[COVER PICTURE]
2
[LOGO] FIRST BANK SYSTEM FORM 10-Q / JUNE 30, 1996
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM (NOT APPLICABLE)
COMMISSION FILE NUMBER 1-6880
FIRST BANK SYSTEM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
41-0255900
(I.R.S. Employer
Identification No.)
FIRST BANK PLACE,
601 SECOND AVENUE SOUTH,
MINNEAPOLIS, MINNESOTA 55402-4302
(Address of principal executive offices and Zip Code)
612-973-1111
(Registrant's telephone number, including area code)
(NOT APPLICABLE)
(Former name, former address and former fiscal year,
if changed since last report).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months and (2) has been subject to such
filing requirements for the past 90 days.
YES _X_ NO ___
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date.
Class Outstanding as of July 31, 1996
Common Stock, $1.25 Par Value 136,702,571 shares
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Income before nonrecurring items $167.1 $137.9 $327.2 $271.7
Nonrecurring items 87.0 -- 103.7 --
Net income $254.1 $137.9 $430.9 $271.7
PER COMMON SHARE
Primary income before nonrecurring items $1.18 $1.00 $2.34 $1.97
Nonrecurring items .63 -- .75 --
Primary net income $1.81 $1.00 $3.09 $1.97
Fully diluted income before nonrecurring items $1.17 $.99 $2.31 $1.95
Nonrecurring items .61 -- .73 --
Fully diluted net income $1.78 $.99 $3.04 $1.95
Earnings on a cash basis before nonrecurring items* $1.31 $1.09 $2.57 $2.15
Nonrecurring items .61 -- .94 --
Earnings on a cash basis (fully diluted)* $1.92 $1.09 $3.51 $2.15
Dividends paid .4125 .3625 .825 .725
Common shareholders' equity 22.68 20.33
RETURN ON AVERAGE ASSETS
Income before nonrecurring items 1.87 % 1.68 % 1.85 % 1.67 %
Nonrecurring items .98 -- .59 --
Return on average assets 2.85 % 1.68 % 2.44 % 1.67 %
RETURN ON AVERAGE COMMON EQUITY
Income before nonrecurring items 21.3 % 20.4 % 21.1 % 20.8 %
Nonrecurring items 11.1 -- 6.8 --
Return on average common equity 32.4 % 20.4 % 27.9 % 20.8 %
Net interest margin (taxable-equivalent basis) 4.91 % 4.93 % 4.89 % 4.99 %
Efficiency ratio before nonrecurring items 50.1 54.9 50.4 55.3
Efficiency ratio 40.8 54.9 48.7 55.3
</TABLE>
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1996 1995
<S> <C> <C>
PERIOD END
Loans $27,029 $26,400
Allowance for credit losses 529 474
Assets 36,184 33,874
Total shareholders' equity 3,193 2,725
Tangible common equity to total assets 6.8 % 6.5 %
Tier 1 capital ratio 6.8 6.5
Total risk-based capital ratio 11.5 11.0
Leverage ratio 6.3 6.1
</TABLE>
*Calculated by adding amortization of goodwill and other intangible assets to
net income.
Refer to Earnings Summary on page 2 for a description of nonrecurring items.
TABLE OF CONTENTS AND FORM 10-Q CROSS-REFERENCE INDEX
PART I -- FINANCIAL INFORMATION
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Item 2) 2
Financial Statements (Item 1) 14
PART II -- OTHER INFORMATION
Exhibits and Reports on Form 8-K (Item 6) 27
Signature 27
Exhibit 11 -- Computation of Primary and Fully Diluted Net Income
Per Common Share 28
Exhibit 12 -- Computation of Ratio of Earnings to Fixed Charges 29
Exhibit 27 -- Article 9 Financial Data Schedule **
**Copies of this exhibit will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the exhibit.
MANAGEMENT'S DISCUSSION AND ANALYSIS
EARNINGS SUMMARY
First Bank System, Inc. (the "Company") reported second quarter 1996 net income
of $254.1 million, an increase of $116.2 million, or 84 percent, from the second
quarter of 1995. On a per share basis, net income was $1.81, compared with $1.00
in the second quarter of 1995, an increase of 81 percent. Return on average
assets and return on average common equity were 2.85 percent and 32.4 percent,
respectively, in the second quarter of 1996, compared with returns of 1.68
percent and 20.4 percent in the second quarter of 1995.
Several nonrecurring items affected results in the second quarter of 1996. The
impact of these items on net income was $87.0 million ($140.4 million on a
pretax basis), or $.63 per share. Nonrecurring pretax gains included: $75
million received from Wells Fargo & Company ("Wells Fargo") as final payment of
a termination fee relating to the proposed First Interstate Bancorp ("First
Interstate") transaction; a $65 million refund of state income taxes, including
interest; and $.4 million in net securities gains.
Operating earnings (net income excluding nonrecurring items) for the second
quarter of 1996 were $167.1 million, an increase of $29.2 million, or 21
percent, from the second quarter of 1995. On a per share basis, operating
earnings were $1.18 in the second quarter of 1996, compared with $1.00 in the
second quarter of 1995, an increase of 18 percent. Return on average assets and
return on average common equity, excluding nonrecurring items, were 1.87 percent
and 21.3 percent, respectively, in the second quarter of 1996, compared with
returns of 1.68 percent and 20.4 percent in the second quarter of 1995.
Excluding nonrecurring items, the efficiency ratio (the ratio of expenses to
revenues) improved to 50.1 percent in the second quarter of 1996 from 54.9
percent in the second quarter of 1995.
Second quarter results reflect the following acquisition and divestiture
activity. On February 16, 1996, the Company completed its acquisition of
Omaha-based FirsTier Financial, Inc. ("FirsTier"), which had $3.7 billion in
assets, $2.9 billion in deposits, and 63 offices in Nebraska and Iowa. In the
first quarter of 1996, the Company sold its servicing and mortgage loan
production business, and during the fourth quarter of 1995 and the first quarter
of 1996, the Company completed its acquisition of the corporate trust business
of BankAmerica Corporation ("BankAmerica").
Second quarter operating results reflected growth in net interest and
noninterest income, controlled operating expenses and effective capital
management. Net interest income on a taxable-equivalent basis was $391.8
million, an increase of $28.8 million, or 8 percent, from the second quarter of
1995. The increase reflected the acquisition of FirsTier in the first quarter of
1996. Excluding nonrecurring items, noninterest income for the second quarter of
1996 increased $29.8 million, or 16 percent, from the same period in 1995
primarily due to growth in credit card and trust fees and acquisitions.
Noninterest expense increased only $3.0 million, or 1 percent, in the second
quarter of 1996, from the same period of 1995, despite the addition of
acquisitions. Compared with noninterest expense for the second quarter of 1995,
adjusted to include the operations of acquisitions and exclude those of
divestitures on a pro forma basis, noninterest expense declined $33.7 million,
or 10 percent, in the second quarter of 1996.
The Company's first half 1996 earnings were $430.9 million, or $3.09 per share,
compared with $271.7 million, or $1.97 per share, in the first half of 1995.
Year-to-date return on average assets and return on average common equity were
2.44 percent and 27.9 percent, compared with returns of 1.67 percent and 20.8
percent in the first half of 1995.
Nonrecurring items totaled $103.7 million ($189.0 million on a pretax basis), or
$.75 per share for the first six months of 1996. In addition to the second
quarter nonrecurring items discussed above, nonrecurring pretax gains in the
first quarter of 1996 were: $115 million, net of expenses, received from First
Interstate as partial payment of a termination fee, $45.8 million in gain on the
sale of the Company's mortgage banking operations; and $14.6 million in net
securities gains. Nonrecurring pretax charges occurring in the first quarter of
1996 included: $31.3 million in merger and integration charges associated with
the acquisitions of FirsTier and the corporate trust business of BankAmerica;
$38.6 million in branch distribution resizing expenses; a $29.5 million
valuation adjustment of cardholder and core deposit intangibles; $10.1 million
for a one-time employee bonus; and $17.3 million to acquire software and write
off other miscellaneous assets.
Excluding the nonrecurring items, operating earnings for the first half of 1996
were $327.2 million, an increase of $55.5 million, or 20 percent, from the first
half of 1995. On a per share basis, operating earnings were $2.34 in the first
six months of 1996, compared with $1.97 in the first half of 1995, an increase
of 19 percent. On the same basis, year-to-date return on average assets was 1.85
percent, up from 1.67 percent in 1995, return on average common equity was 21.1
percent, up from 20.8 percent in 1995, and the efficiency ratio was 50.4
percent, down from 55.3 percent in 1995.
Credit quality remained strong in the second quarter of 1996. Nonperforming
assets totaled $156.3 million at June 30, 1996, up $2.6 million, or 2 percent,
from December 31, 1995, as a result of the acquisition of FirsTier, and down
$18.4 million, or 11 percent, from June 30, 1995. The ratio of the allowance for
credit losses to nonperforming loans at quarter-end was 418 percent compared
with 401 percent at the end of 1995 and 388 percent at June 30, 1995.
TABLE 1. Summary of Consolidated Income
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(TAXABLE-EQUIVALENT BASIS; JUNE 30 JUNE 30 JUNE 30 JUNE 30
DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Interest income $670.2 $643.4 $1,329.5 $1,272.5
Interest expense 278.4 280.4 558.4 542.7
Net interest income 391.8 363.0 771.1 729.8
Provision for credit losses 35.0 27.0 66.0 53.0
Net interest income after provision for credit losses 356.8 336.0 705.1 676.8
Nonrecurring gains 140.4 -- 315.8 --
Other noninterest income 219.5 189.7 427.6 369.3
Nonrecurring charges -- -- 126.8 --
Other noninterest expense 306.2 303.2 603.8 607.5
Income before income taxes 410.5 222.5 717.9 438.6
Taxable-equivalent adjustment 5.5 3.5 10.2 7.0
Income taxes 150.9 81.1 276.8 159.9
Net income $254.1 $137.9 $430.9 $271.7
Return on average assets 2.85% 1.68% 2.44% 1.67%
Return on average common equity 32.4 20.4 27.9 20.8
Net interest margin 4.91 4.93 4.89 4.99
Efficiency ratio 40.8 54.9 48.7 55.3
Efficiency ratio before nonrecurring items 50.1 54.9 50.4 55.3
Per Common Share:
Net income $1.81 $1.00 $3.09 $1.97
Dividends paid .4125 .3625 .8250 .7250
</TABLE>
LINE OF BUSINESS FINANCIAL REVIEW
Financial performance is measured by major lines of business, which include:
Retail Banking, Payment Systems, Business Banking and Private Financial
Services, Commercial Banking, and Corporate Trust and Institutional Financial
Services. Business line results are derived from the Company's business unit
profitability reporting system. Designations, assignments, and allocations may
change from time to time as management accounting systems are enhanced or
product lines change. During 1996 certain organization and methodology changes
were made and 1995 results are presented on a consistent basis.
RETAIL BANKING -- Retail Banking delivers products and services to the broad
consumer market and small-business through branch offices, telemarketing, direct
mail, and automated teller machines ("ATMs"). Net income increased 5 percent in
the second quarter of 1996 and 8 percent in the first six months of 1996
compared with the same periods in 1995. Second quarter return on assets
increased to 1.50 percent from 1.33 percent in the second quarter of 1995.
Return on equity was 20.2 percent, essentially unchanged from the same period in
1995. Year-to-date profitability ratios showed similar trends.
The increase in net interest income was attributable to growth in core
commercial and nonmortgage consumer loans as well as the February 16, 1996
acquisition of FirsTier. The provision for credit losses increased to $5.4
million and $11.4 million in the second quarter and first six months of 1996,
compared with $2.9 million and $3.6 million in the same periods in 1995. These
increases resulted from growth in average loans, excluding residential mortgage
loan balances, as well as higher consumer loan charge-offs. Noninterest income
and noninterest expense were higher in 1996 compared with 1995, reflecting the
impact of acquisitions. The second quarter 1996 efficiency ratio of 63.2 percent
was relatively unchanged from 63.1 percent in the second quarter of 1995 while
the year-to-date 1996 efficiency ratio improved to 62.1 percent from 64.3
percent in 1995.
PAYMENT SYSTEMS -- Payment Systems includes consumer and business credit cards,
corporate and purchasing card services, card-accessed secured and unsecured
lines of credit, ATM processing, and merchant processing. Net earnings increased
33 percent in both the second quarter and the first six months of 1996 compared
with the same periods in 1995. Second quarter return on assets was 2.33 percent,
compared with 2.13 percent in the second quarter of 1995, and return
on equity was 25.0 percent compared with 23.2 percent in 1995. Similar
improvement was achieved in the year-to-date profitability ratios.
Fee-based noninterest income for Payment Systems increased 28 percent in the
second quarter and 22 percent in the first six months of 1996 compared with the
same periods in 1995. The increases were due to growth in the sales volume of
the Corporate Card, the Purchasing Card, the First Bank WorldPerks(R) VISA(R)
card, and the expansion of the ATM network. Net interest income decreased
slightly due to a change in the loan mix. Average commercial loans, which are
primarily noninterest-earning Corporate and Purchasing Card balances, comprised
approximately 30 percent of the portfolio during the second quarter and first
six months of 1996, compared with approximately 25 percent in the same periods
of 1995. Noninterest expense remained relatively flat, despite an increase in
sales volume, reflecting ongoing expense control and the recognition of initial
investment expenses in 1995 associated with the expansion of the ATM network.
The efficiency ratio improved to 44.2 percent in the second quarter and 44.9
percent in the first six months of 1996 from 50.6 percent and 50.2 percent in
the same periods of 1995.
BUSINESS BANKING AND PRIVATE FINANCIAL SERVICES -- Business Banking and Private
Financial Services includes middle-market banking services, private banking, and
personal trust. Net income for the second quarter of 1996 increased 36 percent
to $46.1 million compared with the second quarter of 1995. Net income for the
first half of 1996 increased 30 percent to $87.9 million compared with the same
period in 1995. Second quarter return on assets was 1.82 percent compared with
1.73 percent in 1995, and return on equity was 18.9 percent compared with 18.7
percent in 1995. Year-to-date return on assets was 1.82 percent compared with
1.75 percent in 1995, and return on equity was 19.1 percent compared with 19.6
percent in 1995.
The increase in net interest income was due to acquisitions and growth in core
middle-market business lending, resulting in average commercial loans increasing
27 percent in the second quarter and 24 percent in the first six months of 1996,
compared with the same periods in 1995. Noninterest income in the second quarter
and first six months of 1996 was higher than the same periods in 1995 as a
result of acquisitions and a change in the fee structure for some services.
Noninterest expense remained relatively flat in the second quarter and first six
months of 1996 compared with the same periods in 1995 reflecting the benefits of
increased operational efficiencies, as well as the integration of acquisitions.
The efficiency ratio improved to 39.6 percent in the second quarter and 40.1
percent in the first six months of 1996 from 46.7 percent and 46.4 percent in
the same periods in 1995.
COMMERCIAL BANKING -- Commercial Banking provides lending, treasury management,
and other financial services to middle-market, large corporate and mortgage
banking companies. Net earnings increased 11 percent in the second quarter and 5
percent in the first six months of 1996. Second quarter return on assets was
1.78 percent compared with 1.72 percent in 1995, and return on equity was 25.4
percent compared with 24.6 percent in 1995. Year-to-date return on assets was
1.83 percent compared with 1.89 percent in 1995, and return on equity was 26.2
percent compared with 27.0 percent in 1995.
Although second quarter and year-to-date average loans increased $333 million,
or 7 percent, and $434 million, or 9 percent, from the same periods in 1995,
second quarter net interest income increased 2 percent, and year-to-date net
interest income decreased 3 percent, reflecting a slight narrowing of the net
interest margin. Noninterest income remained relatively flat in the second
quarter and first six months of 1996 compared with the same periods in 1995. The
decrease in noninterest expense for both the second quarter and first six months
of 1996, compared to the same periods in 1995, reflected the benefits of
increased operational efficiencies. The decline in deposits relates to less
activity in the mortgage banking sector. The efficiency ratio remained low at
29.1 percent in the second quarter and 28.0 percent in the first six months of
1996.
CORPORATE TRUST AND INSTITUTIONAL FINANCIAL SERVICES -- Corporate Trust and
Institutional Financial Services includes institutional and corporate trust
services, investment management services, and a full-service brokerage company.
Earnings increased 94 percent in the second quarter and 76 percent in the first
six months of 1996 compared with the same periods in the prior year. The return
on average equity was 20.3 percent in the second quarter and 20.1 percent in the
first half of 1996, compared with 16.9 percent and 18.1 percent in the same
periods in 1995.
Net earnings increased over 1995 primarily due to the Company's acquisition
strategy to grow its fee-based businesses. The efficiency ratio improved to 61.6
percent in the second quarter and 61.9 percent in the first half of 1996 from
69.8 percent in the second quarter and 68.3 percent in the first six months of
1995, reflecting the effective integration of acquisitions, process
re-engineering efforts, and revenue growth.
TABLE 2. Line of Business Financial Performance
<TABLE>
<CAPTION>
CORPORATE TRUST
AND
BUSINESS BANKING AND INSTITUTIONAL
RETAIL PRIVATE FINANCIAL COMMERCIAL FINANCIAL
BANKING PAYMENT SYSTEMS SERVICES BANKING SERVICES
THREE MONTHS ENDED JUNE 30,
(DOLLARS IN MILLIONS) 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONDENSED INCOME STATEMENT:
Net interest income
(taxable-equivalent basis) $191.6 $177.6 $37.1 $39.2 $98.2 $83.6 $54.7 $53.5 $8.1 $6.3
Provision for credit losses 5.4 2.9 23.6 18.9 3.4 2.8 2.6 2.4 -- --
Noninterest income 39.6 34.8 82.8 64.6 31.0 24.4 15.1 14.6 50.7 32.5
Noninterest expense 146.2 134.1 53.0 52.5 51.2 50.4 20.3 23.3 36.2 27.1
Income taxes and
taxable-equivalent
adjustment 30.4 28.7 16.6 12.3 28.5 20.9 17.9 16.2 8.6 4.5
Income before
nonrecurring items $49.2 $46.7 $26.7 $20.1 $46.1 $33.9 $29.0 $26.2 $14.0 $7.2
AVERAGE BALANCE SHEET DATA:
Commercial loans $514 $348 $1,130 $784 $6,867 $5,426 $5,370 $5,037 $-- $--
Consumer loans 9,758 10,752 2,594 2,292 607 519 -- -- -- --
Assets 13,211 14,053 4,609 3,792 10,168 7,857 6,553 6,100 1,151 701
Deposits 17,476 17,318 46 38 3,763 3,190 1,585 1,592 915 782
Common equity 981 933 430 347 979 728 459 427 277 171
Return on average assets 1.50% 1.33% 2.33% 2.13% 1.82% 1.73% 1.78% 1.72% * *
Return on average common
equity ("ROCE") 20.2 20.1 25.0 23.2 18.9 18.7 25.4 24.6 20.3% 16.9%
ROCE on a cash basis ** 22.9 22.1 27.3 26.2 20.2 19.4 25.7 24.8 27.1 22.0
Efficiency ratio 63.2 63.1 44.2 50.6 39.6 46.7 29.1 34.2 61.6 69.8
Efficiency ratio on a
cash basis ** 60.4 61.0 42.2 48.1 37.3 45.6 28.7 33.8 53.4 64.4
SIX MONTHS ENDED JUNE 30,
1996 1995 1996 1995 1996 1995 1996 1995 1996 1995
CONDENSED INCOME STATEMENT:
Net interest income
(taxable-equivalent basis) $374.2 $354.4 $77.3 $80.0 $189.3 $165.2 $108.7 $111.5 $16.0 $13.6
Provision for credit losses 11.4 3.6 42.8 39.3 6.6 5.3 5.2 4.8 -- --
Noninterest income 79.5 69.2 151.6 123.9 58.8 48.1 32.6 32.7 100.3 65.8
Noninterest expense 281.9 272.3 102.7 102.3 99.4 98.9 39.5 47.2 72.0 54.2
Income taxes and
taxable-equivalent
adjustment 61.2 56.2 31.9 23.7 54.2 41.6 36.8 35.2 16.9 9.6
Income before
nonrecurring items $99.2 $91.5 $51.5 $38.6 $87.9 $67.5 $59.8 $57.0 $27.4 $15.6
AVERAGE BALANCE SHEET DATA:
Commercial loans $479 $330 $1,021 $713 $6,612 $5,350 $5,349 $4,915 $-- $--
Consumer loans 9,884 10,692 2,548 2,293 581 494 -- -- -- --
Assets 13,320 14,114 4,428 3,736 9,702 7,767 6,564 6,079 1,155 713
Deposits 17,209 17,400 45 35 3,549 3,213 1,545 1,683 903 794
Common equity 981 900 409 343 927 693 459 426 274 174
Return on average assets 1.50% 1.31% 2.34% 2.08% 1.82% 1.75% 1.83% 1.89% * *
Return on average common
equity ("ROCE") 20.3 20.5 25.3 22.7 19.1 19.6 26.2 27.0 20.1% 18.1%
ROCE on a cash basis ** 22.9 22.5 27.8 25.7 20.1 20.3 26.4 27.2 26.8 22.9
Efficiency ratio 62.1 64.3 44.9 50.2 40.1 46.4 28.0 32.7 61.9 68.3
Efficiency ratio on a
cash basis ** 59.4 62.2 42.6 47.6 38.1 45.2 27.5 32.3 54.0 63.0
</TABLE>
*Not meaningful
**Calculated by excluding amortization of goodwill and other intangible assets.
Note: Preferred dividends and nonrecurring items are not allocated to the
business lines. FBS's mortgage banking operations, which were sold in
first quarter 1996, are not reflected in the table.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME -- Net interest income on a taxable-equivalent basis was
$391.8 million in the second quarter of 1996, an increase of $28.8 million, or 8
percent, from the second quarter of 1995, and $771.1 million in the first half
of 1996, an increase of $41.3 million, or 6 percent, from the first half of
1995. The increases were primarily attributable to growth in average loan
balances in the second quarter and first six months of 1996, compared with the
same periods in 1995. In the first quarter of 1996, $1.3 billion of residential
mortgage loans were securitized and reclassified to available-for-sale
securities to enhance liquidity and financial management flexibility. Excluding
residential mortgage loan balances, average loans for both the second quarter
and first half of 1996 were higher by approximately $3 billion compared with the
same periods in 1995, reflecting growth in core commercial and consumer loans,
as well as the February 16, 1996 acquisition of FirsTier. Average securities for
the second quarter and first six months of 1996 were higher than the respective
1995 periods, reflecting the transfer of securitized mortgage loan balances in
the first quarter of 1996 and the addition of securities acquired with FirsTier,
offset in part by maturities and sales.
Partially offsetting the impact of higher average loan balances in the second
quarter and first six months of 1996, compared with the same periods of 1995,
were the effects of a lower average yield on loans and a change in the mix of
interest-bearing liabilities. The average yield on loans for the second quarter
of 1996 was 8.72 percent, or 36 basis points lower than in the same period of
1995, while the average loan yield for the first half of 1996 was 8.76 percent,
or 31 basis points lower than the first half of 1995 due to declining market
interest rates over the past year.
The average cost of interest-bearing liabilities, however, decreased only 27
basis points to 4.48 percent in the second quarter of 1996 and 10 basis points
to 4.53 percent, in the first half of 1996 compared with the same periods in
1995. The decrease in the average cost of borrowings was offset by a shift in
the composition of interest-bearing liabilities over the past year from lower
rate deposits to higher rate borrowings. The decline in average interest-bearing
deposit balances reflects the divestiture in 1995 of $848 million in deposits,
as well as the national trend over the past year of consumers moving funds into
alternative investment vehicles. The net interest margin in the second quarter
and first six months of 1996 was essentially unchanged at 4.91 percent and 4.89
percent, respectively, compared with 4.93 percent and 4.99 percent in the same
periods of 1995.
TABLE 3. Analysis of Net Interest Income
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30
(DOLLARS IN MILLIONS) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net interest income (taxable-equivalent basis) $391.8 $363.0 $771.1 $729.8
Average balances of earning assets supported by:
Interest-bearing liabilities $24,972 $23,699 $24,816 $23,617
Noninterest-bearing liabilities 7,133 5,860 6,922 5,896
Total earning assets $32,105 $29,559 $31,738 $29,513
Average yields and weighted average rates (taxable-equivalent basis):
Earning assets yield 8.40% 8.73% 8.42% 8.69%
Rate paid on interest-bearing liabilities 4.48 4.75 4.53 4.63
Gross interest margin 3.92% 3.98% 3.89% 4.06%
Net interest margin 4.91% 4.93% 4.89% 4.99%
Net interest margin without taxable-equivalent increments 4.84% 4.88% 4.82% 4.94%
</TABLE>
PROVISION FOR CREDIT LOSSES -- The provision for credit losses was $35.0 million
in the second quarter of 1996, up $8.0 million, or 30 percent, from the second
quarter of 1995. The provision for the first half of 1996 increased $13.0
million to $66.0 million, or 25 percent, from the first half of 1995. These
increases resulted from growth in average loans as well as higher consumer
charge-offs. Refer to Corporate Risk Management for further information on
credit quality.
NONINTEREST INCOME -- Second quarter noninterest income was $359.9 million,
compared with $189.7 million in the second quarter of 1995, an increase of
$170.2 million. Noninterest income in the first half of 1996 was $743.4 million,
compared with $369.3 million in the first half of 1995, an increase of $374.1
million. Nonrecurring gains included in noninterest income in the second quarter
totaled $140.4 million, including the $75 million termination fee received from
Wells Fargo, a $65 million state tax refund, and $.4 million in net securities
gains. The state tax refund represents the refund of taxes paid on U.S.
Government interest in the late 1970s and early 1980s, including interest
through the date of the refund. Nonrecurring gains included in noninterest
income in the first half of 1996 totaled $315.8 million, including a $115
million termination fee received from First Interstate, net of $10 million in
transaction costs; a $45.8 million gain on the sale of the Company's mortgage
banking operations; $14.6 million in net securities gains; and the second
quarter amounts discussed above.
Excluding nonrecurring items, noninterest income was $219.5 million, an
increase of $29.8 million, or 16 percent, from the second quarter of 1995,
and $427.6 million for the first six months of 1996, an increase of $58.3
million, or 16 percent, from the first half of 1995. The improvement in both
periods resulted primarily from growth in credit card and trust fees and the
addition of FirsTier and other acquisitions, offset in part by the loss of
mortgage banking revenues. Credit card fees increased as a result of higher
sales volumes for Corporate and Purchasing Cards and the First Bank
WorldPerks VISA card. Trust fees were up due to the acquisition of the
corporate trust business of BankAmerica, the acquisition of FirsTier and core
growth in personal and institutional trust revenues. Investment product fees
and commissions were higher reflecting an increase in sales of mutual funds
and annuities. Service charges on deposits increased primarily as a result of
increased demand deposits. Other noninterest income decreased, reflecting the
impact of the sale of the Company's mortgage banking operations discussed
above.
TABLE 4. Noninterest Income
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30
(DOLLARS IN MILLIONS) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Credit card fees $73.5 $56.7 $136.3 $108.3
Trust fees 58.5 43.0 114.7 84.7
Service charges on deposit accounts 34.7 30.3 68.6 62.4
Investment products fees and commissions 8.7 6.7 17.2 12.2
Trading account profits and commissions 3.8 2.4 6.5 5.6
Securities gains .4 -- 15.0 --
Termination fee, net 75.0 -- 190.0 --
State income tax refund 65.0 -- 65.0 --
Gain on sale of mortgage banking operations -- -- 45.8 --
Other 40.3 50.6 84.3 96.1
Total noninterest income $359.9 $189.7 $743.4 $369.3
</TABLE>
NONINTEREST EXPENSE -- Second quarter noninterest expense was $306.2 million, an
increase of $3.0 million, from $303.2 million in the second quarter of 1995, and
$730.6 million in the first half of 1996, an increase of $123.1 million, from
$607.5 million in 1995. Year-to-date noninterest expense included nonrecurring
charges of $126.8 million recorded in the first quarter of 1996. These charges
included: merger, integration and resizing charges of $31.3 million for the
acquisitions of FirsTier and the BankAmerica corporate trust business and $38.6
million in branch distribution resizing expenses; a $29.5 million valuation
adjustment to reduce the carrying value of credit card and core deposit
intangibles to estimated fair value; $10.1 million for a one-time, $750
per-employee bonus to thank employees for staying focused on customers and
shareholder value during the bid for First Interstate; and $17.3 million to
acquire credit card and revolving credit software and to write off other
miscellaneous assets. Refer to Note H for further information on merger,
integration and resizing charges.
On a pro forma basis (including acquired companies and excluding divested
businesses and nonrecurring items), noninterest expense declined $33.7 million,
or 10 percent, in the current quarter and $79.4 million, or 12 percent,
year-to-date. These reductions were achieved as a result of lower FDIC premiums
in 1996, effective acquisition integration and ongoing expense control.
Excluding nonrecurring items, the Company's efficiency ratio improved to 50.1
percent in the second quarter and 50.4 percent in the first six months of 1996
from 54.9 percent and 55.3 percent in the same periods in 1995.
Total salaries and benefits expense, excluding nonrecurring charges, remained
relatively flat for the second quarter and first six months of 1996 compared
with the same periods in the previous year as the average full-time equivalent
employees decreased to 13,140 in 1996 from 13,237 in 1995. FDIC insurance
premiums were lower in the second quarter and first half of 1996 compared with
the same periods of last year because the FDIC suspended the assessment of
premiums on deposits covered by the Bank Insurance Fund, which is now fully
funded. The Company continues to pay insurance premiums on approximately $6.0
billion of deposits covered by the Savings Association Insurance Fund ("SAIF").
Compared with the same periods in 1995, amortization of goodwill and intangibles
for the second quarter and first half of 1996, excluding the valuation
adjustment discussed above, increased as a result of FirsTier and the
BankAmerica corporate trust business acquisitions. The increases in other
personnel expense related to several technology projects currently in process.
TABLE 5. Noninterest Expense
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30
(DOLLARS IN MILLIONS, EXCEPT PER EMPLOYEE DATA) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Salaries $114.5 $109.8 $237.9 $221.9
Employee benefits 26.4 25.4 55.3 53.9
Total personnel expense 140.9 135.2 293.2 275.8
Goodwill and other intangible assets 19.9 14.2 67.3 28.3
Net occupancy 24.2 24.3 50.0 50.0
Furniture and equipment 22.1 24.8 45.9 48.3
Other personnel costs 14.0 9.8 23.7 17.4
Professional services 10.9 10.5 19.2 17.1
Advertising and marketing 10.2 9.2 17.0 15.5
Telephone 6.9 6.3 12.7 12.1
Printing, stationery and supplies 5.9 5.8 11.9 10.6
Postage 5.5 5.7 11.7 11.6
Third party data processing 5.3 4.4 10.7 8.7
FDIC insurance 3.6 13.8 7.1 27.4
Merger, integration, and resizing -- -- 69.9 --
Other 36.8 39.2 90.3 84.7
Total noninterest expense $306.2 $303.2 $730.6 $607.5
Efficiency ratio* 40.8% 54.9% 48.7% 55.3%
Efficiency ratio before nonrecurring items 50.1 54.9 50.4 55.3
Average number of employees (full-time equivalents) 13,140 13,237 13,193 13,555
Annualized personnel expense per employee $42,892 $40,855 $44,448 $40,693
</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.
PROVISION FOR INCOME TAXES -- The provision for income taxes was $150.9 million
in the second quarter and $276.8 million in the first half of 1996, compared
with $81.1 million and $159.9 million in the same periods of 1995, respectively.
The increases were primarily the result of higher levels of taxable income and
included $53.4 million and $85.3 million of taxes, respectively, related to the
nonrecurring items discussed above.
CONTINGENCIES
Various legislative proposals have been made, but not enacted, that would affect
the SAIF premium assessments, including a one-time special assessment for SAIF
deposits. It is not clear when such legislation will be passed, if at all. Based
on current proposals, the Company may be subject to a special assessment of up
to $50 million.
BALANCE SHEET ANALYSIS
LOANS -- The Company's loan portfolio increased $629 million, or 2 percent, to
$27.0 billion at June 30, 1996, from $26.4 billion at December 31, 1995. Growth
in most commercial and consumer loan categories was partially offset by a
decrease in residential mortgage-related balances. This decrease reflected the
securitization of $1.3 billion of residential mortgage loans, which resulted in
a reclassification to available-for-sale securities, during the first quarter of
1996. The securitization enhances liquidity and financial management
flexibility. Excluding residential mortgage loan balances, average loans for
both the second quarter and first half of 1996 were higher than the same periods
in 1995 by approximately $3 billion, reflecting growth in core commercial and
consumer loans, as well as the acquisition of FirsTier.
SECURITIES -- At June 30, 1996, securities totaled $4.1 billion compared with
$3.3 billion at December 31, 1995, reflecting the securitization discussed above
and the addition of approximately $900 million relating to the acquisition of
FirsTier, offset by maturities and sales.
DEPOSITS -- Noninterest-bearing deposits were $7.7 billion at June 30, 1996, up
from $6.4 billion at December 31, 1995. Interest-bearing deposits were $16.9
billion at June 30, 1996, up from $16.2 billion at December 31, 1995. The
increases were primarily due to the the acquisitions of FirsTier and the
corporate trust business of BankAmerica. The increases were offset by a decline
in savings certificates as consumers follow the national trend by moving funds
into alternative investment vehicles.
BORROWINGS -- Short-term borrowings, which include federal funds purchased,
securities sold under agreements to repurchase and other short-term borrowings,
were $3.9 billion at June 30, 1996, down $482 million from $4.4 billion at the
end of 1995. The decrease was primarily due to an $824 million reduction in
federal funds purchased offset by an increase in other short-term borrowings.
Long-term debt was $3.4 billion at June 30, 1996, up from $3.2 billion at
December 31, 1995. In March 1996, the Company placed $125 million in 6.875
percent subordinated debt in the form of 10-year noncallable notes. The
Company also issued $300 million in medium-term bank notes during the first
quarter of 1996. These issuances were partially offset by the early
retirement and maturities of approximately $225 million of Federal Home Loan
Bank Advances.
CORPORATE RISK MANAGEMENT
CREDIT MANAGEMENT -- The Company's strategy for credit risk management includes
stringent, centralized credit policies, and standard underwriting criteria for
specialized lending categories, such as mortgage banking, real estate
construction, and consumer credit. The strategy also emphasizes diversification
on both a geographic and customer level, regular credit examinations, and
quarterly management reviews of large loans and loans experiencing deterioration
of credit quality. The Company strives to identify potential problem loans
early, take any necessary charge-offs promptly, and maintain strong reserve
levels. In the Company's retail banking operations, a standard credit scoring
system is used to assess consumer credit risks and to price consumer products
accordingly. Commercial banking operations rely on a strong credit culture that
combines prudent credit policies and individual lender accountability. In
addition, the commercial lenders generally focus on middle-market companies
within their regions.
In evaluating its credit risk, the Company considers the loan portfolio
composition, the level of allowance coverage, and macroeconomic factors. Most
economic indicators in the Company's primary operating region, which includes
Minnesota, Colorado, Montana, North Dakota, South Dakota, Wisconsin, Iowa,
Kansas, Nebraska, Wyoming, and Illinois, compare favorably with national trends.
Approximately 80 percent of the loan portfolio consists of extensions of credit
to customers in this operating region.
ANALYSIS OF NET CHARGE-OFFS AND ALLOWANCE FOR CREDIT LOSSES -- Net loan
charge-offs totaled $36.0 million and $69.5 million in the second quarter and
first half of 1996, up from $29.9 million and $62.0 million in the same periods
in 1995. Commercial loan net recoveries for the quarter and year-to-date were
$4.3 million and $7.8 million, compared with $3.3 million and $4.0 million for
the same periods in 1995. Second quarter and year-to-date due consumer loan net
charge-offs increased $7.1 million, or 21 percent, from the second quarter of
1995, and $11.3 million, or 17 percent, from the first half of 1995, reflecting
higher average nonmortgage loan balances and higher loss ratios. The ratio of
consumer net charge-offs to average loans in the second quarter of 1996 was 1.24
percent, up from .97 percent in the second quarter of 1995. The ratio of total
net charge-offs to average loans was .54 percent in the second quarter of 1996,
compared with .47 percent in the second quarter of 1995.
TABLE 6. Summary of Allowance for Credit Losses
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30
(DOLLARS IN MILLIONS) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Balance at beginning of period $530.1 $470.4 $473.5 $474.7
CHARGE-OFFS:
Commercial:
Commercial 13.4 7.3 19.1 11.9
Financial institutions -- -- -- --
Real estate:
Commercial mortgage 6.2 2.8 11.7 10.1
Construction 1.0 -- 1.0 --
Total commercial 20.6 10.1 31.8 22.0
Consumer:
Residential mortgage 1.1 1.5 2.1 2.8
Credit card 25.8 21.9 47.0 44.9
Other 22.1 20.3 45.2 35.8
Total consumer 49.0 43.7 94.3 83.5
Total 69.6 53.8 126.1 105.5
RECOVERIES:
Commercial:
Commercial 17.0 8.9 25.3 19.1
Financial institutions -- .1 -- .2
Real estate:
Commercial mortgage 7.9 4.3 14.3 6.6
Construction -- .1 -- .1
Total commercial 24.9 13.4 39.6 26.0
Consumer:
Residential mortgage .3 .1 .5 .4
Credit card 2.8 3.0 5.3 5.7
Other 5.6 7.4 11.2 11.4
Total consumer 8.7 10.5 17.0 17.5
Total 33.6 23.9 56.6 43.5
NET CHARGE-OFFS:
Commercial:
Commercial (3.6) (1.6) (6.2) (7.2)
Financial institutions -- (.1) -- (.2)
Real estate:
Commercial mortgage (1.7) (1.5) (2.6) 3.5
Construction 1.0 (.1) 1.0 (.1)
Total commercial (4.3) (3.3) (7.8) (4.0)
Consumer:
Residential mortgage .8 1.4 1.6 2.4
Credit card 23.0 18.9 41.7 39.2
Other 16.5 12.9 34.0 24.4
Total consumer 40.3 33.2 77.3 66.0
Total 36.0 29.9 69.5 62.0
Provision charged to operating expense 35.0 27.0 66.0 53.0
Additions related to acquisitions -- -- 59.1 1.8
Balance at end of period $529.1 $467.5 $529.1 $467.5
Allowance as a percentage of period-end loans 1.96% 1.82%
Allowance as a percentage of nonperforming loans 418 388
Allowance as a percentage of nonperforming assets 339 268
</TABLE>
TABLE 7. Net Charge-offs as a Percentage of Average Loans Outstanding
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30
1996 1995 1996 1995
COMMERCIAL:
Commercial (.15)% (.08)% (.14)% (.19)%
Financial institutions -- (.06) -- (.06)
Real Estate:
Commercial mortgage (.23) (.25) (.18) .29
Construction .86 (.11) .44 (.06)
Total commercial (.12) (.11) (.12) (.07)
CONSUMER:
Residential mortgage .09 .11 .08 .09
Credit card 3.56 3.31 3.29 3.45
Other .96 .83 1.00 .80
Total consumer 1.24 .97 1.18 .97
Total .54% .47% .52% .50%
ANALYSIS OF NONPERFORMING ASSETS -- Nonperforming assets include nonaccrual
loans, restructured loans, other real estate and other nonperforming assets
owned by the Company. At June 30, 1996, nonperforming assets totaled $156.3
million, essentially unchanged from the balance at December 31, 1995, despite
the addition of approximately $14 million of nonperforming assets from the
FirsTier acquisition. The ratio of nonperforming assets to loans and other real
estate was .58 percent at June 30, 1996, unchanged from the level at December
31, 1995.
Accruing loans 90 days or more past due totaled $40.5 million, compared with
$38.8 million at December 31, 1995. These loans are not included in
nonperforming assets and continue to accrue interest because they are secured by
collateral and/or are in the process of collection and are reasonably expected
to result in repayment or restoration to current status. Consumer loans 30 days
or more past due were 2.16 percent of the total consumer loan portfolio at June
30, 1996, compared with 2.04 percent of the total consumer portfolio at December
31, 1995. Consumer loans 90 days or more past due totaled .67 percent of the
consumer loan portfolio at June 30, 1996, compared with .62 percent at year-end
1995.
TABLE 8. Nonperforming Assets*
JUNE 30 DECEMBER 31
(DOLLARS IN MILLIONS) 1996 1995
COMMERCIAL:
Commercial $38.2 $25.1
Real estate:
Commercial mortgage 28.8 42.3
Construction 10.9 1.5
Total commercial 77.9 68.9
CONSUMER:
Residential mortgage 34.7 37.3
Credit card 6.3 5.7
Other 7.8 6.3
Total consumer 48.8 49.3
Total nonperforming loans 126.7 118.2
OTHER REAL ESTATE 25.4 33.2
OTHER NONPERFORMING ASSETS 4.2 2.3
Total nonperforming assets $156.3 $153.7
Nonperforming loans to total loans .47% .45%
Nonperforming assets to total loans plus
other real estate .58 .58
*Throughout this document, nonperforming assets and related ratios do not
include loans more than 90 days past due and still accruing interest.
TABLE 9. Delinquent Loans
JUNE 30 DECEMBER 31
(DOLLARS IN MILLIONS) 1996 1995
Accruing loans 30 days or more past due $342.3 $335.2
Accruing loans 90 days or more past due 40.5 38.8
DELINQUENCY RATIOS*:
Total commercial:
30 days or more past due 1.34% 1.36%
90 days or more past due .57 .56
Total consumer:
30 days or more past due 2.16 2.04
90 days or more past due .67 .62
Total loans:
30 days or more past due 1.74 1.72
90 days or more past due .62 .59
*Ratios include nonperforming loans and are expressed as a percent of ending
loan balances.
INTEREST RATE RISK MANAGEMENT -- The Company's policy is to maintain a low
interest rate risk position. The Company limits the exposure of net interest
income to risks associated with interest rate movements through asset/liability
management strategies. The Company's Asset and Liability Management Committee
("ALCO") uses three methods for measuring and managing interest rate risk: Net
Interest Income Simulation Modeling, Static Gap Analysis, and Market
Value/Duration Analysis.
NET INTEREST INCOME SIMULATION: The Company has developed a net interest income
simulation model to measure near-term (under one year) risk due to changes in
interest rates. The model is particularly useful because it incorporates
substantially all the Company's assets and liabilities and off-balance sheet
instruments, together with forecasted changes in the balance sheet mix and
assumptions that reflect the current interest rate environment. The balance
sheet changes are based on forecasted prepayments of loans, loan and deposit
growth, and historical pricing spreads. The model is updated monthly with the
current balance sheet structure and the current forecast of expected balance
sheet changes. ALCO uses the model to simulate the effect of immediate and
sustained parallel shifts in the current yield curve of 1 percent, 2 percent and
3 percent. ALCO also calculates the sensitivity of the simulation results to
changes in the key assumptions, such as the Prime/LIBOR spread. The results from
the simulation are reviewed by ALCO monthly and are used to guide ALCO's hedging
strategies. ALCO has established guidelines, approved by the Company's Board of
Directors, that limit the estimated change in net interest income, assuming
modest changes in Prime/LIBOR spreads and deposit pricing lags, over the
succeeding 12 months to approximately 3 percent of forecasted net interest
income, given a 1 percent change in interest rates.
STATIC GAP ANALYSIS: A traditional gap analysis provides a point-in-time
measurement of the relationship between the repricing amounts of the interest
rate sensitive assets and liabilities. While the analysis provides a useful
snapshot of interest rate risk, it does not capture all aspects of interest rate
risk. As a result, ALCO uses the gap analysis primarily for managing interest
rate risk beyond one year and has established guidelines, approved by the
Company's Board of Directors, for the gap position in the one- to three-year
time periods. At June 30, 1996, the cumulative negative repricing gap position
at one year was $266 million.
MARKET VALUE/DURATION ANALYSIS: One of the limiting factors of the net interest
income simulation model is its dependence upon accurate forecasts of future
business activity and the resulting effect on balance sheet assets and
liabilities. As a result, its usefulness is greatly diminished for periods
beyond two years. The Company measures this longer-term component of interest
rate risk (referred to as market value or duration risk) by modeling the effect
of interest changes on the estimated discounted future cash flows of the
Company's assets, liabilities and off-balance sheet instruments.
While each of the interest rate risk measurements has limitations, taken
together they represent a comprehensive view of the magnitude of the Company's
interest rate risk over various time intervals. The Company uses a variety of
balance sheet and off-balance sheet financial instruments ("derivatives") to
manage its interest rate risk. The Company manages the forecasted net interest
income at risk by entering into off-balance sheet transactions (primarily
interest rate swaps), investing in fixed-rate assets or increasing variable-rate
liabilities. To a lesser degree, the Company also uses interest rate caps and
floors to hedge this risk. The Company does not enter into derivative contracts
for speculative purposes.
As of June 30, 1996, the Company received payments on $2.6 billion notional
amount of interest rate swap agreements, based on fixed interest rates, and made
payments based on variable interest rates. These swaps had an average fixed rate
of 6.57 percent and an average variable rate, which is tied to various LIBOR
rates, of 5.48 percent. The maturity of these agreements ranges from four months
to 11 years with an average remaining maturity of 4.5 years. Swaps increased net
interest income for the quarters ended June 30, 1996 and 1995 by $8.0 million
and $4.7 million, respectively, and the six months ended June 30, 1996 and 1995
by $15.9 million and $9.2 million, respectively.
The Company also purchases interest rate caps and floors to minimize the impact
of fluctuating interest rates on earnings. The total notional amount of cap
agreements purchased as of June 30, 1996, was $200 million. The impact of caps
on net interest income was not material for the six months ended June 30, 1996
and 1995. To hedge against falling interest rates, the Company uses interest
rate floors. The total notional amount of floor agreements purchased as of June
30, 1996, was $1.35 billion. LIBOR-based floors totaled $950 million and
Constant Maturity Treasury floors totaled $400 million. The impact of floors on
net interest income was not material for the six months ended June 30, 1996 and
1995.
TABLE 10. Interest Rate Swap Hedging Portfolio Notional Balances and Yields by
Maturity Date
AT JUNE 30, 1996 (DOLLARS IN MILLIONS)
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RECEIVE FIXED SWAPS* NOTIONAL INTEREST RATE INTEREST RATE
MATURITY DATE AMOUNT RECEIVED PAID
1996 (remaining six months) $133 7.54% 5.47%
1997 275 6.42 5.46
1998 631 6.01 5.47
1999 400 6.38 5.48
2000 150 6.57 5.49
After 2000** 1,050 6.90 5.50
Total $2,639 6.57% 5.48%
*At June 30, 1996, the Company did not have any hedging swaps in its
portfolio that required it to pay fixed-rate interest.
**At June 30, 1996, all swaps with a maturity after 2003 hedge fixed-rate
subordinated notes.
CAPITAL MANAGEMENT -- The Company is committed to managing capital for maximum
shareholder benefit and maintaining strong protection for depositors and
creditors. At June 30, 1996, tangible common equity was $2.4 billion, or 6.8
percent of assets, compared with 6.5 percent of assets at December 31, 1995. The
total risk-based capital ratio increased to 11.5 percent at June 30, 1996, from
11.0 percent at December 31, 1995. The increase in the capital ratios reflects
earnings retention as well as the issuance of common stock to complete the
FirsTier acquisition, partially offset by common stock repurchases.
On February 21, 1996, the Board of Directors authorized the repurchase of up
to 25 million common shares through December 1997. This new authorization
replaces previous authorizations. Approximately 9.1 million shares have been
repurchased under the 1996 authorization as of June 30, 1996. In addition,
the Board of Directors authorized the retirement of 2.6 million shares
repurchased in the second quarter of 1996. Under previous authorizations, the
Company repurchased 11.9 million shares in 1995.
TABLE 11. Capital Ratios
JUNE 30 DECEMBER 31
(DOLLARS IN MILLIONS) 1996 1995
Tangible common equity* $2,417 $2,184
As a percent of assets 6.8% 6.5%
Tier 1 capital** $2,198 $1,989
As a percent of risk-adjusted assets 6.8% 6.5%
Total risk-based capital** $3,702 $3,367
As a percent of risk-adjusted assets 11.5% 11.0%
Leverage ratio** 6.3 6.1
*Defined as common equity less goodwill.
**In accordance with regulatory guidelines, unrealized securities gains and
losses are excluded from these calculations.
ACCOUNTING CHANGES
SFAS 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF" -- The Company adopted Statement of Financial
Accounting Standards No. ("SFAS") 121 on January 1, 1996, which requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset is not recoverable. In the first quarter of 1996,
the Company recorded a $25.6 million adjustment to the carrying value of certain
bank premises following a decision to sell several buildings in connection with
the streamlining of the branch distribution network. See Note H for further
discussion.
SFAS 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" -- SFAS 123 provides an
alternative to Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," in accounting for stock-based compensation issued to
employees. The Statement allows for a fair value based accounting method for
stock options and similar equity instruments. Companies that continue to account
for such arrangements under APB Opinion No. 25 must disclose the pro forma
effect of its fair value based accounting for those arrangements on net income
and earnings per share. These disclosure requirements become effective in 1996's
year-end financial statements. The Company continues to account for such
arrangements in accordance with APB Opinion No. 25.
SFAS 125, "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES" -- SFAS 125 addresses whether the transfer of
financial assets should be accounted for as a sale and removed from the balance
sheet, or as a financing recognized as a borrowing. The Statement uses a
"financial components" approach which focuses on control to determine whether
the assets have been sold. If the entity has surrendered control over the
transferred assets, the transaction is considered a sale. Control is considered
surrendered only if the seller has no legal rights to the assets, even in
bankruptcy; the buyer has the right to pledge or exchange the assets; and the
seller does not maintain effective control over the assets through an agreement
to repurchase or redeem them. SFAS 125 is effective for transactions occurring
after December 31, 1996, and is to be applied prospectively, with earlier or
retroactive application not permitted. The adoption of SFAS 125 is not expected
to have a material impact on the Company.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
JUNE 30 DECEMBER 31
(IN MILLIONS, EXCEPT SHARES) 1996 1995
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and due from banks $2,066 $1,837
Federal funds sold 130 35
Securities purchased under agreements to resell 430 230
Trading account securities 103 86
Available-for-sale securities 4,077 3,256
Loans 27,029 26,400
Less allowance for credit losses 529 474
Net loans 26,500 25,926
Bank premises and equipment 416 413
Interest receivable 216 197
Customers' liability on acceptances 185 223
Other assets 2,061 1,671
Total assets $36,184 $33,874
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $7,661 $6,357
Interest-bearing 16,928 16,157
Total deposits 24,589 22,514
Federal funds purchased 1,176 2,000
Securities sold under agreements to repurchase 462 269
Other short-term funds borrowed 2,265 2,116
Long-term debt 3,373 3,201
Acceptances outstanding 185 223
Other liabilities 941 826
Total liabilities 32,991 31,149
Shareholders' equity:
Preferred stock 89 103
Common stock, par value $1.25 a share-authorized
200,000,000 shares; issued: 6/30/96 - 141,747,738
shares; 12/31/95 - 135,632,324 shares 177 170
Capital surplus 1,139 909
Retained earnings 2,110 1,918
Unrealized gain (loss) on securities, net of tax (34) 23
Less cost of common stock in treasury:
6/30/96 - 4,880,788 shares; 12/31/95 - 8,297,756 shares (288) (398)
Total shareholders' equity 3,193 2,725
Total liabilities and shareholders' equity $36,184 $33,874
</TABLE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(IN MILLIONS, EXCEPT PER SHARE DATA) JUNE 30 JUNE 30 JUNE 30 JUNE 30
(UNAUDITED) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $582.0 $572.0 $1,156.7 $1,119.2
Securities:
Taxable 63.6 56.1 127.4 122.6
Exempt from federal income taxes 7.4 2.8 12.3 5.6
Other interest income 11.7 9.0 22.9 18.1
Total interest income 664.7 639.9 1,319.3 1,265.5
INTEREST EXPENSE
Deposits 170.9 186.8 337.9 365.2
Federal funds purchased and repurchase agreements 27.6 31.9 59.0 62.8
Other short-term funds borrowed 28.5 15.7 60.6 22.2
Long-term debt 51.4 46.0 100.9 92.5
Total interest expense 278.4 280.4 558.4 542.7
Net interest income 386.3 359.5 760.9 722.8
Provision for credit losses 35.0 27.0 66.0 53.0
Net interest income after provision for credit losses 351.3 332.5 694.9 669.8
NONINTEREST INCOME
Credit card fees 73.5 56.7 136.3 108.3
Trust fees 58.5 43.0 114.7 84.7
Service charges on deposit accounts 34.7 30.3 68.6 62.4
Investment products fees and commissions 8.7 6.7 17.2 12.2
Securities gains .4 -- 15.0 --
Termination fee 75.0 -- 190.0 --
State income tax refund 65.0 -- 65.0 --
Gain on sale of mortgage banking operations -- -- 45.8 --
Other 44.1 53.0 90.8 101.7
Total noninterest income 359.9 189.7 743.4 369.3
NONINTEREST EXPENSE
Salaries 114.5 109.8 237.9 221.9
Employee benefits 26.4 25.4 55.3 53.9
Goodwill and other intangible assets 19.9 14.2 67.3 28.3
Net occupancy 24.2 24.3 50.0 50.0
Furniture and equipment 22.1 24.8 45.9 48.3
Other personnel costs 14.0 9.8 23.7 17.4
Professional services 10.9 10.5 19.2 17.1
Advertising and marketing 10.2 9.2 17.0 15.5
Third party data processing 5.3 4.4 10.7 8.7
FDIC insurance 3.6 13.8 7.1 27.4
Merger, integration, and resizing -- -- 69.9 --
Other 55.1 57.0 126.6 119.0
Total noninterest expense 306.2 303.2 730.6 607.5
Income before income taxes 405.0 219.0 707.7 431.6
Applicable income taxes 150.9 81.1 276.8 159.9
Net income $254.1 $137.9 $430.9 $271.7
Net income applicable to common equity $252.5 $136.0 $427.6 $267.9
EARNINGS PER COMMON SHARE
Average common and common equivalent shares 139,774,503 135,855,386 138,382,903 135,718,099
Net income $1.81 $1.00 $3.09 $1.97
</TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
COMMON GAINS/(LOSSES)
(IN MILLIONS, EXCEPT SHARES) SHARES PREFERRED COMMON CAPITAL RETAINED ON SECURITIES, TREASURY
(UNAUDITED) OUTSTANDING* STOCK STOCK SURPLUS EARNINGS NET OF TAXES STOCK** TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1994 133,832,409 $118.1 $168.3 $865.8 $1,592.8 $(106.4) $(26.7) $2,611.9
Net income 271.7 271.7
Dividends declared:
Preferred (3.8) (3.8)
Common (97.4) (97.4)
Purchase of treasury stock (3,684,885) (148.0) (148.0)
Issuance of common stock:
Acquisitions 1,619,998 .3 4.3 52.4 57.0
Dividend reinvestment 112,723 .1 4.4 4.5
Stock option and stock purchase
plans 1,500,866 .9 27.7 (15.6) 25.9 38.9
Stock warrants exercised 30,174 (.9) 1.1 .2
Redemption of preferred stock 8,281 (12.4) (1.0) (13.4)
Change in unrealized
gains/(losses) 95.9 95.9
BALANCE JUNE 30, 1995 133,419,566 $105.7 $169.5 $897.9 $1,745.8 $(10.5) $(90.9) $2,817.5
BALANCE DECEMBER 31, 1995 127,334,568 $103.2 $169.5 $909.3 $1,918.2 $22.5 $(397.8) $2,724.9
Net income 430.9 430.9
Dividends declared:
Preferred (3.3) (3.3)
Common (116.2) (116.2)
Purchase and retirement of
treasury stock (9,081,111) (3.2) (152.5) (380.3) (536.0)
Issuance of common stock:
Acquisitions 16,460,215 10.7 361.7 (44.4) 384.2 712.2
Dividend reinvestment 110,332 6.4 6.4
Stock option and stock purchase
plans 1,540,817 .2 20.3 (60.5) 69.9 29.9
Conversion of preferred stock 502,129 (14.5) (14.8) 29.3 --
Change in unrealized
gains/(losses) (56.1) (56.1)
BALANCE JUNE 30, 1996 136,866,950 $88.7 $177.2 $1,138.8 $2,109.9 $(33.6) $(288.3) $3,192.7
</TABLE>
*Defined as total common shares less common stock held in treasury.
**Ending treasury shares were 4,880,788 at June 30, 1996; 8,297,756 at
December 31, 1995; 2,212,758 at June 30, 1995; and 767,000 at December 31,
1994.
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30 JUNE 30
(UNAUDITED, IN MILLIONS) 1996 1995
OPERATING ACTIVITIES
Net cash provided by operating activities $752.1 $143.9
INVESTING ACTIVITIES
Net cash provided (used) by:
Interest-bearing deposits with banks -- 28.9
Loans outstanding 137.0 (831.3)
Securities purchased under agreements to resell (159.7) (44.0)
Available-for-sale securities:
Sales 1,032.2 1,908.1
Maturities 634.5 275.6
Purchases (381.6) (228.9)
Proceeds from sales of other real estate 23.0 23.4
Net (purchases) sales of bank premises and equipment (29.9) 2.6
Cash and cash equivalents of acquired subsidiaries 116.5 16.3
Acquisitions, net of cash received (36.5) --
Sale of mortgage banking operations 123.7 --
Other - net (70.9) 2.5
Net cash provided by investing activities 1,388.3 1,153.2
FINANCING ACTIVITIES
Net cash (used) provided by:
Deposits (694.1) (1,670.5)
Federal funds purchased and securities sold under
agreements to repurchase (815.1) (649.5)
Short-term borrowings 160.0 1,416.9
Long-term debt transactions:
Proceeds 499.2 150.6
Principal payments (347.3) (349.0)
Redemption of preferred stock -- (13.4)
Proceeds from issuance of common stock 36.3 43.6
Purchase of treasury stock (536.0) (148.0)
Cash dividends (119.5) (101.2)
Net cash used by financing activities (1,816.5) (1,320.5)
Change in cash and cash equivalents 323.9 (23.4)
Cash and cash equivalents at beginning of period 1,871.6 1,841.9
Cash and cash equivalents at end of period $2,195.5 $1,818.5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A. Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations, and cash flow activity required under generally
accepted accounting principles. In the opinion of management of the Company, all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of results have been made and the Company believes such
presentation is adequate to make the information presented not misleading. For
further information, refer to the consolidated financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995. Certain amounts in prior periods have been reclassified
to conform to the current presentation.
NOTE B. Accounting Changes
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF -- Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. ("SFAS") 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset is not recoverable. In the first quarter of 1996,
the Company recorded a $25.6 million adjustment to the carrying value of certain
bank premises following a decision to sell several buildings in connection with
the streamlining of the branch distribution network. See Note H for further
discussion.
The Company also performed an evaluation of those intangible assets not covered
by SFAS 121 and recorded a first quarter charge of $29.5 million to reduce the
carrying value of credit card holder and core deposit intangibles to their fair
value. The Company performed this analysis of fair value following its
reassessment of business alternatives for a segment of its credit card portfolio
and a change in the mix of deposits at certain acquired entities, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION -- SFAS 123, "Accounting for Stock-Based
Compensation," establishes a new fair value based accounting method for
stock-based compensation plans. Companies may continue to apply the accounting
provisions of APB 25, "Accounting for Stock Issued to Employees," in determining
net income; however, they must make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting defined in
SFAS 123 had been applied. These disclosure requirements are effective beginning
in 1996's year-end financial statements. The Company continues to account for
such arrangements in accordance with APB Opinion No. 25.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES -- SFAS 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," addresses whether the transfer of
financial assets should be accounted for as a sale and removed from the balance
sheet, or as a financing recognized as a borrowing. The Statement uses a
"financial components" approach which focuses on control to determine whether
assets have been sold. If the entity has surrendered control over the
transferred assets, the transaction is considered a sale. Control is considered
surrendered only if the seller has no legal right to the assets, even in
bankruptcy; the buyer has the right to pledge or exchange the assets; and the
seller does not maintain effective control over the assets through an agreement
to repurchase or redeem them. SFAS 125 is effective for transactions occurring
after December 31, 1996, and is to be applied prospectively, with earlier or
retroactive application not permitted. The adoption of SFAS 125 is not expected
to have a material effect on the Company.
NOTE C. Business Combinations and Divestitures
FIRSTIER FINANCIAL, INC. -- On February 16, 1996, the Company issued 16.5
million shares to complete its acquisition of Omaha-based FirsTier Financial,
Inc. ("FirsTier"). FirsTier had $3.7 billion in assets, $2.9 billion in
deposits, and 63 offices in Nebraska and Iowa. Under terms of the purchase
agreement, the Company exchanged .8829 shares of its common stock for each
common share of FirsTier. In addition, FirsTier's outstanding stock options were
converted into stock options for the Company's common stock.
The acquisition of FirsTier was accounted for under the purchase method of
accounting, and accordingly, the purchase price of $717 million was allocated to
assets acquired and liabilities assumed based on their fair market values at the
date of acquisition. The excess of the purchase price over the fair market
values of net assets acquired was recorded as goodwill. Goodwill of $289 million
will be amortized over approximately 25 years and core deposit intangibles of
$63 million will be amortized over the estimated lives of the deposits of
approximately 10 years. The results of operations of FirsTier have been included
in the Company's Consolidated Statement of Income since the date of acquisition.
The following pro forma operating results of the Company assume that the
FirsTier acquisition had occurred at the beginning of each period presented. In
addition to combining the historical results of operations of the two companies,
the pro forma results include adjustments for the estimated effect of purchase
accounting on the Company's results.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1996 1995
Net interest income $386.3 $388.2 $775.6 $779.4
Net income 254.1 144.2 428.7 283.5
Net income per share 1.81 .99 3.02 1.94
The pro forma information may not be indicative of the results that actually
would have occurred if the combination had been in effect on the dates
indicated or which may be obtained in the future.
BANKAMERICA CORPORATE TRUST BUSINESS -- On August 22, 1995, the Company
announced that it had signed a definitive agreement to acquire the corporate
trust business of BankAmerica Corporation. After the acquisition, the Company
became the nation's leading provider of domestic corporate trust services as
measured by revenues. Approximately 80 percent of the transaction was completed
in December 1995 with the remainder completed in the first quarter of 1996.
SALE OF MORTGAGE BANKING OPERATIONS -- In the first quarter of 1996, the Company
sold its servicing and mortgage loan production business to three parties. Bank
of America, fsb, a subsidiary of BankAmerica Corporation, purchased
approximately $14 billion in mortgage servicing rights. Columbia National, Inc.,
of Maryland, and Knutson Mortgage Co., of Minnesota, agreed to purchase the
Company's loan production business. The Company will now deliver mortgage loan
products through bank branches and telemarketing. These transactions resulted in
a net gain of $45.8 million.
FIRST INTERSTATE BANCORP -- On November 6, 1995, the Company and First
Interstate Bancorp ("First Interstate") announced that they had entered into a
definitive agreement whereby the Company would exchange 2.6 shares of its common
stock for each share of First Interstate common stock. On January 24, 1996,
First Interstate announced that it had terminated the merger agreement with the
Company and had entered into a definitive agreement with Wells Fargo & Company
("Wells Fargo"). Under the terms of a settlement agreement, the Company received
$125 million on January 24, 1996. The Company received an additional $75 million
on April 1, 1996, upon consummation of the merger of First Interstate and Wells
Fargo. In addition, all litigation among the parties related to the acquisition
of First Interstate has been settled. The Company incurred transaction costs of
approximately $10 million in connection with the proposed merger.
NOTE D. Securities
The detail of the amortized cost and fair value of available-for-sale securities
consisted of the following:
JUNE 30, 1996 DECEMBER 31, 1995
AMORTIZED FAIR AMORTIZED FAIR
(IN MILLIONS) COST VALUE COST VALUE
U.S. Treasury $609 $597 $921 $925
Mortgage-backed
securities 2,750 2,718 1,703 1,693
Other U.S. agencies 146 144 157 157
State and political 515 505 174 179
Other 112 113 265 302
Total $4,132 $4,077 $3,220 $3,256
NOTE E. Loans
The composition of the loan portfolio was as follows:
JUNE 30 DECEMBER 31
(IN MILLIONS) 1996 1995
COMMERCIAL:
Commercial $9,549 $8,271
Financial institutions 990 1,060
Real estate:
Commercial mortgage 3,017 2,784
Construction 481 403
Total commercial 14,037 12,518
CONSUMER:
Residential mortgage 3,288 4,655
Residential mortgage held for sale 114 257
Home equity and second mortgage 3,048 2,805
Credit card 2,641 2,586
Automobile 2,048 1,821
Revolving credit 758 757
Installment 639 607
Student * 456 394
Total consumer 12,992 13,882
Total loans $27,029 $26,400
*All or part of the student loan portfolio may be sold when the repayment
period begins.
At June 30, 1996, the Company had $78 million in loans considered impaired under
SFAS 114 included in nonaccrual loans. Of this amount, $62 million was valued
using the fair value of the loans' collateral, $1 million using the present
value of expected future cash flows and $15 million was below the Company's
threshold for valuing individual loans. Based on the results of this valuation,
no allowance for credit losses was specifically allocated to impaired loans. For
the quarter ended June 30, 1996, the average recorded investment in impaired
loans was approximately $73 million. No interest income was recognized on
impaired loans during the quarter.
NOTE F. Long-Term Debt
Long-term debt (debt with original maturities of more than one year) consisted
of the following:
JUNE 30 DECEMBER 31
(IN MILLIONS) 1996 1995
Fixed-rate subordinated notes:
6.625% due May 15, 2003 $100 $100
6.00% due October 15, 2003 100 100
7.55% due June 15, 2004 100 100
8.00% due July 2, 2004 125 125
8.35% due November 1, 2004 100 100
7.625% due May 1, 2005 150 150
6.875% due April 1, 2006 125 --
6.875% due September 15, 2007 250 250
Step-up subordinated notes - due August 15, 2005 100 100
Floating-rate subordinated notes - due November 30, 2010 107 107
Federal Home Loan Bank advances (4.52% to 7.34%)
- maturities to August 2000 874 1,099
Medium-term notes (5.40%to 5.66%) - maturities to
August 1999 563 580
Bank notes (5.52% to 6.38%) - maturities to March 2001 600 300
Other 79 90
Total $3,373 $3,201
NOTE G. Shareholders' Equity
On February 21, 1996, the Board of Directors authorized the repurchase of up to
25 million common shares through December 1997. This new authorization replaces
previous authorizations. Approximately 9.1 million shares have been repurchased
under the 1996 authorization as of June 30, 1996. In addition, the Board of
Directors authorized the retirement of 2.6 million shares repurchased in the
second quarter of 1996. Under previous authorizations, the Company repurchased
11.9 million shares in 1995.
NOTE H. Merger, Integration and Resizing Charges
In the first quarter of 1996, the Company recorded merger, integration and
resizing charges of $69.9 million. Merger and integration charges of $31.3
million were associated with the acquisitions of FirsTier and the BankAmerica
corporate trust business. Resizing charges of $38.6 million were associated with
the Company's streamlining of the branch distribution network and trust
operations as the Company expands its alternative distribution channels,
including telemarketing, automated teller machines and in-store branches. The
components of the charges are shown below:
SIX MONTHS ENDED JUNE 30
(IN MILLIONS) 1996
Systems conversions, required customer communications
and professional services $29.7
Premise writedowns 26.0
Severance 14.2
Total merger, integration and resizing charges $69.9
System conversions, required customer communications and professional services
relate to preparation and mailing of numerous customer communications for the
acquisitions and conversion of customer accounts, printing and distribution of
training materials and policy and procedure manuals, outside consulting fees,
and similar expenses related to the conversion and integration of acquired
branches and operations. Premise writedowns include a valuation adjustment of
$25.6 million associated with the planned sale of bank-owned properties as the
Company consolidates and reduces the space requirements of branch facilities.
The Company is presently marketing these bank-owned facilities and expects to
dispose of them over the next 12 months. Severance charges include the cost of
terminations, other benefits, and outplacement costs associated with the
elimination of employees primarily in branch offices and in centralized
corporate support and data processing functions.
The following table presents a summary of activity with respect to the Company's
merger, integration and resizing accrual:
SIX MONTHS ENDED JUNE 30
(IN MILLIONS) 1996
BALANCE AT DECEMBER 31, 1995 $12.6
Provision charged to operating expense 69.9
Cash outlays (23.7)
Noncash writedowns (26.0)
Balance at June 30, 1996 $32.8
The Company expects that substantially all remaining costs will be paid by the
end of 1996. Additional noncash writedowns are not expected to be significant.
NOTE I. Income Taxes
The components of income tax expense were:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30
(IN MILLIONS) 1996 1995 1996 1995
<S> <C> <C>
FEDERAL:
Current tax $123.9 $52.1 $239.8 $104.9
Deferred tax provision 11.8 21.7 13.6 40.0
Federal income tax 135.7 73.8 253.4 144.9
STATE:
Current tax 15.6 3.2 24.0 6.9
Deferred tax provision (credit) (.4) 4.1 (.6) 8.1
State income tax 15.2 7.3 23.4 15.0
Total income tax provision $150.9 $81.1 $276.8 $159.9
</TABLE>
The reconciliation between income tax expense and the amount computed by
applying the statutory federal income tax rate was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30
(IN MILLIONS) 1996 1995 1996 1995
<S> <C> <C>
Tax at statutory rate (35%) $141.8 $76.7 $247.7 $151.1
State income tax, net of federal tax
benefit 9.9 4.8 15.2 9.8
Tax effect of:
Tax-exempt interest:
Loans (1.2) (1.3) (2.4) (2.6)
Securities (2.6) (1.0) (4.3) (2.0)
Amortization of goodwill 4.5 2.7 21.0 6.1
Other items (1.5) (.8) (.4) (2.5)
Applicable income taxes $150.9 $81.1 $276.8 $159.9
</TABLE>
During the second quarter, the Company received a tax refund of $65 million,
including interest, from the State of Minnesota relating to the exemption of
interest income received on investments in U.S. government securities for the
period 1979 to 1983.
The Company's net deferred tax asset was $250.0 million at June 30, 1996, and
$216.3 million at December 31, 1995.
NOTE J. Commitments, Contingent Liabilities and Off-Balance Sheet Financial
Instruments
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS -- In the normal course of business, the
Company uses various financial instruments with off-balance sheet risk to meet
the financing needs of its customers and to manage its interest rate risk. These
instruments carry varying degrees of credit, interest rate or liquidity risk.
The contract or notional amounts of these financial instruments were as follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
(IN MILLIONS) 1996 1995
------ ------
<S> <C> <C>
Commitments to extend credit:
Commercial $8,197 $7,240
Corporate and purchasing cards 10,609 5,220
Consumer credit card 8,504 9,247
Other consumer 3,508 3,264
Letters of credit:
Standby 1,411 1,412
Commercial 230 161
Interest rate swap contracts:
Hedges 2,639 2,839
Intermediated 138 169
Options contracts:
Hedge interest rate floors purchased 1,350 1,250
Hedge interest rate caps purchased 200 200
Intermediated interest rate and foreign exchange caps and floors purchased 170 126
Intermediated interest rate and foreign exchange caps and floors written 170 126
Liquidity support guarantees 101 142
Forward contracts 110 294
Commitments to sell loans -- 223
Mortgages sold with recourse 157 242
Foreign currency commitments:
Commitments to purchase 1,177 792
Commitments to sell 1,174 785
</TABLE>
Activity for the six months ended June 30, 1996, with respect to interest rate
swaps which the Company uses to hedge commercial loans, subordinated debt, bank
notes, certificates of deposit, deposit accounts, and savings certificates was
as follows:
(IN MILLIONS)
Notional amount outstanding at December 31, 1995 $2,839
Additions 300
Maturities (300)
Terminations (200)
Notional amount outstanding at June 30, 1996 $2,639
Weighted average interest rates paid 5.48%
Weighted average interest rates received 6.57%
The Company receives fixed rates and pays floating rates on all hedges as of
June 30, 1996. Net unamortized deferred gains, which amortize through the year
2000, were $.2 million at June 30, 1996.
At June 30, 1996 and December 31, 1995, LIBOR based interest rate floors
totaling $950 million with a remaining maturity of 1.48 years and 2.00 years,
respectively, hedged floating rate commercial loans. The strike rate on these
LIBOR based floors ranged from 3.25 percent to 4.00 percent at June 30, 1996 and
December 31, 1995. Constant Maturity Treasury (CMT) interest rate floors
totaling $400 million with an average remaining maturity of 7 months at June 30,
1996 and $300 million with an average remaining maturity of 9 months at December
31, 1995, hedged the reinvestment risk of fixed rate residential mortgage loans.
The strike rate on these CMT floors ranged from 5.70 percent to 6.36 percent at
June 30, 1996 and from 6.25 percent to 6.36 percent at December 31, 1995. At
June 30, 1996 and December 31, 1995, the total notional amount of interest rate
caps purchased was $200 million with an average strike level at 6.00 percent.
COMMITMENTS AND CONTINGENT LIABILITIES -- Various legislative proposals have
been made, but not enacted, which would affect the Savings Association Insurance
Fund ("SAIF") premium assessments, including a one-time special assessment for
SAIF deposits. It is not clear when such legislation will be passed, if at all.
Based on current proposals, the Company may be subject to a special assessment
of up to $50 million.
NOTE K. Supplemental Information to the Consolidated Financial Statements
CONSOLIDATED BALANCE SHEET -- Time certificates of deposit in denominations of
$100,000 or more totaled $924 million and $900 million at June 30, 1996, and
December 31, 1995, respectively.
CONSOLIDATED STATEMENT OF CASH FLOWS
Listed below are supplemental disclosures to the Consolidated Statement of
Cash Flows.
SIX MONTHS ENDED
JUNE 30 JUNE 30
(IN MILLIONS) 1996 1995
Income taxes paid $192.3 $118.3
Interest paid 556.5 512.7
Net noncash transfers to foreclosed property 13.2 8.6
Change in unrealized gain (loss) on available-for-sale
securities, net of taxes of $34.3 in 1996 and
$59.0 in 1995 (56.1) 95.9
Cash acquisitions of businesses:
Fair value of noncash assets acquired $36.5 $--
Liabilities assumed -- --
Net $36.5 $--
Stock acquisitions of businesses:
Fair value of noncash assets acquired $3,627.9 $329.3
Net cash acquired 116.5 16.3
Liabilities assumed (3,032.2) (288.6)
Net value of common stock issued $712.2 $57.0
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30
1996 1995
YIELDS YIELDS % CHANGE
(IN MILLIONS) AND AND AVERAGE
(UNAUDITED) BALANCE INTEREST RATES BALANCE INTEREST RATES BALANCE
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Securities:
U.S. Treasury $646 $9.9 6.16% $988 $15.2 6.17% (34.6)%
Mortgage-backed 2,828 49.3 7.01 1,920 33.1 6.91 47.3
State & political subdivisions 522 11.5 8.86 177 4.8 10.88 194.9
U.S. agencies and other 267 4.1 6.18 488 7.3 6.00 (45.3)
Total securities 4,263 74.8 7.06 3,573 60.4 6.78 19.3
Unrealized loss on available-for-sale
securities (34) (50)
Net securities 4,229 3,523
Trading account securities 91 1.3 5.75 93 1.2 5.18 (2.2)
Federal funds sold and resale agreements 482 6.2 5.17 293 4.4 6.02 64.5
Loans:
Commercial:
Commercial 9,412 184.0 7.86 8,166 178.1 8.75 15.3
Financial institutions 981 10.3 4.22 642 6.6 4.12 52.8
Real estate:
Commercial mortgage 3,023 67.0 8.91 2,428 55.5 9.17 24.5
Construction 465 10.3 8.91 363 8.7 9.61 28.1
Total commercial 13,881 271.6 7.87 11,599 248.9 8.61 19.7
Consumer:
Residential mortgage 3,358 66.7 7.99 5,003 93.8 7.52 (32.9)
Residential mortgage held for sale 160 2.9 7.29 210 4.0 7.64 (23.8)
Home equity and second mortgage 2,977 70.7 9.55 2,587 63.2 9.80 15.1
Credit card 2,597 73.1 11.32 2,292 72.0 12.60 13.3
Other 3,959 98.7 10.03 3,673 92.1 10.06 7.8
Total consumer 13,051 312.1 9.62 13,765 325.1 9.47 (5.2)
Total loans 26,932 583.7 8.72 25,364 574.0 9.08 6.2
Allowance for credit losses 536 473 13.3
Net loans 26,396 24,891 6.0
Other earning assets 337 4.2 5.01 236 3.4 5.78 42.8
Total earning assets* 32,105 670.2 8.40 29,559 643.4 8.73 8.6
Cash and due from banks 1,846 1,709 8.0
Other assets 2,541 2,160 17.6
Total assets $35,922 $32,905 9.2%
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $6,578 $5,435 21.0%
Interest-bearing deposits:
Interest checking 3,169 10.6 1.35 2,854 11.8 1.66 11.0
Money market accounts 4,263 37.4 3.53 3,928 37.5 3.83 8.5
Other savings accounts 1,683 8.9 2.13 1,697 10.8 2.55 (.8)
Savings certificates 7,432 100.2 5.42 8,107 107.4 5.31 (8.3)
Certificates over $100,000 916 13.8 6.06 1,160 19.3 6.67 (21.0)
Total interest-bearing deposits 17,463 170.9 3.94 17,746 186.8 4.22 (1.6)
Short-term borrowings 4,047 56.1 5.58 3,077 47.6 6.20 31.5
Long-term debt 3,462 51.4 5.97 2,876 46.0 6.42 20.4
Total interest-bearing liabilities 24,972 278.4 4.48 23,699 280.4 4.75 5.4
Other liabilities 1,150 995 15.6
Preferred equity 90 106 (15.1)
Common equity 3,153 2,701 16.7
Unrealized loss on available-for-sale
securities, net of taxes (21) (31) (32.3)
Total liabilities and shareholders' equity $35,922 $32,905 9.2%
Net interest income $391.8 $363.0
Gross interest margin 3.92% 3.98%
Gross interest margin without taxable-
equivalent increments 3.85% 3.93%
Net interest margin 4.91% 4.93%
Net interest margin without taxable-
equivalent increments 4.84% 4.88%
</TABLE>
Interest and rates are presented on a fully taxable-equivalent basis under a
tax rate of 35 percent.
Interest income and rates on loans include loan fees. Nonaccrual loans are
included in average loan balances.
*Before deducting the allowance for credit losses and excluding the
unrealized gain (loss) on available-for-sale securities.
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30
1996 1995
YIELDS YIELDS % CHANGE
(IN MILLIONS) AND AND AVERAGE
(UNAUDITED) BALANCE INTEREST RATES BALANCE INTEREST RATES BALANCE
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Securities:
U.S. Treasury $771 $23.9 6.23% $1,027 $31.4 6.17% (24.9)%
Mortgage-backed 2,671 92.6 6.97 2,190 74.7 6.88 22.0
State & political subdivisions 434 19.4 8.99 176 9.4 10.77 146.6
U.S. agencies and other 331 10.2 6.20 519 15.6 6.06 (36.2)
Total securities 4,207 146.1 6.98 3,912 131.1 6.76 7.5
Unrealized loss on available-for-sale
securities (1) (94)
Net securities 4,206 3,818
Trading account securities 99 2.6 5.28 87 2.3 5.33 13.8
Federal funds sold and resale agreements 486 12.6 5.21 302 9.0 6.01 60.9
Loans:
Commercial:
Commercial 9,039 358.0 7.96 7,832 341.8 8.80 15.4
Financial institutions 1,005 22.0 4.40 683 13.5 3.99 47.1
Real estate:
Commercial mortgage 2,964 133.2 9.04 2,436 108.4 8.97 21.7
Construction 454 20.7 9.17 360 16.9 9.47 26.1
Total commercial 13,462 533.9 7.98 11,311 480.6 8.57 19.0
Consumer:
Residential mortgage 3,625 140.8 7.81 5,036 189.9 7.60 (28.0)
Residential mortgage held for sale 190 6.9 7.30 192 7.5 7.88 (1.0)
Home equity and second mortgage 2,918 139.5 9.61 2,517 119.9 9.61 15.9
Credit card 2,548 146.4 11.55 2,293 143.5 12.62 11.1
Other 3,888 193.0 9.98 3,631 181.8 10.10 7.1
Total consumer 13,169 626.6 9.57 13,669 642.6 9.48 (3.7)
Total loans 26,631 1,160.5 8.76 24,980 1,123.2 9.07 6.6
Allowance for credit losses 519 475 9.3
Net loans 26,112 24,505 6.6
Other earning assets 315 7.7 4.92 232 6.9 6.00 35.8
Total earning assets* 31,738 1,329.5 8.42 29,513 1,272.5 8.69 7.5
Cash and due from banks 1,786 1,693 5.5
Other assets 2,479 2,167 14.4
Total assets $35,483 $32,804 8.2%
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $6,363 $5,472 16.3 %
Interest-bearing deposits:
Interest checking 3,085 20.8 1.36 2,910 24.2 1.68 6.0
Money market accounts 4,170 73.7 3.55 3,834 71.8 3.78 8.8
Other savings accounts 1,666 17.8 2.15 1,814 23.0 2.56 (8.2)
Savings certificates 7,352 197.8 5.41 8,226 209.7 5.14 (10.6)
Certificates over $100,000 908 27.8 6.16 1,120 36.5 6.57 (18.9)
Total interest-bearing deposits 17,181 337.9 3.96 17,904 365.2 4.11 (4.0)
Short-term borrowings 4,267 119.6 5.64 2,808 85.0 6.10 52.0
Long-term debt 3,368 100.9 6.02 2,905 92.5 6.42 15.9
Total interest-bearing liabilities 24,816 558.4 4.53 23,617 542.7 4.63 5.1
Other liabilities 1,126 1,008 11.7
Preferred equity 96 106 (9.4)
Common equity 3,082 2,663 15.7
Unrealized loss on available-for-sale
securities, net of taxes -- (62) 100.0
Total liabilities and shareholders' equity $35,483 $32,804 8.2%
Net interest income $771.1 $729.8
Gross interest margin 3.89% 4.06%
Gross interest margin without taxable-
equivalent increments 3.83% 4.02%
Net interest margin 4.89% 4.99%
Net interest margin without taxable-
equivalent increments 4.82% 4.94%
</TABLE>
Interest and rates are presented on a fully taxable-equivalent basis under a
tax rate of 35 percent.
Interest income and rates on loans include loan fees. Nonaccrual loans are
included in average loan balances.
*Before deducting the allowance for credit losses and excluding the
unrealized gain (loss) on available-for-sale securities.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11 Computation of Primary and Fully Diluted Net Income Per Common Share
12 Computation of Ratio of Earnings to Fixed Charges
27 Article 9 Financial Data Schedule*
(b) REPORTS ON FORM 8-K
During the three months ended June 30, 1996, the Company did not file any
Current Reports on Form 8-K.
*Copies of this exhibit will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the exhibit.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST BANK SYSTEM, INC.
By: /s/ DAVID J. PARRIN
David J. Parrin
Senior Vice President and Controller
(Chief Accounting Officer and Duly
Authorized Officer)
DATE: August 13, 1996
[LOGO] First Bank System First Class
P.O. BOX 522 U.S. Postage
MINNEAPOLIS, MINNESOTA PAID
55480 Permit No. 2440
Minneapolis, MN
SHAREHOLDER INQUIRIES
FINANCIAL INFORMATION
FBS news and financial results are available by fax, mail, or on-line.
FAX. To access FBS's fax-on-demand service, call 1-800-758-5804. When asked,
enter FBS's extension number, 312402. Enter "1" for the most current news
release or "2" for a menu of recent releases. Enter your fax and phone numbers
as directed. The information will be faxed to you immediately.
MAIL. If you don't have access to a fax machine or prefer not to use FBS's
fax-on-demand service, we will, on request, mail to you our quarterly earnings
news release. To be added to FBS's mailing list, please contact Investor &
Corporate Relations, First Bank System, First Bank Place, Minneapolis,
Minnesota, 55402, (612) 973-2434.
INTERNET. For information about FBS, including news releases, product
information, and a list of service locations, access FBS's home page on the
world wide web. The address is www.fbs.com.
For further information, contact John Danielson, Senior Vice President, (612)
973-2261, or Karin Glasgow, Vice President, (612) 973-2264.
STOCK AND DIVIDEND INFORMATION
For matters related specifically to First Bank System stock records or dividend
payments, contact the Office of the Corporate Secretary, (612) 973-0334.
DIVIDEND REINVESTMENT
For information regarding First Bank System's dividend reinvestment plan,
contact First Chicago Trust Company of New York, P.O. Box 2598, Jersey City, New
Jersey 07303-2598, (800) 446-2617.
EXHIBIT 11
COMPUTATION OF PRIMARY AND FULLY DILUTED NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
PRIMARY:
Average shares outstanding 137,725,350 133,869,847 136,155,737 133,833,696
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 2,049,153 1,985,539 2,227,166 1,884,403
139,774,503 135,855,386 138,382,903 135,718,099
Net income $254.1 $137.9 $430.9 $271.7
Preferred dividends (1.6) (1.9) (3.3) (3.8)
Net income applicable to common equity $252.5 $136.0 $427.6 $267.9
Net income per common share $1.81 $1.00 $3.09 $1.97
FULLY DILUTED: *
Average shares outstanding 137,725,350 133,869,847 136,155,737 133,833,696
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 period-end market price,
whichever is higher 2,051,711 1,991,663 2,325,038 2,146,433
Assumed conversion of Series 1991A Preferred Stock 3,107,268 3,647,401 3,275,485 3,647,401
142,884,329 139,508,911 141,756,260 139,627,530
Net income $254.1 $137.9 $430.9 $271.7
Preferred dividends, excluding 1991A Preferred Stock -- -- -- --
Net income applicable to common equity $254.1 $137.9 $430.9 $271.7
Net income per common share $1.78 $.99 $3.04 $1.95
</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%.
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
THREE SIX
MONTHS MONTHS
ENDED ENDED
JUNE 30 JUNE 30
(DOLLARS IN MILLIONS) 1996 1996
<S> <C> <C> <C> <C>
EARNINGS
1. Net income $254.1 $430.9
2. Applicable income taxes 150.9 276.8
3. Net income before taxes (1 + 2) $405.0 $707.7
4. Fixed charges:
a. Interest expense excluding interest on deposits $107.5 $220.5
b. Portion of rents representative of interest and amortization of debt
expense 8.3 14.9
c. Fixed charges excluding interest on deposits (4a + 4b) 115.8 235.4
d. Interest on deposits 170.9 337.9
e. Fixed charges including interest on deposits (4c + 4d) $286.7 $573.3
5. Amortization of interest capitalized $-- $--
6. Earnings excluding interest on deposits (3 + 4c + 5) 520.8 943.1
7. Earnings including interest on deposits (3 + 4e + 5) 691.7 1,281.0
8. Fixed charges excluding interest on deposits (4c) 115.8 235.4
9. Fixed charges including interest on deposits (4e) 286.7 573.3
RATIO OF EARNINGS TO FIXED CHARGES
10. Excluding interest on deposits (line 6/line 8) 4.50 4.01
11. Including interest on deposits (line 7/line 9) 2.41 2.23
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
BANK SYSTEM, INC. JUNE 30, 1996, 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,066,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 560,000
<TRADING-ASSETS> 103,000
<INVESTMENTS-HELD-FOR-SALE> 4,077,000
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 27,029,000
<ALLOWANCE> 529,000
<TOTAL-ASSETS> 36,184,000
<DEPOSITS> 24,589,000
<SHORT-TERM> 3,903,000
<LIABILITIES-OTHER> 941,000
<LONG-TERM> 3,373,000
0
89,000
<COMMON> 177,000
<OTHER-SE> 2,927,000
<TOTAL-LIABILITIES-AND-EQUITY> 36,184,000
<INTEREST-LOAN> 1,156,700
<INTEREST-INVEST> 139,700
<INTEREST-OTHER> 22,900
<INTEREST-TOTAL> 1,319,300
<INTEREST-DEPOSIT> 337,900
<INTEREST-EXPENSE> 558,400
<INTEREST-INCOME-NET> 760,900
<LOAN-LOSSES> 66,000
<SECURITIES-GAINS> 15,000
<EXPENSE-OTHER> 730,600
<INCOME-PRETAX> 707,700
<INCOME-PRE-EXTRAORDINARY> 430,900
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 430,900
<EPS-PRIMARY> 3.09
<EPS-DILUTED> 3.04
<YIELD-ACTUAL> 4.91
<LOANS-NON> 126,600
<LOANS-PAST> 40,500
<LOANS-TROUBLED> 100
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 473,500
<CHARGE-OFFS> 126,100
<RECOVERIES> 56,600
<ALLOWANCE-CLOSE> 529,100
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
