, or .8 percent, from 1992. Credit card
fees, trust fees, and service charges increased $49.7
million, or 13.8 percent, over 1992, partially offset by a
$46.0 million decline in securities gains, primarily related
to MFC mortgage-backed securities sales.
Credit card fees were $179.0 million in 1994, up $41.9
million, or 30.6 percent, from $137.1 million in 1993. Credit
card fees in 1993 were up $20.2 million, or 17.3 percent
higher than 1992 credit card fees that totaled $116.9
million. Most of the 1994 increase in credit card fees is
attributable to increased volumes for the Company's payment
systems products, including the Corporate Card, the
Purchasing Card, the Northwest Airlines WorldPerks(R) credit
card, and merchant processing. Most of the 1993 increase is
attributable to increased volumes for the Corporate Card
product.
Trust fees in 1994 were $159.2 million, up $13.1 million,
or 9.0 percent, from $146.1 million in 1993. Trust fees in
1994 reflect growth in corporate and institutional trust
fees, including income from the March acquisition of
Boulevard and the September acquisition of the domestic
corporate trust business of J.P. Morgan. Trust fees in 1993
increased $18.3 million, or 14.3 percent, from $127.8 million
in 1992. Trust fees for 1993 reflect growth from the BSI
acquisition and the corporate trust business units purchased
from U.S. Bancorp in March of 1993 and Bankers Trust Company
of California in July of 1992. Trust assets under management
were $24.6 billion at December 31, 1994, compared with
$21.7 billion in 1993 and $19.1 billion in 1992.
Service charges on deposit accounts totaled $127.3 million
in 1994, compared with $126.0 million in 1993 and $114.8
million in 1992.
<TABLE>
<CAPTION>
TABLE 5. Noninterest Income
(Dollars in Millions) 1994 1993 1992
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Credit card fees.......................................... $ 179.0 $137.1 $116.9
Trust fees................................................ 159.2 146.1 127.8
Services charges on deposit accounts...................... 127.3 126.0 114.8
Insurance commissions..................................... 29.2 24.2 28.1
Trading account profits and commissions................... 9.3 10.1 10.5
Securities gains (losses)................................. (115.0) .3 46.3
Other..................................................... 169.9 175.1 169.3
---------------------------
Total noninterest income................................ $ 558.9 $618.9 $613.7
===========================
</TABLE>
First Bank System, Inc. and Subsidiaries 9
<PAGE>
Insurance commissions were $29.2 million in 1994, compared
with $24.2 million in 1993, reflecting increased commission
income on annuity sales. In 1992, the Company decided to
reduce its focus on traditional insurance products and
concentrate on other retail and community banking efforts in
the regions, including annuities. The Company sold its
Montana insurance agencies in December 1992, and in the first
quarter of 1993, the Company sold its Twin Cities Metro
insurance agency.
Trading account profits were $9.3 million in 1994, down
slightly from $10.1 million in 1993 and $10.5 million in
1992. Securities losses totaled $115.0 million in 1994,
compared with securities gains of $.3 million in 1993 and
$46.3 million in 1992. Included in the 1994 amount is a
$111.2 million loss related to MFC's securities portfolio as
discussed above. Gains on sales of mortgage-backed and other
securities of $44.4 million in 1992 represent MFC's sale of
$919 million of 30-year fixed rate mortgage-backed securities
in conjunction with its decision to restructure its balance
sheet and reduce its interest rate risk.
Other noninterest income, which includes loan servicing
fees, letters of credit and other fees, gains on sales of
assets, and other miscellaneous income, decreased 3.0 percent
to $169.9 million in 1994 from $175.1 million in 1993.
Included in 1993 noninterest income were $16.3 million of net
gains related to the sale of mortgage loans compared with $.4
million of net losses recorded in 1994 which was offset by a
reduction in accelerated amortization of mortgage servicing
rights. In 1993, net charges of approximately $28 million
related to the accelerated amortization of mortgage loan
servicing rights due to prepayments in the Company's mortgage
servicing portfolio, partially offset by $11 million in one-
time gains from the sale of assets.
NONINTEREST EXPENSE - Noninterest expense was $1.35 billion,
$1.26 billion, and $1.25 billion in 1994, 1993, and 1992,
respectively. Included in noninterest expense are merger and
integration charges of $125.3 million in 1994 relating to the
MFC acquisition, $72.2 million in 1993 relating to the CNB
acquisition, and $110.4 million in 1992 relating to the WCIC
and BSI acquisitions. These accruals were made to reflect the
anticipated acceleration of the disposal of problem assets
and to provide for merger-related costs.
Excluding the effects of the merger-related charges,
noninterest expense for 1994 increased $31.6 million, or 2.6
percent. The modest increase in expenses reflects the
addition of the operations of Boulevard, Rocky Mountain, and
J.P. Morgan domestic corporate trust business, offset by the
benefits realized through integrating the acquisitions
completed in 1994. Compared with noninterest expense for
1993, adjusted to include the expenses of Boulevard, Rocky
Mountain and the acquired corporate trust business on a pro
forma basis and excluding merger-related charges, noninterest
expense for the year declined by $41.0 million, or 3.2
percent. Excluding merger-related charges, noninterest
expense in 1993 increased $30.2 million, or 2.6 percent, from
$1.16 billion in 1992 due to the December 1992 acquisitions
of BSI and American Charter Federal Savings and Loan
Association ("ACF"). Compared with noninterest expense for
1992, adjusted to include the operations of BSI and ACF on a
pro forma basis and excluding merger-related charges,
noninterest expense for 1993 declined $65.1 million, or 5.2
percent. This decline reflects the successful integration of
the CNB, WCIC, ACF, and BSI acquisitions in 1993.
10 First Bank System, Inc. and Subsidiaries
<PAGE>
TABLE 6. Noninterest Expense
<TABLE>
<CAPTION>
(Dollars in Millions, Except Per Employee Data) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries..................................................... $ 450.7 $ 439.8 $ 426.3
Employee benefits............................................ 105.7 99.1 94.9
----------------------------------
Total personnel expense.................................... 556.4 538.9 521.2
Net occupancy................................................ 103.8 109.7 97.7
Furniture and equipment...................................... 88.3 80.7 72.7
FDIC insurance............................................... 58.4 57.5 51.5
Advertising.................................................. 35.5 25.6 26.7
Amortization of goodwill and other intangible assets......... 50.4 41.3 34.0
Other personnel costs........................................ 35.7 31.0 23.3
Professional services........................................ 38.5 41.5 43.8
Data processing.............................................. 20.3 27.1 26.7
Printing, stationery and supplies............................ 23.0 25.1 23.6
Postage...................................................... 23.0 23.1 22.0
Telephone.................................................... 25.9 23.1 18.6
Other real estate (includes merger-related charges of
$2.6 in 1994 and $26.4 in 1992)............................ 1.4 8.9 45.1
Merger and integration....................................... 122.7 72.2 84.0
Other........................................................ 166.1 159.0 155.4
----------------------------------
Total noninterest expense.................................. $1,349.4 $1,264.7 $1,246.3
==================================
Efficiency ratio*............................................ 64.0% 64.1% 71.5%
Efficiency ratio, excluding merger-related charges........... 58.1 60.4 65.2
Average number of full-time equivalent employees............. 14,725 14,867 14,596
Personnel expense per employee............................... $ 37,786 $ 36,248 $ 35,708
==================================
</TABLE>
*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.
Excluding merger-related charges, the efficiency ratio
improved to 58.1 percent in 1994 from 60.4 percent in 1993
and 65.2 percent in 1992 and now ranks among the top five in
the Company's peer group. The keys to the high productivity
are the tight cost control culture throughout the
organization and the successful integration of acquisitions.
Each acquisition completed has been integrated at a
progressively faster pace, enabling the Company to realize
substantial cost reductions. Although the restatement of
prior years' results for the acquisition of MFC has
negatively affected the Company's previously reported
efficiency ratios, once the operations of MFC are fully
integrated the Company expects the ratio to return to its
previous levels and to reach the low 50's over the next few
years.
Salaries and employee benefits expenses in 1994 were $556.4
million, up only slightly from 1993's total of $538.9
million. Including the operations of Boulevard, Rocky
Mountain and the corporate trust unit of J.P. Morgan on a pro
forma basis in 1993, salaries and benefits expense in 1994
decreased $18.7 million, or 3.3 percent. In 1992, salaries
and employee benefits expenses were $521.2 million. Including
BSI and ACF on a pro forma basis in 1992, salaries and
benefits expense in 1993 decreased $29.0 million, or 5.1
percent.
Net occupancy expense totaled $103.8 million in 1994, a
decrease of $5.9 million, or 5.4 percent, from 1993,
reflecting efforts to improve productivity in the Company's
distribution network by subleasing excess office space.
Furniture and equipment expense increased $7.6 million, or
9.4 percent, from 1993. This increase included costs
associated with acquisitions and recent investments in
communication and data processing technology.
FDIC insurance premiums remained relatively constant at
$58.4 million in 1994, compared with $57.5 million and $51.5
million in 1993 and 1992, respectively. The increase in
premiums of $6.0 million, or 11.7 percent, during 1993
resulted from generally higher deposit levels, primarily
related to BSI and ACF.
First Bank System, Inc. and Subsidiaries 11
<PAGE>
Advertising expense was $35.5 million in 1994, compared
with $25.6 million in 1993 and $26.7 million in 1992,
reflecting expanded marketing efforts in the growing consumer
asset businesses.
Amortization of goodwill and other intangible assets was
$50.4 million in 1994, $41.3 million in 1993, and $34.0
million in 1992. The increases are primarily attributable to
the additional goodwill and intangible assets resulting from
the Boulevard, Rocky Mountain and J.P. Morgan acquisitions in
1994 and the BSI, ACF and the corporate trust unit
acquisitions in 1993 and 1992.
Other personnel costs were $35.7 million in 1994, $31.0
million in 1993, and $23.3 million in 1992. The increased use
of temporary labor related to system improvements and
conversions caused the increases in both 1994 and 1993.
The Company recorded merger and integration charges of
$122.7 million relating to the MFC acquisition in 1994. The
charges include $56.5 million in severance, $19.6 million in
asset write-downs primarily related to premises and
equipment, $6.2 million for contract terminations, and $14
million of other costs. The charges also include $26.4
million of costs incurred as of December 31, 1994, for
systems conversions, required customer communications, and
other professional services. Merger-related charges of $72.2
million relating to the CNB acquisition were recorded in
1993. The charges relate to the closing of redundant
facilities and consolidation of operations and include $29.7
million in conversion and required customer communications
costs, $22.8 million in severance, $14.3 million in premises
and equipment write-downs, and $5.4 million in other merger-
related costs. Merger-related charges of $84.0 million
relating primarily to the acquisition of WCIC were recorded
in 1992. The charges include $31.2 million in premises and
equipment write-downs, $12.6 million in securities and
interest rate swap write-downs, and $40.2 million in
severance, system conversions, and required customer
communications costs.
INCOME TAX EXPENSE - The provision for income taxes was
$191.8 million in 1994, compared with $198.6 million in 1993
and $115.7 million in 1992. The decrease in 1994 is primarily
due to the lower level of taxable income, resulting from the
recognition of securities losses and merger-related charges.
The increase in 1993 is primarily a result of the higher
level of taxable income along with a continued decline in
tax-exempt interest income. The provision for 1993 reflects a
one percent increase in the corporate income tax rate, but
the effect was partially offset by the favorable impact of
recording the related increase in deferred tax assets.
At December 31, 1994, the Company's net deferred tax asset
was $363.0 million, net of valuation allowances of $14.0
million, compared with a net deferred tax asset of $212.0
million, net of valuation allowances of $19.6 million, at
December 31, 1993. Tax benefits related to securities losses,
merger-related charges, and the Boulevard acquisition caused
most of the increase over last year. 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 L on page 48.
DISCONTINUED OPERATIONS - Because of regulatory restrictions
on nonbanking activities, the Company expects that within two
years of the MFC acquisition date, it will sell Edina Realty,
Inc. ("Edina"), MFC's real estate brokerage subsidiary.
Edina's operations are 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 are
not material to the Company's financial statements and have
not been segregated. Included in the 1994 discontinued
operations is a $12.5 million accrual for the settlement of
two class action lawsuits against Edina.
Balance Sheet Analysis
----------------------
LOANS - On an aggregate basis, the Company's loan portfolio
increased $1.1 billion, or 4.5 percent, to $24.6 billion at
year-end 1994 from $23.5 billion at year-end 1993. Growth in
most commercial and consumer loan categories was partially
offset by a $2.2 billion decrease in loans to mortgage
bankers and residential mortgages held for sale.
12 First Bank System, Inc. and Subsidiaries
<PAGE>
<TABLE>
<CAPTION>
TABLE 7. Loan Portfolio Distribution
1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------
At December 31 (Dollars in Percent Percent Percent Percent Percent
Millions) Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL:
Commercial................ $ 7,002 28.5% $ 5,987 25.5% $ 5,497 26.6% $ 5,395 28.8% $ 6,505 34.5%
Financial institutions.... 787 3.2 2,004 8.5 1,132 5.5 1,001 5.3 568 3.0
Real estate:
Commercial mortgage...... 2,448 10.0 2,227 9.5 2,178 10.5 2,144 11.4 2,170 11.5
Construction............. 330 1.3 241 1.0 239 1.2 312 1.7 375 2.0
HLTs...................... 283 1.2 183 .8 284 1.4 334 1.8 577 3.1
------------------------------------------------------------------------------------------------------
Total commercial........ 10,850 44.2 10,642 45.3 9,330 45.2 9,186 49.0 10,195 54.1
CONSUMER:
Residential mortgage...... 5,098 20.8 5,125 21.8 4,641 22.5 3,608 19.3 3,145 16.7
Residential mortgage held
for sale................. 197 .8 1,149 4.9 856 4.1 775 4.1 717 3.8
Home equity and second
mortgage................. 2,453 10.0 1,932 8.2 1,482 7.2 1,012 5.4 884 4.7
Credit card............... 2,409 9.8 1,757 7.5 1,782 8.6 1,709 9.1 1,232 6.5
Automobile................ 1,770 7.2 1,159 4.9 1,050 5.1 1,034 5.5 1,346 7.1
Revolving credit.......... 725 2.9 695 3.0 605 2.9 576 3.1 363 1.9
Installment............... 712 2.9 772 3.3 671 3.2 594 3.2 745 4.0
Student loans held for
sale..................... 336 1.4 260 1.1 246 1.2 240 1.3 218 1.2
------------------------------------------------------------------------------------------------------
Total consumer.......... 13,700 55.8 12,849 54.7 11,333 54.8 9,548 51.0 8,650 45.9
------------------------------------------------------------------------------------------------------
Total loans............. $ 24,550 100.0% $23,491 100.0% $20,663 100.0% $18,734 100.0% $18,845 100.0%
======================================================================================================
</TABLE>
COMMERCIAL: Commercial loans totaled $7.0 billion at year-
end 1994, up $1.0 billion, or 17.0 percent, from year-end
1993. Year-end 1993 commercial loans were $6.0 billion, up
$.5 billion, or 8.9 percent, from year-end 1992. The increase
in commercial loans includes growth of $583 million in small
and middle-market business lending and $250 million in the
Corporate Payment System that issues Visa corporate,
business and purchasing cards to businesses.
At December 31, 1994, the significant industry groups based
on commercial loans outstanding were consumer product
manufacturers (29 percent), service industries, including
both business and consumer services (26 percent), and
wholesalers (20 percent). This mix is similar to those in
1993 and 1992.
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 dropped to $.8 billion at December 31, 1994,
from $2.0 billion at December 31, 1993, and $1.1 billion at
December 31, 1992. The significant decrease from prior years
is attributable to the cyclical nature of the Company's
secured loans to mortgage banking firms. The mortgage banking
firms' loan volume has decreased due to a decline in
refinancings related to a rise in market interest rates.
The financial institutions group provides financing to
customer institutions headquartered throughout the United
States. Many of these institutions originate residential
mortgages on a national basis. The Company secures these
loans primarily with first liens on single family residences.
COMMERCIAL REAL ESTATE: The Company's portfolio of
commercial real estate mortgages and construction loans grew
approximately $310 million to $2.8 billion at December 31,
1994, compared with $2.5 billion at December 31, 1993, and
$2.4 billion at December 31, 1992. The Company has seen
increased activity in commercial real estate loans as market
prices stabilizes and vacant space declines, allowing more
projects to meet the Company's high credit standards.
First Bank System, Inc. and Subsidiaries 13
<PAGE>
Commercial mortgages outstanding were $2.4 billion at
December 31, 1994, compared with $2.2 billion at December 31,
1993. Real estate construction loans outstanding at December
31, 1994, totaled $330 million, compared with $241 million
from year-end 1993. The Company maintains the real estate
construction designation on a loan 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 $25 million
of construction loans were transferred to the commercial
mortgage portfolio in 1994.
The Company's commercial real estate mortgages and
construction loans had combined unfunded commitments of $367
million at December 31, 1994, and $223 million at December
31, 1993. At year-end 1994, real estate interests secured
$184 million of tax-exempt industrial development loans and
commitments and $298 million of standby letters of credit. At
year-end 1993, these exposures totaled $227 million and $304
million, respectively. Table 8 shows the breakdown of these
real estate exposures by property type and geographic
location.
TABLE 8. Commercial Real Estate Exposure by Property Type
and Geography
<TABLE>
<CAPTION>
Percentage of Total
at December 31
-------------------
PROPERTY TYPE 1994 1993
-------------------------------------------------------------
<S> <C> <C>
Retail.................................. 17.2% 14.1%
Office building......................... 17.1 14.9
Mixed-use office........................ 16.7 15.1
Multi-family............................ 16.6 19.2
Hotel/motel............................. 6.2 6.0
Single-family residential............... 4.2 4.0
Land.................................... 1.9 1.8
Other, primarily owner-occupied......... 20.1 24.9
-------------------
100.0% 100.0%
===================
GEOGRAPHY
-------------------------------------------------------------
Minnesota............................... 33.1% 34.6%
Colorado................................ 19.2 20.2
Montana, North Dakota and South Dakota.. 11.9 11.9
Wisconsin............................... 8.9 10.0
Iowa, Kansas, Nebraska and Wyoming...... 5.1 5.7
Illinois................................ 4.5 .5
-------------------
Total FBS region..................... 82.7 82.9
Other West.............................. 9.1 6.8
Southeast............................... 3.0 2.9
Other Southwest......................... 2.8 3.4
Other Midwest........................... 1.8 3.3
Mid-Atlantic............................ .6 .7
-------------------
100.0% 100.0%
===================
</TABLE>
Other real estate totaled $69.8 million at December 31,
1994. These properties are valued at estimated market value,
and year-end 1994 book value represents approximately 35
percent of the aggregate original investment. In-substance
foreclosures, which are included in the other real estate
balance at year-end 1994, are properties held as collateral
over which the Company possesses economic control due to the
borrower's inability to repay the related loan or rebuild
equity in the property. The Company does not possess legal
title to these properties. The adoption of SFAS 114,
14 First Bank System, Inc. and Subsidiaries
- --
<PAGE>
"Accounting by Creditors for Impairment of a Loan," effective
January 1, 1995, will require the reclassification of certain
of the in-substance foreclosure assets to nonperforming
loans. These amounts are not material.
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 $342 million at December 31, 1994, and $286
million at December 31, 1993.
HIGHLY LEVERAGED TRANSACTIONS: The Company's exposure to
commercial loans involving the buyout, recapitalization or
acquisition of an existing business, called highly leveraged
transactions ("HLTs"), remained at relatively low levels. At
December 31, 1994, the Company had HLT outstandings totaling
$283 million and was committed under definitive loan
agreements to lend an additional amount of approximately $179
million. Total exposure was $233 million at December 31,
1993, and $375 million at December 31, 1992. The increase in
HLT originations is consistent with industry and economic
trends. The Company continues to have stringent underwriting
criteria and monitoring procedures for its HLT lending.
CONSUMER: Consistent with the Company's strategy, growth in
retail lending is of continuing importance to the Company.
Total consumer loan outstandings were $13.7 billion at
December 31, 1994, up $851 million from $12.8 billion at
year-end 1993. Excluding a $1.0 billion decrease in
residential mortgage loans held for sale, the other consumer
loans increased $1.8 billion, or 15.4 percent.
Home equity and second mortgages increased $521 million, or
27.0 percent, primarily due to successful promotions. In
addition, credit card loans, including the new Northwest
Airlines WorldPerks credit card, grew $652 million, or 37.1
percent. During 1994, automobile loans increased $611
million, or 52.7 percent, to $1.8 billion primarily due to
the emphasis on indirect automobile lending by MFC. Revolving
credit loans remained relatively constant at $.7 billion at
December 31, 1994, and 1993, and installment loans decreased
$60 million, or 7.8 percent, to $712 million. At December 31,
1994, student loans totaled $336 million, up $76 million from
the prior year.
The rising interest rate environment in 1994 resulted in
decreased activity in the Company's residential mortgage loan
portfolio. Residential mortgage outstandings decreased $27
million, or .5 percent, to $5.1 billion, and residential
mortgages held for sale decreased $1.0 billion, or 82.9
percent. Loan production was approximately $2.7 billion in
1994, a 68.4 percent decrease from 1993. Included in 1993
loan production was $3.1 billion related to correspondent
business and $1.9 billion more in refinance business than
occurred in 1994. The Company's decision to exit the
correspondent business contributed to approximately half of
the 1994 loan production decline. The effect of this decision
on net income was not material. Table 7 on page 13 shows the
breakdown of the Company's consumer loan portfolio by type of
loan.
Consumer lending is based primarily in the Company's
operating region of Minnesota, Colorado, Montana, North
Dakota, South Dakota, Illinois, Wisconsin, Wyoming, Iowa,
Nebraska, and Kansas. Of total consumer balances outstanding,
approximately 75 percent are to customers located in the
Company's operating region. See page 17 for a discussion of
the general economic conditions within the Company's
operating region.
ALLOWANCE FOR CREDIT LOSSES - At December 31, 1994, the
allowance for credit losses was $474.7 million, compared with
an allowance of $466.1 million at year-end 1993 and $483.8
million at year-end 1992. The ratio of the allowance for
credit losses to nonperforming loans increased to 293 percent
at December 31, 1994, from 213 percent at December 31, 1993,
and 163 percent at December 31, 1992. For further information
on the allowance for credit losses, refer to "Corporate Risk
Profile," beginning on page 17.
SECURITIES - At December 31, 1994, the Company's available-
for-sale securities portfolio was $5.19 billion compared with
$4.09 billion at December 31, 1993. The increase is due to
the classification of the entire MFC securities portfolio as
available for sale at December 31, 1994, to reflect MFC's
board-approved plan to sell $1.56 billion of its securities
and to conform with FBS policies and due to the addition of
the $770 million portfolio acquired with the Boulevard
purchase. These increases were partially offset by securities
sales and attrition. The relative mix of the securities
portfolio has not changed significantly from the prior years
with U.S. Treasury and mortgage-backed securities
representing the majority of the portfolio.
First Bank System, Inc. and Subsidiaries 15
<PAGE>
TABLE 9. Available-for-sale Securities Portfolio Average
Maturity
<TABLE>
<CAPTION>
At December 31, 1994 Average Maturity
<S> <C>
U.S. Treasury........... 3 years, 2 months
Other U.S. Agencies..... 4 years, 0 months
State and Political..... 14 years, 2 months
Other*.................. 4 years, 7 months
Total................ 4 years, 6 months
</TABLE>
*Excludes equity securities which have no stated maturity.
The average effective life of the holdings is expected to be
less than the average contractual maturities shown in the
table because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
The table above does not reflect the average contractual
maturity of mortgage-backed securities.
TABLE 10. Available-for-sale Securities Portfolio Amortized Cost, Fair Value
and Yield by Maturity Date
<TABLE>
<CAPTION>
MATURING: WITHIN 1 YEAR 1-5 YEARS 5-10 YEARS
- ------------------------------------------------------------------------------------------------------------------------------
At
December 31,
1994 Amor- Amor- Amor-
(Dollars in tized Fair tized Fair tized Fair
Millions) Cost Value Yield Cost Value Yield Cost Value Yield
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 71.9 $ 71.5 5.03% $ 897.4 $ 867.5 6.23% $207.2 $173.8 5.22%
Mortgage-backed
securities* - - - - - - - - -
Other U.S.
Agencies.... 74.3 74.5 7.36 173.3 166.3 5.73 41.8 38.6 6.86
State and
Political*** 3.1 3.1 7.86 20.7 20.8 9.69 39.2 39.1 9.02
Other........ 14.5 14.4 5.79 83.7 82.5 7.67 39.9 38.8 6.18
-----------------------------------------------------------------------------------------------------------
$163.8 $163.5 6.20% $1,175.1 $1,137.1 6.32% $328.1 $290.3 6.00%
===========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
MORTGAGE-BACKED
MATURING: OVER 10 YEARS SECURITIES TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
At
December 31,
1994 Amor- Amor- Amor-
(Dollars in tized Fair tized Fair tized Fair
Millions) Cost Value Yield Cost Value Yield Cost Value Yield
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ - $ - -% $ - $ - -% $1,176.5 $1,112.8 5.99%
Mortgage-backed
securities* - - - 3,400.2 3,297.2 6.58 3,400.2 3,297.2 6.58
Other U.S.
Agencies.... 44.0 44.0 7.04 - - - 333.4 323.4 6.40
State and
Political*** 115.4 118.4 11.27 - - - 178.4 181.4 10.53
Other........ 130.4 134.6 6.86** - - - 268.5 270.3 7.02**
-----------------------------------------------------------------------------------------------------------
$289.8 $297.0 9.82%** $3,400.2 $3,297.2 6.58% $5,357.0 $5,185.1 6.58%**
===========================================================================================================
</TABLE>
*Adjustable rate mortgage securities (ARMs) represent 34% of the balance of
mortgage-backed securities.
**Excludes equity securities which have no stated yield.
***Yields on state and political obligations that are not subject to federal
income tax have been adjusted to taxable-equivalent using a 35% tax rate.
Trading account assets are purchased for resale to
customers. Trading account assets consist primarily of
securities of the U.S. Treasury and its agencies, state and
political subdivisions, and short-term obligations of banks.
Other earning assets consist of federal funds sold, reverse
repurchase agreements, deposits with banks, and equity
securities that do not have readily determinable fair
values. Trading account and other earning assets averaged
$.7 billion in 1994 compared with $1.1 billion in 1993.
DEPOSITS--Noninterest-bearing deposits averaged $6.3 billion
in 1994, down $378 million from the 1993 average of $6.7
billion. The decrease in noninterest-bearing deposits
resulted from reduced loan production at mortgage banking
firms that generate noninterest-bearing deposits.
Average interest-bearing deposits include certificates of
deposit, savings certificates, and money market and interest
checking products. These deposits averaged $18.4 billion in
1994 compared with $18.9 billion in 1993. The relatively low
market interest rate environment throughout 1994 caused
deposits to decline.
SHORT-TERM BORROWINGS--Short-term borrowings, which include
federal funds purchased, securities sold under agreements to
repurchase and other short-term borrowings, averaged $3.0
billion in 1994, or $1.5 billion more than in the prior year.
These borrowings were obtained at competitive rates during
1994 and replaced the lower level of deposits in 1994.
LONG-TERM DEBT--Intermediate- and long-term debt averaged
$2.3 billion in 1994, up from $1.5 billion in 1993. In
October 1994, First Bank National Association ("FBNA"), the
Company's lead bank, completed a $100 million subordinated
debt issuance in the form of 10-year noncallable notes. The
notes were priced at 8.35 percent, or 70 basis points over
the 10-year Treasury note. In June 1994, the Company placed
$100 million in subordinated debt in the form of 10-year
noncallable notes. The notes were priced at 7.55 percent, or
64 basis points over the 10-year Treasury note. During 1993,
the Company placed three $100 million subordinated debt
issuances.
16 First Bank System, Inc. and Subsidiaries
- --
<PAGE>
Medium-term notes outstanding totaled $514 million at
December 31, 1994, compared with $248 million at December 31,
1993. During 1994, the Company issued $355 million of medium-
term notes with maturities of one to three years and $50
million of notes with maturities of less than one year.
Maturities and retirement of medium-term notes during 1994
totaled $139 million.
Federal Home Loan Bank ("FHLB") advances increased to $1.1
billion at December 31, 1994, from $.8 billion at December
31, 1993. These advances increased to fund current loan
production and to offset fluctuations in MFC's core deposit
balances in 1994. The FHLB advances have terms which extend
to 2008.
Corporate Risk Profile
----------------------
OVERALL RISK PROFILE - Managing risk is an essential part of
the operation of a financial services institution. The most
prominent risk exposures are credit quality, interest rate
sensitivity, and liquidity risk. Credit quality risk involves
the risk of either not collecting interest when it is due or
not receiving the principal balance of the loan or investment
when it matures or otherwise is due. Interest rate
sensitivity risk is the risk of reduced net interest income
because of differences in the repricing characteristics of
assets and liabilities, as well as the change in the market
value of assets and liabilities as interest rates fluctuate.
Liquidity risk is the risk that the Company will not be able
to fund its obligations and is largely a function of how
effectively the Company manages its other risks.
CREDIT MANAGEMENT - The Company continued to maintain its
high level of credit quality in 1994. Nonperforming assets
declined for the fifth consecutive year during 1994,
reflecting the Company's disciplined credit culture
characterized by individual lender accountability and prudent
credit policies, the reduced risk profile of the loan
portfolio, and improved economic conditions in the Company's
lending region. The ratio of nonperforming assets to loans
plus other real estate declined to .94 percent at year-end
1994 from 1.45 percent at year-end 1993 and 2.45 percent at
year-end 1992. The risk reduction in the portfolio is a
result of the Company's focus on middle market lending in its
region and a shift toward more consumer lending. Consistent
with the Company's strategy, the acquisitions made during the
past three years have enhanced middle market and consumer
loan portfolios. The ratio of the allowance for credit losses
to nonperforming loans increased to 293 percent indicating
strong reserve coverage. This coverage ratio was 213 percent
at year-end 1993 and 163 percent at year-end 1992.
In evaluating credit risk, the Company takes into
consideration the composition of its loan portfolio, its
level of allowance coverage, macroeconomic concerns, such as
the level of debt outstanding in the public and private
sectors and the effects of domestic and international
economic conditions, regional economic conditions, and other
issues.
The Company's credit management process includes central
credit policy and administration functions and standard
underwriting criteria for specialized lending categories,
such as mortgage banking, real estate construction, and
consumer credit. Regular credit examinations conducted by the
credit administration function support the Company's credit
management process. Quarterly, management reviews large loans
and all loans experiencing deterioration of credit quality. A
standard credit scoring system is used to assess consumer
credit risks and to price consumer products relative to their
assigned risk rating.
The Company operates principally in Minnesota, Colorado,
Illinois, Montana, Wisconsin, North Dakota, South Dakota,
Wyoming, Iowa, Nebraska, and Kansas. Most economic indicators
in the Company's operating regions compare favorably with
national indicators. Approximately 50 percent of the
Company's loan portfolio consists of extensions of credit to
companies and consumers in Minnesota and Colorado. According
to federal and state government agencies, unemployment rates
in Minnesota and Colorado were 3.5 percent and 3.3 percent,
respectively, compared with the national unemployment rate of
5.1 percent at December 31, 1994. Through September 30, 1994,
the national foreclosure rate was .92 percent, compared with
.58 percent in Minnesota and .36 percent in Colorado.
The Company engages in various non-lending activities which
may give rise to credit risk, including interest rate swap
contracts, foreign exchange transactions for the benefit of
customers, and the processing of credit card transactions for
merchants' activities. These activities are subject to the
same credit review, analysis and approval processes as those
applied to commercial loans. For additional information on
the Company's interest rate swap positions see "Interest Rate
Risk Management" on page 21.
First Bank System, Inc. and Subsidiaries 17
<PAGE>
<TABLE>
<CAPTION>
TABLE 11. Summary of Allowance for Credit Losses
(Dollars in Millions) 1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period................................ $ 466.1 $483.8 $453.2 $484.4 $507.2
CHARGE-OFFS:
Commercial:
Commercial.................................................. 53.3 45.5 60.6 94.5 97.0
Financial institutions...................................... 1.1 6.5 - 2.0 3.0
Real estate:
Commercial mortgage........................................ 34.4 59.8 48.7 79.6 66.8
Construction............................................... .2 .4 6.1 6.3 32.0
HLTs........................................................ 3.8 8.0 27.0 11.5 15.9
------------------------------------------------
Total commercial.......................................... 92.8 120.2 142.4 193.9 214.7
Consumer:
Residential mortgage........................................ 4.7 3.0 6.8 6.1 7.0
Credit card................................................. 78.5 71.6 85.5 68.4 43.7
Other....................................................... 50.8 44.4 50.5 49.8 39.3
------------------------------------------------
Total consumer............................................ 134.0 119.0 142.8 124.3 90.0
------------------------------------------------
Total..................................................... 226.8 239.2 285.2 318.2 304.7
RECOVERIES:
Commercial:
Commercial.................................................. 36.4 31.2 37.2 27.7 30.4
Financial institutions...................................... .4 7.0 - - .7
Real estate:
Commercial mortgage........................................ 17.7 11.7 6.3 11.8 5.8
Construction............................................... .9 1.3 1.9 1.2 4.7
HLTs........................................................ 6.4 2.4 3.0 5.3 3.1
------------------------------------------------
Total commercial.......................................... 61.8 53.6 48.4 46.0 44.7
Consumer:
Residential mortgage........................................ 1.1 1.7 2.3 1.6 2.0
Credit card................................................. 9.1 9.7 8.0 6.0 4.3
Other....................................................... 14.5 11.9 12.8 10.1 10.6
------------------------------------------------
Total consumer............................................ 24.7 23.3 23.1 17.7 16.9
------------------------------------------------
Total..................................................... 86.5 76.9 71.5 63.7 61.6
NET CHARGE-OFFS:
Commercial:
Commercial.................................................. 16.9 14.3 23.4 66.8 66.6
Financial institutions...................................... .7 (.5) - 2.0 2.3
Real estate:
Commercial mortgage........................................ 16.7 48.1 42.4 67.8 61.0
Construction............................................... (.7) (.9) 4.2 5.1 27.3
HLTs........................................................ (2.6) 5.6 24.0 6.2 12.8
------------------------------------------------
Total commercial.......................................... 31.0 66.6 94.0 147.9 170.0
Consumer:
Residential mortgage........................................ 3.6 1.3 4.5 4.5 5.0
Credit card................................................. 69.4 61.9 77.5 62.4 39.4
Other....................................................... 36.3 32.5 37.7 39.7 28.7
------------------------------------------------
Total consumer............................................ 109.3 95.7 119.7 106.6 73.1
------------------------------------------------
Total..................................................... 140.3 162.3 213.7 254.5 243.1
Provision charged to operating expense........................ 123.6 133.1 191.7 210.2 219.7
Additions related to acquisitions............................. 25.3 11.5 52.6 13.1 .6
------------------------------------------------
Balance at end of period...................................... $ 474.7 $466.1 $483.8 $453.2 $484.4
================================================
Allowance as a percentage of period-end loans................. 1.93% 1.98% 2.34% 2.42% 2.57%
Allowance as a percentage of nonperforming loans.............. 293 213 163 131 103
Allowance as a percentage of nonperforming assets............. 204 137 95 69 66
------------------------------------------------
</TABLE>
18 First Bank System, Inc. and Subsidiaries
<PAGE>
ANALYSIS AND ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES - The
allowance for credit losses provides for credit losses
inherent in the Company's loan portfolio and related off-
balance sheet commitments. The provision for credit losses
increases and net charge-offs decrease the allowance.
Management has determined that the allowance for credit
losses is adequate based on a continuing evaluation of the
loan portfolio and off-balance sheet commitments, economic
conditions and expectations, historical experience and the
risk evaluation of individual credits. Although the recent
trend of slow steady economic growth may contribute to the
continued improvement in the credit portfolio, any stagnation
or reversals in the economy could cause an increase in the
required level of the allowance for credit losses.
Management reviews the adequacy of the allowance each
quarter based on the status of problem loans and related off-
balance sheet commitments, recent loss experience and other
pertinent factors, including current and anticipated economic
conditions. As a result of these assessments, management
determines whether an additional allowance above specified
allocations should be provided for the inherent loss in loans
concentrated in certain industries.
Management allocates components of the allowance to certain
industry sectors based on its assessment of the 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.
At December 31, 1994, the allowance for credit losses was
$474.7 million, or 1.93 percent of loans. This compares with
an allowance of $466.1 million, or 1.98 percent of loans, at
year-end 1993 and $483.8 million, or 2.34 percent of loans,
at December 31, 1992. The allowance increased to 293 percent
of nonperforming loans at December 31, 1994, compared with
213 percent at December 31, 1993, and 163 percent at December
31, 1992.
The unallocated allowance increased to $277.7 million at
year-end 1994 from $261.0 million and $213.4 million at
December 31, 1993, and 1992, respectively. Generally, the
increase in the unallocated allowance reflects the trend of
improving credit quality in the portfolio and the lower level
of charge-offs. Although the allocation of the allowance is
an important tool in credit management, the entire allowance
for credit losses is available for the entire loan portfolio.
<TABLE>
<CAPTION>
TABLE 12. Allocation of Allowance for Credit Losses
Allocation Amount at December 31 Allocation as a Percent of Loans Outstanding
--------------------------------------------------------------------------------------
(Dollars in Millions) 1994 1993 1992 1991 1990 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL:
Commercial and financial institutions... $ 74.5 $ 71.1 $ 84.1 $103.3 $134.7 .96% .89% 1.27% 1.62% 1.90%
Real estate:
Commercial mortgage................... 32.7 59.8 69.9 92.2 145.1 1.34 2.69 3.21 4.30 6.69
Construction.......................... 1.9 1.0 7.3 5.3 3.6 .58 .41 3.05 1.70 .96
HLTs.................................... 4.3 9.0 21.8 23.1 31.5 1.52 4.92 7.68 6.92 5.46
----------------------------------------------------------------------------------
Total commercial...................... 113.4 140.9 183.1 223.9 314.9 1.05 1.32 1.96 2.44 3.09
CONSUMER:
Residential mortgage.................... 10.6 13.8 14.9 15.4 13.8 .20 .22 .27 .35 .36
Credit card............................. 32.5 22.0 38.9 39.7 31.0 1.35 1.25 2.18 2.32 2.52
Other................................... 40.5 28.4 33.5 19.0 28.4 .68 .59 .83 .55 .80
----------------------------------------------------------------------------------
Total consumer........................ 83.6 64.2 87.3 74.1 73.2 .61 .50 .77 .78 .85
----------------------------------------------------------------------------------
Total allocated......................... 197.0 205.1 270.4 298.0 388.1 .80 .87 1.31 1.59 2.06
Unallocated portion..................... 277.7 261.0 213.4 155.2 96.3 1.13 1.11 1.03 .83 .51
----------------------------------------------------------------------------------
Total allowance....................... $474.7 $466.1 $483.8 $453.2 $484.4 1.93% 1.98% 2.34% 2.42% 2.57%
==================================================================================
</TABLE>
First Bank System, Inc. and Subsidiaries 19
<PAGE>
ANALYSIS OF NET LOAN CHARGE-OFFS - As shown in Table 11 on page 18, net loan
charge-offs decreased $22.0 million to $140.3 million from the $162.3 million
reported in 1993 primarily due to decreases in commercial mortgage net charge-
offs. Consumer loan net charge-offs in 1994 were $13.6 million higher than in
1993, reflecting an acceleration of the timing of charge-offs for fraud losses
on credit card and other consumer loan balances. Net charge-offs were $213.7
million in 1992. Table 13 shows net charge-offs as a percentage of average loans
outstanding by industry.
<TABLE>
<CAPTION>
TABLE 13. Net Charge-offs as a Percentage of Average Loans Outstanding by Industry
1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL:
Commercial .21% .34% .86% 1.17% 1.03%
Financial institutions .06 (.03) - .28 .41
Real Estate:
Commercial mortgage .71 2.18 1.99 3.07 2.81
Construction (.26) (.41) 1.54 1.51 5.32
--------------------------------------------------------------------------
Total commercial .29 .68 1.05 1.56 1.55
CONSUMER:
Residential mortgage .06 .02 .10 .11 .10
Credit card 3.38 3.57 4.53 4.17 3.61
Other .66 .74 1.03 1.17 .95
--------------------------------------------------------------------------
Total consumer .82 .80 1.19 1.19 .82
--------------------------------------------------------------------------
Total .59% .74% 1.12% 1.38% 1.22%
==========================================================================
</TABLE>
ANALYSIS OF NONPERFORMING ASSETS - Nonperforming assets include all nonaccrual
loans, restructured loans, other real estate and other nonperforming assets
owned by the Company. At December 31, 1994, nonperforming assets totaled $232.3
million, a decrease of $109.1 million, or 32.0 percent, from year-end 1993. The
ratio of nonperforming assets to loans plus other real estate improved to .94
percent at December 31, 1994, compared with 1.45 percent at year-end 1993 and
2.45 percent at year-end 1992. The most significant reductions in nonperforming
assets occurred in commercial, HLT, and residential mortgage nonperforming loans
and other real estate. Commercial nonperforming loans declined $16.5 million, or
38.3 percent, HLT nonperforming loans declined $10.2 million, or 50.7 percent,
residential mortgage nonperforming loans declined $14.7 million, or 25.3
percent, and other real estate declined $51.7 million, or 42.6 percent.
At December 31, 1993, nonperforming assets were $341.4 million, down $169.1
million, or 33.1 percent, from year-end 1992. The most significant reduction
occurred in other real estate, which declined $88.6 million, or 42.2 percent,
primarily due to sales of properties. The decrease in HLT nonperforming loans
was related to one credit totaling $37.5 million which was paid in 1993.
Residential mortgage nonperforming loans increased to $58.2 million at
December 31, 1993, from $36.8 million at December 31, 1992, due to the purchase
of $24.0 million of delinquent residential mortgages in connection with a sale
of mortgage loan servicing rights. Government-sponsored mortgage insurance
supports these loans, and the Company does not anticipate any significant losses
related to these loans.
Interest payments are currently received on approximately 25 percent of the
Company's nonperforming loans. The payments are typically applied against
principal and not recorded as income.
20 First Bank System, Inc. and Subsidiaries
<PAGE>
<TABLE>
<CAPTION>
TABLE 14. Nonperforming Assets
At December 31
--------------------------------------------------
(Dollars in Millions) 1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans............................. $162.0 $218.9 $293.2 $329.5 $443.0
Restructured loans........................... .1 - 3.5 16.7 25.7
--------------------------------------------------
Nonperforming loans........................ 162.1 218.9 296.7 346.2 468.7
Other real estate............................ 69.8 121.5 210.1 293.3 248.2
Other nonperforming assets................... .4 1.0 3.7 18.3 20.3
--------------------------------------------------
Nonperforming assets....................... $232.3 $341.4 $510.5 $657.8 $737.2
==================================================
Accruing loans 90 days or more past due...... $ 26.0 $ 31.2 $ 30.2 $ 43.7 $ 35.1
Nonperforming loans to total loans........... .66% .93% 1.44% 1.85% 2.49%
Nonperforming assets to total loans
plus other real estate..................... .94 1.45 2.45 3.46 3.86
Net interest lost on nonperforming loans..... $ 11.0 $ 15.6 $ 18.1 $ 26.3 $ 33.0
--------------------------------------------------
</TABLE>
Accruing loans 90 days or more past due at December 31,
1994, totaled $26.0 million, compared with $31.2 million at
December 31, 1993, and $30.2 million at December 31, 1992.
Consumer loans 30 days or more past due were 1.8 percent of
the total consumer portfolio at December 31, 1994, compared
with 2.1 percent at December 31, 1993. Consumer loans 90 days
or more past due at December 31, 1994, totaled .6 percent of
the total consumer loan portfolio, compared with .8 percent
at December 31, 1993. The decreases were primarily due to the
improvement in delinquent residential mortgages purchased in
1993 in connection with a sale of mortgage loan servicing
rights. Government-sponsored mortgage insurance supports all
of the delinquent residential mortgages.
<TABLE>
<CAPTION>
TABLE 15. Nonperforming Assets by Industry
At December 31 1994 COMPARED WITH 1993
------------------------------------------
(Dollars in Millions) 1994 1993 Amount Percent
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL:
Commercial............................................. $ 26.6 $ 43.1 $ (16.5) (38.3)%
Financial institutions................................. - .9 (.9) (100.0)
Real estate:
Commercial mortgage.................................. 65.2 77.7 (12.5) (16.1)
Construction......................................... 1.6 3.7 (2.1) (56.8)
HLTs................................................... 9.9 20.1 (10.2) (50.7)
---------------- -------
Total commercial..................................... 103.3 145.5 (42.2) (29.0)
CONSUMER:
Residential mortgage................................... 43.5 58.2 (14.7) (25.3)
Credit card............................................ 9.9 10.3 (.4) (3.9)
Other.................................................. 5.4 4.9 .5 10.2
---------------- -------
Total consumer....................................... 58.8 73.4 (14.6) (19.9)
---------------- -------
Total nonperforming loans............................ 162.1 218.9 (56.8) (25.9)
OTHER REAL ESTATE........................................ 69.8 121.5 (51.7) (42.6)
OTHER NONPERFORMING ASSETS............................... .4 1.0 (.6) (60.0)
---------------- -------
Total nonperforming assets........................... $232.3 $341.4 $(109.1) (32.0)%
================ ====================
</TABLE>
INTEREST RATE RISK MANAGEMENT -- The Company's principal
objective for interest rate risk management is to control the
exposure of net interest income to risks associated with
interest rate movements. The Company uses derivative
financial instruments ("derivatives") to hedge on-balance
sheet items and, to a lesser extent, in connection with
intermediated transactions for customers. The market risk on
intermediated transactions is limited by entering into
generally matching or offsetting positions. The Company does
not enter into derivative contracts for speculative purposes.
First Bank System, Inc. and Subsidiaries 21
<PAGE>
Interest rate risk is measured and reported to the
Company's Asset and Liability Management Committee ("ALCO")
through the use of traditional gap analysis which measures
the difference between assets and liabilities that reprice in
a given time period, simulation modeling which produces
projections of net interest income under various interest
rate scenarios and balance sheet strategies, and valuation
modeling which measures the sensitivity of various components
of the balance sheet under various interest rate scenarios.
The significant assumptions include rate sensitivities,
prepayment risks, and the timing of changes in prime and
deposit rates compared with changes in money market rates.
The MFC securities sold in January 1995 are included in the
less than 3 months category and the deposits expected to be
sold in connection with the sale of MFC branches are
reflected in the 3-6 month category.
Table 16 shows the Company's interest rate repricing gap
position at several repricing maturities. As of December 31,
1994, the Company had a cumulative positive repricing gap
position at one year of $502 million, indicating that more
assets than liabilities reprice within that period. This
analysis is useful as a point-in-time measurement of interest
rate risk. However, the gap analysis is unable to capture
prepayment risk, the changing relationships between asset
rates and liability rates of similar maturity (basis risk),
option risk represented by interest rate caps and floors, and
timing differences in adjusting the interest rates of certain
assets and liabilities that have varying sensitivities to
market interest rates. As a result, management places a
greater reliance on simulation and valuation modeling to
measure and manage interest rate risk.
It is the Company's policy to maintain a low interest rate
risk position by limiting the amount of forecasted net
interest income at risk over a 12-month period assuming an
immediate and sustained 100-basis point change in interest
rates. Forecasted results are sensitive to many assumptions,
including estimates of the timing of changes in rates which
are determined by reference to market indices, such as prime
or LIBOR, relative to each other and relative to rates which
are determined by the Company subject to competitive factors.
The Company assumes that the timing of the changes in these
rates will follow historic patterns, adjusted as necessary
for current competitive factors and market conditions.
<TABLE>
<CAPTION>
TABLE 16. Interest Rate Sensitivity Gap Analysis
REPRICING MATURITIES
-----------------------------------------------------------------------
Less Than 3-6 6-12 1-5 More Than Non-Rate
At December 31, 1994 (In Millions) 3 Months Months Months Years 5 Years Sensitive Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans................................................... $11,739 $ 1,257 $2,333 $5,845 $3,214 $ 162 $24,550
Available-for-sale securities........................... 2,270 283 300 1,598 875 (141) 5,185
Other earning assets.................................... 576 - - - - - 576
Nonearning assets....................................... 256 10 5 402 1,469 1,675 3,817
----------------------------------------------------------------------
Total assets........................................... $14,841 $ 1,550 $2,638 $7,845 $5,558 $ 1,696 $34,128
======================================================================
Liabilities and Equity:
Deposits................................................ $ 7,758 $ 2,400 $1,775 $7,809 $4,478 $ 36 $24,256
Other purchased funds................................... 3,253 243 3 4 20 - 3,523
Long-term debt.......................................... 753 5 95 1,082 749 - 2,684
Other liabilities....................................... 28 - - - - 1,025 1,053
Equity.................................................. - - - - - 2,612 2,612
----------------------------------------------------------------------
Total liabilities and equity........................... $11,792 $ 2,648 $1,873 $8,895 $5,247 $ 3,673 $34,128
======================================================================
Effect of off-balance sheet hedging instruments:
Receiving fixed......................................... $ 115 $ 130 $ 215 $1,489 $ 725 $ - $ 2,674
Paying floating......................................... (2,499) (25) (150) - - - (2,674)
----------------------------------------------------------------------
Total effect of off-balance sheet hedging instruments.. $(2,384) $ 105 $ 65 $1,489 $ 725 $ - $ -
======================================================================
Repricing gap............................................ $ 665 $ (993) $ 830 $ 439 $1,036 $(1,977) $ -
Cumulative repricing gap................................. 665 (328) 502 941 1,977 -
======================================================================
</TABLE>
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 fifty percent of regular savings, interest-
bearing checking, and money market checking balances and sixty-seven percent of
money market savings balances are reflected in the Less Than 3 Months category,
four percent of the interest checking and regular savings and one percent of
the money market savings balances are reflected in the 3-6 Months category,
with the remainder placed in the 1-5 Years category. Approximately seventy-three
percent of demand deposits and related nonearning asset accounts is allocated in
the More Than 5 Years category, fifteen percent is allocated in the 1-5 Years
category with the remaining allocated in the Less Than 3 Months category.
22 First Bank System, Inc. and Subsidiaries
<PAGE>
The Company invests in fixed rate assets or receives the
fixed rate payments on interest rate swaps as a hedge to
maintain acceptable rate risk levels. The derivatives the
Company uses to achieve its hedging objectives are primarily
interest rate swaps, caps, and floors. Interest rate swap
agreements involve the exchange of fixed and floating rate
interest payments without the exchange of the underlying
notional amount on which the interest payments are
calculated. As of December 31, 1994, the Company receives
payments on $2.7 billion notional amount of interest rate
swap agreements, based on fixed interest rates, and makes
payments based on variable interest rates. These swaps have
an average fixed rate of 6.91 percent and an average variable
rate, which is tied to various LIBOR rates, of 6.09 percent.
The maturity of these agreements ranges from one month to 10
years with an average remaining maturity of 4.0 years.
<TABLE>
<CAPTION>
TABLE 17. Interest Rate Swap Hedging Portfolio Notional Balances and Yields by Maturity Date
At December 31, 1994 (Dollars in Millions)
---------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Receive Fixed Swaps* Notional Interest Rate Interest Rate
Maturity Date Amount Received Paid
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995 $ 460 7.36% 6.17%
1996 433 7.96 6.17
1997 250 6.36 5.95
1998 356 5.77 6.06
1999 550 6.83 6.20
After 1999** 625 6.80 5.94
------
Total $2,674 6.91% 6.09%
=========================================
</TABLE>
*At December 31, 1994, the Company did not have any swaps in
its portfolio which required it to pay fixed-rate interest.
**At December 31, 1994, all swaps with a maturity after 1999
hedge fixed rate subordinated notes.
Swaps contributed to the Company's net interest margin by
reducing interest expense for the years ended December 31,
1994, 1993, and 1992, by $62.3 million, $82.9 million, and
$74.3 million, respectively.
The Company also uses interest rate caps and floors to
minimize the impact of fluctuating interest rates on
earnings. The total notional amount of cap agreements
purchased as of December 31, 1994, was $250 million with an
average strike level of 3-month LIBOR at 6.10 percent. The
unamortized premium on caps is amortized over the life of the
cap. The caps decreased net income by $2.5 million and $2.3
million during 1994 and 1993, respectively. Interest rate
floor counterparties will pay the Company the difference
between a certain short-term rate and the strike level of the
agreement should the short-term rate fall below the strike
level. The total notional amount of floor agreements
purchased as of December 31, 1994, was $950 million with an
average strike level of 3-month LIBOR at 3.50 percent and an
average remaining maturity of 3.0 years. The impact of floors
on net interest income was not material for the year ended
December 31, 1994. Note M on page 50 has further information
on interest rate swaps and options.
Forward contracts, totaling $196 million at December 31,
1994, hedge the interest rate risk of the fixed rate mortgage
loans originated and held for sale by the Company's mortgage
subsidiary. The Company enters into foreign currency
commitments primarily as an intermediary for customers.
Derivative contracts which are not hedges are primarily
customer-driven. The Company limits its exposure to market
risk on these contracts by entering into generally matching
or offsetting positions. The Company also manages its credit
risk on all derivative contracts through counterparty and
credit limit approvals and monitoring credit concentration
risks.
Another objective of the interest rate risk measurement and
management process is to quantify the sensitivity of the
market value of the Corporation's balance sheet components to
changes in interest rates. SFAS 107, "Disclosures about Fair
Value of Financial Instruments," requires the disclosure of
the fair value of all financial instruments for which it is
practicable to estimate that value. The general definition of
financial instruments is cash, equity instruments or
investments and contractual obligations to pay or receive
cash or other financial instruments. The Statement indicates
that quoted market prices are the preferred means of
estimating the fair value of a specific instrument, but in
the cases where market quotes are not available, various
valuation techniques, such as discounted cash flow
First Bank System, Inc. and Subsidiaries 23
<PAGE>
calculations, or pricing models or services, should be used
to determine fair values. Due to the nature of its business
and the financing needs of its customers, the Company uses a
large number of financial instruments, the majority of which
are not actively traded. Accordingly, the Company uses
various valuation techniques to estimate the fair value of
its financial instruments. For further information on fair
values of financial instruments refer to Note N on page 53.
LIQUIDITY MANAGEMENT - The objective of liquidity management
is to ensure the continuous availability of funds to meet the
demands of depositors, investors and borrowers. ALCO is
responsible for managing these needs while achieving the
Company's financial objectives. ALCO meets regularly to
review funding capacity, current and forecasted loan demand
and investment opportunities. With this information, ALCO
supervises the funding needs and excess funding positions, as
well as the maintenance of contingent funding sources, to
achieve a balance sheet structure that provides sufficient
liquidity.
Several rating agencies recognized the sustained
improvement in the Company's credit quality, liquidity,
capital and earnings. As of December 31, 1994, Moody's
Investors Service, Standard & Poors, and Thomson BankWatch
rated the Company's senior debt as "A2," "A," and "A+,"
respectively. The strong debt ratings allowed the Company to
obtain negotiated funding, which includes term certificates
of deposit, foreign branch time deposits, national federal
funds purchased, bank notes, and medium-term notes, at
competitive rates. Negotiated funding increased to $3.1
billion at year-end 1994, compared with $.7 billion at year-
end 1993 and $.8 billion at year-end 1992. Although
negotiated funding has increased, the Company continues to
focus its funding opportunities primarily on deposits within
its operating region. Approximately 83 percent of the
Company's funding comes from retail deposits within its
operating region. The Company's purchased funds index,
calculated as negotiated funding and repurchase agreements,
net of federal funds sold and resale agreements, divided by
loans and securities, remains relatively low at 10.6 percent
at December 31, 1994, compared with a peer group average of
20.2 percent.
Holding company assets totaled $4.0 billion at December 31,
1994, compared with $3.7 billion both at December 31, 1993,
and December 31, 1992. The increase in holding company assets
during 1994 relates primarily to the acquisitions which were
made during the year.
The funding for the holding company consists primarily of
long-term debt and equity, while funding for the Company's
bank subsidiaries consists primarily of customer deposits.
During 1994, holding company long-term debt, including
medium-term notes, increased to $1.1 billion from $.8 billion
at year-end 1993. The Company placed subordinated debt
issuances of $100 million during both 1994 and 1993. FBNA,
the Company's lead bank, placed subordinated debt issuances
of $100 million during 1994 and $200 million during 1993. In
1994, three of the Company's bank subsidiaries registered a
$2 billion medium-term bank note program. Notes issued
under this program may mature from 30 days to 15 years after
issuance and bear fixed or floating interest rates. Proceeds
from the sale of the notes will be used for general corporate
purposes. At December 31, 1994, there were no notes issued
under this program. First Bank, fsb, also has a $100 million
FHLB line of credit with no balance drawn on this line at
December 31, 1994.
Long-term debt maturing in 1995 is approximately $195
million. These debt obligations will be met through
medium-term note or subordinated debt issuance, as well as
from the approximately $398 million of holding company cash
and cash equivalents on hand at December 31, 1994. It is
the Company's operating practice to maintain liquid assets
at the holding company sufficient to fund its operating cash
needs, including debt repayment.
Capital Management
------------------
At December 31, 1994, total shareholders' equity was $2.612
billion, or 7.7 percent of assets, compared with 8.2 percent
at year-end 1993 and 8.4 percent at year-end 1992. Common
shareholders' equity at December 31, 1994, was $2.494
billion, or $18.64 per share, compared with $2.466 billion,
or $18.91 per share, at year-end 1993 and $2.354 billion, or
$17.89 per share, at year-end 1992. The common equity-to-
assets ratio remained relatively constant at 7.3 percent at
year-end 1994, compared with 7.4 percent at year-end 1993 and
7.2 percent at year-end 1992. Compared to 1993, earnings
retention has offset the decrease caused by stock
repurchases.
24 First Bank System, Inc. and Subsidiaries
<PAGE>
TABLE 18. Capital Ratios
<TABLE>
<CAPTION>
At December 31 (Dollars in Millions) 1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Common equity.................................... $2,494 $2,466 $2,354
As a percent of assets......................... 7.3% 7.4% 7.2%
Tangible common equity*.......................... $2,082 $2,236 $2,116
As a percent of assets......................... 6.2% 6.7% 6.5%
Total shareholders' equity....................... $2,612 $2,744 $2,745
As a percent of assets......................... 7.7% 8.2% 8.4%
Tier 1 capital................................... $2,052 $2,385 $2,369
As a percent of risk-adjusted assets........... 7.3% 9.4% 9.8%
Total risk-based capital......................... $3,227 $3,399 $3,145
As a percent of risk-adjusted assets........... 11.4% 13.4% 13.0%
Leverage ratio................................... 6.2 7.3 7.6
----------------------------
*Defined as common equity less goodwill.
</TABLE>
During 1994, the Company repurchased approximately 6.3
million shares of its common stock, of which 4.4 million
shares related to acquisitions. On January 18, 1995, and
February 15, 1995, the Board of Directors authorized
additional repurchase programs of 2.0 million and 14.0
million shares of common stock, respectively. The Company
will use those shares in connection with previously announced
acquisitions, stock option plans, dividend reinvestment
plans, employee stock purchase plans, and other corporate
purposes.
On April 1, 1994, the Company completed the redemption of
$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. During 1993, the Company
redeemed its $100 million Series 1983A Adjustable Rate
Cumulative Preferred Stock. 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 Company's risk-based capital ratios, which take into
account the different credit risks among banking
organizations' assets, have remained strong over the past
three years. Tier 1 and total risk-based capital ratios were
7.3 percent and 11.4 percent, respectively, on December 31,
1994, compared with 9.4 percent and 13.4 percent at December
31, 1993, and 9.8 percent and 13.0 percent at December 31,
1992. The decrease in the ratios was due to the preferred
stock redemptions and common stock repurchases discussed
above. In accordance with the regulatory guidelines,
unrealized gains and losses on the securities portfolio are
excluded from the risk-based capital calculations, and equity
capital created by the adoption of SFAS 109, related to
deferred tax assets, is subject to limitations for inclusion
in risk-based capital.
At December 31, 1994, the Company's leverage ratio, the
ratio of Tier 1 capital to total quarterly average assets,
was 6.2 percent compared with 7.3 percent and 7.6 percent at
December 31, 1993, and 1992, respectively.
The Federal Deposit Insurance Corporation ("FDIC")
typically defines a bank to be "well capitalized" if it
maintains a Tier 1 capital ratio of at least 6.0 percent, a
total risk-based capital ratio of at least 10.0 percent and a
leverage ratio of at least 5.0 percent. Generally, it is the
Company's intention to maintain sufficient capital in each of
its bank subsidiaries to permit them to maintain a "well
capitalized" designation. As shown by Table 19 on page 26,
all of the Company's bank subsidiaries met the "well
capitalized" designation at December 31, 1994.
First Bank System, Inc. and Subsidiaries 25
<PAGE>
TABLE 19. Bank Subsidiary Capital Ratios
<TABLE>
<CAPTION>
At December 31, 1994
----------------------------------------------------
Total
Tier 1 Risk-based Total
(Dollars in Millions) Capital Capital Leverage Assets
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REGULATORY CAPITAL REQUIREMENTS:
Minimum..................................................... 4.0% 8.0% 3.0%
Well-capitalized............................................ 6.0 10.0 5.0
BANK SUBSIDIARIES:
First Bank National Association (Minnesota)................. 7.4 11.6 7.3 $14,567
First Bank, fsb............................................. * 9.1 5.0 7,901
Colorado National Bank...................................... 10.6 12.6 7.5 6,702
First Bank National Association (Illinois).................. 18.1 19.4 10.4 1,383
First Bank of South Dakota (National Association)........... 8.1 11.7 8.1 1,290
First Bank Montana, National Association.................... 10.2 12.1 9.7 1,214
First Bank (N.A.) (Wisconsin)............................... 8.7 11.1 9.0 1,166
First Bank of North Dakota, National Association............ 9.6 12.8 9.4 881
Colorado National Bank Aspen................................ 25.4 26.7 12.6 54
First National Bank of East Grand Forks..................... 15.7 18.5 9.8 42
----------------------------------------------------
Note: These balances and ratios were prepared in accordance with regulatory accounting principles as disclosed in the
banks' Call Reports.
*At December 31, 1994, First Bank, fsb, a thrift subsidiary of the Company (formerly Metropolitan Federal Bank, fsb), had tangible
capital of 4.6 percent, core capital of 5.0 percent and risk-based capital of 9.1 percent as compared with Thrift regulatory
minimums of 1.5 percent, 3.0 percent and 8.0 percent, respectively.
</TABLE>
During 1994, total dividends on common stock were $156.0
million compared with $121.8 million in 1993 and $80.8
million in 1992. On a per share basis, dividends paid to
common shareholders totaled $1.16 in 1994, $1.00 in 1993, and
$.88 in 1992. On February 15, 1995, the Board of Directors
increased the quarterly dividend rate paid to common
shareholders from $.29 to $.3625. At this dividend rate, the
annual dividend is equivalent to $1.45 per share. Dividends
per share have not been restated for the MFC, CNB, or WCIC
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).
The primary sources of funds for the dividends paid by the
Company to its shareholders are dividends received from its
bank and nonbank subsidiaries. Payment of dividends to the
Company by its subsidiary banks is subject to ongoing review
by banking regulators and to various statutory limitations.
For further information, see Note Q of Notes to Consolidated
Financial Statements on page 57.
Accounting Changes
------------------
The Company will adopt SFAS 114, "Accounting by Creditors for
Impairment of a Loan," in January 1995. This Statement
requires creditors to establish a valuation allowance when it
is probable that all the principal and interest due under the
contractual terms of a loan will not be collected. The
impairment is measured based on the present value of expected
future cash flows based on the effective interest rate of the
loan, observable market price or fair value of a collateral
dependent loan. This differs from the Company's current
policy in that it requires establishing a valuation allowance
for uncollectible interest in addition to the uncollectible
principal amounts of impaired loans. The Statement also
requires the reclassification of in-substance foreclosures
from other real estate to nonperforming loans. The adoption
of SFAS 114 is not expected to have a material effect on the
Company.
Effective December 31, 1993, the Company adopted the
provisions of SFAS 115, "Accounting for Certain Investments
in Debt and Equity Securities," and reported $4.1 billion of
its investment securities as available for sale. SFAS 115
requires that investments in debt securities and equity
securities with readily determinable fair values be
classified into three categories which then establish the
accounting treatment. The accounting for two of the
categories, trading securities and held-to-maturity
securities, is essentially the same as prior practice. The
other category, available-for-sale securities, is accounted
for at fair value with unrealized holding gains or losses
being reported in shareholders' equity. At December 31, 1994,
the Company's available for sale securities portfolio was
$5.2 billion, with an after-tax loss of $106.4 million
recorded in shareholders' equity.
26 First Bank System, Inc. and Subsidiaries
<PAGE>
Impact of Inflation
-------------------
The assets and liabilities of a financial institution are
primarily monetary in nature. As such, 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.
Fourth Quarter Summary
----------------------
In the fourth quarter of 1994, the Company reported a net
loss of $35.3 million ($.28 per share) due to an after-tax
$87.0 million ($.65 per share) merger-related charge for the
MFC transaction, an after-tax loss of $69.0 million ($.52 per
share) on the sale of MFC's securities, and a $1.9 million
($.01 per share) loss from Edina, which is a discontinued
operation. Excluding these charges, fourth quarter net income
would have been $122.6 million, or $.90 per share, compared
with fourth quarter 1993 net income of $113.7 million, or
$.81 per share. Excluding the nonrecurring charges, the
strong results for the fourth quarter of 1994, as compared
with the fourth quarter of 1993, reflect a higher net
interest margin, growth in fee income, ongoing expense
control, continued improvement in credit quality, and
effective capital management.
Net interest income on a taxable equivalent basis was
$370.2 million in the fourth quarter of 1994, an increase of
$24.2 million, or 7.0 percent, from the fourth quarter of
1993. The net interest margin on a taxable-equivalent basis
was 4.79 percent compared with 4.60 percent a year ago. Net
interest income and the margin improved principally due to
increases in the average loan yield, resulting from increases
in the Company's reference rate on variable rate loans during
1994, and a shift in the mix of loans from lower-margin,
mortgage-related balances to higher yield consumer and
commercial loans. Total average earning assets were $30.7
billion during the fourth quarter of 1994, up $.9 billion
from the level of $29.8 billion in the same period of 1993.
The provision for credit losses was $44.0 million in the
fourth quarter of 1994 compared with $28.9 million in the
fourth quarter of 1993. The increase in the provision was due
to the $16.5 million provision recorded in connection with
the MFC acquisition partially offset by continued declines in
net charge-offs and nonperforming assets. See "Provision for
Credit Losses" on page 9 and "Credit Management" on page
17 for further information regarding the provision, net
charge-offs and the allowance for credit losses.
Noninterest income was $61.4 million in the fourth quarter
of 1994, compared with $163.1 million during the same quarter
a year ago. The decrease reflects the $111.2 million loss
related to MFC available-for-sale securities partially offset
by higher trust and credit card fees. Credit card fees were
up as a result of higher sales volume for Corporate Card,
Purchasing Card, merchant processing, and the Northwest
Airlines WorldPerks(R) credit card. Trust fees increased
due to the growth in corporate and institutional trust fees,
including the J.P. Morgan corporate trust unit and Boulevard
acquisitions.
First Bank System, Inc. and Subsidiaries 27
<PAGE>
<TABLE>
<CAPTION>
TABLE 20. Fourth Quarter Summary
Three Months Ended
December 31
------------------
(Dollars in Millions) 1994 1993
---------------------------------------------------------------------------------------------------
<S> <C> <C>
CONDENSED INCOME STATEMENT:
Net interest income (taxable-equivalent basis)................................ $ 370.2 $346.0
Provision for credit losses (includes $16.5 merger-related in 1994)........... 44.0 28.9
----------------
Net interest income after provision for credit losses..................... 326.2 317.1
Securities losses............................................................. (112.2) -
Other noninterest income...................................................... 173.6 163.1
Merger-related charges (includes $2.6 million related to ORE in 1994)......... 123.9 -
Other noninterest expense..................................................... 311.8 296.9
----------------
Loss from continuing operations before income taxes......................... (48.1) 183.3
Taxable-equivalent adjustment................................................. 3.6 3.7
Income taxes (credit)......................................................... (18.3) 65.8
----------------
Income (loss) from continuing operations.................................... (33.4) 113.8
Income (loss) from discontinued operations.................................... (1.9) (.1)
----------------
Net income (loss)........................................................... $ (35.3) $113.7
================
Return on average assets...................................................... (.41)% 1.36%
Return on average common equity............................................... (5.6) 17.6
Net interest margin (taxable-equivalent basis)................................ 4.79 4.60
Efficiency ratio.............................................................. 80.1 58.3
Efficiency ratio excluding merger-related charges............................. 57.3 58.3
PER SHARE DATA:
Income (loss) from continuing operations...................................... $ (.27) $ .81
Loss from discontinued operations............................................. (.01) --
Net income (loss)............................................................. (.28) .81
Common dividends paid......................................................... .29 .25
----------------
</TABLE>
Fourth quarter noninterest expense in 1994 was $435.7
million, an increase of $138.8 million, from the fourth
quarter of 1993. Included in the increase were merger and
integration charges of $121.3 million and an ORE charge of
$2.6 million, both associated with the acquisition of MFC.
These charges include $56.5 million in severance, $25.0
million of costs incurred as of December 31, 1994 for systems
conversions, required customer communications and other
professional services. In addition, $6.2 million was recorded
for contract terminations, $19.6 million for asset
writedowns, primarily related to premise and equipment
writeoffs of redundant main office space and branch
facilities, and $14 million for other costs. Compared with
noninterest expense for the fourth quarter of 1993, adjusted
to include the expenses of Boulevard, Rocky Mountain, and
the acquired corporate trust business on a pro forma basis,
noninterest expense for the fourth quarter of 1994 declined
by $11.4 million, or 3.5 percent. Excluding merger-related
charges, the efficiency ratio for the fourth quarter of 1994
improved to 57.3 percent from 58.3 percent for the same
quarter last year.
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- On
January 24, 1995, the Company completed its merger of
Metropolitan Financial Corporation using the pooling of
interests method to account for the transaction. Accordingly,
the Company's financial statements have been restated for all
periods prior to the acquisition to include the accounts and
operations of MFC. These supplemental financial statements,
giving retroactive effect to the merger of MFC, will become
the Company's historical financial statements upon issuance
of its quarterly financial statements for the period ended
March 31, 1995. See Note C "Business Combinations and
Discontinued Operations" on page 35.
28 First Bank System, Inc. and Subsidiaries
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
At December 31 (In Millions, Except Shares) 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks.................................................................................... $ 1,707 $ 1,767
Federal funds sold......................................................................................... 135 1,032
Securities purchased under agreements to resell............................................................ 336 306
Interest-bearing deposits with banks....................................................................... 28 82
Trading account securities................................................................................. 77 55
Available-for-sale securities.............................................................................. 5,185 4,087
Investment securities (market value: 1993-$955)............................................................ -- 943
Loans...................................................................................................... 24,550 23,491
Less allowance for credit losses.......................................................................... 475 466
------------------
Net loans................................................................................................. 24,075 23,025
Bank premises and equipment................................................................................ 479 474
Interest receivable........................................................................................ 198 166
Customers' liability on acceptances........................................................................ 178 186
Other assets............................................................................................... 1,730 1,247
------------------
Total assets............................................................................................ $34,128 $33,370
==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing....................................................................................... $ 5,933 $ 7,743
Interest-bearing.......................................................................................... 18,323 18,643
------------------
Total deposits.......................................................................................... 24,256 26,386
Federal funds purchased.................................................................................... 1,630 553
Securities sold under agreements to repurchase............................................................. 938 369
Other short-term funds borrowed............................................................................ 955 577
Long-term debt............................................................................................. 2,684 1,905
Acceptances outstanding.................................................................................... 178 186
Other liabilities.......................................................................................... 875 650
------------------
Total liabilities....................................................................................... 31,516 30,626
Shareholders' equity:
Preferred stock........................................................................................... 118 278
Common stock, par value $1.25 a share-authorized 200,000,000 shares;
issued: 1994 - 134,599,409 shares; 1993 -- 135,800,363 shares............................................ 168 170
Capital surplus........................................................................................... 866 852
Retained earnings......................................................................................... 1,487 1,613
Less cost of common stock in treasury: 1994 - 767,000 shares; 1993 -- 5,391,883 shares.................... (27) (169)
------------------
Total shareholders' equity.............................................................................. 2,612 2,744
------------------
Total liabilities and shareholders' equity.............................................................. $34,128 $33,370
==================
</TABLE>
See Notes to Consolidated Financial Statements.
First Bank System, Inc. and Subsidiaries 29
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31 (In Millions, Except Per-Share Data) 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans................................................................................... $1,914.7 $1,730.7 $1,687.2
Securities:
Taxable................................................................................ 327.9 352.1 336.5
Exempt from federal income taxes....................................................... 12.0 14.6 12.0
Other interest income................................................................... 33.5 37.1 70.4
------------------------------------
Total interest income................................................................ 2,288.1 2,134.5 2,106.1
INTEREST EXPENSE
Deposits................................................................................ 597.3 648.3 797.7
Federal funds purchased and repurchase agreements....................................... 103.1 31.8 37.1
Other short-term funds borrowed......................................................... 36.4 26.4 30.8
Long-term debt.......................................................................... 131.9 89.8 87.5
------------------------------------
Total interest expense............................................................... 868.7 796.3 953.1
------------------------------------
Net interest income..................................................................... 1,419.4 1,338.2 1,153.0
Provision for credit losses............................................................. 123.6 133.1 191.7
------------------------------------
Net interest income after provision for credit losses................................... 1,295.8 1,205.1 961.3
NONINTEREST INCOME
Credit card fees........................................................................ 179.0 137.1 116.9
Trust fees.............................................................................. 159.2 146.1 127.8
Service charges on deposit accounts..................................................... 127.3 126.0 114.8
Insurance Commissions................................................................... 29.2 24.2 28.1
Securities gains (losses)............................................................... (115.0) .3 46.3
Other................................................................................... 179.2 185.2 179.8
------------------------------------
Total noninterest income............................................................. 558.9 618.9 613.7
NONINTEREST EXPENSE
Salaries................................................................................ 450.7 439.8 426.3
Employee benefits....................................................................... 105.7 99.1 94.9
Net occupancy........................................................................... 103.8 109.7 97.7
Furniture and equipment................................................................. 88.3 80.7 72.7
FDIC insurance.......................................................................... 58.4 57.5 51.5
Advertising............................................................................. 35.5 25.6 26.7
Amortization of goodwill and other intangible assets.................................... 50.4 41.3 34.0
Other personnel costs................................................................... 35.7 31.0 23.3
Professional services................................................................... 38.5 41.5 43.8
Data processing......................................................................... 20.3 27.1 26.7
Other real estate....................................................................... 1.4 8.9 45.1
Merger and integration.................................................................. 122.7 72.2 84.0
Other................................................................................... 238.0 230.3 219.6
------------------------------------
Total noninterest expense............................................................ 1,349.4 1,264.7 1,246.3
------------------------------------
Income from continuing operations before income taxes and cumulative effect of changes
in accounting principles............................................................... 505.3 559.3 328.7
Applicable income taxes................................................................. 191.8 198.6 115.7
------------------------------------
Income from continuing operations before cumulative effect of changes in accounting
principles............................................................................. 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..................... 305.0 363.2 215.7
Cumulative effect of changes in accounting principles................................... -- -- 233.2
------------------------------------
Net income.............................................................................. $ 305.0 $ 363.2 $ 448.9
====================================
Net income applicable to common equity.................................................. $ 292.4 $ 334.0 $ 417.3
====================================
EARNINGS PER COMMON SHARE
Average common and common
equivalent shares...................................................................... 136,274,991 134,588,664 124,670,657
Income from continuing operations before cumulative effect of changes in accounting
principles............................................................................ $ 2.21 $ 2.46 $ 1.46
Income (loss) from discontinued operations............................................. (.06) .02 .02
Cumulative effect of changes in accounting principles.................................. -- -- 1.87
------------------------------------
Net income............................................................................. $ 2.15 $ 2.48 $ 3.35
====================================
</TABLE>
See Notes to Consolidated Financial Statements.
30 First Bank System, Inc. and Subsidiaries
<PAGE>
<TABLE>
<CAPTION>
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 Taxes Stock** Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1991, AS ORIGINALLY
REPORTED.................................... 102,536,867 $ 378.5 $ 128.5 $417.6 $ 931.8 $ -- $ (4.3) $1,852.1
Adjustments for pooling of interest.......... 12,973,920 58.2 16.2 61.2 143.2 -- 278.8
-------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1991, restated.......... 115,510,787 436.7 144.7 478.8 1,075.0 -- (4.3) 2,130.9
Net income................................... 448.9 448.9
Dividends declared:
Preferred................................... (31.6) (31.6)
Common...................................... (80.8) (80.8)
Retirement of stock acquired in mergers...... (290,129) (.4) (5.9) (6.3)
Issuance of common stock:
Acquisition of Bank Shares Incorporated..... 8,163,265 10.2 200.3 .7 211.2
Other acquisitions ......................... 1,640,188 2.0 25.8 7.2 35.0
Dividend reinvestment....................... 508,397 .5 7.8 2.0 10.3
Stock option and stock purchase plans....... 1,989,339 2.4 20.9 1.6 24.9
Stock warrants exercised.................... 21,470 .2 .2
Net treasury stock sold and retired......... 111,704 .2 2.8 3.0
Conversion of preferred stock Series A....... 3,913,879 (46.0) 4.9 40.3 (.8)
-------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1992.................... 131,568,900 390.7 164.5 771.0 1,418.7 -- -- 2,744.9
Net income................................... 363.2 363.2
Dividends declared:
Preferred................................... (29.2) (29.2)
Common...................................... (121.8) (121.8)
Purchase and retirement of treasury stock.... (6,880,457) (.9) (16.1) (187.1) (204.1)
Issuance of common stock:
Acquisition of Western Financial Corporation 636,606 .8 16.2 17.0
Dividend reinvestment....................... 227,287 .3 6.4 6.7
Stock option and stock purchase plans....... 2,803,048 2.8 33.2 (3.6) 11.3 43.7
Stock warrants exercised.................... 132,405 .2 .7 .9
Stock dividends............................. 1,920,691 2.4 46.9 (49.3) --
Redemption of preferred stock................ (112.6) (2.6) (115.2)
Change in unrealized gain.................... 38.0 38.0
-------------------------------------------------------------------------------------
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)
Acquisition of Boulevard Bancorp, Inc. for
common stock, warrants, and stock options... 6,227,649 1.9 54.9 149.4 206.2
Other acquisitions........................... 1,385,806 (13.9) 48.1 34.2
Issuance of common stock:
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
=====================================================================================
</TABLE>
*Defined as total common shares less common stock held in treasury.
**Ending treasury shares were 767,000 at December 31, 1994, 5,391,883 at
December 31, 1993, and 253,920 at December 31, 1991. See Notes to Consolidated
Financial Statements.
First Bank System, Inc. and Subsidiaries 31
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31 (In Millions) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................................................... $ 305.0 $ 363.2 $ 448.9
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses................................................................. 123.6 133.1 191.7
Losses on available-for-sale securities..................................................... 111.2 -- --
Depreciation and amortization of bank premises and equipment................................ 74.5 67.7 55.3
Provision for deferred income taxes......................................................... (1.1) 75.7 56.7
Amortization of goodwill and other intangible assets........................................ 50.4 41.3 34.0
Amortization and write-downs of loan servicing related intangibles.......................... 37.9 69.0 17.2
Write-downs of other real estate............................................................ 5.1 22.6 52.0
Provision for merger and integration........................................................ 122.7 72.2 84.0
Cumulative effect of accounting changes..................................................... -- -- (233.2)
Changes in operating assets and liabilities, excluding the effects of purchase acquisitions:
(Increase) decrease in trading account securities.......................................... (22.6) 39.3 57.2
Decrease (increase) in loans held for sale................................................. 580.8 (794.6) (765.4)
Decrease in securities held for sale....................................................... -- 1,090.0 1,491.4
Decrease (increase) in accrued receivables................................................. 42.0 (5.8) 27.1
Decrease in accrued liabilities............................................................ (11.7) (191.0) (6.5)
Other -- net............................................................................... (28.5) (74.6) 11.5
-----------------------------------
Net cash provided by operating activities................................................. 1,389.3 908.1 1,521.9
INVESTING ACTIVITIES
Net cash provided (used) by:
Interest-bearing deposits with banks........................................................ 63.3 397.6 (35.4)
Loans outstanding........................................................................... (1,200.5) (2,287.2) (242.2)
Securities purchased under agreements to resell............................................. (30.5) (93.4) (76.7)
Available-for-sale securities:
Sales....................................................................................... 1,607.1 -- --
Maturities.................................................................................. 1,083.7 -- --
Purchases................................................................................... (1,143.2) -- --
Investment securities:
Sales....................................................................................... -- 46.9 41.0
Maturities.................................................................................. 271.4 2,137.4 1,474.0
Purchases................................................................................... (283.4) (1,243.7) (2,581.0)
Proceeds from sales/repayments of other real estate.......................................... 109.3 134.8 137.2
Proceeds from sales of bank premises and equipment........................................... 8.2 31.5 9.7
Purchases of bank premises and equipment..................................................... (73.3) (134.7) (126.7)
Purchases of loans........................................................................... (496.3) (205.1) (161.7)
Cash and cash equivalents of acquired subsidiaries........................................... 74.5 8.9 200.7
Business acquisitions, net of cash received.................................................. (107.2) (18.6) 385.3
Sale of unconsolidated subsidiaries.......................................................... -- 12.8 --
Other -- net................................................................................. 11.9 21.7 29.1
-----------------------------------
Net cash used by investing activities..................................................... (105.0) (1,191.1) (946.7)
FINANCING ACTIVITIES
Net cash provided (used) by:
Deposits.................................................................................... (4,135.6) (599.1) 119.6
Federal funds purchased and securities sold under agreements to repurchase.................. 1,340.4 (198.9) 12.5
Short-term borrowings....................................................................... 226.2 57.0 (34.9)
Purchases of deposits........................................................................ 11.1 -- 231.5
Long-term debt transactions:
Proceeds.................................................................................... 1,877.8 1,210.0 2,180.1
Principal payments.......................................................................... (1,027.7) (478.0) (2,522.3)
Redemption of preferred stock................................................................ (167.0) (115.2) (.8)
Proceeds from dividend reinvestment, stock option, and stock purchase plans.................. 40.3 50.4 34.4
(Purchase) issuance of treasury stock and stock warrants..................................... (245.8) (204.1) 3.0
Stock warrants exercised..................................................................... 7.9 .9 .2
Cash dividends............................................................................... (168.6) (151.0) (112.4)
-----------------------------------
Net cash used by financing activities..................................................... (2,241.0) (428.0) (89.1)
-----------------------------------
Change in cash and cash equivalents....................................................... (956.7) (711.0) 486.1
Cash and cash equivalents at beginning of year............................................... 2,798.6 3,509.6 3,023.5
-----------------------------------
Cash and cash equivalents at end of year.................................................. $ 1,841.9 $ 2,798.6 $ 3,509.6
===================================
</TABLE>
See Notes to Consolidated Financial Statements.
32 First Bank System, Inc. and Subsidiaries
<PAGE>
Notes to Consolidated Financial Statements
NOTE A. Significant Accounting Policies
----------------------------------------
First Bank System, Inc. ("The Company") is a regional,
multibank holding company which provides bank and bank-
related services principally to domestic markets, through its
subsidiaries.
BASIS OF PRESENTATION - The consolidated financial statements
include the accounts of the Company and its subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in consolidation. Certain amounts in prior periods
have been reclassified to conform to the current
presentation.
TRADING ACCOUNT SECURITIES - Debt and equity securities that
are bought and held principally for the purpose of selling
them in the near term are classified as trading account
securities and are reported at fair value. Gains or losses on
sales of trading account securities, adjustments to fair
values, and other noninterest income are included in trading
account profits and commissions.
AVAILABLE-FOR-SALE SECURITIES - Securities that are not
trading account securities and which may be sold before
maturity in response to changes in interest rates or
prepayment risk, or due to liquidity needs or changes in
funding sources or terms, are classified as available-for-
sale. These securities are carried at fair value, with
unrealized holding gains or losses, net of tax, reported in
shareholders' equity. When securities are sold, the amortized
cost of the specific securities sold is used to compute the
gain or loss on sale.
HELD-TO-MATURITY SECURITIES - Included in held-to-maturity
securities are those securities which management has the
positive intent and ability to hold to maturity. These
securities are stated at cost, as adjusted for accretion of
discounts or amortization of premiums, computed by the
interest method. The adjusted cost of the specific security
sold is used to compute the gains or losses on the sale.
LOANS - Loans are reported net of any unearned discount.
Interest income is accrued on loan balances outstanding. Loan
and commitment fees are deferred and recognized over the loan
and/or commitment period as yield adjustments.
Loans are reviewed regularly by management and are
generally placed on nonaccrual status when the collection of
interest or principal has become 90 days past due or
collection is otherwise considered doubtful. When a loan is
placed on nonaccrual status, previously recorded accrued but
uncollected interest is reversed against current period
interest income. Interest payments received on nonaccrual
loans are generally applied against principal.
Certain subsidiaries engage in both direct and leveraged
lease financing. The net investment in direct financing
leases consists of the sum of all minimum lease payments and
estimated residual values, less unearned income and
investment tax credit. Unearned income is accreted into loan
interest income over the terms of the leases to produce a
constant rate of return on the net investment.
The investment in leveraged leases consists of the sum of
all lease payments (less the portion applicable to principal
and interest on nonrecourse debt) plus estimated residual
values, less unearned income. Unearned income is accreted
into loan interest income over the positive years of the net
investment.
Loans and mortgages held for sale are carried at the lower
of cost or market value as determined on an aggregate basis
by type of loan.
ALLOWANCE FOR CREDIT LOSSES - Management determines the
adequacy of the allowance based on periodic evaluations of
the loan portfolio and related off-balance sheet commitments,
recent loss experience, and other pertinent factors,
including current and anticipated economic conditions. The
allowance is increased by provisions charged to operating
expense and reduced by net charge-offs.
First Bank System, Inc. and Subsidiaries 33
<PAGE>
MORTGAGE BANKING - Acquisition costs of purchased mortgage
servicing rights and excess mortgage servicing fee
receivables are capitalized and amortized on an accelerated
basis over the estimated period of net servicing revenue. On
a quarterly basis the Company reviews the carrying value of
its mortgage servicing rights and fees based on historical
prepayment experience and expectations of future prepayment
activity, and if appropriate, reduces the carrying value to
estimated realizable value, calculated on a discounted basis.
INTEREST RATE SWAPS - The Company engages in interest rate
swap transactions to manage its interest rate risk and as a
financial intermediary. The Company does not enter into these
contracts for speculative purposes. Income or expense on
swaps designated as hedges of assets, liabilities or
commitments is recorded as an adjustment to interest income
or expense. If the hedged instrument is disposed of, the swap
agreement is marked to market with any resulting gain or loss
included with the gain or loss from the disposition. If the
interest rate swap is terminated, the gain or loss is
deferred and amortized over the remaining life of the
specific asset or liability it was hedging. The initial
bid/offer spread on intermediated swaps is deferred and
recognized in trading account profits and commissions over
the life of the agreements. Intermediated swaps are marked to
market and the resultant gain or loss is recorded currently
in trading account profits and commissions.
INTEREST RATE CONTRACTS - The Company uses interest rate
forwards, options, caps, and floors for managing its interest
rate risk, as a financial intermediary and in its trading
operations. For interest rate contracts that meet the
criteria for hedge accounting treatment, gains or losses due
to changes in the market value of the contracts are deferred
initially and amortized over the period of interest rate risk
exposure as adjustments to interest income or expense. Gains
or losses related to the termination of these financial
instruments or disposal of the hedged asset or liability are
treated in the same manner as interest rate swaps. All other
interest rate contracts are marked to market and the
resulting gain or loss is recorded currently in trading
account profits and commissions.
BANK PREMISES AND EQUIPMENT - Bank premises and equipment are
stated at cost less accumulated depreciation and amortized
primarily on the straight line method based on estimated
useful lives.
Capitalized leases, less accumulated amortization, are
included in bank premises and equipment, and the lease
obligations are included in long-term debt. Capitalized
leases are amortized on the straight line method over the
lease term and the amortization is included in depreciation
expense.
OTHER REAL ESTATE - Other real estate (ORE), which is
included in other assets, represents properties acquired
through foreclosure, in-substance foreclosure or other
proceedings. Upon classification as ORE, any excess of the
loan receivable over the fair value of the collateral is
charged to the allowance for credit losses. Property is
evaluated regularly to ensure that the recorded amount is
supported by the current fair value. In addition, annual
appraisals are conducted. Subsequent to classification as
ORE, the asset is carried at the lower of cost or fair value,
less estimated selling costs. Changes in the carrying amount
of the asset are either recorded in a valuation allowance or
charged directly to expense.
INTANGIBLE ASSETS - The excess of cost over net assets of
businesses acquired is included in other assets and is
amortized over periods ranging up to 25 years. At December
31, 1994, goodwill totaled $411.4 million, net of accumulated
amortization of $112.3 million. Other intangible assets, net
of accumulated amortization, include corporate trust customer
relationships of $82.4 million, purchased mortgage servicing
rights of $46.7 million, cardholder relationships of $29.7
million, core deposits of $76.9 million, and other
intangibles of $9.9 million at December 31, 1994. These
assets are amortized over their estimated useful lives
ranging from seven to ten years using straight line and
accelerated methods, as appropriate.
INCOME TAXES - Deferred taxes are recorded to reflect the tax
consequences on future years of differences between the tax
bases of assets and liabilities and the financial reporting
amounts at each year end.
STATEMENT OF CASH FLOWS - For purposes of reporting cash
flows, cash equivalents are those amounts included in cash
and due from banks and federal funds sold.
34 First Bank System, Inc. and Subsidiaries
<PAGE>
PER SHARE CALCULATIONS - Primary earnings per share are
computed by dividing income applicable to common stock (net
income less preferred stock dividends) by the weighted
average number of shares of common stock and dilutive common
stock equivalents outstanding during the period. To compute
the dilutive effect of restricted common shares issued under
the 1991 and 1994 Stock Incentive Plans, the treasury stock
method is applied to the unvested portion of the shares
granted and the related unamortized expense. Fully diluted
earnings per share computations assume the conversion of the
Series 1991A preferred stock during the period that the stock
was outstanding, unless the effect is anti-dilutive.
NOTE B. Accounting Changes
--------------------------
Accounting by Creditors for Impairment of a Loan - In January
1995, the Company will adopt SFAS 114, "Accounting by
Creditors for Impairment of a Loan," which requires creditors
to establish a valuation allowance when it is probable that
all the principal and interest due under the contractual
terms of a loan will not be collected. The impairment is
measured based on the present value of expected future cash
flows based on the loans' effective interest rate, observable
market price or fair value of a collateral dependent loan.
This differs from the Company's current policy in that it
requires establishing a valuation allowance for uncollectible
interest in addition to the principal amounts of impaired
loans. The Statement also requires in-substance foreclosures
to be reclassified from other real estate to nonperforming
loans. The adoption of SFAS 114 is not expected to have a
material effect on the Company.
NOTE C. Business Combinations and Discontinued Operations
---------------------------------------------------------
METROPOLITAN FINANCIAL CORPORATION - Effective December 23,
1994, the Company received all regulatory approvals on the
previously announced acquisition of Metropolitan Financial
Corporation ("MFC"), a regional financial services holding
company headquartered in Minneapolis, Minnesota. On January
24, 1995 the Company issued 21.7 million shares. As of
December 31, 1994, MFC had approximately $7.9 billion in
assets, $5.5 billion in deposits, and 211 offices principally
in North Dakota, Minnesota, Nebraska, Iowa, Kansas, South
Dakota, Wisconsin, and Wyoming. The Company used the pooling
of interests method to account for the transaction.
Accordingly, the Company's financial statements have been
restated for all periods prior to the acquisition to include
the accounts and operations of MFC. These supplemental
financial statements, giving retroactive effect to the merger
of MFC, will become the Company's historical financial
statements upon issuance of its quarterly financial
statements for the period ended March 31, 1995.
Operating results of the Company and MFC for the three
years ended December 31, 1994, prior to restatement were:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
(In Millions) 1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
The Company
Net interest income........................... $1,194.8 $1,132.9 $ 995.1
Cumulative effect of changes in
accounting principles....................... - - 157.3
Net income.................................... 419.8 298.0 311.8
MFC
Net interest income........................... 224.6 205.3 157.9
Income (loss) from discontinued operations.... (8.5) 2.5 2.7
Cumulative effect of changes in accounting
principles.................................. - - 75.9
Net income.................................... (114.8) 65.2 137.1
Combined
Net interest income........................... 1,419.4 1,338.2 1,153.0
Income (loss) from discontinued operations.... (8.5) 2.5 2.7
Cumulative effect of changes in accounting
principles.................................. - - 233.2
Net income.................................... 305.0 363.2 448.9
==============================
</TABLE>
Because of regulatory restrictions on nonbanking
activities, the Company expects that within two years of
closing the acquisition of MFC, it will sell Edina Realty,
Inc. ("Edina"), MFC's real estate brokerage subsidiary.
Edina's income and expenses have been excluded from captions
applicable to continuing operations in the Consolidated
Statement of Income and have been reported as income from
discontinued operations. Edina's assets, liabilities, and
cash flows are not material to the Company's financial
statements and have not been segregated. In 1994, MFC
recorded a $16 million accrual for the settlement of two
class action lawsuits against MFC and its subsidiaries, Edina
and Equity Title Services, Inc. Approximately $12.5 million
of the settlement is included in Edina's 1994 results which
are reflected as discontinued operations.
First Bank System, Inc. and Subsidiaries 35
<PAGE>
BOULEVARD BANCORP, INC. - On March 25, 1994, the Company
completed the acquisition of Boulevard Bancorp, Inc.
("Boulevard"), a commercial bank holding company
headquartered in Chicago, Illinois. Under the terms of the
purchase agreement, 6.2 million shares of the Company's
common stock were issued. In addition, Boulevard's
outstanding stock options and warrants were converted into
stock options and warrants for the Company's common stock, at
the same conversion rate.
In connection with the Boulevard acquisition, the Company
bought back existing shares of its common stock approximately
equal to the number of shares issued at the time of closing
of the Boulevard acquisition. The repurchase of these shares
began in October 1993 and was completed in June 1994.
The acquisition of Boulevard was accounted for under the
purchase method of accounting, and accordingly, the purchase
price of $206.2 million was allocated to assets acquired and
liabilities assumed based on their fair market values at the
date of acquisition. The excess of the purchase price over
the fair market values of net assets acquired was recorded as
goodwill. Core deposit intangibles of $23 million are
amortized over the estimated lives of the deposits of
approximately 10 years, and goodwill of $144 million is
amortized over 25 years. The total assets acquired and
liabilities assumed at the time of acquisition were $1.6
billion and $1.5 billion, respectively. The results of
operations of Boulevard are included in the Company's
Consolidated Statement of Income since the date of
acquisition.
The following pro forma operating results of the Company
assume that the Boulevard acquisition had occurred at the
beginning of each period presented below. In addition to
combining the historical results of operations of the two
companies, the pro forma results include adjustments for the
estimated effect of purchase accounting on the Company's
results, principally amortization of intangibles.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
(In Millions, Except Per-Share Amounts) 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C>
Net interest income................................. $1,431.4 $1,391.4
Net income.......................................... 290.4 364.2
Net income per share................................ 2.02 2.37
========================
</TABLE>
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.
COLORADO NATIONAL BANKSHARES, INC. AND WESTERN CAPITAL
INVESTMENT CORPORATION - Effective May 28, 1993, the Company
completed the acquisition of Colorado National Bankshares,
Inc. ("CNB"), formerly the largest independent commercial
bank holding company in Colorado with $3.0 billion in assets.
Approximately 20.6 million shares of the Company's common
stock were issued for all of the outstanding common stock of
CNB. Effective December 18, 1992, Western Capital Investment
Corporation ("WCIC"), a $2.5 billion financial institution
headquartered in Denver, Colorado, merged with a wholly-owned
subsidiary of the Company, resulting in 5.3 million shares of
the Company's common stock being issued for all the
outstanding common shares of WCIC.
Both the CNB and WCIC acquisitions were accounted for as
poolings of interests. Accordingly, the Company's financial
statements have been restated for all periods prior to the
acquisitions to include the accounts and operations of CNB
and WCIC.
BANK SHARES INCORPORATED - On December 31, 1992, the Company
acquired Bank Shares Incorporated ("BSI"), a $2.1 billion
bank holding company headquartered in Minneapolis, Minnesota,
in a stock-for-stock exchange. Under the terms of the
purchase agreement, the Company issued 8.2 million shares of
common stock for all outstanding shares of BSI common stock.
The acquisition of BSI was accounted for under the purchase
method of accounting, and accordingly, the results of
operations of BSI have been included in the Company's
Consolidated Statement of Income since the acquisition date.
The following pro forma operating results of the Company
assume that the BSI acquisition had occurred at the beginning
of 1992. 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.
36 First Bank System, Inc. and Subsidiaries
<PAGE>
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
(In Millions, Except Per-Share Amounts) 1992
- -------------------------------------------------------------------------------
<S> <C>
Net interest income.............................................. $1,227.8
Cumulative effect of changes in accounting principles............ 233.2
Net income....................................................... 430.2
Net income per share............................................. 3.00
</TABLE> ========
The pro forma information may not be indicative of the
results that actually would have occurred if the combination
had been in effect on the dates indicated or which may be
obtained in the future.
OTHER ACQUISITIONS - During the past three years, the Company
completed many smaller acquisitions and has one pending
acquisition in markets in which the Company has an existing
presence, serving to strengthen the Company's retail banking
market shares in these communities. These acquisitions,
accounted for as purchases, are not material to the financial
condition or operating results of the Company. On October 18,
1994, the Company signed a definitive purchase agreement to
acquire First Western Corporation ("FWC"), a $323 million
bank holding company based in Sioux Falls, South Dakota. FWC
owns Western Bank, which has nine branches in South Dakota.
The transaction received regulatory approval in January 1995
and is expected to close in the first quarter of 1995. On
September 30, 1994, the Company completed the acquisition of
Green Mountain Bancorporation, the holding company for the
$35 million Green Mountain Bank, located in Lakewood,
Colorado. On September 9, 1994, the Company completed its
acquisition of the $121 million United Bank of Bismarck,
located in Bismarck, North Dakota. On April 29, 1994, the
Company completed the acquisition of First Financial
Investors, Inc., a $200 million savings bank holding company
located in Duluth, Minnesota. On March 25, 1994, the Company
completed its acquisition of Rocky Mountain Financial
Corporation, a $537 million savings bank holding company
located in Cheyenne, Wyoming. On March 11, 1994, the Company
completed the acquisition of $11.3 million in deposits of two
branches of Pioneer Federal Savings and Loan Association, a
failed savings bank in Kansas. On February 28, 1994, the
Company completed the acquisition of American Bancshares of
Mankato, a $116 million bank holding company.
During 1993, the Company completed the acquisitions of
Eureka Savings Bank, fsb, a $233 million savings bank
headquartered in Eureka, Kansas and Western Financial
Corporation, a $580 million savings bank holding company
located in Overland Park, Kansas.
During 1992, the Company completed the acquisition of the
$945 million American Charter Federal Savings and Loan
Association of Lincoln, Nebraska. The Company also added $220
million in assets through the acquisition of Security
Financial Group, Inc., located in St. Cloud, Minnesota, $174
million in assets through the acquisition of Siouxland Bank
Holding Company, headquartered in Fargo, North Dakota, and
$127 million in assets from the acquisition of Home Owners
Savings Bank of Fergus Falls, Minnesota. Acquisitions from
the Resolution Trust Corporation included 12 branch offices
and $160 million in deposits of First Federal Savings Bank of
South Dakota, and five branch offices and $73 million in
deposits of Monycor Federal Savings Bank, Barron, Wisconsin.
The Company also completed the purchase of several
corporate trust businesses serving to strengthen the
strategic direction of the Company. On September 2, 1994, the
Company acquired the domestic corporate trust business of
J.P. Morgan & Co., Incorporated, which provides trust
services for approximately 650 clients with 3,800 bond issues
in the areas of municipal, revenue, housing and corporate
bond indenture trusteeships. In March 1993, the Company
acquired the corporate trust business of two U.S. Bancorp
subsidiaries in Washington and Oregon, and in July 1992, the
Company acquired the corporate trust business of Bankers
Trust Company of California.
NOTE D. Restrictions on Cash and Due from Banks
-----------------------------------------------
Bank subsidiaries are required to maintain average reserve
balances with the Federal Reserve Bank. The amount of those
reserve balances averaged $435 million for the quarter ended
December 31, 1994.
First Bank System, Inc. and Subsidiaries 37
<PAGE>
NOTE E. Securities
--------------------
The detail of the amortized cost, gross unrealized holding
gains and losses, and fair value of available-for-sale and
held-to-maturity securities at December 31 was as follows:
<TABLE>
<CAPTION>
1994 1993
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
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury......... $1,177 $ 1 $ (65) $1,113 $1,540 $25 $(11) $1,554
Mortgage-backed
securities.......... 3,400 2 (105) 3,297 1,900 23 (5) 1,918
Other U.S. agencies... 333 1 (11) 323 169 4 -- 173
State and political... 178 3 -- 181 184 12 -- 196
Other................. 269 11 (9) 271 232 16 (2) 246
-------------------------------------------------------------------------------------
Total available-
for-sale........ $5,357 $18 $(190) $5,185 $4,025 $80 $(18) $4,087
-------------------------------------------------------------------------------------
Held-to-maturity:
Mortgage-backed
securities.......... $ -- $-- $ -- $ -- $ 943 $15 $(3) $ 955
=====================================================================================
</TABLE>
The Company adopted SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities," at December 31,
1993, reported $4.1 billion of its investment securities as
available for sale. At December 31, 1994, the Company's
available-for-sale securities portfolio was $5.2 billion,
with an after-tax unrealized loss of $106.4 million recorded
in shareholders' equity.
Securities carried at $1.6 billion at December 31, 1994,
and $1.1 billion at December 31, 1993, were pledged to secure
public, private and trust deposits and for other purposes
required by law. Securities sold under agreements to
repurchase had an amortized cost of $.9 billion and $.4
billion at December 31, 1994, and 1993, respectively.
Gross realized gains and losses are shown in the table
below. Included in the amounts is the $111.2 million loss
related to the MFC securities sold in January 1995 as a
result of MFC's December 1994 board-approved plan to reduce
its interest rate risk consistent with prior regulatory
requests and to align more closely the interest rate risk
with that of FBS.
<TABLE>
<CAPTION>
(In Millions) 1994 1993 1992
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross realized gains $ 3.1 $ 3.3 $46.3
Gross realized losses (118.1) (3.0) -
-----------------------------------
Net realized gains (losses) $(115.0) $ .3 $46.3
===================================
Income taxes (credit) on
realized gains or losses $ (43.7) $ .1 $16.3
===================================
</TABLE>
For amortized cost, fair value and yield by maturity date
of available-for-sale securities outstanding as of
December 31, 1994, see Table 10 on page 16 from which such
information is incorporated by reference into these Notes to
Consolidated Financial Statements.
38 First Bank System, Inc. and Subsidiaries
<PAGE>
<TABLE>
<CAPTION>
NOTE F. Loans and Allowance for Credit Losses
----------------------------------------------
The composition of the loan portfolio at December 31 was as follows:
(In Millions) 1994 1993
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMERCIAL:
Commercial............................................................. $ 7,002 $ 5,987
Financial institutions................................................. 787 2,004
Real estate:
Commercial mortgage.................................................. 2,448 2,227
Construction......................................................... 330 241
HLTs................................................................... 283 183
--------------------------
Total commercial................................................... 10,850 10,642
--------------------------
CONSUMER:
Residential mortgage................................................... 5,098 5,125
Residential mortgage held for sale..................................... 197 1,149
Home equity and second mortgage........................................ 2,453 1,932
Credit card............................................................ 2,409 1,757
Automobile............................................................. 1,770 1,159
Revolving credit....................................................... 725 695
Installment............................................................ 712 772
Student loans held for sale............................................ 336 260
--------------------------
Total consumer..................................................... 13,700 12,849
--------------------------
Total loans........................................................ $24,550 $23,491
==========================
</TABLE>
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, 1994, and 1993. The aggregate dollar amounts
of these loans were $10.2 million and $18.6 million at
December 31, 1994, and 1993, respectively. During 1994,
additions totaled $90.3 million and repayments totaled $98.7
million.
Nonaccrual and renegotiated loans totaled $162 million,
$219 million, and $297 million at December 31, 1994, 1993,
and 1992, respectively. The effect of nonaccrual and
renegotiated loans on interest income was as follows:
<TABLE>
<CAPTION>
(In Millions) 1994 1993 1992
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income that would have been accrued
at original contractual rates...................... $13.7 $19.3 $26.1
Amount recognized as interest income................. 2.7 3.7 8.0
---------------------------
Foregone revenue..................................... $11.0 $15.6 $18.1
===========================
</TABLE>
Commitments to lend additional funds to customers whose
loans were classified as nonaccrual or renegotiated at
December 31, 1994, totaled $6.7 million. During 1994, there
were no loans that were restructured at market interest rates
and returned to a fully performing status.
First Bank System, Inc. and Subsidiaries 39
<PAGE>
Activity in the allowance for credit losses was as follows:
<TABLE>
<CAPTION>
(In Millions) 1994 1993 1992
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year............................. $466.1 $483.8 $453.2
Add:
Provision charged to operating expense................. 123.6 133.1 191.7
Deduct:
Loans charged off...................................... 226.8 239.2 285.2
Less recoveries of loans charged off................... 86.5 76.9 71.5
--------------------------------------------
Net loans charged off.................................. 140.3 162.3 213.7
Additions from acquisitions.............................. 25.3 11.5 52.6
--------------------------------------------
Balance at end of year................................... $474.7 $466.1 $483.8
============================================
</TABLE>
NOTE G. Bank Premises and Equipment
Bank premises and equipment at December 31 consisted of the following:
<TABLE>
<CAPTION>
(In Millions) 1994 1993
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land....................................................................... $ 85 $ 84
Buildings and improvements................................................. 417 399
Furniture, fixtures and equipment.......................................... 391 419
Capitalized building leases................................................ 35 33
Capitalized equipment leases............................................... 35 31
--------------------------
963 966
Less accumulated depreciation and amortization............................. 484 492
--------------------------
Total.................................................................... $479 $474
==========================
</TABLE>
NOTE H. Long-Term Debt
Long-term debt (debt with original maturities of more than one year) at
December 31 consisted of the following:
<TABLE>
<CAPTION>
(In Millions) 1994 1993
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
FIRST BANK SYSTEM (Parent Company):
Floating-rate subordinated capital notes -- due November 29, 1996.......... $ 150 $ 150
Fixed-rate 8.25% subordinated notes -- due October 1, 1999................. 86 86
Fixed-rate 6.625% subordinated notes -- due May 15, 2003................... 100 100
Fixed-rate 8.00% subordinated notes -- due July 2, 2004.................... 125 125
Floating-rate subordinated notes -- due November 30, 2010.................. 107 107
Medium-term notes.......................................................... 514 248
Capitalized lease obligations and other.................................... 15 22
--------------------------
1,097 838
SUBSIDIARIES:
Fixed-rate 6.00% subordinated notes -- due October 15, 2003................ 100 100
Fixed-rate 7.55% subordinated notes -- due June 15, 2004................... 100 --
Fixed-rate 8.35% subordinated notes -- due November 1, 2004................ 100 --
Step-up subordinated notes -- due August 15, 2005.......................... 100 100
Federal Home Loan Bank advances............................................ 1,088 757
Capitalized lease obligations.............................................. 39 39
Mortgage indebtedness and notes............................................ 60 71
--------------------------
Total.................................................................... $2,684 $1,905
==========================
</TABLE>
40 First Bank System, Inc. and Subsidiaries
<PAGE>
The floating-rate subordinated capital notes due November
29, 1996, are currently redeemable at the option of the
Company (with Federal Reserve Bank approval). If the option
is not exercised, the notes will be exchanged at maturity for
capital securities of the Company whose market value will
equal the principal amount of the notes. The interest rate
per annum is one-eighth of one percent above the London
Interbank Offered Rate ("LIBOR") for three-month Eurodollar
deposits subject to a minimum of 5.25 percent. At December
31, 1994, the interest rate was 6.125 percent.
The floating-rate subordinated notes due November 30, 2010,
may be redeemed at par at the option of the Company. The
interest rate per annum for each quarterly period is one-
eighth of one percent above LIBOR for three-month Eurodollar
deposits subject to a minimum of 5.25 percent. At December
31, 1994, the interest rate was 6.094 percent.
The step-up subordinated notes due August 15, 2005, are
issued by the Company's subsidiary bank, First Bank National
Association. The interest rate on these notes is 6.25 percent
through August 14, 2000, and 7.30 percent thereafter. The
notes have a one-time call feature at the option of the Bank
on August 15, 2000.
Notes issued under the Company's medium-term note program
may mature from 9 months to 15 years and bear fixed or
floating interest rates. The notes outstanding at December
31, 1994, mature from February 1995 to November 1997 and have
rates of 6.125 percent to 9.91 percent. The weighted average
interest rate at December 31, 1994, is 6.47 percent.
The Federal Home Loan Bank advances outstanding at
December 31, 1994, mature from January 25, 1996 through
May 28, 2008. All advances have fixed rate interest, ranging
from 4.37 percent to 7.9 percent. The weighted average
interest rate at December 31, 1994, is 5.73 percent.
Maturities of long-term debt outstanding at December 31,
1994, were:
<TABLE>
<CAPTION>
Parent
(In Millions) Consolidated Company
---------------------------------------------------------------
<S> <C> <C>
1995............................. $ 195 $ 189
1996............................. 633 291
1997............................. 564 185
1998............................. 247 --
1999............................. 190 87
Thereafter....................... 855 345
--------------------------
Total.......................... $2,684 $1,097
==========================
</TABLE>
NOTE I. Shareholders' Equity
COMMON STOCK - At December 31, 1994, the Company has
9,936,528 shares of its common stock reserved for future
issuances under the Dividend Reinvestment Plan, Employee
Stock Purchase Plan, and the Stock Option Plans (see Note K
on page 44). Additionally, there are 3,952,000 shares of
common stock reserved for issuance upon conversion of the
Series 1991A Convertible Preferred Stock, described below
under "Preferred Stock."
The Company completed several acquisitions since 1992 with
a total of 65.7 million common shares issued in exchange for
the stock of the acquired banks. (See Note C on page 35.)
During 1994, the Company repurchased 6.3 million shares of
common stock utilized in connection with previously announced
acquisitions and other corporate purposes. On January 18,
1995, and February 15, 1995, the Board of Directors
authorized additional repurchase programs of 2.0 million and
14.0 million shares of common stock, respectively, for
previously announced acquisitions and other corporate
purposes.
The Company has outstanding 12.6 million common shares sold
in a private placement on July 18, 1990, which had
accompanying periodic stock purchase rights ("PSPRs") and
risk event warrants. The PSPRs become exercisable upon the
event of a dividend shortfall, which will be deemed to exist
if the Company does not pay an annual dividend equal to at
least $.82 per share during any of the ten years following
closing. Upon exercise, the holders of the PSPRs will receive
value equal to the dividend shortfall in the form of shares
of the Company's common or preferred stock, or the PSPRs may
be redeemed for cash.
First Bank System, Inc. and Subsidiaries 41
<PAGE>
The risk event warrants become exercisable (i) when a
change in control, as defined, occurs and the value received
by common shareholders is less than $13.875 per share, or
(ii) on July 18, 2000, if the common stock market price is
less than $13.875 per share; however, this exercise provision
terminates at any time after July 18, 1995, if the common
stock market price exceeds $20.82 per share for 30
consecutive trading days and tangible book value exceeds
$16.32 per share. If the risk event warrants become
exercisable in either event, the holders of the warrants will
receive value equal to any shortfall in the form of common or
preferred stock or cash at the option of the Company.
The Company's Dividend Reinvestment Plan provides for
automatic reinvestment of dividends and for optional cash
purchases of additional shares at market price of up to
$5,000 per quarter.
Preferred Stock - The Company has six classes of cumulative
preferred stock, with 10,000,000 shares authorized. Since
1992, the Company redeemed three of the four classes of $1.00
par value cumulative preferred stock and redeemed both
classes of $.01 par value cumulative preferred stock.
Series 1991A Convertible Preferred Stock, issued in
November 1991, has 2,118,500 shares outstanding at $1.00 par
value, redeemable at the option of the Company on or after
January 1, 1996, at $52.1375 per share, and thereafter at
prices declining to its stated value of $50 per share on or
after July 1, 2002. During 1994, the Company repurchased
approximately 15,100 shares. Dividends are at a rate of 7.125
percent per annum. Series 1991A Convertible Preferred Stock
is convertible at the option of the holder at any time into
common stock of the Company at the rate of 1.7256 shares of
common stock for each share of preferred stock, which is
equivalent to a conversion price of $28.975 per share of
common stock.
On April 1, 1994, the Company redeemed the 3,560,000 and
1,405,000 shares of $1.00 par value Series 1989A and Series
1989B, respectively, at a cost of $166.0 million. The annual
dividend prior to redemption was 10.5 percent on the Series
1989A shares and the average annual dividend rate on the
Series 1989B shares was 7.41 percent and 8.24 percent in 1993
and 1992, respectively.
In September 1993, the Company redeemed the 1,000,000
shares of $1.00 par value Series 1983A at the stated value of
$100 per share. There was an average 6.5 percent dividend on
the Series 1983A shares during 1992.
Series B, $2.875 Cumulative Perpetual Preferred Stock,
which had 488,750 shares outstanding at $.01 par value at
December 31, 1994, was redeemed by the Company on January 24,
1995, for cash of $27.00 per share, plus any accumulated and
unpaid dividends on such shares. Dividends on the Series B
shares prior to redemption were $2.875 per share. Each share
of Series B included one warrant to purchase .90 shares of
the Company's common stock, which became exercisable on
February 19, 1991, and expires November 20, 2000. The
warrants outstanding at December 31, 1994, would have allowed
for the purchase of approximately 88,643 shares of the
Company's common stock with proceeds to the Company of $.6
million.
In April 1992, the Company redeemed the 1,840,000 shares of
$.01 par value Series A, $2.00 Cumulative Convertible
Preferred Stock for 3,913,879 shares of common stock and
$400,000 to holders exercising options to receive cash.
Dividends on the Series A shares prior to redemption were
$2.00 per share.
Shares of all the Company's preferred stock issuances rank
prior to common stock as to dividends and liquidation and
have no voting rights except (i) in the event of certain
dividend arrearages (in which event, holders of shares of the
preferred stock are entitled to elect two additional
directors to the Company's Board of Directors to serve until
such dividend arrearages have been eliminated), and (ii) on
matters that would have an adverse effect upon a series of
the preferred stock, including the issuance of additional
shares of preferred stock or shares of any other preferred
stock ranking on a parity with the preferred stock.
42 First Bank System, Inc. and Subsidiaries
<PAGE>
PREFERRED STOCK PURCHASE RIGHTS - In December 1988, the
Company declared a dividend of one preferred stock purchase
right ("Right") for each outstanding share of common stock
based on the shareholders of record on January 4, 1989. One
Right was also issued with respect to each share of common
stock issued since January 4, 1989. The rights are designed
to help management obtain fair and equal treatment for all
shareholders in the event of a potential takeover.
Each Right initially entitles the registered holder to
purchase from the Company one one-hundredth of a share of
Series A Junior Participating Preferred stock, par value $1,
of the Company at a price of $80, subject to adjustment.
In the event that any person or group acquires 20 percent
or more of the Company's common stock outstanding, each Right
(other than any Right held by the acquiring person or group)
will thereafter entitle the holder to receive upon exercise
shares of the Company's common stock having a market value of
two times the purchase price.
In the event that the Company is acquired in a merger or
other business combination transaction or 50 percent or more
of its consolidated assets or earning power is sold, each
Right will thereafter entitle the holder to receive, upon
exercise, shares of common stock of the acquiring company
having a market value of two times the purchase price.
The Rights will not be exercisable and will be transferable
with and only with the common stock until 10 days after (i) a
public announcement that a person or group has acquired 20
percent or more of the Company's common stock outstanding, or
(ii) a public announcement or commencement of a tender or
exchange offer which would result in a person or group
acquiring 20 percent or more of the common stock.
The Rights expire on January 4, 1999, unless they are
redeemed by the Company at a price of $.01 per Right prior to
the acquisition by a person or group of 20 percent of the
Company's common stock outstanding. Pursuant to an amendment
adopted by the Board of Directors, the Rights will also
expire on the date which is 24 months after the first date
upon which the Company can generally be acquired by bank
holding companies, principally located in at least 15 of the
20 states which as of September 30, 1992, had the largest
amount of bank deposits.
Until the Right is exercised, the Right holder will have no
rights as a stockholder of the Company, including the right
to vote or to receive dividends.
NOTE J. Merger and Integration Charges
--------------------------------------
In December 1994, the Company recorded a $111.2 million loss
related to $1.56 billion of securities sold in January 1995.
The sales resulted from MFC's board approved plan to reduce
the interest rate risk of MFC's securities portfolio
consistent with prior regulatory requests and to align more
closely the interest rate risk profile of MFC with that of
FBS. The Company also recorded merger and integration charges
totaling $122.7 million relating to the acquisition of MFC.
These charges include $26.4 million of costs incurred as of
December 31, 1994 for systems conversions, required customer
communications and other professional services. In addition,
$6.2 million was recorded for contract terminations, $19.6
million for asset writedowns, primarily related to premise
and equipment writeoffs of redundant main office space
and branch facilities, and $14 million for other costs.
Other charges, totaling $56.5 million, primarily involve
severance. In addition, a provision for other real estate
related reserves of $2.6 million was recorded to provide for
the Company's strategies for the accelerated disposition of
problem assets.
In 1993, the Company recorded merger and integration
charges totaling $72.2 million relating to the acquisition of
CNB. Charges of $29.7 million were recorded for anticipated
integration expenses, system and operational conversions, and
required customer communications costs. Premises and
equipment write-downs of $14.3 million relate to redundant
main office and branch facilities. Other charges, totaling
$28.2 million, primarily involve severance.
In 1992, the Company recorded merger and integration
charges totaling $84.0 million relating primarily to the
acquisition of WCIC. Premises and equipment write-downs of
$31.2 million relate to the closing of redundant main office
and branch facilities. Securities and interest rate swap
write-downs of $12.6 million reflect the Company's intention
to dispose of certain mortgage-backed securities and swaps.
Other charges, totaling $40.2 million, primarily involve
severance, system conversions, and required customer
communications costs.
First Bank System, Inc. and Subsidiaries 43
<PAGE>
NOTE K. Employee Benefits
-------------------------
PENSION PLAN - Pension benefits are provided to substantially
all employees based on years of service and employees'
compensation while employed with the Company. Employees are
fully vested after five years of service.
The Company's funding policy is to contribute actuarially
determined amounts to the plan sufficient to meet the minimum
funding requirements set forth in the Employee Retirement
Income Security Act of 1974, plus such additional amounts as
the Company determines to be appropriate. The actuarial cost
method used to compute pension cost is the projected unit
credit method.
Prior to their acquisition dates, the former MFC, CNB and
Boulevard employees were covered by noncontributory pension
plans that provided defined benefits based on an employee's
years of service and compensation during employment. The
Company has merged the CNB plan and is in the process of
merging the MFC and Boulevard plans into the Company's plan.
The funded status and income statement effects of these plans
have been aggregated with the Company's plan in the table
below.
The following table sets forth the aggregate funded status
and the net amounts recognized in the Company's balance sheet
and statement of income for the plans at December 31:
<TABLE>
<CAPTION>
(Dollars in Millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $271.1 million in 1994, $255.5 million in 1993, and
$219.1 million in 1992.................................................. $(281.2) $(264.6) $(226.1)
====================================
Projected benefit obligation for service rendered to date................... $(291.5) $(295.6) $(255.4)
Plan assets at fair value, primarily listed stocks and U.S. bonds........... 287.4 272.7 259.2
------------------------------------
Excess (Deficiency) of plan assets over projected benefit obligation........ (4.1) (22.9) 3.8
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions........................ 20.7 37.5 13.7
Unrecognized net asset at end of year (amortized over 15 years)............. (25.1) (32.6) (31.1)
------------------------------------
Accrued pension cost included in other liabilities.......................... $ (8.5) $ (18.0) $ (13.6)
====================================
Net pension costs include the following components:
Service cost-benefits earned during the period............................ $ 20.4 $ 18.5 $ 15.7
Interest cost on projected benefit obligation............................. 21.8 21.4 21.2
Actual return on plan assets.............................................. (10.9) (30.6) (20.0)
Net amortization and deferral............................................. (18.7) 2.6 (7.6)
------------------------------------
Net periodic pension benefit cost........................................... $ 12.6 $ 11.9 $ 9.3
====================================
</TABLE>
The FBS, MFC, CNB, and Boulevard plans were each valued
separately for the years prior to their acquisitions, and
each plan independently determined its assumptions. The
aggregate disclosures above, therefore, reflect the following
weighted average assumptions.
<TABLE>
<CAPTION>
FBS MFC CNB Boulevard
-------------------------------------------------------------------------------
1994 1993 1992 1994 1993 1992 1992 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted average discount rate................... 8.0% 7.0% 8.0% 8.0% 7.0% 7.0% 9.0% 7.0% 8.3%
Expected long-term rate of return................ 9.5 10.0 10.0 7.0 7.0 7.0 9.0 10.0 10.0
Rate of increase in future compensation.......... 5.6 6.0 6.0 5.0 7.0 7.0 5.6 5.0 5.0
===============================================================================
</TABLE>
OTHER POSTRETIREMENT PLANS - In addition to providing pension
benefits, the Company provides certain health care and life
insurance benefits to retired employees. Substantially all of
the Company's employees may become eligible for these
benefits at or after age 55 with at least five years of
service and age plus years of service equal to or greater
than 65 while working for the Company.
44 First Bank System, Inc. and Subsidiaries
<PAGE>
Effective January 1, 1993, the Company revised the
provisions of the existing retiree health care plan. Under
the terms of the new plan, the Company will subsidize the
cost of coverage for employees who retire before age 65 with
at least 10 years of service. The dollar amount of the
subsidy will be based on the employee's age and service at
the time of retirement, and will remain frozen until the
retiree reaches age 65. After age 65 the retiree will assume
responsibility for the full cost of coverage. The new plan
also contains other cost-sharing features such as deductibles
and coinsurance. The Company will continue to subsidize the
cost of coverage for employees who retired before 1993, and
will subsidize the cost for certain employees who retire
before 1995. Those subsidies, as well as the retirees'
contributions, will be adjusted periodically.
Both MFC and CNB also had post-retirement health care
plans. The funded status and income statement effects of
these plans have been aggregated with the Company's plan in
the table below.
Effective January 1, 1992, the Company adopted SFAS 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions," for its retiree benefit plans. Under SFAS 106, the
Company accrues the estimated cost of retiree benefit
payments, other than pensions, during the employees' active
service periods.
The Company elected to recognize the effect of this change
in accounting on the immediate recognition basis. The
cumulative effect as of January 1, 1992, of adopting SFAS 106
was the recognition of accrued postretirement health care
costs totaling $52.1 million. After related tax benefits of
$20.5 million, net income for 1992 was reduced by $31.6
million.
The Company currently intends to fund the postretirement
benefit costs as they are incurred. The following table sets
forth the plan's funded status recognized in the Company's
balance sheet and statement of income at December 31:
<TABLE>
<CAPTION>
(In Millions) 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................................................ $(41.7) $(49.0)
Fully eligible active plan participants............................................. (3.6) (3.4)
Other active plan participants...................................................... (11.3) (14.9)
------------------------
Total unfunded accumulated postretirement benefit obligation...................... (56.6) (67.3)
Unrecognized net loss (gain) from past experience different from that assumed
and from changes in assumptions..................................................... (10.1) 5.5
Unrecognized implementation obligation................................................ 4.4 4.7
------------------------
Accrued postretirement benefit cost................................................... $(62.3) $(57.1)
========================
Net periodic postretirement benefit cost includes the following components:
Service cost -- benefits attributed to service during the period...................... $ 1.4 $ 1.5
Interest cost on accumulated postretirement benefit obligation........................ 4.2 4.9
Net amortization and deferral......................................................... .3 .3
------------------------
Total postretirement benefit cost..................................................... $ 5.9 $ 6.7
========================
</TABLE>
For measurement purposes, 11.0 percent and 7.0 percent
annual rates of increase in the per capita cost of covered
health care benefits for participants under age 65 and aged
65 and over, respectively, were assumed for 1994. For 1995
the annual rates of increase were assumed to be 10.0 percent
and 6.5 percent, respectively. Both rates were assumed to
decrease gradually to 5.5 percent by 2003 and remain at that
level thereafter. The health care cost trend rate assumption
has a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend
rates by 1 percentage point in each year would increase the
accumulated postretirement benefit obligation as of December
31, 1994, by $5.3 million and the aggregate of the service
and interest cost components of net periodic postretirement
benefit cost for the year then ended by $.5 million.
First Bank System, Inc. and Subsidiaries 45
<PAGE>
The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 8.0 percent
as of December 31, 1994, and 7.0 percent as of December 31,
1993.
STOCK PURCHASE PLAN - The 1984 Employee Stock Purchase Plan,
as amended in 1989 and 1991, permits all eligible employees
(those employed for one year with the Company) and directors
to purchase common stock. The plan provides for a purchase
price of 85 percent to 100 percent (as determined by a
committee of the Board of Directors for each purchase period)
of the fair market value at the beginning or the end of the
purchase period, whichever is lower. For the current option
period ending June 30, 1995, the Committee approved an option
price of 85 percent of fair market value. The plan results in
no expense to the Company. MFC had a substantially similar
plan that terminates on March 31, 1995, the end of the
last open option period.
STOCK INCENTIVE PLAN - In April 1994, shareholders approved a
revision to the 1991 Stock Incentive Plan, which increases
the authorized issuance up to 5,000,000 shares of the
Company's common stock. The Plan extends through April 2001.
In April 1994, the shareholders also approved a Stock
Incentive Plan which authorizes the issuance of up to
5,000,000 shares of the Company's common stock. This plan
extends through January 2004. The terms of the new plan are
substantially the same as the 1991 Stock Incentive Plan. The
Plans allow for the granting of nonqualified stock options,
incentive stock options, stock appreciation rights (SARs),
restricted stock or stock units (RSUs), performance awards,
dividend equivalents, and other stock-based awards at or
above 100 percent of the market price at the date of grant.
Awards may provide that upon their exercise, the holder will
receive shares of common stock or cash as determined by a
committee of the Board of Directors (Committee). Restrictions
on the restricted shares and RSUs generally limit the
holders' rights to transfer the shares during the restriction
period determined by the Committee. At December 31, 1994,
there were 3,775,882 shares available, subject to adjustment
for forfeitures, for grant under the Plans.
Restricted shares granted under the Plans vest over periods
of three to seven years, with the vesting of certain shares
being subject to acceleration based on the performance of the
Company in comparison to the performance of a predetermined
group of regional banks. Compensation expense related to
these shares is determined at the time of grant based on the
market price of the Company's stock and is amortized on a
straight-line basis over the vesting period. For the
performance-based restricted shares, compensation expense is
amortized using the midpoint of the vesting period.
Options granted under the Plans and predecessor plans are
generally exercisable up to 10 years from the date of grant.
On the date exercised, the option proceeds are credited to
the common stock account to the extent of par value of the
shares issued and the excess is credited to capital surplus.
Prior to their mergers with the Company, MFC, Boulevard,
and WCIC also had stock incentive plans under which options
were granted. These plans were terminated at the respective
closing dates. Outstanding options either converted into
options to purchase the Company's common stock based on the
conversion terms of the various merger agreements or the
option holders received shares of the Company's common stock
equal to the fair value of the options.
46 First Bank System, Inc. and Subsidiaries
<PAGE>
The historical option information presented below has been
restated to reflect options originally granted under the
former MFC, CNB and WCIC Plans. The number and exercise price
(option price) of options and restricted shares granted under
these plans were as follows:
<TABLE>
<CAPTION>
Additional Shares Outstanding
Available Under Outstanding Restricted Option/Market
Incentive Plan Options Shares Price Per Share
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1991*................ 4,817,985 4,874,036 4,800 $ 2.31 - 30.125
=================
Granted:
Stock Options................... 1,374,950 -- 14.29 - 27.25
Restricted Stock................ -- 166,583 24.50 - 27.25
Exercised......................... (1,052,168) -- 2.70 - 25.885
Cancelled......................... (165,753) -- 6.39 - 30.125
-----------------------------------------------------------
DECEMBER 31, 1992*................ 2,811,057 5,031,065 171,383 $ 2.31 - 30.125
=================
Granted:
Stock Options................... 1,517,953 -- 22.24 - 33.75
Restricted Stock................ -- 105,300 28.25 - 33.25
Exercised......................... (2,285,546) -- 2.31 - 30.125
Cancelled/Vested.................. (54,883) (15,387) 8.41 - 33.75
-----------------------------------------------------------
DECEMBER 31, 1993*................ 2,729,069 4,208,589 261,296 $ 4.19 - 33.75
=================
Granted:
Stock Options................... 6,576,268 -- 22.05 - 39.00
Restricted Stock................ -- 192,732 29.75 - 39.00
Exercised......................... (2,052,389) -- 4.23 - 35.25
Cancelled/Vested.................. (340,319) (26,084) 8.41 - 35.625
-----------------------------------------------------------
DECEMBER 31, 1994*................ 3,775,822 8,392,149 427,944 $ 4.19 - 39.00
================================================================================
*At December 31, 1994, 1993, 1992, and 1991 options for 3,698,081, 2,430,045, 3,723,110 and 2,796,788 shares,
respectively, were exercisable.
</TABLE>
First Bank System, Inc. and Subsidiaries 47
<PAGE>
NOTE L. Income Taxes
- --------------------
The components of income tax expense were:
<TABLE>
<CAPTION>
(Dollars in Millions) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FEDERAL:
Current tax........................................................... $156.3 $ 95.1 $ 39.4
Deferred tax provision................................................ 8.3 68.6 50.1
--------------------------------------
Federal income tax.................................................. 164.6 163.7 89.5
--------------------------------------
STATE:
Current tax........................................................... 36.6 27.8 19.6
Deferred tax provision (credit)....................................... (9.4) 7.1 6.6
--------------------------------------
State income tax.................................................... 27.2 34.9 26.2
--------------------------------------
Total income tax provision.......................................... $191.8 $198.6 $115.7
======================================
</TABLE>
The reconciliation between income tax expense and the amount computed by
applying the statutory federal income tax rate was as follows:
<TABLE>
<CAPTION>
(Dollars in Millions) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate (35% in 1994 and 1993, 34% in 1992)............. $176.9 $195.8 $111.8
State income tax, at statutory rates, net of federal tax benefit...... 17.7 23.9 18.3
Tax effect of:
Tax-exempt interest:
Loans............................................................. (6.0) (7.9) (11.2)
Securities........................................................ (4.1) (4.4) (4.2)
Amortization of goodwill............................................ 10.3 8.5 4.9
Other items......................................................... (3.0) (17.3) (3.9)
--------------------------------------
Applicable income taxes............................................. $191.8 $198.6 $115.7
======================================
</TABLE>
At December 31, 1994, for income tax purposes, the Company had the
following net operating loss carryforwards available:
<TABLE>
<CAPTION>
Expiration
(Dollars in Millions) Amount Dates
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal regular tax operating loss carryforwards.................................... $ 4.3 2002
4.5 2003
5.8 2004
39.5 2005
5.2 2006
24.6 2008
----------
$83.9
==========
Federal AMT operating loss carryforwards............................................ $ 2.8 2002
.7 2003
5.8 2004
.7 2005
----------
$10.0
==========
Alternative minimum tax credit carryforwards........................................ $11.7 Unlimited
========================
</TABLE>
In addition, the Company has state net operating loss carryforwards of
$409 million, primarily in two taxing jurisdictions. These carryforwards
expire in years 1995-2008.
48 First Bank System, Inc. and Subsidiaries
<PAGE>
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:
<TABLE>
<CAPTION>
(Dollars in Millions) 1994 1993
------------------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Loan loss reserves......................................................... $ 166.5 $ 158.2
Adjustment of available-for-sale securities to market value................ 66.2 (24.1)
Real estate and other asset basis differences.............................. 33.2 50.7
Federal operating loss carryforward........................................ 29.7 24.4
State operating loss carryforward.......................................... 19.8 28.0
Deferred gain on sale of buildings......................................... 12.2 13.6
Deferred loan fees......................................................... 10.9 16.7
Accrued severance, pension and retirement benefits......................... 8.6 11.3
Accelerated depreciation................................................... 4.4 (2.4)
Alternative minimum tax credit carryforward................................ 11.7 48.5
Contingent liabilities and other miscellaneous accruals.................... 160.8 69.6
----------------------
Gross deferred tax assets................................................ 524.0 394.5
DEFERRED TAX LIABILITIES:
Leasing activities......................................................... (46.2) (46.9)
Deferred gains and other investment basis differences...................... (39.7) (30.5)
Other deferred liabilities and reserves.................................... (61.1) (85.5)
----------------------
Gross deferred tax liabilities........................................... (147.0) (162.9)
Deferred tax assets valuation reserve...................................... (14.0) (19.6)
----------------------
NET DEFERRED TAX ASSETS.................................................... $ 363.0 $ 212.0
======================
</TABLE>
Effective January 1, 1992, the Company adopted the provisions of SFAS
109, "Accounting for Income Taxes." This resulted in the recognition of
$289.8 million of deferred tax assets at January 1, 1992, of which
$264.8 million was included in the 1992 results of operations as a
cumulative effect of an accounting change and $25.0 million pertaining
to carryforwards resulting from purchase business combinations was
reflected as a reduction of goodwill.
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 $5.6 million from December
31, 1993, to December 31, 1994. During 1994, the Company realized tax
benefits related to state net operating losses and the related valuation
allowance was eliminated.
First Bank System, Inc. and Subsidiaries 49
<PAGE>
NOTE M. Financial Instruments With Off-Balance Sheet Risk
- ---------------------------------------------------------
and Credit Concentrations
- -------------------------
The Company uses various financial instruments that have off-
balance sheet risk in the normal course of business to meet
the financing needs of its customers and to manage its
interest rate risk. These instruments involve, to varying
degrees, elements of credit, interest rate, or liquidity
risk. The contract or notional amounts of these financial
instruments at December 31 were as follows:
<TABLE>
<CAPTION>
(In Millions) 1994 1993
----------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit:
Commercial............................................ $7,006 $5,714
Corporate and purchasing cards........................ 3,210 1,744
Consumer credit card.................................. 7,875 5,208
Other consumer........................................ 2,628 2,659
Letters of credit:
Standby............................................... 1,321 1,211
Commercial............................................ 175 135
Interest rate swap contracts:
Hedge................................................. 2,674 3,011
Intermediated......................................... 127 199
Interest rate options contracts:
Hedge interest rate floors purchased.................. 950 950
Hedge interest rate caps purchased.................... 250 450
Intermediated interest rate caps and floors purchased. 127 225
Intermediated interest rate caps and floors written... 127 225
Liquidity support guarantees............................ 142 157
Forward and option contracts............................ 196 1,352
Mortgages sold with recourse............................ 1,351 1,236
Commitments to sell loans............................... 935 225
Foreign currency commitments:
Commitments to purchase............................... 941 1,073
Commitments to sell................................... 941 1,073
========================
</TABLE>
COMMITMENTS TO EXTEND CREDIT - Commitments to extend credit are legally
binding and generally have fixed expiration dates or other termination
clauses. The contractual amount of the commitments represents the
Company's exposure to credit loss on commitments to extend credit, in
the event of nonperformance by the counterparty. The Company monitors
its credit risk for commitments to extend credit by applying the same
credit policies in making commitments as it does for loans, including
obtaining collateral to secure commitments based on management's credit
assessment of the counterparty. Collateral held varies, but may include
marketable securities, receivables, inventory, equipment, and real
estate. Since the Company expects many of the commitments will expire
without being drawn upon, total commitment amounts do not necessarily
represent the Company's future liquidity requirements. In addition, the
commitments to extend consumer credit include various consumer credit
line products that are cancelable upon notification.
LETTERS OF CREDIT - Standby letters of credit are conditional
commitments issued by the Company guaranteeing the performance of a
customer to a third party. The guarantees frequently support public and
private borrowing arrangements, including commercial paper issuances,
bond financings, and other similar transactions. The Company issues
commercial letters of credit on behalf of customers to ensure payment of
amounts owed or collection of amounts receivable in connection with
trade transactions. The Company's credit loss exposure in the event of
counterparty nonperformance is the letter of credit contractual amount
and is the same exposure involved in extending loans. Management
assesses the counterparty's credit to determine the collateral obtained
to support the letters of credit. Collateral held varies, but may
include marketable securities, real estate, accounts receivable and
inventory. Since the conditions requiring the Company to fund letters of
credit may not materialize, the Company expects the letters of credit
liquidity requirements to be less than the total outstanding
commitments.
50 First Bank System, Inc. and Subsidiaries
<PAGE>
INTEREST RATE OPTIONS AND SWAPS - Interest rate swaps involve the
contractual exchange of fixed and floating rate interest payment
obligations based on a notional principal amount. The Company enters
into interest rate swap contracts to hedge its balance sheet for risk
caused by fluctuations in interest rates and as an intermediary for
customers. At December 31, 1994, and 1993, interest rate swaps totaling
$2.7 billion and $3.0 billion, respectively, hedged medium-term notes,
subordinated debt, deposit notes, long-term certificates of deposit,
deposit accounts, savings certificates, and commercial loans.
Activity with respect to interest rate swap hedges was as
follows:
<TABLE>
<CAPTION>
(In Millions) 1994 1993 1992
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Notional amount outstanding at beginning of year.. $3,010.8 $2,909.8 $2,189.7
Additions......................................... 1,275.0 400.0 1,261.0
Maturities........................................ (824.1) (275.8) (309.1)
Terminations...................................... (787.9) (23.2) (231.8)
-------------------------------------------
Notional amount outstanding at end of year...... $2,673.8 $3,010.8 $2,909.8
===========================================
</TABLE>
For interest rate swaps designated as hedges, the weighted average
interest rates to be paid were 6.09 percent and 3.54 percent at December
31, 1994, and 1993, respectively. At these same dates, the weighted
average interest rates to be received were 6.91 percent and 6.74
percent. FBS is a receiver of fixed rate interest and a payer of
floating rate interest on all hedges as of December 31, 1994.
For notional balances and yields by maturity date of the interest rate
swap hedging portfolio as of December 31, 1994, see Table 17 on page 23.
For a description of the Company's objectives for using derivative
financial instruments, refer to "Interest Rate Risk Management" on pages
21 through 24. Such information is incorporated by reference into these
Notes to Consolidated Financial Statements.
Interest rate caps are used to minimize the impact of fluctuating
interest rates on earnings by effectively extending the life and placing
a ceiling on the interest rate paid on the Company's short term
deposits. The total notional amount of cap agreements purchased at
December 31, 1994 was $250 million with an average strike level of
3-month LIBOR at 6.10 percent. The total notional amount of cap
agreements purchased at December 31, 1993, was $450 million with an
average strike level of 3-month LIBOR at 6.56 percent. The unamortized
premium on caps is amortized over the life of the cap. The caps
decreased net income by $2.5 million and $2.3 million during 1994 and
1993, respectively.
At December 31, 1994, and 1993, interest rate floors totaling $950
million with an average remaining maturity of 3.0 years and 4.0 years,
respectively, hedged floating rate commercial loans. For interest rate
floors designated as hedges, the weighted average 3-month LIBOR strike
was 3.50 percent, compared with a corresponding market index of 6.50
percent.
In addition to utilizing swaps and options as part of the Company's
asset/liability management strategy, the Company also acts as
intermediary for swap and option agreements on behalf of its customers.
To reduce its exposure to interest and market risks related to these
agreements, the Company enters into generally matching or offsetting
positions. The total notional amount of customer swap agreements,
including the offsetting positions, was $127 million and $199 million at
December 31, 1994, and 1993, respectively. The total notional amount of
customer option agreements, including the offsetting positions, was $254
million and $450 million at December 31, 1994, and 1993, respectively.
Interest rate swap and option contracts will result in gains and
losses subsequent to the date of the contract, due to interest rate
movements. For intermediated swaps and options, the Company records
these gains and losses as they occur in trading income. For swaps used
as hedges, the Company recognizes the gains or losses as an adjustment
to interest income or expense over the terms of the hedge. The Company
amortizes the gain or loss on terminated hedges over the original life
of the hedge if the hedged item remains outstanding. The amortization of
deferred gains and losses increased net interest income by $3.1 million
and decreased net interest income by $.9 million during 1994, and 1993,
respectively. Unamortized deferred gains were $9.6 million at December
31, 1994. The Company will amortize these gains through the year 2000.
Interest rate swap and option agreements contain credit risk in the
event counterparties are unable to meet the terms of their contracts.
The Company estimates the credit risk for interest rate swap and option
contracts by calculating the present value of the cost to replace all
outstanding contracts in a gain position at current market rates,
excluding counterparty contract gains and losses reported on a net
basis. At December 31, 1994, and 1993, the gain position of these
contracts, in the aggregate, was approximately $12 million and $172
million, respectively.
First Bank System, Inc. and Subsidiaries 51
<PAGE>
The Company manages the credit risk of its interest rate
swap and option contracts through credit approvals, limits,
bilateral collateral agreements and monitoring procedures.
Independent commercial bankers perform credit 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 - Liquidity support guarantees
are contracts whereby the Company agrees to provide a
liquidity facility to support commercial paper or tax-exempt
bonds issued by its customers. The 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 materialize, total guarantee
amounts do not necessarily represent the Company's future
funding obligation.
FORWARD CONTRACTS AND COMMITMENTS TO SELL MORTGAGE LOANS -
Forward contracts are contracts for the delayed delivery of
securities or cash settlement money market instruments. The
Company enters into these contracts to hedge the interest
rate risk of its mortgage loans held for sale. At December
31, 1994, and 1993, forward contracts outstanding were $.2
billion and $1.4 billion, respectively. At December 31, 1994,
net unamortized deferred gains on the forward agreements were
$200,000. The Company manages its credit risk on forward
contracts, which would arise in the event of nonperformance
by counterparties, through credit approval and limit
procedures.
The Company is committed under agreements, which are not
expected to result in loss to the Company, to sell mortgage
loans pursuant to master delivery commitments, and the
remaining balance on those commitments was $935 million at
December 31, 1994, and $225 million at December 31, 1993.
MORTGAGES SOLD WITH RECOURSE - Various recourse provisions,
relating to residential and multi-family mortgages sold with
recourse, obligate the Company for $1.4 billion at December
31, 1994, and $1.2 billion at December 31, 1993. All of the
loans sold are collateralized by real estate mortgages and a
portion of some of the loans sold is supported by either
government-sponsored or private mortgage insurance.
FOREIGN CURRENCY COMMITMENTS - Commitments to purchase and
sell foreign currency primarily consist of contracts to
exchange currencies at specified exchange rates on specified
dates with various counterparties, which enables customers to
transfer or reduce the risks associated with changes in
foreign currency exchange rates. The Company minimizes the
market and liquidity risks created by changes in currency
exchange rates by taking offsetting positions. In addition,
the Company controls the market risks associated with these
contracts by limiting the net exposure through policies,
procedures, and monitoring. The Company manages its credit
risk, or potential risk of loss from contract nonperformance
by a counterparty, through credit limit approval and
monitoring procedures. The aggregate replacement cost of
contracts in a gain position at December 31, 1994, was not
significant.
CREDIT CONCENTRATIONS - The Company concentrates its lending
to borrowers in the region where the Company has banking
offices and lends to borrowers in a wide variety of
industries.
Approximately 80 percent of the Company's commercial and
financial portfolio is outstanding to borrowers located in
the Company's operating region of Minnesota, Colorado,
Wisconsin, Montana, North Dakota, South Dakota, and Illinois.
Collateral held may include marketable securities, accounts
receivable, inventory, and equipment.
For detail of the Company's real estate portfolio by
project type and geography as of December 31, 1994, and 1993,
see Table 8 on page 14 which is incorporated by reference
into these Notes to Financial Statements. Such loans are
collateralized by the related property.
For detail of the Company's consumer loan portfolio by loan
type see Table 7 on page 13 under the category "Consumer" as
of December 31, 1994, and 1993, which is incorporated by
reference into these Notes to Financial Statements.
Approximately 80 percent of the total consumer portfolio
outstanding at December 31, 1994, is to customers located in
the Company's operating region. Residential mortgages, home
equity and auto loans are secured, but other consumer loan
types are generally not secured.
52 First Bank System, Inc. and Subsidiaries
<PAGE>
NOTE N. Fair Values of Financial Instruments
----------------------------------------------
SFAS 107, "Disclosures about Fair Value of Financial
Instruments," requires the disclosure of the fair value of
all financial instruments, both on and off balance sheet, for
which it is practicable to estimate their value. Financial
instruments are generally defined as cash, equity instruments
or investments, and contractual obligations to pay or receive
cash or another financial instrument. In defining fair value,
the Statement indicates that quoted market prices are the
preferred means of estimating the value of a specific
instrument, but in the cases where market quotes are not
available, fair values should be determined using various
valuation techniques such as discounted cash flow
calculations or by using pricing models or services.
Due to the nature of its business and the financing and
investing needs of its customers, the Company is involved
with a large number of financial instruments, the majority of
which are not actively traded. Accordingly, the Company has
used several valuation techniques and considered various
assumptions, including the discount rate, the estimated
timing and amount of cash flows and the aggregation methods
for valuing similar products, to estimate the fair value of
the financial instruments. As a result, the fair value
estimates cannot be substantiated by comparison to
independent markets, and in a majority of the cases, could
not be realized by the immediate sale or settlement of the
financial instrument. Also, the estimates reflect a point in
time valuation that could change significantly based on
changes in outside economic factors, such as the general
level of interest rates. 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 provide
or estimate a market value of the Company as a whole. The
following summarizes the valuation techniques and assumptions
used by the Company in estimating the fair value of the
financial instruments:
CASH AND CASH EQUIVALENTS - Cash, fed funds sold and
investments under repurchase programs have no interest rate
risk component and accordingly their carrying value 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 rate and
fixed rate loans, the fair value of which was estimated using
discounted cash flow analyses or other valuation techniques.
In order to apply discounted cash flow analyses, loans were
aggregated into "pools" of similar types and expected
repayment terms. The expected cash flows were reduced for
estimated historical prepayment experience. The projected
cash flows on nonaccrual loans were further reduced by the
amount of estimated losses on the portfolio and discounted
over an assumed average remaining life of one to two years.
COMMERCIAL AND FINANCIAL INSTITUTIONS: Commercial and
financial institution loans were valued using a discounted
cash flow analysis. The fixed rate loans in the commercial
and financial institutions portfolio (excluding nonaccrual
loans) had a weighted average rate of 8.1 percent in 1994 and
7.5 percent in 1993 and a weighted average maturity of 1.7
years in 1994 and 1993. The floating rate loans had a
weighted average rate of 8.4 percent in 1994 and 5.7 percent
in 1993. The high grade corporate bond yield curve was used
to arrive at the discount rates applied to these loans.
CORPORATE CARD: The fair value of corporate cards and
business cards was based on an approach that is similar to
that used by the Company to evaluate potential acquisitions
of portfolios of this type. Estimated net income adjusted for
account attrition was discounted using an estimated cost of
capital of 13.6 percent in 1994 and 13.7 percent in 1993. The
weighted average life was 7.6 years in 1994 and 9.3 years in
1993.
COMMERCIAL REAL ESTATE AND CONSTRUCTION: Commercial real
estate and construction loans were valued using a discounted
cash flow analysis. The fixed rate portion of this portfolio
(excluding nonaccrual loans) had a weighted average interest
rate of 8.8 percent and a weighted average remaining maturity
of 4.5 years in 1994 compared to 9.0 percent and 4.9 years in
1993. The floating rate portion of this portfolio (excluding
nonaccrual loans) had a weighted average interest rate of 8.8
percent and a weighted average remaining maturity of 3.7
years in 1994 compared to 9.0 percent and 4.7 years in 1993.
The high grade corporate bond yield curve was used to arrive
at the discount rates applied to these loans.
First Bank System, Inc. and Subsidiaries 53
<PAGE>
RESIDENTIAL FIRST MORTGAGES: Residential first mortgages
were segregated into pools of similar coupons and maturities.
These pools were matched to similar mortgage-backed
securities, and market quotes were obtained. In addition, the
fair value of the mortgage servicing rights related to these
mortgages was estimated using a discounted cash flow analysis
and was included in the fair value of the loans. The fixed
rate portion of this portfolio had a weighted average
interest rate of 7.7 percent in 1994 and 7.9 percent in 1993
with a weighted average contractual final remaining maturity
of 16.7 years in 1994 and 16.1 years in 1993.
CONSUMER INSTALLMENT: Fair value for consumer installment
loans was estimated using a discounted cash flow analysis.
Prepayment assumptions ranging from 20-25 percent were
applied to scheduled cash flows, based upon the Company's
experience with these assets. The floating rate portion of
the consumer installment loan portfolio had a weighted
average rate of 9.0 percent in 1994 and 7.0 percent in 1993.
The fixed rate portion of this portfolio had a weighted
average rate of 8.7 percent in 1994 and 8.9 percent in 1993
and a weighted average remaining maturity of 1.4 years in
1994 and 3.3 years in 1993. The high grade corporate bond
yield curve was used to arrive at the discount rates applied
to these loans.
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 an approach similar
to that used by the Company to evaluate potential
acquisitions of portfolios of this type. Estimated net income
adjusted for account attrition was discounted using an
estimated cost of capital of 12.1 percent for secured lines
and loans and 13.6 for unsecured lines in 1994 and 13.7
percent for both secured and unsecured lines in 1993. The
home equity lines had a weighted average interest rate of
10.3 percent in 1994 and 7.9 percent in 1993 with a weighted
average life of 5.4 years in 1994 and 5.2 years in 1993. The
fixed rate portion of the second mortgage loan portfolio had
a weighted average rate of 8.9 percent in 1994 and 9.0
percent in 1993 and a weighted average remaining maturity of
3.6 years in 1994 and 3.1 years in 1993. Retail credit cards
had a weighted average interest rate of 16.9 percent in 1994
and 15.4 percent in 1993 with a weighted average life of 7.1
years in 1994 and 7.3 years in 1993. Other revolving lines
had a weighted average interest rate of 12.4 percent in 1994
and 10.6 percent in 1993 with a weighted average life of 7.8
years in 1994 and 7.6 years in 1993.
CORE DEPOSIT INTANGIBLE - Core deposits provide a stable,
low-cost source of funds which can be invested to earn a
return greater than the cost of servicing the deposits. The
fair value of the Company's core deposits was estimated using
a discounted cash flow model which estimates the present
value of the difference between the ongoing cost of the core
deposits and the cost of alternative funds at current market
rates. This is the same method the Company uses in
calculating the value of the core deposit intangible of an
acquired bank.
DEPOSIT LIABILITIES - The fair value of demand deposits,
savings accounts and certain money market deposits is defined
by SFAS 107 to be equal to the amount payable on demand at
the date of the financial statements. Fair values for fixed
rate certificates of deposits were estimated using a
discounted cash flow analysis using the high grade corporate
bond yield curve to establish discount rates. The weighted
average interest rate for the certificate of deposits was 5.3
percent in 1994 and 4.6 percent in 1993 and the weighted
average maturity was 1.2 years in 1994 and 1.4 years in 1993.
SHORT-TERM BORROWINGS - The majority of the federal funds
purchased, borrowings under repurchase agreements and other
short-term borrowings are at variable rates or have short-
term maturities and their carrying value is assumed to
approximate their fair value.
LONG-TERM DEBT - Medium-term notes, Federal Home Loan Bank
Advances, and mortgage note obligations totaling $514 million
in 1994 and $123 million in 1993 were valued with a
discounted cash flow analysis using current market rates of
similar maturity debt securities to discount cash flows.
The weighted average interest rate was 6.0 percent in 1994
and 5.9 percent in 1993 with a weighted average maturity of
1.0 years in 1994 and 3.1 years in 1993. Other long-term debt
instruments were valued using available market quotes.
LOAN COMMITMENTS, LETTERS OF CREDIT AND GUARANTEES - The
substantial majority of the Company's commitments have
variable rates and do not expose the Company to interest rate
risk. No premium or discount was ascribed to loan commitments
because when funded, virtually all funding will be at current
market rates.
54 First Bank System, Inc. and Subsidiaries
<PAGE>
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, Euro dollar future and
Treasury yield curves.
The estimated fair values of the Company's financial instruments are
shown in the table below.
<TABLE>
<CAPTION>
1994 1993
------------------------------------------
Carrying Fair Carrying Fair
(Dollars in Millions) Amount Value Amount Value
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks................................ $ 1,707 $ 1,707 $ 1,767 $ 1,767
Interest bearing deposits with banks................... 28 28 82 82
Federal funds sold and resale agreements............... 471 471 1,338 1,338
Trading account securities............................. 77 77 55 55
Available-for-sale securities.......................... 5,185 5,185 5,030 5,042
Loans:
Commercial:
Commercial............................................. 7,285 7,429 6,170 6,390
Financial institutions................................. 787 719 2,004 1,828
Commercial real estate and construction................ 2,778 2,934 2,468 2,714
Consumer:
Residential mortgage................................... 5,098 4,840 5,125 5,148
Residential mortgage held for sale..................... 197 197 1,149 1,166
Home equity and second mortgage........................ 2,453 2,520 1,932 2,000
Credit card and revolving lines........................ 3,134 3,371 2,452 2,678
Other consumer installment............................. 2,818 2,862 2,191 2,233
Allowance for credit losses............................. (475) - (466) -
------------------------------------------
Total loans............................................ 24,075 24,872 23,025 24,157
------------------------------------------
Total financial assets................................. 31,543 32,340 31,297 32,441
NONFINANCIAL ASSETS:
Core deposit intangible................................ 77 863 56 235
Mortgage servicing portfolio........................... 47 138 58 105
------------------------------------------
Total................................................ 31,667 $33,341 31,411 $32,781
========= ==========
Other assets............................................. 2,461 1,959
---------- --------
Total Assets......................................... $34,128 $33,370
========== ========
FINANCIAL LIABILITIES:
Deposits:
Noninterest-bearing deposits........................... $ 5,933 $ 5,933 $ 7,743 $ 7,743
Interest-bearing checking and other savings............ 8,908 8,908 9,422 9,422
Savings certificates and certificates > $100,000....... 9,415 9,221 9,221 9,328
------------------------------------------
Total deposits....................................... 24,256 24,062 26,386 26,493
Federal funds purchased................................ 1,630 1,630 553 553
Securities sold under agreements to repurchase......... 938 940 369 378
Other short-term funds borrowed........................ 955 955 577 577
Long-term debt......................................... 2,684 2,594 1,905 1,934
------------------------------------------
Total financial liabilities.......................... 30,463 $30,181 29,790 $29,935
========= ==========
NONFINANCIAL LIABILITIES................................. 1,053 836
SHAREHOLDERS' EQUITY..................................... 2,612 2,744
---------- --------
Total Liabilities and Shareholders' Equity........... $34,128 $33,370
========== ========
Off-Balance Sheet Financial Instruments:
Unrecognized gain on interest rate swaps and options... N/A $ 8 N/A $ 134
Unrecognized loss on interest rate swaps and options... N/A 121 N/A 12
Loan commitments....................................... N/A N/A 1
Letters of credit...................................... N/A - N/A -
------------------------------------------
</TABLE>
First Bank System, Inc. and Subsidiaries 55
<PAGE>
NOTE O. Commitments and Contingent Liabilities
- ----------------------------------------------
Rental expense for operating leases amounted to $77.5 million
in 1994, $82.2 million in 1993, and $73.8 million in 1992.
Future minimum payments, by year and net of sublease rentals, under
capitalized leases and noncancelable operating leases with initial terms
of one year or more, consisted of the following at December 31, 1994:
<TABLE>
<CAPTION>
Capitalized Operating
(In Millions) Leases Leases
-----------------------------------------------------------------------------------
<S> <C> <C>
1995..................................................... $ 10.6 $ 56.0
1996..................................................... 10.7 48.5
1997..................................................... 10.7 45.3
1998..................................................... 4.5 43.6
1999..................................................... 4.5 82.0
Thereafter............................................... 62.9 316.2
------------------------
Total minimum lease payments............................. 103.9 $591.6
======
Less amount representing interest........................ 51.1
------
Present value of net minimum lease payments.............. $ 52.8
======
</TABLE>
The Company currently occupies approximately 640,000 square feet in
First Bank Place, located in Minneapolis, under a 10-year lease. The
Company has eight five-year options to renew the lease. Minimum rental
payments are approximately $12.5 million annually.
The Company occupies a 368,000 square foot facility in St. Paul. The
lease term extends for 21 years, commencing November 1991, with two
five-year renewal options. Minimum rental payments are approximately
$4.2 million annually.
A wholly-owned subsidiary of First Bank National Association ("the
Bank") is a partner in a joint venture that owns and operates a twin-
tower office complex known as Pillsbury Center. The Bank and the Parent
Company have long-term lease agreements to occupy space in one of the
towers. Approximately two-thirds of the space has been sublet for the
remaining life of the long-term lease obligation and the remaining space
has been sublet through the year 2001. The unamortized portion of the
capitalized lease was $23.0 million at December 31, 1994, and $23.3
million at December 31, 1993. Minimum annual payments required under the
leases are approximately $2.7 million.
The Company occupies 94,115 square feet in the Metropolitan Centre
located in Minneapolis under three leases. The largest lease is for
83,230 square feet and extends until March 2004 with two five year
renewal options. The Company also occupies 84,441 square feet in the
Southdale Office Center under six separate leases. The leases extend
until July 1998 with one five year renewal for 50,944 square feet of
space.
Various legal proceedings are currently pending against the Company.
Due to the complex nature of some of these actions and proceedings, it
may be a number of years before such matters ultimately are resolved. In
the opinion of management, the aggregate liability, if any, will not
have a material adverse effect on the Company's financial position.
56 First Bank System, Inc. and Subsidiaries
<PAGE>
NOTE P. Supplemental Disclosures to the Consolidated
- ----------------------------------------------------
Financial Statements
--------------------
CONSOLIDATED BALANCE SHEET - Time certificates of deposit in
denominations of $100,000 or more totaled $1,318 million and
$1,467 million at December 31, 1994, and 1993, respectively.
CONSOLIDATED STATEMENT OF CASH FLOWS - Listed below are
supplemental disclosures to the Consolidated Statement of
Cash Flows.
<TABLE>
<CAPTION>
Year Ended December 31 (In Millions) 1994 1993 1992
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes paid..................................... $ 155.6 $ 122.4 $ 56.6
Interest paid......................................... 833.1 845.6 982.3
Net noncash transfers to foreclosed property.......... 41.4 42.8 81.5
Noncash merger-related transfers to
securities held for sale............................ -- 181.6 --
Change in unrealized gain (loss) on
available-for-sale securities, net of taxes of
$89.6 in 1994 and $23.7 in 1993..................... (144.4) 38.0 --
Cash acquisitions of businesses:
Fair value of noncash assets acquired............... 805.9 276.6 785.6
Liabilities assumed................................. (698.7) (258.0) (1,170.9)
--------------------------------------------
Net............................................... $ 107.2 $ 18.6 $ (385.3)
============================================
Stock acquisitions of businesses:
Fair value of noncash assets acquired............... $ 1,805.8 $ 571.5 $ 2,347.2
Net cash acquired................................... 74.5 8.9 200.7
Liabilities assumed................................. (1,648.0) (563.4) (2,301.6)
--------------------------------------------
Net value of common stock issued.................. $ 232.3 $ 17.0 $ 246.3
============================================
</TABLE>
NOTE Q. First Bank System, Inc. (Parent Company)
- -------------------------------------------------
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31 (In Millions) 1994 1993
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Deposits with banks, principally interest-bearing
(including $397 and $151 with subsidiaries).......................... $ 398 $ 152
Available-for-sale securities.......................................... 136 116
Investments in:
Bank affiliates and bank holding companies........................... 2,812 2,878
Nonbank affiliates................................................... 46 84
Trust affiliates..................................................... 56 51
Advances to:
Bank affiliates and bank holding companies........................... 155 141
Nonbank affiliates................................................... 100 67
Other assets........................................................... 338 246
---------------------------
Total assets....................................................... $ 4,041 $3,735
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term funds borrowed.............................................. $ 6 $ 4
Advances from subsidiaries............................................. 70 54
Long-term debt......................................................... 1,097 838
Other liabilities...................................................... 256 95
Shareholders' equity................................................... 2,612 2,744
---------------------------
Total liabilities and shareholders' equity......................... $ 4,041 $3,735
===========================
</TABLE>
First Bank System, Inc. and Subsidiaries 57
<PAGE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31 (In Millions) 1994 1993 1992
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries (including $447.9, $379.1 and $166.1
from bank and bank holding company subsidiaries)....................... $ 480.9 $385.1 $176.0
Interest from subsidiaries............................................... 19.0 20.4 24.8
Service and management fees from subsidiaries............................ 103.4 90.2 80.3
Other income............................................................. 23.7 20.3 16.4
--------------------------
Total income......................................................... 627.0 516.0 297.5
EXPENSES
Interest on short-term funds borrowed.................................... 2.8 2.4 .6
Interest on long-term debt............................................... 55.0 51.8 48.7
Operating expenses paid to subsidiaries.................................. 8.3 7.0 7.0
Other expenses........................................................... 193.3 117.8 90.3
--------------------------
Total expenses....................................................... 259.4 179.0 146.6
--------------------------
Income before income taxes, cumulative effect of changes
in accounting principles and equity in undistributed income
of subsidiaries........................................................ 367.6 337.0 150.9
Income taxes (credit).................................................... (41.4) (17.2) 47.0
--------------------------
Income before cumulative effect of changes in accounting principles
and equity in undistributed income of subsidiaries..................... 409.0 354.2 103.9
Cumulative effect of changes in accounting principles.................... - - 40.3
--------------------------
Income of parent company................................................. 409.0 354.2 144.2
Equity (deficiency) in undistributed income of subsidiaries:
Bank affiliates and bank holding companies............................. (81.5) (4.2) 284.3
Nonbank affiliates..................................................... (28.0) 6.5 17.0
Trust affiliates....................................................... 5.5 6.7 3.4
--------------------------
(104.0) 9.0 304.7
--------------------------
Net income........................................................... $ 305.0 $363.2 $448.9
==========================
</TABLE>
Certain restrictions exist regarding the extent to which bank
and thrift subsidiaries may transfer funds to the Company in the
form of dividends, loans or advances. Federal law prevents the
Company and its nonbank subsidiaries from borrowing from bank and
thrift subsidiaries unless the loans are secured by various types
of collateral. These secured loans that may be made by bank and
thrift subsidiaries to the Company or any individual affiliate
are generally limited to 10 percent of the bank's or thrift's
equity and 20 percent of the bank's or thrift's equity for loans
to all affiliates and the Company in the aggregate.
Payment of dividends to the Company by its subsidiary banks
and thrift is subject to review by regulators and is subject to
various statutory limitations and in certain circumstances
requires approval by regulatory agencies. The approval of the
Comptroller of the Currency is required if total dividends
declared by a national bank in any calendar year exceed the
bank's net profits (as defined) for that year combined with its
retained net profits for the preceding two calendar years. These
permissible dividends are further limited by the minimum capital
constraints imposed on all national banks by the Comptroller of
the Currency. Within the limit of these regulatory guidelines,
all subsidiaries have the ability to pay dividends without prior
regulatory approval.
First Bank, fsb (the "Thrift") is required to give the Office
of Thrift Supervision thirty 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 the calendar year's
earnings plus 50 percent of the surplus capital (the percentage
by which the ratio of its regulatory capital to assets ratio
exceeds the fully phased in ratio) at the beginning of the year.
58 First Bank System, Inc. and Subsidiaries
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31 (In Millions) 1994 1993 1992
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................................ $ 305.0 $ 363.2 $ 448.9
Adjustments to reconcile net income to net cash
provided by operating activities:
(Equity) deficiency in undistributed income of subsidiaries
before cumulative effect of accounting changes........................ 104.0 (9.0) (304.7)
Cumulative effect of accounting changes................................. - - (40.3)
Decrease (increase) in accrued receivables, net......................... 46.1 (5.7) .2
(Decrease) increase in accrued liabilities, net......................... (21.4) (30.7) 68.5
Amortization of goodwill and other intangibles.......................... 5.5 5.4 4.9
Deferred tax provision.................................................. 27.5 13.4 (7.6)
Provision for merger and integration.................................... 72.8 - -
Other -- net............................................................ (38.1) (37.8) (.2)
-----------------------------
Net cash provided by operating activities............................. 501.4 298.8 169.7
INVESTING ACTIVITIES
Securities transactions:
Sales and maturities.................................................... 20.4 22.5 26.9
Purchases............................................................... (47.1) (56.2) (45.5)
Investment in subsidiaries................................................ (83.7) (43.2) (236.7)
Equity distributions from subsidiaries.................................... 235.0 - -
Net (increase) decrease in short-term advances to affiliates.............. (50.0) 54.2 21.9
Long-term advances made to affiliates..................................... - (22.4) (40.0)
Principal collected on long-term advances made to affiliates.............. .3 126.0 .8
Other -- net.............................................................. (31.6) 23.3 16.6
-----------------------------
Net cash provided (used) by investing activities...................... 43.3 104.2 (256.0)
FINANCING ACTIVITIES
Net (decrease) increase in short-term funds borrowed...................... (25.1) 43.4 10.7
Proceeds from long-term debt.............................................. 405.1 240.0 212.0
Principal payments on long-term debt...................................... (145.1) (248.6) (91.0)
Redemption of preferred stock............................................. (167.0) (115.2) (.8)
Proceeds from dividend reinvestment, stock option, and
stock purchase plans.................................................... 40.3 50.4 26.2
(Purchase) issuance of treasury stock and stock warrants.................. (245.8) (204.1) 3.0
Stock warrants exercised.................................................. 7.9 .9 .2
Cash dividends............................................................ (168.6) (151.0) (109.2)
-----------------------------
Net cash used by financing activities................................. (298.3) (384.2) 51.1
-----------------------------
Change in cash and cash equivalents................................... 246.4 18.8 (35.2)
Cash and cash equivalents at beginning of yea............................. 151.8 133.0 168.2
-----------------------------
Cash and cash equivalents at end of year.............................. $ 398.2 $ 151.8 $ 133.0
=============================
</TABLE>
First Bank System, Inc. and Subsidiaries 59
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
First Bank System, Inc.
We have audited the supplemental consolidated balance sheets of First Bank
System, Inc. and subsidiaries (formed as a result of the consolidation of First
Bank System, Inc. and Metropolitan Financial Corporation) as of December 31,
1994 and 1993, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1994. The supplemental consolidated financial statements give retroactive
effect to the merger of First Bank System, Inc. and Metropolitan Financial
Corporation on January 24, 1995, which has been accounted for using the pooling
of interests method as described in the notes to the supplemental consolidated
statements. These supplemental financial statements are the responsibility of
the management of First Bank System, Inc. Our responsibility is to express an
opinion on these supplemental financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the supplemental 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, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, after giving retroactive
effect to the merger of Metropolitan Financial Corporation, as described in the
notes to the supplemental consolidated financial statements, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 24, 1995
60 First Bank System, Inc. and Subsidiaries
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET - FIVE-YEAR SUMMARY
% Change
December 31 (In Millions) 1994 1993 1992 1991 1990 1993-1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks......... $ 1,707 $ 1,767 $ 2,011 $ 1,650 $ 1,970 (3.4)%
Federal funds sold and resale
agreements..................... 471 1,338 1,710 1,509 1,604 (64.8)
Interest-bearing deposits with
banks.......................... 28 82 484 446 128 (65.9)
Trading account securities...... 77 55 94 151 136 40.0
Securities held for sale........ - - 295 1,201 - *
Securities:
U.S. Treasury.................. 1,113 1,554 1,827 1,174 1,030 (28.4)
Mortgage-backed securities..... 3,297 2,861 3,196 2,102 3,088 15.2
State and political
subdivisions.................. 181 196 188 166 445 (7.7)
U.S. agencies and other........ 594 419 586 101 498 41.8
------------------------------------------------------
Total securities.............. 5,185 5,030 5,797 3,543 5,061 3.1
Loans........................... 24,550 23,491 20,663 18,734 18,845 4.5
Less allowance for credit
losses........................ 475 466 484 453 484 1.9
------------------------------------------------------
Net loans..................... 24,075 23,025 20,179 18,281 18,361 4.6
Other assets.................... 2,585 2,073 2,188 1,727 2,079 24.7
------------------------------------------------------
Total assets................. $ 34,128 $ 33,370 $ 32,758 $ 28,508 $ 29,339 2.3%
======================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing............ $ 5,933 $ 7,743 $ 6,243 $ 4,880 $ 4,405 (23.4)%
Interest-bearing............... 18,323 18,643 20,152 18,089 18,367 (1.7)
------------------------------------------------------
Total deposits............... 24,256 26,386 26,395 22,969 22,772 (8.1)
Short-term borrowings........... 3,523 1,499 1,550 1,508 2,141 135.0
Long-term debt.................. 2,684 1,905 1,141 1,261 1,886 40.9
Other liabilities............... 1,053 836 927 639 714 26.0
------------------------------------------------------
Total liabilities............ 31,516 30,626 30,013 26,377 27,513 2.9
Shareholders' equity............ 2,612 2,744 2,745 2,131 1,826 (4.8)
------------------------------------------------------
Total liabilities and
shareholders' equity........ $ 34,128 $ 33,370 $ 32,758 $ 28,508 $ 29,339 2.3%
======================================================
</TABLE>
*Not meaningful
First Bank System, Inc. and Subsidiaries 61
<PAGE>
CONSOLIDATED STATEMENT OF INCOME - FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
% Change
Year Ended December 31 (In Millions) 1994 1993 1992 1991 1990 1993-1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans....................................... $1,914.7 $1,730.7 $1,687.2 $ 1,842.1 $ 2,105.9 10.6%
Securities:
Taxable.................................... 327.9 352.1 336.5 377.6 402.3 (6.9)
Exempt from federal income taxes........... 12.0 14.6 12.0 19.1 34.9 (17.8)
FSLIC notes and covered assets.............. - - - 25.9 46.3 *
Other interest income....................... 33.5 37.1 70.4 104.3 155.9 (9.7)
------------------------------------------------------
Total interest income...................... 2,288.1 2,134.5 2,106.1 2,369.0 2,745.3 7.2
INTEREST EXPENSE
Deposits.................................... 597.3 648.3 797.7 1,125.9 1,405.4 (7.9)
Federal funds purchased and repurchase
agreements................................. 103.1 31.8 37.1 59.9 152.1 224.2
Other short-term funds borrowed............. 36.4 26.4 30.8 40.3 89.1 37.9
Long-term debt.............................. 131.9 89.8 87.5 128.1 197.6 46.9
------------------------------------------------------
Total interest expense..................... 868.7 796.3 953.1 1,354.2 1,844.2 9.1
------------------------------------------------------
Net interest income......................... 1,419.4 1,338.2 1,153.0 1,014.8 901.1 6.1
Provision for credit losses (1994 and 1992
include $16.5 and $13.6 respectively, in
merger-related provisions)................. 123.6 133.1 191.7 210.2 219.7 (7.1)
------------------------------------------------------
Net interest income after provision for
credit losses.............................. 1,295.8 1,205.1 961.3 804.6 681.4 7.5
NONINTEREST INCOME
Credit card fees............................ 179.0 137.1 116.9 94.4 71.6 30.6
Trust fees.................................. 159.2 146.1 127.8 115.5 108.1 9.0
Service charges on deposit accounts......... 127.3 126.0 114.8 102.0 95.6 1.0
Insurance commissions....................... 29.2 24.2 28.1 28.3 30.7 20.7
Securities gains (losses)................... (115.0) .3 46.3 42.3 10.2 *
Other....................................... 179.2 185.2 179.8 174.5 155.9 (3.2)
------------------------------------------------------
Total noninterest income................... 558.9 618.9 613.7 557.0 472.1 (9.7)
NONINTEREST EXPENSE
Salaries.................................... 450.7 439.8 426.3 401.2 419.9 2.5
Employee benefits........................... 105.7 99.1 94.9 87.3 82.8 6.7
Net occupancy............................... 103.8 109.7 97.7 92.7 90.1 (5.4)
Furniture and equipment..................... 88.3 80.7 72.7 68.8 70.6 9.4
FDIC insurance.............................. 58.4 57.5 51.5 46.5 30.6 1.6
Advertising................................. 35.5 25.6 26.7 26.1 29.8 38.7
Amortization of goodwill and other
intangible assets.......................... 50.4 41.3 34.0 29.3 20.3 22.0
Other personnel costs....................... 35.7 31.0 23.3 19.2 12.1 15.2
Professional services....................... 38.5 41.5 43.8 40.3 39.1 (7.2)
Data processing............................. 20.3 27.1 26.7 27.5 20.9 (25.1)
Other real estate (1994 and 1992 include
$2.6 and $26.4 respectively, in merger-
related expense)........................... 1.4 8.9 45.1 36.6 47.0 (84.3)
Merger and integration...................... 122.7 72.2 84.0 - - 69.9
Other....................................... 238.0 230.3 219.6 192.4 199.8 3.3
------------------------------------------------------
Total noninterest expense................... 1,349.4 1,264.7 1,246.3 1,067.9 1,063.0 6.7
------------------------------------------------------
Income from continuing operations before
income taxes and cumulative effect of
changes in accounting principles........... 505.3 559.3 328.7 293.7 90.5 (9.7)
Applicable income taxes..................... 191.8 198.6 115.7 30.3 6.5 (3.4)
------------------------------------------------------
Income from continuing operations before
cumulative effect of changes in accounting
principles................................. 313.5 360.7 213.0 263.4 84.0 (13.1)
Income (loss) from discontinued
operations................................. (8.5) 2.5 2.7 1.1 .6 *
------------------------------------------------------
Income before cumulative effect of changes
in accounting principles................... 305.0 363.2 215.7 264.5 84.6 (16.0)
Cumulative effect of changes in
accounting principles...................... - - 233.2 - 1.0 *
------------------------------------------------------
Net income.................................. $ 305.0 $ 363.2 $ 448.9 $ 264.5 $ 85.6 (16.0)
====================================================== ======
Net income applicable to common equity...... $ 292.4 $ 334.0 $ 417.3 $ 235.7 $ 58.1 (12.5)%
====================================================== ======
</TABLE>
*Not meaningful
62 First Bank System, Inc. and Subsidiaries
<PAGE>
<TABLE>
<CAPTION>
QUARTERLY CONSOLIDATED FINANCIAL DATA
1994 1993
-------------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
(In Millions, Except Per Share Data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans........................... $ 521.4 $ 491.3 $ 468.3 $ 433.7 $ 442.4 $ 442.1 $ 427.9 $ 418.3
Securities:
Taxable........................ 85.9 89.7 81.1 71.2 76.7 86.7 93.2 95.5
Exempt from federal income
taxes......................... 2.9 3.0 3.1 3.0 4.7 3.2 3.3 3.4
Other interest income........... 9.7 8.4 8.7 6.7 8.6 6.5 8.6 13.4
-------------------------------------------------------------------------------------------
Total interest income........ 619.9 592.4 561.2 514.6 532.4 538.5 533.0 530.6
INTEREST EXPENSE
Deposits........................ 164.2 151.5 144.7 136.9 148.7 159.2 162.3 178.1
Federal funds purchased and
repurchase agreements.......... 36.6 34.5 22.3 9.7 7.6 9.0 7.5 7.7
Other short-term funds borrowed. 13.0 8.7 8.4 6.3 6.9 7.3 7.8 4.4
Long-term debt.................. 39.5 34.6 31.9 25.9 26.9 23.3 20.0 19.6
-------------------------------------------------------------------------------------------
Total interest expense....... 253.3 229.3 207.3 178.8 190.1 198.8 197.6 209.8
-------------------------------------------------------------------------------------------
Net interest income............. 366.6 363.1 353.9 335.8 342.3 339.7 335.4 320.8
Provision for credit losses..... 44.0 27.0 26.0 26.6 28.9 29.1 35.5 39.6
-------------------------------------------------------------------------------------------
Net interest income after
provision for credit losses.... 322.6 336.1 327.9 309.2 313.4 310.6 299.9 281.2
NONINTEREST INCOME
Credit card fees................ 50.3 49.2 43.5 36.0 37.5 36.6 34.5 28.5
Trust fees...................... 41.7 38.9 40.1 38.5 37.5 36.6 36.5 35.5
Service charges on deposit
accounts....................... 30.7 32.1 32.3 32.2 31.6 31.5 30.8 32.1
Insurance commissions........... 7.8 8.2 7.4 5.8 6.5 6.7 5.1 5.9
Securities gains (losses)....... (112.2) (2.8) - - - - - .3
Other........................... 43.1 44.7 42.5 48.9 50.0 43.8 45.2 46.2
-------------------------------------------------------------------------------------------
Total noninterest income..... 61.4 170.3 165.8 161.4 163.1 155.2 152.1 148.5
NONINTEREST EXPENSE
Salaries........................ 116.5 114.5 113.2 106.5 107.6 109.7 109.6 112.9
Employee benefits............... 24.4 27.1 26.9 27.3 23.2 23.2 24.5 28.2
Net occupancy................... 25.0 26.9 26.4 25.5 27.1 27.0 27.3 28.3
Furniture and equipment......... 22.6 21.5 22.8 21.4 21.1 20.3 20.3 19.0
FDIC insurance.................. 14.4 13.7 15.7 14.6 14.6 14.5 14.2 14.2
Advertising..................... 8.5 7.7 9.8 9.5 6.1 7.4 5.9 6.2
Amortization of goodwill and
other intangible assets........ 13.8 13.2 12.7 10.7 9.7 10.8 10.7 10.1
Other personnel costs........... 8.6 8.5 10.0 8.6 9.5 8.1 7.4 6.0
Professional services........... 11.9 9.6 9.5 7.5 11.9 10.1 9.8 9.7
Data processing................. 5.6 4.8 5.0 4.9 4.7 5.5 8.7 8.2
Other real estate............... 2.6 .5 (2.6) .9 1.4 3.9 2.7 .9
Merger and integration.......... 121.3 1.4 - - - - 72.2 --
Other........................... 60.5 63.2 58.6 55.7 60.0 56.2 57.1 57.0
-------------------------------------------------------------------------------------------
Total noninterest expense.... 435.7 312.6 308.0 293.1 296.9 296.7 370.4 300.7
-------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes. (51.7) 193.8 185.7 177.5 179.6 169.1 81.6 129.0
Applicable income taxes
(credit)....................... (18.3) 74.3 70.2 65.6 65.8 62.4 35.0 35.4
-------------------------------------------------------------------------------------------
Income (loss) from continuing
operations..................... (33.4) 119.5 115.5 111.9 113.8 106.7 46.6 93.6
Income (loss) from discontinued
operations..................... (1.9) (7.0) 1.6 (1.2) (.1) 1.3 2.1 (.8)
-------------------------------------------------------------------------------------------
Net income (loss)............... $ (35.3) $ 112.5 $ 117.1 $ 110.7 $ 113.7 $ 108.0 $ 48.7 $ 92.8
===========================================================================================
Net income (loss) applicable to
common equity.................. $ (37.6) $ 110.3 $ 114.9 $ 104.8 $ 107.9 $ 100.3 $ 40.9 $ 84.9
===========================================================================================
Earnings (loss) per common
share.......................... $ (.28) $ .80 $ .83 $ .79 $ .81 $ .74 $ .30 $ .63
SELECTED AVERAGE BALANCES
Loans........................... $24,314 $23,931 $24,097 $23,044 $23,309 $22,558 $21,122 $20,151
Earning assets.................. 30,676 30,681 30,666 28,958 29,825 29,217 28,433 27,904
Total assets.................... 34,031 33,908 34,049 32,159 33,248 32,513 31,754 31,159
Deposits........................ 24,076 24,337 25,325 24,911 26,323 25,734 25,449 25,026
Long-term debt.................. 2,547 2,399 2,323 1,973 1,921 1,640 1,324 1,199
Common equity................... 2,645 2,650 2,617 2,497 2,438 2,444 2,391 2,356
-------------------------------------------------------------------------------------------
</TABLE>
The fourth quarter of 1994 includes $121.3 million in merger-related charges,
$16.5 million in provision for credit losses and $2.6 million in ORE charges
related to the MFC acquisition. The third quarter of 1994 includes $1.4 million
in merger-related charges related to the MFC acquisition. The second quarter of
1993 includes $72.2 million in merger-related charges in connection with the
Colorado National Bankshares, Inc. acquisition.
First Bank System, Inc. and Subsidiaries 63
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
Five Year Summary of Consolidated Operations 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Interest
Yields Yields
(In Millions) Balance Interest and Rates Balance Interest and Rates
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities:
U.S. Treasury................................................ $ 1,574 $ 82.8 5.26% $ 1,797 $ 101.5 5.65%
Mortgage-backed securities................................... 3,288 208.7 6.35 3,323 207.8 6.25
State & political subdivisions............................... 188 20.0 10.64 202 22.4 11.09
U.S. agencies and other...................................... 619 34.4 5.56 630 38.1 6.05
-------------------- --------------------
Total securities............................................ 5,669 345.9 6.10 5,952 369.8 6.21
Unrealized loss on available-for-sale securities.............. (69) --
-------- --------
Net securities.............................................. 5,600 5,952
Trading account securities.................................... 73 3.4 4.66 117 4.7 4.02
Federal funds sold and resale agreements...................... 405 16.5 4.07 755 22.3 2.95
FSLIC notes and covered assets................................ -- -- -- -- -- --
Loans:
Commercial:
Commercial mortgage......................................... 6,832 514.7 7.53 5,804 414.4 7.14
Financial institutions...................................... 1,146 30.1 2.63 1,534 42.5 2.77
Real estate:
Commercial................................................. 2,359 194.1 8.23 2,207 179.7 8.14
Construction............................................... 268 21.4 7.99 213 15.5 7.28
-------------------- --------------------
Total commercial........................................... 10,605 760.3 7.17 9,758 652.1 6.68
Consumer:
Residential mortgage........................................ 5,345 385.6 7.21 4,860 384.6 7.91
Residential mortgage held for sale.......................... 387 27.4 7.08 1,040 72.4 6.96
Home equity and second mortgage............................. 2,223 193.2 8.69 1,539 127.1 8.26
Credit card................................................. 2,054 248.9 12.12 1,733 233.1 13.45
Other....................................................... 3,243 308.3 9.51 2,872 272.6 9.49
-------------------- --------------------
Total consumer............................................. 13,252 1,163.4 8.78 12,044 1,089.8 9.05
-------------------- --------------------
Total loans................................................ 23,857 1,923.7 8.06 21,802 1,741.9 7.99
Allowance for credit losses.................................. 486 489
-------- --------
Net loans................................................... 23,371 21,313
Other earning assets.......................................... 255 13.7 5.37 275 13.5 4.91
-------------------- --------------------
Total earning assets*...................................... 30,259 2,303.2 7.61 28,901 2,152.2 7.45
Cash and due from banks....................................... 1,749 1,786
Other assets.................................................. 2,092 1,993
-------- --------
Total assets............................................... $ 33,545 $ 32,191
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits................................. $ 6,310 $ 6,688
Interest-bearing deposits:
Interest checking........................................... 2,940 44.4 1.51 2,789 45.2 1.62
Money market accounts....................................... 4,035 110.2 2.73 4,077 106.8 2.62
Other savings accounts...................................... 2,245 49.5 2.20 2,157 49.2 2.28
Savings certificates........................................ 7,750 315.4 4.07 8,297 357.4 4.31
Certificates over $100,000.................................. 1,381 77.8 5.63 1,629 89.7 5.51
-------------------- --------------------
Total interest-bearing deposits............................ 18,351 597.3 3.25 18,949 648.3 3.42
Short-term borrowings......................................... 2,955 139.5 4.72 1,417 58.2 4.11
Long-term debt................................................ 2,312 131.9 5.71 1,523 89.8 5.90
-------------------- --------------------
Total interest-bearing liabilities......................... 23,618 868.7 3.68 21,889 796.3 3.64
Other liabilities............................................. 871 845
Preferred equity.............................................. 143 360
Common equity................................................. 2,603 2,409
-------- --------
Total liabilities and shareholders' equity................. $ 33,545 $ 32,191
======== ========
Net interest income........................................... $1,434.5 $1,355.9
======== ========
Gross interest margin......................................... 3.93% 3.81%
===== =====
Gross interest margin without taxable-equivalent increments... 3.88% 3.75%
===== =====
PERCENT OF EARNING ASSETS
Interest income............................................... 7.61% 7.45%
Interest expense.............................................. 2.87 2.76
===== =====
Net interest margin......................................... 4.74 4.69
===== =====
Net interest margin without taxable-equivalent increments..... 4.69% 4.63%
===== =====
</TABLE>
Interest and rates are presented on a fully taxable-equivalent basis under a tax
rate of 35 percent for 1994 and 1993 and 34 percent for 1992, 1991 and 1990.
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
64 First Bank System, Inc. and Subsidiaries
<PAGE>
<TABLE>
<CAPTION>
1992 1991 1990 1993-1994
- ---------------------------------------------------------------------------------------------------------------------------------
Interest Interest Interest
Yields Yields Yields % Change
Balance Interest and Rates Balance Interest and Rates Balance Interest and Rates Average Balance
- ---------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1,557 $ 98.2 6.31% $ 1,043 $ 81.7 7.83% $ 1,032 $ 83.7 8.11% (12.4)%
2,673 207.3 7.76 2,901 262.3 9.04 2,812 270.0 9.60 (1.1)
153 18.1 11.83 242 27.5 11.36 583 62.4 10.70 (6.9)
444 26.2 5.90 483 33.2 6.87 655 37.1 5.66 (1.7)
- ------------------- ------------------ ---------------------
4,827 349.8 7.25 4,669 404.7 8.67 5,082 453.2 8.92 (4.8)
-- -- -- **
- ------- ------- -------
4,827 4,669 5,082 (5.9)
137 6.5 4.74 176 12.1 6.88 185 15.8 8.54 (37.6)
1,318 45.1 3.42 1,292 75.8 5.87 1,353 110.4 8.16 (46.4)
-- -- -- 366 25.9 7.08 512 46.3 9.04 **
5,490 423.1 7.71 6,254 596.7 9.54 7,732 837.0 10.83 17.7
1,096 40.8 3.72 710 31.2 4.39 562 33.6 5.98 (25.3)
2,135 178.5 8.36 2,208 204.0 9.24 2,172 210.0 9.67 6.9
270 20.4 7.56 337 30.7 9.11 513 49.2 9.59 25.8
- ------------------- ------------------ ---------------------
8,991 662.8 7.37 9,509 862.6 9.07 10,979 1,129.8 10.29 8.7
3,851 347.7 9.03 3,401 322.6 9.49 3,876 400.5 10.33 10.0
867 70.5 8.13 688 65.7 9.55 888 90.4 10.18 (62.8)
1,135 100.5 8.85 889 82.1 9.24 693 80.0 11.54 44.4
1,709 243.0 14.22 1,495 217.3 14.54 1,091 174.1 15.96 18.5
2,526 279.2 11.05 2,503 316.4 12.64 2,321 261.6 11.27 12.9
- ------------------- ------------------ ---------------------
10,088 1,040.9 10.32 8,976 1,004.1 11.19 8,869 1,006.6 11.35 10.0
- ------------------- ------------------ ---------------------
19,079 1,703.7 8.93 18,485 1,866.7 10.10 19,848 2,136.4 10.76 9.4
496 485 505 (.6)
- ------- ------- -------
18,583 18,000 19,343 9.7
509 23.7 4.66 261 18.2 6.97 389 31.3 8.05 (7.3)
- ------------------- ------------------ ---------------------
25,870 2,128.8 8.23 25,249 2,403.4 9.52 27,369 2,793.4 10.21 4.7
1,558 1,372 1,426 (2.1)
1,905 1,539 1,596 5.0
- ------- ------- -------
$28,837 $27,675 $29,886 4.2%
======= ======= =======
$ 5,000 $ 4,012 $ 3,673 (5.7)%
2,553 59.5 2.33 2,028 64.6 3.19 1,856 88.4 4.76 5.4
3,980 129.4 3.25 3,779 205.9 5.45 3,504 243.2 6.94 (1.0)
1,666 59.0 3.54 1,458 72.6 4.98 1,292 68.2 5.28 4.1
7,836 426.0 5.44 7,879 581.9 7.39 7,385 593.9 8.04 (6.6)
1,918 123.8 6.45 2,778 200.9 7.23 4,726 411.7 8.71 (15.2)
- ------------------- ------------------ ---------------------
17,953 797.7 4.44 17,922 1,125.9 6.28 18,763 1,405.4 7.49 (3.2)
1,353 67.9 5.02 1,613 100.2 6.21 2,894 241.2 8.33 108.5
1,279 87.5 6.84 1,552 128.1 8.25 2,167 197.6 9.12 51.8
- ------------------- ------------------ ---------------------
20,585 953.1 4.63 21,087 1,354.2 6.42 23,824 1,844.2 7.74 7.9
757 640 682 3.1
405 340 322 (60.3)
2,090 1,596 1,385 8.1
- ------- ------- -------
$28,837 $27,675 $29,886 4.2%
======= ======= =======
$1,175.7 $1,049.2 $ 949.2
======== ======== ========
3.60% 3.10% 2.47%
==== ==== =====
3.51% 2.96% 2.29%
==== ==== =====
8.23% 9.52% 10.21%
3.69 5.36 6.74
==== ==== =====
4.54 4.16 3.47
==== ==== =====
4.46% 4.02% 3.29%
==== ==== =====
</TABLE>
First Bank System, Inc. and Subsidiaries 65
<PAGE>
SUPPLEMENTAL FINANCIAL DATA
EARNINGS PER SHARE SUMMARY
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Primary net income from continuing operations
before cumulative effect of accounting changes............... $2.21 $2.46 $1.46 $2.00 $.53
Income (loss) from discontinued operations.................... (.06) .02 .02 .01 .01
Cumulative effect of accounting changes....................... - - 1.87 - .01
-----------------------------------------------------
Primary net income............................................ $2.15 $2.48 $3.35 $2.01 $.55
=====================================================
Fully diluted net income from continuing operations
before cumulative effect of accounting changes............... $2.20 $2.45 $1.45 $1.92 $.51
Income (loss) from discontinued operations.................... (.06) .02 .02 .01 .01
Cumulative effect of accounting changes....................... - - 1.79 - .01
-----------------------------------------------------
Fully diluted net income...................................... $2.14 $2.47 $3.26 $1.93 $.53
=====================================================
</TABLE>
RATIOS
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets...................................... .91% 1.13% 1.56% .96% .29%
Return on average common shareholders' equity................. 11.2 13.9 20.0 14.8 4.2
Average total equity to average assets........................ 8.2 8.6 8.7 7.0 5.7
Dividends per share to net income per share................... 54.0 40.3 26.3 40.8 *
-----------------------------------------------------
</TABLE>
*Not meaningful
OTHER STATISTICS
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common shares outstanding -- year end*................ 133,832,409 130,408,480 131,568,900 115,510,787 113,217,195
Average common shares outstanding and
common stock equivalents:
Primary.............................................. 136,274,991 134,588,664 124,670,657 117,259,058 106,118,280
Fully diluted........................................ 140,128,566 138,328,002 130,497,272 123,053,421 110,445,124
Number of shareholders -- year-end**.................. 25,481 25,653 28,572 26,384 27,559
Average number of employees (full-time equivalents)... 14,725 14,867 14,596 14,467 15,293
Common dividends paid (millions)...................... $156.0 $121.8 $80.8 $69.8 $61.9
------------------------------------------------------------------------
</TABLE>
*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
<TABLE>
<CAPTION>
1994 1993
--------------------------------------------------------------------------------
Sales Price Sales Price
---------------------- Dividends ---------------------- Dividends
High Low Paid High Low Paid
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First quarter............................. $33.13 $29.38 $.29 $32.00 $27.13 $.25
Second quarter............................ 39.00 31.50 .29 34.00 25.88 .25
Third quarter............................. 38.50 35.25 .29 33.63 29.50 .25
Fourth quarter............................ 37.50 32.13 .29 34.13 28.00 .25
Closing price -- December 31.............. 33.22 30.75
</TABLE>
The common stock of First Bank System, Inc. is traded on the New York Stock
Exchange.
66 First Bank System, Inc. and Subsidiaries
<PAGE>
COMMERCIAL LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
<TABLE>
<CAPTION>
Maturing
- -------------------------------------------------------------------------------------------------------------------------------
In 1 Year After 1 Year
At December 31, 1994 (In Millions) or Less Through 5 Years After 5 Years
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial.................................................................. $5,987 $1,125 $173
Financial institutions...................................................... 663 110 14
Real estate:
Commercial mortgage....................................................... 1,186 844 418
Construction.............................................................. 306 14 10
-----------------------------------------------
Total............................................................... $8,142 $2,093 $615
===============================================
Due in Due After
One Year One Year Total
- -------------------------------------------------------------------------------------------------------------------------------
Loans at fixed interest rates............................................... $ 693 $ 945 $ 1,638
Loans at variable interest rates............................................ 7,449 1,763 9,212
-----------------------------------------------
Total............................................................... $8,142 $2,708 $10,850
===============================================
The maturities of loans shown above are based on remaining scheduled repayments.
TIME CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS IN DENOMINATIONS OF $100,000 OR MORE AT DECEMBER 31
Under Three Six to Over
Three to Six Twelve Twelve
(In Millions) Months Months Months Months Total
- -------------------------------------------------------------------------------------------------------------------------------
1994........................................... $399 $138 $266 $515 $1,318
1993........................................... 379 188 263 637 1,467
1992........................................... 493 274 260 805 1,832
----------------------------------------------------------------------------
</TABLE>
First Bank System, Inc. and Subsidiaries 67
<PAGE>
<TABLE>
<CAPTION>
SHORT-TERM FUNDS BORROWED
Average Maximum Average Weighted
Daily Outstanding Interest Rate Average
Outstanding Amount Month-Ending Paid During Interest Rate
(In Millions) at Year-End Outstanding Balance the Year at Year-End
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994
Federal funds purchased and securities sold under
agreements to repurchase.......................... $2,568 $2,264 $3,223 4.55% 5.49%
Other.............................................. 955 691 1,252 5.27 5.76
-------------------------
Total............................................. $3,523 $2,955 4,007 4.72 5.56
=========================
1993
Federal funds purchased and securities sold under
agreements to repurchase.......................... $ 922 $ 990 $1,388 3.21% 3.15%
Other.............................................. 577 427 642 6.18 3.31
-------------------------
Total............................................. $1,499 $1,417 1,872 4.11 3.21
=========================
1992
Federal funds purchased and securities sold under
agreements to repurchase.......................... $1,122 $ 842 $1,140 4.41% 3.39%
Other.............................................. 428 511 1,156 6.03 3.34
-------------------------
Total............................................. $1,550 $1,353 2,239 5.02 3.37
========================= ======================================
</TABLE>
68 First Bank System, Inc. and Subsidiaries
<PAGE>
[LOGO OF FIRST BANK SYSTEM]
First Bank System
P.O. Box 522
Minneapolis, Minnesota
55480
<PAGE>
EXHIBIT 11
Computation of Primary and Fully Diluted Net Income Per Common Share
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------
(Dollars in millions, except per share data) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRIMARY:
Average shares outstanding 133,752,000 132,757,389 121,915,389
Net effect of the assumed purchase of stock under the stock option
and stock purchase plans--based on the treasury stock method using
average market price 2,522,991 1,831,275 2,755,268
-----------------------------------------------
136,274,991 134,588,664 124,670,657
===============================================
Income from continuing operations before cumulative effect of
accounting changes $313.5 $360.7 $213.0
Preferred dividends (12.6) (29.2) (31.6)
-----------------------------------------------
Income from continuing operations before cumulative effect
of accounting changes applicable to common equity $300.9 $331.5 $181.4
===============================================
Income from continuing operations before cumulative effect of
accounting changes per common share $2.21 $2.46 $1.46
===============================================
Income (loss) from discontinued operations ($8.5) $2.5 $2.7
===============================================
Income (loss) from discontinued operations per common share ($0.06) $0.02 $0.02
===============================================
Cumulative effect of accounting changes applicable to common equity -- -- $233.2
===============================================
Cumulative effect of accounting changes per common share -- -- $1.87
===============================================
Net income $305.0 $363.2 $448.9
Preferred dividends (12.6) (29.2) (31.6)
-----------------------------------------------
Net income applicable to common equity $292.4 $334.0 $417.3
===============================================
Net income per common share $2.15 $2.48 $3.35
===============================================
FULLY DILUTED: *
Average shares outstanding 133,752,000 132,757,389 121,915,389
Net effect of the assumed purchase of stock under the stock
option and stock purchase plans--based on the treasury stock
method using average market price or year-end market price,
whichever is higher 2,720,882 1,888,873 4,630,259
Assumed conversion of Series 1991A Preferred Stock 3,655,684 3,681,740 3,951,624
-----------------------------------------------
140,128,566 138,328,002 130,497,272
===============================================
Income from continuing operations before cumulative effect
of accounting changes $313.5 $360.7 $213.0
Preferred dividends, excluding 1991A Preferred Stock (5.1) (21.2) (23.4)
-----------------------------------------------
Income from continuing operations before cumulative effect of
accounting changes applicable to common equity $308.4 $339.5 $189.6
===============================================
Income from continuing operations before cumulative effect
of accounting changes per common share $2.20 $2.45 $1.45
===============================================
Income (loss) from discontinued operations ($8.5) $2.5 $2.7
===============================================
Income (loss) from discontinued operations per common share ($0.06) $0.02 $0.02
===============================================
Cumulative effect of accounting changes applicable to common equity -- -- $233.2
===============================================
Cumulative effect of accounting changes per common share -- -- $1.79
===============================================
Net income $305.0 $363.2 $448.9
Preferred dividends, excluding 1991A Preferred Stock (5.1) (21.2) (23.4)
-----------------------------------------------
Net income applicable to common equity $299.9 $342.0 $425.5
===============================================
Net income per common share $2.14 $2.47 $3.26
===============================================
</TABLE>
* This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 17 of APB Opinion
No. 15 because it results in dilution of less than 3%.
<PAGE>
EXHIBIT 12
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
December 31 December 31 December 31 December 31 December 31
----------------------------------------------------------------------------
(Dollars in Millions) 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS
1. Net income from continuing operations before
cumulative effect $ 313,500 $ 360,700 $ 213,000 $ 263,400 $ 84,000
2. Applicable income taxes 191,800 198,600 115,700 30,300 6,500
----------------------------------------------------------------------------
3. Income before taxes (1 + 2) $ 505,300 $ 559,300 $ 328,700 $ 293,700 $ 90,500
============================================================================
4. Fixed charges:
a. Interest expense excluding interest
on deposits $ 271,400 $ 148,000 $ 155,400 $ 228,300 $ 438,900
b. Portion of rents representative of
interest and amortization of debt expense 30,200 34,800 36,700 34,400 36,800
----------------------------------------------------------------------------
c. Fixed charges excluding interest on
deposits (4a + 4b) 301,600 182,800 192,100 262,700 475,700
d. Interest on deposits 597,300 648,300 797,700 1,125,900 1,405,400
----------------------------------------------------------------------------
e. Fixed charges including interest on
deposits (4c + 4d) $ 898,900 $ 831,100 $ 989,800 $1,388,600 $1,881,100
============================================================================
5. Amortization of interest capitalized $ 4,800 $ 4,900 $ 300 $ 300 $ 300
6. Earnings excluding interest on
deposits (3 + 4c + 5) 811,700 747,000 521,100 556,700 566,500
7. Earnings including interest
on deposits (3 + 4e + 5) 1,409,000 1,395,300 1,318,800 1,682,600 1,971,900
8. Fixed charges excluding interest on
deposits (4c) 301,600 182,800 192,100 262,700 475,700
9. Fixed charges including interest
on deposits (4e) 898,900 831,100 989,800 1,388,600 1,881,100
RATIO OF EARNINGS TO FIXED CHARGES
10. Excluding interest on deposits (line 6/line 8) 2.69 4.09 2.71 2.12 1.19
11. Including interest on deposits (line 7/line 9) 1.57 1.68 1.33 1.21 1.05
----------------------------------------------------------------------------
</TABLE>
<PAGE>
[ARTICLE] 9
[LEGEND] THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FIRST BANK SYSTEM, INC. DECEMBER 31, 1994, RESTATED ANNUAL REPORT AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[/LEGEND]
[RESTATED]
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1994
[PERIOD-START] JAN-01-1994
[PERIOD-END] DEC-31-1994
[CASH] 1,707,000
[INT-BEARING-DEPOSITS] 28,000
[FED-FUNDS-SOLD] 471,000
[TRADING-ASSETS] 77,000
[INVESTMENTS-HELD-FOR-SALE] 5,185,000
[INVESTMENTS-CARRYING] 0
[INVESTMENTS-MARKET] 0
[LOANS] 24,550,000
[ALLOWANCE] 475,000
[TOTAL-ASSETS] 34,128,000
[DEPOSITS] 24,256,000
[SHORT-TERM] 3,523,000
[LIABILITIES-OTHER] 1,053,000
[LONG-TERM] 2,684,000
[COMMON] 168,000
[PREFERRED-MANDATORY] 0
[PREFERRED] 118,000
[OTHER-SE] 2,326,000
[TOTAL-LIABILITIES-AND-EQUITY] 34,128,000
[INTEREST-LOAN] 1,914,700
[INTEREST-INVEST] 339,900
[INTEREST-OTHER] 33,500
[INTEREST-TOTAL] 2,288,100
[INTEREST-DEPOSIT] 597,300
[INTEREST-EXPENSE] 868,700
[INTEREST-INCOME-NET] 1,419,400
[LOAN-LOSSES] 123,600
[SECURITIES-GAINS] (115,000)
[EXPENSE-OTHER] 1,349,400
[INCOME-PRETAX] 505,300
[INCOME-PRE-EXTRAORDINARY] 313,500
[EXTRAORDINARY] (8,500)
[CHANGES] 0
[NET-INCOME] 305,000
[EPS-PRIMARY] 2.15
[EPS-DILUTED] 2.14
[YIELD-ACTUAL] 4.74
[LOANS-NON] 162,000
[LOANS-PAST] 26,000
[LOANS-TROUBLED] 100
[LOANS-PROBLEM] 0
[ALLOWANCE-OPEN] 466,100
[CHARGE-OFFS] 226,800
[RECOVERIES] 86,500
[ALLOWANCE-CLOSE] 474,700
[ALLOWANCE-DOMESTIC] 0
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 277,700
</TABLE>
