-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ASzftaprz2KuMxikZxsK8mH5YNO+ykej1ikLrKrgSIjuNFkDUN0qP896ce+kDUzm cHnJ95t7YtuGBSthRSXMiA== 0000897101-96-000643.txt : 19960814 0000897101-96-000643.hdr.sgml : 19960814 ACCESSION NUMBER: 0000897101-96-000643 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST BANK SYSTEM INC CENTRAL INDEX KEY: 0000036104 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [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: 96610981 BUSINESS ADDRESS: STREET 1: FIRST BANK PL STREET 2: 601 SECOND AVE S 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 [COVER PICTURE] 2 [LOGO] FIRST BANK SYSTEM FORM 10-Q / JUNE 30, 1996 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM (NOT APPLICABLE) COMMISSION FILE NUMBER 1-6880 FIRST BANK SYSTEM, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 41-0255900 (I.R.S. Employer Identification No.) FIRST BANK PLACE, 601 SECOND AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55402-4302 (Address of principal executive offices and Zip Code) 612-973-1111 (Registrant's telephone number, including area code) (NOT APPLICABLE) (Former name, former address and former fiscal year, if changed since last report). Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ___ Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. Class Outstanding as of July 31, 1996 Common Stock, $1.25 Par Value 136,702,571 shares FINANCIAL SUMMARY
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 JUNE 30 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1996 1995 Income before nonrecurring items $167.1 $137.9 $327.2 $271.7 Nonrecurring items 87.0 -- 103.7 -- Net income $254.1 $137.9 $430.9 $271.7 PER COMMON SHARE Primary income before nonrecurring items $1.18 $1.00 $2.34 $1.97 Nonrecurring items .63 -- .75 -- Primary net income $1.81 $1.00 $3.09 $1.97 Fully diluted income before nonrecurring items $1.17 $.99 $2.31 $1.95 Nonrecurring items .61 -- .73 -- Fully diluted net income $1.78 $.99 $3.04 $1.95 Earnings on a cash basis before nonrecurring items* $1.31 $1.09 $2.57 $2.15 Nonrecurring items .61 -- .94 -- Earnings on a cash basis (fully diluted)* $1.92 $1.09 $3.51 $2.15 Dividends paid .4125 .3625 .825 .725 Common shareholders' equity 22.68 20.33 RETURN ON AVERAGE ASSETS Income before nonrecurring items 1.87 % 1.68 % 1.85 % 1.67 % Nonrecurring items .98 -- .59 -- Return on average assets 2.85 % 1.68 % 2.44 % 1.67 % RETURN ON AVERAGE COMMON EQUITY Income before nonrecurring items 21.3 % 20.4 % 21.1 % 20.8 % Nonrecurring items 11.1 -- 6.8 -- Return on average common equity 32.4 % 20.4 % 27.9 % 20.8 % Net interest margin (taxable-equivalent basis) 4.91 % 4.93 % 4.89 % 4.99 % Efficiency ratio before nonrecurring items 50.1 54.9 50.4 55.3 Efficiency ratio 40.8 54.9 48.7 55.3
JUNE 30 DECEMBER 31 1996 1995 PERIOD END Loans $27,029 $26,400 Allowance for credit losses 529 474 Assets 36,184 33,874 Total shareholders' equity 3,193 2,725 Tangible common equity to total assets 6.8 % 6.5 % Tier 1 capital ratio 6.8 6.5 Total risk-based capital ratio 11.5 11.0 Leverage ratio 6.3 6.1
*Calculated by adding amortization of goodwill and other intangible assets to net income. Refer to Earnings Summary on page 2 for a description of nonrecurring items. TABLE OF CONTENTS AND FORM 10-Q CROSS-REFERENCE INDEX PART I -- FINANCIAL INFORMATION Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 2) 2 Financial Statements (Item 1) 14 PART II -- OTHER INFORMATION Exhibits and Reports on Form 8-K (Item 6) 27 Signature 27 Exhibit 11 -- Computation of Primary and Fully Diluted Net Income Per Common Share 28 Exhibit 12 -- Computation of Ratio of Earnings to Fixed Charges 29 Exhibit 27 -- Article 9 Financial Data Schedule ** **Copies of this exhibit will be furnished upon request and payment of the Company's reasonable expenses in furnishing the exhibit. MANAGEMENT'S DISCUSSION AND ANALYSIS EARNINGS SUMMARY First Bank System, Inc. (the "Company") reported second quarter 1996 net income of $254.1 million, an increase of $116.2 million, or 84 percent, from the second quarter of 1995. On a per share basis, net income was $1.81, compared with $1.00 in the second quarter of 1995, an increase of 81 percent. Return on average assets and return on average common equity were 2.85 percent and 32.4 percent, respectively, in the second quarter of 1996, compared with returns of 1.68 percent and 20.4 percent in the second quarter of 1995. Several nonrecurring items affected results in the second quarter of 1996. The impact of these items on net income was $87.0 million ($140.4 million on a pretax basis), or $.63 per share. Nonrecurring pretax gains included: $75 million received from Wells Fargo & Company ("Wells Fargo") as final payment of a termination fee relating to the proposed First Interstate Bancorp ("First Interstate") transaction; a $65 million refund of state income taxes, including interest; and $.4 million in net securities gains. Operating earnings (net income excluding nonrecurring items) for the second quarter of 1996 were $167.1 million, an increase of $29.2 million, or 21 percent, from the second quarter of 1995. On a per share basis, operating earnings were $1.18 in the second quarter of 1996, compared with $1.00 in the second quarter of 1995, an increase of 18 percent. Return on average assets and return on average common equity, excluding nonrecurring items, were 1.87 percent and 21.3 percent, respectively, in the second quarter of 1996, compared with returns of 1.68 percent and 20.4 percent in the second quarter of 1995. Excluding nonrecurring items, the efficiency ratio (the ratio of expenses to revenues) improved to 50.1 percent in the second quarter of 1996 from 54.9 percent in the second quarter of 1995. Second quarter results reflect the following acquisition and divestiture activity. On February 16, 1996, the Company completed its acquisition of Omaha-based FirsTier Financial, Inc. ("FirsTier"), which had $3.7 billion in assets, $2.9 billion in deposits, and 63 offices in Nebraska and Iowa. In the first quarter of 1996, the Company sold its servicing and mortgage loan production business, and during the fourth quarter of 1995 and the first quarter of 1996, the Company completed its acquisition of the corporate trust business of BankAmerica Corporation ("BankAmerica"). Second quarter operating results reflected growth in net interest and noninterest income, controlled operating expenses and effective capital management. Net interest income on a taxable-equivalent basis was $391.8 million, an increase of $28.8 million, or 8 percent, from the second quarter of 1995. The increase reflected the acquisition of FirsTier in the first quarter of 1996. Excluding nonrecurring items, noninterest income for the second quarter of 1996 increased $29.8 million, or 16 percent, from the same period in 1995 primarily due to growth in credit card and trust fees and acquisitions. Noninterest expense increased only $3.0 million, or 1 percent, in the second quarter of 1996, from the same period of 1995, despite the addition of acquisitions. Compared with noninterest expense for the second quarter of 1995, adjusted to include the operations of acquisitions and exclude those of divestitures on a pro forma basis, noninterest expense declined $33.7 million, or 10 percent, in the second quarter of 1996. The Company's first half 1996 earnings were $430.9 million, or $3.09 per share, compared with $271.7 million, or $1.97 per share, in the first half of 1995. Year-to-date return on average assets and return on average common equity were 2.44 percent and 27.9 percent, compared with returns of 1.67 percent and 20.8 percent in the first half of 1995. Nonrecurring items totaled $103.7 million ($189.0 million on a pretax basis), or $.75 per share for the first six months of 1996. In addition to the second quarter nonrecurring items discussed above, nonrecurring pretax gains in the first quarter of 1996 were: $115 million, net of expenses, received from First Interstate as partial payment of a termination fee, $45.8 million in gain on the sale of the Company's mortgage banking operations; and $14.6 million in net securities gains. Nonrecurring pretax charges occurring in the first quarter of 1996 included: $31.3 million in merger and integration charges associated with the acquisitions of FirsTier and the corporate trust business of BankAmerica; $38.6 million in branch distribution resizing expenses; a $29.5 million valuation adjustment of cardholder and core deposit intangibles; $10.1 million for a one-time employee bonus; and $17.3 million to acquire software and write off other miscellaneous assets. Excluding the nonrecurring items, operating earnings for the first half of 1996 were $327.2 million, an increase of $55.5 million, or 20 percent, from the first half of 1995. On a per share basis, operating earnings were $2.34 in the first six months of 1996, compared with $1.97 in the first half of 1995, an increase of 19 percent. On the same basis, year-to-date return on average assets was 1.85 percent, up from 1.67 percent in 1995, return on average common equity was 21.1 percent, up from 20.8 percent in 1995, and the efficiency ratio was 50.4 percent, down from 55.3 percent in 1995. Credit quality remained strong in the second quarter of 1996. Nonperforming assets totaled $156.3 million at June 30, 1996, up $2.6 million, or 2 percent, from December 31, 1995, as a result of the acquisition of FirsTier, and down $18.4 million, or 11 percent, from June 30, 1995. The ratio of the allowance for credit losses to nonperforming loans at quarter-end was 418 percent compared with 401 percent at the end of 1995 and 388 percent at June 30, 1995. TABLE 1. Summary of Consolidated Income
THREE MONTHS ENDED SIX MONTHS ENDED (TAXABLE-EQUIVALENT BASIS; JUNE 30 JUNE 30 JUNE 30 JUNE 30 DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 1996 1995 1996 1995 Interest income $670.2 $643.4 $1,329.5 $1,272.5 Interest expense 278.4 280.4 558.4 542.7 Net interest income 391.8 363.0 771.1 729.8 Provision for credit losses 35.0 27.0 66.0 53.0 Net interest income after provision for credit losses 356.8 336.0 705.1 676.8 Nonrecurring gains 140.4 -- 315.8 -- Other noninterest income 219.5 189.7 427.6 369.3 Nonrecurring charges -- -- 126.8 -- Other noninterest expense 306.2 303.2 603.8 607.5 Income before income taxes 410.5 222.5 717.9 438.6 Taxable-equivalent adjustment 5.5 3.5 10.2 7.0 Income taxes 150.9 81.1 276.8 159.9 Net income $254.1 $137.9 $430.9 $271.7 Return on average assets 2.85% 1.68% 2.44% 1.67% Return on average common equity 32.4 20.4 27.9 20.8 Net interest margin 4.91 4.93 4.89 4.99 Efficiency ratio 40.8 54.9 48.7 55.3 Efficiency ratio before nonrecurring items 50.1 54.9 50.4 55.3 Per Common Share: Net income $1.81 $1.00 $3.09 $1.97 Dividends paid .4125 .3625 .8250 .7250
LINE OF BUSINESS FINANCIAL REVIEW Financial performance is measured by major lines of business, which include: Retail Banking, Payment Systems, Business Banking and Private Financial Services, Commercial Banking, and Corporate Trust and Institutional Financial Services. Business line results are derived from the Company's business unit profitability reporting system. Designations, assignments, and allocations may change from time to time as management accounting systems are enhanced or product lines change. During 1996 certain organization and methodology changes were made and 1995 results are presented on a consistent basis. RETAIL BANKING -- Retail Banking delivers products and services to the broad consumer market and small-business through branch offices, telemarketing, direct mail, and automated teller machines ("ATMs"). Net income increased 5 percent in the second quarter of 1996 and 8 percent in the first six months of 1996 compared with the same periods in 1995. Second quarter return on assets increased to 1.50 percent from 1.33 percent in the second quarter of 1995. Return on equity was 20.2 percent, essentially unchanged from the same period in 1995. Year-to-date profitability ratios showed similar trends. The increase in net interest income was attributable to growth in core commercial and nonmortgage consumer loans as well as the February 16, 1996 acquisition of FirsTier. The provision for credit losses increased to $5.4 million and $11.4 million in the second quarter and first six months of 1996, compared with $2.9 million and $3.6 million in the same periods in 1995. These increases resulted from growth in average loans, excluding residential mortgage loan balances, as well as higher consumer loan charge-offs. Noninterest income and noninterest expense were higher in 1996 compared with 1995, reflecting the impact of acquisitions. The second quarter 1996 efficiency ratio of 63.2 percent was relatively unchanged from 63.1 percent in the second quarter of 1995 while the year-to-date 1996 efficiency ratio improved to 62.1 percent from 64.3 percent in 1995. PAYMENT SYSTEMS -- Payment Systems includes consumer and business credit cards, corporate and purchasing card services, card-accessed secured and unsecured lines of credit, ATM processing, and merchant processing. Net earnings increased 33 percent in both the second quarter and the first six months of 1996 compared with the same periods in 1995. Second quarter return on assets was 2.33 percent, compared with 2.13 percent in the second quarter of 1995, and return on equity was 25.0 percent compared with 23.2 percent in 1995. Similar improvement was achieved in the year-to-date profitability ratios. Fee-based noninterest income for Payment Systems increased 28 percent in the second quarter and 22 percent in the first six months of 1996 compared with the same periods in 1995. The increases were due to growth in the sales volume of the Corporate Card, the Purchasing Card, the First Bank WorldPerks(R) VISA(R) card, and the expansion of the ATM network. Net interest income decreased slightly due to a change in the loan mix. Average commercial loans, which are primarily noninterest-earning Corporate and Purchasing Card balances, comprised approximately 30 percent of the portfolio during the second quarter and first six months of 1996, compared with approximately 25 percent in the same periods of 1995. Noninterest expense remained relatively flat, despite an increase in sales volume, reflecting ongoing expense control and the recognition of initial investment expenses in 1995 associated with the expansion of the ATM network. The efficiency ratio improved to 44.2 percent in the second quarter and 44.9 percent in the first six months of 1996 from 50.6 percent and 50.2 percent in the same periods of 1995. BUSINESS BANKING AND PRIVATE FINANCIAL SERVICES -- Business Banking and Private Financial Services includes middle-market banking services, private banking, and personal trust. Net income for the second quarter of 1996 increased 36 percent to $46.1 million compared with the second quarter of 1995. Net income for the first half of 1996 increased 30 percent to $87.9 million compared with the same period in 1995. Second quarter return on assets was 1.82 percent compared with 1.73 percent in 1995, and return on equity was 18.9 percent compared with 18.7 percent in 1995. Year-to-date return on assets was 1.82 percent compared with 1.75 percent in 1995, and return on equity was 19.1 percent compared with 19.6 percent in 1995. The increase in net interest income was due to acquisitions and growth in core middle-market business lending, resulting in average commercial loans increasing 27 percent in the second quarter and 24 percent in the first six months of 1996, compared with the same periods in 1995. Noninterest income in the second quarter and first six months of 1996 was higher than the same periods in 1995 as a result of acquisitions and a change in the fee structure for some services. Noninterest expense remained relatively flat in the second quarter and first six months of 1996 compared with the same periods in 1995 reflecting the benefits of increased operational efficiencies, as well as the integration of acquisitions. The efficiency ratio improved to 39.6 percent in the second quarter and 40.1 percent in the first six months of 1996 from 46.7 percent and 46.4 percent in the same periods in 1995. COMMERCIAL BANKING -- Commercial Banking provides lending, treasury management, and other financial services to middle-market, large corporate and mortgage banking companies. Net earnings increased 11 percent in the second quarter and 5 percent in the first six months of 1996. Second quarter return on assets was 1.78 percent compared with 1.72 percent in 1995, and return on equity was 25.4 percent compared with 24.6 percent in 1995. Year-to-date return on assets was 1.83 percent compared with 1.89 percent in 1995, and return on equity was 26.2 percent compared with 27.0 percent in 1995. Although second quarter and year-to-date average loans increased $333 million, or 7 percent, and $434 million, or 9 percent, from the same periods in 1995, second quarter net interest income increased 2 percent, and year-to-date net interest income decreased 3 percent, reflecting a slight narrowing of the net interest margin. Noninterest income remained relatively flat in the second quarter and first six months of 1996 compared with the same periods in 1995. The decrease in noninterest expense for both the second quarter and first six months of 1996, compared to the same periods in 1995, reflected the benefits of increased operational efficiencies. The decline in deposits relates to less activity in the mortgage banking sector. The efficiency ratio remained low at 29.1 percent in the second quarter and 28.0 percent in the first six months of 1996. CORPORATE TRUST AND INSTITUTIONAL FINANCIAL SERVICES -- Corporate Trust and Institutional Financial Services includes institutional and corporate trust services, investment management services, and a full-service brokerage company. Earnings increased 94 percent in the second quarter and 76 percent in the first six months of 1996 compared with the same periods in the prior year. The return on average equity was 20.3 percent in the second quarter and 20.1 percent in the first half of 1996, compared with 16.9 percent and 18.1 percent in the same periods in 1995. Net earnings increased over 1995 primarily due to the Company's acquisition strategy to grow its fee-based businesses. The efficiency ratio improved to 61.6 percent in the second quarter and 61.9 percent in the first half of 1996 from 69.8 percent in the second quarter and 68.3 percent in the first six months of 1995, reflecting the effective integration of acquisitions, process re-engineering efforts, and revenue growth. TABLE 2. Line of Business Financial Performance
CORPORATE TRUST AND BUSINESS BANKING AND INSTITUTIONAL RETAIL PRIVATE FINANCIAL COMMERCIAL FINANCIAL BANKING PAYMENT SYSTEMS SERVICES BANKING SERVICES THREE MONTHS ENDED JUNE 30, (DOLLARS IN MILLIONS) 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995 CONDENSED INCOME STATEMENT: Net interest income (taxable-equivalent basis) $191.6 $177.6 $37.1 $39.2 $98.2 $83.6 $54.7 $53.5 $8.1 $6.3 Provision for credit losses 5.4 2.9 23.6 18.9 3.4 2.8 2.6 2.4 -- -- Noninterest income 39.6 34.8 82.8 64.6 31.0 24.4 15.1 14.6 50.7 32.5 Noninterest expense 146.2 134.1 53.0 52.5 51.2 50.4 20.3 23.3 36.2 27.1 Income taxes and taxable-equivalent adjustment 30.4 28.7 16.6 12.3 28.5 20.9 17.9 16.2 8.6 4.5 Income before nonrecurring items $49.2 $46.7 $26.7 $20.1 $46.1 $33.9 $29.0 $26.2 $14.0 $7.2 AVERAGE BALANCE SHEET DATA: Commercial loans $514 $348 $1,130 $784 $6,867 $5,426 $5,370 $5,037 $-- $-- Consumer loans 9,758 10,752 2,594 2,292 607 519 -- -- -- -- Assets 13,211 14,053 4,609 3,792 10,168 7,857 6,553 6,100 1,151 701 Deposits 17,476 17,318 46 38 3,763 3,190 1,585 1,592 915 782 Common equity 981 933 430 347 979 728 459 427 277 171 Return on average assets 1.50% 1.33% 2.33% 2.13% 1.82% 1.73% 1.78% 1.72% * * Return on average common equity ("ROCE") 20.2 20.1 25.0 23.2 18.9 18.7 25.4 24.6 20.3% 16.9% ROCE on a cash basis ** 22.9 22.1 27.3 26.2 20.2 19.4 25.7 24.8 27.1 22.0 Efficiency ratio 63.2 63.1 44.2 50.6 39.6 46.7 29.1 34.2 61.6 69.8 Efficiency ratio on a cash basis ** 60.4 61.0 42.2 48.1 37.3 45.6 28.7 33.8 53.4 64.4 SIX MONTHS ENDED JUNE 30, 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995 CONDENSED INCOME STATEMENT: Net interest income (taxable-equivalent basis) $374.2 $354.4 $77.3 $80.0 $189.3 $165.2 $108.7 $111.5 $16.0 $13.6 Provision for credit losses 11.4 3.6 42.8 39.3 6.6 5.3 5.2 4.8 -- -- Noninterest income 79.5 69.2 151.6 123.9 58.8 48.1 32.6 32.7 100.3 65.8 Noninterest expense 281.9 272.3 102.7 102.3 99.4 98.9 39.5 47.2 72.0 54.2 Income taxes and taxable-equivalent adjustment 61.2 56.2 31.9 23.7 54.2 41.6 36.8 35.2 16.9 9.6 Income before nonrecurring items $99.2 $91.5 $51.5 $38.6 $87.9 $67.5 $59.8 $57.0 $27.4 $15.6 AVERAGE BALANCE SHEET DATA: Commercial loans $479 $330 $1,021 $713 $6,612 $5,350 $5,349 $4,915 $-- $-- Consumer loans 9,884 10,692 2,548 2,293 581 494 -- -- -- -- Assets 13,320 14,114 4,428 3,736 9,702 7,767 6,564 6,079 1,155 713 Deposits 17,209 17,400 45 35 3,549 3,213 1,545 1,683 903 794 Common equity 981 900 409 343 927 693 459 426 274 174 Return on average assets 1.50% 1.31% 2.34% 2.08% 1.82% 1.75% 1.83% 1.89% * * Return on average common equity ("ROCE") 20.3 20.5 25.3 22.7 19.1 19.6 26.2 27.0 20.1% 18.1% ROCE on a cash basis ** 22.9 22.5 27.8 25.7 20.1 20.3 26.4 27.2 26.8 22.9 Efficiency ratio 62.1 64.3 44.9 50.2 40.1 46.4 28.0 32.7 61.9 68.3 Efficiency ratio on a cash basis ** 59.4 62.2 42.6 47.6 38.1 45.2 27.5 32.3 54.0 63.0
*Not meaningful **Calculated by excluding amortization of goodwill and other intangible assets. Note: Preferred dividends and nonrecurring items are not allocated to the business lines. FBS's mortgage banking operations, which were sold in first quarter 1996, are not reflected in the table. INCOME STATEMENT ANALYSIS NET INTEREST INCOME -- Net interest income on a taxable-equivalent basis was $391.8 million in the second quarter of 1996, an increase of $28.8 million, or 8 percent, from the second quarter of 1995, and $771.1 million in the first half of 1996, an increase of $41.3 million, or 6 percent, from the first half of 1995. The increases were primarily attributable to growth in average loan balances in the second quarter and first six months of 1996, compared with the same periods in 1995. In the first quarter of 1996, $1.3 billion of residential mortgage loans were securitized and reclassified to available-for-sale securities to enhance liquidity and financial management flexibility. Excluding residential mortgage loan balances, average loans for both the second quarter and first half of 1996 were higher by approximately $3 billion compared with the same periods in 1995, reflecting growth in core commercial and consumer loans, as well as the February 16, 1996 acquisition of FirsTier. Average securities for the second quarter and first six months of 1996 were higher than the respective 1995 periods, reflecting the transfer of securitized mortgage loan balances in the first quarter of 1996 and the addition of securities acquired with FirsTier, offset in part by maturities and sales. Partially offsetting the impact of higher average loan balances in the second quarter and first six months of 1996, compared with the same periods of 1995, were the effects of a lower average yield on loans and a change in the mix of interest-bearing liabilities. The average yield on loans for the second quarter of 1996 was 8.72 percent, or 36 basis points lower than in the same period of 1995, while the average loan yield for the first half of 1996 was 8.76 percent, or 31 basis points lower than the first half of 1995 due to declining market interest rates over the past year. The average cost of interest-bearing liabilities, however, decreased only 27 basis points to 4.48 percent in the second quarter of 1996 and 10 basis points to 4.53 percent, in the first half of 1996 compared with the same periods in 1995. The decrease in the average cost of borrowings was offset by a shift in the composition of interest-bearing liabilities over the past year from lower rate deposits to higher rate borrowings. The decline in average interest-bearing deposit balances reflects the divestiture in 1995 of $848 million in deposits, as well as the national trend over the past year of consumers moving funds into alternative investment vehicles. The net interest margin in the second quarter and first six months of 1996 was essentially unchanged at 4.91 percent and 4.89 percent, respectively, compared with 4.93 percent and 4.99 percent in the same periods of 1995. TABLE 3. Analysis of Net Interest Income
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 JUNE 30 (DOLLARS IN MILLIONS) 1996 1995 1996 1995 Net interest income (taxable-equivalent basis) $391.8 $363.0 $771.1 $729.8 Average balances of earning assets supported by: Interest-bearing liabilities $24,972 $23,699 $24,816 $23,617 Noninterest-bearing liabilities 7,133 5,860 6,922 5,896 Total earning assets $32,105 $29,559 $31,738 $29,513 Average yields and weighted average rates (taxable-equivalent basis): Earning assets yield 8.40% 8.73% 8.42% 8.69% Rate paid on interest-bearing liabilities 4.48 4.75 4.53 4.63 Gross interest margin 3.92% 3.98% 3.89% 4.06% Net interest margin 4.91% 4.93% 4.89% 4.99% Net interest margin without taxable-equivalent increments 4.84% 4.88% 4.82% 4.94%
PROVISION FOR CREDIT LOSSES -- The provision for credit losses was $35.0 million in the second quarter of 1996, up $8.0 million, or 30 percent, from the second quarter of 1995. The provision for the first half of 1996 increased $13.0 million to $66.0 million, or 25 percent, from the first half of 1995. These increases resulted from growth in average loans as well as higher consumer charge-offs. Refer to Corporate Risk Management for further information on credit quality. NONINTEREST INCOME -- Second quarter noninterest income was $359.9 million, compared with $189.7 million in the second quarter of 1995, an increase of $170.2 million. Noninterest income in the first half of 1996 was $743.4 million, compared with $369.3 million in the first half of 1995, an increase of $374.1 million. Nonrecurring gains included in noninterest income in the second quarter totaled $140.4 million, including the $75 million termination fee received from Wells Fargo, a $65 million state tax refund, and $.4 million in net securities gains. The state tax refund represents the refund of taxes paid on U.S. Government interest in the late 1970s and early 1980s, including interest through the date of the refund. Nonrecurring gains included in noninterest income in the first half of 1996 totaled $315.8 million, including a $115 million termination fee received from First Interstate, net of $10 million in transaction costs; a $45.8 million gain on the sale of the Company's mortgage banking operations; $14.6 million in net securities gains; and the second quarter amounts discussed above. Excluding nonrecurring items, noninterest income was $219.5 million, an increase of $29.8 million, or 16 percent, from the second quarter of 1995, and $427.6 million for the first six months of 1996, an increase of $58.3 million, or 16 percent, from the first half of 1995. The improvement in both periods resulted primarily from growth in credit card and trust fees and the addition of FirsTier and other acquisitions, offset in part by the loss of mortgage banking revenues. Credit card fees increased as a result of higher sales volumes for Corporate and Purchasing Cards and the First Bank WorldPerks VISA card. Trust fees were up due to the acquisition of the corporate trust business of BankAmerica, the acquisition of FirsTier and core growth in personal and institutional trust revenues. Investment product fees and commissions were higher reflecting an increase in sales of mutual funds and annuities. Service charges on deposits increased primarily as a result of increased demand deposits. Other noninterest income decreased, reflecting the impact of the sale of the Company's mortgage banking operations discussed above. TABLE 4. Noninterest Income
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 JUNE 30 (DOLLARS IN MILLIONS) 1996 1995 1996 1995 Credit card fees $73.5 $56.7 $136.3 $108.3 Trust fees 58.5 43.0 114.7 84.7 Service charges on deposit accounts 34.7 30.3 68.6 62.4 Investment products fees and commissions 8.7 6.7 17.2 12.2 Trading account profits and commissions 3.8 2.4 6.5 5.6 Securities gains .4 -- 15.0 -- Termination fee, net 75.0 -- 190.0 -- State income tax refund 65.0 -- 65.0 -- Gain on sale of mortgage banking operations -- -- 45.8 -- Other 40.3 50.6 84.3 96.1 Total noninterest income $359.9 $189.7 $743.4 $369.3
NONINTEREST EXPENSE -- Second quarter noninterest expense was $306.2 million, an increase of $3.0 million, from $303.2 million in the second quarter of 1995, and $730.6 million in the first half of 1996, an increase of $123.1 million, from $607.5 million in 1995. Year-to-date noninterest expense included nonrecurring charges of $126.8 million recorded in the first quarter of 1996. These charges included: merger, integration and resizing charges of $31.3 million for the acquisitions of FirsTier and the BankAmerica corporate trust business and $38.6 million in branch distribution resizing expenses; a $29.5 million valuation adjustment to reduce the carrying value of credit card and core deposit intangibles to estimated fair value; $10.1 million for a one-time, $750 per-employee bonus to thank employees for staying focused on customers and shareholder value during the bid for First Interstate; and $17.3 million to acquire credit card and revolving credit software and to write off other miscellaneous assets. Refer to Note H for further information on merger, integration and resizing charges. On a pro forma basis (including acquired companies and excluding divested businesses and nonrecurring items), noninterest expense declined $33.7 million, or 10 percent, in the current quarter and $79.4 million, or 12 percent, year-to-date. These reductions were achieved as a result of lower FDIC premiums in 1996, effective acquisition integration and ongoing expense control. Excluding nonrecurring items, the Company's efficiency ratio improved to 50.1 percent in the second quarter and 50.4 percent in the first six months of 1996 from 54.9 percent and 55.3 percent in the same periods in 1995. Total salaries and benefits expense, excluding nonrecurring charges, remained relatively flat for the second quarter and first six months of 1996 compared with the same periods in the previous year as the average full-time equivalent employees decreased to 13,140 in 1996 from 13,237 in 1995. FDIC insurance premiums were lower in the second quarter and first half of 1996 compared with the same periods of last year because the FDIC suspended the assessment of premiums on deposits covered by the Bank Insurance Fund, which is now fully funded. The Company continues to pay insurance premiums on approximately $6.0 billion of deposits covered by the Savings Association Insurance Fund ("SAIF"). Compared with the same periods in 1995, amortization of goodwill and intangibles for the second quarter and first half of 1996, excluding the valuation adjustment discussed above, increased as a result of FirsTier and the BankAmerica corporate trust business acquisitions. The increases in other personnel expense related to several technology projects currently in process. TABLE 5. Noninterest Expense
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 JUNE 30 (DOLLARS IN MILLIONS, EXCEPT PER EMPLOYEE DATA) 1996 1995 1996 1995 Salaries $114.5 $109.8 $237.9 $221.9 Employee benefits 26.4 25.4 55.3 53.9 Total personnel expense 140.9 135.2 293.2 275.8 Goodwill and other intangible assets 19.9 14.2 67.3 28.3 Net occupancy 24.2 24.3 50.0 50.0 Furniture and equipment 22.1 24.8 45.9 48.3 Other personnel costs 14.0 9.8 23.7 17.4 Professional services 10.9 10.5 19.2 17.1 Advertising and marketing 10.2 9.2 17.0 15.5 Telephone 6.9 6.3 12.7 12.1 Printing, stationery and supplies 5.9 5.8 11.9 10.6 Postage 5.5 5.7 11.7 11.6 Third party data processing 5.3 4.4 10.7 8.7 FDIC insurance 3.6 13.8 7.1 27.4 Merger, integration, and resizing -- -- 69.9 -- Other 36.8 39.2 90.3 84.7 Total noninterest expense $306.2 $303.2 $730.6 $607.5 Efficiency ratio* 40.8% 54.9% 48.7% 55.3% Efficiency ratio before nonrecurring items 50.1 54.9 50.4 55.3 Average number of employees (full-time equivalents) 13,140 13,237 13,193 13,555 Annualized personnel expense per employee $42,892 $40,855 $44,448 $40,693
*Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income net of securities gains and losses. PROVISION FOR INCOME TAXES -- The provision for income taxes was $150.9 million in the second quarter and $276.8 million in the first half of 1996, compared with $81.1 million and $159.9 million in the same periods of 1995, respectively. The increases were primarily the result of higher levels of taxable income and included $53.4 million and $85.3 million of taxes, respectively, related to the nonrecurring items discussed above. CONTINGENCIES Various legislative proposals have been made, but not enacted, that would affect the SAIF premium assessments, including a one-time special assessment for SAIF deposits. It is not clear when such legislation will be passed, if at all. Based on current proposals, the Company may be subject to a special assessment of up to $50 million. BALANCE SHEET ANALYSIS LOANS -- The Company's loan portfolio increased $629 million, or 2 percent, to $27.0 billion at June 30, 1996, from $26.4 billion at December 31, 1995. Growth in most commercial and consumer loan categories was partially offset by a decrease in residential mortgage-related balances. This decrease reflected the securitization of $1.3 billion of residential mortgage loans, which resulted in a reclassification to available-for-sale securities, during the first quarter of 1996. The securitization enhances liquidity and financial management flexibility. Excluding residential mortgage loan balances, average loans for both the second quarter and first half of 1996 were higher than the same periods in 1995 by approximately $3 billion, reflecting growth in core commercial and consumer loans, as well as the acquisition of FirsTier. SECURITIES -- At June 30, 1996, securities totaled $4.1 billion compared with $3.3 billion at December 31, 1995, reflecting the securitization discussed above and the addition of approximately $900 million relating to the acquisition of FirsTier, offset by maturities and sales. DEPOSITS -- Noninterest-bearing deposits were $7.7 billion at June 30, 1996, up from $6.4 billion at December 31, 1995. Interest-bearing deposits were $16.9 billion at June 30, 1996, up from $16.2 billion at December 31, 1995. The increases were primarily due to the the acquisitions of FirsTier and the corporate trust business of BankAmerica. The increases were offset by a decline in savings certificates as consumers follow the national trend by moving funds into alternative investment vehicles. BORROWINGS -- Short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings, were $3.9 billion at June 30, 1996, down $482 million from $4.4 billion at the end of 1995. The decrease was primarily due to an $824 million reduction in federal funds purchased offset by an increase in other short-term borrowings. Long-term debt was $3.4 billion at June 30, 1996, up from $3.2 billion at December 31, 1995. In March 1996, the Company placed $125 million in 6.875 percent subordinated debt in the form of 10-year noncallable notes. The Company also issued $300 million in medium-term bank notes during the first quarter of 1996. These issuances were partially offset by the early retirement and maturities of approximately $225 million of Federal Home Loan Bank Advances. CORPORATE RISK MANAGEMENT CREDIT MANAGEMENT -- The Company's strategy for credit risk management includes stringent, centralized credit policies, and standard underwriting criteria for specialized lending categories, such as mortgage banking, real estate construction, and consumer credit. The strategy also emphasizes diversification on both a geographic and customer level, regular credit examinations, and quarterly management reviews of large loans and loans experiencing deterioration of credit quality. The Company strives to identify potential problem loans early, take any necessary charge-offs promptly, and maintain strong reserve levels. In the Company's retail banking operations, a standard credit scoring system is used to assess consumer credit risks and to price consumer products accordingly. Commercial banking operations rely on a strong credit culture that combines prudent credit policies and individual lender accountability. In addition, the commercial lenders generally focus on middle-market companies within their regions. In evaluating its credit risk, the Company considers the loan portfolio composition, the level of allowance coverage, and macroeconomic factors. Most economic indicators in the Company's primary operating region, which includes Minnesota, Colorado, Montana, North Dakota, South Dakota, Wisconsin, Iowa, Kansas, Nebraska, Wyoming, and Illinois, compare favorably with national trends. Approximately 80 percent of the loan portfolio consists of extensions of credit to customers in this operating region. ANALYSIS OF NET CHARGE-OFFS AND ALLOWANCE FOR CREDIT LOSSES -- Net loan charge-offs totaled $36.0 million and $69.5 million in the second quarter and first half of 1996, up from $29.9 million and $62.0 million in the same periods in 1995. Commercial loan net recoveries for the quarter and year-to-date were $4.3 million and $7.8 million, compared with $3.3 million and $4.0 million for the same periods in 1995. Second quarter and year-to-date due consumer loan net charge-offs increased $7.1 million, or 21 percent, from the second quarter of 1995, and $11.3 million, or 17 percent, from the first half of 1995, reflecting higher average nonmortgage loan balances and higher loss ratios. The ratio of consumer net charge-offs to average loans in the second quarter of 1996 was 1.24 percent, up from .97 percent in the second quarter of 1995. The ratio of total net charge-offs to average loans was .54 percent in the second quarter of 1996, compared with .47 percent in the second quarter of 1995. TABLE 6. Summary of Allowance for Credit Losses
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 JUNE 30 (DOLLARS IN MILLIONS) 1996 1995 1996 1995 Balance at beginning of period $530.1 $470.4 $473.5 $474.7 CHARGE-OFFS: Commercial: Commercial 13.4 7.3 19.1 11.9 Financial institutions -- -- -- -- Real estate: Commercial mortgage 6.2 2.8 11.7 10.1 Construction 1.0 -- 1.0 -- Total commercial 20.6 10.1 31.8 22.0 Consumer: Residential mortgage 1.1 1.5 2.1 2.8 Credit card 25.8 21.9 47.0 44.9 Other 22.1 20.3 45.2 35.8 Total consumer 49.0 43.7 94.3 83.5 Total 69.6 53.8 126.1 105.5 RECOVERIES: Commercial: Commercial 17.0 8.9 25.3 19.1 Financial institutions -- .1 -- .2 Real estate: Commercial mortgage 7.9 4.3 14.3 6.6 Construction -- .1 -- .1 Total commercial 24.9 13.4 39.6 26.0 Consumer: Residential mortgage .3 .1 .5 .4 Credit card 2.8 3.0 5.3 5.7 Other 5.6 7.4 11.2 11.4 Total consumer 8.7 10.5 17.0 17.5 Total 33.6 23.9 56.6 43.5 NET CHARGE-OFFS: Commercial: Commercial (3.6) (1.6) (6.2) (7.2) Financial institutions -- (.1) -- (.2) Real estate: Commercial mortgage (1.7) (1.5) (2.6) 3.5 Construction 1.0 (.1) 1.0 (.1) Total commercial (4.3) (3.3) (7.8) (4.0) Consumer: Residential mortgage .8 1.4 1.6 2.4 Credit card 23.0 18.9 41.7 39.2 Other 16.5 12.9 34.0 24.4 Total consumer 40.3 33.2 77.3 66.0 Total 36.0 29.9 69.5 62.0 Provision charged to operating expense 35.0 27.0 66.0 53.0 Additions related to acquisitions -- -- 59.1 1.8 Balance at end of period $529.1 $467.5 $529.1 $467.5 Allowance as a percentage of period-end loans 1.96% 1.82% Allowance as a percentage of nonperforming loans 418 388 Allowance as a percentage of nonperforming assets 339 268
TABLE 7. Net Charge-offs as a Percentage of Average Loans Outstanding THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 JUNE 30 1996 1995 1996 1995 COMMERCIAL: Commercial (.15)% (.08)% (.14)% (.19)% Financial institutions -- (.06) -- (.06) Real Estate: Commercial mortgage (.23) (.25) (.18) .29 Construction .86 (.11) .44 (.06) Total commercial (.12) (.11) (.12) (.07) CONSUMER: Residential mortgage .09 .11 .08 .09 Credit card 3.56 3.31 3.29 3.45 Other .96 .83 1.00 .80 Total consumer 1.24 .97 1.18 .97 Total .54% .47% .52% .50% ANALYSIS OF NONPERFORMING ASSETS -- Nonperforming assets include nonaccrual loans, restructured loans, other real estate and other nonperforming assets owned by the Company. At June 30, 1996, nonperforming assets totaled $156.3 million, essentially unchanged from the balance at December 31, 1995, despite the addition of approximately $14 million of nonperforming assets from the FirsTier acquisition. The ratio of nonperforming assets to loans and other real estate was .58 percent at June 30, 1996, unchanged from the level at December 31, 1995. Accruing loans 90 days or more past due totaled $40.5 million, compared with $38.8 million at December 31, 1995. These loans are not included in nonperforming assets and continue to accrue interest because they are secured by collateral and/or are in the process of collection and are reasonably expected to result in repayment or restoration to current status. Consumer loans 30 days or more past due were 2.16 percent of the total consumer loan portfolio at June 30, 1996, compared with 2.04 percent of the total consumer portfolio at December 31, 1995. Consumer loans 90 days or more past due totaled .67 percent of the consumer loan portfolio at June 30, 1996, compared with .62 percent at year-end 1995. TABLE 8. Nonperforming Assets* JUNE 30 DECEMBER 31 (DOLLARS IN MILLIONS) 1996 1995 COMMERCIAL: Commercial $38.2 $25.1 Real estate: Commercial mortgage 28.8 42.3 Construction 10.9 1.5 Total commercial 77.9 68.9 CONSUMER: Residential mortgage 34.7 37.3 Credit card 6.3 5.7 Other 7.8 6.3 Total consumer 48.8 49.3 Total nonperforming loans 126.7 118.2 OTHER REAL ESTATE 25.4 33.2 OTHER NONPERFORMING ASSETS 4.2 2.3 Total nonperforming assets $156.3 $153.7 Nonperforming loans to total loans .47% .45% Nonperforming assets to total loans plus other real estate .58 .58 *Throughout this document, nonperforming assets and related ratios do not include loans more than 90 days past due and still accruing interest. TABLE 9. Delinquent Loans JUNE 30 DECEMBER 31 (DOLLARS IN MILLIONS) 1996 1995 Accruing loans 30 days or more past due $342.3 $335.2 Accruing loans 90 days or more past due 40.5 38.8 DELINQUENCY RATIOS*: Total commercial: 30 days or more past due 1.34% 1.36% 90 days or more past due .57 .56 Total consumer: 30 days or more past due 2.16 2.04 90 days or more past due .67 .62 Total loans: 30 days or more past due 1.74 1.72 90 days or more past due .62 .59 *Ratios include nonperforming loans and are expressed as a percent of ending loan balances. INTEREST RATE RISK MANAGEMENT -- The Company's policy is to maintain a low interest rate risk position. The Company limits the exposure of net interest income to risks associated with interest rate movements through asset/liability management strategies. The Company's Asset and Liability Management Committee ("ALCO") uses three methods for measuring and managing interest rate risk: Net Interest Income Simulation Modeling, Static Gap Analysis, and Market Value/Duration Analysis. NET INTEREST INCOME SIMULATION: The Company has developed a net interest income simulation model to measure near-term (under one year) risk due to changes in interest rates. The model is particularly useful because it incorporates substantially all the Company's assets and liabilities and off-balance sheet instruments, together with forecasted changes in the balance sheet mix and assumptions that reflect the current interest rate environment. The balance sheet changes are based on forecasted prepayments of loans, loan and deposit growth, and historical pricing spreads. The model is updated monthly with the current balance sheet structure and the current forecast of expected balance sheet changes. ALCO uses the model to simulate the effect of immediate and sustained parallel shifts in the current yield curve of 1 percent, 2 percent and 3 percent. ALCO also calculates the sensitivity of the simulation results to changes in the key assumptions, such as the Prime/LIBOR spread. The results from the simulation are reviewed by ALCO monthly and are used to guide ALCO's hedging strategies. ALCO has established guidelines, approved by the Company's Board of Directors, that limit the estimated change in net interest income, assuming modest changes in Prime/LIBOR spreads and deposit pricing lags, over the succeeding 12 months to approximately 3 percent of forecasted net interest income, given a 1 percent change in interest rates. STATIC GAP ANALYSIS: A traditional gap analysis provides a point-in-time measurement of the relationship between the repricing amounts of the interest rate sensitive assets and liabilities. While the analysis provides a useful snapshot of interest rate risk, it does not capture all aspects of interest rate risk. As a result, ALCO uses the gap analysis primarily for managing interest rate risk beyond one year and has established guidelines, approved by the Company's Board of Directors, for the gap position in the one- to three-year time periods. At June 30, 1996, the cumulative negative repricing gap position at one year was $266 million. MARKET VALUE/DURATION ANALYSIS: One of the limiting factors of the net interest income simulation model is its dependence upon accurate forecasts of future business activity and the resulting effect on balance sheet assets and liabilities. As a result, its usefulness is greatly diminished for periods beyond two years. The Company measures this longer-term component of interest rate risk (referred to as market value or duration risk) by modeling the effect of interest changes on the estimated discounted future cash flows of the Company's assets, liabilities and off-balance sheet instruments. While each of the interest rate risk measurements has limitations, taken together they represent a comprehensive view of the magnitude of the Company's interest rate risk over various time intervals. The Company uses a variety of balance sheet and off-balance sheet financial instruments ("derivatives") to manage its interest rate risk. The Company manages the forecasted net interest income at risk by entering into off-balance sheet transactions (primarily interest rate swaps), investing in fixed-rate assets or increasing variable-rate liabilities. To a lesser degree, the Company also uses interest rate caps and floors to hedge this risk. The Company does not enter into derivative contracts for speculative purposes. As of June 30, 1996, the Company received payments on $2.6 billion notional amount of interest rate swap agreements, based on fixed interest rates, and made payments based on variable interest rates. These swaps had an average fixed rate of 6.57 percent and an average variable rate, which is tied to various LIBOR rates, of 5.48 percent. The maturity of these agreements ranges from four months to 11 years with an average remaining maturity of 4.5 years. Swaps increased net interest income for the quarters ended June 30, 1996 and 1995 by $8.0 million and $4.7 million, respectively, and the six months ended June 30, 1996 and 1995 by $15.9 million and $9.2 million, respectively. The Company also purchases interest rate caps and floors to minimize the impact of fluctuating interest rates on earnings. The total notional amount of cap agreements purchased as of June 30, 1996, was $200 million. The impact of caps on net interest income was not material for the six months ended June 30, 1996 and 1995. To hedge against falling interest rates, the Company uses interest rate floors. The total notional amount of floor agreements purchased as of June 30, 1996, was $1.35 billion. LIBOR-based floors totaled $950 million and Constant Maturity Treasury floors totaled $400 million. The impact of floors on net interest income was not material for the six months ended June 30, 1996 and 1995. TABLE 10. Interest Rate Swap Hedging Portfolio Notional Balances and Yields by Maturity Date AT JUNE 30, 1996 (DOLLARS IN MILLIONS) WEIGHTED WEIGHTED AVERAGE AVERAGE RECEIVE FIXED SWAPS* NOTIONAL INTEREST RATE INTEREST RATE MATURITY DATE AMOUNT RECEIVED PAID 1996 (remaining six months) $133 7.54% 5.47% 1997 275 6.42 5.46 1998 631 6.01 5.47 1999 400 6.38 5.48 2000 150 6.57 5.49 After 2000** 1,050 6.90 5.50 Total $2,639 6.57% 5.48% *At June 30, 1996, the Company did not have any hedging swaps in its portfolio that required it to pay fixed-rate interest. **At June 30, 1996, all swaps with a maturity after 2003 hedge fixed-rate subordinated notes. CAPITAL MANAGEMENT -- The Company is committed to managing capital for maximum shareholder benefit and maintaining strong protection for depositors and creditors. At June 30, 1996, tangible common equity was $2.4 billion, or 6.8 percent of assets, compared with 6.5 percent of assets at December 31, 1995. The total risk-based capital ratio increased to 11.5 percent at June 30, 1996, from 11.0 percent at December 31, 1995. The increase in the capital ratios reflects earnings retention as well as the issuance of common stock to complete the FirsTier acquisition, partially offset by common stock repurchases. On February 21, 1996, the Board of Directors authorized the repurchase of up to 25 million common shares through December 1997. This new authorization replaces previous authorizations. Approximately 9.1 million shares have been repurchased under the 1996 authorization as of June 30, 1996. In addition, the Board of Directors authorized the retirement of 2.6 million shares repurchased in the second quarter of 1996. Under previous authorizations, the Company repurchased 11.9 million shares in 1995. TABLE 11. Capital Ratios JUNE 30 DECEMBER 31 (DOLLARS IN MILLIONS) 1996 1995 Tangible common equity* $2,417 $2,184 As a percent of assets 6.8% 6.5% Tier 1 capital** $2,198 $1,989 As a percent of risk-adjusted assets 6.8% 6.5% Total risk-based capital** $3,702 $3,367 As a percent of risk-adjusted assets 11.5% 11.0% Leverage ratio** 6.3 6.1 *Defined as common equity less goodwill. **In accordance with regulatory guidelines, unrealized securities gains and losses are excluded from these calculations. ACCOUNTING CHANGES SFAS 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" -- The Company adopted Statement of Financial Accounting Standards No. ("SFAS") 121 on January 1, 1996, which requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset is not recoverable. In the first quarter of 1996, the Company recorded a $25.6 million adjustment to the carrying value of certain bank premises following a decision to sell several buildings in connection with the streamlining of the branch distribution network. See Note H for further discussion. SFAS 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" -- SFAS 123 provides an alternative to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for stock-based compensation issued to employees. The Statement allows for a fair value based accounting method for stock options and similar equity instruments. Companies that continue to account for such arrangements under APB Opinion No. 25 must disclose the pro forma effect of its fair value based accounting for those arrangements on net income and earnings per share. These disclosure requirements become effective in 1996's year-end financial statements. The Company continues to account for such arrangements in accordance with APB Opinion No. 25. SFAS 125, "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES" -- SFAS 125 addresses whether the transfer of financial assets should be accounted for as a sale and removed from the balance sheet, or as a financing recognized as a borrowing. The Statement uses a "financial components" approach which focuses on control to determine whether the assets have been sold. If the entity has surrendered control over the transferred assets, the transaction is considered a sale. Control is considered surrendered only if the seller has no legal rights to the assets, even in bankruptcy; the buyer has the right to pledge or exchange the assets; and the seller does not maintain effective control over the assets through an agreement to repurchase or redeem them. SFAS 125 is effective for transactions occurring after December 31, 1996, and is to be applied prospectively, with earlier or retroactive application not permitted. The adoption of SFAS 125 is not expected to have a material impact on the Company.
CONSOLIDATED BALANCE SHEET JUNE 30 DECEMBER 31 (IN MILLIONS, EXCEPT SHARES) 1996 1995 (UNAUDITED) ASSETS Cash and due from banks $2,066 $1,837 Federal funds sold 130 35 Securities purchased under agreements to resell 430 230 Trading account securities 103 86 Available-for-sale securities 4,077 3,256 Loans 27,029 26,400 Less allowance for credit losses 529 474 Net loans 26,500 25,926 Bank premises and equipment 416 413 Interest receivable 216 197 Customers' liability on acceptances 185 223 Other assets 2,061 1,671 Total assets $36,184 $33,874 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $7,661 $6,357 Interest-bearing 16,928 16,157 Total deposits 24,589 22,514 Federal funds purchased 1,176 2,000 Securities sold under agreements to repurchase 462 269 Other short-term funds borrowed 2,265 2,116 Long-term debt 3,373 3,201 Acceptances outstanding 185 223 Other liabilities 941 826 Total liabilities 32,991 31,149 Shareholders' equity: Preferred stock 89 103 Common stock, par value $1.25 a share-authorized 200,000,000 shares; issued: 6/30/96 - 141,747,738 shares; 12/31/95 - 135,632,324 shares 177 170 Capital surplus 1,139 909 Retained earnings 2,110 1,918 Unrealized gain (loss) on securities, net of tax (34) 23 Less cost of common stock in treasury: 6/30/96 - 4,880,788 shares; 12/31/95 - 8,297,756 shares (288) (398) Total shareholders' equity 3,193 2,725 Total liabilities and shareholders' equity $36,184 $33,874
CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED SIX MONTHS ENDED (IN MILLIONS, EXCEPT PER SHARE DATA) JUNE 30 JUNE 30 JUNE 30 JUNE 30 (UNAUDITED) 1996 1995 1996 1995 INTEREST INCOME Loans $582.0 $572.0 $1,156.7 $1,119.2 Securities: Taxable 63.6 56.1 127.4 122.6 Exempt from federal income taxes 7.4 2.8 12.3 5.6 Other interest income 11.7 9.0 22.9 18.1 Total interest income 664.7 639.9 1,319.3 1,265.5 INTEREST EXPENSE Deposits 170.9 186.8 337.9 365.2 Federal funds purchased and repurchase agreements 27.6 31.9 59.0 62.8 Other short-term funds borrowed 28.5 15.7 60.6 22.2 Long-term debt 51.4 46.0 100.9 92.5 Total interest expense 278.4 280.4 558.4 542.7 Net interest income 386.3 359.5 760.9 722.8 Provision for credit losses 35.0 27.0 66.0 53.0 Net interest income after provision for credit losses 351.3 332.5 694.9 669.8 NONINTEREST INCOME Credit card fees 73.5 56.7 136.3 108.3 Trust fees 58.5 43.0 114.7 84.7 Service charges on deposit accounts 34.7 30.3 68.6 62.4 Investment products fees and commissions 8.7 6.7 17.2 12.2 Securities gains .4 -- 15.0 -- Termination fee 75.0 -- 190.0 -- State income tax refund 65.0 -- 65.0 -- Gain on sale of mortgage banking operations -- -- 45.8 -- Other 44.1 53.0 90.8 101.7 Total noninterest income 359.9 189.7 743.4 369.3 NONINTEREST EXPENSE Salaries 114.5 109.8 237.9 221.9 Employee benefits 26.4 25.4 55.3 53.9 Goodwill and other intangible assets 19.9 14.2 67.3 28.3 Net occupancy 24.2 24.3 50.0 50.0 Furniture and equipment 22.1 24.8 45.9 48.3 Other personnel costs 14.0 9.8 23.7 17.4 Professional services 10.9 10.5 19.2 17.1 Advertising and marketing 10.2 9.2 17.0 15.5 Third party data processing 5.3 4.4 10.7 8.7 FDIC insurance 3.6 13.8 7.1 27.4 Merger, integration, and resizing -- -- 69.9 -- Other 55.1 57.0 126.6 119.0 Total noninterest expense 306.2 303.2 730.6 607.5 Income before income taxes 405.0 219.0 707.7 431.6 Applicable income taxes 150.9 81.1 276.8 159.9 Net income $254.1 $137.9 $430.9 $271.7 Net income applicable to common equity $252.5 $136.0 $427.6 $267.9 EARNINGS PER COMMON SHARE Average common and common equivalent shares 139,774,503 135,855,386 138,382,903 135,718,099 Net income $1.81 $1.00 $3.09 $1.97
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
UNREALIZED COMMON GAINS/(LOSSES) (IN MILLIONS, EXCEPT SHARES) SHARES PREFERRED COMMON CAPITAL RETAINED ON SECURITIES, TREASURY (UNAUDITED) OUTSTANDING* STOCK STOCK SURPLUS EARNINGS NET OF TAXES STOCK** TOTAL BALANCE DECEMBER 31, 1994 133,832,409 $118.1 $168.3 $865.8 $1,592.8 $(106.4) $(26.7) $2,611.9 Net income 271.7 271.7 Dividends declared: Preferred (3.8) (3.8) Common (97.4) (97.4) Purchase of treasury stock (3,684,885) (148.0) (148.0) Issuance of common stock: Acquisitions 1,619,998 .3 4.3 52.4 57.0 Dividend reinvestment 112,723 .1 4.4 4.5 Stock option and stock purchase plans 1,500,866 .9 27.7 (15.6) 25.9 38.9 Stock warrants exercised 30,174 (.9) 1.1 .2 Redemption of preferred stock 8,281 (12.4) (1.0) (13.4) Change in unrealized gains/(losses) 95.9 95.9 BALANCE JUNE 30, 1995 133,419,566 $105.7 $169.5 $897.9 $1,745.8 $(10.5) $(90.9) $2,817.5 BALANCE DECEMBER 31, 1995 127,334,568 $103.2 $169.5 $909.3 $1,918.2 $22.5 $(397.8) $2,724.9 Net income 430.9 430.9 Dividends declared: Preferred (3.3) (3.3) Common (116.2) (116.2) Purchase and retirement of treasury stock (9,081,111) (3.2) (152.5) (380.3) (536.0) Issuance of common stock: Acquisitions 16,460,215 10.7 361.7 (44.4) 384.2 712.2 Dividend reinvestment 110,332 6.4 6.4 Stock option and stock purchase plans 1,540,817 .2 20.3 (60.5) 69.9 29.9 Conversion of preferred stock 502,129 (14.5) (14.8) 29.3 -- Change in unrealized gains/(losses) (56.1) (56.1) BALANCE JUNE 30, 1996 136,866,950 $88.7 $177.2 $1,138.8 $2,109.9 $(33.6) $(288.3) $3,192.7
*Defined as total common shares less common stock held in treasury. **Ending treasury shares were 4,880,788 at June 30, 1996; 8,297,756 at December 31, 1995; 2,212,758 at June 30, 1995; and 767,000 at December 31, 1994. CONSOLIDATED STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30 JUNE 30 (UNAUDITED, IN MILLIONS) 1996 1995 OPERATING ACTIVITIES Net cash provided by operating activities $752.1 $143.9 INVESTING ACTIVITIES Net cash provided (used) by: Interest-bearing deposits with banks -- 28.9 Loans outstanding 137.0 (831.3) Securities purchased under agreements to resell (159.7) (44.0) Available-for-sale securities: Sales 1,032.2 1,908.1 Maturities 634.5 275.6 Purchases (381.6) (228.9) Proceeds from sales of other real estate 23.0 23.4 Net (purchases) sales of bank premises and equipment (29.9) 2.6 Cash and cash equivalents of acquired subsidiaries 116.5 16.3 Acquisitions, net of cash received (36.5) -- Sale of mortgage banking operations 123.7 -- Other - net (70.9) 2.5 Net cash provided by investing activities 1,388.3 1,153.2 FINANCING ACTIVITIES Net cash (used) provided by: Deposits (694.1) (1,670.5) Federal funds purchased and securities sold under agreements to repurchase (815.1) (649.5) Short-term borrowings 160.0 1,416.9 Long-term debt transactions: Proceeds 499.2 150.6 Principal payments (347.3) (349.0) Redemption of preferred stock -- (13.4) Proceeds from issuance of common stock 36.3 43.6 Purchase of treasury stock (536.0) (148.0) Cash dividends (119.5) (101.2) Net cash used by financing activities (1,816.5) (1,320.5) Change in cash and cash equivalents 323.9 (23.4) Cash and cash equivalents at beginning of period 1,871.6 1,841.9 Cash and cash equivalents at end of period $2,195.5 $1,818.5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A. Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, and cash flow activity required under generally accepted accounting principles. In the opinion of management of the Company, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of results have been made and the Company believes such presentation is adequate to make the information presented not misleading. For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. Certain amounts in prior periods have been reclassified to conform to the current presentation. NOTE B. Accounting Changes ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF -- Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. ("SFAS") 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset is not recoverable. In the first quarter of 1996, the Company recorded a $25.6 million adjustment to the carrying value of certain bank premises following a decision to sell several buildings in connection with the streamlining of the branch distribution network. See Note H for further discussion. The Company also performed an evaluation of those intangible assets not covered by SFAS 121 and recorded a first quarter charge of $29.5 million to reduce the carrying value of credit card holder and core deposit intangibles to their fair value. The Company performed this analysis of fair value following its reassessment of business alternatives for a segment of its credit card portfolio and a change in the mix of deposits at certain acquired entities, respectively. ACCOUNTING FOR STOCK-BASED COMPENSATION -- SFAS 123, "Accounting for Stock-Based Compensation," establishes a new fair value based accounting method for stock-based compensation plans. Companies may continue to apply the accounting provisions of APB 25, "Accounting for Stock Issued to Employees," in determining net income; however, they must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in SFAS 123 had been applied. These disclosure requirements are effective beginning in 1996's year-end financial statements. The Company continues to account for such arrangements in accordance with APB Opinion No. 25. ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES -- SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," addresses whether the transfer of financial assets should be accounted for as a sale and removed from the balance sheet, or as a financing recognized as a borrowing. The Statement uses a "financial components" approach which focuses on control to determine whether assets have been sold. If the entity has surrendered control over the transferred assets, the transaction is considered a sale. Control is considered surrendered only if the seller has no legal right to the assets, even in bankruptcy; the buyer has the right to pledge or exchange the assets; and the seller does not maintain effective control over the assets through an agreement to repurchase or redeem them. SFAS 125 is effective for transactions occurring after December 31, 1996, and is to be applied prospectively, with earlier or retroactive application not permitted. The adoption of SFAS 125 is not expected to have a material effect on the Company. NOTE C. Business Combinations and Divestitures FIRSTIER FINANCIAL, INC. -- On February 16, 1996, the Company issued 16.5 million shares to complete its acquisition of Omaha-based FirsTier Financial, Inc. ("FirsTier"). FirsTier had $3.7 billion in assets, $2.9 billion in deposits, and 63 offices in Nebraska and Iowa. Under terms of the purchase agreement, the Company exchanged .8829 shares of its common stock for each common share of FirsTier. In addition, FirsTier's outstanding stock options were converted into stock options for the Company's common stock. The acquisition of FirsTier was accounted for under the purchase method of accounting, and accordingly, the purchase price of $717 million was allocated to assets acquired and liabilities assumed based on their fair market values at the date of acquisition. The excess of the purchase price over the fair market values of net assets acquired was recorded as goodwill. Goodwill of $289 million will be amortized over approximately 25 years and core deposit intangibles of $63 million will be amortized over the estimated lives of the deposits of approximately 10 years. The results of operations of FirsTier have been included in the Company's Consolidated Statement of Income since the date of acquisition. The following pro forma operating results of the Company assume that the FirsTier acquisition had occurred at the beginning of each period presented. In addition to combining the historical results of operations of the two companies, the pro forma results include adjustments for the estimated effect of purchase accounting on the Company's results. THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1996 1995 Net interest income $386.3 $388.2 $775.6 $779.4 Net income 254.1 144.2 428.7 283.5 Net income per share 1.81 .99 3.02 1.94 The pro forma information may not be indicative of the results that actually would have occurred if the combination had been in effect on the dates indicated or which may be obtained in the future. BANKAMERICA CORPORATE TRUST BUSINESS -- On August 22, 1995, the Company announced that it had signed a definitive agreement to acquire the corporate trust business of BankAmerica Corporation. After the acquisition, the Company became the nation's leading provider of domestic corporate trust services as measured by revenues. Approximately 80 percent of the transaction was completed in December 1995 with the remainder completed in the first quarter of 1996. SALE OF MORTGAGE BANKING OPERATIONS -- In the first quarter of 1996, the Company sold its servicing and mortgage loan production business to three parties. Bank of America, fsb, a subsidiary of BankAmerica Corporation, purchased approximately $14 billion in mortgage servicing rights. Columbia National, Inc., of Maryland, and Knutson Mortgage Co., of Minnesota, agreed to purchase the Company's loan production business. The Company will now deliver mortgage loan products through bank branches and telemarketing. These transactions resulted in a net gain of $45.8 million. FIRST INTERSTATE BANCORP -- On November 6, 1995, the Company and First Interstate Bancorp ("First Interstate") announced that they had entered into a definitive agreement whereby the Company would exchange 2.6 shares of its common stock for each share of First Interstate common stock. On January 24, 1996, First Interstate announced that it had terminated the merger agreement with the Company and had entered into a definitive agreement with Wells Fargo & Company ("Wells Fargo"). Under the terms of a settlement agreement, the Company received $125 million on January 24, 1996. The Company received an additional $75 million on April 1, 1996, upon consummation of the merger of First Interstate and Wells Fargo. In addition, all litigation among the parties related to the acquisition of First Interstate has been settled. The Company incurred transaction costs of approximately $10 million in connection with the proposed merger. NOTE D. Securities The detail of the amortized cost and fair value of available-for-sale securities consisted of the following: JUNE 30, 1996 DECEMBER 31, 1995 AMORTIZED FAIR AMORTIZED FAIR (IN MILLIONS) COST VALUE COST VALUE U.S. Treasury $609 $597 $921 $925 Mortgage-backed securities 2,750 2,718 1,703 1,693 Other U.S. agencies 146 144 157 157 State and political 515 505 174 179 Other 112 113 265 302 Total $4,132 $4,077 $3,220 $3,256 NOTE E. Loans The composition of the loan portfolio was as follows: JUNE 30 DECEMBER 31 (IN MILLIONS) 1996 1995 COMMERCIAL: Commercial $9,549 $8,271 Financial institutions 990 1,060 Real estate: Commercial mortgage 3,017 2,784 Construction 481 403 Total commercial 14,037 12,518 CONSUMER: Residential mortgage 3,288 4,655 Residential mortgage held for sale 114 257 Home equity and second mortgage 3,048 2,805 Credit card 2,641 2,586 Automobile 2,048 1,821 Revolving credit 758 757 Installment 639 607 Student * 456 394 Total consumer 12,992 13,882 Total loans $27,029 $26,400 *All or part of the student loan portfolio may be sold when the repayment period begins. At June 30, 1996, the Company had $78 million in loans considered impaired under SFAS 114 included in nonaccrual loans. Of this amount, $62 million was valued using the fair value of the loans' collateral, $1 million using the present value of expected future cash flows and $15 million was below the Company's threshold for valuing individual loans. Based on the results of this valuation, no allowance for credit losses was specifically allocated to impaired loans. For the quarter ended June 30, 1996, the average recorded investment in impaired loans was approximately $73 million. No interest income was recognized on impaired loans during the quarter. NOTE F. Long-Term Debt Long-term debt (debt with original maturities of more than one year) consisted of the following: JUNE 30 DECEMBER 31 (IN MILLIONS) 1996 1995 Fixed-rate subordinated notes: 6.625% due May 15, 2003 $100 $100 6.00% due October 15, 2003 100 100 7.55% due June 15, 2004 100 100 8.00% due July 2, 2004 125 125 8.35% due November 1, 2004 100 100 7.625% due May 1, 2005 150 150 6.875% due April 1, 2006 125 -- 6.875% due September 15, 2007 250 250 Step-up subordinated notes - due August 15, 2005 100 100 Floating-rate subordinated notes - due November 30, 2010 107 107 Federal Home Loan Bank advances (4.52% to 7.34%) - maturities to August 2000 874 1,099 Medium-term notes (5.40%to 5.66%) - maturities to August 1999 563 580 Bank notes (5.52% to 6.38%) - maturities to March 2001 600 300 Other 79 90 Total $3,373 $3,201 NOTE G. Shareholders' Equity On February 21, 1996, the Board of Directors authorized the repurchase of up to 25 million common shares through December 1997. This new authorization replaces previous authorizations. Approximately 9.1 million shares have been repurchased under the 1996 authorization as of June 30, 1996. In addition, the Board of Directors authorized the retirement of 2.6 million shares repurchased in the second quarter of 1996. Under previous authorizations, the Company repurchased 11.9 million shares in 1995. NOTE H. Merger, Integration and Resizing Charges In the first quarter of 1996, the Company recorded merger, integration and resizing charges of $69.9 million. Merger and integration charges of $31.3 million were associated with the acquisitions of FirsTier and the BankAmerica corporate trust business. Resizing charges of $38.6 million were associated with the Company's streamlining of the branch distribution network and trust operations as the Company expands its alternative distribution channels, including telemarketing, automated teller machines and in-store branches. The components of the charges are shown below: SIX MONTHS ENDED JUNE 30 (IN MILLIONS) 1996 Systems conversions, required customer communications and professional services $29.7 Premise writedowns 26.0 Severance 14.2 Total merger, integration and resizing charges $69.9 System conversions, required customer communications and professional services relate to preparation and mailing of numerous customer communications for the acquisitions and conversion of customer accounts, printing and distribution of training materials and policy and procedure manuals, outside consulting fees, and similar expenses related to the conversion and integration of acquired branches and operations. Premise writedowns include a valuation adjustment of $25.6 million associated with the planned sale of bank-owned properties as the Company consolidates and reduces the space requirements of branch facilities. The Company is presently marketing these bank-owned facilities and expects to dispose of them over the next 12 months. Severance charges include the cost of terminations, other benefits, and outplacement costs associated with the elimination of employees primarily in branch offices and in centralized corporate support and data processing functions. The following table presents a summary of activity with respect to the Company's merger, integration and resizing accrual: SIX MONTHS ENDED JUNE 30 (IN MILLIONS) 1996 BALANCE AT DECEMBER 31, 1995 $12.6 Provision charged to operating expense 69.9 Cash outlays (23.7) Noncash writedowns (26.0) Balance at June 30, 1996 $32.8 The Company expects that substantially all remaining costs will be paid by the end of 1996. Additional noncash writedowns are not expected to be significant. NOTE I. Income Taxes The components of income tax expense were:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 JUNE 30 (IN MILLIONS) 1996 1995 1996 1995 FEDERAL: Current tax $123.9 $52.1 $239.8 $104.9 Deferred tax provision 11.8 21.7 13.6 40.0 Federal income tax 135.7 73.8 253.4 144.9 STATE: Current tax 15.6 3.2 24.0 6.9 Deferred tax provision (credit) (.4) 4.1 (.6) 8.1 State income tax 15.2 7.3 23.4 15.0 Total income tax provision $150.9 $81.1 $276.8 $159.9
The reconciliation between income tax expense and the amount computed by applying the statutory federal income tax rate was as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 JUNE 30 (IN MILLIONS) 1996 1995 1996 1995 Tax at statutory rate (35%) $141.8 $76.7 $247.7 $151.1 State income tax, net of federal tax benefit 9.9 4.8 15.2 9.8 Tax effect of: Tax-exempt interest: Loans (1.2) (1.3) (2.4) (2.6) Securities (2.6) (1.0) (4.3) (2.0) Amortization of goodwill 4.5 2.7 21.0 6.1 Other items (1.5) (.8) (.4) (2.5) Applicable income taxes $150.9 $81.1 $276.8 $159.9
During the second quarter, the Company received a tax refund of $65 million, including interest, from the State of Minnesota relating to the exemption of interest income received on investments in U.S. government securities for the period 1979 to 1983. The Company's net deferred tax asset was $250.0 million at June 30, 1996, and $216.3 million at December 31, 1995. NOTE J. Commitments, Contingent Liabilities and Off-Balance Sheet Financial Instruments OFF-BALANCE SHEET FINANCIAL INSTRUMENTS -- In the normal course of business, the Company uses various financial instruments with off-balance sheet risk to meet the financing needs of its customers and to manage its interest rate risk. These instruments carry varying degrees of credit, interest rate or liquidity risk. The contract or notional amounts of these financial instruments were as follows:
JUNE 30 DECEMBER 31 (IN MILLIONS) 1996 1995 ------ ------ Commitments to extend credit: Commercial $8,197 $7,240 Corporate and purchasing cards 10,609 5,220 Consumer credit card 8,504 9,247 Other consumer 3,508 3,264 Letters of credit: Standby 1,411 1,412 Commercial 230 161 Interest rate swap contracts: Hedges 2,639 2,839 Intermediated 138 169 Options contracts: Hedge interest rate floors purchased 1,350 1,250 Hedge interest rate caps purchased 200 200 Intermediated interest rate and foreign exchange caps and floors purchased 170 126 Intermediated interest rate and foreign exchange caps and floors written 170 126 Liquidity support guarantees 101 142 Forward contracts 110 294 Commitments to sell loans -- 223 Mortgages sold with recourse 157 242 Foreign currency commitments: Commitments to purchase 1,177 792 Commitments to sell 1,174 785
Activity for the six months ended June 30, 1996, with respect to interest rate swaps which the Company uses to hedge commercial loans, subordinated debt, bank notes, certificates of deposit, deposit accounts, and savings certificates was as follows: (IN MILLIONS) Notional amount outstanding at December 31, 1995 $2,839 Additions 300 Maturities (300) Terminations (200) Notional amount outstanding at June 30, 1996 $2,639 Weighted average interest rates paid 5.48% Weighted average interest rates received 6.57% The Company receives fixed rates and pays floating rates on all hedges as of June 30, 1996. Net unamortized deferred gains, which amortize through the year 2000, were $.2 million at June 30, 1996. At June 30, 1996 and December 31, 1995, LIBOR based interest rate floors totaling $950 million with a remaining maturity of 1.48 years and 2.00 years, respectively, hedged floating rate commercial loans. The strike rate on these LIBOR based floors ranged from 3.25 percent to 4.00 percent at June 30, 1996 and December 31, 1995. Constant Maturity Treasury (CMT) interest rate floors totaling $400 million with an average remaining maturity of 7 months at June 30, 1996 and $300 million with an average remaining maturity of 9 months at December 31, 1995, hedged the reinvestment risk of fixed rate residential mortgage loans. The strike rate on these CMT floors ranged from 5.70 percent to 6.36 percent at June 30, 1996 and from 6.25 percent to 6.36 percent at December 31, 1995. At June 30, 1996 and December 31, 1995, the total notional amount of interest rate caps purchased was $200 million with an average strike level at 6.00 percent. COMMITMENTS AND CONTINGENT LIABILITIES -- Various legislative proposals have been made, but not enacted, which would affect the Savings Association Insurance Fund ("SAIF") premium assessments, including a one-time special assessment for SAIF deposits. It is not clear when such legislation will be passed, if at all. Based on current proposals, the Company may be subject to a special assessment of up to $50 million. NOTE K. Supplemental Information to the Consolidated Financial Statements CONSOLIDATED BALANCE SHEET -- Time certificates of deposit in denominations of $100,000 or more totaled $924 million and $900 million at June 30, 1996, and December 31, 1995, respectively. CONSOLIDATED STATEMENT OF CASH FLOWS Listed below are supplemental disclosures to the Consolidated Statement of Cash Flows. SIX MONTHS ENDED JUNE 30 JUNE 30 (IN MILLIONS) 1996 1995 Income taxes paid $192.3 $118.3 Interest paid 556.5 512.7 Net noncash transfers to foreclosed property 13.2 8.6 Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $34.3 in 1996 and $59.0 in 1995 (56.1) 95.9 Cash acquisitions of businesses: Fair value of noncash assets acquired $36.5 $-- Liabilities assumed -- -- Net $36.5 $-- Stock acquisitions of businesses: Fair value of noncash assets acquired $3,627.9 $329.3 Net cash acquired 116.5 16.3 Liabilities assumed (3,032.2) (288.6) Net value of common stock issued $712.2 $57.0 CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
FOR THE THREE MONTHS ENDED JUNE 30 1996 1995 YIELDS YIELDS % CHANGE (IN MILLIONS) AND AND AVERAGE (UNAUDITED) BALANCE INTEREST RATES BALANCE INTEREST RATES BALANCE ASSETS Securities: U.S. Treasury $646 $9.9 6.16% $988 $15.2 6.17% (34.6)% Mortgage-backed 2,828 49.3 7.01 1,920 33.1 6.91 47.3 State & political subdivisions 522 11.5 8.86 177 4.8 10.88 194.9 U.S. agencies and other 267 4.1 6.18 488 7.3 6.00 (45.3) Total securities 4,263 74.8 7.06 3,573 60.4 6.78 19.3 Unrealized loss on available-for-sale securities (34) (50) Net securities 4,229 3,523 Trading account securities 91 1.3 5.75 93 1.2 5.18 (2.2) Federal funds sold and resale agreements 482 6.2 5.17 293 4.4 6.02 64.5 Loans: Commercial: Commercial 9,412 184.0 7.86 8,166 178.1 8.75 15.3 Financial institutions 981 10.3 4.22 642 6.6 4.12 52.8 Real estate: Commercial mortgage 3,023 67.0 8.91 2,428 55.5 9.17 24.5 Construction 465 10.3 8.91 363 8.7 9.61 28.1 Total commercial 13,881 271.6 7.87 11,599 248.9 8.61 19.7 Consumer: Residential mortgage 3,358 66.7 7.99 5,003 93.8 7.52 (32.9) Residential mortgage held for sale 160 2.9 7.29 210 4.0 7.64 (23.8) Home equity and second mortgage 2,977 70.7 9.55 2,587 63.2 9.80 15.1 Credit card 2,597 73.1 11.32 2,292 72.0 12.60 13.3 Other 3,959 98.7 10.03 3,673 92.1 10.06 7.8 Total consumer 13,051 312.1 9.62 13,765 325.1 9.47 (5.2) Total loans 26,932 583.7 8.72 25,364 574.0 9.08 6.2 Allowance for credit losses 536 473 13.3 Net loans 26,396 24,891 6.0 Other earning assets 337 4.2 5.01 236 3.4 5.78 42.8 Total earning assets* 32,105 670.2 8.40 29,559 643.4 8.73 8.6 Cash and due from banks 1,846 1,709 8.0 Other assets 2,541 2,160 17.6 Total assets $35,922 $32,905 9.2% LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits $6,578 $5,435 21.0% Interest-bearing deposits: Interest checking 3,169 10.6 1.35 2,854 11.8 1.66 11.0 Money market accounts 4,263 37.4 3.53 3,928 37.5 3.83 8.5 Other savings accounts 1,683 8.9 2.13 1,697 10.8 2.55 (.8) Savings certificates 7,432 100.2 5.42 8,107 107.4 5.31 (8.3) Certificates over $100,000 916 13.8 6.06 1,160 19.3 6.67 (21.0) Total interest-bearing deposits 17,463 170.9 3.94 17,746 186.8 4.22 (1.6) Short-term borrowings 4,047 56.1 5.58 3,077 47.6 6.20 31.5 Long-term debt 3,462 51.4 5.97 2,876 46.0 6.42 20.4 Total interest-bearing liabilities 24,972 278.4 4.48 23,699 280.4 4.75 5.4 Other liabilities 1,150 995 15.6 Preferred equity 90 106 (15.1) Common equity 3,153 2,701 16.7 Unrealized loss on available-for-sale securities, net of taxes (21) (31) (32.3) Total liabilities and shareholders' equity $35,922 $32,905 9.2% Net interest income $391.8 $363.0 Gross interest margin 3.92% 3.98% Gross interest margin without taxable- equivalent increments 3.85% 3.93% Net interest margin 4.91% 4.93% Net interest margin without taxable- equivalent increments 4.84% 4.88%
Interest and rates are presented on a fully taxable-equivalent basis under a tax rate of 35 percent. Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances. *Before deducting the allowance for credit losses and excluding the unrealized gain (loss) on available-for-sale securities. CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
FOR THE SIX MONTHS ENDED JUNE 30 1996 1995 YIELDS YIELDS % CHANGE (IN MILLIONS) AND AND AVERAGE (UNAUDITED) BALANCE INTEREST RATES BALANCE INTEREST RATES BALANCE ASSETS Securities: U.S. Treasury $771 $23.9 6.23% $1,027 $31.4 6.17% (24.9)% Mortgage-backed 2,671 92.6 6.97 2,190 74.7 6.88 22.0 State & political subdivisions 434 19.4 8.99 176 9.4 10.77 146.6 U.S. agencies and other 331 10.2 6.20 519 15.6 6.06 (36.2) Total securities 4,207 146.1 6.98 3,912 131.1 6.76 7.5 Unrealized loss on available-for-sale securities (1) (94) Net securities 4,206 3,818 Trading account securities 99 2.6 5.28 87 2.3 5.33 13.8 Federal funds sold and resale agreements 486 12.6 5.21 302 9.0 6.01 60.9 Loans: Commercial: Commercial 9,039 358.0 7.96 7,832 341.8 8.80 15.4 Financial institutions 1,005 22.0 4.40 683 13.5 3.99 47.1 Real estate: Commercial mortgage 2,964 133.2 9.04 2,436 108.4 8.97 21.7 Construction 454 20.7 9.17 360 16.9 9.47 26.1 Total commercial 13,462 533.9 7.98 11,311 480.6 8.57 19.0 Consumer: Residential mortgage 3,625 140.8 7.81 5,036 189.9 7.60 (28.0) Residential mortgage held for sale 190 6.9 7.30 192 7.5 7.88 (1.0) Home equity and second mortgage 2,918 139.5 9.61 2,517 119.9 9.61 15.9 Credit card 2,548 146.4 11.55 2,293 143.5 12.62 11.1 Other 3,888 193.0 9.98 3,631 181.8 10.10 7.1 Total consumer 13,169 626.6 9.57 13,669 642.6 9.48 (3.7) Total loans 26,631 1,160.5 8.76 24,980 1,123.2 9.07 6.6 Allowance for credit losses 519 475 9.3 Net loans 26,112 24,505 6.6 Other earning assets 315 7.7 4.92 232 6.9 6.00 35.8 Total earning assets* 31,738 1,329.5 8.42 29,513 1,272.5 8.69 7.5 Cash and due from banks 1,786 1,693 5.5 Other assets 2,479 2,167 14.4 Total assets $35,483 $32,804 8.2% LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits $6,363 $5,472 16.3 % Interest-bearing deposits: Interest checking 3,085 20.8 1.36 2,910 24.2 1.68 6.0 Money market accounts 4,170 73.7 3.55 3,834 71.8 3.78 8.8 Other savings accounts 1,666 17.8 2.15 1,814 23.0 2.56 (8.2) Savings certificates 7,352 197.8 5.41 8,226 209.7 5.14 (10.6) Certificates over $100,000 908 27.8 6.16 1,120 36.5 6.57 (18.9) Total interest-bearing deposits 17,181 337.9 3.96 17,904 365.2 4.11 (4.0) Short-term borrowings 4,267 119.6 5.64 2,808 85.0 6.10 52.0 Long-term debt 3,368 100.9 6.02 2,905 92.5 6.42 15.9 Total interest-bearing liabilities 24,816 558.4 4.53 23,617 542.7 4.63 5.1 Other liabilities 1,126 1,008 11.7 Preferred equity 96 106 (9.4) Common equity 3,082 2,663 15.7 Unrealized loss on available-for-sale securities, net of taxes -- (62) 100.0 Total liabilities and shareholders' equity $35,483 $32,804 8.2% Net interest income $771.1 $729.8 Gross interest margin 3.89% 4.06% Gross interest margin without taxable- equivalent increments 3.83% 4.02% Net interest margin 4.89% 4.99% Net interest margin without taxable- equivalent increments 4.82% 4.94%
Interest and rates are presented on a fully taxable-equivalent basis under a tax rate of 35 percent. Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances. *Before deducting the allowance for credit losses and excluding the unrealized gain (loss) on available-for-sale securities. PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 11 Computation of Primary and Fully Diluted Net Income Per Common Share 12 Computation of Ratio of Earnings to Fixed Charges 27 Article 9 Financial Data Schedule* (b) REPORTS ON FORM 8-K During the three months ended June 30, 1996, the Company did not file any Current Reports on Form 8-K. *Copies of this exhibit will be furnished upon request and payment of the Company's reasonable expenses in furnishing the exhibit. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST BANK SYSTEM, INC. By: /s/ DAVID J. PARRIN David J. Parrin Senior Vice President and Controller (Chief Accounting Officer and Duly Authorized Officer) DATE: August 13, 1996 [LOGO] First Bank System First Class P.O. BOX 522 U.S. Postage MINNEAPOLIS, MINNESOTA PAID 55480 Permit No. 2440 Minneapolis, MN SHAREHOLDER INQUIRIES FINANCIAL INFORMATION FBS news and financial results are available by fax, mail, or on-line. FAX. To access FBS's fax-on-demand service, call 1-800-758-5804. When asked, enter FBS's extension number, 312402. Enter "1" for the most current news release or "2" for a menu of recent releases. Enter your fax and phone numbers as directed. The information will be faxed to you immediately. MAIL. If you don't have access to a fax machine or prefer not to use FBS's fax-on-demand service, we will, on request, mail to you our quarterly earnings news release. To be added to FBS's mailing list, please contact Investor & Corporate Relations, First Bank System, First Bank Place, Minneapolis, Minnesota, 55402, (612) 973-2434. INTERNET. For information about FBS, including news releases, product information, and a list of service locations, access FBS's home page on the world wide web. The address is www.fbs.com. For further information, contact John Danielson, Senior Vice President, (612) 973-2261, or Karin Glasgow, Vice President, (612) 973-2264. STOCK AND DIVIDEND INFORMATION For matters related specifically to First Bank System stock records or dividend payments, contact the Office of the Corporate Secretary, (612) 973-0334. DIVIDEND REINVESTMENT For information regarding First Bank System's dividend reinvestment plan, contact First Chicago Trust Company of New York, P.O. Box 2598, Jersey City, New Jersey 07303-2598, (800) 446-2617. EX-11 2 EXHIBIT 11 COMPUTATION OF PRIMARY AND FULLY DILUTED NET INCOME PER COMMON SHARE
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30 (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 1996 1995 1996 1995 PRIMARY: Average shares outstanding 137,725,350 133,869,847 136,155,737 133,833,696 Net effect of the assumed purchase of stock under the stock option and stock purchase plans--based on the treasury stock method using average market price 2,049,153 1,985,539 2,227,166 1,884,403 139,774,503 135,855,386 138,382,903 135,718,099 Net income $254.1 $137.9 $430.9 $271.7 Preferred dividends (1.6) (1.9) (3.3) (3.8) Net income applicable to common equity $252.5 $136.0 $427.6 $267.9 Net income per common share $1.81 $1.00 $3.09 $1.97 FULLY DILUTED: * Average shares outstanding 137,725,350 133,869,847 136,155,737 133,833,696 Net effect of the assumed purchase of stock under the stock option and stock purchase plans--based on the treasury stock method using average market price or period-end market price, whichever is higher 2,051,711 1,991,663 2,325,038 2,146,433 Assumed conversion of Series 1991A Preferred Stock 3,107,268 3,647,401 3,275,485 3,647,401 142,884,329 139,508,911 141,756,260 139,627,530 Net income $254.1 $137.9 $430.9 $271.7 Preferred dividends, excluding 1991A Preferred Stock -- -- -- -- Net income applicable to common equity $254.1 $137.9 $430.9 $271.7 Net income per common share $1.78 $.99 $3.04 $1.95
*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%. EX-12 3 EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
THREE SIX MONTHS MONTHS ENDED ENDED JUNE 30 JUNE 30 (DOLLARS IN MILLIONS) 1996 1996 EARNINGS 1. Net income $254.1 $430.9 2. Applicable income taxes 150.9 276.8 3. Net income before taxes (1 + 2) $405.0 $707.7 4. Fixed charges: a. Interest expense excluding interest on deposits $107.5 $220.5 b. Portion of rents representative of interest and amortization of debt expense 8.3 14.9 c. Fixed charges excluding interest on deposits (4a + 4b) 115.8 235.4 d. Interest on deposits 170.9 337.9 e. Fixed charges including interest on deposits (4c + 4d) $286.7 $573.3 5. Amortization of interest capitalized $-- $-- 6. Earnings excluding interest on deposits (3 + 4c + 5) 520.8 943.1 7. Earnings including interest on deposits (3 + 4e + 5) 691.7 1,281.0 8. Fixed charges excluding interest on deposits (4c) 115.8 235.4 9. Fixed charges including interest on deposits (4e) 286.7 573.3 RATIO OF EARNINGS TO FIXED CHARGES 10. Excluding interest on deposits (line 6/line 8) 4.50 4.01 11. Including interest on deposits (line 7/line 9) 2.41 2.23
EX-27 4 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST BANK SYSTEM, INC. JUNE 30, 1996, 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 2,066,000 0 560,000 103,000 4,077,000 0 0 27,029,000 529,000 36,184,000 24,589,000 3,903,000 941,000 3,373,000 0 89,000 177,000 2,927,000 36,184,000 1,156,700 139,700 22,900 1,319,300 337,900 558,400 760,900 66,000 15,000 730,600 707,700 430,900 0 0 430,900 3.09 3.04 4.91 126,600 40,500 100 0 473,500 126,100 56,600 529,100 0 0 0
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