-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, N04zPD6PdodFTIg4P51xPx6Cy3goGKrVDvjP1+MFcRBEIGQmtZG5LJFXCbC4/ceV bQlukyHaqj/Y3hF9u9kKUQ== 0000897101-94-000055.txt : 19940520 0000897101-94-000055.hdr.sgml : 19940520 ACCESSION NUMBER: 0000897101-94-000055 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940331 FILED AS OF DATE: 19940516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST BANK SYSTEM INC CENTRAL INDEX KEY: 0000036104 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 410255900 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06880 FILM NUMBER: 94528737 BUSINESS ADDRESS: STREET 1: 601 SECOND AVE S STREET 2: FIRST BANK PL CITY: MINNEAPOLIS STATE: MN ZIP: 55402-4302 BUSINESS PHONE: 6129731111 FORMER COMPANY: FORMER CONFORMED NAME: FIRST BANK STOCK CORP DATE OF NAME CHANGE: 19720317 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM (NOT APPLICABLE) COMMISSION FILE NUMBER 1-6880 FIRST BANK SYSTEM, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 41-0255900 (I.R.S. Employer Identification No.) FIRST BANK PLACE, 601 SECOND AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55402-4302 (Address of principal executive offices and Zip Code) 612-973-1111 (Registrant's telephone number, including area code) (NOT APPLICABLE) (Former name, former address and former fiscal year, if changed since last report). Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. Class Outstanding as of April 30, 1994 Common Stock, $1.25 Par Value 114,473,564 shares Total # of pages: 25 Exhibit Index appears on page 1. FINANCIAL SUMMARY
March 31 December 31 March 31 (Dollars in Millions, Except Per Share Data) 1994 1993 1993 THREE MONTHS ENDED Net income $ 98.5 $ 95.9 $ 77.5 Return on average assets 1.59% 1.45% 1.25% Return on average common equity 18.8 18.3 14.7 Net interest margin (taxable-equivalent basis) 5.19 5.00 5.07 Efficiency ratio 58.0 58.1 61.4 PER COMMON SHARE Net income $ .84 $ .81 $ .61 Dividends paid 0.29 0.25 0.25 Common shareholders' equity 18.84 18.09 17.29 PERIOD END Loans $18,256 $18,779 $16,918 Allowance for credit losses 442 423 443 Assets 26,509 26,385 25,153 Deposits 20,768 21,031 20,060 Total shareholders' equity 2,289 2,245 2,320 Common equity to total assets 8.2% 7.5% 7.7% Tier 1 capital ratio 8.4 9.2 9.8
TABLE OF CONTENTS AND FORM 10-Q CROSS-REFERENCE INDEX
PART I -- FINANCIAL INFORMATION Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 2) 2 Financial Statements (Item 1): Consolidated Balance Sheet 13 Consolidated Statement of Income 14 Consolidated Statement of Shareholders' Equity 15 Consolidated Statement of Cash Flows 16 Notes to Consolidated Financial Statements 17 Selected Statistical Information: Consolidated Daily Average Balance Sheet and Related Yields and Rates 23 PART II -- OTHER INFORMATION Submission of Matters to a Vote of Security Holders (Item 4) 24 Exhibits and Reports on Form 8-K (Item 6) 24 Signature 24 Exhibit 11 - Computation of Primary and Fully Diluted Net Income Per Common Share 25 Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges 25
page 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OVERVIEW DISCUSSION EARNINGS SUMMARY > First Bank System, Inc. (the "Company") reported first quarter 1994 earnings of $98.5 million, an increase of $21.0 million, or 27.1 percent, from the first quarter of 1993. On a per share basis, earnings were $.84 in the first quarter of 1994, compared with earnings of $.61 in the first quarter of 1993, an increase of 37.7 percent. Return on average assets increased to 1.59 percent in the first quarter of 1994 from 1.25 percent in the first quarter of 1993, and return on average common equity increased to 18.8 percent from 14.7 percent over the same period. Net interest margin on a taxable-equivalent basis strengthened 12 basis points from the first quarter of 1993, to 5.19 percent. The efficiency ratio, the ratio of expenses to revenues, was 58.0 percent, an improvement of 345 basis points from 61.4 percent in the first quarter of 1993. Compared to the first quarter of 1993, the strong improvement in net income resulted from an increase in net interest income on a taxable-equivalent basis of $6.8 million, or 2.4 percent, an increase in noninterest income of $10.6 million, or 7.5 percent, a reduction in the provision for credit losses of $14.1 million, or 37.0 percent, and a decrease in noninterest expense of $4.2 million, or 1.6 percent. Nonperforming assets declined $156.7 million, or 41.9 percent, from March 31, 1993, and $8.3 million from December 31, 1993, to a level of $217.7 million at March 31, 1994, despite the addition of $29.3 million in nonperforming assets through the acquisition of Boulevard Bancorp, Inc. The ratio of the allowance for credit losses to nonperforming loans at quarter-end was 293 percent, compared with 269 percent at year-end 1993 and 186 percent at the end of the first quarter last year. Earnings per share in the first quarter of 1994 reflect the impact of the repurchase of 4.0 million average common shares, as discussed in "Recent Developments" below. Without the effect of the share repurchases during the first quarter of 1994, earnings per share would have been $.82, and return on average common equity would have been 17.8 percent.
Table 1 > Summary of Consolidated Income Three Months Ended (Taxable-Equivalent Basis; March 31 December 31 September 30 June 30 March 31 Dollars In Millions, Except Per Share Data) 1994 1993 1993 1993 1993 Interest income $396.2 $414.7 $419.2 $422.1 $423.5 Interest expense 111.2 121.4 129.6 132.6 145.3 Net interest income 285.0 293.3 289.6 289.5 278.2 Provision for credit losses 24.0 27.0 27.0 33.1 38.1 Net interest income after provision for credit losses 261.0 266.3 262.6 256.4 240.1 Noninterest income 151.8 145.9 142.0 140.5 141.2 Merger-related charges -- -- -- 72.2 -- Other noninterest expense 253.3 255.3 255.7 259.8 257.5 Income before income taxes 159.5 156.9 148.9 64.9 123.8 Taxable-equivalent adjustment 3.7 3.7 4.3 4.7 5.0 Income taxes 57.3 57.3 53.5 26.7 41.3 Net income $ 98.5 $ 95.9 $ 91.1 $ 33.5 $ 77.5 Return on average assets: Before merger-related charges 1.59% 1.45% 1.41% 1.32% 1.25% Based on net income 1.59 1.45 1.41 0.53 1.25 Return on average common equity: Before merger-related charges 18.8 18.3 16.8 15.7 14.7 Based on net income 18.8 18.3 16.8 5.4 14.7 Net interest margin 5.19 5.00 5.06 5.17 5.07 Efficiency ratio 58.0 58.1 59.2 77.2 61.4 Efficiency ratio excluding merger-related charges 58.0 58.1 59.2 60.4 61.4 Per share: Net income $ 0.84 $ 0.81 $ 0.74 $ 0.23 $ 0.61 Common dividends paid 0.29 0.25 0.25 0.25 0.25
page 2 RECENT DEVELOPMENTS > On March 25, 1994, the Company completed the previously announced acquisition of Boulevard Bancorp, Inc. (Boulevard) of Chicago, a commercial bank holding company with $1.6 billion in assets, $1.2 billion in deposits, and $114 million in shareholders' equity. Approximately 6.2 million shares of the common stock of the Company were exchanged for all of the outstanding common stock of Boulevard. The transaction was accounted for using the purchase method of accounting, and therefore, had no significant effect on first quarter earnings. For further information, see Note C of Notes to Consolidated Financial Statements. On February 28, 1994, the Company completed the acquisition of American Bancshares of Mankato, a $116 million bank holding company. This acquisition was not material to the Company's financial position or operating results. Additionally, the Company has signed agreements to acquire three institutions in markets in which the Company has an existing presence, serving to strengthen the Company's retail banking market shares in these communities. First Financial Investors, Inc., with approximately $200 million in assets, is the holding company for St. Louis Bank for Savings, FSB, located in Duluth, Minnesota. United Bank of Bismarck, with approximately $123 million in assets is located in Bismarck, North Dakota. Green Mountain Bancorporation, Inc., the holding company for Green Mountain Bank, located in Lakewood, Colorado, has approximately $32 million in assets. The First Financial Investors, Inc. transaction closed on April 29, 1994, while the United Bank of Bismarck and Green Mountain Bancorporation, Inc. acquisitions are expected to close in the third quarter of 1994. Finally, in January 1994, the Company announced that it had signed an agreement to acquire the domestic corporate trust business of J. P. Morgan & Co., Incorporated. This business unit provides trust services for approximately 650 clients with 3,800 bond issues in the areas of municipal, revenue, housing and corporate bond indenture trusteeships. The transaction is expected to close in the third quarter of 1994. During the quarter, the Company was awarded two significant credit card contracts. On January 26, 1994, the Company was selected by Northwest Airlines to be its bank credit card marketing partner in the First Bank System/Northwest Airlines WorldPerks credit card program. By the end of the first quarter of 1994, the Company had opened well over 100,000 WorldPerks customer accounts. In February, the Company's contract with the U. S. General Services Administration was expanded to provide Visa Procurement Cards to tens of thousands of authorized government employees for use in making small purchases. The Company's strong capital position has enabled it to pursue several stock repurchases. On January 19, 1994, the Board of Directors authorized the redemption of $159.3 million of the Company's preferred stock, consisting of $89 million of Preferred Stock Series 1989A and $70.3 million of Preferred Stock Series 1989B. These redemptions are reflected in the March 31, 1994, capital ratios. During 1993, the Company redeemed its $100 million Series 1983A Adjustable Rate Cumulative Preferred Stock and, as of March 31, 1994, had repurchased $16.1 million of Preferred Stock Series 1991A and 1989B. The Company is authorized to repurchase up to an additional $8.9 million of preferred stock. During 1993, the Company also announced plans to repurchase approximately $275 million of its common stock, including all of the shares issued in the acquisition of Boulevard. At March 31, 1994, a total of 6.6 million shares of common stock with a cost of $202 million had been repurchased. LINE OF BUSINESS FINANCIAL REVIEW > Each of the Company's three business lines--Retail and Community Banking, Commercial Banking, and the Trust and Investment Group--contributed to the strong financial performance in the first quarter of 1994. Compared to the first quarter of 1993 results, all achieved earnings increases of more than 25 percent. Business line results are derived from the Company's business unit profitability reporting system which specifically attributes most assets, deposits and income statement items to a business line. The Company's internal Funds Transfer Pricing system allocates a standard cost of funds used or credit for funds provided to all assets and liabilities using a matched funding concept. Expenses which directly support business line operations are allocated based on a standard unit cost and actual volume measurements. Expenses which indirectly support the business line operations as well as those which primarily support the holding company are allocated based on the ratio of the business line's noninterest expense to total noninterest expense. Income taxes have been calculated based upon the Company's consolidated effective tax rate. Capital is allocated within the business unit profitability system based upon credit, operational and business risks. The asset and liability components of the balance sheet are assigned risk factors ranging from .50 percent for deposits to 100 percent for goodwill. Asset components subject to credit risk are assigned risk factors based upon historic loss experience after taking into consideration changes in business practice which may introduce more or less risk into the portfolio. Certain lines of business, such as the Trust and Investment Group, which have no significant balance sheet components, are assigned capital after taking into consideration operational risk, capital levels of independent organizations operating similar businesses and regulatory minimums. Designations, assignments, and allocations may change from time to time as management accounting systems are enhanced or product lines change. During 1994 certain methodologies were changed, and accordingly, results for 1993 are presented on a consistent basis. page 3 Table 2 > Line of Business Financial Performance
Retail & Community Commercial Trust and Investment Consolidated Banking Banking Group Company Three Months Ended March 31, (Dollars in Millions) 1994 1993 1994 1993 1994 1993 1994 1993 CONDENSED INCOME STATEMENT: Net interest income (taxable-equivalent basis) $223.5 $220.2 $55.1 $51.6 $ 6.4 $ 6.4 $285.0 $278.2 Provision for credit losses 22.1 28.9 1.9 9.2 -- -- 24.0 38.1 Noninterest income 88.9 82.2 15.5 14.7 47.4 44.3 151.8 141.2 Noninterest expense 193.0 198.2 23.6 21.6 36.7 37.7 253.3 257.5 Income before income taxes 97.3 75.3 45.1 35.5 17.1 13.0 159.5 123.8 Income taxes and taxable- equivalent adjustment 37.2 28.1 17.2 13.3 6.6 4.9 61.0 46.3 Net income $ 60.1 $ 47.2 $27.9 $22.2 $ 10.5 $ 8.1 $ 98.5 $ 77.5 Return on average assets 1.39% 1.07% 1.69% 1.40% * * 1.59% 1.25% Return on average common equity 18.2 14.5 24.1 20.1 21.4% 19.6% 18.8 14.7 Efficiency ratio 61.8 65.5 33.4 32.6 68.2 74.4 58.0 61.4 AVERAGE BALANCE SHEET DATA: Total commercial loans $4,715 $4,142 $5,179 $4,471 -- -- $9,894 $8,613 Credit card loans 1,736 1,738 -- -- -- -- 1,736 1,738 Residential mortgage loans 3,001 3,231 -- -- -- -- 3,001 3,231 Other consumer loans 3,403 3,103 -- -- -- -- 3,403 3,103 Total consumer loans 8,140 8,072 -- -- -- -- 8,140 8,072 Total loans 12,855 12,214 5,179 4,471 -- -- 18,034 16,685 Assets 17,584 17,898 6,711 6,409 768 746 25,063 25,053 Deposits 15,874 17,139 2,756 1,977 974 800 19,604 19,916 Common equity 1,342 1,319 470 449 199 168 2,011 1,936
* Not meaningful Note: Preferred dividends are not allocated to the business lines. RETAIL AND COMMUNITY BANKING > Retail and Community Banking, which includes consumer, small business and middle market banking services, residential mortgage lending, and consumer and corporate credit card and payment systems processing, achieved strong revenue growth while containing costs. Net income increased 27.3 percent to $60.1 million in the first quarter of 1994, compared with the first quarter of 1993. Return on assets increased to 1.39 percent from 1.07 percent and return on equity increased to 18.2 percent from 14.5 percent. Net interest income increased $3.3 million, or 1.5 percent, from first quarter 1993 while fee-based noninterest income increased $6.7 million, or 8.2 percent. The increases are attributable to strong home equity loan promotions, aggressive small and middle market business lending, and growth in the mutual funds and Corporate Card products. Compared with the first quarter of 1993, the provision for credit losses decreased $6.8 million, or 23.5 percent, to $22.1 million in the first quarter of 1994, reflecting improved credit quality. Noninterest expense was $193.0 million in the first quarter of 1994, a decrease of $5.2 million, or 2.6 percent, from $198.2 million in the same quarter a year ago. The efficiency ratio improved to 61.8 percent in the first quarter of 1994 from 65.5 percent in the first quarter of 1993. COMMERCIAL BANKING > Commercial Banking, which provides lending, cash management, and other financial services to middle market, large corporate and mortgage banking companies, contributed net earnings of $27.9 million in the first quarter of 1994, a 25.7 percent increase over the first quarter of 1993. Return on assets rose to 1.69 percent in the first quarter of 1994 from 1.40 percent in the same quarter a year ago. Similarly, return on equity increased to 24.1 percent in 1994 from 20.1 percent a year ago. page 4 Net interest income increased to $55.1 million in the first quarter of 1994 from $51.6 million in the first quarter of 1993, while noninterest income increased 5.4 percent to $15.5 million in 1994, reflecting increased secured credit financings to mortgage banking firms accompanied by increases in noninterest-bearing deposits. The provision for credit losses declined 79.3 percent to $1.9 million from $9.2 million in the first quarter of 1993, reflecting improved credit quality. Noninterest expense increased to $23.6 million in the first quarter of 1994 from $21.6 million in the same quarter of 1993, and the efficiency ratio increased slightly to 33.4 percent in the first quarter of 1994 from 32.6 percent in the first quarter of 1993. TRUST AND INVESTMENT GROUP > The Trust and Investment Group, which includes corporate, personal and institutional trust services, investment management services, and a full-service brokerage company, reported net income of $10.5 million in the first quarter of 1994, a 29.6 percent increase over the first quarter of 1993. The return on average equity improved to 21.4 percent in the first quarter of 1994 from 19.6 percent in the same period in 1993. Much of the gain resulted from stronger noninterest income, which was $47.4 million for the quarter, up 7.0 percent over 1993. The increase in noninterest income was partially due to the March 1993 acquisition of the corporate trust business of two U. S. Bancorp subsidiaries in Oregon and Washington. Net interest income remained constant at $6.4 million in the first quarters of 1994 and 1993. Noninterest expense decreased to $36.7 million in the first quarter of 1994 from $37.7 million in the first quarter of 1993, while the efficiency ratio improved to 68.2 percent in 1994 from 74.3 percent in 1993. CAPITAL AND SHAREHOLDERS' EQUITY > The ratio of common equity to assets increased 51 basis points from a year ago to 8.2 percent at March 31, 1994, primarily due to earnings retention. Total equity to assets was 8.6 percent at March 31, 1994, up from 8.5 percent at December 31, 1993, and down from 9.2 percent at March 31, 1993. The decrease from a year ago was a result of the repurchase and redemption of $272.6 million of preferred stock, as previously discussed. Risk-based capital ratios, which take into account the different credit risks of various assets, reflect the Company's capital strength. Tier 1 and total risk-based capital ratios were 8.4 percent and 12.3 percent on March 31, 1994, compared with 9.8 percent and 12.9 percent at March 31, 1993, respectively. The leverage ratio, the measure of Tier 1 capital to total quarterly average assets, was also down to 7.6 percent from 8.2 percent a year ago. The decrease in the ratios from the prior year was due to the previously discussed preferred and common stock repurchases. Common equity per share at March 31, 1994 was $18.84, compared with $18.09 at December 31, 1993, and $17.29 at March 31, 1993. Table 3 > Capital Ratios
March 31 December 31 September 30 June 30 March 31 (Dollars in Millions) 1994 1993 1993 1993 1993 Common equity $2,183 $1,979 $2,007 $1,950 $1,941 As a percent of assets 8.2% 7.5% 7.7% 7.6% 7.7% Tangible common equity* $1,874 $1,811 $1,837 $1,777 $1,767 As a percent of assets 7.2% 6.9% 7.1% 7.0% 7.1% Total shareholders' equity $2,289 $2,245 $2,276 $2,329 $2,320 As a percent of assets 8.6% 8.5% 8.8% 9.1% 9.2% Tier 1 capital $1,871 $1,971 $2,022 $2,025 $2,032 As a percent of risk-adjusted assets 8.4% 9.2% 9.5% 9.5% 9.8% Total risk-based capital $2,744 $2,863 $2,966 $2,767 $2,688 As a percent of risk-adjusted assets 12.3% 13.3% 13.9% 13.0% 12.9% Leverage ratio 7.6 7.6 8.0 8.1 8.2
* Defined as common equity less goodwill NET INTEREST INCOME > Net interest income on a taxable-equivalent basis was $285.0 million in the first quarter of 1994, an increase of $6.8 million, or 2.4 percent, from the first quarter of 1993. The improvement in net interest income reflects increases in average loans and noninterest-bearing deposits. Average loans totaled $18.0 billion in the first quarter of 1994, an increase of $1.3 billion, or 8.1 percent, from $16.7 billion in the first quarter of 1993. Noninterest-bearing deposits averaged $6.4 billion in the first quarter of 1994, up from $5.3 billion in the first quarter of 1993. Approximately one-half of the increase in average loans and three-quarters of the increase in noninterest-bearing deposits during the first quarter, as compared with the same period in 1993, were attributable to cyclical activity in the Company's portfolio of secured loans to mortgage banking firms and related escrow balances. Total noninterest-bearing deposits at March 31, 1994, were lower than at the end of 1993 because of seasonal factors that typically increase deposit balances at year-end. Net interest income growth was also aided by the decline in nonperforming assets. page 5 The net interest margin on a taxable-equivalent basis was 5.19 percent in the first quarter of 1994, an increase of 12 basis points from 5.07 percent in the first quarter of 1993. The increase in the net interest margin from a year ago results primarily from decreased funding costs. Table 4 > Analysis of Net Interest Income
Three Months Ended March 31 December 31 September 30 June 30 March 31 (Dollars in Millions) 1994 1993 1993 1993 1993 Net interest income (taxable-equivalent basis) $ 285.0 $ 293.3 $ 289.6 $ 289.5 $ 278.2 Average balances of earning assets supported by: Interest-bearing liabilities $15,658 $15,767 $15,946 $16,051 $16,662 Noninterest-bearing liabilities 6,620 7,503 6,764 6,404 5,605 Total earning assets $22,278 $23,270 $22,710 $22,455 $22,267 Average yields and weighted average rates (taxable-equivalent basis): Earning assets yield 7.21% 7.07% 7.32% 7.54% 7.71% Rate paid on interest-bearing liabilities 2.88 3.05 3.22 3.31 3.54 Gross interest margin 4.33% 4.02% 4.10% 4.23% 4.17% Net interest margin 5.19% 5.00% 5.06% 5.17% 5.07% Net interest margin without taxable-equivalent increments 5.12% 4.94% 4.98% 5.09% 4.98%
PROVISION FOR CREDIT LOSSES > The provision for credit losses was $24.0 million in the first quarter of 1994, down $14.1 million from the level in the first quarter of 1993. Net charge-offs totaled $25.6 million in the first quarter of 1994, down from $42.8 million in the same quarter a year ago. Commercial loan net charge-offs for the quarter were lower by $17.7 million, or 78.0 percent, from the same quarter of the prior year, while consumer loan net charge-offs were essentially unchanged. The allowance for credit losses was $442.5 million at March 31, 1994, down slightly from $443.3 million at March 31, 1993, and up from $423.2 million at December 31, 1993. The increase from year-end includes the addition of $20.2 million of allowance from the Boulevard acquisition. Reserve coverage remained strong as the allowance for credit losses to nonperforming loans ratio increased to 293 percent at quarter-end, compared with 269 percent at the end of 1993, and 186 percent at the end of the first quarter a year ago. NONINTEREST INCOME > Noninterest income in the first quarter of 1994 was $151.8 million, an increase of $10.6 million, or 7.5 percent, from the first quarter last year. Trust fees and credit card fees increased $10.5 million, or 16.4 percent, from the prior year quarter. Most of the increase occurred in credit card fees, reflecting higher sales volume for Corporate Card, Procurement Card, and merchant card processing. Trust fees for the quarter were up from the first quarter of 1993 level as a result of increased corporate trust fee revenue. Table 5 > Noninterest Income
Three Months Ended March 31 December 31 September 30 June 30 March 31 (Dollars in Millions) 1994 1993 1993 1993 1993 Trust fees $ 38.5 $ 37.5 $ 36.6 $ 36.5 $ 35.5 Credit card fees 36.0 37.5 36.6 34.5 28.5 Service charges on deposit accounts 29.4 28.4 28.6 28.0 30.3 Insurance commissions 5.0 5.3 5.8 4.5 5.3 Trading account profits and commissions 2.7 2.2 2.4 2.9 2.6 Investment securities gains -- -- -- -- 0.3 Other 40.2 35.0 32.0 34.1 38.7 Total noninterest income $151.8 $145.9 $142.0 $140.5 $141.2
page 6 NONINTEREST EXPENSE > Noninterest expense was $253.3 million in the first quarter of 1994, a decrease of $4.2 million, or 1.6 percent, from first quarter of 1993. The decrease in expenses reflects the benefits of integrating recent acquisitions, partially offset by higher advertising and contract labor expenses. The Company's efficiency ratio, the measure of expenses to revenues, improved to 58.0 percent for the quarter from 61.4 percent a year ago. Total salaries and benefits expense for the first quarter of 1994 decreased by $6.4 million, or 5.1 percent, from the first quarter of 1993. Average full-time equivalent employees decreased by 7.2 percent, to 11,815 in the first quarter of 1994, from 12,735 in the first quarter of 1993. As compared to the first quarter of 1993, net occupancy and equipment expense decreased by $1.2 million, or 2.9 percent. Advertising expense increased $3.4 million, or 72.3 percent, over the 1993 level, reflecting expanded marketing efforts in the growing consumer asset businesses. Other personnel costs increased $2.5 million, or 48.1 percent, primarily due to the increased use of temporary labor related to system improvements and integrations. Professional services expense decreased by $1.8 million, or 21.7 percent. Data processing decreased $4.6 million, or 56.8 percent, primarily due to efficiencies obtained through integrating recent acquisitions and the elimination of an outside data processor previously used for a portion of the Company's item processing. Table 6 > Noninterest Expense
Three Months Ended March 31 December 31 September 30 June 30 March 31 (Dollars in Millions, Except Per Employee Data) 1994 1993 1993 1993 1993 Salaries $ 94.2 $ 95.0 $ 97.3 $ 97.3 $ 99.5 Employee benefits 23.7 19.6 20.0 21.9 24.8 Total personnel expense 117.9 114.6 117.3 119.2 124.3 Net occupancy 21.5 22.8 22.8 23.2 24.6 Furniture and equipment 19.1 19.2 17.8 18.5 17.2 FDIC insurance 11.5 11.5 11.4 11.7 11.8 Advertising 8.1 4.7 6.0 5.1 4.7 Amortization of goodwill and other intangible assets 8.0 7.7 7.7 7.7 7.5 Other personnel costs 7.7 8.5 7.2 6.6 5.2 Professional services 6.5 10.7 9.1 8.6 8.3 Telephone 5.1 5.0 4.4 4.7 4.6 Postage 4.9 4.8 4.6 4.9 5.1 Printing, stationery and supplies 4.8 6.8 4.5 5.7 4.9 Data processing 3.5 4.7 5.8 8.4 8.1 Other real estate -- (0.1) 2.2 0.9 (0.8) Merger, integration and restructuring -- -- -- 72.2 -- Other 34.7 34.4 34.9 34.6 32.0 Total noninterest expense $ 253.3 $ 255.3 $ 255.7 $ 332.0 $ 257.5 Efficiency ratio* 58.0% 58.1% 59.2% 77.2% 61.4% Efficiency ratio excluding merger-related charges 58.0 58.1 59.2 60.4 61.4 Quarterly average number of employees (full-time equivalents) 11,815 11,981 12,110 12,375 12,735 Annualized personnel expense per employee $39,915 $38,261 $38,745 $38,529 $39,042
* Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income net of investment securities gains. PROVISION FOR INCOME TAXES > The provision for income taxes was $57.3 million in the first quarter of 1994, compared with $41.3 million in the first quarter of 1993. The increase is primarily the result of a higher level of taxable income. At March 31, 1994, the Company's net deferred tax assets were $219.7 million, compared with $160.0 million at December 31, 1993, and $212.8 million at March 31, 1993. The recent acquisition of Boulevard Bancorp accounted for most of the increase in deferred tax assets. Realization of these assets over time is dependent upon the Company generating earnings in future periods. For further information regarding income taxes, refer to Note H on page 20. ACCOUNTING CHANGES > Effective December 31, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. ("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 establishes the accounting requirements. The accounting to be followed for two of the categories, trading securities and held-to-maturity securities, was 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 March 31, 1994, the Company's available-for-sale securities portfolio was $4.3 billion, with an after-tax unrealized loss of $17.9 million recorded in shareholders' equity. page 7 The Company adopted the provisions of SFAS 112, "Employers' Accounting for Postemployment Benefits," as of December 31, 1993. This Statement requires accrual of costs associated with postemployment benefits (principally disability-related benefits) provided to former or inactive employees after employment but before retirement if certain conditions are met. The effect of adopting SFAS 112 was not material. The Financial Accounting Standards Board has issued SFAS 114, "Accounting by Creditors for Impairment of a Loan," which requires creditors to establish a valuation allowance when it is probable that all the principal and interest due under the contractual terms of a loan will not be collected. The impairment is measured based on the present value of expected future cash flows based on the 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 principal amounts of impaired loans. The adoption of this Statement is required for fiscal years beginning after December 15, 1994. The adoption of SFAS 114 is not expected to have a material effect on the Company. CREDIT MANAGEMENT > The Company's credit management process includes centralized credit policy and administration functions and standardized underwriting criteria for specialized lending categories, such as mortgage banking, real estate construction, and consumer credit. The Company's credit management process is supported by regular examinations conducted by the credit administration function. Large loans and all loans experiencing deterioration of credit quality are reviewed quarterly by management. A standardized credit scoring system is used to assess consumer credit risks and to price consumer products relative to their assigned risk rating. 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 and regional economic conditions, and other issues. LOAN PORTFOLIO REVIEW > One of the ways the Company manages its credit risk is by ensuring its loan portfolio is well diversified by industry classification, size and type of loan. The Company's primary operating region includes Minnesota, Colorado, Montana, North Dakota, South Dakota, Wisconsin, and Illinois. Approximately 80 percent of the loan portfolio consists of extensions of credit to customers in the Company's operating region. A discussion of the Company's major loan categories follows. COMMERCIAL > The Company's portfolio of commercial loans totaled $6.7 billion at March 31, 1994, and comprised 36.8 percent of the portfolio. This level is up from $6.2 billion at December 31, 1993, and $5.9 billion at March 31, 1993. As a percentage of the total portfolio, commercial loans totaled 32.9 percent at December 31, 1993, and 35.0 percent at March 31, 1993. The $537 million increase over December 31, 1993, and the $799 million increase over the first quarter of the prior year reflect growth in small business and middle market loans as well as the acquisition of Boulevard. At March 31, 1994, commercial loans totaling $32.4 million were included in nonperforming assets, down $9.8 million, or 23.2 percent, from December 31, 1993, and down $39.7 million, or 55.1 percent, from March 31, 1993. Net charge-offs of commercial loans totaled $1.8 million in the first quarter of 1994, compared with net charge-offs of $5.1 million and $2.5 million in the fourth quarter of 1993 and in the first quarter of 1993, respectively. Table 7 > Nonperforming Assets
March 31 December 31 September 30 June 30 March 31 (Dollars in Millions) 1994 1993 1993 1993 1993 Nonaccrual loans $150.8 $157.6 $183.5 $226.7 $234.8 Restructured loans -- -- -- -- 3.1 Nonperforming loans 150.8 157.6 183.5 226.7 237.9 Other real estate 66.3 67.4 81.1 99.4 133.1 Other nonperforming assets 0.6 1.0 2.2 2.4 3.4 Nonperforming assets $217.7 $226.0 $266.8 $328.5 $374.4 Accruing loans 90 days or more past due $ 26.7 $ 31.2 $ 32.1 $ 25.1 $ 28.4 Nonperforming loans to total loans 0.83% 0.84% 0.99% 1.26% 1.41% Nonperforming assets to total loans plus other real estate 1.19 1.20 1.43 1.82 2.20
page 8 FINANCIAL INSTITUTIONS > The portfolio of loans to financial institutions totaled $1.4 billion at March 31, 1994, a decrease of $634 million from the $2.0 billion balance at December 31, 1993. Compared to the March 31, 1993 balance, the portfolio is up $379 million. Both the decrease from year-end and the increase from a year ago can be attributed to cyclical activity in the Company's secured loans to mortgage banking firms. This portfolio includes a $700 million low margin credit facility to one mortgage banking customer with a term extending through the third quarter of 1994 under which borrowings are fully secured by short-term U. S. Treasury securities. There were no significant charge-offs or recoveries in the first quarter of 1994 or the fourth quarter of 1993. In the first quarter of 1993, net charge-offs were $6.4 million, primarily related to one large loan, which was fully recovered through repayment in the third quarter of 1993. COMMERCIAL REAL ESTATE LENDING > The commercial real estate mortgage and construction loan portfolio totaled $1.9 billion at March 31, 1994, compared with $1.7 billion at December 31, 1993, and March 31, 1993. The increase is primarily due to the acquisition of Boulevard. page 9 Commercial real estate loans included in nonperforming assets at the end of the first quarter of 1994 increased to $46.4 million from $39.1 million at the end of the fourth quarter of 1993 and declined from $68.3 million at the end of the first quarter of 1993. Total commercial real estate exposure (including other real estate-owned) on nonperforming status was $112.7 million at March 31, 1994, up from $106.5 million at December 31, 1993, and down significantly from $201.4 million at March 31, 1993. The increases from December 31, 1993, are primarily due to the acquisition of Boulevard. The decline in total real estate exposure from March 31, 1993, was due to reductions of $66.8 million in other real estate and $21.9 million in nonperforming commercial real estate loans, reflecting sales of properties and loan repayments. 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 March 31, 1994, the Company had HLT outstandings totaling $191 million and was committed under definitive agreements to lend an additional amount of approximately $57 million. This exposure has decreased 15.6 percent from March 31, 1993, when outstandings were $230 million and additional commitments were $64 million. HLT outstandings totaling $16.1 million were included in nonperforming assets at March 31, 1994, compared with $20.1 million at December 31, 1993, and $56.7 million at March 31, 1993. The significant drop in nonperforming HLT outstandings from first quarter of 1993 was due to the repayment of a $37.5 million loan in the third quarter of 1993. Net recoveries of HLT loans totaled $.9 million in the first quarter of 1994 compared with charge-offs of $3.7 million and $2.8 million in the fourth quarter of 1993 and the first quarter of 1993, respectively. page 10 CONSUMER LENDING > The consumer loan portfolio, which includes residential mortgages, totaled $8.1 billion at March 31, 1994. This level is down $569 million from $8.7 billion at December 31, 1993, primarily due to a $733 million decrease in residential mortgages held for sale, partially offset by increases in home equity and second mortgage, credit card, and automobile loans. The increase from the prior year is a result of the Company's home equity promotions (an increase of $524 million) and growth in credit card loans (growth of $93 million), partially offset by decreases in residential mortgages (a decline of $240 million), residential mortgages held for sale (a decline of $269 million), and installment loans (a decline of $91 million). Net charge-offs of consumer loans in the first quarter of 1994 were $20.6 million, relatively constant from the $20.1 million for the same period in 1993. Consumer loans 30 days or more past due were 2.1 percent of the total consumer portfolio at March 31, 1994, compared with 2.3 percent at December 31, 1993, and March 31, 1993. ANALYSIS OF NET LOAN CHARGE-OFFS AND ALLOWANCE FOR CREDIT LOSSES > Net charge-offs totaled $25.6 million in the first quarter of 1994, down $17.2 million, or 40.2 percent, from the $42.8 million reported in the first quarter a year ago, primarily due to declines in net charge-offs on financial institutions, HLTs, and commercial mortgage loans. At March 31, 1994, the allowance for credit losses was $442.5 million, or 2.42 percent of loans. This compares with an allowance of $423.2 million, or 2.25 percent of loans, at December 31, 1993, and $443.3 million, or 2.62 percent of loans, at March 31, 1993. The increase from year-end includes the addition of $20.2 million of allowance from the Boulevard acquisition. The ratio of the allowance to nonperforming loans continues to indicate strong reserve coverage, increasing to 293 percent at March 31, 1994, compared with 269 percent at December 31, 1993, and 186 percent at March 31, 1993. Table 8 > Summary of Allowance for Credit Losses
Three Months Ended March 31 December 31 March 31 (Dollars in Millions) 1994 1993 1993 Balance at beginning of period $423.2 $427.2 $448.0 CHARGE-OFFS: Commercial: Commercial 11.4 11.0 9.4 Financial institutions -- -- 6.5 Real estate: Commercial mortgage 7.9 3.3 15.0 Construction -- -- -- HLTs 3.1 3.7 4.3 Total commercial 22.4 18.0 35.2 Consumer: Residential mortgage 0.7 0.4 0.4 Credit card 16.7 18.1 17.8 Other 8.3 9.7 7.8 Total consumer 25.7 28.2 26.0 Total 48.1 46.2 61.2 RECOVERIES: Commercial: Commercial 9.6 5.9 6.9 Financial institutions 0.1 0.2 0.1 Real estate: Commercial mortgage 3.5 3.8 3.3 Construction 0.2 0.3 0.7 HLTs 4.0 -- 1.5 Total commercial 17.4 10.2 12.5 Consumer: Residential mortgage 0.1 0.6 0.4 Credit card 2.2 1.9 2.3 Other 2.8 2.5 3.2 Total consumer 5.1 5.0 5.9 Total 22.5 15.2 18.4 NET CHARGE-OFFS: Commercial: Commercial 1.8 5.1 2.5 Financial institutions (0.1) (0.2) 6.4 Real estate: Commercial mortgage 4.4 (0.5) 11.7 Construction (0.2) (0.3) (0.7) HLTs (0.9) 3.7 2.8 Total commercial 5.0 7.8 22.7 Consumer: Residential mortgage 0.6 (0.2) -- Credit card 14.5 16.2 15.5 Other 5.5 7.2 4.6 Total consumer 20.6 23.2 20.1 Total 25.6 31.0 42.8 Provision charged to operating expense 24.0 27.0 38.1 Additions related to acquisitions 20.9 -- -- Balance at end of period $442.5 $423.2 $443.3 Allowance as a percentage of period-end loans 2.42% 2.25% 2.62% Allowance as a percentage of nonperforming loans 293 269 186
ANALYSIS OF NONPERFORMING ASSETS > Nonperforming assets include all nonaccrual loans, restructured loans, other real estate and other nonperforming assets owned by the Company. At March 31, 1994, nonperforming assets totaled $217.7 million, down $8.3 million, or 3.7 percent, from December 31, 1993, and down $156.7 million, or 41.9 percent, from March 31, 1993, despite the addition of $29.3 million in nonperforming assets from the acquisition of Boulevard. The ratio of nonperforming assets to loans and other real estate improved to 1.19 percent at March 31, 1994, and 1.20 percent at December 31, 1993, from 2.20 percent at March 31, 1993. Significant decreases occurred in the categories of nonperforming HLT, commercial, and financial institutions loans and other real estate, primarily the result of loan repayments and property sales. Accruing loans 90 days or more past due at March 31, 1994, totaled $26.7 million, compared with $31.2 million at December 31, 1993, and $28.4 million at March 31, 1993. Table 9 > Nonperforming Assets by Industry
March 31 December 31 September 30 June 30 March 31 (Dollars in Millions) 1994 1993 1993 1993 1993 COMMERCIAL: Commercial $ 32.4 $ 42.2 $ 49.7 $ 65.2 $ 72.1 Financial institutions 0.6 0.9 2.5 1.6 2.2 Real estate: Commercial mortgage 38.2 36.9 39.4 43.2 51.7 Construction 8.2 2.2 2.2 12.0 16.6 HLTs 16.1 20.1 27.4 67.2 56.7 Total commercial 95.5 102.3 121.2 189.2 199.3 CONSUMER: Residential mortgage 42.8 44.8 51.4 25.8 25.4 Credit card 10.8 10.3 9.9 10.5 10.4 Other 1.7 0.2 1.0 1.2 2.8 Total consumer 55.3 55.3 62.3 37.5 38.6 Total nonperforming loans 150.8 157.6 183.5 226.7 237.9 OTHER REAL ESTATE 66.3 67.4 81.1 99.4 133.1 OTHER NONPERFORMING ASSETS 0.6 1.0 2.2 2.4 3.4 Total nonperforming assets $217.7 $226.0 $266.8 $328.5 $374.4
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. Interest rate risk is measured and reported to the Company's Asset and Liability Management Committee ("ALCO") through the use of traditional gap analysis, which measures the difference between assets and liabilities that reprice in a given time period, and simulation modeling, which produces projections of net interest income under various interest rate scenarios and balance sheet strategies. Including the effect of interest rate swaps, futures, options and other hedging instruments, the Company had a positive cumulative repricing gap position at one year of $755 million at March 31, 1994, indicating that more assets than liabilities reprice within that period. While this analysis is useful as a point-in-time measurement of interest rate risk, there are certain risks that the repricing gap position does not capture, such as basis risk and prepayment risk. Due to these limitations, management places a greater reliance on simulation modeling to measure and manage interest rate risk. page 11 It is the Company's policy to maintain a low interest rate risk position by limiting the amount of forecasted net interest income at risk under a steady 200 basis point change in interest rates over a 12-month period. The Company's current business mix results in more assets than liabilities repricing in a one-year time frame. To maintain acceptable interest rate risk levels, the Company invests in fixed-rate assets or receives fixed rates on interest rate swaps. The Company has entered into interest rate swap agreements that hedge specific assets and liabilities to manage the impact of fluctuating interest rates on earnings. As of March 31, 1994, the Company receives payments on $3.1 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 6.75 percent and an average variable rate, which is tied to various LIBOR rates, of 3.66 percent. The maturity of these agreements ranges from 1 month to 10 years with an average remaining maturity of 3.2 years. Swaps contributed to the Company's net interest margin by reducing interest expense by $25.9 million and $22.1 million for the quarters ended March 31, 1994, and 1993, respectively. Interest rate caps and floors are similarly used by the Company to minimize the impact of fluctuating interest rates on earnings. The total notional amount of floor agreements purchased as of March 31, 1994, was $950 million with an average strike level of 3-month LIBOR at 3.5 percent and an average remaining maturity of 3.7 years. Floors increased interest income by $.2 million for the quarter ended March 31, 1994. Further information on interest rate swaps and options can be found in Note I on page 21. Table 10 > Interest Rate Swap Hedging Portfolio Notional Balances and Yields by Maturity Date
At March 31, 1994 (Dollars in Millions) Weighted Average Receive Fixed Swaps Notional Interest Rate Maturity Date Amount Received 1994 (remaining nine months) $ 405 6.40% 1995 677 7.04 1996 629 7.95 1997 250 5.87 1998 406 6.22 After 1998 725 6.22 Total $3,092 6.75%
At March 31, 1994, the Company did not have any swaps in its portfolio which required it to pay fixed-rate interest. 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 manages 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. BALANCE SHEET ANALYSIS > Average loans totaled $18.0 billion in the first quarter of 1994, up $1.3 billion, or 8.1 percent, from the first quarter a year ago. The increase reflected growth in loans to financial institutions and small business and middle market loans, as well as home equity and second mortgage loans. Average securities for the first quarter of 1994 decreased $522 million from the first quarter of 1993, reflecting maturities of U. S. Treasury and agency securities. The Company adopted the provisions of SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," as of December 31, 1993, and reported its entire $3.3 billion investment portfolio as available-for-sale. Under this Statement, securities are classified as held-to-maturity if the Company has the intent and ability to hold the securities to maturity. Securities that the Company may sell as part of its asset/liability management strategy or which may be sold in response to changes in interest rates, resultant prepayment risk and other factors are classified as available-for-sale. At March 31, 1994, the available-for-sale portfolio totaled $4.3 billion and a $17.9 million after-tax unrealized loss was recorded in shareholders' equity. Trading and other short-term earning assets averaged $.7 billion in the first quarter of 1994, compared with an average of $1.5 billion in the first quarter of 1993. The decrease was primarily due to average federal funds sold and resale agreements which dropped to $.5 billion in the first quarter of 1994 from $1.1 billion in the first quarter of 1993. Noninterest-bearing deposits averaged $6.4 billion in the first quarter of 1994, up $1.1 billion from the first quarter of 1993. The increase in noninterest-bearing deposits resulted from the higher level of loans to mortgage banking firms which generate higher noninterest-bearing deposits. Average domestic interest-bearing deposits include certificates of deposit, savings certificates, money market savings, and interest checking products. These deposits averaged $13.2 billion in the first quarter of 1994, compared with $14.6 billion in the first quarter of 1993. The decrease reflects a $1.3 billion decline in savings certificates. Short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings, averaged $1.4 billion in the first quarter of 1994, compared with $1.2 billion in the first quarter a year ago. Average intermediate and long-term debt increased to $1.1 billion in the first quarter of 1994 from $.8 billion in the first quarter of 1993. During 1993, the Company placed three $100 million subordinated debt issuances. page 12 CONSOLIDATED BALANCE SHEET
March 31 December 31 March 31 (In Millions, Except Shares) 1994 1993 1993 ASSETS Cash and due from banks $ 1,932 $ 1,682 $ 1,477 Federal funds sold 131 1,032 849 Securities purchased under agreements to resell 268 306 212 Interest-bearing deposits with banks -- -- 2 Trading account securities 60 55 111 Available-for-sale securities 4,334 3,319 145 Investment securities (market value: 3/31/93 - $4,246) -- -- 4,163 Loans 18,256 18,779 16,918 Less allowance for credit losses 442 423 443 Net loans 17,814 18,356 16,475 Bank premises and equipment 387 382 406 Interest receivable 141 129 147 Customers' liability on acceptances 143 186 143 Other assets 1,299 938 1,023 Total assets $26,509 $26,385 $25,153 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 6,808 $ 7,489 $ 5,593 Interest-bearing 13,960 13,542 14,467 Total deposits 20,768 21,031 20,060 Federal funds purchased 414 553 564 Securities sold under agreements to repurchase 640 369 336 Other short-term funds borrowed 365 412 246 Long-term debt 1,090 1,015 808 Acceptances outstanding 143 186 143 Other liabilities 800 574 676 Total liabilities 24,220 24,140 22,833 Shareholders' equity: Preferred stock 106 266 379 Common stock, par value $1.25 a share-authorized 150,000,000 shares; issued: 3/31/94-116,300,311 shares; 12/31/93-114,793,547 shares; 3/31/93-114,020,623 shares 145 144 142 Capital surplus 731 676 666 Retained earnings 1,320 1,328 1,184 Less cost of common stock in treasury: 3/31/94-398,337 shares; 12/31/93-5,391,883 shares; 3/31/93-1,777,727 shares (13) (169) (51) Total shareholders' equity 2,289 2,245 2,320 Total liabilities and shareholders' equity $26,509 $26,385 $25,153
page 13 CONSOLIDATED STATEMENT OF INCOME
Three Months Ended March 31 December 31 September 30 June 30 March 31 (In Millions, Except Per-Share Data) 1994 1993 1993 1993 1993 INTEREST INCOME Loans $338.2 $352.6 $353.9 $348.6 $343.5 Investment securities: Taxable 46.4 46.9 52.9 58.4 60.0 Exempt from federal income taxes 3.0 4.7 3.2 3.3 3.4 Other interest income 4.9 6.8 4.9 7.1 11.6 Total interest income 392.5 411.0 414.9 417.4 418.5 INTEREST EXPENSE Deposits 85.1 94.0 102.1 107.0 120.6 Federal funds purchased and repurchase agreements 9.1 7.6 9.0 7.5 7.7 Other short-term funds borrowed 3.6 4.9 5.1 5.1 3.9 Long-term debt 13.4 14.9 13.4 13.0 13.1 Total interest expense 111.2 121.4 129.6 132.6 145.3 Net interest income 281.3 289.6 285.3 284.8 273.2 Provision for credit losses 24.0 27.0 27.0 33.1 38.1 Net interest income after provision for credit losses 257.3 262.6 258.3 251.7 235.1 NONINTEREST INCOME Trust fees 38.5 37.5 36.6 36.5 35.5 Credit card fees 36.0 37.5 36.6 34.5 28.5 Service charges on deposit accounts 29.4 28.4 28.6 28.0 30.3 Investment securities gains -- -- -- -- 0.3 Other 47.9 42.5 40.2 41.5 46.6 Total noninterest income 151.8 145.9 142.0 140.5 141.2 NONINTEREST EXPENSE Salaries 94.2 95.0 97.3 97.3 99.5 Employee benefits 23.7 19.6 20.0 21.9 24.8 Net occupancy 21.5 22.8 22.8 23.2 24.6 Furniture and equipment 19.1 19.2 17.8 18.5 17.2 FDIC insurance 11.5 11.5 11.4 11.7 11.8 Advertising 8.1 4.7 6.0 5.1 4.7 Amortization of goodwill and other intangible assets 8.0 7.7 7.7 7.7 7.5 Other personnel costs 7.7 8.5 7.2 6.6 5.2 Professional services 6.5 10.7 9.1 8.6 8.3 Data processing 3.5 4.7 5.8 8.4 8.1 Other real estate -- (0.1) 2.2 0.9 (0.8) Merger, integration and restructuring -- -- -- 72.2 -- Other 49.5 51.0 48.4 49.9 46.6 Total noninterest expense 253.3 255.3 255.7 332.0 257.5 Income before income taxes 155.8 153.2 144.6 60.2 118.8 Applicable income taxes 57.3 57.3 53.5 26.7 41.3 Net income $ 98.5 $ 95.9 $ 91.1 $ 33.5 $ 77.5 Net income applicable to common equity $ 93.0 $ 90.4 $ 83.7 $ 26.1 $ 70.0 EARNINGS PER COMMON SHARE Average common and common equivalent shares 110,771,619 111,278,886 113,721,471 113,392,157 113,982,746 Net income $0.84 $0.81 $0.74 $0.23 $0.61
page 14 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, 1992 113,450,425 $ 378.5 $141.8 $657.7 $1,140.3 $ -- $ -- $2,318.3 Net income 77.5 77.5 Dividends declared: Preferred (7.5) (7.5) Common (25.8) (25.8) Repurchase of common stock for treasury (1,859,200) (53.8) (53.8) Issuance of common stock: Dividend reinvestment 84,477 0.1 2.5 2.6 Stock option and stock purchase plans 567,194 0.7 8.2 8.9 BALANCE MARCH 31, 1993 112,242,896 $ 378.5 $142.5 $666.0 $1,184.5 $ -- $ (51.3) $2,320.2 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 98.5 98.5 Dividends declared: Preferred (5.5) (5.5) Common (31.9) (31.9) Repurchase of common stock for treasury (458,200) (0.1) (14.8) (14.9) Acquisition of Boulevard Bancorp, Inc. for common stock, warrants, and stock options 6,227,649 1.9 54.9 149.4 206.2 Other business acquisitions 526,000 (8.1) 16.2 8.1 Issuance of common stock: Dividend reinvestment 51,070 1.6 1.6 Stock option and stock purchase plans 153,791 0.3 (3.1) 3.8 1.0 Redemption of preferred stock (160.0) (7.0) (167.0) Change in unrealized gains/(losses) (51.9) (51.9) BALANCE MARCH 31, 1994 115,901,974 $ 105.9 $145.4 $731.5 $1,337.5 $(17.9) $ (13.2) $2,289.2
* Defined as total common shares less common stock held in treasury. ** Ending treasury shares were 398,337 at March 31, 1994; 5,391,883 at December 31, 1993; 1,777,727 at March 31, 1993; and none at December 31, 1992. page 15 CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31 (In Millions) 1994 1993 OPERATING ACTIVITIES Net income $ 98.5 $ 77.5 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 24.0 38.1 Depreciation and amortization of bank premises and equipment 15.1 14.1 Provision for deferred income taxes 11.0 11.2 Amortization of goodwill and other intangible assets 8.0 7.5 Amortization and write-downs of loan servicing related intangibles 5.7 5.7 Write-downs of other real estate 0.6 1.7 Changes in operating assets and liabilities, excluding the effects of purchase acquisitions: Increase in trading account securities (5.2) (17.1) Decrease in loans held for sale 667.4 104.3 Decrease in securities held for sale -- 138.1 Increase in accrued receivables (27.5) (15.4) (Decrease) increase in accrued liabilities (59.0) 20.3 Other - net (23.3) (19.0) Net cash provided by operating activities 715.3 367.0 INVESTING ACTIVITIES Net cash provided (used) by: Interest-bearing deposits with banks -- 325.8 Loans outstanding of subsidiaries 574.8 17.7 Securities purchased under agreements to resell 37.9 0.7 Securities transactions: Sales 3.2 42.1 Maturities 351.9 170.1 Purchases (674.2) (461.6) Proceeds from sales/repayments of other real estate 12.0 24.3 Proceeds from sales of bank premises and equipment 2.1 0.2 Purchases of bank premises and equipment (10.6) (37.5) Purchases of loans (0.6) (1.3) Cash and cash equivalents of acquired subsidiaries 72.8 -- Business acquisitions, net of cash received -- 5.9 Other - net (1.1) (0.7) Net cash provided by investing activities 368.2 85.7 FINANCING ACTIVITIES Net cash provided (used) by: Deposits (1,509.2) (1,138.0) Federal funds purchased and securities sold under agreements to repurchase (173.9) (221.8) Short-term borrowings (63.8) (82.3) Long-term debt transactions: Proceeds 130.0 15.0 Principal payments (65.9) (37.9) Redemption of preferred stock (0.9) -- Proceeds from dividend reinvestment, stock option, and stock purchase plans 2.6 11.5 Repurchase of common stock for treasury (14.9) (53.8) Cash dividends (37.4) (33.3) Net cash used by financing activities (1,733.4) (1,540.6) Change in cash and cash equivalents (649.9) (1,087.9) Cash and cash equivalents at beginning of period 2,713.5 3,414.2 Cash and cash equivalents at end of period $ 2,063.6 $2,326.3
page 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A > Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, and cash flow activity required under generally accepted accounting principles. In the opinion of management of the Company, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of results have been made and the Company believes such presentation is adequate to make the information presented not misleading. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 1993. Certain amounts in prior periods have been reclassified to conform to the current presentation. Note B > Accounting Changes ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES > Effective December 31, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") 115, "Accounting for Certain Investments in Debt and Equity Securities," 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 one of three categories which then establishes the accounting requirements. The accounting for two of the categories, trading securities and held-to-maturity securities, is essentially the same as prior practice. The other category, available-for-sale securities, is accounted for at fair value with unrealized holding gains or losses being reported as a separate component of shareholders' equity. At March 31, 1994, the Company's available-for-sale securities portfolio was $4.3 billion, with an after-tax unrealized loss of $17.9 million recorded in shareholders' equity. ACCOUNTING FOR POSTEMPLOYMENT BENEFITS > The Company adopted the provisions of SFAS 112, "Employers' Accounting for Postemployment Benefits," as of December 31, 1993. This Statement requires accrual of costs associated with postemployment benefits (principally disability-related benefits) provided to former or inactive employees after employment but before retirement if certain conditions are met. The effect of adopting SFAS 112 was not material. ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN > The Financial Accounting Standards Board has issued SFAS 114, "Accounting by Creditors for Impairment of a Loan," which requires creditors to establish a valuation allowance when it is probable that all the principal and interest due under the contractual terms of a loan will not be collected. The impairment is measured based on the present value of expected future cash flows based on the loans' effective interest rate, observable market price or fair value of a collateral dependent loan. This differs from the Company's current policy in that it requires establishing a valuation allowance for uncollectible interest in addition to the principal amounts of impaired loans. The adoption of this Statement is required for fiscal years beginning after December 15, 1994. The adoption of SFAS 114 is not expected to have a material effect on the Company. Note C > Business Combinations and Asset Acquisitions On March 25, 1994, the Company completed the acquisition of Boulevard Bancorp, Inc. ("Boulevard"), a commercial bank holding company headquartered in Chicago, Illinois, and 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. In connection with the Boulevard acquisition, the Company announced that it would buy 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 may continue through the end of the second quarter. As of March 31, 1994, approximately 4.4 million shares with a cost of $136.2 million have been repurchased. The acquisition of Boulevard was accounted for under the purchase method of accounting, and accordingly, the purchase price of $208.0 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 will be amortized over the estimated lives of the deposits of approximately 10 years, and goodwill of $144 million will be 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 have been included in the Company's Consolidated Statement of Income since the date of acquisition but had no significant effect on earnings. page 17 The following pro forma operating results of the Company assume that the Boulevard acquisition had occurred at the beginning of each period presented. In addition to combining the historical results of operations of the two companies, the pro forma results include adjustments for the estimated effect of purchase accounting on the Company's results.
Three Months Ended March 31, (In Millions, Except Per-Share Amounts) 1994 1993 Net interest income $293.3 $287.0 Net income 82.4 77.7 Net income per share .65 .58
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. On February 28, 1994, the Company completed the acquisitions of American Bankshares of Mankato, Inc. and Eagle Insurance Agency. These acquisitions are not material to the Company's financial position or operating results. In the second quarter of 1993, the Company completed the acquisition of Colorado National Bankshares, Inc. ("CNB"), which had $3.0 billion in assets, $2.5 billion in deposits and $271 million in common equity. Under the terms of the merger agreement, 20.6 million shares of the Company's common stock were issued. The CNB acquisition was accounted for using the pooling-of-interests method. Accordingly, the Company's financial statements have been restated for all periods prior to the acquisition to include the accounts and operations of CNB. Additionally, the Company has signed agreements to acquire three financial institutions in markets in which the Company has an existing presence, serving to strengthen the Company's retail banking market shares in these communities. First Financial Investors, Inc., with approximately $200 million in assets, is the holding company for St. Louis Bank for Savings, FSB, located in Duluth, Minnesota. United Bank of Bismarck, with approximately $123 million in assets, is located in Bismarck, North Dakota. Green Mountain Bancorporation, Inc., the holding company for Green Mountain Bank, located in Lakewood, Colorado, has approximately $32 million in assets. The First Financial Investors, Inc. transaction closed on April 29, 1994, while the United Bank of Bismarck and the Green Mountain Bancorporation, Inc. acquisitions are expected to close in the third quarter of 1994. In January 1994, the Company announced that it had signed an agreement to acquire the domestic corporate trust business of J.P. Morgan & Co., Incorporated. This business unit provides trust services for approximately 650 clients with 3,800 bond issues in the areas of municipal, revenue, housing and corporate bond indenture trusteeships. The transaction is expected to close in the third quarter of 1994. Note D > Securities The detail of the amortized cost and fair value of securities consisted of the following:
March 31, 1994 December 31, 1993 March 31, 1993 Amortized Fair Amortized Fair Amortized Fair (In Millions) Cost Value Cost Value Cost Value U.S. Treasury $1,855 $1,829 $1,527 $1,541 $1,857 $1,897 Mortgage-backed securities 1,750 1,730 1,286 1,300 1,577 1,594 U.S. agencies and other 260 260 51 52 125 126 State and political subdivisions 186 194 184 196 184 202 Other 312 321 216 230 420 427 Total $4,363 $4,334 $3,264 $3,319 $4,163 $4,246
As described in Note B to the Consolidated Financial Statements, the Company adopted SFAS 115 at December 31, 1993, and at that date, all of the Company's investment securities were classified as available for sale. At March 31, 1993, investment securities with amortized cost totaling $4.2 billion were held as long-term investments, and securities held for sale totaling $145 million were carried at lower of cost or market. page 18 Note E > Loans The composition of the loan portfolio was as follows:
March 31 December 31 March 31 (In Millions) 1994 1993 1993 COMMERCIAL: Commercial* $ 6,713 $ 6,176 $ 5,914 Financial institutions 1,370 2,004 991 Real estate: Commercial mortgage 1,599 1,495 1,519 Construction 262 231 222 HLTs 191 183 230 Total commercial loans 10,135 10,089 8,876 CONSUMER: Residential mortgage 2,389 2,422 2,629 Residential mortgages held for sale 355 1,088 624 Home equity and second mortgage 1,803 1,755 1,279 Credit card 1,801 1,757 1,708 Revolving credit 666 690 601 Automobile 429 342 466 Installment 384 376 475 Student loans held for sale 294 260 260 Total consumer loans 8,121 8,690 8,042 Total loans $18,256 $18,779 $16,918
*Tax-exempt industrial development loans dependent upon real estate interests included in commercial loans were approximately $204 million, $218 million and $291 million at March 31, 1994, December 31, 1993, and March 31, 1993, respectively. Note F > Long-Term Debt Long-term debt (debt with original maturities of more than one year) consisted of the following:
March 31 December 31 March 31 (In Millions) 1994 1993 1993 Fixed-rate 8.00% subordinated debentures - due October 31, 1994 $ 11 $ -- $ -- Floating-rate subordinated capital notes - due November 29, 1996 150 150 150 Floating-rate subordinated capital notes - due May 30, 1997 -- -- 93 Fixed-rate 6.63% subordinated notes - due May 15, 2003 100 100 -- Fixed-rate 6.00% subordinated notes - due October 15, 2003 100 100 -- Fixed-rate 8.00% subordinated notes - due July 2, 2004 125 125 125 Step-up subordinated notes - due August 15, 2005 100 100 -- Floating-rate subordinated notes - due November 30, 2010 107 107 107 Medium-term notes (3.56% to 9.91%) - maturities to August 1996 314 248 237 Other 83 85 96 Total $1,090 $1,015 $808
page 19 Note G > Shareholders' Equity On January 19, 1994, the Board of Directors authorized the redemption of $159.3 million of the Company's preferred stock, consisting of $89 million of Preferred Stock Series 1989A and $70.3 million of Preferred Stock Series 1989B. This redemption is reflected in the March 31, 1994, capital ratios. During 1993, the Company redeemed the $100 million Series 1983A Adjustable Rate Cumulative Preferred Stock and, as of March 31, 1994, had repurchased $16.1 million of Preferred Stock Series 1991A and 1989B. The Company is authorized to repurchase up to an additional $8.9 million of preferred stock. The Company is in the process of repurchasing shares of its common stock equal to the 6.9 million shares and warrants issued in connection with the Boulevard Bancorp, Inc. acquisition. The repurchase of these shares began in October 1993 and may continue through the end of the second quarter. As of March 31, 1994, approximately 4.4 million shares with a cost of $136.2 million had been repurchased. In January 1993, the Company also announced a $75 million common stock repurchase program. Repurchased shares were to replace a portion of the shares issued in connection with the Bank Shares Incorporated acquisition, to provide for issuances under the Employee Stock Purchase Plan and the Dividend Reinvestment Plan and to be used for corporate purposes. As of March 31, 1994, approximately 2.3 million shares with a cost of $65.7 million had been repurchased. The Board authorization for this program expired in January 1994. Note H > Income Taxes The components of income tax expense were:
Three Months Ended March 31 December 31 September 30 June 30 March 31 (In Millions) 1994 1993 1993 1993 1993 FEDERAL: Current tax $38.0 $12.6 $48.1 $ 3.6 $25.4 Deferred tax provision (credit) 10.8 35.1 (4.8) 17.3 11.7 Federal income tax 48.8 47.7 43.3 20.9 37.1 STATE: Current tax 8.3 4.3 10.3 5.8 4.7 Deferred tax provision (credit) 0.2 5.3 (0.1) -- (0.5) State income tax 8.5 9.6 10.2 5.8 4.2 Total income tax provision $57.3 $57.3 $53.5 $26.7 $41.3
The reconciliation between income tax expense and the amount computed by applying the statutory federal income tax rate was as follows:
Three Months Ended March 31 December 31 September 30 June 30 March 31 (In Millions) 1994 1993 1993 1993 1993 Tax at statutory rate (35%; 34% prior to September 30, 1993) $54.5 $53.6 $52.4 $20.5 $40.4 State income tax, net of federal tax benefit 5.5 6.3 6.5 3.2 3.4 Tax effect of: Tax-exempt interest: Loans (1.4) (1.6) (1.9) (1.9) (2.2) Securities (1.0) (0.9) (1.1) (1.3) (1.1) Amortization of goodwill 1.5 1.6 1.7 2.5 1.5 Non-deductible interest expense 0.1 0.4 0.5 4.3 0.2 Change in tax rate on deferred assets -- -- (6.6) -- -- Other items (1.9) (2.1) 2.0 (0.6) (0.9) Applicable income taxes $57.3 $57.3 $53.5 $26.7 $41.3
At March 31, 1994, the Company's net deferred tax asset was $219.7 million, compared with $160.0 million at December 31, 1993, and $212.8 million at March 31, 1993. page 20 Note I > Commitments, Contingent Liabilities and Off-Balance Sheet Financial Instruments 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. The contract or notional amounts of these financial instruments were as follows:
March 31 December 31 March 31 (In Millions) 1994 1993 1993 Commitments to extend credit (net): Commercial $6,340 $5,714 $5,664 Corporate Payment System 2,037 1,744 1,325 Consumer credit card 6,636 5,208 3,817 Other consumer 2,244 2,391 3,230 Standby letters of credit (net of participations) 1,225 1,208 1,222 Interest rate swap contracts: Hedge 3,092 2,811 2,638 Intermediated 199 199 358 Interest rate options contracts: Hedge interest rate floors purchased 950 950 - - -- Intermediated interest rate caps and floors purchased 214 198 187 Intermediated interest rate caps and floors written 214 198 182 Liquidity support guarantees and futures and forward contracts 628 1,509 1,568 Foreign currency commitments: Commitments to purchase 1,171 1,101 931 Commitments to sell 1,166 1,100 926 Mortgages sold with recourse 201 198 390 Commitment to sell loans 973 132 402
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. Activity for the quarter ended March 31, 1994 with respect to interest rate swaps which the Company used to hedge medium-term notes, subordinated debt, deposit notes, long-term certificates of deposit, deposit accounts, and savings certificates was as follows:
(In Millions) Notional amount outstanding at December 31, 1993 $2,811 Additions 500 Maturities 219 Terminations -- Notional amount outstanding at March 31, 1994 $3,092 Notional amount outstanding at March 31, 1993 $2,638
For interest rate swaps designated as hedges, the weighted average interest rates to be paid were 3.66 percent and 3.23 percent at March 31, 1994, and 1993, respectively. At these same dates, the weighted average interest rates to be received were 6.75 percent and 7.09 percent. FBS is a receiver of fixed and payor of floating rate interest on all hedges as of March 31, 1994. The amortization of deferred gains and losses on terminated hedges decreased net interest income by $.3 million in the first quarter of 1994 and increased net interest income by $.1 million in the first quarter of 1993. Unamortized deferred losses net of gains and deferred fees, were $1.7 million at March 31, 1994. The Company will amortize these losses, gains and fees through the year 2000. At March 31, 1994, interest rate floors totaling $950 million with an average remaining maturity of 3.7 years hedged floating rate commercial loans. For interest rate floors designated as hedges, the strike rate ranged from 3.25 percent to 4.00 percent. No interest rate floors designated as hedges were outstanding at March 31, 1993. page 21 Note J > Supplemental Information to the Consolidated Financial Statements CONSOLIDATED BALANCE SHEET > Time certificates of deposit in denominations of $100,000 or more totaled $1,105 million, $1,061 million and $1,276 million at March 31, 1994, December 31, 1993, and March 31, 1993, respectively. CONSOLIDATED STATEMENT OF CASH FLOWS > Listed below are supplemental disclosures to the Consolidated Statement of Cash Flows.
Three Months Ended March 31 (In Millions) 1994 1993 Income taxes paid $ 8.6 $ 7.2 Interest paid 120.5 179.8 Net noncash transfers to foreclosed property 2.6 0.9 Noncash transfer to liabilities resulting from notification to shareholders of preferred stock redemption 166.1 -- Change in unrealized loss on available-for-sale securities, net of taxes of $31.8 (51.9) -- Cash acquisitions of businesses: Fair value of noncash assets acquired -- 4.5 Liabilities assumed -- (10.4) Net -- $ (5.9) Stock acquisition of Boulevard and related subsidiaries: Fair value of noncash assets acquired 1,674.0 -- Net cash acquired 72.8 -- Liabilities assumed (1,540.6) -- Net value of common stock issued $ 206.2 --
page 22 CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
1994 1993 ------------------------------------------------------------------- % Change Interest Interest Average Yields Yields Balance For the Three Months Ended March 31 and and Increase (In Millions) Balance Interest Rates Balance Interest Rates (Decrease) ASSETS Securities: U.S. Treasury $ 1,664 $ 21.6 5.26% $ 1,820 $ 26.5 5.91% (8.6)% Mortgage-backed securities 1,348 19.2 5.78 1,473 25.0 6.88 (8.5) State & political subdivisions 183 4.9 10.86 186 5.0 10.90 (1.6) U.S. agencies and other 328 4.0 4.95 611 8.0 5.31 (46.3) Total securities 3,523 49.7 5.72 4,090 64.5 6.40 (13.9) Unrealized gain on available-for-sale securities 45 -- Net securities 3,568 4,090 Trading account securities 64 0.6 3.80 97 1.1 4.60 (34.0) Deposits with banks -- -- -- 229 2.0 3.54 (100.0) Federal funds sold and resale agreements 547 4.3 3.19 1,103 8.4 3.09 (50.4) Loans: Commmercial: Commercial 6,445 110.9 6.98 5,974 104.4 7.09 7.9 Financial institutions 1,715 11.7 2.77 906 7.1 3.18 89.3 Real Estate: Commercial mortgage 1,504 30.7 8.28 1,509 31.4 8.44 (0.3) Construction 230 4.1 7.23 224 4.4 7.97 2.7 Total commercial 9,894 157.4 6.45 8,613 147.3 6.94 14.9 Consumer: Residential mortgage 2,358 43.6 7.50 2,592 53.7 8.40 (9.0) Residential mortgages held for sale 643 10.5 6.62 639 12.1 7.68 0.6 Credit card 1,736 56.2 13.13 1,738 60.9 14.21 (0.1) Other 3,403 72.7 8.66 3,103 72.8 9.51 9.7 Total consumer 8,140 183.0 9.12 8,072 199.5 10.02 0.8 Total loans 18,034 340.4 7.66 16,685 346.8 8.43 8.1 Allowance for credit losses 438 460 (4.8) Net loans 17,596 16,225 8.4 Other earning assets 110 1.2 4.42 63 0.7 4.51 74.6 Total earning assets* 22,278 396.2 7.21 22,267 423.5 7.71 - - -- Cash and due from banks 1,646 1,570 4.8 Other assets 1,532 1,676 (8.6) Total assets $25,063 $25,053 - - -- LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits $ 6,401 $ 5,277 21.3% Interest-bearing deposits: Interest checking 2,571 8.7 1.37 2,410 13.9 2.34 6.7 Money market accounts 3,978 24.2 2.47 3,944 24.0 2.47 0.9 Other savings accounts 1,382 6.4 1.88 1,479 8.0 2.19 (6.6) Savings certificates 4,259 30.8 2.93 5,567 56.9 4.15 (23.5) Certificates over $100,000 1,013 15.0 6.01 1,239 17.8 5.83 (18.2) Total interest-bearing deposits 13,203 85.1 2.61 14,639 120.6 3.34 (9.8) Short-term borrowings 1,399 12.7 3.68 1,206 11.6 3.90 16.0 Long-term debt 1,056 13.4 5.15 817 13.1 6.50 29.3 Total interest-bearing liabilities 15,658 111.2 2.88 16,662 145.3 3.54 (6.0) Other liabilities 784 799 (1.9) Preferred equity 209 379 (44.9) Common equity 2,011 1,936 3.9 Total liabilities and shareholders' equity $25,063 $25,053 - - -- Net interest income $285.0 $278.2 Gross interest margin 4.33% 4.17% Gross interest margin without taxable- equivalent increments 4.27% 4.08% Net interest margin 5.19% 5.07% Net interest margin without taxable- equivalent increments 5.12% 4.98%
Interest and rates are presented on a fully taxable-equivalent basis under a tax rate of 35 percent for 1994 and 34 percent for 1993. Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances. * Before deducting the allowance for credit losses and excluding the unrealized gain on available-for-sale securities. page 23 Part II -- Other Information ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS > The 65th Annual Meeting of Shareholders of First Bank System, Inc. was held on Thursday, April 28, 1994, at the Minneapolis Convention Center. John F. Grundhofer, Chairman, President and Chief Executive Officer, presided. The holders of 94,573,149 shares of common stock, 87 percent of the 109,039,832 outstanding shares entitled to vote, were represented at the meeting in person or by proxy. The candidates for election as Class II Directors listed in the proxy statement were elected to serve three-year terms expiring at the 1997 annual shareholders' meeting. The tabulation for each nominee for office is listed in the table below. The proposal to ratify the appointment of Ernst & Young as the Company's independent auditors for the year ending December 31, 1994, was approved. The proposal to amend the Company's 1991 Stock Incentive Plan to provide for the issuance of an additional 2,000,000 shares of common stock and to provide that shares of common stock received by the Company from a participant in the 1991 Plan shall again be available for grant under certain circumstances was approved. The 1994 Stock Incentive Plan was approved. The proposal to amend the Company's Certificate of Incorporation to increase the number of authorized shares of common stock by 50,000,000 was approved. The results of these matters voted upon by shareholders are listed in the table below. SUMMARY OF MATTERS VOTED UPON BY SHAREHOLDERS
Number of Shares In Favor Withheld Election of Class II Directors: Marilyn C. Nelson 93,772,613 800,536 Nicholas R. Petry 93,749,969 823,180 S. Walter Richey 93,808,325 764,824 Richard L. Robinson 93,809,722 763,427 Lyle E. Schroeder 93,806,624 766,525 In Favor Against Abstained Non Vote Other Matters: Ratification of appointment of Ernst & Young as independent auditors 92,883,786 1,415,744 273,619 Amendments to 1991 Stock Incentive Plan 75,711,312 10,960,788 911,934 6,989,115 Approval of 1994 Stock Incentive Plan 71,362,790 15,014,775 1,206,469 6,989,115 Amendment to Certificate of Incorporation to increase the number of authorized shares of common stock 88,107,310 5,782,302 683,537
For a copy of the meeting minutes, please write to the Office of the Secretary, First Bank System, P.O. Box 522, Minneapolis, Minnesota 55480. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 11 Computation of Primary and Fully Diluted Net Income Per Common Share 12 Computation of Ratio of Earnings to Fixed Charges (B) REPORTS ON FORM 8-K During the three months ended March 31, 1994, the Company filed the following reports on Form 8-K: Form 8-K filed January 18, 1994, relating to fourth quarter 1993 earnings. Form 8-K filed March 22, 1994, relating to the prospectus supplement to the Company's $450,000,000 medium-term note, Series F offering. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST BANK SYSTEM, INC. By: /s/ SUSAN E. LESTER Susan E. Lester Executive Vice President & Controller (Chief Accounting Officer and Duly Authorized Officer) May 16, 1994 page 24 Exhibit 11 - Computation of Primary and Fully Diluted Net Income Per Common Share
Three Months Ended March 31 (Dollars In Millions, Except Per Share Data) 1994 1993 PRIMARY: Average shares outstanding 109,810,535 112,396,574 Net effect of the assumed purchase of stock under the stock option and stock purchase plans - based on the treasury stock method using average market price 961,084 1,586,172 110,771,619 113,982,746 Net income $98.5 $77.5 Preferred dividends (5.5) (7.5) Net income applicable to common equity $93.0 $70.0 Net income per common share $0.84 $0.61 FULLY DILUTED:* Average shares outstanding 109,810,535 112,396,574 Net effect of the assumed purchase of stock under the stock option and stock purchase plans - based on the treasury stock method using average market price or quarter-end market price, whichever is higher 1,079,890 1,735,957 Assumed conversion of Series 1991A Preferred Stock 3,655,684 3,951,624 114,546,109 118,084,155 Net income $98.5 $77.5 Preferred dividends (3.6) (5.5) Net income applicable to common equity $94.9 $72.0 Net income per common share $0.83 $0.61
* This calculation is submitted in accordance with Regulation S-K item 601(b) (11) although not required by footnote 2 to paragraph 17 of APB Opinion No. 15 because it results in dilution of less than 3%. Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
Three Months Ended March 31 (Dollars in Thousands) 1994 EARNINGS 1. Net income $ 98,500 2. Applicable income taxes 57,300 3. Net income before taxes (1 + 2) $155,800 4. Fixed charges: a. Interest expense excluding interest on deposits $ 26,100 b. Portion of rents representative of interest and amortization of debt expense 5,776 c. Fixed charges excluding interest on deposits (4a + 4b) 31,876 d. Interest on deposits 85,100 e. Fixed charges including interest on deposits (4c + 4d) $116,976 5. Amortization of interest capitalized $ 1,154 6. Earnings excluding interest on deposits (3 + 4c + 5) 188,830 7. Earnings including interest on deposits (3 + 4e + 5) 273,930 8. Fixed charges excluding interest on deposits (4c) 31,876 9. Fixed charges including interest on deposits (4e) 116,976 RATIO OF EARNINGS TO FIXED CHARGES 10. Excluding interest on deposits (line 6/line 8) 5.92 11. Including interest on deposits (line 7/line 9) 2.34
page 25 [logo] FIRST BANK SYSTEM P.O. Box 522 Minneapolis, Minnesota 55480 First Class U.S. Postage PAID Permit No. 2440 Minneapolis, MN SHAREHOLDER INQUIRIES STOCK AND DIVIDEND INFORMATION For matters related specifically to First Bank System stock records or dividend payments, contact the Office of the Corporate Secretary, 612-973-0334. DIVIDEND REINVESTMENT For information regarding First Bank System's dividend reinvestment plan, contact First Chicago Trust Company of New York, P.O. Box 13531, Newark, New Jersey 07188-0001, (800)446-2617. FINANCIAL INFORMATION For further information contact John Danielson, Senior Vice President, 612-973-2261, or Karin Glasgow, Assistant Vice President, 612-973-2264. -----END PRIVACY-ENHANCED MESSAGE-----