-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, lm1vwFOy+3DDWYO4aTsZMAHr1woUCqaVEkbIDIgjBQ6qoKk5f6T4d5kf15R1ZPUQ 0WBY2k7nKX3JK0hdLjlhHA== 0000897101-94-000157.txt : 19941110 0000897101-94-000157.hdr.sgml : 19941110 ACCESSION NUMBER: 0000897101-94-000157 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941109 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST BANK SYSTEM INC CENTRAL INDEX KEY: 0000036104 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 410255900 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06880 FILM NUMBER: 94558353 BUSINESS ADDRESS: STREET 1: 601 SECOND AVE S STREET 2: FIRST BANK PL CITY: MINNEAPOLIS STATE: MN ZIP: 55402-4302 BUSINESS PHONE: 6129731111 FORMER COMPANY: FORMER CONFORMED NAME: FIRST BANK STOCK CORP DATE OF NAME CHANGE: 19720317 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM (NOT APPLICABLE) COMMISSION FILE NUMBER 1-6880 FIRST BANK SYSTEM, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 41-0255900 (I.R.S. Employer Identification No.) FIRST BANK PLACE, 601 SECOND AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55402-4302 (Address of principal executive offices and Zip Code) 612-973-1111 (Registrant's telephone number, including area code) (NOT APPLICABLE) (Former name, former address and former fiscal year, if changed since last report). Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. Class Outstanding as of October 31, 1994 Common Stock, $1.25 Par Value 114,070,025 shares Total # of pages: 25 Exhibit Index appears on page 1. FINANCIAL SUMMARY
Nine Months Ended Three Months Ended September 30 September 30 September 30 June 30 September 30 (Dollars in Millions, Except Per Share Data) 1994 1993 1994 1994 1993 Income before merger-related charges $309.3 $252.1 $108.1 $102.7 $91.1 Merger-related charges (after-tax) -- 50.0 -- -- -- Net income $309.3 $202.1 $108.1 $102.7 $91.1 Return on average assets: Before merger-related charges 1.61% 1.33% 1.66% 1.58% 1.41% Based on net income 1.61 1.07 1.66 1.58 1.41 Return on average common equity: Before merger-related charges 19.1 15.7 19.4 18.9 16.8 Based on net income 19.1 12.3 19.4 18.9 16.8 Net interest margin (taxable-equivalent basis) 5.24 5.09 5.33 5.19 5.06 Efficiency ratio 57.4 66.0 56.5 57.8 59.2 Efficiency ratio excluding merger-related charges 57.4 60.4 56.5 57.8 59.2 PER COMMON SHARE Income before merger-related charges $ 2.62 $ 2.02 $ 0.91 $ 0.87 $ 0.74 Merger-related charges (after-tax) -- 0.44 -- -- -- Net income $ 2.62 $ 1.58 $ 0.91 $ 0.87 $ 0.74 Dividends paid 0.87 0.75 0.29 0.29 0.25 Common shareholders' equity 19.28 18.74 17.72 PERIOD END Loans $19,110 $18,704 $18,568 Allowance for credit losses 437 440 427 Assets 26,330 25,932 25,941 Deposits 18,793 18,917 20,466 Total shareholders' equity 2,319 2,245 2,276 Common equity to total assets 8.4% 8.3% 7.7% Tier 1 capital ratio 8.2 8.3 9.5
TABLE OF CONTENTS AND FORM 10-Q CROSS-REFERENCE INDEX PART I -- FINANCIAL INFORMATION Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 2) 2 Financial Statements (Item 1): Consolidated Balance Sheet 12 Consolidated Statement of Income 13 Consolidated Statement of Shareholders' Equity 14 Consolidated Statement of Cash Flows 15 Notes to Consolidated Financial Statements 16 Selected Statistical Information: Consolidated Daily Average Balance Sheet and Related Yields and Rates (Nine Months Ended) 22 Consolidated Daily Average Balance Sheet and Related Yields and Rates (Three Months Ended) 23 PART II -- OTHER INFORMATION Exhibits and Reports on Form 8-K (Item 6) 24 Signature 24 Exhibit 11 - Computation of Primary and Fully Diluted Net Income Per Common Share 25 Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges 25 MANAGEMENT'S DISCUSSION AND ANALYSIS EARNINGS SUMMARY First Bank System, Inc. (the "Company") reported third quarter 1994 earnings of $108.1 million, an increase of $17.0 million, or 18.7 percent, from the third quarter of 1993. On a per share basis, earnings were $.91 in the third quarter of 1994, compared with earnings of $.74 in the third quarter of 1993, an increase of 23.0 percent. Return on average assets increased to 1.66 percent in the third quarter of 1994 from 1.41 percent in the third quarter of 1993, and return on average common equity increased to 19.4 percent from 16.8 percent over the same period. The efficiency ratio, the ratio of expenses to revenues, was 56.5 percent, improving from 59.2 percent in the third quarter of 1993. The Company's net income for the first nine months of 1994 was $309.3 million, or $2.62 per share, compared with $202.1 million, or $1.58 per share, in the first nine months of 1993. Included in 1993's net income was $50.0 million, or $.44 per share, in after-tax merger-related charges associated with the acquisition of Colorado National Bankshares, Inc. ("CNB"). Excluding these merger-related charges, earnings for the first nine months of 1994 increased $57.2 million, or 22.7 percent, and earnings per share increased $.60, or 29.7 percent, from the first nine months of 1993. TABLE 1 Summary of Consolidated Income
Three Months Ended (Taxable-Equivalent Basis; September 30 June 30 March 31 December 31 September 30 Dollars In Millions, Except Per Share Data) 1994 1994 1994 1993 1993 -------------------------------------------------------------------------------------------------------------------------------- Interest income $455.8 $429.8 $396.2 $414.7 $419.2 Interest expense 145.7 129.6 111.2 121.4 129.6 Net interest income 310.1 300.2 285.0 293.3 289.6 Provision for credit losses 23.0 23.0 24.0 27.0 27.0 Net interest income after provision for credit losses 287.1 277.2 261.0 266.3 262.6 Noninterest income 159.4 153.7 151.8 145.9 142.0 Noninterest expense 266.9 262.2 253.3 255.3 255.7 Income before income taxes 179.6 168.7 159.5 156.9 148.9 Taxable-equivalent adjustment 3.9 3.9 3.7 3.7 4.3 Income taxes 67.6 62.1 57.3 57.3 53.5 Net income $108.1 $102.7 $ 98.5 $ 95.9 $ 91.1 Return on average assets 1.66% 1.58% 1.59% 1.45% 1.41% Return on average common equity 19.4 18.9 18.8 18.3 16.8 Net interest margin 5.33 5.19 5.19 5.00 5.06 Efficiency ratio 56.5 57.8 58.0 58.1 59.2 Per share: Net income $ 0.91 $ 0.87 $ 0.84 $ 0.81 $ 0.74 Common dividends paid 0.29 0.29 0.29 0.25 0.25
ACQUISITIONS On July 21, 1994, the Company announced that it had signed a definitive purchase agreement to acquire Metropolitan Financial Corporation ("MFC"), a regional financial services holding company headquartered in Minneapolis, Minnesota. As of September 30, 1994, MFC had approximately $8.1 billion in assets, $5.5 billion in deposits and more than 200 offices principally in North Dakota, Minnesota, Nebraska, Iowa, Kansas, South Dakota, Wisconsin, and Wyoming. The Company will issue .6803 share of FBS common stock for each share of MFC's outstanding common stock at closing, subject to certain adjustments based on changes in FBS stock price. Based on current outstanding MFC shares, approximately 21.4 million shares would be issued. The transaction, which will be accounted for using the pooling-of-interests method, is subject to the approval of regulatory agencies and both companies' shareholders and is expected to close in the first quarter of 1995. On October 18, 1994, the Company announced that it had signed an agreement to acquire First Western Corporation ("FWC"), a $323 million bank holding company based in Sioux Falls, South Dakota. FWC owns Western Bank, which has nine branches in South Dakota. The acquisition is subject to the approval of regulatory agencies and is expected to close in the first quarter of 1995. The Company completed two previously announced acquisitions in existing markets during the quarter, serving to strengthen the Company's retail banking market shares in these communities. United Bank of Bismarck, which was acquired on September 9, 1994, had assets of $121 million and is located in Bismarck, North Dakota. Green Mountain Bancorporation, Inc., which was acquired on September 30, 1994, had assets of $35 million and is located in Lakewood, Colorado. On September 2, 1994, the Company completed a previously announced agreement to acquire the domestic corporate trust business of J. P. Morgan & Co., Incorporated. This business unit provides trust services for approximately 650 clients with 3,800 bond issues in the areas of municipal, revenue, housing and corporate bond indenture trusteeships. LINE OF BUSINESS FINANCIAL REVIEW Each of the Company's three business lines--Retail and Community Banking, Commercial Banking, and the Trust and Investment Group--contributed to the strong financial performance for the nine months ended September 30, 1994. Compared with the first nine months of 1993 results, earnings increases for the three business lines were 31.1 percent, 10.4 percent and 8.4 percent, respectively. The results for 1994 include the operating results of Boulevard Bancorp, Inc. ("Boulevard"), a $1.6 billion commercial bank holding company, since its acquisition on March 25, 1994. 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 1994 certain methodologies were changed, and accordingly, results for 1993 have been restated to conform to the current presentation basis. Retail And Community Banking. Retail and Community Banking, which includes consumer, small business and middle market banking services, residential mortgage lending, consumer and corporate credit card services, and merchant payment processing, achieved strong revenue growth while containing costs. Earnings increased 34.7 percent in the third quarter of 1994 and 31.1 percent in the first nine months of 1994 compared with the same periods last year. Third quarter return on average assets increased to 1.51 percent from 1.18 percent and return on average common equity increased to 18.2 percent from 15.6 percent over the same period. These ratios showed similar improvement on a year-to-date basis. The strong improvement in earnings is due to improvements in net interest income, noninterest income and the provision for credit losses, partially offset by slight increases in noninterest expense as a result of acquisitions. Net interest income increases are primarily attributable to successful home equity loan promotions and strong small- and middle-market business lending. Noninterest income increased primarily due to growth in mutual funds, the Corporate Card, the Purchasing Card, the new Northwest Airlines WorldPerks credit card and merchant processing. The efficiency ratio improved 430 basis points in the third quarter and 380 basis points in the first nine months of 1994 compared with the same periods in 1993. Commercial Banking. Commercial Banking, which provides lending, cash management, and other financial services to middle market, large corporate and mortgage banking companies, reported a return on average assets of 1.81 percent in the third quarter and 1.76 percent for the first nine months of 1994. These ratios improved from 1.63 percent and 1.54 percent in the same periods in 1993. Year-to-date earnings improved by 10.4 percent compared with the first nine months of 1993. The earnings increase reflects continuing improvement in credit quality and further reduction of noninterest expenses. Although net interest income and noninterest income were relatively unchanged over the same period last year, Commercial Banking had solid growth in most loan categories which was offset by a significiant decline in loans to the rapidly consolidating mortgage banking industry. The efficiency ratio improved to 32.5 percent in the third quarter and 32.7 percent in the first nine months of 1994 compared to 33.9 percent in both the third quarter and the first nine months of 1993. Trust And Investment Group. The Trust and Investment Group, which includes personal, institutional and corporate trust services, investment management services, and a full-service brokerage company, reported an earnings decrease of 14.4 percent in the third quarter and an increase of 8.4 percent in the first nine months of 1994 compared with similar periods in the prior year. The return on average common equity was 18.8 percent in the third quarter and 23.1 percent in the first nine months of 1994 compared with 28.9 percent and 25.5 percent in the same periods in 1993. Compared with third quarter of 1993, the current quarter's net interest income decreased primarily due to a reduction in balances from mortgage custody accounts. Noninterest income and noninterest expenses increased primarily due to recent acquisitions. For the first nine months of 1994, stronger noninterest income is primarily due to growth in Corporate Trust and investment sales and management fees. The efficiency ratio was 73.2 percent in the third quarter and 71.3 percent in the first nine months of 1994 compared with 69.6 percent and 73.3 percent in the same periods in 1993. TABLE 2 Line of Business Financial Performance
Trust and Retail & Community Commercial Investment Consolidated Banking Banking Group Company ------------------------------------------------------------------------------------ NINE MONTHS ENDED SEPTEMBER 30 ------------------------------------------------------------------------------------ (Dollars in Millions) 1994 1993 1994 1993 1994 1993 1994 1993 CONDENSED INCOME STATEMENT: Net interest income (taxable-equivalent basis) $ 714.6 $ 668.5 $162.5 $166.4 $ 18.2 $ 22.4 $ 895.3 $ 857.3 Provision for credit losses 67.0 79.9 3.0 18.3 -- -- 70.0 98.2 Noninterest income 283.7 247.7 44.2 46.0 137.0 130.0 464.9 423.7 Noninterest expense* 604.2 589.4 67.5 71.9 110.7 111.7 782.4 773.0 Income taxes and taxable-equivalent adjustment 127.9 95.0 53.2 47.0 17.4 15.7 198.5 157.7 Income before merger-related charges $ 199.2 $ 151.9 $ 83.0 $ 75.2 $ 27.1 $ 25.0 309.3 252.1 Merger-related charges (after tax) -- 50.0 Net income $ 309.3 $ 202.1 AVERAGE BALANCE SHEET DATA: Commercial loans $ 5,150 $ 4,326 $4,868 $4,757 $ -- $ -- $10,018 $ 9,083 Consumer loans 8,380 8,314 -- -- -- -- 8,380 8,314 Assets 18,577 18,090 6,304 6,530 805 722 25,686 25,342 Deposits 15,984 16,840 2,442 2,456 904 855 19,330 20,151 Common equity 1,507 1,369 441 457 157 131 2,105 1,957 Return on average assets* 1.43% 1.12% 1.76% 1.54% ** ** 1.61% 1.33% Return on average common equity* 17.7 14.8 25.2 22.0 23.1% 25.5% 19.1 15.7 Efficiency ratio* 60.5 64.3 32.7 33.9 71.3 73.3 57.4 60.4
Three Months Ended September 30 CONDENSED INCOME STATEMENT: Net interest income (taxable-equivalent basis) $ 250.3 $ 224.9 $ 53.5 $ 56.0 $ 6.3 $ 8.7 $ 310.1 $ 289.6 Provision for credit losses 23.0 24.1 -- 2.9 -- -- 23.0 27.0 Noninterest income 99.7 81.6 14.5 17.1 45.2 43.3 159.4 142.0 Noninterest expense 207.1 194.7 22.1 24.8 37.7 36.2 266.9 255.7 Income taxes and taxable- equivalent adjustment 47.7 34.1 18.3 17.6 5.5 6.1 71.5 57.8 Net income $ 72.2 $ 53.6 $ 27.6 $ 27.8 $ 8.3 $ 9.7 $ 108.1 $ 91.1 AVERAGE BALANCE SHEET DATA: Commercial loans $ 5,369 $ 4,498 $4,731 $5,128 $ -- $ -- $10,100 $ 9,626 Consumer loans 8,584 8,562 -- -- -- -- 8,584 8,562 Assets 18,967 18,019 6,039 6,776 854 759 25,860 25,554 Deposits 15,766 16,527 2,125 2,779 850 942 18,741 20,248 Common equity 1,570 1,367 423 474 175 133 2,168 1,974 Return on average assets 1.51% 1.18% 1.81% 1.63% ** ** 1.66% 1.41% Return on average common equity 18.2 15.6 25.9 23.2 18.8% 28.9% 19.4 16.8 Efficiency ratio 59.2 63.5 32.5 33.9 73.2 69.6 56.5 59.2
* Excluding merger-related charges ** Not meaningful Note: Preferred dividends are not allocated to the business lines. CAPITAL AND SHAREHOLDERS' EQUITY The ratio of common equity to assets increased 67 basis points from a year ago to 8.4 percent at September 30, 1994, primarily due to earnings retention. Common equity per share at September 30, 1994, was $19.28 compared with $18.74 at June 30, 1994, and $17.72 at September 30, 1993. Total equity to assets was 8.8 percent at September 30, 1994, compared with 8.7 percent at June 30, 1994, and 8.8 percent at September 30, 1993. Compared with a year ago, earnings retention has offset the decrease caused by stock repurchases. Tier 1 and total risk-based capital ratios were 8.2 percent and 12.5 percent on September 30, 1994, compared with 9.5 percent and 13.9 percent at September 30, 1993, respectively. The leverage ratio, the measure of Tier 1 capital to total quarterly average assets, was 7.4 percent compared with 8.0 percent a year ago. The decrease in the ratios from the prior year was due to stock repurchases and an increase in risk-weighted assets. On October 21, 1994, the Company announced plans to repurchase up to 2 million shares of common stock to be utilized in connection with previously announced acquisitions and other corporate purposes. TABLE 3 Capital Ratios
September 30 June 30 March 31 December 31 September 30 (Dollars in Millions) 1994 1994 1994 1993 1993 Common equity $2,213 $2,139 $2,183 $1,979 $2,007 As a percent of assets 8.4% 8.3% 8.2% 7.5% 7.7% Tangible common equity* $1,890 $1,824 $1,874 $1,811 $1,837 As a percent of assets 7.3% 7.1% 7.2% 6.9% 7.1% Total shareholders' equity $2,319 $2,245 $2,289 $2,245 $2,276 As a percent of assets 8.8% 8.7% 8.6% 8.5% 8.8% Tier 1 capital $1,871 $1,855 $1,871 $1,971 $2,022 As a percent of risk-adjusted assets 8.2% 8.3% 8.4% 9.2% 9.5% Total risk-based capital $2,850 $2,828 $2,744 $2,863 $2,966 As a percent of risk-adjusted assets 12.5% 12.6% 12.3% 13.3% 13.9% Leverage ratio 7.4 7.2 7.6 7.6 8.0
*Defined as common equity less goodwill NET INTEREST INCOME Net interest income on a taxable-equivalent basis was $310.1 million in the third quarter of 1994, an increase of $20.5 million, or 7.1 percent, from the third quarter of 1993. The improvement in net interest income reflects increases in average loan yields and average loan balances. The yield on loans for the third quarter averaged 8.36 percent, or 58 basis points higher than the yield of 7.78 percent in the third quarter of last year, reflecting market rate increases in 1994. The effect of the increase in average yield on loans more than offsets the impact of higher rates paid on interest-bearing liabilities. These rates averaged 3.40 percent in the third quarter, or 18 basis points higher than a year ago. Average loans totaled $18.7 billion in the third quarter of 1994, an increase of $.5 billion, or 2.7 percent, from the third quarter of 1993, reflecting significant growth in both consumer and commercial loans, offset by a large decrease in the balance of loans to mortgage bankers. Excluding these mortgage-related balances, average loans for the quarter increased by $2.4 billion, or 18.8 percent, over the same quarter in 1993, reflecting increases in credit cards, home equity loans and consumer lines of credit, as well as commercial loans (small business and middle market), including loans acquired with Boulevard. The average balance of interest-bearing liabilities in the third quarter of 1994 increased $1.1 billion, or 6.7 percent, over the third quarter of 1993, as noninterest-bearing deposits related to loans to mortgage bankers were replaced with short-term borrowings. The net interest margin on a taxable-equivalent basis of 5.33 percent in the third quarter of 1994 was higher than the 5.06 percent reported in the third quarter of 1993. The improvement resulted from both a shift in the mix of loans, from lower-margin loans to mortgage bankers to higher yield consumer and commercial loans, and increases in the reference rate on loans that reprice with prime. TABLE 4 Analysis of Net Interest Income
Three Months Ended September 30 June 30 March 31 December 31 September 30 (Dollars in Millions) 1994 1994 1994 1993 1993 Net interest income (taxable-equivalent basis) $ 310.1 $ 300.2 $ 285.0 $ 293.3 $ 289.6 Average balances of earning assets supported by: Interest-bearing liabilities $17,007 $16,948 $15,658 $15,767 $15,946 Noninterest-bearing liabilities 6,055 6,257 6,620 7,503 6,764 Total earning assets $23,062 $23,205 $22,278 $23,270 $22,710 Average yields and weighted average rates (taxable-equivalent basis): Earning assets yield 7.84% 7.43% 7.21% 7.07% 7.32% Rate paid on interest-bearing liabilities 3.40 3.07 2.88 3.05 3.22 Gross interest margin 4.44% 4.36% 4.33% 4.02% 4.10% Net interest margin 5.33% 5.19% 5.19% 5.00% 5.06% Net interest margin without taxable-equivalent increments 5.27% 5.12% 5.12% 4.94% 4.98%
PROVISION FOR CREDIT LOSSES The provision for credit losses was $23.0 million in the third quarter of 1994, down $4.0 million from the third quarter of 1993. Net charge-offs totaled $26.8 million in the third quarter of 1994, down from $34.6 million in the same quarter a year ago. For further discussion, refer to "Analysis of Net Loan Charge-offs and Allowance for Credit Losses" on page 8. NONINTEREST INCOME Noninterest income in the third quarter of 1994 was $159.4 million, an increase of $17.4 million, or 12.3 percent, from the third quarter last year. Credit card fees increased $12.6 million, or 34.4 percent, from the prior year quarter, reflecting higher sales volumes for Corporate Card, Purchasing Card, the new Northwest Airlines WorldPerks credit card, and merchant processing. During the third quarter, the Company sold U. S. Treasury Notes at a net loss of $2.8 million. TABLE 5 Noninterest Income
Three Months Ended September 30 June 30 March 31 December 31 September 30 (Dollars in Millions) 1994 1994 1994 1993 1993 Trust fees $ 38.9 $ 40.1 $ 38.5 $ 37.5 $ 36.6 Credit card fees 49.2 43.5 36.0 37.5 36.6 Service charges on deposit accounts 29.2 29.1 29.4 28.4 28.6 Insurance commissions 6.3 6.1 5.0 5.3 5.8 Trading account profits and commissions 2.1 2.2 2.7 2.2 2.4 Securities losses (2.8) -- -- -- -- Other 36.5 32.7 40.2 35.0 32.0 Total noninterest income $159.4 $153.7 $151.8 $145.9 $142.0
NONINTEREST EXPENSE Noninterest expense was $266.9 million in the third quarter of 1994, an increase of $11.2 million, or 4.4 percent, from third quarter of 1993. The increase in expenses reflects the addition of Boulevard and J.P. Morgan domestic corporate trust operations. Compared with noninterest expense for the third quarter of 1993, including Boulevard and the acquired corporate trust business expenses on a pro forma basis, noninterest expense for the quarter declined by $7.0 million, or 2.6 percent. The Company's efficiency ratio, the measure of expenses to revenues, improved to 56.5 percent for the quarter from 59.2 percent a year ago. Employee benefits expense for the third quarter increased by $3.6 million, or 18.0 percent, from the third quarter of 1993, due to an actuarially-determined adjustment in the accrual for retirement benefits and an acquisition-related increase in medical benefits. As compared with the third quarter of 1993, amortization of goodwill and intangibles expense for the quarter increased by $2.8 million, or 36.4 percent, as a result of higher intangible balances relating to recent acquisitions. PROVISION FOR INCOME TAXES The provision for income taxes was $67.6 million in the third quarter of 1994, compared with $53.5 million in the third quarter of 1993. The increase is due to the higher level of taxable income. At September 30, 1994, the Company's net deferred tax asset was $222.3 million, compared with $229.9 million at June 30, 1994, and $200.4 million at September 30, 1993. The Boulevard acquisition caused most of the increase over last year. For further information regarding income taxes, refer to Note H on page 19. TABLE 6 Noninterest Expense
Three Months Ended (Dollars in Millions, September 30 June 30 March 31 December 31 September 30 Except Per Employee Data) 1994 1994 1994 1993 1993 Salaries $ 100.2 $ 98.5 $ 94.2 $ 95.0 $ 97.3 Employee benefits 23.6 23.3 23.7 19.6 20.0 Total personnel expense 123.8 121.8 117.9 114.6 117.3 Net occupancy 22.0 22.2 21.5 22.8 22.8 Furniture and equipment 18.8 20.2 19.1 19.2 17.8 FDIC insurance 11.0 12.3 11.5 11.5 11.4 Advertising 6.2 8.1 8.1 4.7 6.0 Amortization of goodwill and other intangible assets 10.5 9.9 8.0 7.7 7.7 Other personnel costs 7.6 8.8 7.7 8.5 7.2 Professional services 8.6 8.5 6.5 10.7 9.1 Telephone 5.1 5.6 5.1 5.0 4.4 Postage 4.7 4.7 4.9 4.8 4.6 Printing, stationery and supplies 5.0 4.9 4.8 6.8 4.5 Data processing 3.4 3.4 3.5 4.7 5.8 Other 40.2 31.8 34.7 34.3 37.1 Total noninterest expense $ 266.9 $ 262.2 $ 253.3 $ 255.3 $ 255.7 Efficiency ratio* 56.5% 57.8% 58.0% 58.1% 59.2% Quarterly average number of employees (full-time equivalents) 12,056 12,139 11,815 11,981 12,110 Annualized personnel expense per employee $41,075 $40,135 $39,915 $38,261 $38,745
* Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income net of securities gains. ACCOUNTING CHANGES The Financial Accounting Standards Board recently issued SFAS 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." This Statement requires disclosure of amounts, nature, and terms of derivative financial instruments, distinguishing between those used for trading and those used for other purposes. For entities that use derivatives for purposes other than trading, it requires disclosure about those purposes and about how the instruments are reported in the financial statements. Fair value and related carrying value information must be presented without aggregating or netting the derivatives with the related hedged items. The Statement is effective for fiscal years ending after December 15, 1994. The Company has expanded its disclosure of derivative financial instruments and does not anticipate significant changes to its disclosures as a result of adopting this Statement. The Company has not yet adopted SFAS 114, "Accounting by Creditors for Impairment of a Loan," which is effective for fiscal years beginning after December 15, 1994. The Statement requires creditors to establish a valuation allowance when it is probable that all the principal and interest due under the contractual terms of a loan will not be collected. The adoption of SFAS 114 is not expected to have a material effect on the Company. CREDIT MANAGEMENT The Company's credit management process includes central credit policy and administration functions and standard underwriting criteria for specialized lending categories, such as mortgage banking, real estate construction, and consumer credit. The Company's credit management process is supported by regular examinations conducted by the credit administration function. Large loans and all loans experiencing deterioration of credit quality are reviewed quarterly by management. A standard credit scoring system is used to assess consumer credit risks and to price consumer products relative to their assigned risk rating. In evaluating credit risk, the Company takes into consideration the composition of its loan portfolio, its level of allowance coverage, macroeconomic factors such as the level of debt outstanding in the public and private sectors, the effects of domestic and international economic conditions, regional economic conditions, and other issues. LOAN PORTFOLIO REVIEW One of the ways the Company manages its credit risk is by ensuring its loan portfolio is well diversified by industry classification, size and type of loan. The Company's primary operating region includes Minnesota, Colorado, Montana, North Dakota, South Dakota, Wisconsin, and Illinois. Approximately 80 percent of the loan portfolio consists of extensions of credit to customers in the Company's operating region. A discussion of the Company's major loan categories follows. Commercial. The Company's portfolio of commercial loans totaled $7.2 billion at September 30, 1994, representing 37.9 percent of the portfolio. This level is up from $7.0 billion at June 30, 1994, and $6.1 billion at September 30, 1993. As a percentage of the total portfolio, commercial loans totaled 37.6 percent at June 30, 1994, and 32.7 percent at September 30, 1993. The increase over the third quarter of 1993 reflects growth in small business and middle- market loans, as well as the acquisition of Boulevard. Financial Institutions. The portfolio of loans to financial institutions totaled $.9 billion at September 30, 1994, relatively unchanged from June 30, 1994, and down $1.1 billion compared with the September 30, 1993, balance. The decrease from the prior year can be attributed to the cyclical activity in the Company's secured loans to mortgage banking firms. The mortgage banking firms' loan volume has decreased due to a decline in refinancings related to a rise in market interest rates. Commercial Real Estate. The commercial real estate mortgage and construction loan portfolio totaled $2.1 billion at September 30, 1994, compared with $2.0 billion at June 30, 1994, and $1.7 billion at September 30, 1993. The increase over the prior year resulted from selective loan originations in the Company's existing markets as well as the acquisition of Boulevard. Highly Leveraged Transactions. The Company's exposure to commercial loans involving the buyout, recapitalization or acquisition of an existing business, called highly leveraged transactions ("HLTs"), remained at relatively low levels. At September 30, 1994, the Company had HLT outstandings totaling $273 million and was committed under definitive agreements to lend an additional amount of approximately $125 million. This exposure has increased from September 30, 1993, when outstandings were $134 million and additional commitments were $175 million. The increase in HLT originations is consistent with industry trends. The Company continues to have stringent underwriting criteria and monitoring procedures for its HLT lending. Consumer. The consumer loan portfolio, which includes residential mortgages, totaled $8.6 billion at September 30, 1994. This portfolio is up $61 million since June 30, 1994, primarily due to increases in home equity and second mortgages, credit card, and consumer lines of credit partially offset by a decrease in residential mortgages held for sale. Total consumer loans remained relatively unchanged from September 30, 1993. Home equity and second mortgages increased $459 million, primarily due to successful promotions. In addition, credit card loans, including the new Northwest Airlines WorldPerks credit card, grew $488 million. This growth was offset by a $900 million decrease in residential mortgages held for sale primarily due to fewer housing starts and refinancings as a result of rising market interest rates. ANALYSIS OF NET LOAN CHARGE-OFFS AND ALLOWANCE FOR CREDIT LOSSES Net charge-offs totaled $26.8 million in the third quarter of 1994, down $7.8 million, or 22.5 percent, from the $34.6 million reported in the third quarter a year ago. Commercial loan net charge-offs for the quarter were lower by $11.9 million, or 93.7 percent, reflecting continued improvement in the quality of the commercial loan portfolio. Consumer loan net charge-offs in the third quarter of 1994 were $4.1 million higher than in the third quarter of 1993, reflecting an acceleration of the timing of charge-offs for fraud losses on credit card and other consumer loan balances. At September 30, 1994, the allowance for credit losses was $437.3 million, or 2.29 percent of loans. This compares with an allowance of $439.9 million, or 2.35 percent of loans, at June 30, 1994, and $427.2 million, or 2.30 percent of loans, at September 30, 1993. The increase in the balance from last year reflects lower charge-offs, as well as additions from acquisitions. The ratio of allowance to nonperforming loans continues to indicate strong reserve coverage, increasing to 355 percent at September 30, 1994, compared with 300 percent at June 30, 1994, and 233 percent at September 30, 1993. TABLE 7 Nonperforming Assets
September 30 June 30 March 31 December 31 September 30 (Dollars in Millions) 1994 1994 1994 1993 1993 Nonaccrual loans $123.3 $146.4 $150.8 $157.6 $183.5 Other real estate 46.1 54.9 66.3 67.4 81.1 Other nonperforming assets 0.7 0.8 0.6 1.0 2.2 Nonperforming assets $170.1 $202.1 $217.7 $226.0 $266.8 Accruing loans 90 days or more past due $ 23.8 $ 23.5 $ 26.7 $ 31.2 $ 32.1 Nonperforming loans to total loans 0.65% 0.78% 0.83% 0.84% 0.99% Nonperforming assets to total loans plus other real estate 0.89 1.08 1.19 1.20 1.43
TABLE 8 Summary of Allowance for Credit Losses
Nine Months Ended Three Months Ended September 30 September 30 September 30 September 30 (Dollars in Millions) 1994 1993 1994 1993 Balance at beginning of period $423.2 $448.0 $439.9 $434.8 CHARGE-OFFS: Commercial: Commercial 42.6 34.5 9.7 11.4 Financial institutions 1.1 6.5 -- -- Real estate: Commercial mortgage 12.4 52.2 3.1 18.0 Construction 0.1 0.4 -- -- HLTs 3.8 4.3 -- -- Total commercial 60.0 97.9 12.8 29.4 Consumer: Residential mortgage 2.4 1.5 1.4 0.3 Credit card 55.6 53.5 21.5 18.5 Other 24.4 25.9 8.1 9.5 Total consumer 82.4 80.9 31.0 28.3 Total 142.4 178.8 43.8 57.7 RECOVERIES: Commercial: Commercial 29.1 25.1 9.0 9.0 Financial institutions 0.2 6.8 -- 5.5 Real estate: Commercial mortgage 12.8 6.5 1.5 1.6 Construction 0.9 1.0 0.6 0.2 HLTs 5.5 2.4 0.9 0.4 Total commercial 48.5 41.8 12.0 16.7 Consumer: Residential mortgage 0.4 0.8 0.1 0.3 Credit card 6.8 7.8 2.3 3.1 Other 8.6 9.4 2.6 3.0 Total consumer 15.8 18.0 5.0 6.4 Total 64.3 59.8 17.0 23.1 NET CHARGE-OFFS: Commercial: Commercial 13.5 9.4 0.7 2.4 Financial institutions 0.9 (0.3) -- (5.5) Real estate: Commercial mortgage (0.4) 45.7 1.6 16.4 Construction (0.8) (0.6) (0.6) (0.2) HLTs (1.7) 1.9 (0.9) (0.4) Total commercial 11.5 56.1 0.8 12.7 Consumer: Residential mortgage 2.0 0.7 1.3 -- Credit card 48.8 45.7 19.2 15.4 Other 15.8 16.5 5.5 6.5 Total consumer 66.6 62.9 26.0 21.9 Total 78.1 119.0 26.8 34.6 Provision charged to operating expense 70.0 98.2 23.0 27.0 Additions related to acquisitions 22.2 -- 1.2 -- Balance at end of period $437.3 $427.2 $437.3 $427.2 Allowance as a percentage of period-end loans 2.29% 2.30% Allowance as a percentage of nonperforming loans 355 233 Allowance as a percentage of nonperforming assets 257 160
ANALYSIS OF NONPERFORMING ASSETS Nonperforming assets include all nonaccrual loans, restructured loans, other real estate and other nonperforming assets owned by the Company. At September 30, 1994, nonperforming assets totaled $170.1 million, down $32.0 million, or 15.8 percent, from June 30, 1994, and down $96.7 million, or 36.2 percent, from September 30, 1993, despite the addition in the first quarter of 1994 of $29.3 million in nonperforming assets from the acquisition of Boulevard. The ratio of nonperforming assets to loans and other real estate improved to .89 percent at September 30, 1994, from 1.08 percent at June 30, 1994, and 1.43 percent at September 30, 1993. Compared with the balances at September 30, 1993, significant decreases occurred in both commercial and consumer categories of nonperforming loans, as well as other real estate, primarily the result of loan repayments and property sales. TABLE 9 Nonperforming Assets by Industry
September 30 June 30 March 31 December 31 September 30 (Dollars in Millions) 1994 1994 1994 1993 1993 COMMERCIAL: Commercial $ 34.1 $ 43.2 $ 32.4 $ 42.2 $ 49.7 Financial institutions -- 0.6 0.6 0.9 2.5 Real estate: Commercial mortgage 30.4 36.4 38.2 36.9 39.4 Construction 3.7 1.7 8.2 2.2 2.2 HLTs 10.0 13.2 16.1 20.1 27.4 Total commercial 78.2 95.1 95.5 102.3 121.2 CONSUMER: Residential mortgage 34.1 39.7 42.8 44.8 51.4 Credit card 10.1 11.1 10.8 10.3 9.9 Other 0.9 0.5 1.7 0.2 1.0 Total consumer 45.1 51.3 55.3 55.3 62.3 Total nonperforming loans 123.3 146.4 150.8 157.6 183.5 OTHER REAL ESTATE 46.1 54.9 66.3 67.4 81.1 OTHER NONPERFORMING ASSETS 0.7 0.8 0.6 1.0 2.2 Total nonperforming assets $170.1 $202.1 $217.7 $226.0 $266.8
INTEREST RATE RISK MANAGEMENT The Company's principal objective for interest rate risk management is to control exposure of net interest income to risks associated with interest rate movements. Interest rate risk is measured and reported to the Company's Asset and Liability Management Committee ("ALCO") through the use of traditional gap analysis, which measures the difference between assets and liabilities that reprice in a given time period; simulation modeling, which produces projections of net interest income under various interest rate scenarios and balance sheet strategies; and valuation risk analysis, which measures the change in the economic value of the Company under various interest rate scenarios. Including the effect of interest rate swaps, futures, options and other hedging instruments, the Company has a cumulative positive repricing gap position at one year of $1.1 billion at September 30, 1994, indicating that more assets than liabilities reprice within that period. While this analysis is useful as a point-in-time measurement of interest rate risk, there are certain risks that the repricing gap position does not capture, such as basis risk and prepayment risk. Due to these limitations, management places a greater reliance on simulation modeling to measure and manage interest rate risk. It is the Company's policy to maintain a low interest rate risk position by limiting the amount of forecasted net interest income at risk under an immediate 100 basis point fluctuation in interest rates. To maintain acceptable interest rate risk levels, the Company will invest in fixed rate assets or will receive fixed rates on interest rate swaps. The Company has entered into interest rate swap agreements that hedge specific assets and liabilities to manage the impact of fluctuating interest rates on earnings. As of September 30, 1994, the Company receives payments on $2.0 billion notional amount of interest rate swap agreements, based on fixed interest rates, and makes payments based on variable interest rates. These swaps have an average fixed rate of 6.53 percent and an average variable rate, which is tied to various LIBOR rates, of 4.93 percent. The maturity of these agreements ranges from 1 month to 10 years with an average remaining maturity of 3.9 years. Swaps contributed to the Company's net interest margin by reducing interest expense by $15.2 million and $22.0 million for the quarters ended September 30, 1994, and 1993, respectively. Interest rate caps and floors are similarly used by the Company to minimize the impact of fluctuating interest rates on earnings. The total notional amount of floor agreements purchased as of September 30, 1994, was $950 million with an average strike level of 3-month LIBOR at 3.5 percent and an average remaining maturity of 3.2 years. The impact of floors on interest income was not material for the quarter ended September 30, 1994. Further information on interest rate swaps and options can be found in Note I on page 20. TABLE 10 Interest Rate Swap Hedging Portfolio Notional Balances and Yields by Maturity Date
At September 30, 1994 (Dollars in Millions) ------------------------------------------------------------------------------------------ Weighted Weighted Average Average Interest Receive Fixed Swaps Notional Interest Rate Rate Maturity Date Amount Received Paid ------------------------------------------------------------------------------------------ 1994 (remaining three months) $ 50 6.41% 4.88% 1995 460 6.95 4.91 1996 258 8.32 4.93 1997 150 5.39 4.90 1998 306 5.44 4.92 After 1998 825 6.35 4.96 Total $2,049 6.53% 4.93%
At September 30, 1994, the Company did not have any swaps in its portfolio which required it to pay fixed-rate interest. DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments ("derivatives") are primarily used to hedge on-balance sheet items and, to a lesser extent, in connection with intermediated transactions for customers. The Company does not enter into these contracts for trading purposes. To control risks related to the hedges, ALCO monitors and reviews on a regular basis all elements of market risk affecting value for these instruments. ALCO also periodically reviews the assumptions related to the derivative positions used in the simulation and valuation models. The significant assumptions include rate sensitivities, prepayment risks, and lags in prime and deposit rates compared to changes in money market rates. On all other derivative transactions, which are primarily customer-driven, the Company limits its exposure to market risk by entering into generally matching or offsetting positions. The Company also manages its credit risk on all derivative contracts through counterparty and credit limit approvals and monitoring credit concentration risks. The derivatives the Company uses to achieve the hedging objectives discussed above are primarily interest rate swaps, caps, and floors. Forward contracts, totaling $225 million at September 30, 1994, were used to hedge the interest rate risk of the fixed rate mortgage loans originated and held for sale by the Company's mortgage subsidiary. The Company enters into foreign currency commitments primarily as an intermediary for customers. LIQUIDITY MANAGEMENT The objective of liquidity management is to ensure the continuous availability of funds to meet the demands of depositors, investors and borrowers. ALCO is responsible for managing these needs while achieving the Company's financial objectives. ALCO meets regularly to review funding capacity, current and forecasted loan demand and investment opportunities. With this information, ALCO supervises the Company's funding needs and the maintenance of contingent funding sources to achieve a balance sheet structure that provides sufficient liquidity. BALANCE SHEET ANALYSIS Average loans totaled $18.7 billion in the third quarter of 1994, up $.5 billion, or 2.7 percent, from the third quarter a year ago. The increase reflected growth in home equity, credit card and consumer lines of credit, as well as commercial loans, including loans acquired with Boulevard. These increases more than offset the $763 million decline over the same period in average residential mortgage loans held for sale. Average securities for the third quarter of 1994 decreased $144 million from the third quarter of 1993. The decrease resulted from a sale of U.S. Treasury Notes in the third quarter and the $79 million increase in the average unrealized loss on available-for-sale securities partially offset by the increase in average mortgage-backed securities. Average interest-bearing deposits were $12.9 billion in the third quarter of 1994, compared with $13.7 billion in the third quarter of 1993. The decrease reflects a $675 million decline in savings certificates. Average intermediate and long-term debt increased to $1.3 billion in the third quarter of 1994 from $.9 billion in the third quarter of 1993. In June 1994, the Company placed $100 million in subordinated debt in the form of 10-year noncallable notes. The notes were priced at 7.55 percent, or 64 basis points over the ten-year Treasury note. During 1993, the Company placed three $100 million subordinated debt issuances. CONSOLIDATED BALANCE SHEET
September 30 June 30 December 31 September 30 (In Millions, Except Shares) 1994 1994 1993 1993 ASSETS Cash and due from banks $ 1,870 $ 1,488 $ 1,682 $ 1,773 Federal funds sold 79 119 1,032 47 Securities purchased under agreements to resell 281 293 306 362 Trading account securities 108 58 55 140 Available-for-sale securities 3,377 3,863 3,319 72 Investment securities (market value: 9/30/93 - $3,870) -- -- -- 3,794 Loans 19,110 18,704 18,779 18,568 Less allowance for credit losses 437 440 423 427 Net loans 18,673 18,264 18,356 18,141 Bank premises and equipment 392 391 382 393 Interest receivable 138 140 129 143 Customers' liability on acceptances 116 144 186 167 Other assets 1,296 1,172 938 909 Total assets $ 26,330 $ 25,932 $ 26,385 $ 25,941 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 6,030 $ 5,829 $ 7,489 $ 6,882 Interest-bearing 12,763 13,088 13,542 13,584 Total deposits 18,793 18,917 21,031 20,466 Federal funds purchased 2,118 1,602 553 602 Securities sold under agreements to repurchase 695 780 369 373 Other short-term funds borrowed 399 379 412 332 Long-term debt 1,265 1,312 1,015 1,030 Acceptances outstanding 116 144 186 167 Other liabilities 625 553 574 695 Total liabilities 24,011 23,687 24,140 23,665 Shareholders' equity: Preferred stock 106 106 266 269 Common stock, par value $1.25 a share-authorized 200,000,000 shares; issued: 9/30/94 and 6/30/94 - 116,300,311 shares; 12/31/93 and 9/30/93 - 114,793,547 shares 145 145 144 144 Capital surplus 728 729 676 676 Retained earnings 1,392 1,340 1,328 1,236 Less cost of common stock in treasury: 9/30/94 - 1,496,525 shares; 6/30/94 - 2,144,277 shares; 12/31/93 - 5,391,883 shares; 9/30/93 - 1,559,784 shares (52) (75) (169) (49) Total shareholders' equity 2,319 2,245 2,245 2,276 Total liabilities and shareholders' equity $ 26,330 $ 25,932 $ 26,385 $ 25,941
CONSOLIDATED STATEMENT OF INCOME
Nine Months Ended Three Months Ended ---------------------------- --------------------------------------------------------------- September 30 September 30 September 30 June 30 March 31 December 31 September 30 (In Millions, Except Per-Share Data) 1994 1993 1994 1994 1994 1993 1993 ------------ ------------ ------------ ------ -------- ----------- ----------- INTEREST INCOME Loans $1,091.5 $1,046.0 $391.1 $362.2 $338.2 $352.6 $353.9 Securities: Taxable 151.7 171.3 51.5 53.8 46.4 46.9 52.9 Exempt from federal income taxes 9.1 9.9 3.0 3.1 3.0 4.7 3.2 Other interest income 18.0 23.6 6.3 6.8 4.9 6.8 4.9 Total interest income 1,270.3 1,250.8 451.9 425.9 392.5 411.0 414.9 INTEREST EXPENSE Deposits 268.3 329.7 93.9 89.3 85.1 94.0 102.1 Federal funds purchased and repurchase agreements 60.1 24.2 30.4 20.6 9.1 7.6 9.0 Other short-term funds borrowed 10.0 14.1 3.2 3.2 3.6 4.9 5.1 Long-term debt 48.1 39.5 18.2 16.5 13.4 14.9 13.4 Total interest expense 386.5 407.5 145.7 129.6 111.2 121.4 129.6 Net interest income 883.8 843.3 306.2 296.3 281.3 289.6 285.3 Provision for credit losses 70.0 98.2 23.0 23.0 24.0 27.0 27.0 Net interest income after provision for credit losses 813.8 745.1 283.2 273.3 257.3 262.6 258.3 NONINTEREST INCOME Trust fees 117.5 108.6 38.9 40.1 38.5 37.5 36.6 Credit card fees 128.7 99.6 49.2 43.5 36.0 37.5 36.6 Service charges on deposit accounts 87.7 86.9 29.2 29.1 29.4 28.4 28.6 Securities gains (losses) (2.8) 0.3 (2.8) -- -- -- -- Other 133.8 128.3 44.9 41.0 47.9 42.5 40.2 Total noninterest income 464.9 423.7 159.4 153.7 151.8 145.9 142.0 NONINTEREST EXPENSE Salaries 292.9 294.1 100.2 98.5 94.2 95.0 97.3 Employee benefits 70.6 66.7 23.6 23.3 23.7 19.6 20.0 Net occupancy 65.7 70.6 22.0 22.2 21.5 22.8 22.8 Furniture and equipment 58.1 53.5 18.8 20.2 19.1 19.2 17.8 FDIC insurance 34.8 34.9 11.0 12.3 11.5 11.5 11.4 Advertising 22.4 15.8 6.2 8.1 8.1 4.7 6.0 Amortization of goodwill and other intangible assets 28.4 22.9 10.5 9.9 8.0 7.7 7.7 Other personnel costs 24.1 19.0 7.6 8.8 7.7 8.5 7.2 Professional services 23.6 26.0 8.6 8.5 6.5 10.7 9.1 Data processing 10.3 22.3 3.4 3.4 3.5 4.7 5.8 Merger, integration and restructuring -- 72.2 -- -- -- -- -- Other 151.5 147.2 55.0 47.0 49.5 50.9 50.6 Total noninterest expense 782.4 845.2 266.9 262.2 253.3 255.3 255.7 Income before income taxes 496.3 323.6 175.7 164.8 155.8 153.2 144.6 Applicable income taxes 187.0 121.5 67.6 62.1 57.3 57.3 53.5 Net income $ 309.3 $ 202.1 $108.1 $102.7 $ 98.5 $ 95.9 $ 91.1 Net income applicable to common equity $ 300.0 $ 179.8 $106.2 $100.8 $ 93.0 $ 90.4 $ 83.7 EARNINGS PER COMMON SHARE Average common and common equivalent shares 114,347,741 113,677,049 116,082,079 116,209,225 110,771,619 111,278,886 113,721,471 Net income $ 2.62 $ 1.58 $ 0.91 $ 0.87 $ 0.84 $ 0.81 $ 0.74
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Unrealized Common Gains/(Losses) Shares Preferred Common Capital Retained on Securities, Treasury (In Millions, Except Shares) Outstanding* Stock Stock Surplus Earnings Net of Taxes Stock** Total BALANCE DECEMBER 31, 1992 113,450,425 $ 378.5 $ 141.8 $657.7 $1,140.3 $ -- $ -- $2,318.3 Net income 202.1 202.1 Dividends declared: Preferred (22.3) (22.3) Common (82.3) (82.3) Purchase of treasury stock (2,049,600) (59.7) (59.7) Issuance of common stock: Dividend reinvestment 176,129 0.3 5.0 5.3 Stock option and stock purchase plans 1,656,809 1.7 18.4 5.1 25.2 Redemption of preferred stock (109.6) (1.5) (111.1) BALANCE SEPTEMBER 30, 1993 113,233,763 $ 268.9 $ 143.5 $676.4 $1,236.3 -- $ (49.6) $2,275.5 BALANCE DECEMBER 31, 1993 109,401,664 $ 265.9 $ 143.5 $676.4 $1,294.6 $ 34.0 $(169.4) $2,245.0 Net income 309.3 309.3 Dividends declared: Preferred (9.3) (9.3) Common (98.2) (98.2) Purchase of treasury stock (3,553,482) (124.2) (124.2) Repurchase of stock warrants (2.3) (2.3) Acquisition of Boulevard Bancorp, Inc. for common stock, warrants, and stock options 6,227,649 1.9 54.9 149.4 206.2 Other business acquisitions 1,385,806 (13.9) 48.1 34.2 Issuance of common stock: Dividend reinvestment 138,194 0.2 4.7 4.9 Stock option and stock purchase plans 832,862 (0.9) (13.4) 26.3 12.0 Stock warrants exercised 371,093 (8.0) 13.1 5.1 Redemption of preferred stock (160.0) (7.0) (167.0) Change in unrealized gains/(losses) (96.7) (96.7) BALANCE SEPTEMBER 30, 1994 114,803,786 $ 105.9 $ 145.4 $728.3 $1,454.1 $ (62.7) $ (52.0) $2,319.0
* Defined as total common shares less common stock held in treasury. ** Ending treasury shares were 1,496,525 at September 30, 1994; 5,391,883 at December 31, 1993; 1,559,784 at September 30, 1993; and none at December 31, 1992. CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30 (In Millions) 1994 1993 OPERATING ACTIVITIES Net income $ 309.3 $ 202.1 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 70.0 98.2 Depreciation and amortization of bank premises and equipment 47.0 43.0 Provision for deferred income taxes 36.0 23.6 Amortization of goodwill and other intangible assets 28.4 22.9 Amortization and write-downs of loan servicing related intangibles 13.3 45.3 Write-downs of other real estate 1.2 15.6 Provision for merger, integration and restructuring -- 72.2 Changes in operating assets and liabilities, excluding the effects of purchase acquisitions: Increase in trading account securities (53.8) (46.6) Decrease (increase) in loans held for sale 822.1 (363.1) Decrease in securities held for sale -- 389.8 Decrease (increase) in accrued receivables 29.2 (16.0) Decrease in accrued liabilities (38.1) (169.7) Other - net (17.5) (6.2) Net cash provided by operating activities 1,247.1 311.1 INVESTING ACTIVITIES Net cash provided (used) by: Interest-bearing deposits with banks 9.1 322.4 Loans outstanding of subsidiaries (325.4) (1,237.6) Securities purchased under agreements to resell 24.5 (150.1) Securities transactions: Sales 749.6 46.5 Maturities 671.0 718.3 Purchases (787.3) (867.0) Proceeds from sales/repayments of other real estate 49.9 82.8 Proceeds from sales of bank premises and equipment 3.5 19.6 Purchases of bank premises and equipment (40.8) (100.1) Purchases of loans (29.9) (1.3) Cash and cash equivalents of acquired subsidiaries 74.5 -- Business acquisitions, net of cash received (57.4) (3.0) Sale of unconsolidated subsidiaries -- 12.8 Other - net (12.2) 0.1 Net cash provided (used) by investing activities 329.1 (1,156.6) FINANCING ACTIVITIES Net cash provided (used) by: Deposits (3,748.4) (633.4) Federal funds purchased and securities sold under agreements to repurchase 1,585.2 (146.4) Short-term borrowings (33.1) (22.4) Long-term debt transactions: Proceeds 359.7 345.0 Principal payments (125.1) (146.3) Redemption of preferred stock (167.0) (11.1) Proceeds from dividend reinvestment, stock option, and stock purchase plans 16.9 30.5 Purchase of treasury stock and stock warrants (126.5) (59.7) Stock warrants exercised 5.1 -- Cash dividends (107.5) (104.6) Net cash used by financing activities (2,340.7) (748.4) Change in cash and cash equivalents (764.5) (1,593.9) Cash and cash equivalents at beginning of period 2,713.5 3,414.2 Cash and cash equivalents at end of period $ 1,949.0 $ 1,820.3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, and cash flow activity required under generally accepted accounting principles. In the opinion of management of the Company, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of results have been made and the Company believes such presentation is adequate to make the information presented not misleading. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 1993. Certain amounts in prior periods have been reclassified to conform to the current presentation. Note B Accounting Changes ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES Effective December 31, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") 115, "Accounting for Certain Investments in Debt and Equity Securities," and reported its entire $3.3 billion of investment securities as available for sale. SFAS 115 requires that investments in debt securities and equity securities with readily determinable fair values be classified into one of three categories which then establishes the accounting requirements. The accounting for two of the categories, trading securities and held-to-maturity securities, is essentially the same as prior practice. The other category, available-for-sale securities, is accounted for at fair value with unrealized holding gains or losses reported in shareholders' equity. At September 30, 1994, the Company's available-for-sale securities portfolio was $3.4 billion, with an after-tax unrealized loss of $62.7 million recorded in shareholders' equity. DISCLOSURE ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS The Financial Accounting Standards Board recently issued SFAS 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." The Statement expands on SFAS 105, which deals with off balance sheet risk and SFAS 107, which requires disclosures about the fair value of financial instruments. It requires disclosure about the amounts, nature, and terms of derivatives that do not fall under SFAS 105. For derivatives held for trading purposes, SFAS 119 requires disclosure of the average fair value balance of positions during the reporting period and the net gains or losses occurring from trading activities, including identification of the derivatives from which the gains or losses arose and where those amounts are reported in the income statement. For other instruments, SFAS 119 requires disclosures about the objectives for holding the derivatives, how they are reported in the financial statements, and hedging of anticipated transactions. SFAS 119 is effective for fiscal years ending after December 15, 1994. The Company has expanded its disclosure of derivative financial instruments and does not anticipate significant changes to its disclosures as a result of adopting SFAS 119. ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN The Company has not yet adopted SFAS 114, "Accounting by Creditors for Impairment of a Loan," which requires creditors to establish a valuation allowance when it is probable that all the principal and interest due under the contractual terms of a loan will not be collected. The impairment is measured based on the present value of expected future cash flows based on the loans' effective interest rate, observable market price or fair value of a collateral dependent loan. This differs from the Company's current policy in that it requires establishing a valuation allowance for uncollectible interest in addition to the principal amounts of impaired loans. The adoption of this Statement is required for fiscal years beginning after December 15, 1994. The adoption of SFAS 114 is not expected to have a material effect on the Company. Note C Business Combinations and Asset Acquisitions On October 18, 1994, the Company announced that it had signed a definitive purchase agreement to acquire First Western Corporation ("FWC"), a $323 million bank holding company based in Sioux Falls, South Dakota. FWC owns Western Bank, which has nine branches in the Sioux Falls community. The transaction is subject to regulatory approvals and is expected to close in the first quarter of 1995. On July 21, 1994, the Company announced that it had signed a definitive purchase agreement to acquire Metropolitan Financial Corporation ("MFC"), a regional financial services holding company headquartered in Minneapolis, Minnesota. As of September 30, 1994, MFC had approximately $8.1 billion in assets, $5.5 billion in deposits, and operated more than 200 offices, principally in North Dakota, Minnesota, Nebraska, Iowa, Kansas, South Dakota, Wisconsin, and Wyoming. The Company will issue .6803 share of FBS common stock for each share of MFC's outstanding common stock at closing, subject to certain adjustments based on changes in FBS stock price. Based on current outstanding MFC shares, approximately 21.4 million shares would be issued. The transaction, which will be accounted for using the pooling-of-interests method, is subject to the approval of regulatory agencies and both companies' shareholders and is expected to close in the first quarter of 1995. In the third quarter of 1994, the Company completed three previously announced acquisitions. Effective September 30, 1994, the Company completed the acquisition of Green Mountain Bancorporation, the holding company for Green Mountain Bank, located in Lakewood, Colorado. On September 9, 1994, the Company completed the acquisition of United Bank of Bismarck, located in Bismarck, North Dakota. And on September 2, 1994, the Company acquired the domestic corporate trust business of J.P. Morgan & Co., Incorporated. This business unit provides trust services for approximately 650 clients with 3,800 bond issues in the areas of municipal, revenue, housing and corporate bond indenture trusteeships. These acquisitions were accounted for under the purchase method of accounting and are not material to the Company's financial position. On March 25, 1994, the Company completed the acquisition of Boulevard Bancorp, Inc. ("Boulevard"), a commercial bank holding company headquartered in Chicago, Illinois, and under the terms of the purchase agreement, 6.2 million shares of the Company's common stock were issued. In addition, Boulevard's outstanding stock options and warrants were converted into stock options and warrants for the Company's common stock, at the same conversion rate. In connection with the Boulevard acquisition, the Company announced it would buy back existing shares of its common stock approximately equal to the number of shares issued at the time of closing of the Boulevard acquisition. The repurchase of these shares began in October 1993 and was completed in June 1994. The acquisition of Boulevard was accounted for under the purchase method of accounting, and accordingly, the purchase price of $206.2 million was allocated to assets acquired and liabilities assumed based on their fair market values at the date of acquisition. The excess of the purchase price over the fair market value of net assets acquired was recorded as goodwill. Core deposit intangibles of $23 million are amortized over the estimated lives of the deposits of approximately 10 years, and goodwill of $144 million is amortized over 25 years. The total assets acquired and liabilities assumed at the time of acquisition were $1.6 billion and $1.5 billion, respectively. The results of operations of Boulevard are included in the Company's Consolidated Statement of Income since the date of acquisition. The following pro forma operating results of the Company assume that the Boulevard acquisition had occurred at the beginning of each period presented. 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.
Nine Months Ended September 30, (In Millions, Except Per-Share Amounts) 1994 1993 Net interest income $895.8 $883.6 Net income 293.2 204.3 Net income per share 2.44 1.51
Three Months Ended September 30, (In Millions, Except Per-Share Amounts) 1994 1993 Net interest income $306.2 $298.8 Net income 108.1 91.5 Net income per share .91 .70
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. Note D Securities The detail of the amortized cost and fair value of securities consisted of the following:
September 30, 1994 June 30, 1994 December 31, 1993 September 30, 1993 Amortized Fair Amortized Fair Amortized Fair Amortized Fair (In Millions) Cost Value Cost Value Cost Value Cost Value U.S. Treasury $1,266 $1,211 $1,626 $1,575 $1,527 $1,541 $1,868 $1,899 Mortgage-backed securities 1,545 1,483 1,603 1,556 1,286 1,300 1,179 1,202 Other U.S. agencies 213 207 217 212 51 52 228 231 State and political subdivisions 181 187 183 189 184 196 176 191 Other 273 289 318 331 216 230 343 347 Total $3,478 $3,377 $3,947 $3,863 $3,264 $3,319 $3,794 $3,870
As described in Note B, the Company adopted SFAS 115 at December 31, 1993, and at that date, all of the Company's investment securities were classified as available for sale. At September 30, 1993, investment securities with amortized cost totaling $3.8 billion were held as long-term investments, and securities held for sale totaling $72 million were carried at lower of cost or market. Note E Loans The composition of the loan portfolio was as follows:
September 30 June 30 December 31 September 30 (In Millions) 1994 1994 1993 1993 COMMERCIAL: Commercial * $ 7,236 $ 7,039 $ 6,176 $ 6,075 Financial institutions 911 876 2,004 1,982 Real estate: Commercial mortgage 1,764 1,696 1,495 1,534 Construction 288 256 231 197 HLTs 273 260 183 134 Total commercial loans 10,472 10,127 10,089 9,922 CONSUMER: Residential mortgage 2,337 2,375 2,422 2,516 Residential mortgage held for sale 235 284 1,088 1,106 Home equity and second mortgage 2,090 2,028 1,755 1,631 Credit card 2,226 2,142 1,757 1,738 Revolving credit 671 661 690 664 Automobile 403 413 342 352 Installment 381 390 376 414 Student loans held for sale 295 284 260 225 Total consumer loans 8,638 8,577 8,690 8,646 Total loans $19,110 $18,704 $18,779 $18,568
* Tax-exempt industrial development loans dependent upon real estate interests included in commercial loans were aproximately $193 million, $213 million, $218 million and $242 million at September 30, 1994, June 30, 1994, December 31, 1993, and September 30, 1993, respectively. Note F Long-Term Debt Long-term debt (debt with original maturities of more than one year) consisted of the following:
September 30 June 30 December 31 September 30 (In Millions) 1994 1994 1993 1993 Fixed-rate 8.00% subordinated debentures - due October 31, 1994 $ 10 $ 11 $ -- $ -- Floating-rate subordinated capital notes - due November 29, 1996 150 150 150 150 Floating-rate subordinated capital notes - due May 30, 1997 -- -- -- 93 Fixed-rate 6.63% subordinated notes - due May 15, 2003 100 100 100 100 Fixed-rate 6.00% subordinated notes - due October 15, 2003 100 100 100 100 Fixed-rate 7.55% subordinated notes - due June 15, 2004 100 100 -- -- Fixed-rate 8.00% subordinated notes - due July 2, 2004 125 125 125 125 Step-up subordinated notes - due August 15, 2005 100 100 100 100 Floating-rate subordinated notes - due November 30, 2010 107 107 107 107 Medium-term notes (4.89% to 9.91%) - maturities to April 1997 389 433 248 167 Other 84 86 85 88 Total $1,265 $1,312 $1,015 $1,030
Note G Shareholders' Equity On October 21, 1994, the Company announced plans to repurchase up to 2 million shares of common stock to be utilized in connection with previously announced acquisitions and other corporate purposes. The Company completed its previously announced common stock repurchase programs. On January 19, 1994, the Board of Directors authorized the redemption of the 1989A and 1989B series of preferred stock. This redemption of $159.3 million was completed on April 1, 1994. During 1993, the Company redeemed the $100 million Series 1983A Adjustable Rate Cumulative Preferred Stock. Note H Income Taxes The components of income tax expense were:
Three Months Ended September 30 June 30 March 31 December 31 September 30 (In Millions) 1994 1994 1994 1993 1993 FEDERAL: Current tax $44.1 $43.2 $38.0 $12.6 $48.1 Deferred tax provision (credit) 13.9 10.8 10.8 35.1 (4.8) Federal income tax 58.0 54.0 48.8 47.7 43.3 STATE: Current tax 9.4 8.0 8.3 4.3 10.3 Deferred tax provision (credit) 0.2 0.1 0.2 5.3 (0.1) State income tax 9.6 8.1 8.5 9.6 10.2 Total income tax provision $67.6 $62.1 $57.3 $57.3 $53.5
The reconciliation between income tax expense and the amount computed by applying the statutory federal income tax rate was as follows:
Three Months Ended September 30 June 30 March 31 December 31 September 30 (In Millions) 1994 1994 1994 1993 1993 Tax at statutory rate (35%) $61.5 $57.7 $54.5 $53.6 $52.4 State income tax, net of federal tax benefit 6.2 5.3 5.5 6.3 6.5 Tax effect of: Tax-exempt interest: Loans (1.5) (1.5) (1.4) (1.6) (1.9) Securities (1.1) (1.0) (1.0) (0.9) (1.1) Amortization of goodwill 2.3 2.3 1.5 1.6 1.7 Non-deductible interest expense 0.1 0.2 0.1 0.4 0.5 Change in tax rate on deferred assets -- -- -- -- (6.6) Other items 0.1 (0.9) (1.9) (2.1) 2.0 Applicable income taxes $67.6 $62.1 $57.3 $57.3 $53.5
At September 30, 1994, the Company's net deferred tax asset was $222.3 million, compared with $229.9 million at June 30, 1994, $160.0 million at December 31, 1993, and $200.4 million at September 30, 1993. Note I Commitments, Contingent Liabilities and Off-Balance Sheet Financial Instruments The Company uses various financial instruments that have off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage its interest rate risk. The contract or notional amounts of these financial instruments were as follows:
September 30 June 30 December 31 September 30 (In Millions) 1994 1994 1993 1993 Commitments to extend credit (net): Commercial $6,634 $6,768 $5,714 $5,983 Corporate and purchasing cards 2,894 2,082 1,744 1,655 Consumer credit card 7,570 7,487 5,208 3,493 Other consumer 2,359 2,419 2,391 2,698 Standby letters of credit (net of participations) 1,307 1,252 1,208 1,259 Interest rate swap contracts: Hedge 2,049 2,982 2,811 2,869 Intermediated 189 189 199 248 Interest rate options contracts: Hedge interest rate floors purchased 950 950 950 750 Intermediated interest rate caps and floors purchased 121 220 198 176 Intermediated interest rate caps and floors written 121 220 198 176 Liquidity support guarantees and forward contracts 367 400 1,509 2,134 Foreign currency commitments: Commitments to purchase 1,450 1,429 1,101 1,243 Commitments to sell 1,445 1,432 1,100 1,237 Mortgages sold with recourse 157 142 198 256 Commitment to sell loans 808 878 132 258
The Company enters into interest rate swap contracts to hedge its balance sheet for risk caused by fluctuations in interest rates and as an intermediary for customers. Activity for the nine months ended September 30, 1994, with respect to interest rate swaps which the Company used to hedge medium-term notes, subordinated debt, deposit notes, long-term certificates of deposit, deposit accounts, and savings certificates was as follows:
(In Millions) Notional amount outstanding at December 31, 1993 $2,811 Additions 600 Maturities 574 Terminations 788 Notional amount outstanding at September 30, 1994 $2,049 Notional amount outstanding at September 30, 1993 $2,869
For interest rate swaps designated as hedges, the weighted average interest rate to be paid was 4.93 percent and 3.25 percent at September 30, 1994, and 1993, respectively. At these same dates, the weighted average interest rate to be received was 6.53 percent and 7.01 percent. FBS was a receiver of fixed and payer of floating on all hedges as of September 30, 1994. The amortization of net gains increased net interest income in the third quarter of 1994 by $1.6 million and decreased net interest income by $.5 million the third quarter of 1993. Net unamortized deferred gains were $12.1 million at September 30, 1994. The Company will amortize these net gains through the year 2000. At September 30, 1994, interest rate floors totaling $950 million with an average remaining maturity of 3.2 years hedged floating rate commercial loans. At September 30, 1993, interest rate floors totaling $750 million with an average maturity of 4.0 years hedged floating rate commercial loans. For interest rate floors designated as hedges, the strike rate ranged from 3.25 to 4.0 at September 30, 1994 and 1993. Note J Supplemental Information to the Consolidated Financial Statements CONSOLIDATED BALANCE SHEET Time certificates of deposit in denominations of $100,000 or more totaled $883 million, $981 million, $1,061 million, and $1,147 million at September 30, 1994, June 30, 1994, December 31, 1993 and September 30, 1993, respectively. CONSOLIDATED STATEMENT OF CASH FLOWS Listed below are supplemental disclosures to the Consolidated Statement of Cash Flows.
Nine Months Ended September 30 (In Millions) 1994 1993 Income taxes paid $ 129.8 $ 83.2 Interest paid 381.1 460.4 Net noncash transfers to foreclosed property 10.7 21.3 Noncash merger-related transfers to securities held for sale -- 181.6 Noncash transfer to other liabilities resulting from notification to shareholders of preferred stock redemption -- 100.0 Change in unrealized loss on available-for-sale securities, net of taxes of $59.2 (96.7) -- Cash acquisitions of businesses: Fair value of noncash assets acquired 276.9 40.8 Liabilities assumed (219.5) (37.8) Net $ 57.4 $ 3.0 Stock acquisitions of businesses: Fair value of noncash assets acquired $ 1,805.8 -- Net cash acquired 74.5 -- Liabilities assumed (1,648.0) -- Net value of common stock issued $ 232.3 --
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
1994 1993 ---------------------------------- ------------------------------- % Change Interest Interest Average Yields Yields Balance For the Nine Months Ended September 30 and and Increase (In Millions) Balance Interest Rates Balance Interest Rates (Decrease) -------------------------------------------------------------------------------------------------------------------------------- ASSETS Securities: U.S. Treasury $ 1,667 $ 65.2 5.23% $ 1,817 $ 78.2 5.75% (8.3)% Mortgage-backed securities 1,537 67.5 5.87 1,530 65.7 5.74 0.5 State & political subdivisions 183 14.9 10.89 193 15.6 10.81 (5.2) U.S. agencies and other 460 17.7 5.14 526 22.8 5.80 (12.5) Total securities 3,847 165.3 5.74 4,066 182.3 5.99 (5.4) Unrealized loss on available-for-sale securities (32) -- Net securities 3.815 4,066 Trading account securities 66 2.2 4.46 115 3.5 4.07 (42.6) Federal funds sold and resale agreements 420 11.9 3.79 769 17.0 2.96 (45.4) Loans: Commercial: Commercial 6,909 378.7 7.33 6,027 325.3 7.22 14.6 Financial institutions 1,251 23.1 2.47 1,334 27.8 2.79 (6.2) Real estate: Commercial mortgage 1,608 100.9 8.39 1,514 94.6 8.35 6.2 Construction 250 14.5 7.75 208 11.4 7.33 20.2 Total commercial 10,018 517.2 6.90 9,083 459.1 6.76 10.3 Consumer: Residential mortgage 2,361 129.9 7.36 2,544 156.1 8.20 (7.2) Residential mortgage held for sale 404 20.7 6.85 848 45.8 7.22 (52.4) Credit card 1,983 179.7 12.12 1,740 176.8 13.59 14.0 Other 3,632 250.9 9.24 3,182 217.2 9.13 14.1 Total consumer 8,380 581.2 9.27 8,314 595.9 9.58 0.8 Total loans 18,398 1,098.4 7.98 17,397 1,055.0 8.11 5.8 Allowance for credit losses 446 450 (0.9) Net loans 17,952 16,947 5.9 Other earning assets 121 4.0 4.42 154 7.0 6.08 (21.4) Total earning assets* 22,852 1,281.8 7.50 22,501 1,264.8 7.52 1.6 Cash and due from banks 1,648 1,663 (0.9) Other assets 1,664 1,628 2.2 Total assets $25,686 $25,342 1.4 LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits $ 6,149 $ 6,050 1.6% Interest-bearing deposits: Interest checking 2,606 27.2 1.40 2,433 29.6 1.63 7.1 Money market accounts 3,917 76.6 2.61 3,914 78.1 2.67 0.1 Other savings accounts 1,494 22.0 1.97 1,430 23.4 2.19 4.5 Savings certificates 4,190 98.7 3.15 5,115 145.4 3.80 (18.1) Certificates over $100,000 974 43.8 6.01 1,209 53.1 5.87 (19.4) Total interest-bearing deposits 13,181 268.3 2.72 14,101 329.6 3.13 (6.5) Short-term borrowings 2,175 70.1 4.31 1,270 38.4 4.04 71.3 Long-term debt 1,187 48.1 5.42 860 39.5 6.14 38.0 Total interest-bearing liabilities 16,543 386.5 3.12 16,231 407.5 3.36 1.9 Other liabilities 749 729 2.7 Preferred equity 140 375 (62.7) Common equity 2,105 1,957 7.6 Total liabilities and shareholders' equity $25,686 $25,342 1.4 Net interest income $ 895.3 $ 857.3 Gross interest margin 4.38% 4.17% Gross interest margin without taxable- equivalent increments 4.31% 4.08% Net interest margin 5.24% 5.09% Net interest margin without taxable- equivalent increments 5.17% 5.01%
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 loss on available-for-sale securities. CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
1994 1993 ---------------------------------- ------------------------------- % Change Interest Interest Average Yields Yields Balance For the Three Months Ended September 30 and and Increase (In Millions) Balance Interest Rates Balance Interest Rates (Decrease) -------------------------------------------------------------------------------------------------------------------------------- ASSETS Securities: U.S. Treasury $ 1,576 $ 20.7 5.21% $ 1,786 $ 25.1 5.58% (11.8)% Mortgage-backed securities 1,575 23.9 6.02 1,459 16.5 4.49 8.0 State & political subdivisions 181 4.8 10.52 197 5.2 10.47 (8.1) U.S. agencies and other 495 6.5 5.21 450 8.9 7.85 10.0 Total securities 3,827 55.9 5.80 3,892 55.7 5.68 (1.7) Unrealized loss on available-for-sale securities (79) -- Net securities 3,748 3,892 Trading account securities 72 0.9 4.96 139 1.3 3.71 (48.2) Federal funds sold and resale agreements 348 4.0 4.56 402 3.1 3.06 (13.4) Loans: Commercial: Commercial 7,202 139.6 7.69 6,039 109.7 7.21 19.3 Financial institutions 919 5.8 2.50 1,893 13.3 2.79 (51.5) Real estate: Commercial mortgage 1,708 36.4 8.46 1,495 31.6 8.39 14.2 Construction 271 5.6 8.20 199 3.4 6.78 36.2 Total commercial 10,100 187.4 7.36 9,626 158.0 6.51 4.9 Consumer: Residential mortgage 2,346 43.7 7.39 2,515 48.6 7.67 (6.7) Residential mortgage held for sale 260 4.8 7.32 1,023 18.1 7.02 (74.6) Credit card 2,185 65.5 11.89 1,763 57.8 13.01 23.9 Other 3,793 92.1 9.63 3,261 74.3 9.04 16.3 Total consumer 8,584 206.1 9.53 8,562 198.8 9.21 0.3 Total loans 18,684 393.5 8.36 18,188 356.8 7.78 2.7 Allowance for credit losses 447 442 1.1 Net loans 18,237 17,746 2.8 Other earning assets 131 1.5 4.54 89 2.3 10.25 47.2 Total earning assets* 23,062 455.8 7.84 22,710 419.2 7.32 1.5 Cash and due from banks 1,619 1,710 (5.3) Other assets 1,705 1,576 8.2 Total assets $25,860 $25,554 1.2 LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits $ 5,866 $ 6,585 (10.9)% Interest-bearing deposits: Interest checking 2,565 9.1 1.41 2,438 9.7 1.58 5.2 Money market accounts 3,798 26.9 2.81 3,949 25.6 2.57 (3.8) Other savings accounts 1,537 7.9 2.04 1,365 7.2 2.09 12.6 Savings certificates 4,069 35.8 3.49 4,744 42.1 3.52 (14.2) Certificates over $100,000 906 14.2 6.22 1,167 17.5 5.95 (22.4) Total interest-bearing deposits 12,875 93.9 2.89 13,663 102.1 2.96 (5.8) Short-term borrowings 2,853 33.6 4.67 1,367 14.2 4.12 108.7 Long-term debt 1,279 18.2 5.65 916 13.3 5.76 39.6 Total interest-bearing liabilities 17,007 145.7 3.40 15,946 129.6 3.22 6.7 Other liabilities 713 682 4.5 Preferred equity 106 367 (71.1) Common equity 2,168 1,974 9.8 Total liabilities and shareholders' equity $25,860 $25,554 1.2 Net interest income $310.1 $289.6 Gross interest margin 4.44% 4.10% Gross interest margin without taxable- equivalent increments 4.37% 4.03% Net interest margin 5.33% 5.06% Net interest margin without taxable- equivalent increments 5.27% 4.98%
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 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 September 30, 1994, the Company filed the following reports on Form 8-K: Form 8-K filed July 6, 1994, relating to the company's announcement that it had signed a letter of intent to acquire Metropolitan Financial Corporation ("MFC"). Form 8-K filed August 5, 1994, relating to the Company's announcement that it had signed a purchase agreement to acquire MFC. Form 8-K/A filed on September 9, 1994, amending the Form 8-K filed on August 5, 1994, to include pro forma financial information reflecting the acquisition of MFC. *Copies of Exhibit 27 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. /s/ DAVID J. PARRIN By: David J. Parrin Senior Vice President & Controller (Chief Accounting Officer and Duly Authorized Officer) November 9, 1994 EX-11 2 EXHIBIT 11 COMPUTATION OF PRIMARY AND FULLY DILUTED NET INCOME PER COMMON SHARE
NINE MONTHS ENDED SEPTEMBER 30 THREE MONTHS ENDED SEPTEMBER 30 ------------------------------- ----------------------------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 1994 1993 1994 1993 PRIMARY: Average shares outstanding 112,730,565 112,531,682 114,207,432 112,903,824 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 1,617,176 1,145,367 1,874,647 817,647 114,347,741 113,677,049 116,082,079 113,721,471 Net income $309.3 $202.1 $108.1 $91.1 Preferred dividends (9.3) (22.3) (1.9) (7.4) Net income applicable to common equity $300.0 $179.8 $106.2 $83.7 Net income per common share $ 2.62 $ 1.58 $ 0.91 $0.74 FULLY DILUTED:* Average shares outstanding 112,730,565 112,531,682 114,207,432 112,903,824 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 1,910,748 1,342,132 1,876,613 963,137 Assumed conversion of Series 1991A Preferred Stock 3,655,684 3,951,624 3,655,684 3,951,624 118,296,997 117,825,438 119,739,729 117,818,585 Net income $309.3 $202.1 $108.1 $91.1 Preferred dividends, excluding Series 1991A Preferred Stock (3.6) (16.2) -- (5.3) Net income applicable to common equity $305.7 $185.9 $108.1 $85.8 Net income per common share $ 2.58 $ 1.58 $ 0.90 $0.73
* 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
Nine Months Three Months Ended Ended September 30 September 30 (Dollars in Thousands) 1994 1994 EARNINGS 1. Net income $309,300 $108,100 2. Applicable income taxes 187,000 67,600 3. Net income before taxes (1 + 2) $496,300 $175,700 4. Fixed charges: a. Interest expense excluding interest on deposits $118,200 $ 51,800 Portion of rents representative of interest and amortization of debt b. expense 19,003 5,585 c. Fixed charges excluding interest on deposits (4a + 4b) 137,203 57,385 d. Interest on deposits 268,300 93,900 e. Fixed charges including interest on deposits (4c + 4d) $405,503 $151,285 5. Amortization of interest capitalized $ 3,551 $ 1,168 6. Earnings excluding interest on deposits (3 + 4c + 5) 637,054 234,253 7. Earnings including interest on deposits (3 + 4e + 5) 905,354 328,153 8. Fixed charges excluding interest on deposits (4c) 137,203 57,385 9. Fixed charges including interest on deposits (4e) 405,503 151,285 RATIO OF EARNINGS TO FIXED CHARGES 10. Excluding interest on deposits (line 6/line 8) 4.64 4.08 11. Including interest on deposits (line 7/line 9) 2.23 2.17
First Bank System P.O. Box 522 Minneapolis, Minnesota 55480 First Class U.S. Postage PAID Permit No. 2440 Minneapolis, MN SHAREHOLDER INQUIRIES STOCK AND DIVIDEND INFORMATION FOR MATTERS RELATED SPECIFICALLY TO FIRST BANK SYSTEM STOCK RECORDS OR DIVIDEND PAYMENTS, CONTACT THE OFFICE OF THE CORPORATE SECRETARY, 612-973-0334. DIVIDEND REINVESTMENT FOR INFORMATION REGARDING FIRST BANK SYSTEM'S DIVIDEND REINVESTMENT PLAN, CONTACT FIRST CHICAGO TRUST COMPANY OF NEW YORK, P.O. BOX 13531, NEWARK, NEW JERSEY 07188-0001, 800-446-2617. FINANCIAL INFORMATION FOR FURTHER INFORMATION CONTACT JOHN DANIELSON, SENIOR VICE PRESIDENT, 612-973-2261, OR KARIN GLASGOW, ASSISTANT VICE PRESIDENT, 612-973-2264. EX-27 4
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST BANK SYSTEM, INC. SEPTEMBER 30, 1994, 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1994 JAN-01-1994 SEP-30-1994 1,870,000 0 360,000 108,000 3,377,000 0 0 19,110,000 437,300 26,330,000 18,793,000 3,212,000 625,000 1,265,000 145,000 0 106,000 2,068,000 26,330,000 1,091,500 160,800 18,000 1,270,300 268,300 386,500 883,800 70,000 (2,800) 782,400 496,300 309,300 0 0 309,300 2.62 2.58 5.24 123,300 23,800 0 0 423,200 142,400 64,300 437,300 0 0 0
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