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FIRST BANK SYSTEM 1994 INTEGRATED ANNUAL REPORT AND FORM 10-K
(See page 78 for 10-K cover page and cross-reference table)
-COVER-
Locations
[MAP OF UNITED STATES APPEARS ON THIS PAGE]
Iowa, Kansas, Nebraska and Wyoming were added as the result of the Metropolitan
Financial Corporation acquisition in January, 1995.
ABOUT THE COMPANY
First Bank System, Inc., (FBS) is a regional bank holding company serving 11
Midwestern and Rocky Mountain states through more than 300 locations.
Headquartered in Minneapolis, FBS is the 26th largest U.S. commercial bank
holding company with $34.1 billion in assets. Our market capitalization is now
over $5 billion, placing us among the top 20 U.S. banks. This reflects our
January 24, 1995, acquisition of Metropolitan Financial Corporation (MFC).
FBS has four core businesses and a culture that is focused on creating value
for shareholders. Our banking franchise has leading market shares in most of our
region's major markets. We are a leader in electronic payment systems, as the
nation's largest issuer of Visa Corporate and Purchasing Cards, and as the
seventh largest processor of Visa and MasterCard transactions. Our Commercial
Bank's focus on building strong client relationships has translated into
attractive returns for shareholders. We are among the 10 largest providers of
corporate trust services and our investment management services are growing
rapidly. These attributes have made us one of the nation's top performing banks.
The purpose of this report is to reflect FBS's financial condition at December
31, 1994, and therefore it does not include MFC. To obtain a copy of our
supplemental restated financials on Form 8-K, which include MFC, please turn to
the inside back cover for instructions.
FBS is listed on the New York Stock Exchange under the ticker symbol FBS and
FtBkSy.
RETURN ON AVERAGE COMMON EQUITY
(Percent)
[PERFORMANCE BAR GRAPH APPEARS ON THIS PAGE]
EARNINGS PER SHARE
(Dollars)
[PERFORMANCE BAR GRAPH APPEARS ON THIS PAGE]
SHAREHOLDERS' EQUITY TO ASSETS RATIO
(Percent)
[PERFORMANCE BAR GRAPH APPEARS ON THIS PAGE]
[INSIDE FRONT COVER]
Financial Summary
% Change
(Dollars in Millions, Except Per Share Amounts) 1994 1993 1993-1994
- --------------------------------------------------------------------------------
FOR THE YEAR
Income before Merger-related Charges............. $ 419.8 $ 348.0 20.6
Merger-related Charges........................... - (50.0) **
-----------------
Net Income....................................... $ 419.8 $ 298.0 40.9
=================
PER COMMON SHARE
Income before Merger-related Charges............. $ 3.57 $ 2.83 26.1
Merger-related Charges........................... - (.44) **
-----------------
Net Income....................................... $ 3.57 $ 2.39 49.4
=================
Dividends Paid................................... $ 1.16 $ 1.00 16.0
Common Shareholders' Equity...................... $ 19.25 $ 18.09 6.4
-----------------
RETURN ON AVERAGE ASSETS
Before Merger-related Charges.................... 1.63% 1.36% **
Merger-related Charges........................... - (0.19) **
-----------------
Return on Average Assets......................... 1.63% 1.17% **
=================
RETURN ON AVERAGE COMMON EQUITY
Before Merger-related Charges.................... 19.3% 16.4% **
Merger-related Charges........................... - (2.6) **
-----------------
Return on Average Common Equity.................. 19.3% 13.8% **
=================
Net Interest Margin.............................. 5.28% 5.07% **
Efficiency Ratio before Merger-related Charges... 57.2% 59.8% **
AT YEAR END
Loans............................................ $19,281 $18,779 2.7%
Allowance for Credit Losses...................... 434 423 2.6
Assets........................................... 26,219 26,385 (.6)
Total Shareholders' Equity....................... 2,275 2,245 1.3
Common Equity to Total Assets.................... 8.3% 7.5% **
Shareholders' Equity to Total Assets............. 8.7 8.5 **
Tier 1 Capital Ratio............................. 8.0 9.2 **
Total Risk-based Capital Ratio................... 12.5 13.3 **
**Not meaningful
Letter to Shareholders 2
FBS Priorities 4
Management's Discussion & Analysis 14
Consolidated Financial Statements 39
Five-Year Consolidated Financial Statements 70
Quarterly Consolidated Financial Data 74
Form 10-K 78
Executive Officers & Directors 82
FBS Locations 83
Corporate Data 84
RETURN ON AVERAGE ASSETS*
(Percent)
[PERFORMANCE BAR GRAPH APPEARS ON THIS PAGE]
EFFICIENCY RATIO*
(Percent)
[PERFORMANCE BAR GRAPH APPEARS ON THIS PAGE]
ALLOWANCE COVERAGE RATIO OF NONPERFORMING LOANS
(Percent)
[PERFORMANCE BAR GRAPH APPEARS ON THIS PAGE]
To Our Shareholders
- -------------------
When I think about the growth prospects for First Bank System, I am optimistic
because we derive tremendous leverage from our ability to increase revenues
against a low cost structure. While this formula for earnings growth is simple
and straightforward, developing the means to execute it is not.
Over the past several years, we have built an ingrained cost control
discipline that focuses on value in each decision. Strong, fee-generating
payment systems businesses complement our core banking franchise. Our retail
banking paradigm quickly brings new products to market through a multiple
distribution system attuned to customer needs. Innovation, speed, and
productivity permeate our culture, so that our strategic advantages translate
into daily action.
SHAREHOLDER FOCUS As we have said consistently over the past five years, we
strive for profits, not size. We have built shareholder value analysis into our
budgeting and management processes, which provides a disciplined method for
allocating resources to high-growth businesses. Our goal is to build a quality
earnings stream - one that combines stability and diversity- to weather any
industry or economic climate. In short, we are managing First Bank System to be
a superior long-term investment.
Our shareholder focus also guides us in deciding what we won't do. We won't
play the yield curve with bets on the direction of interest rates. Several banks
that did were hurt this past year as rates climbed. Nor will we make
acquisitions that don't make economic sense or don't create value for existing
FBS shareholders. The penalty for overpaying for acquisitions is harsh and long
in terms of lost credibility and diminished financial performance.
GROWTH POTENTIAL First Bank System is sustaining growth in two ways. First, we
are expanding market share in key segments of our core banking businesses, which
operate in a region where employment, household incomes, and loan delinquency
rates are better than the national averages. For example, our portfolio of home
equity loans has grown an average of 26 percent annually over the past five
years. Loans to small- and medium-sized businesses have achieved strong
increases for three consecutive years. The tremendous growth of our
WorldPerks(R) credit card business has created huge cross-selling opportunities.
Investment product sales are growing rapidly. Innovative new products, improved
customer service, and a developing sales culture should fuel continued market
share growth in these core businesses.
New businesses are contributing an important second growth stream. In just
five years, we turned our corporate and purchasing card businesses from test
products into the nation's largest Visa issuers. Merchant processing continues
to grow rapidly, placing First Bank nationally among the industry's largest
providers. This report includes separate financial information on these
increasingly important payment systems products. These and other fee-generating
businesses accounted for more than one-third of our total revenue.
OVER THE PAST FIVE YEARS, THE TOTAL RETURN OF FIRST BANK SYSTEM'S STOCK HAS
GROWN AT A COMPOUNDED ANNUAL RATE OF 19.4 PERCENT.
FIVE-YEAR TOTAL RETURN
(Percent)
[PERFORMANCE GRAPH APPEARS HERE]
2
- -
As for acquisitions, we're content to wait for the right opportunity at the
right price. But once we make an acquisition, we move quickly. Thanks to our
standardized products and centralized operations, we can fully integrate an
acquired bank's products and operations with our own much faster than other
banks. For example, we will complete the integration of the $8 billion-asset
Metropolitan Financial Corporation within just one month of closing. Speedy
integration means we achieve a higher level of cost takeouts and see the results
faster than other banks. We will continue to pursue value-creating acquisitions.
However, if acquisition prices are too high, we will simply continue to buy back
stock, increase dividends, or both. During the past two years, we have
repurchased $700 million of common and preferred stock. In 1995, we increased
the dividend by 25 percent, to $1.45 per share, and announced our intention to
repurchase 16 million shares of common stock by the end of 1996.
COST CONTROL We have fortified the expense side of our leverage equation with
standardized products and centralized operations. Because we support virtually
all products with a single set of systems, we can add significant new business
while adding little incremental cost. Another key factor is our compensation
system, which ties pay to profitable revenue generation. All of our employees
are eligible for variable pay, and nearly a fifth of our people have a
substantial portion of their total compensation based on the performance of FBS,
their business line, and their individual results. In addition, our top 174
managers participate in one of the industry's most aggressive management stock
ownership programs. Linking compensation - by far our largest expense - to
performance places the long-term goal of shareholder value squarely in the realm
of everyday action.
We are among the nation's most efficient banks. Our ratio of noninterest
expenses to revenues fell to 57 percent in 1994 from nearly 80 percent five
years ago. It's still too high, but we're confident that we can drive the
efficiency ratio to the low 50s in the next few years.
This month marks my fifth anniversary with First Bank System. I'm proud of our
accomplishments, but one stands out in my mind as being particularly important.
Our culture has changed from that of a traditional bank to one that highly
values innovation, inspires a sense of urgency, and is dedicated to increasing
productivity. That has made the achievement of every other goal possible. And
that is why I'm confident that First Bank System will continue to win the
loyalty of our customers and the trust of our investors.
/s/ John F. Grundhofer
John F. Grundhofer
Chairman, President and Chief Executive Officer
February 15, 1995
INNOVATION, SPEED, AND PRODUCTIVITY PERMEATE OUR CULTURE, SO THAT OUR STRATEGIC
ADVANTAGES TRANSLATE INTO DAILY ACTION.
3
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Progress on Priorities
- ----------------------
Records. First Bank System set a lot of them in 1994. Record earnings, record
profitability, and record efficiency. The numbers are gratifying not only
because they are among the best in the banking industry, but equally important,
they reflect progress made against long-term management objectives. These
fundamentals may be familiar since we have long held them as guideposts for
creating shareholder wealth. We believe there is great value in this
consistency. Our people know what is expected of them and they in turn can drive
those values deeper into our organization. Our priorities remain: core business
focus, productivity, disciplined acquisitions, asset quality, and effective
capital management.
CORE BUSINESS FOCUS We continue to build our core businesses while investing in
new revenue sources. Our traditional strengths in retail and community banking,
commercial banking, and trust and investment services are now joined by a
fourth: payment systems. Formerly part of retail banking, this fast-growing
collection of card and transaction processing businesses has become a major
focus of First Bank System's future. Together, these four business lines provide
earnings stability over the long term, especially in a changing interest rate
environment.
We are continuously investing in our businesses and assessing new revenue
sources. This long-term vision is reflected in the tremendous technology
investments we've made in recent years to deepen customer relationships and
maximize product profitability.
PRODUCTIVITY Although our stated near-term goal is a ratio of expenses to
revenues in the low 50s, there really is no end point to productivity gains. The
reason is that rapidly evolving technology is creating productivity improvements
that were unthinkable five years ago. More improvements are on the horizon. With
enhancements to our Earnings Analysis System, we are building stronger links
between our management accounting and other computer systems to generate deeper
levels of information about product cost and profitability. This also will
provide a framework for analyzing the profitability of individual customer
segments.
In fact, technology is reshaping the way we deliver financial products and
services. Customers now have the choice of traditional bank branches, automated
teller machines, telephones, and other electronic options. Currently,
approximately half of First Bank System's consumer transactions are initiated
outside of our branch network. We will continue to invest in technology that
maximizes customer convenience and sales productivity.
[PHOTO OF FIRST BANK SENIOR MANAGEMENT TEAM]
FIRST BANK SENIOR MANAGEMENT TEAM:
Front from left: RICHARD A. ZONA, vice chairman and chief financial officer, and
JOHN F. GRUNDHOFER, chairman, president and chief executive officer. Back from
left: WILLIAM F. FARLEY, vice chairman, Distribution Group; J. ROBERT HOFFMANN,
executive vice president and chief credit officer; DANIEL C. ROHR, executive
vice president, Commercial Banking; PHILIP G. HEASLEY, vice chairman and
president, Retail Products Group; JOHN M. MURPHY, JR., chairman and chief
investment officer, First Trust N.A.; MICHAEL J. O'ROURKE, executive vice
president and general counsel; and ROBERT H. SAYRE, executive vice president for
human resources.
4
Acquisitions also present excellent opportunities for economies of scale
through branch consolidation and systems integration. We have a proven
integration model that helps us realize cost savings more quickly than anyone in
the industry. We fully integrated Metropolitan Financial Corporation, an $8
billion institution with 300,000 customer households, within one month of
closing.
DISCIPLINED ACQUISITIONS We expanded our region and strengthened our existing
market presence through acquisitions this past year. In March we entered
Illinois with the acquisition of Boulevard Bancorp, Inc., a $1.6 billion bank
holding company in Chicago. The Metropolitan Financial Corporation acquisition -
the largest in our history - gives us a presence in Iowa, Kansas, Nebraska and
Wyoming, four states contiguous to our existing region. It also strengthened our
share in four of our current states, making Metropolitan an excellent fit both
strategically and economically.
These new states have fragmented banking industries that offer high potential
for building market share through acquisition. We have a strong record of doing
just that. In 1994 we completed or announced five in-market acquisitions in
Colorado, Minnesota, North Dakota, and South Dakota.
We also strengthened our national leadership position as a corporate trust
services provider with the completion of our previously announced acquisition of
J.P. Morgan's domestic corporate trust business.
ASSET QUALITY Despite the rise in interest rates, we expect our asset quality
to continue to remain at a very high level. At year-end, the ratio of
nonperforming assets to loans and other real estate owned was .79 percent.
Higher interest rates may prompt some companies to compromise their credit
standards. First Bank System will not be one of them. Maintaining high standards
and pricing based upon risk is the only way to add profitable business.
Our lending strategy remains unchanged. Led by people with exceptional
backgrounds in credit administration, we continue to focus locally where we can
turn our superior market knowledge into superior credit judgments. These markets
have proven more resilient than other parts of the country during recent
economic downturns.
EFFECTIVE CAPITAL MANAGEMENT We manage our capital to maximize shareholder
value and provide a strong base for acquisitions. During the past two years
we repurchased $700 million of common and preferred stock. We also have
increased our common dividend rate for five consecutive years, including our
most current increase of 25 percent in February, 1995.
THESE FUNDAMENTALS MAY BE FAMILIAR SINCE WE HAVE LONG HELD THEM AS GUIDEPOSTS
FOR CREATING SHAREHOLDER WEALTH. WE BELIEVE THERE IS GREAT VALUE IN THIS
CONSISTENCY.
[TABLE FOR FBS LEADING MARKET SHARES ON THIS PAGE]
[TABLE FOR RECENT ACQUISITION ON THIS PAGE]
5
RETAIL & COMMUNITY BANKING
COMMUNITY BANKING
BUSINESS DESCRIPTION
- --------------------
FBS serves more than 1.4 million households in seven states through 200 banking
locations, 1,055 Fastbank(R) automated teller machines, and 24-hour FastLine(SM)
telephone service. Our core customers - those with checking accounts - have an
average of 3.8 accounts with FBS.
1994 HIGHLIGHTS
- ---------------
. Achieved consumer loan growth of 17 percent to $4 billion. . Increased retail
sales of investment products 21 percent to $428 million. . Deepened core
household penetration to an average of 3.8 accounts from 3.2 accounts a year
ago. . Improved the cross-sell ratio on home equity sales to an average of 2.2
new products per customer, up from 1.8 in the 1993 promotions. . Boosted branch
productivity 17 percent over the past two years to 4,092 monthly transactions
per full-time equivalent teller.
. Serviced more than 24 million customer calls, up 34 percent over 1993, and
increased calls serviced entirely by our audio response unit to 70 percent.
. Improved customer satisfaction with branch bank service to 90 percent from 85
percent. . Opened four new private banking locations in Minnesota.
BUSINESS BANKING
BUSINESS DESCRIPTION
- --------------------
FBS serves approximately 150,000 small and middle-market businesses through 37
business banking hubs and three Mainstreet Loan Centers that are designed to
quickly serve the needs of this important market. At year-end, our portfolio of
$5.2 billion in business loans accounted for 27 percent of FBS's entire loan
portfolio.
1994 HIGHLIGHTS
- ---------------
. Increased business banking loans 16 percent. . Increased business checking
accounts 13 percent. . Earned approval as a Small Business Administration loan
underwriter in every market we serve.
MORTGAGE BANKING
BUSINESS DESCRIPTION
- --------------------
FBS Mortgage is one of the largest residential mortgage lenders in our region.
Home loan origination totaled $1.6 billion in 1994. At year-end, our mortgage
servicing portfolio was $9.8 billion.
1994 HIGHLIGHTS
- ---------------
. Introduced several products, including Combination Lock & Loan, which offers
pre-approval, three-day approval, and rate protection options; a construction-
to-perm loan that provides both construction and permanent mortgage financing
with just one closing; and a "mega-Jumbo" product for borrowers with loan needs
exceeding $1 million.
. Increased loans to low-income households 47 percent and loans to minorities 70
percent. . Improved customer satisfaction rating on loan originations and
servicing to 90 and 88 percent, respectively, from 87 and 74 percent.
. Achieved loan servicing costs that are 12 percent below those of our peer
banks. . Maintained a delinquency rate that was less than half the national
average.
PERCENT OF FBS NET INCOME
EFFICIENCY RATIO (Percent)
NET INTEREST INCOME (Millions)
[THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]
6
- -
LOOKING AHEAD
- -------------
NEW TECHNOLOGY: DEEPENING CUSTOMER RELATIONSHIPS
A sophisticated new management system that focuses on entire customer
relationships across product lines will improve our ability to sell and service
our customers. The Relationship Management System (RMS) leverages our existing
customer data to improve customer service, cross-selling effectiveness, and
productivity. RMS will provide detailed relationship strategies based on four
customer dimensions: profitability, risk, potential for attrition, and
propensity to buy additional products or services.
We are a bank industry leader in broadly applying customer management
practices to our retail business. This new technology will help us better
understand our customers by linking multiple account usage information to
demographics and analysis. It marks an important shift from account management
to relationship management.
DIRECT MARKETING: A POWERFUL SALES TOOL FBS is developing marketing
alternatives to our branch bank system so that customers can conveniently bank
anytime, anywhere. Direct marketing, which includes direct origination of
customer leads for either branch or centralized fulfillment, has been a major
contributor to improved sales results. Last year we converted into new product
sales 35 percent of approximately 680,000 customer calls to our centralized
telephone bank center in response to advertising or direct mail solicitations.
Highly targeted, outbound telemarketing calls resulted in the sale of 68,000
products, a 13 percent conversion rate.
Direct marketing is increasing our household penetration and market share
while lowering the acquisition cost per account and delivering high-quality
service. Over the past four years, retail asset balances originated through
direct marketing have grown rapidly. Last year, nearly 60 percent of our new
retail asset accounts were originated by direct marketing. The number of calls
converted into sales has increased significantly while the cost per new account
has dropped roughly one-third for inbound and outbound calls.
BUSINESS BANKING: AGGRESSIVE PURSUIT OF SALES Aggressive marketing, expansion
of our business banking hubs, and a favorable economy helped spark solid growth
in loans over the past three years to companies with annual sales of $25 million
or less. Excluding acquisitions, our core business banking loans increased 9
percent or $350 million. Growth in loans to businesses with less than $1 million
in annual sales resulted from new performance incentives and standard loan
processing at our Mainstreet Loan Centers. These changes have empowered our
personal bankers to sell business loans. Free of loan under-writing
responsibility, bankers now focus on calling customers.
BRANCH PRODUCTIVITY: USING TECHNOLOGY EFFECTIVELY FBS has steadily improved the
efficiency and productivity of its retail banking operations over the past five
years. Our productivity, as measured by daily transactions per teller, is among
the best at 195, which is substantially above the industry average. We've set
our sights on further productivity gains this year by placing FastLine
telephones in selected branches to shift more customer service inquiries to our
centralized phone bank. We're also encouraging greater use of automatic teller
machines (ATMs) to improve customer service and lower transaction costs. Tests
include extending hours for same-day crediting on ATM deposits and replacing
drive-up tellers with ATMs. Another initiative is the roll-out of Desktop
Expert, a two-way video conferencing system that enhances customer service and
cross-selling. It allows bankers and customers to immediately access a mortgage
or investment specialist when one is unavailable on-site.
NET INCOME (millions)
NONINTEREST INCOME (millions)
[THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]
7
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PAYMENT SYSTEMS
CORPORATE PAYMENT
BUSINESS DESCRIPTION
- --------------------
FBS offers card products to help companies and government entities of all sizes
efficiently manage expenses. Three cards comprise this group:
. Corporate Card, a non-revolving Visa card issued to employees of corporations
with annual travel and entertainment expenses of $1 million or more. National
rank: second. Estimated market: $130 billion annually.
. Purchasing Card, a Visa charge card that reduces the processing cost of small-
dollar purchases and lowers the risk of inappropriate purchases through client-
specified controls. National rank: first. Estimated market: $300-$400 billion
annually.
. Business Card, a revolving Visa credit card for companies with annual travel
and entertainment expenses under $1 million. Estimated market: 8 million
companies.
1994 HIGHLIGHTS
- ---------------
. Increased the number of corporate and purchasing card relationships with
Fortune 100 companies to 43 and with Fortune 500 Industrial and Service
companies to more than 150. . Added more than 1,000 U.S. and state government
entities to our purchasing card program.
. Introduced a new Visa WorldPerks Business Card that provides frequent flier
mileage credit through Northwest Airlines. . Introduced FirstView/SM/, a desk-
top report-writing software that allows purchasing card and corporate card
customers to more closely track their company's expenses.
. Developed and piloted the relocation card product, designed and serviced in
concert with FBS Mortgage, to streamline the relocation process for Fortune 1000
customers.
CREDIT PRODUCTS
BUSINESS DESCRIPTION
- --------------------
FBS is one of the nation's 10 largest issuers of Visa credit cards. We have more
than 2.2 million cards, $2.4 billion in outstanding balances, and annual sales
exceeding $6 billion.
1994 HIGHLIGHTS
- ---------------
. Introduced the new FBSWorldPerks(R) Visa Card and attracted almost 400,000
cardholders and outstanding receiveables of $600 million. Annualized sales
volume is more than $4 billion.
. Increased total credit outstandings 37 percent to $2.4 billion. . Launched a
test of Direct Cash, an unsecured line of credit for low- and moderate-income
customers. . Selected as first U.S. bank to test Visa TravelMoney, an
international prepaid travel card which is an alternative to traveler's cheques.
MERCHANT PROCESSING
BUSINESS DESCRIPTION
- --------------------
FBS is the nation's seventh largest processor of Visa and MasterCard
transactions, serving approximately 60,000 merchant locations nationwide.
1994 HIGHLIGHTS
- ---------------
. Increased merchant processing volume 31 percent to $13.4 billion, our third
year of growth of 25 percent or more. . Completed a conversion of all processing
to an improved merchant system.
AGENT BUSINESSES
BUSINESS DESCRIPTION
- --------------------
FBS is the nation's third largest deployer of off-premise automated teller
machines (ATMs), with more than 1,474 locations in 14 states. FBS distributes
its retail card products through more than 800 independent financial
institutions with more than two million consumer checking accounts. FBS
currently offers two ATM network brands, Fastbank and PEAK, in the Upper Midwest
and Rocky Mountain regions, respectively.
1994 HIGHLIGHTS
- ---------------
. Expanded ATM network with an agreement to place more than 1,000 new machines
in Circle K convenience stores. . Increased ATM transaction volume 8 percent to
66 million.
. Piloted the Visa Interlink program in Colorado, which allows customers to use
their ATM cards to make purchases at selected retailers. . Launched Visa check
card program to Fastbank agents in the Upper Midwest.
PERCENT OF FBS NET INCOME
EFFICIENCY RATIO (Percent)
NET INTEREST INCOME (Millions)
[THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]
8
- -
LOOKING AHEAD
- -------------
PAYMENT SYSTEMS: OPPORTUNITY TO GAIN MARKET SHARE
As banking's historic role as a financial intermediary moves from a physical to
an electronic environment, we see enormous opportunity to further strengthen our
position in the regional payment system. The payment system controls the
processing of transactions between consumers and businesses. It is a highly
profitable volume business with steep barriers to entry. Unlike most financial
institutions, we aggressively pursue both sides of the payment system by
providing both payment vehicles, such as credit, charge, debit, and ATM cards,
as well as payment processing and treasury management services (see page 11). In
addition to generating more fees, "closing the loop" on the payment system
creates competitive advantages by generating a unique level of information,
efficiency and control.
NEW TECHNOLOGY: INCREASING EFFICIENCY AND FLEXIBILITY
We are developing a sophisticated computer system that will consolidate systems
that run our card and credit line products. The Cards and Lines System (CLS)
will cut operating expenses and increase flexibility to enhance or introduce
products. The development of CLS is another example of FBS's commitment to using
technology to improve productivity and profitability.
CORPORATE CARD: A RAPID GROWTH BUSINESS Controlling information about the
business traveller is the key to success in the corporate card business. In this
regard, we have several competitive advantages that bode well for continued
strong growth. One is Visa's unmatched worldwide acceptance. More than 11
million locations means that more data is captured; data is power when managing
costs or negotiating vendor discounts. Widespread presence also allows companies
to eliminate expensive cash advances to travelling employees. Another benefit
for cost-conscious corporate customers is Visa's superior acceptance at more
low- to medium-priced restaurants and hotels. We will expand our entry into the
global market through partnerships with international institutions capable of
extending our product expertise. Development of proprietary technology and
specific product enhancements is expected to limit new competition in this
attractive market.
PURCHASING CARD: EMERGING MARKET, HUGE POTENTIAL The $300-$400 billion annual
market for purchasing cards is still in its infancy, and we intend to continue
to market aggressively and consistently deliver the innovative products that
made us the market leader. We also expect the purchasing card to continue to
help sell our merchant processing business because the large volumes enable us
to offer incentives for signing key vendors to accept Visa. In addition to more
deeply penetrating the Fortune 100 and 500, we are successfully carving a niche
among state governments and federal agencies.
WORLDPERKS VISA CARD: STRONG FEES AND CROSS-SELLING OPPORTUNITIES A key piece
was added to our regional payment systems strategy last year with the award of
the WorldPerks Visa Card partnership with Northwest Airlines. We have already
attracted almost 400,000 cardholders, far exceeding our initial expectations. We
expect to double the WorldPerks card sales volume in five years to approximately
$8 billion. In the meantime, we will pursue the tremendous cross-selling
opportunity that lies in the fact that only about 15 percent of our cardholders
have a pre-existing account relationship with First Bank System.
NET INCOME (Millions)
NONINTEREST INCOME (Millions)
[THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]
9
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COMMERCIAL BANKING
COMMERCIAL LENDING
BUSINESS DESCRIPTION
- --------------------
FBS's Commercial Banking Group takes and manages credit risk and markets
competitively priced products to businesses in our markets with annual revenues
greater than $25 million.
1994 HIGHLIGHTS
- ---------------
. Achieved excellent core loan growth. Average outstanding loans increased
8 percent over 1993. . Reduced nonperforming assets 36 percent to $56 million.
MORTGAGE BANKING SERVICES
BUSINESS DESCRIPTION
- --------------------
FBS is one of the nation's largest providers of credit and other financial
services to mortgage bankers.
1994 HIGHLIGHTS
- ---------------
. Managed business effectively during a cyclical decline in loans to mortgage
bankers and rapid industry consolidation. Previous efforts to strengthen client
relationships reduced turnover.
REAL ESTATE LENDING
BUSINESS DESCRIPTION
- --------------------
FBS provides credit and other financial products and services to selected real
estate developers for the development, renovation, expansion, acquisition or
refinance of their real estate projects.
1994 HIGHLIGHTS
- ---------------
. Continued to build our real estate portfolio and deepen client relationships.
. Continued to build a strong account team. Our relationship managers have an
average of more than 10 years of real estate market experience.
TREASURY MANAGEMENT SERVICES
BUSINESS DESCRIPTION
- --------------------
FBS, one of the region's largest treasury management services providers, helps
companies achieve effective treasury operations through a full range of domestic
and international cash management, information reporting, and trade finance
services.
1994 HIGHLIGHTS
- ---------------
. Achieved a leadership position in the evolving electronic data interchange
business through the introduction of six new EDI services. . Joined EDI Bank
Alliance Network Exchange (EDIBANX), a revolutionary new EDI service. Both moves
broaden our clients' ability to originate and receive financial EDI
transactions. . Worked closely with clients to develop Gallery(TM), an
innovative Windows-based system that enhances the delivery of domestic and
international information reporting and transaction initiation services.
. Established Hong Kong-based subsidiary to issue import letters of credit.
. Introduced Faxport, accelerating the delivery of letters of credit to
exporters through automation. . Enhanced ACH positive pay and cash vault
transaction reporting.
CORPORATE FINANCE AND LOAN SYNDICATIONS
BUSINESS DESCRIPTION
- ---------------------
FBS meets the broad financial needs of our clients by syndicating credit
facilities and placing capital with investors.
1994 HIGHLIGHTS
- ---------------
. Originated and syndicated more than $2.5 billion in loans, meeting the full
credit needs of FBS clients while prudently managing FBS portfolio
concentrations.
PERCENT OF FBS NET INCOME
EFFICIENCY RATIO (Percent)
NET INTEREST INCOME (Millions)
[THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]
10
- --
LOOKING AHEAD
- -------------
COMMERCIAL BANK CULTURE: VALUES FOR SUCCESS Our goal is simple yet ambitious:
to meet our clients' expectations for a superior banking relationship. The
significant characteristics include knowledgeable people, responsiveness,
understanding the client's business, maintaining a long-term commitment to the
client, and competitive pricing.
To accomplish this, we are building a culture that focuses on the client and
rewards initiative, innovation and teamwork. We are continuing to develop strong
leaders to advance the business, not just manage it. Using a rigorous and
disciplined process, based on facts and data, we are embedding core values into
everyday business activity. Only by continuously evaluating and shaping how we
think and act can we make lasting changes that result in consistently superior
performance.
CORPORATE BANKING: A CORE BUSINESS STRENGTH Commercial Banking is a vital part
of FBS's overall strategy of building a balanced earnings stream. By developing
strong client relationships with businesses in our geographic region, we can
translate superior market knowledge into sound credit judgments and, ultimately,
into attractive returns for shareholders.
This past year was one of exceptionally strong growth in our core lending
portfolio, which helped offset a cyclical decline in loans to the rapidly
consolidating mortgage banking industry. Credit quality improved significantly,
which continues a five-year trend that reflects our increasingly strong credit
culture. We will not retreat on credit quality, despite rising competitive
pressures.
We remain committed to our long-term goal of deepening client relationships
through innovative thinking and excellence in client service. As part of these
efforts, we will continue to build our corporate finance expertise as commercial
banking continues its evolution into an advisory business.
ELECTRONIC COMMERCE: THE WAY TO DO BUSINESS FBS has become a leader in the
rapid movement among companies of all sizes from paper-based payments to
electronic payments. Although we have provided electronic data interchange (EDI)
services for five years, we moved into an industry leadership position with our
charter membership in EDI Bank Alliance Network Exchange (EDIBANX). EDIBANX, a
strategic alliance of 13 of the country's leading treasury management banks, is
advancing the future of EDI. The network helps facilitate electronic commerce by
providing clients with an efficient means to exchange EDI transactions with
other EDI-capable businesses.
Our leadership position in EDI ensures that FBS clients will have access to
information and services that will help them effectively implement EDI programs,
thereby taking advantage of cost and operating efficiencies. It also further
strengthens our position as a regional leader in payment systems (see pages 8
and 9 for Payment Systems discussion).
Another important effort to help companies transact business efficiently is
Gallery(TM), one of the first Windows-based computer software services to
combine international and domestic information reporting and transaction
initiation services. Scheduled for introduction in 1995, Gallery enhances the
value of financial information by enabling clients to integrate data into their
systems through the use of client/server technology. Companies also can use
Gallery to initiate ACH transactions, domestic and international wire transfers,
foreign drafts, and letters of credit.
FBS also is introducing image services to deliver check images to clients
through a variety of media. Clients will use these images to assist in the
verification and reconciliation of check processing functions.
NET INCOME (Millions)
NONINTEREST INCOME (Millions)
[THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]
11
--
TRUST & INVESTMENT GROUP
CORPORATE TRUST
BUSINESS DESCRIPTION
- --------------------
FBS is one of the nation's 10 largest providers of domestic trusteeship, paying
agency, and custody services to debt issuers. We have in excess of $250 billion
in administered assets and 12 offices that provide a coast-to-coast presence.
1994 HIGHLIGHTS
- ---------------
. Completed the acquisition of J.P. Morgan's domestic corporate trust
business. . Ranked first nationally in the principal amount ($13.5 billion) of
new long-term municipal issues awarded to trustees in 1994.
. Awarded $5.9 billion in corporate finance issues. . Implemented a new
bondholder recordkeeping system.
INVESTMENT MANAGEMENT
BUSINESS DESCRIPTION
- --------------------
FBS provides asset management services to individuals and institutions through
common, collective, and mutual funds, and individual portfolios.
1994 HIGHLIGHTS
- ---------------
. Increased assets under management 13 percent to $24.5 billion. . Grew
proprietary First American mutual fund assets more than 65 percent to $4.7
billion, despite declining market.
. Introduced five new mutual funds for a total of 27. . Launched B class or
"back-end" load mutual fund shares.
INVESTMENT SERVICES
BUSINESS DESCRIPTION
- --------------------
FBS's full-service brokerage company distributes municipal and government bonds,
equities, mutual funds, and annuities to correspondent banks, corporations,
public agencies, and individuals.
1994 HIGHLIGHTS
- ---------------
. Became one of the first major banks to create a unified sales force, making
one-stop shopping for investment products possible. . Increased investment sales
force to 166 from 135 people.
. Established approximately 23,000 new retail account relationships, an increase
of 83 percent over 1993.
PERSONAL FINANCIAL SERVICES
BUSINESS DESCRIPTION
- --------------------
FBS provides a wide range of investment advisory, administrative, and fiduciary
services for individuals, families, and charitable institutions.
1994 HIGHLIGHTS
- ---------------
. Developed new organizational structure that eliminates internal barriers to
superior client service. . Began creating teams of specialists from trust,
private banking, and investment services to serve affluent households.
INSTITUTIONAL TRUST
BUSINESS DESCRIPTION
- --------------------
FBS provides trustee, investment management, and custodial services, primarily
for 401(k) and other employee benefit plans.
1994 HIGHLIGHTS
- ---------------
. Nearly doubled the size of the Diamond program, our bundled 401(k) product for
small and medium-sized businesses, to 178 plans with $197 million in assets.
. Expanded Diamond program to appeal to companies with up to 1,500 employees.
. Implemented new accounting system and standardized traditional recordkeeping.
. Grew First Stable Fund, which invests in guaranteed investment contracts, 95
percent to $182 million in assets.
. Developed a measurement system that provides custody clients with an
independent, consistent and consolidated performance evaluation.
. Enhanced First Access, a Windows-based, on-line computer system that allows
clients to review their portfolios.
. Expanded institutional trust sales force.
PERCENT OF FBS NET INCOME
EFFICIENCY RATIO (Percent)
NET INTEREST INCOME (Millions)
[THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]
12
- --
LOOKING AHEAD
- -------------
CORPORATE TRUST: TECHNOLOGY INCREASES PROFITABILITY A new bondholder
recordkeeping system installed last year has significantly cut our operating
costs, making us a low-cost provider of domestic corporate trust services. This
single system enables us to handle all types of securities, eliminating the need
for multiple systems that most of our competitors use. It also enables us to
integrate acquisitions quickly and completely. Improved technology and lower
costs are essential in a scale business such as corporate trust.
ASSET MANAGEMENT: THE KEY TO GROWTH One of our long-term goals is to
significantly increase the Trust & Investment Group's revenue contribution to
First Bank System. To help accomplish this, we completed a major study last year
that identified initiatives for quickly growing assets managed for both
individuals and institutions. We intend to leverage our 105 years of money
management experience to capture a larger slice of this rapidly growing
industry:
. RETAIL MARKET. Last year our 83 percent growth in new investment product
accounts easily outpaced the industry. We will continue to strengthen the sales
efforts and build recognition for the 27 First American Investment Funds, our
proprietary mutual fund family. New products, mutual fund wholesaling, and a
significant technology investment in a new workstation for brokers will fuel
future growth.
. AFFLUENT MARKET. FBS is moving toward a fully integrated approach to
serving the complex needs of our most affluent clients with household incomes of
at least $150,000. Our new Private Financial Services group creates client teams
whose expertise spans our traditional trust, private banking, and investment
areas. These teams are designed to satisfy client desire for easy access to a
broad range of financial products and services through a single relationship
manager. Focusing on each client's entire relationship with FBS provides
superior service and cross-selling opportunities in this rapidly growing market.
. INSTITUTIONAL MARKET. We see enormous opportunity in the fact that only 9
percent of U.S. companies with fewer than 100 employees have 401(k) plans. Our
Diamond 401(k) plan, with its standard features, overcomes the primary barrier
of cost. Diamond plan sales nearly doubled last year almost exclusively on
referrals from business banking. We've only begun to tap the cross-selling
potential of FBS's deep regional penetration in the business banking market. We
have begun marketing our ability to customize the Diamond program to appeal to
larger companies, those with up to 1,500 employees. We also are strengthening
our distribution system by training business bankers to sell the Diamond plan,
doubling our sales force, and developing aggressive marketing and advertising
campaigns.
INVESTMENT PERFORMANCE: A COMPETITIVE ADVANTAGE
Despite the dismal year in 1994 for the mutual fund industry, all 12 First
American Investment Funds with a track record of longer than one year
outperformed their peer group average. Nine of those funds ranked among the top
20 percent of their investment category, according to Lipper Analytical
Services, Inc. In addition, our core institutional equity product has
outperformed the Standard & Poor's Index of 500 stocks over the past one, three
and five years. Superior investment performance and a diverse range of
investment styles give us a distinct competitive advantage over other asset
managers.
NET INCOME (Millions)
NONINTEREST INCOME (Millions)
[THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]
13
--
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
- --------
EARNINGS SUMMARY - First Bank System, Inc. (the "Company") reported net income
in 1994 of $419.8 million ($3.57 per share), an increase of $121.8 million, or
40.9 percent, from 1993. Net income for 1993 of $298.0 million ($2.39 per share)
included after-tax merger-related charges of $50.0 million ($.44 per share)
recorded in connection with the acquisition of Colorado National Bankshares,
Inc. ("CNB"). Earnings in 1994 increased $71.8 million, or 20.6 percent, from
1993, excluding merger-related charges. Net income for 1992 of $311.8 million
($2.67 per share) included after-tax merger-related charges of $81.8 million
($.78 per share) related to the acquisitions of Western Capital Investment
Corporation ("WCIC") and Bank Shares Incorporated ("BSI"), in addition to $157.3
million of income related to the cumulative effect of changes in accounting
principles.
Return on average common equity increased to 19.3 percent in 1994 from 13.8
percent in 1993 and return on average assets increased to 1.63 percent from 1.17
percent for the same periods. Excluding merger-related charges, return on
average common equity was 16.4 percent and return on average assets was 1.36 in
1993. The efficiency ratio improved to 57.2 percent in 1994 from 59.8 percent in
1993, excluding merger-related charges.
The improvement in earnings reflects increases in net interest income on a
taxable-equivalent basis of $59.3 million, or 5.2 percent, and noninterest
income of $58.4 million, or 10.3 percent, together with a reduction in provision
for credit losses of $32.2 million, or 25.7 percent, and controlled noninterest
expense growth of $24.8 million, or 2.4 percent (excluding merger-related
charges in 1993). Compared with noninterest expense for 1993, adjusted to
include the operations of Boulevard Bancorp, Inc. ("Boulevard") and the acquired
corporate trust unit of J.P. Morgan and Co., Incorporated, ("J.P. Morgan") on a
pro forma basis, noninterest expense in 1994 declined $33.2 million, or 3.1
percent. For further information on the specific components of the 1994
operating results, see the "Statement of Income Analysis" on page 18.
Nonperforming assets dropped to $153.0 million at December 31, 1994, a
decrease of $73.0 million, or 32.3 percent, from December 31, 1993, despite the
addition of $29.3 million in nonperforming assets from the acquisition of
Boulevard in the first quarter of 1994. The ratio of the allowance for credit
losses to nonperforming loans increased to 385 percent, from 269 percent at
December 31, 1993.
ACQUISITIONS - On January 24, 1995, the Company issued approximately 21.7
million shares in connection with the acquisition of Metropolitan Financial
Corporation ("MFC"), a regional financial services holding company headquartered
in Minneapolis, Minnesota. As of December 31, 1994, MFC had approximately $7.9
billion in assets, $5.5 billion in deposits and 211 offices principally in North
Dakota, Minnesota, Nebraska, lowa, Kansas, South Dakota, Wisconsin, and Wyoming.
The transaction will be accounted for as a pooling-of-interests.
On September 2, 1994, the Company completed the acquisition of the domestic
corporate trust business of J. P. Morgan. This business unit provides trust
services for approximately 650 clients with 3,800 bond issues in the areas of
municipal, revenue, housing and corporate bond indenture trusteeships.
On March 25, 1994, the Company completed the acquisition of Boulevard Bancorp,
Inc., a commercial bank holding company based in Chicago, Illinois, with $1.6
billion in assets and $1.2 billion in deposits. The Company exchanged
approximately 6.2 million shares of its common stock for all of the outstanding
common stock of Boulevard and accounted for the transaction as a purchase. The
Company also repurchased existing shares of its common stock approximately equal
to the number of shares issued at the time of closing of the Boulevard
acquisition.
14 First Bank System, Inc. and Subsidiaries
- --
TABLE 1. Selected Financial Data
(Dollars in Millions, Except Per Share Amounts) 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------------------------
CONDENSED INCOME STATEMENT:
Net interest income (taxable-equivalent basis)......................... $1,209.9 $1,150.6 $1,017.8 $ 941.2 $ 872.7
Provision for credit losses............................................ 93.0 125.2 183.4 202.2 215.4
--------------------------------------------------
Net interest income after provision for credit losses................ 1,116.9 1,025.4 834.4 739.0 657.3
Noninterest income..................................................... 628.0 569.6 535.7 497.7 437.6
Merger-related charges (including $26.4 related to ORE in 1992)........ - 72.2 110.4 - -
Other noninterest expense.............................................. 1,053.1 1,028.3 1,003.9 969.3 981.0
--------------------------------------------------
Income before income taxes and cumulative effect
of changes in accounting principles................................ 691.8 494.5 255.8 267.4 113.9
Taxable-equivalent adjustment.......................................... 15.1 17.7 22.7 34.4 48.1
Income taxes........................................................... 256.9 178.8 78.6 25.9 8.5
--------------------------------------------------
Income before cumulative effect of changes in accounting principles.. 419.8 298.0 154.5 207.1 57.3
Cumulative effect of changes in accounting principles.................. - - 157.3 - -
--------------------------------------------------
Net income........................................................... $ 419.8 $ 298.0 $ 311.8 $ 207.1 $ 57.3
==================================================
Return on average assets............................................... 1.63% 1.17% 1.32% .90% .22%
Return on average common equity........................................ 19.3 13.8 16.4 13.1 2.7
Net interest margin.................................................... 5.28 5.07 4.85 4.50 3.70
Efficiency ratio....................................................... 57.2 64.0 71.8 67.8 75.1
Efficiency ratio, excluding merger-related charges..................... 57.2 59.8 64.7 67.8 75.1
PER SHARE DATA:
Primary income before cumulative effect of accounting changes.......... $ 3.57 $ 2.39 $ 1.18 $ 1.79 $ .36
Cumulative effect of accounting changes.............................. - - 1.49 - -
--------------------------------------------------
Primary net income..................................................... $ 3.57 $ 2.39 $ 2.67 $ 1.79 $ .36
==================================================
Fully diluted income before cumulative effect of accounting changes.... $ 3.52 $ 2.38 $ 1.21 $ 1.78 $ .36
Cumulative effect of accounting changes.............................. - - 1.43 - -
--------------------------------------------------
Fully diluted net income............................................. $ 3.52 $ 2.38 $ 2.64 $ 1.78 $ .36
==================================================
Common dividends paid*................................................. $ 1.16 $ 1.00 $ .88 $ .82 $ .82
--------------------------------------------------
AVERAGE BALANCE SHEET DATA:
Total loans............................................................ $ 18,562 $ 17,756 $ 16,257 $16,341 $18,104
Total earning assets................................................... 22,901 22,695 20,983 20,916 23,597
Total assets........................................................... 25,762 25,575 23,592 23,075 25,856
Total deposits......................................................... 19,142 20,347 18,774 18,215 19,564
Long-term debt......................................................... 1,232 913 927 1,214 1,652
Common equity.......................................................... 2,121 1,957 1,720 1,402 1,246
Total shareholders' equity............................................. 2,252 2,305 2,099 1,684 1,510
YEAR-END BALANCE SHEET DATA:
Total loans............................................................ $ 19,281 $ 18,779 $ 17,076 $16,365 $16,829
Total assets........................................................... 26,219 26,385 26,625 23,851 24,804
Total deposits......................................................... 18,791 21,031 21,188 19,145 19,378
Long-term debt......................................................... 1,483 1,015 822 948 1,506
Common equity.......................................................... 2,169 1,979 1,939 1,474 1,336
Total shareholders' equity............................................. 2,275 2,245 2,318 1,852 1,600
--------------------------------------------------
*Dividends per share have not been restated for the WCIC or CNB mergers. CNB
paid common dividends of $3.2 million in 1992 ($.28 per CNB share), and $1.8
million in 1991 and 1990 ($.16 per CNB share). WCIC did not pay dividends in the
years shown.
First Bank System, Inc. and Subsidiaries 15
--
The Company completed the acquisition of four additional institutions and
announced the planned acquisition of a fifth in markets in which the Company has
an existing presence, serving to strengthen the Company's retail banking market
shares in these communities. On October 18, 1994, the Company announced an
agreement to acquire First Western Corporation ("FWC"), a $323 million bank
holding company based in Sioux Falls, South Dakota. FWC owns Western Bank, which
has nine branches in South Dakota. The acquisition received regulatory approvals
in January 1995 and is expected to close in the first quarter of 1995. On
February 28, 1994, the Company completed the acquisition of American Bancshares
of Mankato, a $116 million bank holding company. On April 29, 1994, the Company
completed the acquisition of First Financial Investors, Inc., which had
approximately $200 million in assets. The United Bank of Bismarck acquisition,
with approximately $121 million in assets, closed on September 9, 1994. Green
Mountain Bancorporation, Inc., located in Lakewood, Colorado, with approximately
$35 million in assets, was acquired on September 30, 1994. For further
information regarding acquisitions, refer to Note C on page 45.
Line of Business Financial Review
- ---------------------------------
Each of the Company's four business lines -- Retail and Community Banking,
Payment Systems, Commercial Banking, and Trust and Investment Group --
contributed to the strong financial performance in 1994. Compared with 1993
results, before merger-related expenses, earnings increases for the four
business lines were 28.6 percent, 32.7 percent, 7.9 percent, and 3.6 percent,
respectively. Each business line made significant productivity improvements, as
measured by its efficiency ratio, and includes the operating results of
Boulevard since its acquisition date.
The Company's business unit profitability reporting system derives business
line results by specifically attributing most assets, deposits and income
statement items to a business line. The Company's internal Funds Transfer
Pricing system allocates a standard cost for funds used or credit for funds
provided to all business line assets and liabilities using a matched funding
concept. Expenses which directly support business line operations are charged to
the business lines based on a standard unit cost and actual volume measurements.
Expenses that indirectly support the business line operations, as well as the
expenses of those departments that primarily support the holding company, are
allocated based on the ratio of the business line's noninterest expense to total
consolidated noninterest expense. The Company calculates business line income
taxes based upon the consolidated effective tax rate.
The business unit profitability system allocates capital based upon credit,
operational and business risks. Asset components subject to credit risk are
assigned risk factors based upon historic loss experience after taking into
consideration changes in business practice which may introduce more or less risk
into the portfolio. Capital is assigned to certain lines of business, such as
the Trust and Investment Group, which have no significant balance sheet
components, after taking into consideration operational risk, capital levels of
independent organizations operating similar businesses and regulatory minimum
requirements. Management accounting system enhancements or product line changes
may affect designations, assignments, and allocations from time to time. During
1994 certain methodologies were changed, and accordingly, results for 1993 have
been restated to conform to the current presentation basis.
RETAIL AND COMMUNITY BANKING - Retail and Community Banking, which includes
consumer, small business and middle market banking services, and residential
mortgage lending, achieved strong revenue growth while containing costs. Net
income increased 28.6 percent to $177.0 million in 1994, with a return on assets
of 1.15 percent compared with .88 percent in 1993. Return on equity increased to
14.9 percent from 12.7 percent for the previous year.
16 First Bank System, Inc. and Subsidiaries
- --
TABLE 2. Line of Business Financial Performance
Retail and Trust and
Community Payment Commercial Investment Consolidated
Banking Systems Banking Group Company
-----------------------------------------------------------------------------------------------------
(Dollars in Millions) 1994 1993 1994 1993 1994 1993 1994 1993 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
CONDENSED INCOME STATEMENT:
Net interest income
(taxable-equivalent basis) $ 780.5 $ 743.9 $184.7 $147.7 $218.5 $227.3 $ 26.2 $ 31.7 $1,209.9 $1,150.6
Provision for credit losses 20.6 42.8 69.4 61.9 3.0 20.5 - - 93.0 125.2
Noninterest income......... 187.1 179.1 195.7 157.2 59.5 60.3 185.7 173.0 628.0 569.6
Noninterest expense*....... 655.3 656.3 158.5 129.2 89.1 97.0 150.2 145.8 1,053.1 1,028.3
Income taxes and
taxable-equivalent
adjustment 114.7 86.3 59.9 44.0 73.1 65.6 24.3 22.8 272.0 218.7
-----------------------------------------------------------------------------------------------------
Income before
merger-related charges.... $ 177.0 $ 137.6 $ 92.6 $ 69.8 $112.8 $104.5 $ 37.4 $ 36.1 419.8 348.0
================================================================================
Merger-related charges
(after tax)............... - 50.0
---------------------
Net income............. $ 419.8 $ 298.0
=====================
AVERAGE BALANCE SHEET DATA:
Commercial loans........... $ 4,755 $ 4,172 $ 505 $ 255 $4,842 $4,902 $ - $ - $ 10,102 $ 9,329
Consumer loans............. 6,406 6,694 2,054 1,733 - - - - 8,460 8,427
Assets..................... 15,417 15,676 3,274 2,649 6,233 6,516 838 734 25,762 25,575
Deposits................... 15,905 16,720 26 16 2,299 2,692 912 919 19,142 20,347
Common equity 1,191 1,087 320 283 437 456 173 131 2,121 1,957
-----------------------------------------------------------------------------------------------------
Return on average assets* 1.15% .88% 2.83% 2.63% 1.81% 1.60% ** ** 1.63% 1.36%
Return on average common
equity*................... 14.9 12.7 28.9 24.7 25.8 22.9 21.6% 27.6% 19.3 16.4
Efficiency ratio*.......... 67.7 71.1 41.7 42.4 32.1 33.7 70.9 71.2 57.2 59.8
=====================================================================================================
*Excluding merger-related charges
**Not meaningful
Note: Preferred dividends are not allocated to the business lines.
Both revenue growth and cost savings contributed to the improved earnings. The
increases in net interest income and noninterest income are attributable to
strong home equity loan promotions, aggressive small- and middle-market business
lending, and growth in mutual fund sales. The decline in average consumer loans
reflects the run off of residential mortgage loans of $204 million and the
reduction in residential mortgages held for sale of $595 million. The decrease
in the provision for credit losses reflects improved credit quality. Noninterest
expense decreased slightly, despite the acquisition of Boulevard in the first
quarter of 1994. The efficiency ratio improved to 67.7 percent in 1994 from 71.1
percent in 1993.
PAYMENT SYSTEMS - Payment Systems, which includes consumer credit card,
corporate and purchasing card services, card-accessed secured and unsecured
lines of credit, ATM processing, and merchant processing, achieved net earnings
of $92.6 million in 1994, up 32.7 percent over 1993. Return on assets increased
to 2.83 percent from 2.63 percent in 1993. Return on equity increased to 28.9
percent from 24.7 percent for the previous year.
The strong growth in earnings is due to higher net interest income and
noninterest income, partially offset by increases in the provision for credit
losses and noninterest expense. The increases in net interest income and fee-
based noninterest income are attributable to growth in the Corporate Card, the
Purchasing Card, the Northwest Airlines WorldPerks credit card, and merchant
processing. The increase in the provision for credit losses reflects growth in
the loan portfolios and an acceleration of the timing of charge-offs for fraud
losses on credit card and other consumer loan balances. Noninterest expense
increased due to the overall growth in the sales volumes and number of products
offered by this business line. Payment Systems continues to be cost effective as
measured by its efficiency ratios of 41.7 percent in 1994 and 42.4 percent in
1993.
First Bank System, Inc. and Subsidiaries 17
--
COMMERCIAL BANKING - Commercial Banking, which provides lending, treasury
management, and other financial services to middle market, large corporate, and
mortgage banking companies, contributed net earnings of $112.8 million in 1994,
a 7.9 percent increase over 1993. Return on assets rose to 1.81 percent in 1994
from 1.60 percent in 1993. Similarly, return on equity increased to 25.8 percent
in 1994 from 22.9 percent in the previous year.
The earnings increase reflects continuing improvement in credit quality and
further reduction of noninterest expense. Commercial Banking's average loans,
excluding loans to mortgage banking companies, increased $319 million, or 9.0
percent from 1993. The efficiency ratio improved to 32.1 percent compared with
33.7 percent in 1993.
TRUST AND INVESTMENT GROUP - Net income for the Trust and Investment Group,
which includes personal, institutional and corporate trust services, investment
management services, and a full-service brokerage company, increased 3.6
percent to $37.4 million in 1994. The return on average equity declined to 21.6
percent in 1994 from 27.6 percent in 1993 due to additional equity assigned to
the business line for 1994 acquisitions.
Much of the gain resulted from stronger noninterest income, which increased
primarily due to growth in corporate trust, investment sales and management
fees. Assets under management totaled $24.5 billion at year-end 1994, up from
$21.6 billion at the previous year-end. Net interest income decreased,
reflecting a reduction in balances from mortgage custody accounts. The increase
in noninterest expense reflects costs associated with recent acquisitions;
however, the efficiency ratio improved to 70.9 percent in 1994 from 71.2 percent
in 1993.
Statement of Income Analysis
- ----------------------------
NET INTEREST INCOME - Net interest income on a taxable-equivalent basis was
$1.21 billion in 1994, compared with $1.15 billion in 1993 and $1.02 billion in
1992. The improvement in net interest income reflects increases in average loan
yields and average loan balances. The average yield on loans for 1994 was 8.19
percent, or 25 basis points higher than the average yield of 7.94 percent in
1993, reflecting the rising rate environment which increased rates on variable
rate loans. Average loans totaled $18.6 billion in 1994, an increase of $806
million, or 4.5 percent, from 1993, reflecting significant growth in both
consumer and commercial loans, partially offset by decreases in the balance of
loans to mortgage bankers and residential first mortgage loans. Excluding these
first mortgage-related balances, average loans for the year increased by $2.0
billion, or 15.7 percent from 1993, reflecting increases in credit cards, home
equity loans, and consumer lines of credit, as well as small business
and middle-market commercial loans, including loans acquired with Boulevard.
The average balance of interest-bearing liabilities in 1994 increased $574
million, or 3.6 percent, over 1993, as short-term borrowings replaced
noninterest-bearing deposits related to loans to mortgage bankers.
The improvement in net interest income from 1992 to 1993 reflects increases in
average earning assets of $1.7 billion, or 8.2 percent, and average noninterest-
bearing deposits of $1.6 billion, or 33.4 percent. The increases in earning
assets and noninterest-bearing deposits were largely a result of the Bank Shares
Incorporated ("BSI") acquisition, higher production in residential mortgage
banking and increases in secured loans to mortgage banking companies. The
decline in nonperforming assets also contributed to the growth in net interest
income in both years.
18 First Bank System, Inc. and Subsidiaries
- --
TABLE 3. Analysis of Net Interest Income
(Dollars in Millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
Net interest income (taxable-equivalent basis)....................... $1,209.9 $1,150.6 $1,017.8
===============================
Average balances of earning assets supported by:
Interest-bearing liabilities....................................... $ 16,688 $ 16,114 $ 15,997
Noninterest-bearing liabilities.................................... 6,213 6,581 4,986
-------------------------------
Total earning assets............................................. $ 22,901 $ 22,695 $ 20,983
===============================
Average yields and weighted average rates (taxable-equivalent basis):
Earning assets yield............................................... 7.69% 7.40% 8.12%
Rate paid on interest-bearing liabilities.......................... 3.31 3.28 4.29
--------------------------------
Gross interest margin................................................ 4.38% 4.12% 3.83%
================================
Net interest margin.................................................. 5.28% 5.07% 4.85%
================================
Net interest margin without taxable-equivalent increments............ 5.22% 4.99% 4.74%
================================
The net interest margin, on a taxable-equivalent basis, was 5.28 percent in
1994, an increase of 21 basis points from 5.07 percent in 1993 and 43 basis
points from 4.85 percent in 1992. The improvement in the net interest margin in
1994 over 1993 resulted from both a shift in the mix of loans and increases in
the reference rate on variable-rate loans. There was a decrease in lower-margin
mortgage-related loans and an increase in higher yield consumer and commercial
loans. The improvement from 1992 to 1993 is attributable to two factors having
approximately equal effects on the Company's ratios. The Company's balance sheet
mix changed, including a decrease in lower yielding short-term investments and a
shift in the loan portfolio mix toward consumer loans, as a result of the BSI
acquisition, and promotional campaigns for the Company's home equity product. In
addition, cyclical economic factors resulted in lower interest rates, increasing
the level of noninterest-bearing deposits and allowing for wider spreads between
prime rates and short-term funding costs.
TABLE 4. Changes in Rate and Volume
1994 COMPARED WITH 1993 1993 COMPARED WITH 1992
---------------------------------------------------------------------
(In Millions) Volume Yield/Rate Total Volume Yield/Rate Total
- --------------------------------------------------------------------------------------------------------------
Increase (decrease) in:
Interest income:
Loans........................... $ 65.2 $ 44.7 $109.9 $126.0 $(151.5) $ (25.5)
Taxable securities.............. (9.8) (4.6) (14.4) 59.5 (27.5) 32.0
Nontaxable securities........... (1.9) (1.1) (3.0) 3.2 (.3) 2.9
Federal funds sold and
resale agreements............. (12.5) 6.7 (5.8) (17.3) (5.5) (22.8)
Other........................... (2.7) (1.3) (4.0) (12.5) 1.4 (11.1)
---------------------------------------------------------------------
Total......................... 38.3 44.4 82.7 158.9 (183.4) (24.5)
Interest expense:
Savings deposits and time
deposits less than $100,000... (16.4) (22.6) (39.0) 9.2 (123.9) (114.7)
Time deposits over $100,000..... (14.5) 2.9 (11.6) (17.6) (12.7) (30.3)
Short-term borrowings........... 49.8 9.1 58.9 7.1 (7.7) (.6)
Long-term debt.................. 18.1 (3.0) 15.1 (1.0) (10.7) (11.7)
---------------------------------------------------------------------
Total......................... 37.0 (13.6) 23.4 (2.3) (155.0) (157.3)
---------------------------------------------------------------------
Increase (decrease) in net
interest income............... $ 1.3 $ 58.0 $ 59.3 $161.2 $ (28.4) $ 132.8
=====================================================================
This table shows the components of the change in net interest income by volume
and rate on a taxable-equivalent basis. The effect of changes in rates on volume
changes is allocated based on the percentage relationship of changes in volume
and changes in rate. This table does not take into account the level of
noninterest-bearing funding, nor does it fully reflect changes in the mix of
assets and liabilities.
First Bank System, Inc. and Subsidiaries 19
--
PROVISION FOR CREDIT LOSSES - The provision for credit losses was $93.0 million
in 1994, down $32.2 million from the provision of $125.2 million in 1993, and
$90.4 million from the provision of $183.4 million in 1992. Improved credit
quality caused the decrease in the provision. Nonperforming assets declined to
$153.0 million at December 31, 1994, from $226.0 million at December 31, 1993,
and $412.1 million at December 31, 1992. Net charge-offs declined to $104.6
million in 1994 from $150.0 million in 1993, and $203.1 million in 1992.
Included in the 1992 provision for credit losses is a merger-related provision
of $13.6 million related principally to the Company's valuation of WCIC's $70
million mobile home loan portfolio.
NONINTEREST INCOME - Noninterest income was $628.0 million in 1994, compared
with $569.6 million in 1993, an increase of $58.4 million, or 10.3 percent.
Noninterest income was $535.7 million in 1992. The increases in both 1994 and
1993 were primarily due to higher credit card and trust fees. Credit card and
trust fees increased $55.0 million, or 19.4 percent, from 1993. From 1992 to
1993, these fees increased by $38.5 million, or 15.7 percent.
Credit card fees were $179.0 million in 1994, up $41.9 million, or 30.6
percent, from $137.1 million in 1993. Credit card fees in 1993 were up $20.2
million, or 17.3 percent higher than 1992 credit card fees which totaled $116.9
million. Most of the 1994 increase in credit card fees is attributable to
increased volumes for the Company's payment systems products, including the
Corporate Card, the Purchasing Card, the Northwest Airlines WorldPerks credit
card, and merchant processing. Most of the 1993 increase is attributable to
increased volumes for the Corporate Card product.
Trust fees in 1994 were $159.2 million, up $13.1 million, or 9.0 percent, from
$146.1 million in 1993. Trust fees in 1994 reflect growth in corporate and
institutional trust fees, including income from the March acquisition of
Boulevard and the September acquisition of the domestic corporate trust business
of J.P. Morgan. Trust fees in 1993 increased $18.3 million, or 14.3 percent,
from $127.8 million in 1992. Trust fees for 1993 reflect growth from the BSI
acquisition and the corporate trust business units purchased from U.S. Bancorp
in March of 1993 and Bankers Trust Company of California in July of 1992. Trust
assets under management were $24.5 billion at December 31, 1994, compared with
$21.6 billion in 1993 and $19.1 billion in 1992.
Service charges on deposit accounts totaled $115.6 million in 1994, compared
with $115.3 million in 1993 and $108.4 million in 1992.
TABLE 5. Noninterest Income
(Dollars in Millions) 1994 1993 1992
- ------------------------------------------------------------------------------------
Credit card fees........................................ $179.0 $137.1 $116.9
Trust fees.............................................. 159.2 146.1 127.8
Services charges on deposit accounts.................... 115.6 115.3 108.4
Insurance commissions................................... 23.8 20.9 27.3
Trading account profits and commissions................. 9.3 10.1 10.5
Securities gains (losses)............................... (3.8) .3 1.9
Other................................................... 144.9 139.8 142.9
------------------------
Total noninterest income.............................. $628.0 $569.6 $535.7
========================
Insurance commissions were $23.8 million in 1994, compared with $20.9 million
in 1993, reflecting increased commission income on annuity sales. In 1992, the
Company decided to reduce its focus on traditional insurance products and
concentrate on other retail and community banking efforts in the regions,
including annuities. The Company sold its Montana insurance agencies in December
1992, and in the first quarter of 1993, the Company sold its Twin Cities Metro
insurance agency.
Trading account profits were $9.3 million in 1994, down slightly from $10.1
million in 1993 and $10.5 million in 1992. Sales of securities resulted in net
losses of $3.8 million in 1994, and sales of investment securities resulted in
net gains of $.3 million in 1993 and $1.9 million in 1992. Sales of available-
for-sale securities are effected to improve the overall return of the portfolio
through the reinvestment of the proceeds at higher rates.
20 First Bank System, Inc. and Subsidiaries
- --
Other noninterest income increased 3.6 percent to $144.9 million in 1994 from
$139.8 million in 1993. Included in 1993 were net charges of approximately $28
million related to the accelerated amortization of mortgage loan servicing
rights due to prepayments in the Company's mortgage servicing portfolio,
partially offset by $11 million in one-time gains from the sale of assets. Other
noninterest income totaled $142.9 million in 1992.
NONINTEREST EXPENSE - Noninterest expense was $1.05 billion, a decrease of $47.4
million, or 4.3 percent, from 1993. Included in 1993 noninterest expense are
merger and integration charges totaling $72.2 million relating to the CNB
acquisition. Noninterest expense in 1992 also included merger-related charges of
$110.4 million associated with the acquisition of WCIC and BSI. These accruals
were made to reflect the disposal of problem assets and to provide for other
merger-related costs.
Excluding the effects of the 1993 merger-related provisions, noninterest
expense for the year increased $24.8 million, or 2.4 percent. The modest
increase in expenses reflects the addition of the operations of Boulevard and
J.P. Morgan domestic corporate trust business, offset by the benefits realized
through integrating recent acquisitions. Compared with noninterest expense for
1993, adjusted to include the expenses of Boulevard and the acquired corporate
trust business on a pro forma basis and excluding merger-related charges,
noninterest expense for the year declined by $33.2 million, or 3.1 percent.
Excluding merger-related charges, noninterest expense in 1993 increased $24.4
million, or 2.4 percent, from $1.00 billion in 1992 due to the December 31,
1992, acquisition of BSI. Compared with noninterest expense for 1992, adjusted
to include the operations of BSI on a pro forma basis, and excluding merger-
related charges, noninterest expense for 1993 declined $76.7 million, or 6.9
percent. This decline reflects the successful integration of the CNB, WCIC and
BSI acquisitions in 1993.
TABLE 6. Noninterest Expense
(Dollars in Millions, Except Per Employee Data) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
Salaries......................................................... $ 395.7 $ 389.1 $ 388.7
Employee benefits................................................ 91.6 86.3 85.5
-------------------------------
Total personnel expense........................................ 487.3 475.4 474.2
Net occupancy.................................................... 86.3 93.4 87.9
Furniture and equipment.......................................... 78.3 72.7 67.2
FDIC insurance................................................... 46.0 46.4 42.2
Advertising...................................................... 29.7 20.5 20.0
Amortization of goodwill and other intangible assets............. 39.6 30.6 25.2
Other personnel costs............................................ 32.2 27.5 20.2
Professional services............................................ 33.8 36.7 38.7
Data processing.................................................. 13.9 21.3 22.4
Printing, stationery and supplies................................ 20.0 21.9 21.0
Postage.......................................................... 19.1 19.4 19.1
Telephone........................................................ 21.1 18.7 16.5
Other real estate (includes $26.4 merger-related charge in 1992). (2.9) 2.2 41.2
Merger and integration........................................... - 72.2 84.0
Other............................................................ 148.7 141.6 134.5
-------------------------------
Total noninterest expense...................................... $1,053.1 $1,100.5 $1,114.3
===============================
Efficiency ratio*................................................ 57.2% 64.0% 71.8%
Efficiency ratio, excluding merger-related charges............... 57.2 59.8 64.7
Average number of full-time equivalent employees**............... 11,997 12,300 12,553
Personnel expense per employee................................... $ 40,619 $ 38,650 $ 37,776
===============================
*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.
First Bank System, Inc. and Subsidiaries 21
--
The efficiency ratio improved to 57.2 percent in 1994 from 59.8 percent in
1993 and 64.7 percent in 1992, excluding merger-related charges. The Company's
efficiency ratio now ranks among the top five banks of its peer group. The keys
to the high productivity are the tight cost control culture throughout the
organization and the successful integration of acquisitions. Each acquisition
completed has been integrated at a progressively faster pace, enabling the
Company to realize substantial cost reductions.
Salaries and employee benefits expenses in 1994 were $487.3 million, up only
slightly from 1993's total of $475.4 million. Including the operations of
Boulevard and the corporate trust unit of J.P. Morgan on a pro forma basis in
1993, salaries and benefits expense in 1994 decreased $17.6 million, or 3.5
percent. In 1992, salaries and employee benefits expenses were $474.2 million.
Including BSI on a pro forma basis in 1992, salaries and benefits expense in
1993 decreased $36.3 million, or 7.1 percent.
Net occupancy expense totaled $86.3 million in 1994, a decrease of $7.1
million, or 7.6 percent, from 1993, reflecting efforts to improve productivity
in the Company's distribution network by subleasing excess office space.
Furniture and equipment expense increased $5.6 million, or 7.7 percent, from
1993. This increase included costs associated with acquisitions and recent
investments in communication and data processing technology.
FDIC insurance premiums remained relatively constant at $46.0 million in 1994,
compared with $46.4 million and $42.2 million in 1993 and 1992, respectively.
The increase in premiums of $4.2 million, or 10.0 percent, during 1993 resulted
from generally higher deposit levels, primarily related to BSI.
Advertising expense was $29.7 million in 1994, compared with $20.5 million in
1993 and $20.0 million in 1992, reflecting expanded marketing efforts in the
growing consumer asset businesses.
Amortization of goodwill and other intangible assets was $39.6 million in
1994, $30.6 million in 1993, and $25.2 million in 1992. The increases are
primarily attributable to the additional goodwill and intangible assets
resulting from the Boulevard and J.P. Morgan acquisitions in 1994 and the BSI
and the corporate trust unit acquisitions in 1993 and 1992.
Other personnel costs were $32.2 million in 1994, $27.5 million in 1993, and
$20.2 million in 1992. The increased use of temporary labor related to system
improvements and conversions caused the increases in both 1994 and 1993.
The Company recorded merger-related charges of $72.2 million relating to the
CNB acquisition in 1993. The charges relate to the closing of redundant
facilities and consolidation of operations and include $29.7 million in
conversion and required customer communications costs, $22.8 million in
severance, $14.3 million in premises and equipment write-downs, and $5.4 million
in other merger-related costs. Merger-related charges of $84.0 million relating
primarily to the acquisition of WCIC were recorded in 1992. The charges include
$31.2 million in premises and equipment write-downs, $12.6 million in securities
and interest rate swap write-downs, and $40.2 million in severance, system
conversions, and required customer communications costs.
INCOME TAX EXPENSE - The provision for income taxes was $256.9 million in 1994,
compared with $178.8 million in 1993 and $78.6 million in 1992. The increase is
primarily a result of the higher level of taxable income along with a continued
decline in tax-exempt interest income. The provision for 1993 reflects a one
percent increase in the corporate income tax rate, but the effect was partially
offset by the favorable impact of recording the related increase in deferred tax
assets.
At December 31, 1994, the Company's net deferred tax asset was $220.2 million,
net of valuation allowances of $14.0 million, compared with a net deferred tax
asset of $160.0 million, net of valuation allowances of $19.6 million, at
December 31, 1993. The acquisition of Boulevard caused most of the increase over
last year. In determining that realization of the deferred tax asset was more
likely than not, the Company gave consideration to a number of factors,
including its recent earnings history, its expectations for earnings in the
future and, where applicable, the expiration dates associated with tax
carryforwards. For further information on income taxes, refer to Note L on page
57.
Balance Sheet Analysis
- -----------------------
LOANS - On an aggregate basis, the Company's loan portfolio increased $502
million, or 2.7 percent, to $19.3 billion at year-end 1994 from $18.8 billion at
year-end 1993. An increase of $2.8 billion primarily in the commercial, credit
card, and home equity and second mortgage portfolios was offset by a $2.3
billion decrease in loans to mortgage bankers and residential mortgages.
22 First Bank System, Inc. and Subsidiaries
- --
TABLE 7. Loan Portfolio Distribution
1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------------------------
At December 31 (Dollars Percent Percent Percent Percent Percent
in Millions) Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
- ----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL:
Commercial.................... $ 7,196 37.3% $ 6,176 32.8% $ 5,675 33.3% $ 5,842 35.8% $ 6,898 41.0%
Financial institutions........ 787 4.1 2,004 10.7 1,132 6.6 1,001 6.1 568 3.4
Real estate:
Commercial mortgage.......... 1,822 9.4 1,495 8.0 1,539 9.0 1,445 8.8 1,438 8.5
Construction................. 327 1.7 231 1.2 234 1.4 295 1.8 358 2.1
HLTs.......................... 283 1.5 183 1.0 284 1.7 334 2.0 577 3.4
-------------------------------------------------------------------------------------------------
Total commercial............ 10,415 54.0 10,089 53.7 8,864 52.0 8,917 54.5 9,839 58.4
CONSUMER:
Residential mortgage.......... 2,273 11.8 2,422 12.9 2,568 15.0 2,006 12.3 1,967 11.7
Residential mortgage held for
sale......................... 162 .8 1,088 5.8 705 4.1 758 4.6 643 3.8
Home equity and second
mortgage..................... 2,199 11.4 1,755 9.3 1,362 8.0 992 6.1 884 5.3
Credit card................... 2,409 12.5 1,757 9.4 1,782 10.5 1,709 10.4 1,232 7.3
Revolving credit.............. 694 3.6 690 3.7 600 3.5 573 3.5 350 2.1
Automobile.................... 392 2.0 342 1.8 519 3.0 726 4.4 1,124 6.7
Installment................... 401 2.1 376 2.0 430 2.5 444 2.7 572 3.4
Student loans held for sale... 336 1.8 260 1.4 246 1.4 240 1.5 218 1.3
-------------------------------------------------------------------------------------------------
Total consumer.............. 8,866 46.0 8,690 46.3 8,212 48.0 7,448 45.5 6,990 41.6
-------------------------------------------------------------------------------------------------
Total loans................. $19,281 100.0% $18,779 100.0% $17,076 100.0% $16,365 100.0% $16,829 100.0%
=================================================================================================
COMMERCIAL: Commercial loans totaled $7.2 billion at year-end 1994, up $1.0
billion, or 16.5 percent, from year-end 1993. Year-end 1993 commercial loans
were $6.2 billion, up $.5 billion, or 8.8 percent from year-end 1992. The
increase in commercial loans includes growth of $583 million in small and middle
market business lending and $250 million in the Corporate Payment System which
issues Visa corporate, business and purchasing cards to businesses.
At December 31, 1994, the significant industry groups based on commercial
loans outstanding were consumer product manufacturers (29 percent), service
industries, including both business and consumer services (26 percent), and
wholesalers (20 percent). This mix is similar to those in 1993 and 1992.
The geographical distribution of the commercial portfolio is concentrated in
the Company's operating region, with approximately 80 percent of amounts
outstanding to borrowers located in Minnesota, Colorado, Wisconsin, Illinois,
Montana, North Dakota, and South Dakota.
FINANCIAL INSTITUTIONS: The portfolio of loans to financial institutions dropped
to $.8 billion at December 31, 1994, from $2.0 billion at December 31, 1993, and
$1.1 billion at December 31, 1992. The significant decrease from prior years is
attributable to the cyclical nature of the Company's secured loans to mortgage
banking firms. The mortgage banking firms' loan volume has decreased due to a
decline in refinancings related to a rise in market interest rates.
The financial institutions group provides financing to customer institutions
headquartered throughout the United States. Many of these institutions originate
residential mortgages on a national basis. The Company secures these loans
primarily with first liens on single family residences.
COMMERCIAL REAL ESTATE: The Company's portfolio of commercial real estate
mortgages and construction loans grew approximately $400 million to $2.1 billion
at December 31, 1994, compared with $1.7 billion at December 31, 1993, and $1.8
billion at December 31, 1992. The Company has seen increased activity in
commercial real estate loans as market prices stabilized and vacant space
declined, allowing more projects to meet the Company's high credit standards.
First Bank System, Inc. and Subsidiaries 23
--
Commercial mortgages outstanding were $1.8 billion at December 31, 1994,
compared with $1.5 billion at December 31, 1993. Real estate construction loans
outstanding at December 31, 1994, totaled $327 million, compared with $231
million from year-end 1993. The Company maintains the real estate construction
designation on a loan until the project is producing sufficient cash flow to
service traditional mortgage financing, at which time the loan is transferred to
the commercial mortgage portfolio. Approximately $23 million of construction
loans were transferred to the commercial mortgage portfolio in 1994.
The Company's commercial real estate mortgages and construction loans had
combined unfunded commitments of $355 million at December 31, 1994, and $206
million at December 31, 1993. At year-end 1994, real estate interests secured
$176 million of tax-exempt industrial development loans and commitments and $295
million of standby letters of credit. At year-end 1993, these exposures totaled
$218 million and $301 million, respectively. Table 8 shows the breakdown of
these real estate exposures by property type and geographic location.
TABLE 8. Commercial Real Estate Exposure by Property Type and Geography
Percentage of Total
at December 31
-------------------
PROPERTY TYPE 1994 1993
- ------------------------------------------------------------
Mixed-use office........................ 19.3% 18.0%
Retail.................................. 18.8 15.0
Office building......................... 17.2 14.6
Multi-family............................ 10.9 11.3
Hotel/motel............................. 5.8 6.0
Single-family residential............... 5.2 5.4
Land.................................... 2.3 2.5
Other, primarily owner-occupied......... 20.5 27.2
-------------------
100.0% 100.0%
-------------------
GEOGRAPHY
- ------------------------------------------------------------
Minnesota............................... 31.2% 32.5%
Colorado................................ 23.8 28.0
Montana, North Dakota and South Dakota.. 11.9 11.8
Wisconsin............................... 10.5 12.8
Illinois................................ 5.3 .4
-------------------
Total FBS region...................... 82.7 85.5
Other West.............................. 8.3 3.7
Southeast............................... 3.1 3.0
Other Southwest......................... 3.0 3.5
Other Midwest........................... 2.6 4.1
Mid-Atlantic............................ .3 .2
-------------------
100.0% 100.0%
-------------------
Other real estate totaled $39.9 million at December 31, 1994. These
properties are valued at estimated market value, and year-end 1994 book value
represents approximately 32 percent of the aggregate original investment. In-
substance foreclosures, which are included in the other real estate balance at
year-end 1994, are properties held as collateral over which the Company
possesses economic control due to the borrower's inability to repay the related
loan or rebuild equity in the property. The Company does not possess legal title
to these properties. The adoption of SFAS 114,
24 First Bank System, Inc. and Subsidiaries
- --
"Accounting by Creditors for Impairment of a Loan," effective January 1, 1995,
will require the reclassification of certain of the in-substance foreclosure
assets to nonperforming loans. These amounts are not material.
The Company also finances the operations of real estate developers and
other entities with operations related to real estate. These loans are not
secured directly by real estate and are subject to terms and conditions similar
to commercial loans. These loans are included in the commercial category and
totaled $342 million at December 31, 1994, and $286 million at December 31,
1993.
HIGHLY LEVERAGED TRANSACTIONS: The Company's exposure to commercial loans
involving the buyout, recapitalization or acquisition of an existing business,
called highly leveraged transactions ("HLTs"), remained at relatively low
levels. At December 31, 1994, the Company had HLT outstandings totaling $283
million and was committed under definitive loan agreements to lend an additional
amount of approximately $179 million. Total exposure was $233 million at
December 31, 1993, and $375 million at December 31, 1992. The increase in HLT
originations is consistent with industry and economic trends. The Company
continues to have stringent underwriting criteria and monitoring procedures for
its HLT lending.
CONSUMER: Consistent with the Company's strategy, growth in retail lending is of
continuing importance to the Company. Total consumer loan outstandings were $8.9
billion at December 31, 1994, up $176 million from $8.7 billion at year-end
1993. Excluding a $1.1 billion decrease in first mortgage residential loans and
residential mortgage loans held for sale, the other consumer loans increased
$1.3 billion, or 24.2 percent.
Home equity and second mortgages increased $444 million, or 25.3 percent,
primarily due to successful promotions. In addition, credit card loans,
including the new Northwest Airlines WorldPerks credit card, grew $652 million,
or 37.1 percent. Revolving credit loans remained relatively constant at $.7
billion at December 31, 1994, and 1993. During 1994, automobile loans increased
$50 million, or 14.6 percent, to $392 million and installment loans increased
$25 million, or 6.6 percent, to $401 million. At December 31, 1994, student
loans totaled $336 million, up $76 million from the prior year.
The rising interest rate environment in 1994 resulted in decreased activity
in the Company's residential mortgage loan portfolio. Residential mortgage
outstandings decreased $149 million, or 6.2 percent, to $2.3 billion, and
residential mortgages held for sale decreased $926 million, or 85.1 percent.
Loan production was approximately $1.6 billion in 1994, a 76.5 percent decrease
from 1993. Included in 1993 loan production was $3.1 billion related to
correspondent business and $2.0 billion more in refinance business than occurred
in 1994. The Company's decision to exit the correspondent business contributed
to approximately half of the 1994 loan production decline. The effect of this
decision on net income was not material. Table 7 on page 23 shows the breakdown
of the Company's consumer loan portfolio by type of loan.
Consumer lending is based primarily in the Company's operating region of
Minnesota, Colorado, Montana, North Dakota, South Dakota, Illinois, and
Wisconsin. Of total consumer balances outstanding, approximately 80 percent are
to customers located in the Company's operating region. See page 27 for a
discussion of the general economic conditions within the Company's operating
region.
ALLOWANCE FOR CREDIT LOSSES--At December 31, 1994, the allowance for credit
losses was $433.8 million, compared with an allowance of $423.2 million at year-
end 1993 and $448.0 million at year-end 1992. The ratio of the allowance for
credit losses to nonperforming loans increased to 385 percent at December 31,
1994, from 269 percent at December 31, 1993, and 179 percent at December 31,
1992. For further information on the allowance for credit losses, refer to
"Corporate Risk Profile," beginning on page 27.
SECURITIES--At December 31, 1994, the Company's available-for-sale securities
portfolio was $3.15 billion compared with $3.32 billion at December 31, 1993.
Securities sales and attrition more than offset the growth related to
acquisitions, including the $770 million portfolio acquired with the Boulevard
purchase. The relative mix of the securities portfolio has not changed
significantly from the prior years with U.S. Treasury and mortgage-backed
securities representing the majority of the portfolio.
First Bank System, Inc. and Subsidiaries 25
--
TABLE 9. Available-for-sale Securities Portfolio Average Maturity
At December 31, 1994 Average Maturity
- ---------------------------------------------------------------
U.S. Treasury............................. 3 years, 2 months
Other U.S. Agencies....................... 3 years, 0 months
State and Political....................... 14 years, 2 months
Other*.................................... 4 years, 7 months
Total.................................... 4 years, 5 months
====================
*Excludes equity securities which have no stated maturity.
The average effective life of the holdings is expected to be less than the
average contractual maturities shown in the table because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties. The table above does not reflect the average contractual maturity of
mortgage-backed securities.
TABLE 10. Available-for-sale Securities Portfolio Amortized Cost, Fair Value
and Yield by Maturity Date
MATURING: WITHIN 1 YEAR 1-5 YEARS 5-10 YEARS
- -----------------------------------------------------------------------------------------------------------------------------
Amor- Amor- Amor-
At December 31, 1994 tized Fair tized Fair tized Fair
(Dollars in Millions) Cost Value Yield Cost Value Yield Cost Value Yield
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury.............. $ 61.8 $ 61.5 5.06% $ 892.9 $ 863.0 6.24% $207.2 $173.8 5.22%
Mortgage-backed
securities*.............. - - - - - - - - -
Other U.S. Agencies........ 31.0 30.9 5.27 117.4 111.0 5.55 41.8 38.6 6.86
State and Political***..... 3.1 3.1 7.86 20.1 20.2 9.79 39.2 39.1 9.02
Other...................... 13.6 13.5 5.89 83.7 82.5 7.67 39.9 38.8 6.18
--------------------------------------------------------------------------------------------------
$109.5 $109.0 5.30% $1,114.1 $1,076.7 6.34% $328.1 $290.3 6.00%
==================================================================================================
MORTGAGE-BACKED
MATURING: OVER 10 YEARS SECURITIES TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
Amor- Amor- Amor-
At December 31, 1994 tized Fair tized Fair tized Fair
(Dollars in Millions) Cost Value Yield Cost Value Yield Cost Value Yield
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury.............. $ - $ - -% $ - $ - -% $1,161.9 $1,098.3 6.00%
Mortgage-backed
securities*.............. - - - 1,497.4 1,414.3 6.47 1,497.4 1,414.3 6.47
Other U.S. Agencies........ .6 .6 9.51 - - - 190.8 181.1 5.81
State and Political***..... 112.8 116.0 11.35 - - - 175.2 178.4 10.59
Other...................... 137.6 141.4 6.86** - - - 274.8 276.2 7.04**
--------------------------------------------------------------------------------------------------
$251.0 $258.0 10.81%** $1,497.4 $1,414.3 6.47% $3,300.1 $3,148.3 6.51%**
==================================================================================================
*Adjustable rate mortgage securities (ARMs) represent 46% of the balance of
mortgage-backed securities.
**Excludes equity securities which have no stated yield.
***Yields on state and political obligations that are not subject to federal
income tax have been adjusted to taxable-equivalent using a 35% tax rate.
Trading account assets are purchased for resale to customers. Trading account
assets consist primarily of securities of the U.S. Treasury and its agencies,
state and political subdivisions, and short-term obligations of banks. Other
earning assets consist of federal funds sold, reverse repurchase agreements,
deposits with banks, and equity securities that do not have readily determinable
fair values. Trading account and other earning assets averaged $.6 billion in
1994 compared with $1.0 billion in 1993.
DEPOSITS - Noninterest-bearing deposits averaged $6.1 billion in 1994, down $359
million from the 1993 average of $6.4 billion. The decrease in noninterest-
bearing deposits resulted from reduced loan production at mortgage banking firms
that generate noninterest-bearing deposits.
Average interest-bearing deposits include certificates of deposit, savings
certificates, and money market and interest checking products. These deposits
averaged $13.1 billion in 1994 compared with $13.9 billion in 1993. The
relatively low market interest rate environment throughout 1994 caused deposits
to decline.
SHORT-TERM BORROWINGS - Short-term borrowings, which include federal funds
purchased, securities sold under agreements to repurchase and other short-term
borrowings, averaged $2.4 billion in 1994, or $1.1 billion more than in the
prior year. These borrowings were obtained at competitive rates during 1994 and
replaced the lower level of deposits in 1994.
LONG-TERM DEBT - Intermediate- and long-term debt averaged $1.2 billion in 1994,
up from $913 million in 1993. In October 1994, First Bank National Association
("FBNA"), the Company's lead bank, completed a $100 million subordinated debt
issuance in the form of 10-year noncallable notes. The notes were priced at 8.35
percent, or 70 basis points over the 10-year Treasury note. In June 1994, the
Company placed $100 million in subordinated debt in the form of 10-year
noncallable notes. The notes
26 First Bank System, Inc. and Subsidiaries
- --
were priced at 7.55 percent, or 64 basis points over the 10-year Treasury note.
During 1993, the Company placed three $100 million subordinated debt issuances.
Medium-term notes outstanding totaled $514 million at December 31, 1994,
compared with $248 million at December 31, 1993. During 1994, the Company issued
$355 million of medium-term notes with maturities of one to three years and $50
million of notes with maturities of less than one year. Maturities and
retirement of medium-term notes during 1994 totaled $139 million.
Corporate Risk Profile
- ----------------------
OVERALL RISK PROFILE - Managing risk is an essential part of the operation of a
financial services institution. The most prominent risk exposures are credit
quality, interest rate sensitivity and liquidity risk. Credit quality risk
involves the risk of either not collecting interest when it is due or not
receiving the principal balance of the loan or investment when it matures or
otherwise is due. Interest rate sensitivity risk is the risk of reduced net
interest income because of differences in the repricing characteristics of
assets and liabilities, as well as the change in the market value of assets and
liabilities as interest rates fluctuate. Liquidity risk is the risk that the
Company will not be able to fund its obligations and is largely a function of
how effectively the Company manages its other risks.
CREDIT MANAGEMENT - The Company continued to maintain its high level of credit
quality in 1994. Nonperforming assets declined for the fifth consecutive year
during 1994, reflecting the Company's disciplined credit culture characterized
by individual lender accountability and prudent credit policies, the reduced
risk profile of the loan portfolio, and improved economic conditions in the
Company's lending region. The ratio of nonperforming assets to loans plus other
real estate declined to .79 percent at year-end 1994 from 1.20 percent at year-
end 1993 and 2.39 percent at year-end 1992. The risk reduction in the portfolio
is a result of the Company's focus on middle market lending in its region and a
shift toward more consumer lending. Consistent with the Company's strategy, the
acquisitions made during the past three years have enhanced middle market and
consumer loan portfolios. The ratio of the allowance for credit losses to
nonperforming loans increased to 385 percent indicating strong reserve coverage.
This coverage ratio was 269 percent at year-end 1993 and 179 percent at year-end
1992.
In evaluating credit risk, the Company takes into consideration the
composition of its loan portfolio, its level of allowance coverage,
macroeconomic concerns such as the level of debt outstanding in the public and
private sectors, the effects of domestic and international economic conditions,
regional economic conditions, and other issues.
The Company's credit management process includes central credit policy and
administration functions and standard underwriting criteria for specialized
lending categories, such as mortgage banking, real estate construction, and
consumer credit. Regular credit examinations conducted by the credit
administration function support the Company's credit management process.
Quarterly, management reviews large loans and all loans experiencing
deterioration of credit quality. A standard credit scoring system is used to
assess consumer credit risks and to price consumer products relative to their
assigned risk rating.
The Company operates principally in Minnesota, Colorado, Illinois, Montana,
Wisconsin, North Dakota, and South Dakota. Most economic indicators in the
Company's operating regions compare favorably with national indicators.
Approximately 60 percent of the Company's loan portfolio consists of extensions
of credit to companies and consumers in Minnesota and Colorado. According to
federal and state government agencies, unemployment rates in Minnesota and
Colorado were 3.5 percent and 3.3 percent, respectively, compared to the
national unemployment rate of 5.1 percent at December 31, 1994. Through
September 30, 1994, the national foreclosure rate was .92 percent, compared with
.58 percent in Minnesota and .36 percent in Colorado.
The Company engages in various non-lending activities which may give rise to
credit risk, including interest rate swap contracts, foreign exchange
transactions for the benefit of customers, and the processing of credit card
transactions for merchants' activities. These activities are subject to the same
credit review, analysis and approval processes as those applied to commercial
loans. For additional information on the Company's interest rate swap positions
see "Interest Rate Risk Management" on page 31.
First Bank System, Inc. and Subsidiaries 27
--
TABLE 11. Summary of Allowance for Credit Losses
(Dollars in Millions) 1994 1993 1992 1991 1990
- --------------------------------------------------------------------------------------------
Balance at beginning of period..................... $423.2 $448.0 $426.9 $454.0 $480.0
CHARGE-OFFS
Commercial:
Commercial..................................... 53.3 45.5 58.8 93.3 96.8
Financial institutions......................... 1.1 6.5 -- 2.0 3.0
Real estate:
Commercial mortgage.......................... 16.0 55.5 45.6 72.0 66.3
Construction................................. .2 .4 6.1 6.3 32.0
HLTs........................................... 3.8 8.0 27.0 11.5 15.9
---------------------------------------
Total commercial........................... 74.4 115.9 137.5 185.1 214.0
Consumer:
Residential mortgage........................... 3.0 1.9 5.1 5.1 6.9
Credit card.................................... 78.5 71.6 85.5 68.4 43.7
Other.......................................... 31.9 35.6 45.6 47.1 37.2
---------------------------------------
Total consumer............................. 113.4 109.1 136.2 120.6 87.8
---------------------------------------
Total...................................... 187.8 225.0 273.7 305.7 301.8
RECOVERIES:
Commercial:
Commercial..................................... 36.4 31.0 37.1 27.6 30.4
Financial institutions......................... .4 7.0 -- -- .7
Real estate:
Commercial mortgage.......................... 17.5 10.3 5.9 11.7 4.2
Construction................................. .9 1.3 1.9 1.2 4.7
HLTs........................................... 6.4 2.4 3.0 5.3 3.1
---------------------------------------
Total commercial........................... 61.6 52.0 47.9 45.8 43.1
Consumer:
Residential mortgage........................... .9 1.4 2.1 1.6 2.0
Credit card.................................... 9.1 9.7 8.0 6.0 4.3
Other.......................................... 11.6 11.9 12.6 10.0 10.5
---------------------------------------
Total consumer............................. 21.6 23.0 22.7 17.6 16.8
---------------------------------------
Total...................................... 83.2 75.0 70.6 63.4 59.9
NET CHARGE-OFFS
Commercial:
Commercial..................................... 16.9 14.5 21.7 65.7 66.4
Financial institutions......................... .7 (.5) -- 2.0 2.3
Real estate:
Commercial mortgage.......................... (1.5) 45.2 39.7 60.3 62.1
Construction................................. (.7) (.9) 4.2 5.1 27.3
HLTs........................................... (2.6) 5.6 24.0 6.2 12.8
---------------------------------------
Total commercial........................... 12.8 63.9 89.6 139.3 170.9
Consumer:
Residential mortgage........................... 2.1 .5 3.0 3.5 4.9
Credit card.................................... 69.4 61.9 77.5 62.4 39.4
Other.......................................... 20.3 23.7 33.0 37.1 26.7
---------------------------------------
Total consumer............................. 91.8 86.1 113.5 103.0 71.0
---------------------------------------
Total...................................... 104.6 150.0 203.1 242.3 241.9
Provision charged to operating expense............. 93.0 125.2 183.4 202.2 215.4
Additions related to acquisitions.................. 22.2 -- 40.8 13.0 .5
---------------------------------------
Balance at end of period........................... $433.8 $423.2 $448.0 $426.9 $454.0
---------------------------------------
Allowance as a percentage of period-end loans...... 2.25% 2.25% 2.62% 2.61% 2.70%
Allowance as a percentage of nonperforming loans... 385 269 179 142 104
Allowance as a percentage of nonperforming assets.. 284 187 109 78 68
---------------------------------------
28 First Bank System, Inc. and Subsidiaries
- --
ANALYSIS AND ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES--The allowance for
credit losses provides for credit losses inherent in the Company's loan
portfolio and related off-balance sheet commitments. The provision for credit
losses increases and net charge-offs decrease the allowance. Management has
determined that the allowance for credit losses is adequate based on a
continuing evaluation of the loan portfolio and off-balance sheet commitments,
economic conditions and expectations, historical experience and the risk
evaluation of individual credits. Although the recent trend of slow steady
economic growth may contribute to the continued improvement in the credit
portfolio, any stagnation or reversals in the economy could cause an increase in
the required level of the allowance for credit losses.
Management reviews the adequacy of the allowance each quarter based on the
status of problem loans and related off-balance sheet commitments, recent loss
experience and other pertinent factors, including current and anticipated
economic conditions. As a result of these assessments, management determines
whether an additional allowance above specified allocations should be provided
for the inherent loss in loans concentrated in certain industries.
Management allocates components of the allowance to certain industry sectors
based on its assessment of the relative risk characteristics of the loan
portfolio. Table 12 shows the allocation of the allowance for credit losses by
loan category. Commercial allocations are based on a quarterly review of
individual loans outstanding and binding commitments to lend, including standby
letters of credit. Consumer allocations are based on an analysis of historical
and expected delinquency and charge-off statistics.
At December 31, 1994, the allowance for credit losses was $433.8 million, or
2.25 percent of loans. This compares with an allowance of $423.2 million, or
2.25 percent of loans, at year-end 1993 and $448.0 million, or 2.62 percent of
loans, at December 31, 1992. The allowance increased to 385 percent of
nonperforming loans at December 31, 1994, compared with 269 percent at December
31, 1993, and 179 percent at December 31, 1992.
The unallocated allowance increased to $268.1 million at year-end 1994 from
$254.9 million and $202.7 million at December 31, 1993, and 1992, respectively.
Generally, the increase in the unallocated allowance reflects the trend of
improving credit quality in the portfolio and the lower level of charge-offs.
Although the allocation of the allowance is an important tool in credit
management, the entire allowance for credit losses is available for the entire
loan portfolio.
TABLE 12. Allocation of Allowance for Credit Losses
Allocation Amount at December 31 Allocation as a Percent of Loans Outstanding
------------------------------------------------------------------------------------------------------
(Dollars in Millions) 1994 1993 1992 1991 1990 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL:
Commercial and financial
institutions............ $ 74.4 $ 70.8 $ 83.7 $102.6 $133.9 .93% .87% 1.23% 1.50% 1.79%
Real estate:
Commercial mortgage.... 18.7 36.8 52.8 77.2 127.5 1.03 2.46 3.43 5.34 8.87
Construction........... 1.9 1.0 7.3 5.3 3.6 .58 .43 3.12 1.80 1.01
HLTs..................... 4.3 9.0 21.8 23.1 31.5 1.52 4.92 7.68 6.92 5.46
------------------------------------------------------------------------------------------------------
Total commercial....... 99.3 117.6 165.6 208.2 296.5 .95 1.17 1.87 2.33 3.01
CONSUMER:
Residential mortgage..... 8.9 11.9 13.0 13.9 12.1 .37 .34 .40 .50 .46
Credit card.............. 32.5 22.0 38.9 39.7 31.0 1.35 1.25 2.18 2.32 2.52
Other.................... 25.0 16.8 27.8 15.0 24.1 .62 .49 .88 .50 .77
------------------------------------------------------------------------------------------------------
Total consumer......... 66.4 50.7 79.7 68.6 67.2 .75 .58 .97 .92 .96
------------------------------------------------------------------------------------------------------
Total allocated.......... 165.7 168.3 245.3 276.8 363.7 .86 .90 1.44 1.69 2.16
Unallocated portion...... 268.1 254.9 202.7 150.1 90.3 1.39 1.35 1.18 .92 .54
------------------------------------------------------------------------------------------------------
Total allowance........ $433.8 $423.2 $448.0 $426.9 $454.0 2.25% 2.25% 2.62% 2.61% 2.70%
First Bank System, Inc. and Subsidiaries 29
--
ANALYSIS OF NET LOAN CHARGE-OFFS - As shown in Table 11 on page 28, net loan
charge-offs decreased $45.4 million to $104.6 million from the $150.0 million
reported in 1993 primarily due to decreases in commercial mortgage net charge-
offs. Consumer loan net charge-offs in 1994 were $5.7 million higher than in
1993, reflecting an acceleration of the timing of charge-offs for fraud losses
on credit card and other consumer loan balances. Net charge-offs were $203.1
million in 1992. Table 13 shows net charge-offs as a percentage of average loans
outstanding by industry.
TABLE 13. Net Charge-offs as a Percentage of Average Loans Outstanding by
Industry
1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------
COMMERCIAL:
Commercial................................ .20% .33% .78% 1.06% .95%
Financial institutions.................... .06 (.03) - .28 .41
Real Estate:
Commercial mortgage...................... (.09) 2.99 2.64 4.34 4.84
Construction............................. (.27) (.43) 1.63 1.55 5.87
-----------------------------------------------------------
Total commercial......................... .13 .68 1.03 1.51 1.60
CONSUMER:
Residential mortgage...................... .08 .01 .11 .13 .13
Credit card............................... 3.38 3.57 4.53 4.17 3.61
Other..................................... .55 .74 1.11 1.26 1.01
-----------------------------------------------------------
Total consumer........................... 1.09 1.02 1.51 1.44 .96
-----------------------------------------------------------
Total.................................... .56% .84% 1.25% 1.48% 1.34%
===========================================================
ANALYSIS OF NONPERFORMING ASSETS - Nonperforming assets include all nonaccrual
loans, restructured loans, other real estate and other nonperforming assets
owned by the Company. At December 31, 1994, nonperforming assets totaled $153.0
million, a decrease of $73.0 million, or 32.3 percent, from year-end 1993. The
ratio of nonperforming assets to loans plus other real estate improved to .79
percent at December 31, 1994, compared with 1.20 percent at year-end 1993 and
2.39 percent at year-end 1992. The most significant reductions in nonperforming
assets occurred in commercial, HLT, and residential mortgage nonperforming loans
and other real estate. Commercial nonperforming loans declined $16.1 million, or
38.2 percent, HLT nonperforming loans declined $10.2 million, or 50.7 percent,
residential mortgage nonperforming loans declined $13.6 million, or 30.4
percent, and other real estate declined $27.5 million, or 40.8 percent.
At December 31, 1993, nonperforming assets were $226.0 million, down $186.1
million, or 45.2 percent, from year-end 1992. The most significant reduction
occurred in other real estate, which declined $90.8 million, or 57.4 percent,
primarily due to sales of properties. The decrease in HLT nonperforming loans
was related to one credit totaling $37.5 million which was paid in 1993.
Residential mortgage nonperforming loans increased to $44.8 million at December
31, 1993, from $20.5 million at December 31, 1992, due to the purchase of $24.0
million of delinquent residential mortgages in connection with a sale of
mortgage loan servicing rights. Government-sponsored mortgage insurance supports
these loans, and the Company does not anticipate any significant losses related
to these loans.
Interest payments are currently received on approximately 20 percent of the
Company's nonperforming assets. The payments are typically applied against
principal and not recorded as income.
30 First Bank System, Inc. and Subsidiaries
- --
TABLE 14. Nonperforming Assets
At December 31
-----------------------------------------
(Dollars in Millions) 1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------
Nonaccrual loans........................... $112.6 $157.6 $246.7 $284.8 $412.1
Restructured loans......................... .1 - 3.5 16.7 25.7
------------------------------------------
Nonperforming loans....................... 112.7 157.6 250.2 301.5 437.8
Other real estate.......................... 39.9 67.4 158.2 229.9 207.1
Other nonperforming assets................. .4 1.0 3.7 18.3 20.3
------------------------------------------
Nonperforming assets...................... $153.0 $226.0 $412.1 $549.7 $665.2
------------------------------------------
Accruing loans 90 days or more past due.... $ 26.0 $ 31.2 $ 30.2 $ 43.4 $ 33.0
Nonperforming loans to total loans......... .59% .84% 1.47% 1.84% 2.60%
Nonperforming assets to total loans
plus other real estate.................... .79 1.20 2.39 3.31 3.90
Net interest lost on nonperforming loans... $ 7.6 $ 10.2 $ 13.8 $ 22.3 $ 31.1
------------------------------------------
Accruing loans 90 days or more past due at December 31, 1994, totaled $26.0
million, compared with $31.2 million at December 31, 1993, and $30.2 million at
December 31, 1992. Consumer loans 30 days or more past due were 1.8 percent of
the total consumer portfolio at December 31, 1994, compared with 2.1 percent at
December 31, 1993. Consumer loans 90 days or more past due at December 31, 1994,
totaled .7 percent of the total consumer loan portfolio, compared to 1.0 percent
at December 31, 1993. The decreases were primarily due to the improvement in
delinquent residential mortgages purchased in 1993 in connection with a sale of
mortgage loan servicing rights. Government-sponsored mortgage insurance supports
all of these loans.
TABLE 15. Nonperforming Assets by Industry
1994 Compared
At December 31 with 1993
-------------------------------------------
(Dollars in Millions) 1994 1993 Amount Percent
- -----------------------------------------------------------------------------
COMMERCIAL:
Commercial.................... $ 26.1 $ 42.2 $(16.1) (38.2)%
Financial institutions........ - .9 (.9) (100.0)
Real estate:
Commercial mortgage......... 33.6 36.9 (3.3) (8.9)
Construction................ 1.6 2.2 (.6) (27.3)
HLTs.......................... 9.9 20.1 (10.2) (50.7)
------------------- -------
Total commercial............ 71.2 102.3 (31.1) (30.4)
CONSUMER:
Residential mortgage.......... 31.2 44.8 (13.6) (30.4)
Credit card................... 9.9 10.3 (.4) (3.9)
Other......................... .4 .2 .2 100.0
------------------- -------
Total consumer.............. 41.5 55.3 (13.8) (25.0)
------------------- -------
Total nonperforming loans... 112.7 157.6 (44.9) (28.5)
OTHER REAL ESTATE............... 39.9 67.4 (27.5) (40.8)
OTHER NONPERFORMING ASSETS...... .4 1.0 (.6) (60.0)
------------------- -------
Total nonperforming assets.. $153.0 $226.0 $(73.0) (32.3)%
------------------- ------- -------
INTEREST RATE RISK MANAGEMENT - The Company's principal objective for interest
rate risk management is to control exposure of net interest income to risks
associated with interest rate movements. The Company uses derivative financial
instruments ("derivatives") to hedge on-balance sheet items and, to a lesser
extent, in connection with intermediated transactions for customers. The market
risk on intermediated transactions is limited by entering into generally
matching or offsetting positions. The Company does
First Bank System, Inc. and Subsidiaries 31
--
not enter into derivative contracts for speculative purposes.
Interest rate risk is measured and reported to the Company's Asset and
Liability Management Committee ("ALCO") through the use of traditional gap
analysis which measures the difference between assets and liabilities that
reprice in a given time period, simulation modeling which produces projections
of net interest income under various interest rate scenarios and balance sheet
strategies, and valuation modeling which measures the sensitivity of various
components of the balance sheet under various interest rate scenarios. The
significant assumptions include rate sensitivities, prepayment risks, and the
timing of changes in prime and deposit rates compared with changes in money
market rates.
Table 16 shows the Company's interest rate repricing gap position at several
repricing maturities. As of December 31, 1994, the Company had a cumulative
positive repricing gap position at one year of $869 million, indicating that
more assets than liabilities reprice within that period. This analysis is useful
as a point-in-time measurement of interest rate risk. However, the gap analysis
is unable to capture prepayment risk, the changing relationships between asset
rates and liability rates of similar maturity (basis risk), option risk
represented by interest rate caps and floors, and timing differences in
adjusting the interest rates of certain assets and liabilities that have varying
sensitivities to market interest rates. As a result, management places a greater
reliance on simulation and valuation modeling to measure and manage interest
rate risk.
It is the Company's policy to maintain a low interest rate risk position by
limiting the amount of forecasted net interest income at risk over a 12-month
period assuming an immediate and sustained 100 basis point change in interest
rates. Forecasted results are sensitive to many assumptions, including estimates
of the timing of changes in rates which are determined by reference to market
indices, such as prime or LIBOR, relative to each other and relative to rates
which are determined by the Company subject to competitive factors. The Company
assumes that the timing of the changes in these rates will follow historic
patterns, adjusted as necessary for current competitive factors and market
conditions.
TABLE 16. Interest Rate Sensitivity Gap Analysis
REPRICING MATURITIES
-------------------------------------------------------------------------
Less Than 3-6 6-12 1-5 More Than Non-Rate
At December 31, 1994 (In Millions) 3 Months Months Months Years 5 Years Sensitive Total
- ---------------------------------------------------------------------------------------------------------------------------------
Assets:
Loans................................................... $11,125 $ 800 $1,457 $3,662 $2,121 $ 116 $19,281
Available-for-sale securities........................... 654 190 202 1,470 773 (141) 3,148
Other earning assets.................................... 548 - - - - - 548
Nonearning assets....................................... 217 - - 270 1,397 1,358 3,242
-----------------------------------------------------------------------
Total assets........................................... $12,544 $ 990 $1,659 $5,402 $4,291 $ 1,333 $26,219
=======================================================================
Liabilities and Equity:
Deposits................................................ $ 6,576 $ 802 $1,156 $6,169 $4,052 $ 36 $18,791
Other purchased funds................................... 2,798 - - 4 20 - 2,822
Long-term debt.......................................... 749 1 - 21 712 - 1,483
Other liabilities....................................... 28 - - - - 820 848
Equity.................................................. - - - - - 2,275 2,275
-----------------------------------------------------------------------
Total liabilities and equity........................... $10,151 $ 803 $1,156 $6,194 $4,784 $ 3,131 $26,219
=======================================================================
Effect of off-balance sheet hedging instruments:
Receiving fixed......................................... $ 115 $ 130 $ 215 $1,489 $ 725 $ - $ 2,674
Paying floating......................................... (2,499) (25) (150) - - - (2,674)
-----------------------------------------------------------------------
Total effect of off-balance sheet hedging instruments.. $(2,384) $ 105 $ 65 $1,489 $ 725 $ - $ -
=======================================================================
Repricing gap............................................ $ 9 $ 292 $ 568 $ 697 $ 232 $(1,798) $ -
Cumulative repricing gap................................. 9 301 869 1,566 1,798 -
=======================================================================
This table estimates the repricing maturities of the Company's assets,
liabilities and hedging instruments based upon the Company's assessment of the
repricing characteristics of contractual and non-contractual instruments. Non-
contractual deposit liabilities are allocated among the various maturity
categories as follows: approximately fifty percent of regular savings, interest-
bearing checking, and money market checking balances and sixty-eight percent of
money market savings balances are reflected in the Less Than 3 Months category,
with the remainder placed in the 1-5 Years category. Approximately seventy-three
percent of demand deposits and related nonearning asset accounts is allocated in
the More Than 5 Years category, fifteen percent is allocated in the 1-5 Years
category with the remaining allocated in the Less Than 3 Months category.
32 First Bank System, Inc. and Subsidiaries
- --
The Company invests in fixed rate assets or receives the fixed rate on interest
rate swaps as a hedge to maintain acceptable rate risk levels. The derivatives
the Company uses to achieve its hedging objectives are primarily interest rate
swaps, caps, and floors. Interest rate swap agreements involve the exchange of
fixed and floating rate interest payments without the exchange of the underlying
notional amount on which the interest payments are calculated. As of December
31, 1994, the Company receives payments on $2.7 billion notional amount of
interest rate swap agreements, based on fixed interest rates, and makes payments
based on variable interest rates. These swaps have an average fixed rate of 6.91
percent and an average variable rate, which is tied to various LIBOR rates, of
6.09 percent. The maturity of these agreements ranges from one month to 10 years
with an average remaining maturity of 4.0 years.
TABLE 17. Interest Rate Swap Hedging Portfolio Notional Balances and Yields by
Maturity Date
At December 31, 1994 (Dollars in Millions)
- ---------------------------------------------------------------------------
Weighted Weighted
Average Average
Receive Fixed Swaps* Notional Interest Rate Interest Rate
Maturity Date Amount Received Paid
- ---------------------------------------------------------------------------
1995............................ $ 460 7.36% 6.17%
1996............................ 433 7.96 6.17
1997............................ 250 6.36 5.95
1998............................ 356 5.77 6.06
1999............................ 550 6.83 6.20
After 1999**.................... 625 6.80 5.94
------
Total........................... $2,674 6.91% 6.09%
======================================
*At December 31, 1994, the Company did not have any swaps in its portfolio which
required it to pay fixed-rate interest.
**At December 31, 1994, all swaps with a maturity after 1999 hedge fixed rate
subordinated notes.
Swaps contributed to the Company's net interest margin by reducing interest
expense for the years ended December 31, 1994, 1993, and 1992, by $63.6 million,
$88.8 million, and $80.6 million, respectively.
The Company also uses interest rate caps and floors to minimize the impact of
fluctuating interest rates on earnings. Interest rate floor counterparties will
pay the Company the difference between a certain short-term rate and the strike
level of the agreement should the short-term rate fall below the strike level.
The total notional amount of floor agreements purchased as of December 31, 1994,
was $950 million with an average strike level of 3-month LIBOR at 3.50 percent
and an average remaining maturity of 3.0 years. The impact of floors on net
interest income was not material for the year ended December 31, 1994. Note M on
page 59 has further information on interest rate swaps and options.
Forward contracts, totaling $196 million at December 31, 1994, hedge the
interest rate risk of the fixed rate mortgage loans originated and held for sale
by the Company's mortgage subsidiary. The Company enters into foreign currency
commitments primarily as an intermediary for customers. Derivative contracts
which are not hedges are primarily customer-driven. The Company limits its
exposure to market risk on these contracts by entering into generally matching
or offsetting positions. The Company also manages its credit risk on all
derivative contracts through counterparty and credit limit approvals and
monitoring credit concentration risks.
Another objective of the interest rate risk measurement and management process
is to quantify the sensitivity of the market value of the Corporation's balance
sheet components to changes in interest rates. SFAS 107, "Disclosures about Fair
Value of Financial Instruments," requires the disclosure of the fair value of
all financial instruments for which it is practicable to estimate that value.
The general definition of financial instruments is cash, equity instruments or
investments and contractual obligations to pay or receive cash or other
financial instruments. The Statement indicates quoted market prices are the
preferred means of estimating the fair value of a specific instrument, but in
the cases where market quotes are not available, various valuation techniques,
such as discounted cash flow
First Bank System, Inc. and Subsidiaries 33
--
calculations, or pricing models or services, should be used to determine fair
values. Due to the nature of its business and the financing needs of its
customers, the Company uses a large number of financial instruments, the
majority of which are not actively traded. Accordingly, the Company uses various
valuation techniques to estimate the fair value of its financial instruments.
For further information on fair values of financial instruments refer to Note N
on page 61.
LIQUIDITY MANAGEMENT -- The objective of liquidity management is to
ensure the continuous availability of funds to meet the demands of depositors,
investors and borrowers. ALCO is responsible for managing these needs while
achieving the Company's financial objectives. ALCO meets regularly to review
funding capacity, current and forecasted loan demand and investment
opportunities. With this information, ALCO supervises the funding needs and
excess funding positions, as well as the maintenance of contingent funding
sources, to achieve a balance sheet structure that provides sufficient
liquidity.
Several rating agencies recognized the sustained improvement in the Company's
credit quality, liquidity, capital and earnings. As of December 31, 1994,
Moody's Investors Service, Standard & Poors, and Thomson BankWatch rated the
Company's senior debt as "A2," "A," and "A+," respectively. The strong debt
ratings allowed the Company to obtain negotiated funding, which includes term
certificates of deposit, foreign branch time deposits, national federal funds
purchased, bank notes, and medium-term notes, at competitive rates. Negotiated
funding increased to $3.1 billion at year-end 1994, compared with $.7 billion at
year-end 1993 and $.8 billion at year-end 1992. Although negotiated funding has
increased, the Company continues to focus its funding opportunities primarily on
deposits within its operating region. Approximately 82 percent of the Company's
funding comes from retail deposits within its operating region. The Company's
purchased funds index, calculated as negotiated funding and repurchase
agreements, net of federal funds sold and resale agreements, divided by loans
and securities, remains relatively low at 12.7 percent at December 31, 1994,
compared with a peer group average of 20.2 percent.
Holding company assets totaled $3.5 billion at December 31, 1994, compared
with $3.1 billion at December 31, 1993, and $3.2 billion at December 31, 1992.
The increase in holding company assets during 1994 relates primarily to the
acquisitions which were made during the year.
The funding for the holding company consists primarily of long-term debt and
equity, while funding for the Company's bank subsidiaries consists primarily of
customer deposits. During 1994, holding company long-term debt, including
medium-term notes, increased to $1.0 billion from $.7 billion at year-end 1993.
The Company placed subordinated debt issuances of $100 million during both 1994
and 1993. FBNA, the Company's lead bank, placed subordinated debt issuances of
$100 million during 1994 and $200 million during 1993. In 1994, three of the
Company's bank subsidiaries registered a $2 billion medium-term bank note
program. Notes issued under this program may mature from 30 days to 15 years
after issuance and bear fixed or floating interest rates. Proceeds from the sale
of the notes will be used for general corporate purposes. At December 31, 1994,
there were no notes issued under this program.
Long-term debt maturing in 1995 is approximately $195 million. These debt
obligations will be met through medium-term note or subordinated debt issuance,
as well as from the approximately $374 million of holding company cash and cash
equivalents on hand at December 31, 1994. It is the Company's operating practice
to maintain liquid assets at the holding company sufficient to fund its
operating cash needs, including debt repayment.
Capital Management
- ------------------
At December 31, 1994, total shareholders' equity was $2.275 billion, or 8.7
percent of assets, compared with 8.5 percent at year-end 1993 and 8.7 percent at
year-end 1992. Common shareholders' equity at December 31, 1994, was $2.169
billion, or $19.25 per share, compared with $1.979 billion, or $18.09 per share,
at year-end 1993 and $1.939 billion, or $17.09 per share, at year-end 1992. The
common equity-to-assets ratio increased 77 basis points from year-end 1993 to
8.3 percent at December 31, 1994. The common equity-to-assets ratio increased 20
basis points to 7.5 percent at year-end 1993 from 7.3 percent at year-end 1992.
Compared to 1993, earnings retention has offset the decrease caused by stock
repurchases.
34 First Bank System, Inc. and Subsidiaries
- --
TABLE 18. Capital Ratios
At December 31 (Dollars in Millions) 1994 1993 1992
- ------------------------------------------------------------------------------
Common equity............................... $2,169 $1,979 $1,939
As a percent of assets.................... 8.3% 7.5% 7.3%
Tangible common equity*..................... $1,844 $1,811 $1,764
As a percent of assets.................... 7.1% 6.9% 6.7%
Total shareholders' equity.................. $2,275 $2,245 $2,318
As a percent of assets.................... 8.7% 8.5% 8.7%
Tier 1 capital.............................. $1,902 $1,971 $2,008
As a percent of risk-adjusted assets...... 8.0% 9.2% 9.5%
Total risk-based capital.................... $2,962 $2,863 $2,669
As a percent of risk-adjusted assets...... 12.5% 13.3% 12.6%
Leverage ratio.............................. 7.5 7.6 7.8
-------------------------------
*Defined as common equity less goodwill.
During 1994, the Company repurchased approximately 6.3 million shares of its
common stock, of which 4.4 million shares related to acquisitions. On January
18, 1995, and February 15, 1995, the Board of Directors authorized additional
repurchase programs of 2.0 million and 14.0 million shares of common stock,
respectively. The Company will use those shares in connection with previously
announced acquisitions, stock option plans, dividend reinvestment plans,
employee stock purchase plans, and other corporate purposes.
On April 1, 1994, the Company completed the redemption of $159.3 million of
its preferred stock, consisting of $89 million of Preferred Stock Series 1989A
and $70.3 million of Preferred Stock Series 1989B. During 1993, the Company
redeemed its $100 million Series 1983A Adjustable Rate Cumulative Preferred
Stock.
The Company's risk-based capital ratios, which take into account the different
credit risks among banking organizations' assets, have remained strong over the
past three years. Tier 1 and total risk-based capital ratios were 8.0 percent
and 12.5 percent, respectively, on December 31, 1994, compared with 9.2 percent
and 13.3 percent at December 31, 1993, and 9.5 percent and 12.6 percent at
December 31, 1992. The decrease in the ratios was due to the preferred stock
redemptions and common stock repurchases discussed above. In accordance with the
regulatory guidelines, unrealized gains and losses on the securities portfolio
are excluded from the risk-based capital calculations, and equity capital
created by the adoption of SFAS 109, related to deferred tax assets, is subject
to limitations for inclusion in risk-based capital.
At December 31, 1994, the Company's leverage ratio, the ratio of Tier 1
capital to total quarterly average assets, was 7.5 percent compared with 7.6
percent and 7.8 percent at December 31, 1993, and 1992, respectively.
The Federal Deposit Insurance Corporation ("FDIC") typically defines a bank to
be "well capitalized" if it maintains a Tier 1 capital ratio of at least 6.0
percent, a total risk-based capital ratio of at least 10.0 percent and a
leverage ratio of at least 5.0 percent. Generally, it is the Company's intention
to maintain sufficient capital in each of its bank subsidiaries to permit them
to maintain a "well capitalized" designation. As shown by Table 19 on page 36,
all of the Company's bank subsidiaries met the "well capitalized" designation at
December 31, 1994.
First Bank System, Inc. and Subsidiaries 35
--
Table 19. Bank Subsidiary Capital Ratios
At December 31, 1994
----------------------------------------
Total
Tier 1 Risk-based Total
(Dollars in Millions) Capital Capital Leverage Assets
- -------------------------------------------------------------------------------------------------------
Regulatory Capital Requirements:
Minimum.................................................. 4.0% 8.0% 3.0%
Well-capitalized......................................... 6.0 10.0 5.0
Bank Subsidiaries:
First Bank National Association (Minnesota).............. 7.4 11.6 7.3 $14,567
Colorado National Bank................................... 10.6 12.6 7.5 6,702
First Bank National Association (Illinois)............... 18.1 19.4 10.4 1,383
First Bank of South Dakota (National Association)........ 8.1 11.7 8.1 1,290
First Bank Montana, National Association................. 10.2 12.1 9.7 1,214
First Bank (N.A.) (Wisconsin)............................ 8.7 11.1 9.0 1,166
First Bank of North Dakota, National Association......... 9.6 12.8 9.4 881
Colorado National Bank Aspen............................. 25.4 26.7 12.6 54
First National Bank of East Grand Forks.................. 15.7 18.5 9.8 42
Note: These balances and ratios were prepared in accordance with regulatory
accounting principles as disclosed in the banks' Call Reports.
During 1994, total dividends on common stock were $130.9 million compared
with $109.7 million in 1993 and $73.1 million in 1992. On a per share basis,
dividends paid to common shareholders totaled $1.16 in 1994, $1.00 in 1993, and
$.88 in 1992. On February 15, 1995, the Board of Directors increased the
quarterly dividend rate paid to common shareholders from $.29 to $.3625. At this
dividend rate, the annual dividend is equivalent to $1.45 per share.
The primary sources of funds for the dividends paid by the Company to its
shareholders are dividends received from its bank and nonbank subsidiaries.
Payment of dividends to the Company by its subsidiary banks is subject to
ongoing review by banking regulators and to various statutory limitations. For
further information, see Note Q of Notes to Consolidated Financial Statements on
page 66.
Accounting Changes
The Company will adopt SFAS 114, "Accounting by Creditors for Impairment of
a Loan," in January 1995. This Statement requires creditors to establish a
valuation allowance when it is probable that all the principal and interest due
under the contractual terms of a loan will not be collected. The impairment is
measured based on the present value of expected future cash flows based on the
effective interest rate of the loan, observable market price or fair value of a
collateral dependent loan. This differs from the Company's current policy in
that it requires establishing a valuation allowance for uncollectible interest
in addition to the uncollectible principal amounts of impaired loans. The
Statement also requires the reclassification of in-substance foreclosures from
other real estate to nonperforming loans. The adoption of SFAS 114 is not
expected to have a material effect on the Company.
Effective December 31, 1993, the Company adopted the provisions of SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities," and reported
its entire $3.3 billion of investment securities as available for sale. SFAS 115
requires that investments in debt securities and equity securities with readily
determinable fair values be classified into three categories which then
establish the accounting treatment. The accounting for two of the categories,
trading securities and held-to-maturity securities, is essentially the same as
prior practice. The other category, available-for-sale securities, is accounted
for at fair value with unrealized holding gains or losses being reported in
shareholders' equity. At December 31, 1994, the Company's available for sale
securities portfolio was $3.1 billion, with an after-tax loss of $94.1 million
recorded in shareholders' equity.
36 First Bank System, Inc. and Subsidiaries
- --
Impact of Inflation
The assets and liabilities of a financial institution are primarily monetary in
nature. As such, future changes in prices do not affect the obligations to pay
or receive fixed and determinable amounts of money. During periods of inflation,
monetary assets lose value in terms of purchasing power while monetary
liabilities have corresponding purchasing power gains. Since banks generally
have an excess of monetary assets over monetary liabilities, inflation will, in
theory, cause a loss of purchasing power in the value of shareholders' equity.
However, the concept of purchasing power is not an adequate indicator of the
effect of inflation on banks because it does not take into account changes in
interest rates, which are a more important determinant of bank earnings.
Other sections of the Management's Discussion and Analysis provide the
information necessary for an understanding of the Company's ability to react to
changing interest rates.
Fourth Quarter Summary
In the fourth quarter of 1994, the Company reported net income of $110.5
million, or $.95 per share, compared with $95.9 million, or $.81 per share, in
the fourth quarter of 1993. Return on average assets and return on average
common equity in the fourth quarter of 1994 were 1.69 percent and 19.9 percent,
respectively, compared with returns of 1.45 percent and 18.3 percent in the
fourth quarter of 1993. The strong results for the fourth quarter reflect a
higher net interest margin, growth in fee income, ongoing expense control,
continued improvement in credit quality and effective capital management.
Table 20. Fourth Quarter Summary
Three Months Ended
December 31
------------------
(Dollars in Millions) 1994 1993
- ----------------------------------------------------------------------------
CONDENSED INCOME STATEMENT:
Net interest income (taxable-equivalent basis)......... $314.6 $293.3
Provision for credit losses............................ 23.0 27.0
------------------
Net interest income after provision for credit losses 291.6 266.3
Noninterest income..................................... 163.1 145.9
Noninterest expense.................................... 270.7 255.3
------------------
Income before income taxes............................ 184.0 156.9
Taxable-equivalent adjustment.......................... 3.6 3.7
Income taxes........................................... 69.9 57.3
------------------
Net income............................................ $110.5 $ 95.9
==================
Return on average assets............................... 1.69% 1.45%
Return on average common equity........................ 19.9 18.3
Net interest margin (taxable-equivalent basis)......... 5.42 5.00
Efficiency ratio....................................... 56.5 58.1
PER SHARE DATA:
Net income............................................. $ .95 $ .81
Common dividends paid.................................. .29 .25
------------------
First Bank System, Inc. and Subsidiaries 37
--
Net interest income on a taxable equivalent basis was $314.6 million in the
fourth quarter of 1994, an increase of $21.3 million, or 7.3 percent, from the
fourth quarter of 1993. The net interest margin on a taxable-equivalent basis
was 5.42 percent compared with 5.00 percent a year ago. Net interest income and
the margin improved principally due to increases in the average loan yield,
resulting from increases in the Company's reference rate on variable rate loans
during 1994, and a shift in the mix of loans from lower-margin mortgage-related
balances to higher yield consumer and commercial loans. Total average earning
assets were $23.0 billion during the fourth quarter of 1994, down $.3 billion
from the level of $23.3 billion in the same period of 1993.
The provision for credit losses was $23.0 million in the fourth quarter of
1994 compared with $27.0 million in the fourth quarter of 1993. The reduction in
the provision was driven by continued declines in net charge-offs and
nonperforming assets. See "Provision for Credit Losses" on page 20 and "Credit
Management" on page 27 for further information regarding the provision, net
charge-offs and the allowance for credit losses.
Noninterest income was $163.1 million in the fourth quarter of 1994, an
increase of $17.2 million, or 11.8 percent, from the same quarter a year ago.
The increase reflects higher trust and credit card fees. Credit card fees were
up as a result of higher sales volume for Corporate Card, Purchasing Card,
merchant processing, and the Northwest Airlines WorldPerks credit card. Trust
fees increased due to the growth in corporate and institutional trust fees,
including the J.P. Morgan corporate trust unit and Boulevard acquisitions.
Fourth quarter noninterest expense in 1994 was $270.7 million, an increase
of only $15.4 million, from the fourth quarter of 1993, despite the addition of
expenses associated with Boulevard and the domestic corporate trust business of
J.P. Morgan. Compared with noninterest expense for the fourth quarter of 1993,
adjusted to include the expenses of Boulevard and the acquired corporate trust
business on a pro forma basis, noninterest expense for the fourth quarter of
1994 declined by $6.4 million, or 2.3 percent. The efficiency ratio for the
fourth quarter of 1994 improved to 56.5 percent from 58.1 percent for the same
quarter last year.
38 First Bank System, Inc. and Subsidiaries
- --
CONSOLIDATED BALANCE SHEET
At December 31 (In Millions, Except Shares) 1994 1993
- -------------------------------------------------------------------------------
ASSETS
Cash and due from banks..................................... $ 1,621 $ 1,682
Federal funds sold.......................................... 135 1,032
Securities purchased under agreements to resell............. 336 306
Trading account securities.................................. 77 55
Available-for-sale securities............................... 3,148 3,319
Loans....................................................... 19,281 18,779
Less allowance for credit losses.......................... 434 423
-----------------
Net loans................................................. 18,847 18,356
Bank premises and equipment................................. 391 382
Interest receivable.......................................... 153 129
Customers' liability on acceptances.......................... 178 186
Other assets................................................. 1,333 938
-----------------
Total assets........................................... $26,219 $26,385
-----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing........................................ $ 5,777 $ 7,489
Interest-bearing........................................... 13,014 13,542
-----------------
Total deposits......................................... 18,791 21,031
Federal funds purchased...................................... 1,630 553
Securities sold under agreements to repurchase............... 534 369
Other short-term funds borrowed.............................. 658 412
Long-term debt............................................... 1,483 1,015
Acceptances outstanding...................................... 178 186
Other liabilities............................................ 670 574
-----------------
Total liabilities...................................... 23,944 24,140
Shareholders' equity:
Preferred stock............................................ 106 266
Common stock, par value $1.25 a share-authorized
200,000,000 shares; issued: 1994 - 116,300,108 shares;
1993 - 114,793,547 shares.................................. 145 144
Capital surplus............................................ 721 676
Retained earnings.......................................... 1,429 1,328
Less cost of common stock in treasury: 1994 - 3,621,450
shares; 1993 - 5,391,883 shares............................ (126) (169)
-----------------
Total shareholders' equity............................. 2,275 2,245
-----------------
Total liabilities and shareholders' equity............. $26,219 $26,385
-----------------
See Notes to Consolidated Financial Statements.
First Bank System, Inc. and Subsidiaries 39
--
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31 (In Millions, Except Per-Share Data) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans................................................................................. $ 1,510.7 $ 1,398.6 $ 1,418.8
Securities:
Taxable............................................................................. 199.2 218.2 186.4
Exempt from federal income taxes.................................................... 12.0 14.6 12.0
Other interest income................................................................. 25.2 30.4 64.1
-----------------------------------------
Total interest income........................................................... 1,747.1 1,661.8 1,681.3
INTEREST EXPENSE
Deposits.............................................................................. 373.1 423.7 568.7
Federal funds purchased and repurchase agreements..................................... 91.2 31.8 37.1
Other short-term funds borrowed....................................................... 18.5 19.0 14.3
Long-term debt........................................................................ 69.5 54.4 66.1
-----------------------------------------
Total interest expense.......................................................... 552.3 528.9 686.2
-----------------------------------------
Net interest income................................................................... 1,194.8 1,132.9 995.1
Provision for credit losses........................................................... 93.0 125.2 183.4
-----------------------------------------
Net interest income after provision for credit losses................................. 1,101.8 1,007.7 811.7
NONINTEREST INCOME
Credit card fees...................................................................... 179.0 137.1 116.9
Trust fees............................................................................ 159.2 146.1 127.8
Service charges on deposit accounts................................................... 115.6 115.3 108.4
Securities gains (losses)............................................................. (3.8) .3 1.9
Other................................................................................. 178.0 170.8 180.7
-----------------------------------------
Total noninterest income........................................................ 628.0 569.6 535.7
NONINTEREST EXPENSE
Salaries.............................................................................. 395.7 389.1 388.7
Employee benefits..................................................................... 91.6 86.3 85.5
Net occupancy......................................................................... 86.3 93.4 87.9
Furniture and equipment............................................................... 78.3 72.7 67.2
FDIC insurance........................................................................ 46.0 46.4 42.2
Advertising........................................................................... 29.7 20.5 20.0
Amortization of goodwill and other intangible assets.................................. 39.6 30.6 25.2
Other personnel costs................................................................. 32.2 27.5 20.2
Professional services................................................................. 33.8 36.7 38.7
Data processing....................................................................... 13.9 21.3 22.4
Other real estate..................................................................... (2.9) 2.2 41.2
Merger and integration................................................................ - 72.2 84.0
Other................................................................................. 208.9 201.6 191.1
-----------------------------------------
Total noninterest expense....................................................... 1,053.1 1,100.5 1,114.3
-----------------------------------------
Income before income taxes and cumulative effect of changes in accounting principles.. 676.7 476.8 233.1
Applicable income taxes............................................................... 256.9 178.8 78.6
-----------------------------------------
Income before cumulative effect of changes in accounting principles................... 419.8 298.0 154.5
Cumulative effect of changes in accounting principles................................. - - 157.3
-----------------------------------------
Net income............................................................................ $ 419.8 $ 298.0 $ 311.8
=========================================
Net income applicable to common equity................................................ $ 408.6 $ 270.2 $ 281.6
=========================================
EARNINGS PER COMMON SHARE
Average common and common equivalent shares........................................... 114,544,806 113,075,429 105,361,022
Income before cumulative effect of changes in accounting principles................. $ 3.57 $ 2.39 $ 1.18
Cumulative effect of changes in accounting principles............................... - - 1.49
-----------------------------------------
Net income.......................................................................... $ 3.57 $ 2.39 $ 2.67
=========================================
See Notes to Consolidated Financial Statements.
40 First Bank System, Inc. and Subsidiaries
- --
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Unrealized
Common Gains/(Losses)
Shares Preferred Common Capital Retained on Securities, Treasury
(In Millions, Except Shares) Outstanding* Stock Stock Surplus Earnings Net of Taxes Stock** Total
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1991........................ 102,536,867 $ 378.5 $128.5 $417.6 $ 931.8 $ -- $ (4.3) $1,852.1
Net income....................................... 311.8 311.8
Dividends declared:
Preferred...................................... (30.2) (30.2)
Common......................................... (73.1) (73.1)
Retirement of stock acquired in mergers.......... (290,129) (.4) (5.9) (6.3)
Issuance of common stock:
Acquisition of Bank Shares Incorporated........ 8,163,265 10.2 200.3 .7 211.2
Acquisition of Siouxland Bank Holding Company.. 994,117 1.2 20.6 21.8
Dividend reinvestment.......................... 508,397 .5 7.8 2.0 10.3
Stock option and stock purchase plans.......... 1,537,908 1.8 17.3 1.6 20.7
----------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1992........................ 113,450,425 378.5 141.8 657.7 1,140.3 -- -- 2,318.3
Net income....................................... 298.0 298.0
Dividends declared:
Preferred...................................... (27.8) (27.8)
Common......................................... (109.7) (109.7)
Repurchase of common stock for treasury.......... (6,181,290) (187.1) (187.1)
Issuance of common stock:
Dividend reinvestment.......................... 227,287 .3 6.4 6.7
Stock option and stock purchase plans.......... 1,905,242 1.7 18.4 (3.6) 11.3 27.8
Redemption of preferred stock.................... (112.6) (2.6) (115.2)
Unrealized gain on available-for-sale securities. 34.0 34.0
----------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1993........................ 109,401,664 265.9 143.5 676.4 1,294.6 34.0 (169.4) 2,245.0
Net income....................................... 419.8 419.8
Dividends declared:
Preferred...................................... (11.2) (11.2)
Common......................................... (130.9) (130.9)
Purchase of treasury stock....................... (6,305,882) (220.4) (220.4)
Repurchase of stock warrants..................... (2.3) (2.3)
Acquisition of Boulevard Bancorp, Inc. for
common stock, warrants, and stock options....... 6,227,649 1.9 54.9 149.4 206.2
Other acquisitions............................... 1,385,806 (13.9) 48.1 34.2
Issuance of common stock:
Dividend reinvestment.......................... 185,890 .2 6.3 6.5
Stock option and stock purchase plans.......... 1,285,965 (8.7) (17.6) 42.7 16.4
Stock warrants exercised....................... 497,566 (10.4) 17.0 6.6
Redemption of preferred stock.................... (160.0) (7.0) (167.0)
Change in unrealized gains/(losses).............. (128.1) (128.1)
----------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1994........................ 112,678,658 $ 105.9 $145.4 $720.5 $1,523.4 $ (94.1) $(126.3) $2,274.8
==================================================================================
*Defined as total common shares less common stock held in treasury.
**Ending treasury shares were 3,621,450 at December 31, 1994, 5,391,883 at
December 31, 1993, and 253,920 at December 31, 1991.
See Notes to Consolidated Financial Statements.
First Bank System, Inc. and Subsidiaries 41
--
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31 (In Millions) 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income...................................................................................... $ 419.8 $ 298.0 $ 311.8
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses................................................................... 93.0 125.2 183.4
Depreciation and amortization of bank premises and equipment.................................. 63.1 58.4 48.6
Provision for deferred income taxes........................................................... 75.7 64.0 22.2
Amortization of goodwill and other intangible assets.......................................... 39.6 30.6 25.2
Amortization and write-downs of loan servicing related intangibles............................ 13.5 55.5 14.3
Write-downs of other real estate.............................................................. 2.5 18.1 47.5
Provision for merger and integration.......................................................... -- 72.2 84.0
Cumulative effect of accounting changes....................................................... -- -- (157.3)
Changes in operating assets and liabilities, excluding the effects of purchase acquisitions:
(Increase) decrease in trading account securities........................................... (22.6) 39.3 57.2
Decrease (increase) in loans held for sale.................................................. 854.1 (379.8) (191.4)
Decrease in securities held for sale........................................................ -- 429.9 183.4
Decrease (increase) in accrued receivables.................................................. 47.6 (10.2) 23.3
(Decrease) increase in accrued liabilities.................................................. (22.5) (152.3) 1.0
Other--net.................................................................................. (37.6) (81.6) 15.0
----------------------------------
Net cash provided by operating activities................................................. 1,526.2 567.3 668.2
INVESTING ACTIVITIES
Net cash provided (used) by:
Interest-bearing deposits with banks.......................................................... 9.1 322.5 85.7
Loans outstanding............................................................................. (556.1) (1,428.3) 160.8
Securities purchased under agreements to resell............................................... (30.5) (93.4) (76.7)
Securities transactions:
Sales......................................................................................... 1,090.1 46.8 35.5
Maturities.................................................................................... 730.5 1,235.5 970.7
Purchases..................................................................................... (1,011.7) (889.4) (1,555.5)
Proceeds from sales/repayments of other real estate............................................. 65.8 99.5 95.8
Proceeds from sales of bank premises and equipment.............................................. 6.4 31.5 9.7
Purchases of bank premises and equipment........................................................ (61.9) (111.6) (99.3)
Purchases of loans.............................................................................. (29.9) (32.6) (56.8)
Cash and cash equivalents of acquired subsidiaries.............................................. 74.5 -- 197.1
Business acquisitions, net of cash received..................................................... (57.4) (3.0) 67.4
Sale of unconsolidated subsidiaries............................................................. -- 12.8 --
Other--net...................................................................................... (12.2) (26.3) 33.2
----------------------------------
Net cash provided (used) by investing activities.......................................... 216.7 (836.0) (132.4)
FINANCING ACTIVITIES
Net cash provided (used) by:
Deposits...................................................................................... (3,812.3) (68.6) 138.8
Federal funds purchased and securities sold under agreements to repurchase.................... 936.6 (198.9) 12.5
Short-term borrowings......................................................................... 226.2 57.0 (32.5)
Long-term debt transactions:
Proceeds...................................................................................... 611.5 440.0 160.8
Principal payments............................................................................ (160.2) (256.2) (294.2)
Redemption of preferred stock................................................................... (167.0) (115.2) --
Proceeds from dividend reinvestment, stock option, and stock purchase plans..................... 22.9 34.5 30.2
Purchase of treasury stock and stock warrants................................................... (222.7) (187.1) --
Stock warrants exercised........................................................................ 6.6 -- --
Cash dividends.................................................................................. (142.1) (137.5) (103.3)
----------------------------------
Net cash used by financing activities..................................................... (2,700.5) (432.0) (87.7)
----------------------------------
Change in cash and cash equivalents....................................................... (957.6) (700.7) 448.1
Cash and cash equivalents at beginning of year.................................................. 2,713.5 3,414.2 2,966.1
----------------------------------
Cash and cash equivalents at end of year.................................................. $ 1,755.9 $ 2,713.5 $ 3,414.2
----------------------------------
See Notes to Consolidated Financial Statements.
42 First Bank System, Inc. and Subsidiaries
- --
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. Significant Accounting Policies
First Bank System, Inc. ("The Company") is a regional, multibank holding
company which provides bank and bank-related services principally to domestic
markets, through its subsidiaries.
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain
amounts in prior periods have been reclassified to conform to the current
presentation.
TRADING ACCOUNT SECURITIES - Debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are
classified as trading account securities and are reported at fair value. Gains
or losses on sales of trading account securities, adjustments to fair values,
and other noninterest income are included in trading account profits and
commissions.
AVAILABLE-FOR-SALE SECURITIES - Securities that are not trading account
securities and which may be sold before maturity in response to changes in
interest rates or prepayment risk, or due to liquidity needs or changes in
funding sources or terms, are classified as available-for-sale. These
securities are carried at fair value, with unrealized holding gains or losses,
net of tax, reported in shareholders' equity. When securities are sold, the
amortized cost of the specific securities sold is used to compute the gain or
loss on sale.
HELD-TO-MATURITY SECURITIES - Included in held-to-maturity securities are those
securities which management has the positive intent and ability to hold to
maturity. These securities are stated at cost, as adjusted for accretion of
discounts or amortization of premiums, computed by the interest method. The
adjusted cost of the specific security sold is used to compute the gains or
losses on the sale.
LOANS - Loans are reported net of any unearned discount. Interest income is
accrued on loan balances outstanding. Loan and commitment fees are deferred and
recognized over the loan and/or commitment period as yield adjustments.
Loans are reviewed regularly by management and are generally placed on
nonaccrual status when the collection of interest or principal has become 90
days past due or collection is otherwise considered doubtful. When a loan is
placed on nonaccrual status, previously recorded accrued but uncollected
interest is reversed against current period interest income. Interest payments
received on nonaccrual loans are generally applied against principal.
Certain subsidiaries engage in both direct and leveraged lease financing. The
net investment in direct financing leases consists of the sum of all minimum
lease payments and estimated residual values, less unearned income and
investment tax credit. Unearned income is accreted into loan interest income
over the terms of the leases to produce a constant rate of return on the net
investment.
The investment in leveraged leases consists of the sum of all lease payments
(less the portion applicable to principal and interest on nonrecourse debt) plus
estimated residual values, less unearned income. Unearned income is accreted
into loan interest income over the positive years of the net investment.
Loans and mortgages held for sale are carried at the lower of cost or market
value as determined on an aggregate basis by type of loan.
ALLOWANCE FOR CREDIT LOSSES - Management determines the adequacy of the
allowance based on periodic evaluations of the loan portfolio and related off-
balance sheet commitments, recent loss experience, and other pertinent factors,
including current and anticipated economic conditions. The allowance is
increased by provisions charged to operating expense and reduced by net charge-
offs.
First Bank System, Inc. and Subsidiaries 43
--
MORTGAGE BANKING - Acquisition costs of purchased mortgage servicing rights and
excess mortgage servicing fee receivables are capitalized and amortized on an
accelerated basis over the estimated period of net servicing revenue. On a
quarterly basis the Company reviews the carrying value of its mortgage servicing
rights and fees based on historical prepayment experience and expectations of
future prepayment activity, and if appropriate, reduces the carrying value to
estimated realizable value, calculated on a discounted basis.
INTEREST RATE SWAPS - The Company engages in interest rate swap transactions to
manage its interest rate risk and as a financial intermediary. The Company does
not enter into these contracts for speculative purposes. Income or expense on
swaps designated as hedges of assets, liabilities or commitments is recorded as
an adjustment to interest income or expense. If the hedged instrument is
disposed of, the swap agreement is marked to market with any resulting gain or
loss included with the gain or loss from the disposition. If the interest rate
swap is terminated, the gain or loss is deferred and amortized over the
remaining life of the specific asset or liability it was hedging. The initial
bid/offer spread on intermediated swaps is deferred and recognized in trading
account profits and commissions over the life of the agreements. Intermediated
swaps are marked to market and the resultant gain or loss is recorded currently
in trading account profits and commissions.
INTEREST RATE CONTRACTS - The Company uses interest rate forwards, options,
caps, and floors for managing its interest rate risk, as a financial
intermediary and in its trading operations. For interest rate contracts that
meet the criteria for hedge accounting treatment, gains or losses due to changes
in the market value of the contracts are deferred initially and amortized over
the period of interest rate risk exposure as adjustments to interest income or
expense. Gains or losses related to the termination of these financial
instruments or disposal of the hedged asset or liability are treated in the same
manner as interest rate swaps. All other interest rate contracts are marked to
market and the resulting gain or loss is recorded currently in trading account
profits and commissions.
BANK PREMISES AND EQUIPMENT - Bank premises and equipment are stated at cost
less accumulated depreciation and amortized primarily on the straight line
method based on estimated useful lives.
Capitalized leases, less accumulated amortization, are included in bank
premises and equipment, and the lease obligations are included in long-term
debt. Capitalized leases are amortized on the straight line method over the
lease term and the amortization is included in depreciation expense.
OTHER REAL ESTATE - Other real estate (ORE), which is included in other assets,
represents properties acquired through foreclosure, in-substance foreclosure or
other proceedings. Upon classification as ORE, any excess of the loan receivable
over the fair value of the collateral is charged to the allowance for credit
losses. Property is evaluated regularly to ensure that the recorded amount is
supported by the current fair value. In addition, annual appraisals are
conducted. Subsequent to classification as ORE, the asset is carried at the
lower of cost or fair value, less estimated selling costs. Changes in the
carrying amount of the asset are either recorded in a valuation allowance or
charged directly to expense.
INTANGIBLE ASSETS - The excess of cost over net assets of businesses acquired is
included in other assets and is amortized over periods ranging up to 25 years.
At December 31, 1994, goodwill totaled $324.7 million, net of accumulated
amortization of $64.5 million. Other intangible assets, net of accumulated
amortization, include corporate trust customer relationships of $82.4 million,
purchased mortgage servicing rights of $43.0 million, cardholder relationships
of $29.7 million, core deposits of $59.6 million, and other intangibles of $4.8
million at December 31, 1994. These assets are amortized over their estimated
useful lives ranging from seven to ten years using straight line and accelerated
methods, as appropriate.
INCOME TAXES - Deferred taxes are recorded to reflect the tax consequences on
future years of differences between the tax bases of assets and liabilities and
the financial reporting amounts at each year end.
STATEMENT OF CASH FLOWS - For purposes of reporting cash flows, cash equivalents
are those amounts included in cash and due from banks and federal funds sold.
44 First Bank System, Inc. and Subsidiaries
- --
PER SHARE CALCULATIONS - Primary earnings per share are computed by dividing
income applicable to common stock (net income less preferred stock dividends) by
the weighted average number of shares of common stock and dilutive common stock
equivalents outstanding during the period. To compute the dilutive effect of
restricted common shares issued under the 1991 and 1994 Stock Incentive Plans,
the treasury stock method is applied to the unvested portion of the shares
granted and the related unamortized expense. Fully diluted earnings per share
computations assume the conversion of the Series 1991A preferred stock during
the period that the stock was outstanding, unless the effect is anti-dilutive.
NOTE B. Accounting Changes
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN - In January 1995, the Company
will adopt SFAS 114, "Accounting by Creditors for Impairment of a Loan," which
requires creditors to establish a valuation allowance when it is probable that
all the principal and interest due under the contractual terms of a loan will
not be collected. The impairment is measured based on the present value of
expected future cash flows based on the loans' effective interest rate,
observable market price or fair value of a collateral dependent loan. This
differs from the Company's current policy in that it requires establishing a
valuation allowance for uncollectible interest in addition to the principal
amounts of impaired loans. The Statement also requires in-substance foreclosures
to be reclassified from other real estate to nonperforming loans. The adoption
of SFAS 114 is not expected to have a material effect on the Company.
NOTE C. Business Combinations and Pending Acquisitions
METROPOLITAN FINANCIAL CORPORATION - On January 24, 1995, the Company completed
the previously announced acquisition of Metropolitan Financial Corporation
("MFC"), a regional financial services holding company headquartered in
Minneapolis, Minnesota, resulting in 21.7 million shares being issued. As of
December 31, 1994, MFC had approximately $7.9 billion in assets, $5.5 billion in
deposits, and 211 offices principally in North Dakota, Minnesota, Nebraska,
Iowa, Kansas, South Dakota, Wisconsin, and Wyoming. The Company will use the
pooling of interests method to account for the transaction. The following pro
formas represent a combination of the results of operations of FBS and MFC for
each period presented.
Years Ended December 31,
--------------------------------
(In Millions, Except Per-Share Amounts) 1994 1993 1992
- --------------------------------------------------------------------------------------------
Net interest income....................................... $1,434.5 $1,355.9 $1,175.7
Cumulative effect of changes in accounting principles..... - - 233.2
Net income................................................ 306.5 363.2 448.9
Net income per share...................................... 2.16 2.48 3.35
================================
BOULEVARD BANCORP, INC. - On March 25, 1994, the Company completed the
acquisition of Boulevard Bancorp, Inc. ("Boulevard"), a commercial bank holding
company headquartered in Chicago, Illinois. Under the terms of the purchase
agreement, 6.2 million shares of the Company's common stock were issued. In
addition, Boulevard's outstanding stock options and warrants were converted into
stock options and warrants for the Company's common stock, at the same
conversion rate.
In connection with the Boulevard acquisition, the Company bought back existing
shares of its common stock approximately equal to the number of shares issued at
the time of closing of the Boulevard acquisition. The repurchase of these shares
began in October 1993 and was completed in June 1994.
First Bank System, Inc. and Subsidiaries 45
--
The acquisition of Boulevard was accounted for under the purchase method of
accounting, and accordingly, the purchase price of $206.2 million was allocated
to assets acquired and liabilities assumed based on their fair market values at
the date of acquisition. The excess of the purchase price over the fair market
values of net assets acquired was recorded as goodwill. Core deposit intangibles
of $23 million are amortized over the estimated lives of the deposits of
approximately 10 years, and goodwill of $144 million is amortized over 25 years.
The total assets acquired and liabilities assumed at the time of acquisition
were $1.6 billion and $1.5 billion, respectively. The results of operations of
Boulevard are included in the Company's Consolidated Statement of Income since
the date of acquisition.
The following pro forma operating results of the Company assume that the
Boulevard acquisition had occurred at the beginning of each period presented
below. In addition to combining the historical results of operations of the two
companies, the pro forma results include adjustments for the estimated effect of
purchase accounting on the Company's results, principally amortization of
intangibles.
Years Ended December 31,
(In Millions, Except Per-Share Amounts) 1994 1993
- ---------------------------------------------------------------------
Net interest income....................... $1,206.8 $1,186.1
Net income................................ 403.7 299.0
Net income per share...................... 3.38 2.26
========================
The pro forma information may not be indicative of the results that actually
would have occurred if the combination had been in effect on the dates indicated
or which may be obtained in the future.
COLORADO NATIONAL BANKSHARES, INC. AND WESTERN CAPITAL INVESTMENT CORPORATION -
Effective May 28, 1993, the Company completed the acquisition of Colorado
National Bankshares, Inc. ("CNB"), formerly the largest independent commercial
bank holding company in Colorado with $3.0 billion in assets. Approximately 20.6
million shares of the Company's common stock were issued for all of the
outstanding common stock of CNB. Effective December 18, 1992, Western Capital
Investment Corporation ("WCIC"), a $2.5 billion financial institution
headquartered in Denver, Colorado, merged with a wholly-owned subsidiary of the
Company, resulting in 5.3 million shares of the Company's common stock being
issued for all the outstanding common shares of WCIC.
Both the CNB and WCIC acquisitions were accounted for using the pooling of
interests method of accounting. Accordingly, the Company's financial statements
have been restated for all periods prior to the acquisitions to include the
accounts and operations of CNB and WCIC.
BANK SHARES INCORPORATED - On December 31, 1992, the Company acquired Bank
Shares Incorporated ("BSI"), a $2.1 billion bank holding company headquartered
in Minneapolis, Minnesota, in a stock-for-stock exchange. Under the terms of the
purchase agreement, the Company issued 8.2 million shares of common stock for
all outstanding shares of BSI common stock. The acquisition of BSI was accounted
for under the purchase method of accounting, and accordingly, the results of
operations of BSI have been included in the Company's Consolidated Statement of
Income since the acquisition date.
The following pro forma operating results of the Company assume that the BSI
acquisition had occurred at the beginning of 1992. In addition to combining the
historical results of operations of the two companies, the pro forma results
include adjustments for the estimated effect of purchase accounting on the
Company's results.
Year Ended
December 31,
(In Millions, Except Per-Share Amounts) 1992
- --------------------------------------------------------------------------------
Net interest income............................................... $1,069.9
Cumulative effect of changes in accounting principles............. 157.3
Net income........................................................ 293.1
Net income per share.............................................. 2.29
========
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.
46 First Bank System, Inc. and Subsidiaries
- --
OTHER ACQUISITIONS - During the past three years, the Company completed several
acquisitions and has one pending acquisition in markets in which the Company has
an existing presence, serving to strengthen the Company's retail banking market
shares in these communities. On October 18, 1994, the Company signed a
definitive purchase agreement to acquire First Western Corporation ("FWC"),
a $323 million bank holding company based in Sioux Falls, South Dakota. FWC
owns Western Bank, which has nine branches in South Dakota. The transaction
received regulatory approval in January 1995 and is expected to close in the
first quarter of 1995. On September 30, 1994, the Company completed the
acquisition of Green Mountain Bancorporation, the holding company for the $35
million Green Mountain Bank, located in Lakewood, Colorado. On September 9,
1994, the Company completed its acquisition of the $121 million United Bank of
Bismarck, located in Bismarck, North Dakota. On April 29, 1994, the Company
completed the acquisition of First Financial Investors, Inc., a $200 million
savings bank holding company located in Duluth, Minnesota. On February 28, 1994,
the Company completed the acquisition of American Bancshares of Mankato, a $116
million bank holding company. During 1992, the Company acquired Siouxland Bank
Holding Company, a $174 million institution headquartered in Fargo, North
Dakota.
The Company also completed the purchase of several corporate trust businesses
serving to strengthen the strategic direction of the Company. On September 2,
1994, the Company acquired the domestic corporate trust business of J.P. Morgan
& Co., Incorporated, which provides trust services for approximately 650 clients
with 3,800 bond issues in the areas of municipal, revenue, housing and corporate
bond indenture trusteeships. In March 1993, the Company acquired the corporate
trust business of two U.S. Bancorp subsidiaries in Washington and Oregon, and in
July 1992, the Company acquired the corporate trust business of Bankers Trust
Company of California.
NOTE D. Restrictions on Cash and Due from Banks
- -------------------------------------------------
Bank subsidiaries are required to maintain average reserve balances with the
Federal Reserve Bank. The amount of those reserve balances averaged $389 million
for the quarter ended December 31, 1994.
NOTE E. Available-for-sale Securities
- -------------------------------------
The detail of the amortized cost, gross unrealized holding gains and losses,
and fair value of available-for-sale securities at December 31 was as follows:
1994 1993
-------------------------------------------------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Amortized Holding Holding Fair Amortized Holding Holding Fair
(In Millions) Cost Gains Losses Value Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------
U.S. Treasury.......... $1,162 $ 1 $ (65) $1,098 $1,527 $25 $(11) $1,541
Mortgage-backed
securities............ 1,497 1 (84) 1,414 1,286 18 (4) 1,300
Other U.S. agencies.... 191 - (10) 181 51 1 - 52
State and political.... 175 3 - 178 184 12 - 196
Other.................. 275 11 (9) 277 216 16 (2) 230
-------------------------------------------------------------------------------------
Total............... $3,300 $16 $(168) $3,148 $3,264 $72 $(17) $3,319
=====================================================================================
The Company adopted SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities," at December 31, 1993, and at that date, all the Company's
investment securities were classified as available for sale. At December 31,
1994, the Company's available-for-sale securities portfolio was $3.1 billion,
with an after-tax unrealized loss of $94.1 million recorded in shareholders'
equity. Securities transactions reported in the Consolidated Statement of Cash
Flows in 1994 reflect available-for-sale securities while transactions in 1993
and 1992 reflect held-to-maturity securities.
First Bank System, Inc. and Subsidiaries 47
--
Securities carried at $1.2 billion at December 31, 1994, and $.8 billion at
December 31, 1993, were pledged to secure public and trust deposits and for
other purposes required by law. Securities sold under agreements to repurchase
had an amortized cost of $.5 billion and $.4 billion at December 31, 1994, and
1993, respectively.
Gross realized gains and losses on securities were as follows:
(In Millions) 1994 1993 1992
- -------------------------------------------------------------------------
Gross realized gains............................. $ 2.0 $ 3.3 $ 1.9
Gross realized losses............................ (5.8) (3.0) --
---------------------
Net realized gains (losses)...................... $(3.8) $ .3 $ 1.9
=====================
For amortized cost, fair value and yield by maturity date of available-for-
sale securities outstanding as of December 31, 1994, see Table 10 on page 26
from which such information is incorporated by reference into these Notes to
Consolidated Financial Statements.
NOTE F. Loans and Allowance for Credit Losses
- ---------------------------------------------
The composition of the loan portfolio at December 31 was as follows:
(In Millions) 1994 1993
- -----------------------------------------------------------------------
COMMERCIAL:
Commercial....................................... $ 7,196 $ 6,176
Financial institutions........................... 787 2,004
Real estate:
Commercial mortgage............................ 1,822 1,495
Construction................................... 327 231
HLTs............................................. 283 183
-----------------
Total commercial loans....................... 10,415 10,089
-----------------
CONSUMER:
Residential mortgage............................. 2,273 2,422
Residential mortgage held for sale............... 162 1,088
Home equity and second mortgage.................. 2,199 1,755
Credit card...................................... 2,409 1,757
Revolving credit................................. 694 690
Automobile....................................... 392 342
Installment...................................... 401 376
Student loans held for sale...................... 336 260
-----------------
Total consumer loans........................... 8,866 8,690
-----------------
Total loans.................................... $19,281 $18,779
=================
Certain directors and executive officers of the Company, including their
immediate families, companies in which they are principal owners, and trusts in
which they are involved, are loan customers of the Company and its subsidiaries.
These loans were made in the ordinary course of business at the subsidiaries'
normal credit terms, including interest rate and collateralization, and were all
current as to their terms at December 31, 1994, and 1993. The aggregate dollar
amounts of these loans were $8.4 million and $18.6 million at December 31, 1994,
and 1993, respectively. During 1994, additions totaled $88.5 million and
repayments totaled $98.7 million.
48 First Bank System, Inc. and Subsidiaries
- --
Nonaccrual and renegotiated loans totaled $113 million, $158 million, and
$250 million at December 31, 1994, 1993, and 1992, respectively. The effect of
nonaccrual and renegotiated loans on interest income was as follows:
(In Millions) 1994 1993 1992
- ---------------------------------------------------------------------------------------
Interest income that would have been accrued
at original contractual rates.................................. $9.7 $13.6 $21.6
Amount recognized as interest income............................. 2.1 3.4 7.8
--------------------
Foregone revenue................................................. $7.6 $10.2 $13.8
====================
Commitments to lend additional funds to customers whose loans were
classified as nonaccrual or renegotiated at December 31, 1994, totaled $6.7
million. During 1994, there were no loans that were restructured at market
interest rates and returned to a fully performing status.
Activity in the allowance for credit losses was as follows:
(In Millions) 1994 1993 1992
- -------------------------------------------------------------------------------------
Balance at beginning of year.............................. $423.2 $448.0 $426.9
Add:
Provision charged to operating expense................... 93.0 125.2 183.4
Deduct:
Loans charged off........................................ 187.8 225.0 273.7
Less recoveries of loans charged off..................... 83.2 75.0 70.6
------------------------
Net loans charged off.................................... 104.6 150.0 203.1
Additions from acquisitions............................... 22.2 - 40.8
------------------------
Balance at end of year.................................... $433.8 $423.2 $448.0
========================
NOTE G. Bank Premises and Equipment
- ------------------------------------
Bank premises and equipment at December 31 consisted of the following:
(In Millions) 1994 1993
- --------------------------------------------------------------------
Land............................................. $ 74 $ 73
Buildings and improvements....................... 346 332
Furniture, fixtures and equipment................ 338 366
Capitalized building leases...................... 35 33
Capitalized equipment leases..................... 35 31
---------------
828 835
Less accumulated depreciation and amortization... 437 453
---------------
Total........................................... $391 $382
===============
First Bank System, Inc. and Subsidiaries 49
--
NOTE H. Long-Term Debt
- ----------------------
Long-term debt (debt with original maturities of more than one year) at
December 31 consisted of the following:
(In Millions) 1994 1993
- -----------------------------------------------------------------------------------
FIRST BANK SYSTEM (Parent Company):
Floating-rate subordinated capital notes -- due November 29, 1996.. $ 150 $ 150
Fixed-rate 6.625% subordinated notes -- due May 15, 2003........... 100 100
Fixed-rate 8.00% subordinated notes -- due July 2, 2004............ 125 125
Floating-rate subordinated notes -- due November 30, 2010.......... 107 107
Medium-term notes.................................................. 514 248
Capitalized lease obligations and other............................ 15 15
--------------
1,011 745
SUBSIDIARIES:
Fixed-rate 6.00% subordinated notes -- due October 15, 2003........ 100 100
Fixed-rate 7.55% subordinated notes -- due June 15, 2004........... 100 -
Fixed-rate 8.35% subordinated notes -- due November 1, 2004........ 100 -
Step-up subordinated notes -- due August 15, 2005.................. 100 100
Capitalized lease obligations...................................... 39 39
Mortgage indebtedness and notes.................................... 33 31
--------------
Total............................................................ $1,483 $1,015
==============
The floating-rate subordinated capital notes due November 29, 1996, are
currently redeemable at the option of the Company (with Federal Reserve Bank
approval). If the option is not exercised, the notes will be exchanged at
maturity for capital securities of the Company whose market value will equal the
principal amount of the notes. The interest rate per annum is one-eighth of one
percent above the London interbank offered rate ("LIBOR") for three-month
Eurodollar deposits subject to a minimum of 5.25 percent. At December 31, 1994,
the interest rate was 6.125 percent.
The floating-rate subordinated notes due November 30, 2010, may be redeemed at
par at the option of the Company. The interest rate per annum for each quarterly
period is one-eighth of one percent above LIBOR for three-month Eurodollar
deposits subject to a minimum of 5.25 percent. At December 31, 1994, the
interest rate was 6.094 percent.
The step-up subordinated notes due August 15, 2005, are issued by the
Company's subsidiary bank, First Bank National Association. The interest rate on
these notes is 6.25 percent through August 14, 2000, and 7.30 percent
thereafter. The notes have a one-time call feature at the option of the Bank on
August 15, 2000.
Notes issued under the Company's medium-term note program may mature from 9
months to 15 years and bear fixed or floating interest rates. The notes
outstanding at December 31, 1994, mature from February 1995 to November 1997 and
have rates of 6.125 percent to 9.91 percent. The weighted average interest rate
at December 31, 1994, is 6.47 percent.
Maturities of long-term debt outstanding at December 31, 1994, were:
Parent
(In Millions) Consolidated Company
- -------------------------------------------------------------------------------
1995..................................................... $ 195 $ 189
1996..................................................... 298 291
1997..................................................... 193 185
1998..................................................... 2 -
1999..................................................... 3 1
Thereafter............................................... 792 345
-----------------
Total.................................................. $1,483 $1,011
=================
50 First Bank System, Inc. and Subsidiaries
- --
NOTE I. Shareholders' Equity
COMMON STOCK - At December 31, 1994, the Company has 9,936,528 shares of its
common stock reserved for future issuances under the Dividend Reinvestment Plan,
Employee Stock Purchase Plan, and the Stock Option Plans (see Note K on page
52). Additionally, there are 3,952,000 shares of common stock reserved for
issuance upon conversion of the Series 1991A Convertible Preferred Stock,
described below under "Preferred Stock."
The Company completed several acquisitions in the past three years with a
total of 42.6 million common shares issued in exchange for the stock of the
acquired banks. (See Note C on page 45.)
During 1994, the Company repurchased 6.3 million shares of common stock
utilized in connection with previously announced acquisitions and other
corporate purposes. On January 18, 1995, and February 15, 1995, the Board of
Directors authorized additional repurchase programs of 2.0 million and 14.0
million shares of common stock, respectively, for previously announced
acquisitions and other corporate purposes.
The Company has outstanding 12.6 million common shares sold in a private
placement on July 18, 1990, which had accompanying periodic stock purchase
rights ("PSPRs") and risk event warrants. The PSPRs become exercisable upon the
event of a dividend shortfall, which will be deemed to exist if the Company does
not pay an annual dividend equal to at least $.82 per share during any of the
ten years following closing. Upon exercise, the holders of the PSPRs will
receive value equal to the dividend shortfall in the form of shares of the
Company's common or preferred stock, or the PSPRs may be redeemed for cash.
The risk event warrants become exercisable (i) when a change in control, as
defined, occurs and the value received by common shareholders is less than
$13.875 per share, or (ii) on July 18, 2000, if the common stock market price is
less than $13.875 per share; however, this exercise provision terminates at any
time after July 18, 1995, if the common stock market price exceeds $20.82 per
share for 30 consecutive trading days and tangible book value exceeds $16.32 per
share. If the risk event warrants become exercisable in either event, the
holders of the warrants will receive value equal to any shortfall in the form of
common or preferred stock or cash at the option of the Company.
The Company's Dividend Reinvestment Plan provides for automatic reinvestment
of dividends and for optional cash purchases of additional shares at market
price of up to $5,000 per quarter.
PREFERRED STOCK - The Company has four classes of cumulative preferred stock
with par values of $1.00 per share and 10,000,000 shares authorized. In the past
two years, the Company redeemed three of the four classes of cumulative
preferred stock.
Series 1991A Convertible Preferred Stock, issued in November 1991, has
2,118,500 shares outstanding, redeemable at the option of the Company on or
after January 1, 1996, at $52.1375 per share, and thereafter at prices declining
to its stated value of $50 per share on or after July 1, 2002. During 1994, the
Company repurchased approximately 15,100 shares. Dividends are at a rate of
7.125 percent per annum. Series 1991A Convertible Preferred Stock is convertible
at the option of the holder at any time into common stock of the Company at the
rate of 1.7256 shares of common stock for each share of preferred stock, which
is equivalent to a conversion price of $28.975 per share of common stock.
On April 1, 1994, the Company redeemed the 3,560,000 and 1,405,000 shares of
Series 1989A and Series 1989B, respectively, at a cost of $166.0 million. The
annual dividend prior to redemption was 10.5 percent on the Series 1989A shares
and the average annual dividend rate on the Series 1989B shares was 7.41 percent
and 8.24 percent in 1993 and 1992, respectively.
In September 1993, the Company redeemed the 1,000,000 shares of Series 1983A
at the stated value of $100 per share. There was an average 6.5 percent dividend
on the Series 1983A shares during 1992.
Shares of all the Company's preferred stock issuances rank prior to common
stock as to dividends and liquidation and have no voting rights except (i) in
the event of certain dividend arrearages (in which event, holders of shares of
the preferred stock are entitled to elect two additional directors to the
Company's Board of Directors to serve until such dividend arrearages have been
eliminated), and (ii) on matters that would have an adverse effect upon a series
of the preferred stock, including the issuance of additional shares of preferred
stock or shares of any other preferred stock ranking on a parity with the
preferred stock.
First Bank System, Inc. and Subsidiaries 51
--
PREFERRED STOCK PURCHASE RIGHTS - In December 1988, the
Company declared a dividend of one preferred stock purchase
right ("Right") for each outstanding share of common stock
based on the shareholders of record on January 4, 1989. One
Right was also issued with respect to each share of common
stock issued since January 4, 1989. The rights are designed
to help management obtain fair and equal treatment for all
shareholders in the event of a potential takeover.
Each Right initially entitles the registered holder to
purchase from the Company one one-hundredth of a share of
Series A Junior Participating Preferred stock, par value $1,
of the Company at a price of $80, subject to adjustment.
In the event that any person or group acquires 20 percent
or more of the Company's common stock outstanding, each Right
(other than any Right held by the acquiring person or group)
will thereafter entitle the holder to receive upon exercise
shares of the Company's common stock having a market value of
two times the purchase price.
In the event that the Company is acquired in a merger or other business
combination transaction or 50 percent or more of its consolidated assets or
earning power is sold, each Right will thereafter entitle the holder to
receive, upon exercise, shares of common stock of the acquiring company having
a market value of two times the purchase price.
The Rights will not be exercisable and will be transferable
with and only with the common stock until 10 days after (i) a
public announcement that a person or group has acquired 20
percent or more of the Company's common stock outstanding, or
(ii) a public announcement or commencement of a tender or
exchange offer which would result in a person or group
acquiring 20 percent or more of the common stock.
The Rights expire on January 4, 1999, unless they are
redeemed by the Company at a price of $.01 per Right prior to
the acquisition by a person or group of 20 percent of the
Company's common stock outstanding. Pursuant to an amendment
adopted by the Board of Directors, the Rights will also
expire on the date which is 24 months after the first date
upon which the Company can generally be acquired by bank
holding companies, principally located in at least 15 of the
20 states which as of September 30, 1992, had the largest
amount of bank deposits.
Until the Right is exercised, the Right holder will have no
rights as a stockholder of the Company, including the right
to vote or to receive dividends.
NOTE J. Merger and Integration Charges
In 1993, the Company recorded merger and integration charges totaling $72.2
million relating to the acquisition of CNB. Charges of $29.7 million were
recorded for anticipated integration expenses, system and operational
conversions, and required customer communications costs. Premises and equipment
write-downs of $14.3 million relate to redundant main office and branch
facilities. Other charges, totaling $28.2 million, primarily involve severance.
In 1992, the Company recorded merger and integration
charges totaling $84.0 million relating primarily to the
acquisition of WCIC. Premises and equipment write-downs of
$31.2 million relate to the closing of redundant main office
and branch facilities. Securities and interest rate swap
write-downs of $12.6 million reflect the Company's intention
to dispose of certain mortgage-backed securities and swaps.
Other charges, totaling $40.2 million, primarily involve
severance, system conversions, and required customer
communications costs.
NOTE K. Employee Benefits
PENSION PLAN - Pension benefits are provided to substantially
all employees based on years of service and employees'
compensation while employed with the Company. Employees are
fully vested after five years of service.
The Company's funding policy is to contribute actuarially
determined amounts to the plan sufficient to meet the minimum
funding requirements set forth in the Employee Retirement
Income Security Act of 1974, plus such additional amounts as
the Company determines to be appropriate. The actuarial cost
method used to compute pension cost is the projected unit
credit method.
52 First Bank System, Inc. and Subsidiaries
- --
Prior to their acquisition dates, when they became participants in the
Company's plan, the former CNB and Boulevard employees were covered by separate,
noncontributory pension plans that provided defined benefits based on an
employee's years of service and compensation during employment.
The following table sets forth the aggregate funded status and the net
amounts recognized in the Company's balance sheet and statement of income for
the plans at December 31:
(Dollars in Millions) 1994 1993 1992
- ------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $267.1 million in 1994, $251.9 million in 1993, and
$213.8 million in 1992......................................... $(276.7) $(260.2) $(220.2)
===========================
Projected benefit obligation for service rendered to date.......... $(284.6) $(288.2) $(247.8)
Plan assets at fair value, primarily listed stocks and U.S. bonds.. 275.5 260.6 247.0
---------------------------
Deficiency of plan assets over projected benefit obligation........ (9.1) (27.6) (0.8)
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions............... 25.9 38.1 14.3
Unrecognized net asset at end of year (amortized over 15 years).... (23.6) (27.5) (26.8)
---------------------------
Accrued pension cost included in other liabilities................. $ (6.8) $ (17.0) $ (13.3)
===========================
Net pension costs include the following components:
Service cost-benefits earned during the period................... $ 19.2 $ 17.2 $ 14.9
Interest cost on projected benefit obligation.................... 21.2 20.8 20.9
Actual return on plan assets..................................... (9.7) (29.2) (18.0)
Net amortization and deferral.................................... (18.8) 2.4 (8.8)
---------------------------
Net periodic pension benefit cost.................................. $ 11.9 $ 11.2 $ 9.0
===========================
The FBS, CNB and Boulevard plans were valued separately for the years prior
to their acquisitions, and each plan independently determined its assumptions.
The aggregate disclosures, therefore, reflect the following weighted average
assumptions.
FBS CNB Boulevard
---------------------------------------
1994 1993 1992 1992 1993 1992
- -----------------------------------------------------------------------------------------------------------
Weighted average discount rate................................... 8.0% 7.0% 8.0% 9.0% 7.0% 8.3%
Expected long-term rate of return................................ 9.5 10.0 10.0 9.0 10.0 10.0
Rate of increase in future compensation.......................... 5.6 6.0 6.0 5.6 5.0 5.0
========================================
Other Postretirement Plans - In addition to providing pension benefits, the
Company provides certain health care and life insurance benefits to retired
employees. Substantially all of the Company's employees may become eligible for
these benefits at or after age 55 with at least five years of service and age
plus years of service equal to or greater than 65 while working for the Company.
Effective January 1, 1993, the Company revised the provisions of the
existing retiree health care plan. Under the terms of the new plan, the Company
will subsidize the cost of coverage for employees who retire before age 65 with
at least 10 years of service. The dollar amount of the subsidy will be based on
the employee's age and service at the time of retirement, and will remain frozen
until the retiree reaches age 65. After age 65 the retiree will assume
responsibility for the full cost of coverage. The new plan also contains other
cost-sharing features such as deductibles and coinsurance. The Company will
continue to subsidize the cost of coverage for employees who retired before
1993, and will subsidize the cost for certain employees who retire before 1995.
Those subsidies, as well as the retirees' contributions, will be adjusted
periodically.
First Bank System, Inc. and Subsidiaries 53
--
Effective January 1, 1992, the Company adopted SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," for its retiree
benefit plans. Under SFAS 106, the Company accrues the estimated cost of retiree
benefit payments, other than pensions, during employees' active service periods.
The Company elected to recognize the effect of this change in accounting on
the immediate recognition basis. The cumulative effect as of January 1, 1992, of
adopting SFAS 106 was the recognition of accrued postretirement health care
costs totaling $52.1 million. After related tax benefits of $20.5 million, net
income for 1992 was reduced by $31.6 million.
The Company currently intends to fund the postretirement benefit costs as they
are incurred. The following table sets forth the plan's funded status recognized
in the Company's balance sheet and statement of income at December 31:
(In Millions) 1994 1993
- ------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees................................................... $(41.3) $(48.5)
Fully eligible active plan participants.................... (3.6) (3.4)
Other active plan participants............................. (9.2) (12.5)
---------------
Total unfunded accumulated postretirement benefit
obligation.............................................. (54.1) (64.4)
Unrecognized net loss (gain) from past experience different
from that assumed and from changes in assumptions........... (9.3) 5.5
Unrecognized implementation obligation....................... 2.1 2.3
---------------
Accrued postretirement benefit cost.......................... $(61.3) $(56.6)
===============
Net periodic postretirement benefit cost includes the
following components:
Service cost -- benefits attributed to service during the
period...................................................... $ 1.1 $ 1.3
Interest cost on accumulated postretirement benefit
obligation.................................................. 4.0 4.7
Net amortization and deferral................................ .2 .2
---------------
Total postretirement benefit cost............................ $ 5.3 $ 6.2
===============
For measurement purposes, 11.0 percent and 7.0 percent annual rates of
increase in the per capita cost of covered health care benefits for participants
under age 65 and aged 65 and over, respectively, were assumed for 1994. For 1995
the annual rates of increase were assumed to be 10.0 percent and 6.5 percent,
respectively. Both rates were assumed to decrease gradually to 5.5 percent by
2003 and remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. To illustrate,
increasing the assumed health care cost trend rates by 1 percentage point in
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1994, by $5.3 million and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for the year then
ended by $.5 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 8.0 percent as of December 31, 1994, and
7.0 percent as of December 31, 1993.
54 First Bank System, Inc. and Subsidiaries
- --
STOCK PURCHASE PLAN - The 1984 Employee Stock Purchase Plan, as amended in 1989
and 1991, permits all eligible employees (those employed for one year with the
Company) and directors to purchase common stock. The plan provides for a
purchase price of 85 percent to 100 percent (as determined by a committee of the
Board of Directors for each purchase period) of the fair market value at the
beginning or the end of the purchase period, whichever is lower. For the current
option period ending June 30, 1995, the Committee approved an option price of 85
percent of fair market value. The plan results in no expense to the Company.
STOCK INCENTIVE PLAN - In April 1994, shareholders approved a revision to the
1991 Stock Incentive Plan, which increases the authorized issuance up to
5,000,000 shares of the Company's common stock. The Plan extends through April
2001. In April 1994, the shareholders also approved a Stock Incentive Plan which
authorizes the issuance of up to 5,000,000 shares of the Company's common stock.
This plan extends through January 2004. The terms of the new plan are
substantially the same as the 1991 Stock Incentive Plan. The Plans allow for the
granting of nonqualified stock options, incentive stock options, stock
appreciation rights (SARs), restricted stock or stock units (RSUs), performance
awards, dividend equivalents, and other stock-based awards at or above 100
percent of the market price at the date of grant. Awards may provide that upon
their exercise, the holder will receive shares of common stock or cash as
determined by a committee of the Board of Directors (Committee). Restrictions on
the restricted shares and RSUs generally limit the holders' rights to transfer
the shares during the restriction period determined by the Committee. At
December 31, 1994, there were 2,566,778 shares available, subject to adjustment
for forfeitures, for grant under the Plans.
Restricted shares granted under the Plans vest over periods of three to seven
years, with the vesting of certain shares being subject to acceleration based on
the performance of the Company in comparison to the performance of a
predetermined group of regional banks. Compensation expense related to these
shares is determined at the time of grant based on the market price of the
Company's stock and is amortized on a straight line basis over the vesting
period. For the performance-based restricted shares, compensation expense is
amortized using the midpoint of the vesting period.
Options granted under the Plans and predecessor plans are generally
exercisable up to 10 years from the date of grant. On the date exercised, the
option proceeds are credited to the common stock account to the extent of par
value of the shares issued and the excess is credited to capital surplus.
First Bank System, Inc. and Subsidiaries 55
--
The option information presented below has been restated to reflect options
under the WCIC and CNB Plans. The number and exercise price (option price) of
options and restricted shares granted under these plans were as follows:
Additional Shares Outstanding Option/Market
Available Under Outstanding Restricted Price
Incentive Plan Options Shares Per Share
- -------------------------------------------------------------------------------
DECEMBER 31, 1991*.. 4,166,357 3,588,598 4,800 $ 2.71 -30.125
=========
Granted:
Stock Options..... 852,616 - 23.50 -27.25
Restricted Stock.. - 166,583 24.50 -27.25
Exercised........... (661,338) - 2.71 -25.885
Cancelled........... (111,963) - 8.41 -30.125
---------------------------------------
DECEMBER 31, 1992*.. 2,178,975 3,667,913 171,383 $ 2.71 -30.125
=========
Granted:
Stock Options..... 837,041 - 28.625-33.75
Restricted Stock.. - 105,300 28.25 -33.25
Exercised........... (1,791,654) - 2.71 -30.125
Cancelled/Vested.... (54,883) (15,387) 8.41 -33.75
---------------------------------------
DECEMBER 31, 1993*.. 1,230,217 2,658,417 261,296 $ 8.41 -33.75
=========
Granted:
Stock Options..... 6,269,997 - 29.75 -39.00
Restricted Stock.. - 192,732 29.75 -39.00
Exercised........... (1,535,200) - 8.41 -35.25
Cancelled/Vested.... (323,856) (26,084) 8.41 -35.625
---------------------------------------
DECEMBER 31, 1994*.. 2,566,778 7,069,358 427,944 $ 8.41 -39.00
========= =======================================
*At December 31, 1994, 1993, 1992 and 1991 options for 2,867,020, 1,184,308,
2,359,958 and 1,511,350 shares, respectively, were exercisable.
56 First Bank System, Inc. and Subsidiaries
- --
NOTE L. Income Taxes
- --------------------
The components of income tax expense were:
(Dollars in Millions) 1994 1993 1992
- ----------------------------------------------------------------------------
FEDERAL:
Current tax.......................................... $147.5 $ 89.7 $38.7
Deferred tax provision............................... 75.3 59.3 21.4
---------------------
Federal income tax................................. 222.8 149.0 60.1
---------------------
STATE:
Current tax.......................................... 33.7 25.1 17.7
Deferred tax provision............................... .4 4.7 .8
---------------------
State income tax................................... 34.1 29.8 18.5
---------------------
Total income tax provision......................... $256.9 $178.8 $78.6
=====================
The reconciliation between income tax expense and the amount computed by
applying the statutory federal income tax rate was as follows:
(Dollars in Millions) 1994 1993 1992
- ------------------------------------------------------------------------
Tax at statutory rate (35% in 1994 and 1993,
34% in 1992)................................. $236.8 $166.9 $ 80.4
State income tax, at statutory rates, net
of federal tax benefit....................... 22.2 19.4 12.1
Tax effect of:
Tax-exempt interest:
Loans..................................... (5.8) (7.6) (10.9)
Securities................................ (4.1) (4.4) (4.2)
Amortization of goodwill.................... 8.6 7.3 3.7
Other items................................. (0.8) (2.8) (2.5)
------------------------
Applicable income taxes....................... $256.9 $178.8 $ 78.6
========================
At December 31, 1994, for income tax purposes, the Company had the following
net operating loss carryforwards available:
Expiration
(Dollars in Millions) Amount Dates
- -------------------------------------------------------------------------------
Federal regular tax operating loss carryforwards........... $ 2.2 2002
3.8 2003
5.2 2006
24.6 2008
-----
$35.8
==============
In addition, the Company has state net operating loss carryforwards of $206
million, primarily in one taxing jurisdiction. These carryforwards expire in
years 2001-2008.
First Bank System, Inc. and Subsidiaries 57
--
Deferred income tax assets and liabilities reflect the tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for the same items for income
tax reporting purposes. Significant components of the Company's deferred tax
assets and liabilities as of December 31 were as follows:
(Dollars in Millions) 1994 1993
- ---------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Loan loss reserves........................................... $ 169.5 $ 151.0
Adjustment of available-for-sale securities to market value.. 57.7 (20.9)
Real estate and other asset basis differences................ 32.4 50.2
Federal operating loss carryforward.......................... 12.9 7.2
State operating loss carryforward............................ 12.0 18.1
Deferred gain on sale of buildings........................... 11.2 12.5
Deferred loan fees........................................... 10.0 12.5
Accrued severance, pension and retirement benefits........... 6.7 9.9
Accelerated depreciation..................................... 2.0 (4.9)
Alternative minimum tax credit carryforward.................. -- 40.5
Contingent liabilities and other miscellaneous accruals...... 52.2 50.2
------------------
Gross deferred tax assets.................................. 366.6 326.3
DEFERRED TAX LIABILITIES:
Leasing activities........................................... (46.2) (46.9)
Deferred gains and other investment basis differences........ (37.0) (26.5)
Other deferred liabilities and reserves...................... (49.2) (73.3)
------------------
Gross deferred tax liabilities............................. (132.4) (146.7)
Deferred tax assets valuation reserve........................ (14.0) (19.6)
------------------
NET DEFERRED TAX ASSETS...................................... $ 220.2 $ 160.0
------------------
Effective January 1, 1992, the Company adopted the provisions of SFAS 109,
"Accounting for Income Taxes." This resulted in the recognition of $213.9
million of deferred tax assets at January 1, 1992, of which $188.9 million was
included in the 1992 results of operations as a cumulative effect of an
accounting change and $25.0 million pertaining to carryforwards resulting from
purchase business combinations was reflected as a reduction of goodwill.
Realization of the deferred tax asset over time is dependent upon the
Company generating sufficient taxable earnings in future periods. In determining
that realization of the deferred tax asset was more likely than not, the Company
gave consideration to a number of factors, including its recent earnings
history, its expectations for earnings in the future and, where applicable, the
expiration dates associated with tax carryforwards.
The Company's valuation allowance decreased $5.6 million from December 31,
1993, to December 31, 1994. During 1994, the Company realized tax benefits
related to state net operating losses and the related valuation allowance was
eliminated.
58 First Bank System, Inc. and Subsidiaries
- --
NOTE M. Financial Instruments With Off-Balance Sheet Risk and Credit
Concentrations
- --------------------------------------------------------------------
The Company uses various financial instruments that have off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to manage its interest rate risk. These instruments involve, to
varying degrees, elements of credit, interest rate, or liquidity risk. The
contract or notional amounts of these financial instruments at December 31 were
as follows:
(In Millions) 1994 1993
- -------------------------------------------------------------------------
Commitments to extend credit:
Commercial............................................. $6,980 $5,714
Corporate and purchasing cards......................... 3,210 1,744
Consumer credit card................................... 7,875 5,208
Other consumer......................................... 2,385 2,391
Letters of credit:
Standby................................................ 1,318 1,208
Commercial............................................. 175 135
Interest rate swap contracts:
Hedge.................................................. 2,674 2,811
Intermediated.......................................... 127 199
Interest rate options contracts:
Hedge interest rate floors purchased................... 950 950
Intermediated interest rate caps and floors purchased.. 127 225
Intermediated interest rate caps and floors written.... 127 225
Liquidity support guarantees............................. 142 157
Forward and option contracts............................. 196 1,352
Mortgages sold with recourse............................. 156 198
Commitments to sell loans................................ 875 132
Foreign currency commitments:
Commitments to purchase................................ 941 1,073
Commitments to sell.................................... 941 1,073
==============
COMMITMENTS TO EXTEND CREDIT - Commitments to extend credit are legally
binding and generally have fixed expiration dates or other termination clauses.
The contractual amount of the commitments represents the Company's exposure to
credit loss on commitments to extend credit, in the event of nonperformance by
the counterparty. The Company monitors its credit risk for commitments to extend
credit by applying the same credit policies in making commitments as it does for
loans, including obtaining collateral to secure commitments based on
management's credit assessment of the counterparty. Collateral held varies, but
may include marketable securities, receivables, inventory, equipment, and real
estate. Since the Company expects many of the commitments will expire without
being drawn upon, total commitment amounts do not necessarily represent the
Company's future liquidity requirements. In addition, the commitments to extend
consumer credit include various consumer credit line products that are
cancelable upon notification.
LETTERS OF CREDIT - Standby letters of credit are conditional commitments
issued by the Company guaranteeing the performance of a customer to a third
party. The guarantees frequently support public and private borrowing
arrangements, including commercial paper issuances, bond financings, and other
similar transactions. The Company issues commercial letters of credit on behalf
of customers to ensure payment of amounts owed or collection of amounts
receivable in connection with trade transactions. The Company's credit loss
exposure in the event of counterparty nonperformance is the letter of credit
contractual amount and is the same exposure involved in extending loans.
Management assesses the counterparty's credit to determine the collateral
obtained to support the letters of credit. Collateral held varies, but may
include marketable securities, real estate, accounts receivable and inventory.
Since the conditions requiring the Company to fund letters of credit may not
materialize, the Company expects the letters of credit liquidity requirements to
be less than the total outstanding commitments.
First Bank System, Inc. and Subsidiaries 59
--
INTEREST RATE OPTIONS AND SWAPS - Interest rate swaps involve the contractual
exchange of fixed and floating rate interest payment obligations based on a
notional principal amount. The Company enters into interest rate swap contracts
to hedge its balance sheet for risk caused by fluctuations in interest rates and
as an intermediary for customers. At December 31, 1994, and 1993, interest rate
swaps totaling $2.7 billion and $2.8 billion, respectively, hedged medium-term
notes, subordinated debt, deposit notes, long-term certificates of deposit,
deposit accounts, savings certificates and commercial loans.
Activity with respect to interest rate swap hedges was as follows:
(In Millions) 1994 1993 1992
- -------------------------------------------------------------------------------
Notional amount outstanding at beginning
of year...................................... $2,810.8 $2,659.8 $2,009.7
Additions...................................... 1,275.0 400.0 1,161.0
Maturities..................................... (624.1) (225.8) (279.1)
Terminations................................... (787.9) (23.2) (231.8)
------------------------------
Notional amount outstanding at end of year... $2,673.8 $2,810.8 $2,659.8
==============================
For interest rate swaps designated as hedges, the weighted average interest
rates to be paid were 6.09 percent and 3.32 percent at December 31, 1994, and
1993, respectively. At these same dates, the weighted average interest rates to
be received were 6.91 percent and 6.98 percent. FBS is a receiver of fixed rate
interest and a payer of floating rate interest on all hedges as of December 31,
1994.
For notional balances and yields by maturity date of the interest rate swap
hedging portfolio as of December 31, 1994, see Table 17 on page 33. For a
description of the Company's objectives for using derivative financial
instruments, refer to "Interest Rate Risk Management" on pages 31 through 33.
Such information is incorporated by reference into these Notes to Consolidated
Financial Statements.
At December 31, 1994, and 1993, interest rate floors totaling $950 million
with an average remaining maturity of 3.0 years and 4.0 years, respectively,
hedged floating rate commercial loans. For interest rate floors designated as
hedges, the weighted average 3-month LIBOR strike was 3.50 percent, compared
with a corresponding market index of 6.50 percent.
In addition to utilizing swaps and options as part of the Company's
asset/liability management strategy, the Company also acts as intermediary for
swap and option agreements on behalf of its customers. To reduce its exposure to
interest and market risks related to these agreements, the Company enters into
generally matching or offsetting positions. The total notional amount of
customer swap agreements, including the offsetting positions, was $127 million
and $199 million at December 31, 1994, and 1993, respectively. The total
notional amount of customer option agreements, including the offsetting
positions, was $254 million and $450 million at December 31, 1994, and 1993,
respectively.
Interest rate swap and option contracts will result in gains and losses
subsequent to the date of the contract, due to interest rate movements. For
intermediated swaps and options, the Company records these gains and losses as
they occur in trading income. For swaps used as hedges, the Company recognizes
the gains or losses as an adjustment to interest income or expense over the
terms of the hedge. The Company amortizes the gain or loss on terminated hedges
over the original life of the hedge if the hedged item remains outstanding. The
amortization of deferred gains and losses increased net interest income by $3.1
million and decreased net interest income by $.9 million during 1994, and 1993,
respectively. Unamortized deferred gains were $9.6 million at December 31, 1994.
The Company will amortize these gains through the year 2000.
Interest rate swap and option agreements contain credit risk in the event
counterparties are unable to meet the terms of their contracts. The Company
estimates the credit risk for interest rate swap and option contracts by
calculating the present value of the cost to replace all outstanding contracts
in a gain position at current market rates, excluding counterparty contract
gains and losses reported on a net basis. At December 31, 1994, and 1993, the
gain position of these contracts, in the aggregate, was approximately $12
million and $172 million, respectively.
The Company manages the credit risk of its interest rate swap and option
contracts through credit approvals, limits, bilateral collateral agreements and
monitoring procedures. Independent commercial bankers perform credit analyses to
establish counterparty limits. Senior management approves counterparty limits
and periodically reviews the limits to monitor compliance. In addition, the
Company reduces the assumed counterparty credit risk through master netting
agreements which permit the Company to settle interest rate contracts with the
same counterparty on a net basis.
60 First Bank System, Inc. and Subsidiaries
- --
LIQUIDITY SUPPORT GUARANTEES - Liquidity support guarantees are contracts
whereby the Company agrees to provide a liquidity facility to support commercial
paper or tax-exempt bonds issued by its customers. The contracts are secured by
notes receivable, bonds or private insurance, guaranteeing payment of principal
and interest on any unreimbursed funds advanced. Since the conditions that
require the Company to fund the guarantees may not materialize, total guarantee
amounts do not necessarily represent the Company's future funding obligation.
FORWARD CONTRACTS AND COMMITMENTS TO SELL MORTGAGE LOANS - Forward contracts are
contracts for the delayed delivery of securities or cash settlement money market
instruments. The Company enters into these contracts to hedge the interest rate
risk of its mortgage loans held for sale. At December 31, 1994, and 1993,
forward contracts outstanding were $.2 billion and $1.4 billion, respectively.
At December 31, 1994, net unamortized deferred gains on the forward agreements
were $200,000. The Company manages its credit risk on forward contracts, which
would arise in the event of nonperformance by counterparties, through credit
approval and limit procedures.
The Company is committed under agreements, which are not expected to result in
loss to the Company, to sell mortgage loans pursuant to master delivery
commitments, and the remaining balance on those commitments was $875 million at
December 31, 1994, and $132 million at December 31, 1993.
MORTGAGES SOLD WITH RECOURSE - Various recourse provisions, relating to
residential and multi-family mortgages sold with recourse, obligate the Company
for $156 million at December 31, 1994, and $198 million at December 31, 1993.
All of the loans sold are collateralized by real estate mortgages and a portion
of some of the loans sold is supported by either government-sponsored or private
mortgage insurance.
FOREIGN CURRENCY COMMITMENTS - Commitments to purchase and sell foreign currency
primarily consist of contracts to exchange currencies at specified exchange
rates on specified dates with various counterparties, which enables customers to
transfer or reduce the risks associated with changes in foreign currency
exchange rates. The Company minimizes the market and liquidity risks created by
changes in currency exchange rates by taking offsetting positions. In addition,
the Company controls the market risks associated with these contracts by
limiting the net exposure through policies, procedures, and monitoring. The
Company manages its credit risk, or potential risk of loss from contract
nonperformance by a counterparty, through credit limit approval and monitoring
procedures. The aggregate replacement cost of contracts in a gain position at
December 31, 1994, was not significant.
CREDIT CONCENTRATIONS - The Company concentrates its lending to borrowers in the
region where the Company has banking offices and lends to borrowers in a wide
variety of industries.
Approximately 75 percent of the Company's commercial and financial portfolio
is outstanding to borrowers located in the Company's operating region of
Minnesota, Colorado, Wisconsin, Montana, North Dakota, South Dakota, and
Illinois. Collateral held may include marketable securities, accounts
receivable, inventory, and equipment.
For detail of the Company's real estate portfolio by project type and
geography as of December 31, 1994, and 1993, see Table 8 on page 24 which is
incorporated by reference into these Notes to Financial Statements. Such loans
are collateralized by the related property.
For detail of the Company's consumer loan portfolio by loan type see Table 7
on page 23 under the category "Consumer" as of December 31, 1994, and 1993,
which is incorporated by reference into these Notes to Financial Statements.
Approximately 80 percent of the total consumer portfolio outstanding at December
31, 1994, is to customers located in the Company's operating region. Residential
mortgages, home equity and auto loans are secured, but other consumer loan types
are generally not secured.
NOTE N. Fair Values of Financial Instruments
- --------------------------------------------
SFAS 107, "Disclosures about Fair Value of Financial Instruments," requires
the disclosure of the fair value of all financial instruments, both on and off
balance sheet, for which it is practicable to estimate their value. Financial
instruments are generally defined as cash, equity instruments or investments,
First Bank System, Inc. and Subsidiaries 61
--
and contractual obligations to pay or receive cash or another financial
instrument. In defining fair value, the Statement indicates quoted market prices
are the preferred means of estimating the value of a specific instrument, but in
the cases where market quotes are not available, fair values should be
determined using various valuation techniques such as discounted cash flow
calculations or by using pricing models or services.
Due to the nature of its business and the financing and investing needs of its
customers, the Company is involved with a large number of financial instruments,
the majority of which are not actively traded. Accordingly, the Company has used
several valuation techniques and considered various assumptions, including the
discount rate, the estimated timing and amount of cash flows and the aggregation
methods for valuing similar products, to estimate the fair value of the
financial instruments. As a result, the fair value estimates cannot be
substantiated by comparison to independent markets, and in a majority of the
cases, could not be realized by the immediate sale or settlement of the
financial instrument. Also, the estimates reflect a point in time valuation that
could change significantly based on changes in outside economic factors, such as
the general level of interest rates. Furthermore, the required disclosures
exclude the estimated values of certain financial instruments and all
nonfinancial instrument cash flows. Finally, the fair value disclosure is not
intended to provide or estimate a market value of the Company as a whole. The
following summarizes the valuation techniques and assumptions used by the
Company in estimating the fair value of the financial instruments:
CASH AND CASH EQUIVALENTS - Cash, fed funds sold and investments under
repurchase programs have no interest rate risk component and accordingly their
carrying value was assumed to approximate fair value.
SECURITIES - Generally, trading securities and available-for-sale securities
were valued using available market quotes. In some instances, for securities
that are not widely traded, market quotes for comparable securities were used.
LOANS - The loan portfolio consists of both variable rate and fixed rate loans,
the fair value of which was estimated using discounted cash flow analyses or
other valuation techniques. In order to apply discounted cash flow analyses,
loans were aggregated into "pools" of similar types and expected repayment
terms. The expected cash flows were reduced for estimated historical prepayment
experience. The projected cash flows on nonaccrual loans were further reduced by
the amount of estimated losses on the portfolio and discounted over an assumed
average remaining life of one to two years.
COMMERCIAL AND FINANCIAL INSTITUTIONS: Commercial and financial institution
loans were valued using a discounted cash flow analysis. The fixed rate loans in
the commercial and financial institutions portfolio (excluding nonaccrual loans)
had a weighted average rate of 8.1 percent in 1994 and 7.5 percent in 1993 and a
weighted average maturity of 1.7 years in 1994 and 1993. The floating rate loans
had a weighted average rate of 8.4 percent in 1994 and 5.7 percent in 1993. The
high grade corporate bond yield curve was used to arrive at the discount rates
applied to these loans.
CORPORATE CARD: The fair value of corporate cards and business cards was based
on an approach that is similar to that used by the Company to evaluate potential
acquisitions of portfolios of this type. Estimated net income adjusted for
account attrition was discounted using an estimated cost of capital of 13.6
percent in 1994 and 13.7 percent in 1993. The weighted average life was 7.6
years in 1994 and 9.3 years in 1993.
COMMERCIAL REAL ESTATE AND CONSTRUCTION: Commercial real estate and
construction loans were valued using a discounted cash flow analysis. The fixed
rate portion of this portfolio (excluding nonaccrual loans) had a weighted
average interest rate of 8.8 percent and a weighted average remaining maturity
of 4.5 years in 1994 compared to 9.0 percent and 4.2 years in 1993. The floating
rate portion of this portfolio (excluding nonaccrual loans) had a weighted
average interest rate of 9.0 percent and a weighted average remaining maturity
of 3.7 years in 1994 compared to 9.0 percent and 4.2 years in 1993. The high
grade corporate bond yield curve was used to arrive at the discount rates
applied to these loans.
RESIDENTIAL FIRST MORTGAGES: Residential first mortgages were segregated into
pools of similar coupons and maturities. These pools were matched to similar
mortgage-backed securities, and
62 First Bank System, Inc. and Subsidiaries
- --
market quotes were obtained. In addition, the fair value of the mortgage
servicing rights related to these mortgages was estimated using a discounted
cash flow analysis and was included in the fair value of the loans. The fixed
rate portion of this portfolio had a weighted average interest rate of 8.0
percent in 1994 and 8.1 percent in 1993 with a weighted average contractual
final remaining maturity of 15.3 years in 1994 and 14.2 years in 1993.
CONSUMER INSTALLMENT: Fair value for consumer installment loans was estimated
using a discounted cash flow analysis. Prepayment assumptions ranging from 20-25
percent were applied to scheduled cash flows, based upon the Company's
experience with these assets. The floating rate portion of the consumer
installment loan portfolio had a weighted average rate of 9.0 percent in 1994
and 7.0 percent in 1993. The fixed rate portion of this portfolio had a weighted
average rate of 8.8 percent in 1994 and 9.2 percent in 1993 and a weighted
average remaining maturity of 1.4 years in 1994 and 1993. The high grade
corporate bond yield curve was used to arrive at the discount rates applied to
these loans.
REVOLVING HOME EQUITY LINES, SECOND MORTGAGES AND CONSUMER LINES: The fair
value of revolving home equity lines, second mortgages and consumer lines was
based on an approach similar to that used by the Company to evaluate potential
acquisitions of portfolios of this type. Estimated net income adjusted for
account attrition was discounted using an estimated cost of capital of 12.1
percent for secured lines and loans and 13.6 for unsecured lines in 1994 and
13.7 percent for both secured and unsecured lines in 1993. The home equity lines
had a weighted average interest rate of 10.4 percent in 1994 and 7.8 percent in
1993 with a weighted average life of 5.4 years in 1994 and 5.3 years in 1993.
The fixed rate portion of the second mortgage loan portfolio had a weighted
average rate of 8.9 percent in 1994 and 9.0 percent in 1993 and a weighted
average remaining maturity of 3.6 years in 1994 and 2.3 years in 1993. Retail
credit cards had a weighted average interest rate of 16.9 percent in 1994 and
15.4 percent in 1993 with a weighted average life of 7.1 years in 1994 and 7.3
years in 1993. Other revolving lines had a weighted average interest rate of
12.4 percent in 1994 and 10.6 percent in 1993 with a weighted average life of
7.8 years in 1994 and 7.6 years in 1993.
CORE DEPOSIT INTANGIBLE - Core deposits provide a stable, low-cost source of
funds which can be invested to earn a return greater than the cost of servicing
the deposits. The fair value of the Company's core deposits was estimated using
a discounted cash flow model which estimates the present value of the difference
between the ongoing cost of the core deposits and the cost of alternative funds
at current market rates. This is the same method the Company uses in calculating
the value of the core deposit intangible of an acquired bank.
DEPOSIT LIABILITIES - The fair value of demand deposits, savings accounts and
certain money market deposits is defined by SFAS 107 to be equal to the amount
payable on demand at the date of the financial statements. Fair values for fixed
rate certificates of deposits were estimated using a discounted cash flow
analysis using the high grade corporate bond yield curve to establish discount
rates. The weighted average interest rate for the certificate of deposits was
5.3 percent in 1994 and 4.4 percent in 1993 and the weighted average maturity
was 1.2 years in 1994 and 1.0 year in 1993.
SHORT-TERM BORROWINGS - The majority of the federal funds purchased, borrowings
under repurchase agreements and other short-term borrowings are at variable
rates or have short-term maturities and their carrying value is assumed to
approximate their fair value.
LONG-TERM DEBT - Medium-term notes and mortgage note obligations totaling $514
million in 1994 and $123 million in 1993 were valued with a discounted cash flow
analysis using current market rates of similar maturity debt securities to
discount cash flows. The weighted average interest rate was 6.5 percent in 1994
and 9.4 percent in 1993 with a weighted average maturity of 1.7 years in 1994
and .7 years in 1993. Other long-term debt instruments were valued using
available market quotes.
LOAN COMMITMENTS, LETTERS OF CREDIT AND GUARANTEES - The substantial majority of
the Company's commitments have variable rates and do not expose the Company to
interest rate risk. No premium or discount was ascribed to loan commitments
because when funded, virtually all funding will be at current market rates.
First Bank System, Inc. and Subsidiaries 63
--
INTEREST RATE SWAPS, OPTIONS, FLOORS AND CAPS - The interest rate options and
swap cash flows were estimated using a third party pricing model and discounted
based on appropriate LIBOR, Euro dollar future and Treasury yield curves.
The estimated fair values of the Company's financial instruments are shown
in the table below.
1994 1993
-------------------------------------
Carrying Fair Carrying Fair
(Dollars in Millions) Amount Value Amount Value
- ---------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and due from banks............................. $ 1,621 $ 1,621 $ 1,682 $ 1,682
Federal funds sold and resale agreements............ 471 471 1,338 1,338
Trading account securities.......................... 77 77 55 55
Available-for-sale securities....................... 3,148 3,148 3,319 3,319
Loans:
Commercial:
Commercial........................................ 7,479 7,623 6,359 6,579
Financial institutions............................ 787 719 2,004 1,828
Commercial real estate and construction........... 2,149 2,292 1,726 1,968
Consumer:
Residential mortgage.............................. 2,273 2,180 2,422 2,482
Residential mortgage held for sale................ 162 162 1,088 1,105
Home equity and second mortgage................... 2,199 2,260 1,755 1,820
Credit card and revolving lines................... 3,103 3,339 2,447 2,673
Other consumer installment........................ 1,129 1,143 978 1,016
Allowance for credit losses......................... (434) - (423) -
-------------------------------------
Total loans..................................... 18,847 19,718 18,356 19,471
-------------------------------------
Total financial assets.......................... 24,164 25,035 24,750 25,865
NONFINANCIAL ASSETS:
Core deposit intangible............................. 60 823 41 220
Mortgage servicing portfolio........................ 43 126 53 80
-------------------------------------
Total........................................... 24,267 $25,984 24,844 $26,165
======= =======
Other assets.......................................... 1,952 1,541
------- -------
Total Assets.................................... $26,219 $26,385
======= =======
FINANCIAL LIABILITIES:
Deposits:
Noninterest-bearing deposits...................... $ 5,777 $ 5,777 $ 7,489 $ 7,489
Interest-bearing checking and other savings....... 7,696 7,696 8,115 8,115
Savings certificates and certificates
(Greater Than)$100,000........................... 5,318 5,217 5,427 5,498
-------------------------------------
Total deposits.................................. 18,791 18,690 21,031 21,102
Federal funds purchased............................. 1,630 1,630 553 553
Securities sold under agreements to repurchase...... 534 536 369 378
Other short-term funds borrowed..................... 658 658 412 412
Long-term debt...................................... 1,483 1,439 1,015 1,036
-------------------------------------
Total financial liabilities..................... 23,096 $22,953 23,380 $23,481
======= =======
NONFINANCIAL LIABILITIES.............................. 848 760
SHAREHOLDERS' EQUITY.................................. 2,275 2,245
------- -------
Total Liabilities and Shareholders' Equity...... $26,219 $26,385
======= =======
Off-Balance Sheet Financial Instruments:
Unrecognized gain on interest rate swaps and
options............................................ N/A $ 3 N/A $ 134
Unrecognized loss on interest rate swaps and
options............................................ N/A 121 N/A 11
Loan commitments.................................... N/A N/A
Letters of credit................................... N/A - N/A -
-------------------------------------
64 First Bank System, Inc. and Subsidiaries
- --
Note O. Commitments and Contingent Liabilities
- ------------------------------------------------
Rental expense for operating leases amounted to $66.2 million in 1994, $72.1
million in 1993 and $66.4 million in 1992.
Future minimum payments, by year and net of sublease rentals, under
capitalized leases and noncancelable operating leases with initial terms of one
year or more, consisted of the following at December 31, 1994:
Capitalized Operating
(In Millions) Leases Leases
- ------------------------------------------------------------------------------
1995................................................ $ 10.6 $ 49.1
1996................................................ 10.7 42.4
1997................................................ 10.7 40.2
1998................................................ 4.5 39.4
1999................................................ 4.5 79.0
Thereafter.......................................... 62.9 310.1
-------------------
Total minimum lease payments........................ 103.9 $560.2
======
Less amount representing interest................... 51.1
------
Present value of net minimum lease payments......... $ 52.8
======
The Company currently occupies approximately 640,000 square feet in First Bank
Place, located in Minneapolis, under a 10-year lease. The Company has eight
five-year options to renew the lease. Minimum rental payments are approximately
$12.5 million annually.
In November 1992 the Company acquired a 368,000 square foot facility in St.
Paul. The lease term extends for 21 years, commencing November 1991, with two
five-year renewal options. Minimum rental payments are approximately $4.2
million annually.
A wholly-owned subsidiary of First Bank National Association ("the Bank") is a
partner in a joint venture that owns and operates a twin-tower office complex
known as Pillsbury Center. The Bank and the Parent Company have long-term lease
agreements to occupy space in one of the towers. Approximately two-thirds of the
space has been sublet for the remaining life of the long-term lease obligation
and the remaining space has been sublet through the year 2001. The unamortized
portion of the capitalized lease was $23.0 million at December 31, 1994, and
$23.3 million at December 31, 1993. Minimum annual payments required under the
leases are approximately $2.7 million.
Various legal proceedings are currently pending against the Company. Due to
the complex nature of some of these actions and proceedings, it may be a number
of years before such matters ultimately are resolved. In the opinion of
management, the aggregate liability, if any, will not have a material adverse
effect on the Company's financial position.
First Bank System, Inc. and Subsidiaries 65
--
NOTE P. Supplemental Disclosures to the Consolidated Financial Statements
- --------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET - Time certificates of deposit in
denominations of $100,000 or more totaled $896 million and
$1,061 million at December 31, 1994, and 1993, respectively.
CONSOLIDATED STATEMENT OF CASH FLOWS - Listed below are
supplemental disclosures to the Consolidated Statement of
Cash Flows.
Year Ended December 31 (In Millions) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------
Income taxes paid................................................................. $ 147.1 $114.2 $ 53.5
Interest paid..................................................................... 529.0 567.1 716.6
Net noncash transfers to foreclosed property...................................... 13.1 26.8 71.6
Noncash merger-related transfers to securities held for sale...................... - 181.6 -
Change in unrealized gain (loss) on available-for-sale securities,
net of taxes of $78.6 in 1994 and $20.9 in 1993................................. (128.1) 34.0 -
Cash acquisitions of businesses:
Fair value of noncash assets acquired........................................... 276.9 40.8 26.0
Liabilities assumed............................................................. (219.5) (37.8) (93.4)
------------------------------
Net........................................................................... $ 57.4 $ 3.0 $ (67.4)
==============================
Stock acquisitions of businesses:
Fair value of noncash assets acquired........................................... $ 1,805.8 - $ 2,096.0
Net cash acquired............................................................... 74.5 - 197.1
Liabilities assumed............................................................. (1,648.0) - (2,060.1)
------------------------------
Net value of common stock issued.............................................. $ 232.3 - $ 233.0
==============================
NOTE Q. First Bank System, Inc. (Parent Company)
- -------------------------------------------------
CONDENSED BALANCE SHEET
December 31 (In Millions) 1994 1993
-------------------------------------------------------------------------------------------------------------------
ASSETS
Deposits with banks, principally interest-bearing (including $373 and $139 with subsidiaries).. $ 374 $ 140
Available-for-sale securities.................................................................. 149 121
Investments in:
Bank affiliates and bank holding companies................................................... 2,322 2,315
Nonbank affiliates........................................................................... 44 69
Trust affiliates............................................................................. 56 51
Advances to:
Bank affiliates and bank holding companies................................................... 155 141
Nonbank affiliates........................................................................... 100 67
Other assets................................................................................... 270 233
------------------
Total assets............................................................................... $3,470 $3,137
==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term funds borrowed...................................................................... $ 6 $ 4
Advances from subsidiaries..................................................................... 30 54
Long-term debt................................................................................. 1,011 745
Other liabilities.............................................................................. 148 89
Shareholders' equity........................................................................... 2,275 2,245
------------------
Total liabilities and shareholders' equity................................................. $3,470 $3,137
==================
66 First Bank System, Inc. and Subsidiaries
- --
CONDENSED STATEMENT OF INCOME
Year Ended December 31 (In Millions) 1994 1993 1992
- ------------------------------------------------------------------------------------------------
INCOME
Dividends from subsidiaries (including $397.9, $357.4 and $152.0
from bank and bank holding company subsidiaries)................... $430.9 $361.4 $158.9
Interest from subsidiaries........................................... 19.0 20.4 24.8
Service and management fees from subsidiaries........................ 78.6 69.3 64.9
Other income......................................................... 23.5 20.3 16.4
------------------------
Total income..................................................... 552.0 471.4 265.0
EXPENSES
Interest on short-term funds borrowed................................ 2.8 2.4 .6
Interest on long-term debt........................................... 47.4 44.0 46.6
Operating expenses paid to subsidiaries.............................. 8.3 7.0 7.0
Other expenses....................................................... 91.9 97.1 75.2
------------------------
Total expenses................................................... 150.4 150.5 129.4
------------------------
Income before income taxes, cumulative effect of changes
in accounting principles and equity in undistributed income
of subsidiaries.................................................... 401.6 320.9 135.6
Income taxes (benefit)............................................... (9.2) (14.3) 47.0
------------------------
Income before cumulative effect of changes in accounting principles
and equity in undistributed income of subsidiaries................. 410.8 335.2 88.6
Cumulative effect of changes in accounting principles................ - - 40.3
------------------------
Income of parent company............................................. 410.8 335.2 128.9
Equity (deficiency) in undistributed income of subsidiaries:
Bank affiliates and bank holding companies......................... 23.0 (47.9) 165.2
Nonbank affiliates................................................. (19.5) 4.0 14.3
Trust affiliates................................................... 5.5 6.7 3.4
------------------------
9.0 (37.2) 182.9
------------------------
Net income....................................................... $419.8 $298.0 $311.8
========================
First Bank System, Inc. and Subsidiaries 67
--
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31 (In Millions) 1994 1993 1992
- ---------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income...................................................... $ 419.8 $ 298.0 $ 311.8
Adjustments to reconcile net income to net cash
provided by operating activities:
(Equity) deficiency in undistributed income of subsidiaries
before cumulative effect of accounting changes.............. (9.0) 37.2 (182.9)
Cumulative effect of accounting changes....................... - - (40.3)
Decrease (increase) in accrued receivables, net............... 46.1 (5.7) .2
(Decrease) increase in accrued liabilities, net............... (15.4) (30.7) 68.5
Amortization of goodwill and other intangibles................ 5.5 5.4 4.9
Deferred tax provision........................................ 53.2 13.4 (7.6)
Other -- net.................................................. (39.7) (31.7) 8.4
---------------------------
Net cash provided by operating activities................... 460.5 285.9 163.0
INVESTING ACTIVITIES
Securities transactions:
Sales and maturities.......................................... 20.4 22.5 26.9
Purchases..................................................... (55.2) (61.3) (45.5)
Investment in subsidiaries...................................... (83.7) (43.2) (158.7)
Equity distributions from subsidiaries.......................... 235.0 - -
Net (increase) decrease in short-term advances to affiliates.... (50.0) 54.2 21.9
Long-term advances made to affiliates........................... - (22.4) (40.0)
Principal collected on long-term advances made to affiliates.... 0.3 126.0 .8
Other -- net.................................................... (31.6) 23.3 16.6
---------------------------
Net cash provided (used) by investing activities............ 35.2 99.1 (178.0)
FINANCING ACTIVITIES
Net (decrease) increase in short-term funds borrowed............ (25.1) 44.5 10.7
Proceeds from long-term debt.................................... 405.1 240.0 125.8
Principal payments on long-term debt............................ (138.8) (244.7) (88.0)
Redemption of preferred stock................................... (167.0) (115.2) -
Proceeds from dividend reinvestment, stock option, and
stock purchase plans.......................................... 22.9 34.5 19.2
(Purchase) issuance of treasury stock and stock warrants........ (222.7) (187.1) 2.8
Stock warrants exercised........................................ 6.6 - -
Cash dividends.................................................. (142.1) (137.5) (100.1)
---------------------------
Net cash used by financing activities....................... (261.1) (365.5) (29.6)
---------------------------
Change in cash and cash equivalents......................... 234.6 19.5 (44.6)
Cash and cash equivalents at beginning of year.................. 139.5 120.0 164.6
---------------------------
Cash and cash equivalents at end of year.................... $ 374.1 $ 139.5 $ 120.0
===========================
Certain restrictions exist regarding the extent to which bank subsidiaries
may transfer funds to the Company in the form of dividends, loans or advances.
Federal law prevents the Company and its nonbank subsidiaries from borrowing
from bank subsidiaries unless the loans are secured by various types of
collateral. These secured loans that may be made by bank subsidiaries to the
Company or any individual affiliate are generally limited to 10 percent of the
bank's equity and 20 percent of the bank's equity for loans to all affiliates
and the Company in the aggregate.
Payment of dividends to the Company by its subsidiary banks is subject to
review by banking regulators and is subject to various statutory limitations and
in certain circumstances requires approval by banking regulatory agencies. The
approval of the Comptroller of the Currency is required if total dividends
declared by a national bank in any calendar year exceed the bank's net profits
(as defined) for that year combined with its retained net profits for the
preceding two calendar years. These permissible dividends are further limited by
the minimum capital constraints imposed on all national banks by the Comptroller
of the Currency. Within the limit of these regulatory guidelines, all
subsidiaries have the ability to pay dividends without prior regulatory
approval.
68 First Bank System, Inc. and Subsidiaries
- --
REPORT OF MANAGEMENT
The financial statements of First Bank System, Inc. were prepared by management,
which is responsible for their integrity and objectivity. The statements have
been prepared in conformity with generally accepted accounting principles
appropriate in the circumstances and include amounts that are based on
management's best estimates and judgment. All financial information throughout
the annual report is consistent with that in the financial statements.
The Company maintains accounting and internal control systems that are
believed to provide reasonable assurance that assets are safeguarded and
transactions are properly authorized and recorded. To monitor compliance, the
Company carries out an extensive audit program. This program includes a review
for compliance with written policies and procedures and a comprehensive review
of the adequacy and effectiveness of internal control systems. However, there
are limits inherent in all systems of internal accounting control and management
recognizes that errors or irregularities may occur. Based on the recognition
that the costs of such systems should not exceed the benefits to be derived,
management believes the Company's system provides an appropriate cost/benefit
balance.
The Company's independent auditors, Ernst & Young LLP, have been engaged to
render an opinion on the financial statements and to assist in carrying out the
audit program described above. Their opinion on the financial statements is
based on procedures performed in accordance with generally accepted auditing
standards, including tests of the accounting records to the extent necessary to
allow them to report on the fairness of the financial statements. Ernst & Young
LLP has full access to the Audit Committee.
The management of the Company is committed to and has always maintained and
enforced a philosophy of high ethical standards in the conduct of its business.
Written policies covering conflicts of interest and other subjects are
formulated in a Code of Ethics which is uniformly applicable to all officers and
employees of the Company.
/s/ John F. Grundhofer
John F. Grundhofer
Chairman, President and Chief Executive Officer
/s/ Richard A. Zona
Richard A. Zona
Vice Chairman and Chief Financial Officer
/s/ David J. Parrin
David J. Parrin
Senior Vice President and Controller
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
First Bank System, Inc.
We have audited the accompanying consolidated balance sheets of First Bank
System, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Bank System,
Inc. and subsidiaries at December 31, 1994 and 1993, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1994, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Minneapolis, Minnesota
January 24, 1995
First Bank System, Inc. and Subsidiaries 69
--
CONSOLIDATED BALANCE SHEET - FIVE-YEAR SUMMARY
% Change
December 31 (In Millions) 1994 1993 1992 1991 1990 1993-1994
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks........................... $ 1,621 $ 1,682 $ 1,916 $ 1,593 $ 1,922 (3.6)%
Federal funds sold and resale agreements.......... 471 1,338 1,710 1,509 1,602 (64.8)
Interest-bearing deposits with banks.............. - - 327 410 58 **
Trading account securities........................ 77 55 94 151 136 40.0
Securities held for sale.......................... - - 284 336 - **
Securities:*
U.S. Treasury................................... 1,098 1,541 1,816 1,155 964 (28.7)
Mortgage-backed securities...................... 1,414 1,300 1,583 1,165 1,577 8.8
State and political subdivisions................ 178 196 188 166 445 (9.2)
U.S. agencies and other......................... 458 282 325 19 420 62.4
---------------------------------------------------
Total securities.............................. 3,148 3,319 3,912 2,505 3,406 (5.2)
Loans............................................. 19,281 18,779 17,076 16,365 16,829 2.7
Less allowance for credit losses................ 434 423 448 427 454 2.6
---------------------------------------------------
Net loans..................................... 18,847 18,356 16,628 15,938 16,375 2.7
Other assets...................................... 2,055 1,635 1,754 1,409 1,305 25.7
---------------------------------------------------
Total assets................................ $26,219 $26,385 $26,625 $23,851 $24,804 (.6)%
===================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing............................. $ 5,777 $ 7,489 $ 6,011 $ 4,723 $ 4,295 (22.9)%
Interest-bearing................................ 13,014 13,542 15,177 14,422 15,083 (3.9)
---------------------------------------------------
Total deposits.............................. 18,791 21,031 21,188 19,145 19,378 (10.7)
Short-term borrowings............................. 2,822 1,334 1,450 1,303 1,651 111.5
Long-term debt.................................... 1,483 1,015 822 948 1,506 46.1
Other liabilities................................. 848 760 847 603 669 11.6
---------------------------------------------------
Total liabilities........................... 23,944 24,140 24,307 21,999 23,204 (.8)
Shareholders' equity.............................. 2,275 2,245 2,318 1,852 1,600 1.3
---------------------------------------------------
Total liabilities and shareholders' equity.. $26,219 $26,385 $26,625 $23,851 $24,804 (.6)%
===================================================
*Available-for-sale in 1994 and 1993
**Not meaningful
70 First Bank System, Inc. and Subsidiaries
- --
CONSOLIDATED STATEMENT OF INCOME -- FIVE-YEAR SUMMARY
% Change
Year Ended December 31 (In Millions) 1994 1993 1992 1991 1990 1993-1994
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans............................................................. $1,510.7 $1,398.6 $1,418.8 $1,624.3 $1,922.2 8.0%
Securities:
Taxable......................................................... 199.2 218.2 186.4 221.1 274.3 (8.7)
Exempt from federal income taxes................................ 12.0 14.6 12.0 19.1 34.9 (17.8)
Other interest income............................................. 25.2 30.4 64.1 97.5 146.4 (17.1)
--------------------------------------------------
Total interest income........................................... 1,747.1 1,661.8 1,681.3 1,962.0 2,377.8 5.1
INTEREST EXPENSE
Deposits.......................................................... 373.1 423.7 568.7 872.8 1,191.4 (11.9)
Federal funds purchased and repurchase agreements................. 91.2 31.8 37.1 57.9 139.0 186.8
Other short-term funds borrowed................................... 18.5 19.0 14.3 24.2 70.6 (2.6)
Long-term debt.................................................... 69.5 54.4 66.1 100.3 152.2 27.8
--------------------------------------------------
Total interest expense.......................................... 552.3 528.9 686.2 1,055.2 1,553.2 4.4
--------------------------------------------------
Net interest income............................................... 1,194.8 1,132.9 995.1 906.8 824.6 5.5
Provision for credit losses (1992 includes $13.6 merger-related).. 93.0 125.2 183.4 202.2 215.4 (25.7)
--------------------------------------------------
Net interest income after provision for credit losses............. 1,101.8 1,007.7 811.7 704.6 609.2 9.3
NONINTEREST INCOME
Credit card fees.................................................. 179.0 137.1 116.9 94.4 71.6 30.6
Trust fees........................................................ 159.2 146.1 127.8 115.5 108.1 9.0
Service charges on deposit accounts............................... 115.6 115.3 108.4 97.2 91.8 .3
Securities gains (losses)......................................... (3.8) .3 1.9 8.9 3.6 *
Other............................................................. 178.0 170.8 180.7 181.7 162.5 4.2
--------------------------------------------------
Total noninterest income........................................ 628.0 569.6 535.7 497.7 437.6 10.3
NONINTEREST EXPENSE
Salaries.......................................................... 395.7 389.1 388.7 371.7 391.8 1.7
Employee benefits................................................. 91.6 86.3 85.5 79.3 77.3 6.1
Net occupancy..................................................... 86.3 93.4 87.9 84.0 83.3 (7.6)
Furniture and equipment........................................... 78.3 72.7 67.2 64.8 67.8 7.7
FDIC insurance.................................................... 46.0 46.4 42.2 38.5 25.2 (.9)
Advertising....................................................... 29.7 20.5 20.0 21.8 26.0 44.9
Amortization of goodwill and other intangible assets.............. 39.6 30.6 25.2 21.6 14.7 29.4
Other personnel costs............................................. 32.2 27.5 20.2 17.8 11.6 17.1
Professional services............................................. 33.8 36.7 38.7 37.8 36.8 (7.9)
Data processing................................................... 13.9 21.3 22.4 23.5 17.1 (34.7)
Other real estate (1992 includes $26.4 merger-related)............ (2.9) 2.2 41.2 29.9 42.4 (231.8)
Merger and integration............................................ - 72.2 84.0 - - *
Other............................................................. 208.9 201.6 191.1 178.6 187.0 3.6
--------------------------------------------------
Total noninterest expense......................................... 1,053.1 1,100.5 1,114.3 969.3 981.0 (4.3)
--------------------------------------------------
Income before income taxes and cumulative effect
of changes in accounting principles............................. 676.7 476.8 233.1 233.0 65.8 41.9
Applicable income taxes........................................... 256.9 178.8 78.6 25.9 8.5 43.7
--------------------------------------------------
Income before cumulative effect
of changes in accounting principles............................. 419.8 298.0 154.5 207.1 57.3 40.9
Cumulative effect of changes in accounting principles............. - - 157.3 - - *
--------------------------------------------------
Net income........................................................ $ 419.8 $ 298.0 $ 311.8 $ 207.1 $ 57.3 40.9%
================================================== =======
Net income applicable to common equity............................ $ 408.6 $ 270.2 $ 281.6 $ 183.4 $ 33.6 51.2%
================================================== =======
*Not meaningful
First Bank System, Inc. and Subsidiaries 71
--
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
Five Year Summary of Consolidated Operations 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Interest
Yields Yields
(In Millions) Balance Interest and Rates Balance Interest and Rates
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Securities:
U.S. Treasury................................................. $ 1,559 $ 81.9 5.25% $ 1,778 $ 100.7 5.66%
Mortgage-backed securities.................................... 1,534 91.4 5.96 1,486 85.1 5.73
State & political............................................. 181 19.7 10.88 192 22.1 11.51
U.S. agencies and other....................................... 463 24.2 5.23 472 26.7 5.66
------------------- -------------------
Total securities............................................ 3,737 217.2 5.81 3,928 234.6 5.97
Unrealized loss on available-for-sale securities................ (58) -
------- -------
Net securities.............................................. 3,679 3,928
Trading account securities...................................... 73 3.4 4.66 117 4.7 4.02
Federal funds sold and resale agreements........................ 405 16.5 4.07 755 22.3 2.95
Loans:
Commercial:
Commercial.................................................. 7,035 528.5 7.51 6,077 433.5 7.13
Financial institutions...................................... 1,146 30.1 2.63 1,534 42.5 2.77
Real estate:
Commercial mortgage....................................... 1,657 141.3 8.53 1,511 125.1 8.28
Construction.............................................. 264 21.3 8.07 207 15.3 7.39
------------------- -------------------
Total commercial.......................................... 10,102 721.2 7.14 9,329 616.4 6.61
Consumer:
Residential mortgage........................................ 2,352 174.5 7.42 2,556 201.9 7.90
Residential mortgage held for sale.......................... 354 24.6 6.95 949 66.0 6.95
Home equity and second mortgage............................. 1,963 170.9 8.71 1,386 113.9 8.22
Credit card................................................. 2,054 248.9 12.12 1,733 233.1 13.45
Other....................................................... 1,737 179.6 10.34 1,803 178.5 9.90
------------------- -------------------
Total consumer............................................ 8,460 798.5 9.44 8,427 793.4 9.41
------------------- -------------------
Total loans............................................... 18,562 1,519.7 8.19 17,756 1,409.8 7.94
Allowance for credit losses................................... 445 447
------- -------
Net loans................................................... 18,117 17,309
Other earning assets............................................ 124 5.4 4.35 139 8.1 5.83
------------------- -------------------
Total earning assets*..................................... 22,901 1,762.2 7.69 22,695 1,679.5 7.40
Cash and due from banks......................................... 1,674 1,720
Other assets.................................................... 1,690 1,607
------- -------
Total assets.............................................. $25,762 $25,575
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits.................................. $ 6,057 $ 6,416
Interest-bearing
deposits:
Interest checking........................................... 2,590 36.7 1.42 2,454 38.6 1.57
Money market accounts....................................... 3.857 106.8 2.77 3,923 102.9 2.62
Other savings accounts...................................... 1,499 30.4 2.03 1,411 30.2 2.14
Savings certificates........................................ 4,192 141.4 3.37 4,957 182.6 3.68
Certificates over $100,000.................................. 947 57.8 6.10 1,186 69.4 5.85
------------------- -------------------
Total interest-bearing deposits........................... 13,085 373.1 2.85 13,931 423.7 3.04
Short-term borrowings........................................... 2,371 109.7 4.63 1,270 50.8 4.00
Long-term debt.................................................. 1,232 69.5 5.64 913 54.4 5.96
------------------- -------------------
Total interest-bearing liabilities........................ 16,688 552.3 3.31 16,114 528.9 3.28
Other liabilities............................................... 765 740
Preferred equity................................................ 131 348
Common equity................................................... 2,121 1,957
------- -------
Total liabilities and shareholders' equity................ $25,762 $25,575
======= =======
Net interest income............................................. $1,209.9 $1,150.6
======== ========
Gross interest margin........................................... 4.38% 4.12%
==== ====
Gross interest margin without taxable-equivalent increments..... 4.32% 4.04%
==== ====
PERCENT OF EARNING ASSETS
Interest income................................................. 7.69% 7.40%
Interest expense................................................ 2.41 2.33
==== ====
Net interest margin......................................... 5.28 5.07
==== ====
Net interest margin without taxable-equivalent increments....... 5.22% 4.99%
==== ====
Interest and rates are presented on a fully taxable-equivalent basis under a tax
rate of 35 percent for 1994 and 1993 and 34 percent for 1992, 1991 and 1990.
Interest income and rates on loans include loan fees. Nonaccrual loans are
included in average loan balances.
*Before deducting the allowance for credit losses and excluding the unrealized
loss on available-for-sale securities.
** Not meaningful
72 First Bank System, Inc. and Subsidiaries
- --
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
1992 1991 1990 1993-1994
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Interest Interest % Change
Yields Yields Yields Average
(In Millions) Balance Interest and Rates Balance Interest and Rates Balance Interest and Rates Balance
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Securities:
U.S. Treasury..................... $ 1,529 $ 97.1 6.35% $ 995 $ 77.8 7.82% $ 970 $ 77.9 8.03% (12.3)%
Mortgage-backed securities........ 953 70.0 7.35 1,312 117.2 8.93 1,576 155.6 9.87 3.2
State & political................. 152 18.1 11.91 241 27.5 11.41 581 62.2 10.71 (5.7)
U.S. agencies and other........... 266 17.6 6.62 398 25.7 6.46 558 29.5 5.29 (1.9)
----------------- ----------------- -----------------
Total securities................ 2,900 202.8 6.99 2,946 248.2 8.42 3,685 325.2 8.82 (4.9)
Unrealized loss on available-for-
sale securities.................... -- -- -- **
------- ------- -------
Net securites................... 2,900 2,946 3,685 (6.3)
Trading account securities.......... 137 6.5 4.74 176 12.1 6.88 185 15.8 8.54 (37.6)
Federal funds sold and resale
agreements......................... 1,318 45.1 3.42 1,292 75.8 5.87 1,353 110.4 8.16 (46.4)
Loans:
Commercial:
Commercial...................... 5,875 451.9 7.69 6,773 638.5 9.43 8,374 891.4 10.64 15.8
Financial institutions.......... 1,096 40.8 3.72 710 31.2 4.39 562 33.6 5.98 (25.3)
Real estate:
Commercial mortgage........... 1,502 128.8 8.58 1,391 135.1 9.71 1,283 133.2 10.38 9.7
Construction.................. 258 20.2 7.83 328 30.5 9.30 465 46.1 9.91 27.5
----------------- ----------------- -----------------
Total commercial.............. 8,731 641.7 7.35 9,202 835.3 9.08 10,684 1,104.3 10.34 8.3
Consumer:
Residential mortgage............ 2,133 183.9 8.62 2,023 182.5 9.02 2,908 293.5 10.09 (8.0)
Residential mortgage held for
sale........................... 718 58.1 8.09 674 64.5 9.57 768 78.1 10.17 (62.7)
Home equity and second mortgage. 1,063 93.8 8.82 854 78.0 9.13 675 77.7 11.51 41.6
Credit card..................... 1,709 243.0 14.22 1,495 217.3 14.54 1,091 174.1 15.96 18.5
Other........................... 1,903 214.8 11.29 2,093 271.3 12.96 1,978 225.0 11.38 (3.7)
----------------- ----------------- -----------------
Total consumer................ 7,526 793.6 10.54 7,139 813.6 11.40 7,420 848.4 11.43 .4
----------------- ----------------- -----------------
Total loans................... 16,257 1,435.3 8.83 16,341 1,648.9 10.09 18,104 1,952.7 10.79 4.5
Allowance for credit losses....... 467 455 478 (.4)
------- ------- -------
Net loans....................... 15,790 15,886 17,626 4.7
Other earning assets................ 371 14.3 3.85 161 11.4 7.08 270 21.8 8.07 (10.8)
----------------- ----------------- -----------------
Total earning assets*......... 20,983 1,704.0 8.12 20,916 1,996.4 9.54 23,597 2,425.9 10.28 .9
Cash and due from banks............. 1,510 1,333 1,383 (2.7)
Other assets........................ 1,566 1,281 1,354 5.2
------- ------- -------
Total assets.................. $23,592 $23,075 $25,856 .7%
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits...... $ 4,810 $ 3,879 $ 3,578 (5.6)%
Interest-bearing deposits:
Interest checking............... 2,198 51.7 2.35 1,897 57.5 3.03 1,748 84.7 4.85 5.5
Money market accounts........... 3,874 124.5 3.21 3,607 194.3 5.39 3,297 226.0 6.85 (1.7)
Other savings accounts.......... 1,132 34.2 3.02 988 47.8 4.84 1,018 52.0 5.11 6.2
Savings certificates............ 5,292 258.6 4.89 5,504 402.1 7.31 5,548 445.7 8.03 (15.4)
Certificates over $100,000...... 1,468 99.7 6.79 2,340 171.1 7.31 4,375 383.0 8.75 (20.2)
----------------- ----------------- -----------------
Total interest-bearing
deposits..................... 13,964 568.7 4.07 14,336 872.8 6.09 15,986 1,191.4 7.45 (6.1)
Short-term borrowings............... 1,106 51.4 4.65 1,384 82.1 5.93 2,507 209.6 8.36 86.7
Long-term debt...................... 927 66.1 7.13 1,214 100.3 8.26 1,652 152.2 9.21 34.9
----------------- ----------------- -----------------
Total interest-bearing
liabilities.................. 15,997 686.2 4.29 16,934 1,055.2 6.23 20,145 1,553.2 7.71 3.6
Other liabilities................... 686 578 623 3.4
Preferred equity.................... 379 282 264 (62.4)
Common equity....................... 1,720 1,402 1,246 8.4
------- ------- -------
Total liabilities and
shareholders' equity......... $23,592 $23,075 $25,856 .7%
======= ======= ======= --
Net interest income................. $1,017.8 $ 941.2 $ 872.7
======== ======== ========
Gross interest margin............... 3.83% 3.31% 2.57%
==== ==== ====
Gross interest margin without
taxable-equivalent increments...... 3.72% 3.15% 2.37%
==== ==== ====
PERCENT OF EARNING ASSETS
Interest income..................... 8.12% 9.54% 10.28%
Interest expense.................... 3.27 5.04 6.58
==== ==== ====
Net interest margin............. 4.85 4.50 3.70
==== ==== ====
Net interest margin without
taxable-equivalent increments...... 4.74% 4.34% 3.49%
==== ==== ====
Interest and rates are presented on a fully taxable-equivalent basis under a tax
rate of 35 percent for 1994 and 1993 and 34 percent for 1992, 1991 and 1990.
Interest income and rates on loans include loan fees. Nonaccrual loans are
included in average loan balances.
*Before deducting the allowance for credit losses and excluding the unrealized
loss on available-for-sale securities.
** Not meaningful
First Bank System, Inc. and Subsidiaries 73
--
QUARTERLY CONSOLIDATED FINANCIAL DATA
1994 1993
-------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
(In Millions, Except Per Share Data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans.................................................. $ 419.2 $ 391.1 $ 362.2 $ 338.2 $ 352.6 $ 353.9 $ 348.6 $ 343.5
Securities:
Taxable.............................................. 47.5 51.5 53.8 46.4 46.9 52.9 58.4 60.0
Exempt from federal income taxes..................... 2.9 3.0 3.1 3.0 4.7 3.2 3.3 3.4
Other interest income.................................. 7.2 6.3 6.8 4.9 6.8 4.9 7.1 11.6
-------------------------------------------------------------------------
Total interest income............................ 476.8 451.9 425.9 392.5 411.0 414.9 417.4 418.5
INTEREST EXPENSE
Deposits............................................... 104.8 93.9 89.3 85.1 94.0 102.1 107.0 120.6
Federal funds purchased and repurchase agreements...... 31.1 30.4 20.6 9.1 7.6 9.0 7.5 7.7
Other short-term funds borrowed........................ 8.5 3.2 3.2 3.6 4.9 5.1 5.1 3.9
Long-term debt......................................... 21.4 18.2 16.5 13.4 14.9 13.4 13.0 13.1
-------------------------------------------------------------------------
Total interest expense........................... 165.8 145.7 129.6 111.2 121.4 129.6 132.6 145.3
-------------------------------------------------------------------------
Net interest income.................................... 311.0 306.2 296.3 281.3 289.6 285.3 284.8 273.2
Provision for credit losses............................ 23.0 23.0 23.0 24.0 27.0 27.0 33.1 38.1
-------------------------------------------------------------------------
Net interest income after provision for credit losses.. 288.0 283.2 273.3 257.3 262.6 258.3 251.7 235.1
NONINTEREST INCOME
Credit card fees....................................... 50.3 49.2 43.5 36.0 37.5 36.6 34.5 28.5
Trust fees............................................. 41.7 38.9 40.1 38.5 37.5 36.6 36.5 35.5
Service charges on deposit accounts.................... 27.9 29.2 29.1 29.4 28.4 28.6 28.0 30.3
Securities gains (losses).............................. (1.0) (2.8) - - - - - .3
Other.................................................. 44.2 44.9 41.0 47.9 42.5 40.2 41.5 46.6
-------------------------------------------------------------------------
Total noninterest income......................... 163.1 159.4 153.7 151.8 145.9 142.0 140.5 141.2
NONINTEREST EXPENSE
Salaries............................................... 102.8 100.2 98.5 94.2 95.0 97.3 97.3 99.5
Employee benefits...................................... 21.0 23.6 23.3 23.7 19.6 20.0 21.9 24.8
Net occupancy.......................................... 20.6 22.0 22.2 21.5 22.8 22.8 23.2 24.6
Furniture and equipment................................ 20.2 18.8 20.2 19.1 19.2 17.8 18.5 17.2
FDIC insurance......................................... 11.2 11.0 12.3 11.5 11.5 11.4 11.7 11.8
Advertising............................................ 7.3 6.2 8.1 8.1 4.7 6.0 5.1 4.7
Amortization of goodwill and other intangible assets... 11.2 10.5 9.9 8.0 7.7 7.7 7.7 7.5
Other personnel costs.................................. 8.1 7.6 8.8 7.7 8.5 7.2 6.6 5.2
Professional services.................................. 10.2 8.6 8.5 6.5 10.7 9.1 8.6 8.3
Data processing........................................ 3.6 3.4 3.4 3.5 3.3 4.4 7.2 6.4
Merger and integration................................. - - - - - - 72.2 -
Other.................................................. 54.5 55.0 47.0 49.5 52.3 52.0 52.0 47.5
-------------------------------------------------------------------------
Total noninterest expense........................ 270.7 266.9 262.2 253.3 255.3 255.7 332.0 257.5
-------------------------------------------------------------------------
Income before income taxes............................. 180.4 175.7 164.8 155.8 153.2 144.6 60.2 118.8
Applicable income taxes................................ 69.9 67.6 62.1 57.3 57.3 53.5 26.7 41.3
-------------------------------------------------------------------------
Net income............................................. $ 110.5 $ 108.1 $ 102.7 $ 98.5 $ 95.9 $ 91.1 $ 33.5 $ 77.5
=========================================================================
Net income applicable to common equity................. $ 108.6 $ 106.2 $ 100.8 $ 93.0 $ 90.4 $ 83.7 $ 26.1 $ 70.0
=========================================================================
Earnings per common share.............................. $ .95 $ .91 $ .87 $ .84 $ .81 $ .74 $ .23 $ .61
SELECTED AVERAGE BALANCES
Loans.................................................. $19,049 $18,684 $18,469 $18,034 $18,819 $18,188 $17,292 $16,685
Earning assets......................................... 23,046 23,062 23,205 22,278 23,270 22,710 22,455 22,267
Total assets........................................... 25,985 25,860 26,125 25,063 26,266 25,554 25,347 25,053
Deposits............................................... 18,577 18,741 19,655 19,604 20,930 20,248 20,284 19,916
Long-term debt......................................... 1,368 1,279 1,222 1,056 1,072 916 847 817
Common equity.......................................... 2,170 2,168 2,134 2,011 1,957 1,974 1,949 1,936
-------------------------------------------------------------------------
The second quarter of 1993 included $72.2 million in merger-related charges in
connection with the Colorado National Bankshares, Inc. acquisition.
74 First Bank System, Inc. and Subsidiaries
- --
SUPPLEMENTAL FINANCIAL DATA
EARNINGS PER SHARE SUMMARY
1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------
Primary net income before cumulative effect
of accounting changes.......................... $3.57 $2.39 $1.18 $1.79 $.36
Cumulative effect of accounting changes......... -- -- 1.49 -- --
------------------------------------------------
Primary net income.............................. $3.57 $2.39 $2.67 $1.79 $.36
================================================
Fully diluted net income before cumulative
effect of accounting changes................... $3.52 $2.38 $1.21 $1.78 $.36
Cumulative effect of accounting changes......... -- -- 1.43 -- --
------------------------------------------------
Fully diluted net income........................ $3.52 $2.38 $2.64 $1.78 $ .36
================================================
RATIOS
1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------
Return on average assets........................ 1.63% 1.17% 1.32% .90% .22%
Return on average common shareholders' equity... 19.3 13.8 16.4 13.1 2.7
Average total equity to average assets.......... 8.7 9.0 8.9 7.3 5.8
Dividends per share to net income per share..... 32.5 41.8 33.0 45.8 *
------------------------------------------------
*Not meaningful
OTHER STATISTICS
1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------------------
Common shares outstanding -- year end*.......... 112,678,658 109,401,664 113,450,425 102,536,867 101,079,861
Average common shares outstanding and common
stock equivalents:
Primary........................................ 114,544,806 113,075,429 105,361,022 102,533,284 93,302,380
Fully diluted.................................. 118,238,360 116,794,358 109,671,248 103,668,953 93,302,380
Number of shareholders -- year-end**............ 22,094 22,100 25,625 23,977 25,484
Average number of employees (full-time
equivalents)................................... 11,997 12,300 12,553 12,742 13,626
Common dividends paid (millions)................ $130.9 $109.7 $73.1 $65.6 $58.8
-----------------------------------------------------------------------
*Defined as total common shares less common stock held in treasury.
**Based on number of common stock shareholders of record
STOCK PRICE RANGE AND DIVIDENDS
1994 1993
---------------------------------------------------------------------
Sales Price Sales Price
------------------- Dividends ------------------- Dividends
High Low Paid High Low Paid
- -----------------------------------------------------------------------------------------------------------------------------
First quarter................................... $33.13 $29.38 $.29 $32.00 $27.13 $.25
Second quarter.................................. 39.00 31.50 .29 34.00 25.88 .25
Third quarter................................... 38.50 35.25 .29 33.63 29.50 .25
Fourth quarter.................................. 37.50 32.13 .29 34.13 28.00 .25
Closing price -- December 31.................... 33.22 30.75
---------------------------------------------------------------------
The common stock of First Bank System, Inc. is traded on the New York Stock
Exchange.
First Bank System, Inc. and Subsidiaries 75
--
COMMERCIAL LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
Maturing
------------------------------------------
In 1 Year After 1 Year
At December 31, 1994 (In Millions) or Less Through 5 Years After 5 Years
- ------------------------------------------------------------------------------------------------------------------
Commercial $6,133 $1,160 $186
Financial institutions............................................ 663 110 14
Real estate:
Commercial mortgage............................................. 979 616 227
Construction.................................................... 303 14 10
------------------------------------------
Total..................................................... $8,078 $1,900 $437
==========================================
Due in Due After
One Year One Year Total
- ------------------------------------------------------------------------------------------------------------------
Loans at fixed interest rates..................................... $ 815 $ 902 $ 1,717
Loans at variable interest rates.................................. 7,263 1,435 8,698
------------------------------------------
Total..................................................... $8,078 $2,337 $10,415
==========================================
The maturities of loans shown above are based on remaining scheduled repayments.
TIME CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS IN DENOMINATIONS OF
$100,000 OR MORE AT DECEMBER 31
Under Three Six to Over
Three to Six Twelve Twelve
(In Millions) Months Months Months Months Total
- -----------------------------------------------------------------------------------------------------------
1994......................................... $358 $103 $199 $236 $ 896
1993......................................... 370 148 209 334 1,061
1992......................................... 462 171 200 541 1,374
----------------------------------------------------------
76 First Bank System, Inc. and Subsidiaries
- --
SHORT-TERM FUNDS BORROWED
Average Maximum Average Weighted
Daily Outstanding Interest Rate Average
Outstanding Amount Month-Ending Paid During Interest Rate
(In Millions) at Year-End Outstanding Balance the Year at Year-End
- -----------------------------------------------------------------------------------------------------------------------------
1994
Federal funds purchased and securities sold under
agreements to repurchase......................... $2,164 $2,018 $2,813 4.52% 5.52%
Other.............................................. 658 353 764 5.24 5.72
-------------------------
Total............................................ $2,822 $2,371 3,212 4.63 5.57
=========================
1993
Federal funds purchased and securities sold under
agreements to repurchase......................... $ 922 $ 990 $1,388 3.21% 3.15%
Other.............................................. 412 280 412 6.79 2.87
-------------------------
Total............................................ $1,334 $1,270 1,642 4.00 3.07
=========================
1992
Federal funds purchased and securities sold under
agreements to repurchase......................... $1,122 $ 842 $1,140 4.41% 3.39%
Other.............................................. 328 264 396 5.42 3.09
-------------------------
Total............................................ $1,450 $1,106 1,479 4.65 3.27
=========================
ANNUAL REPORT ON FORM 10-K
Securities and Exchange Commission
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1994.
Commission File Number 1-6880
FIRST BANK SYSTEM, INC.
Incorporated in the State of Delaware
IRS Employer Identification #41-0255900
Address: 601 Second Avenue South
Minneapolis, Minnesota 55402-4302
Telephone: (612) 973-1111
Securities registered pursuant to Section 12(b) of the Act (all registered on
the New York Stock Exchange): Common Stock, Par Value $1.25; $3.5625 Cumulative
Convertible Preferred Stock, Series 1991A; Preferred Share Purchase Rights.
Securities registered pursuant to Section 12(g) of the Act: Warrants to
Purchase Shares of Common Stock.
As of January 31, 1995, First Bank System, Inc. had 135,215,613 shares of
common stock outstanding. The aggregate market value of common stock held by
non-affiliates as of January 31, 1995, was 4,640,747,984.
First Bank System, Inc. (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months and (2) has been subject to such filing requirements for the past 90
days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
contained in the Company's definitive proxy statement incorporated by reference
herein.
This Annual Report and Form 10-K incorporates into a single document the
requirements of the accounting profession and the Securities and Exchange
Commission. Only those sections of the Annual Report referenced in the following
cross-reference index are incorporated in the Form 10-K.
Cross-Reference Page
- -------------------------------------------------------------------------------
PART I
ITEM 1 Business
General............................................................79
Distribution of Assets, Liabilities and
Stockholders' Equity; Interest Rates
and Interest Differential...............................18-19, 72-73
Investment Portfolio........................................25-26, 70
Loan Portfolio............................22-25, 27-31, 43, 48-49, 76
Summary of Loan Loss Experience.............................20, 27-31
Deposits....................................................72-73, 76
Return on Equity and Assets........................................75
Short-Term Borrowings..............................................77
ITEM 2 Properties.........................................................79
ITEM 3 Legal Proceedings................................................none
ITEM 4 Submission of Matters to a Vote of Security Holders..............none
PART II
ITEM 5 Market for the Registrant's Common
Equity and Related Stockholder Matters....................36, 68, 75
ITEM 6 Selected Financial Data............................................15
ITEM 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations..................14-38
ITEM 8 Financial Statements and Supplemental Data.....................74, 80
ITEM 9 Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosures...........................................none
PART III
ITEM 10 Directors and Executive Officers of the Registrant.................82
ITEM 11 Executive Compensation............................................. *
ITEM 12 Security Ownership of Certain
Beneficial Owners and Management.................................. *
ITEM 13 Certain Relationships and Related Transactions..................... *
PART IV
ITEM 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K...........................................80
*First Bank System's definitive proxy statement for the 1995 Annual Meeting of
Shareholders is incorporated herein by reference, other than the sections
entitled "Report of the Organization Committee on Executive Compensation" and
"Performance Graph."
78 First Bank System, Inc. and Subsidiaries
- --
GENERAL - First Bank System, Inc. (the "Company") is a regional, multi-state
bank holding company headquartered in the Twin Cities of Minneapolis and St.
Paul, Minnesota. The Company was incorporated in Delaware in 1929 and owns more
than 99 percent of the capital stock of each of the nine commercial banks and
four trust companies, having 200 banking offices in Minnesota, Colorado,
Montana, North Dakota, South Dakota, Wisconsin, and Illinois. The Company also
has various nonbank subsidiaries engaged in financial services principally in
the Upper Midwest.
The banks are engaged in general commercial banking business principally in
domestic markets. They range in size from $37 million to $10.0 billion in
deposits and provide a wide variety of services to individuals, businesses,
industry, institutional organizations, governmental entities and other financial
institutions. Depository services include checking accounts, savings accounts
and time certificate contracts. Ancillary services such as cash management and
receivable lockbox collection are provided for corporate customers. Nine
subsidiary banks and four trust companies provide a full range of fiduciary
activities for individuals, estates, foundations, business corporations, and
charitable organizations.
The Company provides banking services through its subsidiary banks to both
domestic and foreign customers and correspondent banks. These services include
consumer banking, commercial lending, financing of import/export trade, foreign
exchange, and investment services.
The Company, through its subsidiaries, also provides services in mortgage
banking, trust, commercial and agricultural finance, data processing, leasing,
and brokerage services.
On a full-time equivalent basis, employment during 1994 averaged a total of
11,997 employees.
COMPETITION - The commercial banking business is highly competitive. Subsidiary
banks compete with other commercial banks and with other financial institutions,
including savings and loan associations, mutual savings banks, finance
companies, mortgage banking companies, credit unions, and mutual funds.
In recent years, competition also has increased from institutions not subject to
the same regulatory restrictions as domestic banks and bank holding companies.
GOVERNMENT POLICIES - The operations of the Company's various operating units
are affected by state and federal legislative changes and by policies of various
regulatory authorities, including those of the several states in which they
operate, the United States and foreign governments. These policies include, for
example, statutory maximum legal lending rates, domestic monetary policies of
the Board of Governors of the Federal Reserve System, United States fiscal
policy, international currency regulations and monetary policies, and capital
adequacy and liquidity constraints imposed by bank regulatory agencies.
SUPERVISION AND REGULATION - The Company is a registered bank holding company
under the Bank Holding Company Act of 1956 (the "Act") and is subject to the
supervision of, and regulation by, the Board of Governors of the Federal Reserve
System (the "Board").
Under the Act, a bank holding company may engage in banking, managing or
controlling banks, furnishing or performing services for banks it controls, and
conducting activities that the Board has determined to be closely related to
banking. The Company must obtain approval of the Board before acquiring control
of a bank or by acquiring more than 5 percent of the outstanding voting shares
of a company engaged in a "bank-related" business. Under the Act and state laws,
the Company is subject to certain restrictions as to states in which the Company
can acquire a bank.
On September 29, 1994, the Act was amended by The Interstate Banking and
Branch Efficiency Act of 1994 which authorizes interstate bank acquisitions
anywhere in the country, effective one year after the date of enactment and
interstate branching by acquisition and consolidation, effective June 1, 1997,
in those states that have not opted out by that date.
National banks are subject to the supervision of, and are examined by, the
Comptroller of the Currency. State banks are subject to the supervision of the
regulatory authorities of the states in which they are located. All subsidiary
banks of the Company are members of the Federal Deposit Insurance Corporation,
and as such, are subject to examination thereby. In practice, the primary
federal regulator makes regular examinations of each subsidiary bank subject to
its regulatory review or participates in joint examinations with other federal
regulators. Areas subject to regulation by federal and state authorities include
the allowance for credit losses, investment, loans, mergers, issuance of
securities, payment of dividends, establishment of branches and other aspects of
operations.
PROPERTIES - At December 31, 1994, the Company's subsidiaries owned and operated
a total of 136 facilities while leasing an additional 157 facilities, all of
which are well maintained.
The Company's three largest facilities are located in Minneapolis, St. Paul,
and Denver. In Minneapolis, First Bank National Association and the Company's
corporate offices occupy parts of four buildings. Thirty-one floors of First
Bank Place and a portion of one floor of the Pillsbury Center are leased. The
Company also occupies ten floors in the Marquette Bank Building and three floors
in the Concourse Building, both of which are owned by the Company. In St. Paul,
the Company leases an Operations Center as well as one-fourth of the First
National Bank Building and four floors in the First Trust Center. In Denver,
Colorado National Bank occupies approximately 70 percent of the Colorado
National Bank Building and three percent of the Park Central Building, both of
which are owned by subsidiaries of Colorado National Bank.
Additional information with respect to premises and equipment is presented in
Notes G and O of Notes to Consolidated Financial Statements.
First Bank System, Inc. and Subsidiaries 79
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EXHIBITS
Financial Statements Filed Page
- -------------------------------------------------------------
First Bank System, Inc. and Subsidiaries
Consolidated Financial Statements..................... 39
Notes to Consolidated Financial Statements............ 43
Report of Independent Auditors........................ 69
Schedules to the consolidated financial statements required by Article 9 of
Regulation S-X are omitted since the required information is included in the
footnotes or is not applicable.
During the three months ended December 31, 1994, the Company filed the
following reports on Form 8-K/A:
Form 8-K/A dated November 10, 1994, amending Form 8-K filed on August 5, 1994,
which includes pro forma financial information reflecting the acquisition of
Metropolitan Financial Corporation filed pursuant to Item 7(b).
Form 8-K/A dated December 8, 1994, amending Form 8-K filed on August 5, 1994,
which includes unaudited financial statements of Metropolitan Financial
Corporation filed pursuant to Item 7(b).
The following Exhibit Index lists the Exhibits to Annual Report on Form 10-K.
(1)3A Restated Certificate of Incorporation, as amended. Filed as
Exhibit 2.1 to Form 8-A/A-2 dated October 6, 1994.
(1)3B By-laws. Filed as Exhibit 3B to report on Form 10-K for fiscal year
ended December 31, 1993.
4 [Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, copies of
instruments defining the rights of holders of long-term debt are
not filed. First Bank System, Inc. agrees to furnish a copy thereof
to the Securities and Exchange Commission upon request.]
(1)10A Stock Purchase Agreements dated as of May 30, 1990, among Corporate
Partners, L.P.; Corporate Offshore Partners, L.P.; The State Board
of Administration of Florida and First Bank System, Inc. and
related documents. Filed as Exhibits 4.8-4.15 to Registration
Statement on Form S-3 filed on September 10, 1991.
(1)(2)10B First Bank System, Inc. 1987 Stock Option Plan. Filed as Exhibit
10E to report on Form 10-K for fiscal year ended December 31, 1991.
(1)(2)10C First Bank System, Inc. Nonqualified Supplemental Executive
Retirement Plan. Filed as Exhibit 10F to report on Form 10-K for
fiscal year ended December 31, 1991.
(1)(2)10D First Bank System, Inc. Executive Deferral Plan. Filed as Exhibit
10G to report on Form 10-K for fiscal year ended December 31, 1991.
(1)(2)10E First Bank System, Inc. Annual Incentive Plan. Filed as Exhibit 10H
to report on Form 10-K for fiscal year ended December 31, 1992.
(1)(2)10F First Bank System, Inc. Independent Director Retirement and Death
Benefit Plan. Filed as Exhibit 10I to report on Form 10-K for
fiscal year ended December 31, 1992.
(1)(2)10G First Bank System, Inc. Deferred Compensation Plan for Directors.
Filed as Exhibit 10J to report on Form 10-K for fiscal year ended
December 31, 1992.
(1)10H Rights Agreement dated as of December 21, 1988, between First Bank
System, Inc. and Morgan Shareholder Services Trust Company. Filed
as Exhibit 1 to Form 8-K filed January 5, 1989.
(1)10I Amendment No. 1 dated as of May 30, 1990, to Rights Agreement.
Filed as Exhibit 4(a) to Form 8-K dated June 5, 1990.
(1)10J Amendment No. 2 dated as of February 17, 1993, to Rights Agreement.
Filed as Exhibit 4(a) to Form 8-K filed March 1, 1993.
(1)(2)10K First Bank System, Inc. Restated Employee Stock Purchase Plan.
Filed as Exhibit 10L to report on Form 10-K for fiscal year ended
December 31, 1991.
(1)(2)10L Form of Change-in-Control Agreement between First Bank System, Inc.
and certain officers of the Company. Filed as Exhibit 10M to report
on Form 10-K for fiscal year ended December 31, 1991.
(2)10M First Bank System, Inc. 1991 Stock Incentive Plan, as amended.
(1)(2)10N First Bank System, Inc. 1994 Stock Incentive Plan. Filed as
Exhibit 10M to report on Form 10-K for fiscal year ended December
31, 1993.
(2)10O Agreement between First Bank System, Inc. and John F. Grundhofer
dated January 18, 1995.
(1)(2)10P Deferred Income Agreement between First Bank System, Inc. and John
F. Grundhofer dated November 1, 1993. Filed as Exhibit 10O to
report on Form 10-K for fiscal year ended December 31, 1993.
(1)(2)10Q Description of First Bank System, Inc. Stock Option Loan Policy.
Filed as Exhibit 10P to report on Form 10-K for fiscal year ended
December 31, 1993.
(2)10R Employment Agreement dated as of April 30, 1993, by and between
First Bank System, Inc. and Will F. Nicholson, Jr.
(2)10S Employment Agreement dated as of December 31, 1994, by and between
First Bank System, Inc. and Will F. Nicholson, Jr.
(2)10T Consulting Agreement dated as of January 23, 1995, by and between
First Bank System, Inc. and Norman M. Jones.
(1)10U Agreement of Merger and Consolidation, dated July 21, 1994, by and
between First Bank System, Inc. and Metropolitan Financial
Corporation. Filed as Exhibit 2.1 to Form 8-K filed August 5, 1994.
11 Statement re: Computation of Primary and Fully Diluted Net Income
per Common Share.
12 Statement re: Computation of Ratio of Earnings to Fixed Charges.
13 Annual Report to Shareholders for the year ended December 31, 1994.
(See Cover Page)
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
Copies of the Exhibits will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the Financial Statement Schedule and
Exhibits.
(1) Exhibit has heretofore been filed with the Securities and Exchange
Commission and is incorporated herein as an exhibit by reference.
(2) Items that are management contracts or compensatory plans or arrangements
required to be filed as an exhibit pursuant to Item 14(c) of this Form 10-K.
80 First Bank System, Inc. and Subsidiaries
- --
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on February
15, 1995, on its behalf by the undersigned thereunto duly authorized.
First Bank System, Inc.
John F. Grundhofer
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on February 15, 1995, by the following persons on behalf
of the registrant and in the capacities indicated.
JOHN F. GRUNDHOFER
Chairman, President, Chief Executive Officer, and Director
(principal executive officer)
RICHARD A. ZONA
Vice Chairman and Chief Financial Officer
(principal financial officer)
DAVID J. PARRIN
Senior Vice President and Controller
(principal accounting officer)
COLEMAN BLOOMFIELD
Director
DELBERT W. JOHNSON
Director
NORMAN M. JONES
Director
JOHN H. KAREKEN
Director
RICHARD L. KNOWLTON
Director
KENNETH A. MACKE
Director
MARILYN C. NELSON
Director
WILL F. NICHOLSON, JR.
Director
NICHOLAS R. PETRY
Director
EDWARD J. PHILLIPS
Director
JAMES J. RENIER
Director
S. WALTER RICHEY
Director
RICHARD L. ROBINSON
Director
RICHARD L. SCHALL
Director
LYLE E. SCHROEDER
Director
First Bank System, Inc. and Subsidiaries 81
--
EXECUTIVE OFFICERS
JOHN F. GRUNDHOFER
Mr. Grundhofer, 56 has been Chairman of the Board, President and Chief Executive
Officer of First Bank System since 1990. Previously, he served as Vice Chairman
and Senior Executive Officer for Southern California, Wells Fargo Bank N.A.
WILLIAM F. FARLEY
Mr. Farley, 50, has been Vice Chairman of First Bank System since 1990. His
previous positions include: Partner, Headrick & Farley and President, First Bank
National Association.
PHILIP G. HEASLEY
Mr. Heasley, 45, was named Vice Chairman in 1993 and continues to serve as
President of the Retail Product Group. His previous positions include: Executive
Vice President and President of the Retail Product Group and Senior Vice
President, Consumer Business, Electronic Banking Division.
RICHARD A. ZONA
Mr. Zona, 50, has served as Vice Chairman since 1990 and Chief Financial Officer
since 1989. He was previously a Partner at Ernst & Young.
J. ROBERT HOFFMANN
Mr. Hoffmann, 49, has been Executive Vice President and Chief Credit Officer
since 1990. He previously served as Executive Vice President, Credit
Administration at First Bank National Association.
JOHN M. MURPHY, JR.
Mr. Murphy, 51, has been Chairman and Chief Investment Officer, First Trust
National Association, since 1990. Before that he was Managing Director, First
Asset Management, a division of First Bank National Association.
DANIEL C. ROHR
Mr. Rohr, 48, has served as Executive Vice President of the Commercial Banking
Group since 1990. Previously, he was Executive Vice President and Chief Credit
Officer at Columbia Savings & Loan Association.
ROBERT H. SAYRE
Mr. Sayre, 55, has served as Executive Vice President of Human Resources since
1990. Previously, he was Executive Director at Russell Reynolds Associates, Inc.
MICHAEL J. O'ROURKE
Mr. O'Rourke, 50, has been Executive Vice President, Secretary and General
Counsel since 1991. Previously, he was Senior Vice President, Secretary and
General Counsel.
DAVID R. EDSTAM
Mr. Edstam, 47, has been Senior Vice President and Treasurer since 1989.
ELIZABETH A. MALKERSON
Ms. Malkerson, 45, has been Senior Vice President of Corporate Relations since
1990. Her previous position was Vice President of External Affairs.
DAVID J. PARRIN
Mr. Parrin, 39, was named Senior Vice President and Controller in 1994.
Previously, he was a Partner at Ernst & Young.
DIRECTORS
COLEMAN BLOOMFIELD
Chairman of the Board
Minnesota Mutual Life Insurance Co.
St. Paul, Minnesota
JOHN F. GRUNDHOFER
Chairman, President and Chief Executive Officer
First Bank System, Inc.
Minneapolis, Minnesota
ROGER L. HALE
President and Chief Executive Officer
TENNANT
Minneapolis, Minnesota
DELBERT W. JOHNSON
Chairman and Chief Operating Officer
Pioneer Metal Finishing, Inc.
Minneapolis, Minnesota
NORMAN M. JONES*
Former Chairman and Chief Executive Officer
Metropolitan Financial Corporation
Minneapolis, Minnesota
JOHN H. KAREKEN
Professor of Banking and Finance
Curtis L. Carlson School of Management
University of Minnesota
Minneapolis, Minnesota
RICHARD L. KNOWLTON
Chairman of the Board
Hormel Foods Corporation
Austin, Minnesota
KENNETH A. MACKE
Macke Partners
Golden Valley, Minnesota
MARILYN C. NELSON
Vice Chair
Carlson Holdings, Inc.
Minneapolis, Minnesota
WILL F. NICHOLSON, JR.
Chairman, President and Chief Executive Officer
Colorado National Bankshares, Inc.
Denver, Colorado
NICHOLAS R. PETRY
President
The Petry Company
Denver, Colorado
EDWARD J. PHILLIPS
Chairman and Chief Executive Officer
Phillips Beverage Company
Minneapolis, Minnesota
JAMES J. RENIER
Retired Chairman of the Board and Chief Executive Officer
Honeywell Inc.
Minneapolis, Minnesota
S. WALTER RICHEY
President and Chief Executive Officer
Space Center Company
St. Paul, Minnesota
RICHARD L. ROBINSON
Chairman and Chief Executive Officer
Robinson Dairy, Inc.
Denver, Colorado
RICHARD L. SCHALL
Retired Vice Chairman of the Board
Dayton Hudson Corporation
Minneapolis, Minnesota
LYLE E. SCHROEDER
President and Chief Executive Officer
Sioux Valley Hospital
Sioux Falls, South Dakota
*Elected to the Board of Directors effective
February 15, 1995
82 First Bank System, Inc. and Subsidiaries
- --
FBS LOCATIONS*
MINNESOTA St. Louis Park KANSAS SOUTH DAKOTA
Albert Lea St. Paul (6) Andover Aberdeen
Alexandria (2) Stillwater Augusta Mitchell
Amboy Virginia Clay Center Pierre
Anoka (2) Wayzata El Dorado Rapid City (4)
Apple Valley West St. Paul Emporia (2) Sioux Falls (5)
Austin White Bear Lake (2) Eureka
Babbitt Willmar Gardner WISCONSIN
Blaine Woodbury Holton Brookfield
Blooming Prairie Iola Brown Deer
Bloomington (4) COLORADO Lawrence (2) Hudson
Brainerd Arvada (2) Manhattan LaCrosse
Brooklyn Center Aspen Overland Park Milwaukee (2)
Brooklyn Park Aurora (3) Prairie Village Onalaska
Burnsville Boulder (2) Pratt
Chisago City Broomfield Topeka (2) WYOMING
Cloquet Canon City Wichita (4) Caspar
Columbia Heights Colorado Springs (6) Cheyenne (2)
Cottage Grove Denver (19) MONTANA Cody
Duluth (7) Englewood (3) Billings (2) Evanston
Eagan (2) Evergreen Bozeman Gillette
East Grand Forks Fort Collins (2) Butte Green River
Eden Prairie (2) Glenwood Springs Great Falls (3) Lander
Edina (3) Golden Havre Laramie
Elk River Grand Junction Helena Riverton
Fairmont Greeley Miles City Rock Springs
Fergus Falls La Junta Missoula (2) Sheridan
Forest Lake Lakewood (4) Torrington
Grand Rapids Littleton (4) NEBRASKA Worland
Hibbing Longmont Beatrice
Hopkins Loveland Bellevue CORPORATE TRUST OFFICES
Lamberton Northglenn Columbus Billings, MT
Little Canada Pueblo (4) Hastings Cheyenne, WY
Mankato (2) Westminster (2) Kearney Chicago, IL
Maple Grove Wheat Ridge Lincoln (4) Denver, CO
Minneapolis (15) North Platte Des Plaines, IL
Minnetonka (2) ILLINOIS Omaha (6) Duluth, MN
Monticello Chicago (6) Fargo, ND
Moorhead Des Plaines (3) NORTH DAKOTA Grand Junction, CO
New Prague Downers Grove Beulah Los Angeles, CA
Oakdale Bismarck (5) Milwaukee, WI
Owatonna IOWA Devils Lake Minneapolis, MN
Pine City Altoona Dickinson New York, NY
Pine River Ankeny Fargo (5) Portland, OR
Plymouth (2) Carlisle Grand Forks (4) Pueblo, CO
Princeton Clear Lake Jamestown Rochester, MN
Prior Lake Council Bluffs (2) Langdon San Francisco, CA
Ramsey Des Moines (6) Lisbon Seattle, WA
Robbinsdale Hampton Mandan Sioux Falls, SD
Rochester (4) Iowa Falls Minot (2) St. Paul, MN
Sauk Rapids Knoxville Valley City
Shoreview Mason City (2) Wahpeton REPUBLIC ACCEPTANCE CORP. OFFICES
St. Anthony Pella West Fargo Brookfield, WI
St. Cloud (2) Red Oak Williston Des Plaines, IL
West Des Moines (2) Kansas City, MO
Lakewood, CO
Minneapolis, MN
St. Louis, MO
*First Bank System, Inc. primarily serves Minnesota, Colorado, Illinois, Iowa,
Kansas, Montana, Nebraska, North Dakota, South Dakota, Wisconsin, and Wyoming
through 310 banking locations and 33 additional offices of nonbank
subsidiaries. This includes 115 offices of Metropolitan Financial Corporation
(January 1995).
First Bank System, Inc. and Subsidiaries 83
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CORPORATE DATA
EXECUTIVE OFFICES
First Bank Place
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
(612) 973-1111
ANNUAL MEETING
The annual meeting of shareholders will be held at the Minneapolis Convention
Center, 1301 Second Avenue South, Minneapolis, Minnesota 55403, at 2 p.m. on
Wednesday, April 26, 1995.
SECURITIES INFORMATION
First Bank System Common Stock is traded on the New York Stock Exchange under
the ticker symbol FBS and also may be found under the listing FtBkSy. The
transfer agent and registrar for First Bank System is First Chicago Trust
Company of New York, P.O. Box 2500, Jersey City, New Jersey 07303-2500.
DIVIDEND REINVESTMENT
First Bank System shareholders can take advantage of a plan that provides
automatic reinvestment of dividends and/or optional cash purchases of additional
shares at market price of up to $5,000 per quarter. If you would like more
information, contact First Chicago Trust Company of New York, P.O. Box 13531,
Newark, New Jersey 07188-0001, (800) 446-2617.
INVESTMENT COMMUNITY CONTACTS
John R. Danielson
Senior Vice President, Investor Relations
(612) 973-2261
General Information, Investor Relations
(612) 973-2263
First Bank System, Inc.
P.O. Box 522
Minneapolis, Minnesota 55480
A limited number of spiral-bound 1994 Annual Reports are available for the
investment community. Also available are a limited number of supplemental
restated financial statements which reflect the acquisition of Metropolitan
Financial Corporation. Please write or call Investor Relations to obtain a copy.
COMMUNITY RESPONSIBILITY REPORT
For information about FBS's community reinvestment activities, call FBS
Community Relations, (612) 973-2433.
For additional annual reports or information about the 1995 annual meeting of
shareholders, please contact Corporate Relations, First Bank System, First Bank
Place, Minneapolis, Minnesota 55402, (612) 973-2434.
First Bank System is an Equal Employment Opportunity/Affirmative Action
employer.
[LOGO OF FIRST BANK SYSTEM]
First Bank System
P.O. Box 522
Minneapolis, Minnesota
55480
Inside Front Cover
- ------------------
Map of the United States. The 11 Midwest and Rocky Mountain states (Montana,
Wyoming, Colorado, North Dakota, South Dakota, Nebraska, Kansas, Minnesota,
Iowa, Wisconsin, and Illinois) in which FBS has retail banking offices as of
January 24, 1995, are shaded.
- - Iowa, Kansas, Nebraska, and Wyoming were added as the result of the
Metropolitan Financial Corporation acquisition in January, 1995.
Graphs illustrate the following information:
Return on average common equity* (percent)
1990: 2.7
1991: 13.1
1992: 12.0
1993: 16.4
1994: 19.3
*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.
Earnings per share* (dollars)
1990: 0.36
1991: 1.79
1992: 1.96
1993: 2.83
1994: 3.57
*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.
Shareholders' equity to assets ratio (percent)
1990: 6.5
1991: 7.8
1992: 8.7
1993: 8.5
1994: 8.7
Page 1
- ------
Graphs illustrate the following information:
Return on average assets* (percent)
1990: 0.22
1991: 0.90
1992: 1.00
1993: 1.36
1994: 1.63
*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.
Efficiency ratio* (percent)
1990: 75.1
1991: 67.8
1992: 64.7
1993: 59.8
1994: 57.2
*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.
Allowance coverage ratio of nonperforming loans (percent)
1990: 104
1991: 142
1992: 179
1993: 269
1994: 385
Page 2
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Graph illustrates the following information: Five-year total return* (percent)
Index: 12/31/89 = 100
S&P500 = Standard & Poor's Index of 500 Stocks
KBW 50 = Keefe Bruyette & Woods 50-bank index
1989: FBS/100, S&P500/100, KBW 50/100
1990: FBS/83, S&P500/97, KBW 50/72
1991: FBS/159, S&P500/126, KBW 50/114
1992: FBS/193, S&P500/136, KBW 50/145
1993: FBS/217, S&P500/150, KBW 50/153
1994: FBS/243, S&P500/154, KBW 50/145
* Capital appreciation plus dividends
Page 4
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Photograph of FBS senior management team. Front from left: Richard A. Zona,
vice chairman and chief financial officer, and John F. Grundhofer, chairman,
president and chief executive officer. Back from left: William F. Farley, vice
chairman, Distribution Group; J. Robert Hoffmann, executive vice president and
chief credit officer; Daniel C. Rohr, executive vice president, Commercial
Banking; Philip G. Heasley, vice chairman and president, Retail Products Group;
John M. Murphy, Jr., chairman and chief investment officer; First Trust N.A.;
Michael J. O'Rourke, executive vice president and general counsel; and Robert H.
Sayre, executive vice president for human resources.
Page 5
- ------
Table entitled "FBS Leading Market Shares*"
Minnesota, deposit share: 25%, rank: 1st
Twin Cities, deposit share: 34%, rank: 1st
Colorado, deposit share: 19%, rank: 1st
Denver, deposit share: 24%, rank: 1st
North Dakota, deposit share: 26%, rank: 1st
Montana, deposit share: 14%, rank: 2nd
South Dakota, deposit share: 11%, rank: 2nd
Wyoming, deposit share: 9%, rank: 2nd
*Note: Includes Metropolitan Financial and First Western. South Dakota excludes
credit card banks.
Table entitled, "Recent Acquisitions" (assets in millions)
First Western Corporation, closing date: 1Q95, location: South Dakota,
assets: 323
Metropolitan Financial Corporation, closing date: 1Q95, location: Midwest,
assets: 7,900
Green Mountain Bancorporation, Inc., closing date: 3Q94, location: Colorado,
assets: 35
J.P. Morgan Corporate Trust, closing date: 3Q94, location: New York/National,
assets: N/A
United Bank of Bismarck, closing date: 3Q94, location: North Dakota, assets: 121
First Financial Investors, Inc., closing date: 2Q94, location: Minnesota,
assets: 200
Boulevard Bancorp, Inc., closing date: 1Q94, location: Illinois, assets: 1,600
American Bancshares of Mankato, closing date: 1Q94, location: Minnesota,
assets: 116
Page 6
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Graphs illustrate the following information:
Pie chart shows that the Retail and Community Banking Group accounts for 42
percent of FBS's net income.
Efficiency Ratio* (percent)
1992: 76.4
1993: 71.1
1994: 67.7
*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.
Net Interest Income (Millions)
1992: 679
1993: 744
1994: 781
Page 7
- ------
Net Income* (Millions)
1992: 94
1993: 138
1994: 177
*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.
Noninterest Income (Millions)
1992: 188
1993: 179
1994: 187
Page 8
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Graphs illustrate the following information:
Pie chart shows that the Payment Systems Group accounts for 22 perecent of FBS's
net income.
Efficiency Ratio* (percent)
1992: 45.7
1993: 42.4
1994: 41.7
*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.
Net Interest Income (Millions)
1992: 136
1993: 148
1994: 185
Page 9
- ------
Net Income* (Millions)
1992: 39
1993: 70
1994: 93
*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.
Noninterest Income (Millions)
1992: 134
1993: 157
1994: 196
Page 10
- -------
Graphs illustrate the following information:
Pie chart shows that the Commercial Banking Group accounts for 27 percent of
FBS's net income.
Efficiency Ratio* (percent)
1992: 37.4
1993: 33.7
1994: 32.1
*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.
Net Interest Income (Millions)
1992: 183
1993: 227
1994: 219
Page 11
- -------
Net Income* (Millions)
1992: 76
1993: 105
1994: 113
*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.
Noninterest Income (Millions)
1992: 56
1993: 60
1994: 60
Page 12
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Graphs illustrate the following information:
Pie chart shows that the Trust & Investment Group accounts for 9 percent of
FBS's net income.
Efficiency Ratio* (percent)
1992: 72.8
1993: 71.2
1994: 70.9
*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.
Net Interest Income (Millions)
1992: 19
1993: 32
1994: 26
Page 13
- -------
Net Income* (Millions)
1992: 28
1993: 36
1994: 37
*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.
Noninterest Income (Millions)
1992: 157
1993: 173
1994: 186