-----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, Pvke/GHmZdAIQ308ciWMk4ogGA7ZiWF4C9Jr3KjjhuAAe8dLqbmcvTf+5stm4SAI VPdxuIw+xIjUcTFuEhcIqQ== 0000897101-95-000408.txt : 19951119 0000897101-95-000408.hdr.sgml : 19951119 ACCESSION NUMBER: 0000897101-95-000408 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951113 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: 95589303 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 [LOGO] FIRST BANK SYSTEM FORM 10-Q September 30, 1995 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, 1995 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, 1995 Common Stock, $1.25 Par Value 129,795,579 shares FINANCIAL SUMMARY
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1995 1994 1995 1994 Income from continuing operations $145.7 $119.5 $417.4 $346.9 Discontinued operations -- (7.0) -- (6.6) Net income $145.7 $112.5 $417.4 $340.3 PER COMMON SHARE Income from continuing operations $1.08 $.85 $3.05 $2.47 Discontinued operations -- (.05) -- (.04) Net income $1.08 $.80 $3.05 $2.43 Net income on a cash basis* $1.18 $.90 $3.36 $2.69 Dividends paid .3625 .29 1.0875 .87 Common shareholders' equity 20.33 19.77 RETURN ON AVERAGE ASSETS From continuing operations 1.76% 1.40% 1.70 % 1.39% Discontinued operations -- (.08) -- (.03) Return on average assets 1.76% 1.32% 1.70% 1.36% RETURN ON AVERAGE COMMON EQUITY From continuing operations 21.2% 17.6 % 20.9% 17.3% Discontinued operations -- (1.1) -- (.3) Return on average common equity 21.2% 16.5% 20.9% 17.0% Net interest margin (taxable-equivalent basis) 4.85% 4.74% 4.94 % 4.72% Efficiency ratio 53.9 57.9 54.8 58.4
SEPTEMBER 30 DECEMBER 31 1995 1994 PERIOD END Loans $25,877 $24,556 Allowance for credit losses 469 475 Assets 32,958 34,128 Total shareholders' equity 2,736 2,612 Common equity to total assets 8.0% 7.3% Tier 1 capital ratio 7.4 7.3 * Calculated by adding amortization of goodwill and other intangible assets to net income. 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) 13 Selected Statistical Information: Consolidated Daily Average Balance Sheet and Related Yields and Rates 23 PART II -- OTHER INFORMATION Exhibits and Reports on Form 8-K (Item 6) 25 Signature 25 Exhibit 11 -- Computation of Primary and Fully Diluted Net Income Per Common Share 26 Exhibit 12 -- Computation of Ratio of Earnings to Fixed Charges 27 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.'s (the "Company" or "FBS") third quarter 1995 net income was $145.7 million, an increase of $33.2 million, or 30 percent, from the third quarter of 1994. On a per share basis, earnings increased 35 percent to $1.08, compared with $.80 for the year-earlier quarter. The Company's earnings for the first nine months of 1995 were $417.4 million, or $3.05 per share, compared with $340.3 million, or $2.43 per share, in the first nine months of 1994. Return on average assets and return on average common equity in the third quarter of 1995 were 1.76 percent and 21.2 percent, respectively, compared with 1.32 percent and 16.5 percent in the third quarter of 1994. The net interest margin on a taxable-equivalent basis strengthened 11 basis points from the third quarter of 1994, to 4.85 percent. The efficiency ratio, the ratio of expenses to revenues, continued to improve, to 53.9 percent from 57.9 percent for the third quarter of 1994. TABLE 1. Summary of Consolidated Income
THREE MONTHS ENDED (TAXABLE-EQUIVALENT BASIS; SEPTEMBER 30 SEPTEMBER 30 DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 1995 1994 Interest income $640.9 $596.3 Interest expense 280.4 229.3 Net interest income 360.5 367.0 Provision for credit losses 31.0 27.0 Net interest income after provision for credit losses 329.5 340.0 Noninterest income 216.5 170.3 Noninterest expense 311.1 312.6 Income from continuing operations before income taxes 234.9 197.7 Taxable-equivalent adjustment 3.4 3.9 Income taxes 85.8 74.3 Income from continuing operations 145.7 119.5 Loss from discontinued operations -- (7.0) Net income $145.7 $112.5 Return on average assets 1.76% 1.32% Return on average common equity 21.2 16.5 Net interest margin 4.85 4.74 Efficiency ratio 53.9 57.9 Per share: Income from continuing operations $1.08 $.85 Loss from discontinued operations -- (.05) Net income $1.08 $.80 Common dividends paid $.3625 $.29
Stronger third quarter results reflected noninterest income growth, ongoing expense control, and effective capital management. Third quarter noninterest income was $216.5 million, an increase of $46.2 million, or 27 percent, from the same quarter of 1994. The increase was primarily due to a $13.5 million, or 27 percent, increase in credit card fees, a $3.9 million, or 10 percent, increase in trust fees and a $31 million nonrecurring gain on the sale of 63 branches. Third quarter noninterest expense totaled $311.1 million, a decrease of $1.5 million, or 1 percent, from the third quarter of 1994. In the third quarter, FBS expensed unamortized software costs of approximately $23 million, primarily related to a change in the Company's policy to expense software costs, and also recorded a charge of approximately $8 million to write off miscellaneous other assets. In addition, FBS received an FDIC premium rebate of approximately $10 million. Net interest income on a taxable-equivalent basis was $360.5 million, a decrease of $6.5 million, or 2 percent, compared with the third quarter of 1994. The decrease was primarily attributable to a $1.2 billion, or 4 percent, decrease in total earning assets, an increase in funding costs and the repurchase of common stock. The provision for credit losses for the quarter was up $4.0 million, or 15 percent, to $31.0 million from third quarter 1994. A decrease of 4.3 million average common shares outstanding also contributed to the improvement in earnings per share in the current quarter, compared with the third quarter of 1994, reflecting progress made under the Company's 1995 share repurchase programs. Nonperforming assets declined $65.4 million, or 28 percent, from December 31, 1994, to $166.9 million at September 30, 1995. The ratio of the allowance for credit losses to nonperforming loans at quarter-end was 400 percent compared with 283 percent at the end of 1994. ACQUISITIONS AND DIVESTITURES On November 6, 1995, FBS and First Interstate Bancorp ("FI") announced that they had entered into a definitive agreement whereby FBS will exchange 2.6 shares of its common stock for each share of FI common stock (and cash in lieu of fractional shares). The combined institution, which will use the First Interstate Bancorp name, will have approximately $90 billion in assets and $7 billion in shareholders' equity. The transaction, which will qualify as a tax-free reorganization and be accounted for as a pooling of interests, is subject to shareholder and regulatory approvals and is expected to close in the second quarter of 1996. On August 7, 1995, FBS announced that it had signed a purchase agreement to acquire FirsTier Financial, Inc. ("FirsTier"), a regional financial services holding company based in Omaha, Nebraska. As of September 30, 1995, FirsTier had approximately $3.6 billion in assets, $2.8 billion in deposits and operated 63 offices in Nebraska and Iowa. Subject to FirsTier shareholder and regulatory approvals, the Company will exchange .8829 shares of FBS common stock for each common share of FirsTier, resulting in a per share price of $38 at the date of the announcement of the transaction. The aggregate purchase price for the transaction as of the announcement date was approximately $714 million. The transaction, which will be accounted for as a purchase, is expected to close in the first quarter of 1996. On August 22, 1995, FBS announced that it had signed a definitive agreement to acquire the corporate trust business of BankAmerica Corporation. Upon completion of this acquisition, the Company will be the leading provider of domestic corporate trust services as measured by revenues, which will approximate $145 million. The Company completed the acquisition of two commercial bank holding companies -- Midwestern Services, Inc. and Southwest Holdings, Inc. -- both of Omaha, Nebraska on November 1, 1995. Together, the two companies have total assets of $424 million, total deposits of $380 million and 12 branches in Omaha. On September 7, 1995, the Company announced that it will seek a buyer for its mortgage banking company and instead plans to deliver mortgage loan products through bank branches and telemarketing. FBS also announced on September 20, 1995, an agreement to sell Edina Reality, Inc., its real estate brokerage subsidiary, to a local investor group. This subsidiary is reported as discontinued operations. During the third quarter of 1995, the Company completed the sale of 63 branch offices resulting in the divestiture of $848 million of deposits and the recognition of a nonrecurring $31 million gain. LINE OF BUSINESS FINANCIAL REVIEW 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 1995 certain changes in organization and methodology were made and 1994 results are presented on a consistent basis. RETAIL AND COMMUNITY BANKING -- Retail and Community Banking, which includes consumer, small-business and middle-market banking services and residential mortgage lending, maintained strong revenue while reducing costs. Net income increased 22 percent in the third quarter of 1995 and 29 percent in the first nine months of 1995 compared with the same periods in 1994. Third quarter return on assets increased to 1.47 percent from 1.11 percent, and return on equity increased to 19.4 percent from 15.4 percent over the same period. Year-to-date profitability ratios showed similar improvement. Net interest income remained strong due to aggressive small- and middle-market business lending and strong consumer loan growth. Lower residential mortgage loans and a shift in balances from lower rate deposits to higher cost borrowings offset these gains. Noninterest income was lower than in the same period of last year primarily as a result of mortgage banking activities. Noninterest expense for the first nine months of 1995 decreased despite the impact of full period expenses of the purchase acquisitions of Boulevard Bancorp, Inc. and Rocky Mountain Financial Corporation which were acquired on March 25, 1994. The improvement in noninterest expense reflects the benefits of continued streamlining of branch operations, as well as the integration of recent business combinations. The efficiency ratio improved to 54.3 percent in the third quarter and 57.7 percent in the first nine months of 1995 from 64.4 percent and 65.3 percent in the same periods in 1994. PAYMENT SYSTEMS -- Payment Systems includes consumer credit card, corporate and purchasing card services, card-accessed secured and unsecured lines of credit, automated teller machine ("ATM") processing, and merchant processing. Net earnings were $23.7 million in the third quarter of 1995, a 22 percent increase from the third quarter of 1994. Return on assets was 2.43 percent compared with 2.35 percent in the third quarter of 1994. Return on equity was 26.6 percent compared with 23.3 percent for the same quarter in the previous year. Fee-based noninterest income for Payment Systems increased 38 percent in the third quarter and 36 percent in the first nine months of 1995 compared with the same periods in 1994. The increase was due to growth in the sales volume of the Corporate Card, the Purchasing Card, the FBS WorldPerks Visa Card, and the expanded ATM network. Net interest income decreased due to the change in the loan mix. Average commercial loans, which are primarily noninterest earning Corporate Card balances, comprised 27 percent and 25 percent of the portfolio during the third quarter and first nine months of 1995, respectively, compared with 19.0 percent in both the third quarter and first nine months of 1994. Noninterest expense increased due to higher variable transaction costs resulting from increased sales volume. Payment Systems continues to be cost effective as measured by its efficiency ratios of 48.0 percent in the third quarter of 1995 and 49.6 percent in the first nine months of 1995. COMMERCIAL BANKING -- Commercial Banking provides lending, treasury management, and other financial services to middle market, large corporate and mortgage banking companies. Third quarter earnings increased 4 percent to $26.7 million from the third quarter of 1994. Year-to-date earnings improved 7 percent to $83.8 million compared with the same period of 1994. Third quarter return on assets was 1.78 percent compared with 1.76 percent in 1994, and return on equity was 25.5 percent compared with 24.7 percent in 1994. Year-to-date return on assets was 1.86 compared with 1.74 percent in 1994, and return on equity was 26.5 percent compared with 24.5 percent in 1994. Continuing strong performance in net interest income as well as ongoing credit quality and expense control contributed to the strong operating results. Commercial Banking's average loans, excluding loans to mortgage banking companies, increased $379 million, or 10 percent, from the third quarter of 1994. The decline in deposits relates to less activity in the mortgage banking sector. The efficiency ratio remained low at 32.2 percent in the third quarter of 1995 and 32.6 percent in the first nine months of 1995. TABLE 2. Line of Business Financial Performance
THREE MONTHS ENDED SEPTEMBER 30, TRUST AND RETAIL AND COMMUNITY COMMERCIAL INVESTMENT CONSOLIDATED BANKING PAYMENT SYSTEMS BANKING GROUP COMPANY (DOLLARS IN MILLIONS) 1995 1994 1995 1994 1995 1994 1995 1994 1995 1994 CONDENSED INCOME STATEMENT: Net interest income (taxable-equivalent basis) $262.9 $264.2 $37.4 $43.6 $53.8 $53.0 $6.4 $6.2 $360.5 $367.0 Provision for credit losses 11.0 5.5 17.6 19.2 2.4 2.3 -- -- 31.0 27.0 Noninterest income 51.6 62.5 69.9 50.7 13.2 14.3 50.8 42.8 216.5 170.3 Noninterest expense 170.9 210.4 51.5 42.5 21.6 22.2 36.1 37.5 311.1 312.6 Income taxes and taxable-equivalent adjustment 50.4 43.3 14.5 13.1 16.3 17.2 8.0 4.6 89.2 78.2 Income from continuing operations $82.2 $67.5 $23.7 $19.5 $26.7 $25.6 $13.1 $6.9 145.7 119.5 Loss from discontinued operations -- (7.0) Net income $145.7 $112.5 AVERAGE BALANCE SHEET DATA: Commercial loans $5,907 $5,381 $848 $514 $4,896 $4,717 $-- $-- $11,651 $10,612 Consumer loans 11,538 11,140 2,347 2,185 -- -- -- -- 13,885 13,325 Assets 22,213 24,114 3,872 3,296 5,948 5,761 735 737 32,768 33,908 Deposits 19,673 21,412 41 27 1,587 2,123 806 775 22,107 24,337 Common equity 1,684 1,735 353 332 416 411 240 172 2,693 2,650 Return on average assets* 1.47% 1.11% 2.43% 2.35% 1.78% 1.76% ** ** 1.76% 1.40% Return on average common equity* 19.4 15.4 26.6 23.3 25.5 24.7 21.7% 15.9% 21.2 17.6 Efficiency ratio 54.3 64.4 48.0 45.1 32.2 33.0 63.1 76.5 53.9 57.9 NINE MONTHS ENDED SEPTEMBER 30, CONDENSED INCOME STATEMENT: 1995 1994 1995 1994 1995 1994 1995 1994 1995 1994 Net interest income (taxable-equivalent basis) $785.5 $756.5 $118.0 $129.5 $165.8 $160.5 $21.0 $17.8 $1,090.3 $1,064.3 Provision for credit losses 19.9 23.7 56.8 48.8 7.3 7.1 -- -- 84.0 79.6 Noninterest income 167.1 180.4 191.1 140.1 45.6 43.7 151.0 133.3 585.8 497.5 Noninterest expense 550.0 612.0 153.3 124.6 68.9 67.9 115.4 109.2 918.6 913.7 Income taxes and taxable-equivalent adjustment 145.6 116.8 37.6 37.7 51.4 50.7 21.5 16.4 256.1 221.6 Income from continuing operations $237.1 $184.4 $61.4 $58.5 $83.8 $78.5 $35.1 $25.5 417.4 346.9 Loss from discontinued operations -- (6.6) Net income $417.4 $340.3 AVERAGE BALANCE SHEET DATA: Commercial loans $5,758 $5,213 $759 $466 $4,909 $4,858 $-- $-- $11,426 $10,537 Consumer loans 11,430 11,235 2,311 1,983 -- -- -- -- 13,741 13,218 Assets 22,221 23,630 3,775 3,041 6,035 6,016 763 693 32,794 33,380 Deposits 20,438 21,573 37 24 1,650 2,437 823 822 22,948 24,856 Common equity 1,622 1,697 347 313 422 429 241 150 2,632 2,589 Return on average assets* 1.43% 1.04% 2.17% 2.57% 1.86% 1.74% ** ** 1.70% 1.39% Return on average common equity* 19.5 14.5 23.7 25.0 26.5 24.5 19.5% 22.7% 20.9 17.3 Efficiency ratio 57.7 65.3 49.6 46.2 32.6 33.3 67.1 72.3 54.8 58.4
* From continuing operations ** Not meaningful Note: Preferred dividends and nonrecurring items are not allocated to the business lines. TRUST AND INVESTMENT GROUP -- The Trust and Investment Group includes personal, institutional and corporate trust services, investment management services, and a full-service brokerage company. Reported earnings increased 90 percent in the third quarter and 38 percent in the first nine months of 1995 compared with the same periods in the prior year. The return on average common equity was 21.7 percent in the third quarter and 19.5 percent in the first nine months of 1995, compared with 15.9 percent and 22.7 percent in the same periods in 1994. Net earnings increased in 1995 over 1994 primarily due to recent acquisitions, including J.P. Morgan's domestic corporate trust business. Stronger noninterest income is due to growth in Corporate Trust, investment sales and management fees, as well as acquisitions. The efficiency ratio improved to 63.1 percent in the third quarter and 67.1 percent in the first nine months of 1995 from 76.5 percent in the third quarter and 72.3 percent in the first nine months of 1994, reflecting the effective integration of acquisitions and revenue growth. INCOME STATEMENT ANALYSIS NET INTEREST INCOME -- Net interest income on a taxable-equivalent basis was $360.5 million in the third quarter of 1995, a decrease of $6.5 million, or 2 percent, from the third quarter of 1994. The decline is attributable to a decrease of $1.2 billion, or 4 percent, in total earning assets, an increase in funding costs and the repurchase of common stock. The decrease in average earning assets for the quarter reflects the shrinkage of securities and mortgage-related loan balances. Partially offsetting the impact of lower total earning assets were the effects of increased average loan balances and average loan yields. The yield on loans in the third quarter averaged 8.95 percent, or 77 basis points higher than the yield of 8.18 percent in the third quarter of last year. The increase in yields resulted from market interest rate increases during the last half of 1994 and the first quarter of 1995. Average loans totaled $25.5 billion in the third quarter of 1995, an increase of $1.6 billion, or 7 percent, from $23.9 billion in the third quarter of 1994. Solid growth occurred in both nonmortgage consumer and commercial loans, partially offset by a decrease in the balance of residential mortgage loans. Excluding residential mortgage loan balances, average loans for the quarter increased by $1.9 billion, or 10 percent, over the same quarter in 1994, as demand for small business and middle market loans, credit cards, home equity, and other consumer loans remained strong. TABLE 3. Analysis of Net Interest Income THREE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 (DOLLARS IN MILLIONS) 1995 1994 Net interest income (taxable-equivalent basis) $360.5 $367.0 Average balances of earning assets supported by: Interest-bearing liabilities $23,336 $24,210 Noninterest-bearing liabilities 6,144 6,477 Total earning assets $29,480 $30,687 Average yields and weighted average rates (taxable-equivalent basis): Earning assets yield 8.63% 7.71% Rate paid on interest-bearing liabilities 4.77 3.76 Gross interest margin 3.86% 3.95% Net interest margin 4.85% 4.74% Net interest margin without taxable-equivalent increments 4.81% 4.69% The average rate paid on interest-bearing liabilities in the third quarter of 1995 was 4.77 percent, or 101 basis points higher than for the same period in 1994. This is a result of increases in deposit rates, as well as a shift in mix of average balances from lower cost core deposits to more expensive short-term borrowings. In the third quarter, average interest-bearing deposits decreased $1.7 billion, or 9 percent, and average noninterest-bearing deposits decreased $.5 billion, or 9 percent, from the third quarter of 1994. The decrease in average deposit balances reflects the divestiture in the current quarter of $848 million of deposits, as well as the national trend of consumers moving funds into alternative investment vehicles over the past year. The net interest margin on a taxable-equivalent basis was 4.85 percent in the third quarter of 1995, an increase of 11 basis points from 4.74 percent a year earlier. The margin increase results from both a shift in the mix of earning assets, from lower margin securities and residential mortgage loan balances to higher yield consumer and commercial loans, and the repricing of assets to generally higher market interest rates over the past 12 months. Compared with the second quarter of this year, net interest income on a taxable-equivalent basis for the third quarter of 1995 decreased $2.5 million, or 1 percent. The decline was primarily attributable to lower average yields on earning assets, reflecting the decrease in market rates of interest in the third quarter. The average cost of interest-bearing liabilities in the third quarter was essentially unchanged from that of the second quarter, as a result of a shift in balances from lower rate deposits to higher cost borrowings. PROVISION FOR CREDIT LOSSES -- The provision for credit losses was $31.0 million in the third quarter of 1995, up $4.0 million from the third quarter of 1994. Net charge-offs totaled $30.0 million, down $.7 million from the same quarter a year ago. Commercial loan net recoveries for the quarter were $2.5 million, compared with net charge-offs of $.8 million in the third quarter of 1994. Consumer loan net charge-offs remained relatively unchanged from the second quarter of 1995, but increased $2.6 million, or 9 percent, from the third quarter of 1994, reflecting the growth in the balance of nonmortgage consumer loans over the past year. The allowance for credit losses was $468.5 million at September 30, 1995, down slightly from $474.7 million at December 31, 1994, and $477.7 million at September 30, 1994. Reserve coverage remains strong as the allowance for credit losses to nonperforming loans ratio increased to 400 percent at quarter-end compared with 283 percent at the end of 1994 and 282 percent at the end of the third quarter a year ago. NONINTEREST INCOME -- Noninterest income in the third quarter of 1995 was $216.5 million, an increase of $46.2 million, or 27 percent, from the third quarter last year, including a $31 million gain on the sale of 63 branches. Excluding this gain, noninterest income was $15.2 million, or 9 percent, higher than in the third quarter of 1994, reflecting growth in credit card and trust fees. Credit card fees increased $13.5 million, or 27 percent, from the prior year quarter, reflecting higher sales volumes for Purchasing Card, Corporate Card, and FBS WorldPerks Visa Card. Trust fees increased $3.9 million, or 10 percent, reflecting growth in personal trust and corporate trust fees. TABLE 4. Noninterest Income THREE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 (DOLLARS IN MILLIONS) 1995 1994 Credit card fees $62.7 $49.2 Trust fees 42.8 38.9 Service charges on deposit accounts 30.9 32.1 Insurance commissions 7.5 8.2 Trading account profits and commissions 2.4 2.1 Securities losses -- (2.8) Gain on sale of branches 31.0 -- Other 39.2 42.6 Total noninterest income $216.5 $170.3 NONINTEREST EXPENSE -- Noninterest expense of $311.1 million for the third quarter declined $1.5 million, or 1 percent, from the third quarter of 1994. In the third quarter, FBS expensed unamortized software costs of approximately $23 million, primarily related to a change in the Company's policy to expense software costs. The Company also recorded a charge of approximately $8 million to write-off other miscellaneous assets. In addition, FBS received an FDIC premium rebate of approximately $10 million, representing the difference between the previous rate of 23 basis points and the new rate of four basis points on Bank Insurance Fund deposits for the period from June 1, 1995 to September 30, 1995. Excluding these items, noninterest expense for the current quarter decreased by $22.5 million, or 7 percent, from the third quarter of 1994. Noninterest expense for the first nine months of 1995 was $918.6 million compared with $913.7 million for the same period in 1994; excluding the FDIC premium rebate and nonrecurring charges in the third quarter, 1995 year-to-date noninterest expense was lower than 1994 by $16.1 million, or 2 percent. The decrease in noninterest expense for the quarter and year-to-date periods in 1995, excluding these items, reflects ongoing expense control and efficiencies realized through the integration of acquisitions. FBS's efficiency ratio improved to 53.9 percent for the quarter from 57.9 percent for the same quarter a year ago. TABLE 5. Noninterest Expense THREE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 (DOLLARS IN MILLIONS, EXCEPT PER EMPLOYEE DATA) 1995 1994 Salaries $108.0 $114.5 Employee benefits 22.1 27.1 Total personnel expense 130.1 141.6 Net occupancy 24.3 26.9 Furniture and equipment 23.5 21.5 Amortization of goodwill and other intangible assets 13.9 13.2 FDIC insurance 2.8 13.7 Advertising 8.4 7.7 Other personnel costs 11.0 8.5 Professional services 8.5 9.6 Data processing 4.2 4.8 Printing, stationery and supplies 5.4 5.6 Postage 5.4 5.8 Telephone 6.1 6.4 Other 67.5 47.3 Total noninterest expense $311.1 $312.6 Efficiency ratio* 53.9% 57.9% Quarterly average number of employees (full-time equivalents) 12,894 14,867 Annualized personnel expense per employee $40,360 $38,098 * 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. Total salaries and benefits expense for the third quarter of 1995 decreased $11.5 million, or 8 percent, from the third quarter of 1994. Average full-time equivalent employees decreased 13 percent, to 12,894 in the third quarter of 1995, from 14,867 in the third quarter of 1994. The increase in furniture and equipment expense in 1995 was primarily related to automated teller machines deployed in Circle K convenience stores late in 1994 and lobby automation and other equipment associated with acquisitions. The $2.5 million, or 29 percent, increase in other personnel expense for the quarter, as compared with the same period in 1994, resulted from contract programming costs associated with several technology projects currently in process. FDIC insurance expense for the quarter decreased $10.9 million as discussed above. A portion of FBS's deposits are subject to assessment by the Savings Association Insurance Fund ("SAIF") and continue to be assessed at the rate of 23 cents per $100 of deposits. 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. PROVISION FOR INCOME TAXES -- The provision for income taxes was $85.8 million in the third quarter of 1995, compared with $74.3 million in the third quarter of 1994. The increase was the result of higher taxable income. BALANCE SHEET ANALYSIS LOANS -- On an aggregate basis, the Company's loan portfolio increased $1.3 billion, or 5 percent, to $25.9 billion at September 30, 1995, from $24.6 billion at December 31, 1994. Commercial Lending. FBS's portfolio of commercial loans totaled $12.0 billion at September 30, 1995, up $1.1 billion from December 31, 1994. The increase reflects growth in small and middle-market business lending and in Payment Systems balances associated with Corporate and Purchasing Cards. The Company's portfolios of loans to financial institutions, commercial real estate mortgages and construction loans were relatively unchanged from December 31, 1994. Consumer Lending. Total consumer loan outstandings were $13.9 billion at September 30, 1995, up from $13.7 billion at December 31, 1994. A $508 million increase primarily in home equity and second mortgages, residential mortgages held for sale and automobile loans was offset by a $326 million decrease in residential mortgage loans. Successful promotions continue to result in increased home equity and second mortgages. Residential mortgages held for sale increased due to seasonality and automobile loans increased due to growth in indirect auto loans. Residential mortgage loans continue to decline as FBS continues to shift its focus to other consumer loan products. SECURITIES -- At September 30, 1995, securities were $3.3 billion compared with $5.2 billion at December 31, 1994, reflecting the sale of $1.56 billion of securities related to the management of the Company's interest rate risk. DEPOSITS -- Noninterest-bearing deposits were $5.8 billion at September 30, 1995, down slightly from $5.9 billion at December 31, 1994. Interest-bearing deposits were $16.1 billion at September 30, 1995, down $2.2 billion from December 31, 1994. The decreases reflect the divestiture in the third quarter of $848 million of deposits, as well as the national trend of consumer balances moving into mutual fund, annuities and other investment products. BORROWINGS -- Short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings, were $4.2 billion at September 30, 1995, up from $3.2 billion at the end of 1994. The increase was funded by a net issuance of $1.7 billion of notes under a $4 billion bank note program and a $1 billion thrift note program. The notes have a weighted average interest rate of 5.78 percent and range in original maturities from 30 days to nine months. Partially offsetting the bank note issuance was the $1.0 billion reduction in federal funds purchased and securities sold under agreements to repurchase. Long-term debt was $3.1 billion at September 30, 1995, essentially unchanged from $3.0 billion at December 31, 1994. In September 1995, FBS issued $250 million of 6.875 percent subordinated 12-year, noncallable notes. In April 1995, the Company issued $150 million of 7.625 percent subordinated 10-year, noncallable notes. The effect of these issuances was partially offset by the call on the $86 million 8.25 percent subordinated note and maturities on other outstanding debt. FBS also issued $300 million of medium-term bank notes during the first nine months of 1995. CORPORATE RISK MANAGEMENT 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. FBS's credit management process is supported by regular examinations conducted by the credit administration function. Quarterly, management reviews large loans and all loans experiencing deterioration of credit quality. A standard credit scoring system is used to assess consumer credit risks and to price consumer products relative to their assigned risk rating. In evaluating credit risk, FBS considers the composition of its loan portfolio; its level of allowance coverage; macroeconomic concerns, such as the level of debt outstanding in the public and private sectors, the effects of domestic and international economic conditions, and regional economic conditions; and other issues. Approximately 78 percent of the loan portfolio consists of extensions of credit to customers in the Company's primary operating region, which includes Minnesota, Colorado, Montana, North Dakota, South Dakota, Wisconsin, Iowa, Kansas, Nebraska, Wyoming, and Illinois. ANALYSIS OF NET CHARGE-OFFS AND ALLOWANCE FOR CREDIT LOSSES -- Net loan charge-offs totaled $30.0 million in the third quarter of 1995, down from $30.7 million in the third quarter of 1994. Commercial loan net recoveries for the quarter were $2.5 million, compared with net charge-offs of $.8 million in the third quarter of 1994, reflecting continued improvement in the credit quality of this portfolio. Consumer loan net charge-offs increased $2.6 million, or 9 percent, from the third quarter of 1994, reflecting growth in the balance of nonmortgage consumer loans and sales volume activity in credit card products over the past year. TABLE 6. Summary of Allowance for Credit Losses
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 (DOLLARS IN MILLIONS) 1995 1994 1995 1994 Balance at beginning of period $467.5 $480.2 $474.7 $466.1 CHARGE-OFFS: Commercial: Commercial 7.5 9.7 19.4 46.4 Financial institutions -- -- -- 1.1 Real estate: Commercial mortgage 3.9 3.2 14.8 16.6 Construction .1 -- .1 .1 Total commercial 11.5 12.9 34.3 64.2 Consumer: Residential mortgage .9 1.8 2.9 3.9 Credit card 20.4 21.5 65.3 55.6 Other 19.9 12.2 55.7 36.0 Total consumer 41.2 35.5 123.9 95.5 Total 52.7 48.4 158.2 159.7 RECOVERIES: Commercial: Commercial 9.1 9.9 28.2 34.6 Financial institutions .3 -- .5 .2 Real estate: Commercial mortgage 4.6 1.6 11.2 13.0 Construction -- .6 .1 .9 Total commercial 14.0 12.1 40.0 48.7 Consumer: Residential mortgage -- .1 .4 .5 Credit card 2.8 2.3 8.5 6.8 Other 5.9 3.2 17.3 10.5 Total consumer 8.7 5.6 26.2 17.8 Total 22.7 17.7 66.2 66.5 NET CHARGE-OFFS: Commercial: Commercial (1.6) (.2) (8.8) 11.8 Financial institutions (.3) -- (.5) .9 Real estate: Commercial mortgage (.7) 1.6 3.6 3.6 Construction .1 (.6) -- (.8) Total commercial (2.5) .8 (5.7) 15.5 Consumer: Residential mortgage .9 1.7 2.5 3.4 Credit card 17.6 19.2 56.8 48.8 Other 14.0 9.0 38.4 25.5 Total consumer 32.5 29.9 97.7 77.7 Total 30.0 30.7 92.0 93.2 Provision charged to operating expense 31.0 27.0 84.0 79.6 Additions related to acquisitions -- 1.2 1.8 25.2 Balance at end of period $468.5 $477.7 $468.5 $477.7 Allowance as a percentage of period-end loans 1.81% 1.96% Allowance as a percentage of nonperforming loans 400 282 Allowance as a percentage of nonperforming assets 281 195
ANALYSIS OF NONPERFORMING ASSETS -- Nonperforming assets include all nonaccrual, impaired, and restructured loans, other real estate and other nonperforming assets owned by FBS. At September 30, 1995, nonperforming assets totaled $166.9 million, down $65.4 million, or 28 percent, from December 31, 1994. The ratio of nonperforming assets to loans and other real estate improved to .64 percent at September 30, 1995, from .94 percent at December 31, 1994. Significant decreases occurred in virtually all categories of nonperforming assets. TABLE 7. Nonperforming Assets SEPTEMBER 30 DECEMBER 31 (DOLLARS IN MILLIONS) 1995 1994 COMMERCIAL: Commercial $ 22.6 $ 36.5 Real estate: Commercial mortgage 45.1 71.0 Construction 2.2 1.6 Total commercial 69.9 109.1 CONSUMER: Residential mortgage 30.7 43.5 Credit card 8.5 9.9 Other 8.0 5.4 Total consumer 47.2 58.8 Total nonperforming loans 117.1 167.9 OTHER REAL ESTATE 46.6 64.0 OTHER NONPERFORMING ASSETS 3.2 0.4 Total nonperforming assets $166.9 $232.3 Accruing loans 90 days or more past due $ 40.7 $ 23.4 Nonperforming loans to total loans .45% .68% Nonperforming assets to total loans plus other real estate .64 .94 INTEREST RATE RISK MANAGEMENT -- FBS's principal objective for interest rate risk management is to control exposure of net interest income to risks associated with interest rate movements. The Company uses derivative financial instruments ("derivatives") to hedge on-balance sheet items and, to a lesser extent, in connection with intermediated transactions for customers. FBS limits market risk on intermediated transactions by entering into generally matching or offsetting positions. The Company does not enter into derivative contracts for speculative purposes. Interest rate risk is measured and reported to the Company's Asset and Liability Management Committee ("ALCO") through the use of traditional gap analysis which measures the difference between assets and liabilities that reprice in a given time period, simulation modeling which produces projections of net interest income under various interest rate scenarios and balance sheet strategies, and valuation modeling which measures the economic value of various components of the balance sheet under various interest rate scenarios. The significant assumptions used in these analyses include the amount and timing of changes in prime and deposit rates compared with changes in money market rates, prepayment risks and volume forecasts. Including the effect of interest rate swaps, futures, options and other hedging instruments, FBS had a cumulative positive repricing gap position at one year of $260 million at September 30, 1995, 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, prepayment risk, and other option risks. Due to these limitations, management places a greater reliance on simulation and valuation modeling to measure and manage interest rate risk. The Company's policy is to maintain a low interest rate risk position by limiting the amount of forecasted net interest income at risk over a 12-month period assuming an immediate and sustained 100-basis point change in interest rates. FBS invests in fixed rate assets or receives the fixed rate payment on interest rate swaps as a hedge to maintain acceptable interest rate risk levels. The derivatives the Company uses to achieve its hedging objectives are primarily interest rate swaps, caps, and floors. As of September 30, 1995, FBS received fixed-rate payments on $3.0 billion notional amount of interest rate swap agreements and made payments based on variable interest rates. These swaps had an average fixed rate of 6.82 percent and an average variable rate, which is tied to various LIBOR rates, of 5.79 percent. The maturity of these agreements ranged from one month to 12.0 years with an average remaining maturity of 4.3 years. Swaps increased net interest income by $5.6 million and $15.2 million for the quarters ended September 30, 1995, and 1994, respectively. TABLE 8. Interest Rate Swap Hedging Portfolio Notional Balances and Yields by Maturity Date At September 30, 1995 (Dollars in Millions) WEIGHTED WEIGHTED AVERAGE AVERAGE RECEIVE FIXED SWAPS* NOTIONAL INTEREST RATE INTEREST RATE MATURITY DATE AMOUNT RECEIVED PAID 1995 (remaining three months) $135 6.72% 5.89% 1996 433 7.96 5.88 1997 275 6.42 5.84 1998 606 5.99 5.83 1999 575 6.88 5.55 After 1999** 950 6.93 5.85 Total $2,974 6.82% 5.79% * At September 30, 1995, the Company does not have any swaps in its portfolio which requires it to pay fixed-rate interest. ** At September 30, 1995, all swaps with a maturity after 1999 hedge fixed rate subordinated notes. FBS similarly uses 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 September 30, 1995, was $200 million with a strike level at 6.00 percent. The premium on caps is amortized over the life of the cap. The total notional amount of floor agreements purchased as of September 30, 1995, was $1.25 billion with an average strike level at 4.17 percent and an average remaining maturity of 2.0 years. The impact of caps and floors on interest income was not material for the quarters ended September 30, 1995, or 1994. Forward contracts, totaling $359 million at September 30, 1995, hedge the interest rate risk of the fixed rate mortgage loans originated and held for sale by the Company's mortgage subsidiary. FBS enters into foreign currency commitments primarily as an intermediary for customers. The Company manages its credit risk on derivative contracts through counterparty and credit limit approvals and monitoring credit concentration risks. Refer to Note I on page 21 for further information on interest rate swaps and options. CAPITAL MANAGEMENT -- The ratio of common equity to assets increased to 8.0 percent at September 30, 1995, from 7.3 percent at December 31, 1994. Common equity per share was $20.33 at September 30, 1995, compared with $18.63 at December 31, 1994. Total equity to assets was 8.3 percent at September 30, 1995, up from 7.7 percent at December 31, 1994. The increases are primarily due to earnings retention and improvement in the market value of available-for-sale securities partially offset by the common stock repurchases. Tier 1 and total risk-based capital ratios were 7.4 percent and 12.3 percent on September 30, 1995, compared with 7.3 percent and 11.4 percent at December 31, 1994, respectively. The leverage ratio, the measure of Tier 1 capital to total quarterly average assets, also increased to 6.7 percent from 6.2 percent at the end of 1994. TABLE 9. Capital Ratios SEPTEMBER 30 DECEMBER 31 (DOLLARS IN MILLIONS) 1995 1994 Common equity $2,631 $2,494 As a percent of assets 8.0% 7.3% Tangible common equity* $2,219 $2,082 As a percent of assets 6.8% 6.2% Total shareholders' equity $2,736 $2,612 As a percent of assets 8.3% 7.7% Tier 1 capital $2,171 $2,052 As a percent of risk-adjusted assets 7.4% 7.3% Total risk-based capital $3,620 $3,227 As a percent of risk-adjusted assets 12.3% 11.4% Leverage ratio 6.7 6.2 *Defined as common equity less goodwill On July 19, 1995, the Board of Directors authorized a common stock repurchase program for 8.3 million shares which is approximately one-half of the number of shares to be issued in the purchase acquisition of FirsTier Financial, Inc. During the first quarter of 1995, the Board of Directors authorized two common stock repurchase programs totaling 16 million shares. A two million share authorization, which provided shares for stock purchase and option plans and for the purchase acquisition of First Western Corporation, was completed during the second quarter. A 14 million share authorization is intended to allow FBS to buy back shares in connection with future excess capital retention expected through December 31, 1996, and is predicated upon such excess capital, as well as for stock purchase and option plans. As of September 30, 1995, approximately 8.0 million shares have been repurchased under the three programs. As discussed in Note C, FBS and First Interstate Bancorp have announced a merger agreement to be accounted for as a pooling. Consistent with the accounting requirements under a pooling, FBS will not purchase treasury shares under its existing authorizations within 90 days of the consummation of the merger (i.e., in the second and third quarters of 1996). After that time, consistent with its prior practice, FBS expects to resume its capital management program to the extent necessary to manage future excess capital retention. At September 30, 1995, approximately 16.3 million shares were available for repurchase under previous authorizations. As previously announced, the Company expects to repurchase approximately 8 million shares in connection with its acquisition of FirsTier. ACCOUNTING CHANGES STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. ("SFAS") 114, "ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN" -- The Company adopted SFAS 114 January 1, 1995, 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 adoption of SFAS 114 did not have a material effect on the Company. SFAS 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF" -- The Company has not yet adopted SFAS 121 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. SFAS 121 is effective for fiscal years beginning after December 15, 1995, and is not expected to have a material effect on the Company. SFAS 122, "ACCOUNTING FOR MORTGAGE SERVICING RIGHTS" -- SFAS 122, issued in May 1995, amends SFAS 65, "Accounting for Certain Mortgage Banking Activities," to require that entities engaged in mortgage banking activities recognize rights to service mortgage loans for others as separate assets, whether those rights were acquired through loan origination activities or through purchase transactions. In addition, a valuation reserve is established for impairment of the mortgage servicing rights. The Statement applies to fiscal years beginning after December 15, 1995; the adoption of SFAS 122 is not expected to have a material effect on the Company. For further information on accounting changes, refer to Note B on page 17. CONSOLIDATED BALANCE SHEET
SEPTEMBER 30 DECEMBER 31 (IN MILLIONS, EXCEPT SHARES) 1995 1994 (UNAUDITED) ASSETS Cash and due from banks $ 1,586 $ 1,707 Federal funds sold 27 135 Securities purchased under agreements to resell 233 336 Trading account securities 164 77 Available-for-sale securities 3,302 5,185 Loans 25,877 24,556 Less allowance for credit losses 469 475 Net loans 25,408 24,081 Bank premises and equipment 410 479 Interest receivable 189 198 Customers' liability on acceptances 165 178 Other assets 1,474 1,752 Total assets $ 32,958 $ 34,128 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 5,779 $ 5,933 Interest-bearing 16,116 18,323 Total deposits 21,895 24,256 Federal funds purchased 1,330 1,630 Securities sold under agreements to repurchase 272 938 Other short-term funds borrowed 2,554 658 Long-term debt 3,127 2,981 Acceptances outstanding 165 178 Other liabilities 879 875 Total liabilities 30,222 31,516 Shareholders' equity: Preferred stock 105 118 Common stock, par value $1.25 a share-authorized 200,000,000 shares; issued: 9/30/95 - 135,632,324 shares; 12/31/94 - 134,599,409 shares 169 168 Capital surplus 900 866 Retained earnings 1,837 1,593 Unrealized loss on securities, net of tax (3) (106) Less cost of common stock in treasury: 9/30/95 - 6,202,961 shares; 12/31/94 - 767,000 shares (272) (27) Total shareholders' equity 2,736 2,612 Total liabilities and shareholders' equity $ 32,958 $ 34,128
CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED NINE MONTHS ENDED (IN MILLIONS, EXCEPT PER-SHARE DATA) SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 (UNAUDITED) 1995 1994 1995 1994 INTEREST INCOME Loans $573.8 $491.3 $1,693.0 $1,393.3 Securities: Taxable 52.6 89.7 175.2 242.0 Exempt from federal income taxes 2.8 3.0 8.4 9.1 Other interest income 8.3 8.4 26.4 23.8 Total interest income 637.5 592.4 1,903.0 1,668.2 INTEREST EXPENSE Deposits 173.0 151.5 538.2 433.1 Federal funds purchased and repurchase agreements 24.8 34.5 87.6 66.5 Other short-term funds borrowed 34.6 3.8 56.8 11.5 Long-term debt 48.0 39.5 140.5 104.3 Total interest expense 280.4 229.3 823.1 615.4 Net interest income 357.1 363.1 1,079.9 1,052.8 Provision for credit losses 31.0 27.0 84.0 79.6 Net interest income after provision for credit losses 326.1 336.1 995.9 973.2 NONINTEREST INCOME Credit card fees 62.7 49.2 171.0 128.7 Trust fees 42.8 38.9 127.5 117.5 Service charges on deposit accounts 30.9 32.1 93.3 96.6 Insurance commissions 7.5 8.2 20.8 21.4 Securities losses -- (2.8) -- (2.8) Gain on sale of branches 31.0 -- 31.0 -- Other 41.6 44.7 142.2 136.1 Total noninterest income 216.5 170.3 585.8 497.5 NONINTEREST EXPENSE Salaries 108.0 114.5 329.9 334.2 Employee benefits 22.1 27.1 76.0 81.3 Net occupancy 24.3 26.9 74.3 78.8 Furniture and equipment 23.5 21.5 71.8 65.7 Amortization of goodwill and other intangible assets 13.9 13.2 42.2 36.6 FDIC insurance 2.8 13.7 30.2 44.0 Advertising 8.4 7.7 23.9 27.0 Other personnel costs 11.0 8.5 28.4 27.1 Professional services 8.5 9.6 25.6 26.6 Data processing 4.2 4.8 12.9 14.7 Other 84.4 65.1 203.4 177.7 Total noninterest expense 311.1 312.6 918.6 913.7 Income from continuing operations before income taxes 231.5 193.8 663.1 557.0 Applicable income taxes 85.8 74.3 245.7 210.1 Income from continuing operations 145.7 119.5 417.4 346.9 Loss from discontinued operations -- (7.0) -- (6.6) Net income $145.7 $112.5 $ 417.4 $ 340.3 Net income applicable to common equity $143.9 $110.3 $ 411.8 $ 330.0 EARNINGS PER COMMON SHARE Average common and common equivalent shares 133,648,942 137,944,608 135,007,519 136,029,810 Income from continuing operations $ 1.08 $ .85 $ 3.05 $ 2.47 Loss from discontinued operations -- (.05) -- (.04) Net income $ 1.08 $ .80 $ 3.05 $ 2.43
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, 1993 130,408,480 $278.1 $169.8 $852.2 $1,575.4 $ 38.0 $(169.4) $2,744.1 Net Income 340.3 340.3 Dividends declared: Preferred (10.3) (10.3) Common (117.0) (117.0) Purchase of treasury stock (4,231,700) (.9) (17.2) (124.2) (142.3) 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 combinations 1,385,806 (13.9) 48.1 34.2 Issuance of common stock: Dividend reinvestment 138,194 .2 4.7 4.9 Stock option and stock purchase plans 1,227,594 .5 7.1 (13.4) 26.3 20.5 Stock warrants exercised 545,186 .2 1.0 (8.0) 13.1 6.3 Redemption of preferred stock (160.0) (7.0) (167.0) Change in unrealized gains/(losses) (117.2) (117.2) BALANCE SEPTEMBER 30, 1994 135,701,209 $118.1 $171.5 $895.9 $1,746.1 $ (79.2) $(52.0) $2,800.4 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 417.4 417.4 Dividends declared: Preferred (5.6) (5.6) Common (145.2) (145.2) Purchase of treasury stock (7,991,505) (341.8) (341.8) Business combinations 1,619,998 .3 4.3 52.4 57.0 Issuance of common stock: Dividend reinvestment 169,590 .3 6.8 7.1 Stock option and stock purchase plans 1,725,303 .9 29.2 (20.1) 35.1 45.1 Stock warrants exercised 34,404 (1.0) 1.2 .2 Redemption/conversion of preferred stock 39,164 (13.3) (1.3) 1.5 (13.1) Change in unrealized gains/(losses) 103.2 103.2 BALANCE SEPTEMBER 30, 1995 129,429,363 $104.8 $169.5 $899.6 $1,837.0 $ (3.2) $(271.5) $2,736.2
* Defined as total common shares less common stock held in treasury. ** Ending treasury shares were 6,202,961 at September 30, 1995; 767,000 at December 31, 1994; 1,496,525 at September 30, 1994; and 5,391,883 at December 31, 1993. CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 (UNAUDITED, IN MILLIONS) 1995 1994 OPERATING ACTIVITIES Net cash provided by operating activities $ 515.6 $ 1,321.3 INVESTING ACTIVITIES Net cash provided (used) by: Interest-bearing deposits with banks 29.1 60.4 Loans outstanding (996.1) (1,400.3) Securities purchased under agreements to resell 103.6 24.5 Available-for-sale securities: Sales 1,978.1 991.1 Maturities 411.3 956.0 Purchases (296.6) (879.2) Investment securities: Maturities -- 240.3 Purchases -- (283.4) Proceeds from sales/repayments of other real estate 34.6 88.9 Net purchases of bank premises and equipment (4.1) (45.0) Cash and cash equivalents of acquired subsidiaries 16.3 74.5 Business acquisitions, net of cash received -- (107.2) Other - net 2.5 (3.1) Net cash provided (used) by investing activities 1,278.7 (282.5) FINANCING ACTIVITIES Net cash (used) provided by: Deposits (2,624.4) (4,019.6) Federal funds purchased and securities sold under agreements to repurchase (965.9) 1,995.2 Short-term borrowings 1,885.2 (33.1) Long-term debt transactions: Proceeds 700.6 1,388.8 Principal payments (564.6) (730.6) Redemption of preferred stock (13.1) (167.0) Proceeds from issuance of common stock 52.4 31.7 Purchase of treasury stock and stock warrants (341.8) (144.6) Cash dividends (150.8) (127.3) Net cash used by financing activities (2,022.4) (1,806.5) Change in cash and cash equivalents (228.1) (767.7) Cash and cash equivalents at beginning of period 1,841.9 2,798.6 Cash and cash equivalents at end of period $ 1,613.8 $ 2,030.9
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 FBS believes such presentation is adequate to make the information presented not misleading. For further information, refer to FBS's Current Report on Form 8-K filed March 3, 1995, which includes a copy of the Company's restated consolidated financial statements and footnotes for the year ended December 31, 1994, which give effect to the merger of Metropolitan Financial Corporation, as discussed in Note C below. Certain amounts in prior periods have been reclassified to conform to the current presentation. NOTE B. Accounting Changes ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN -- Effective January 1, 1995, FBS adopted Statement of Financial Accounting Standards No. ("SFAS") 114, "Accounting by Creditors for Impairment of a Loan." This Statement requires creditors to establish a valuation allowance when it is probable that all the principal and interest due under the contractual terms of a loan will not be collected. The impairment is measured based on the present value of expected future cash flows based on the effective interest rate of the loan, or the observable market price or the fair value of a collateral dependent loan. This differs from the Company's prior policy in that it requires the establishment of a valuation allowance for uncollectible interest in addition to the principal amounts of impaired loans. The Statement also requires the reclassification of in-substance foreclosures from other real estate to nonperforming loans for all periods if the Company has not taken possession of the collateral. The adoption of SFAS 114 did not have a material effect on the Company. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF -- FBS has not yet adopted 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 may not be recoverable. The impairment is measured based on the present value of expected future cash flows from the use of the asset and its eventual disposition. If the expected future cash flows are less than the carrying amount of the asset, an impairment loss is recognized based on current fair values. The Statement is effective for fiscal years beginning after December 15, 1995, and is not expected to have a material effect on the Company. ACCOUNTING FOR MORTGAGE SERVICING RIGHTS -- SFAS 122, "Accounting for Mortgage Servicing Rights," issued in May 1995, amends SFAS 65, "Accounting for Certain Mortgage Banking Activities," to require that entities engaged in mortgage banking activities recognize rights to service mortgage loans for others as separate assets, whether those rights were acquired through loan origination activities or through purchase transactions. In addition, a valuation reserve is established for impairment of the mortgage servicing rights based on the predominant risk characteristics of the underlying loans and subsequently adjusted to reflect changes in the fair value of the servicing rights. The Statement applies to fiscal years beginning after December 15, 1995; the adoption of SFAS 122 is not expected to have a material effect on the Company. NOTE C. Business Combinations and Divestitures FIRST INTERSTATE BANCORP -- On November 6, 1995, FBS and First Interstate Bancorp ("FI") announced that they had entered into a definitive agreement whereby FBS will exchange 2.6 shares of its common stock for each share of FI common stock (and cash in lieu of fractional shares). The combined institution, which will use the First Interstate Bancorp name, will have approximately $90 billion in assets and $7 billion in shareholders' equity. The transaction, which will qualify as a tax-free reorganization and be accounted for as a pooling of interests, is subject to shareholder and regulatory approvals and is expected to close in the second quarter of 1996. FIRSTIER FINANCIAL, INC. -- On August 7, 1995, FBS announced an agreement to acquire FirsTier Financial, Inc. ("FirsTier"), a regional financial services holding company based in Omaha, Nebraska. As of September 30, 1995, FirsTier had $3.6 billion in assets, $2.8 billion in deposits and operated 63 offices in Nebraska and Iowa. Subject to FirsTier shareholder and regulatory approvals, the Company will exchange .8829 shares of FBS common stock for each common share of FirsTier, resulting in a per share price of $38 at the date of the announcement of the transaction. The aggregate purchase price for the transaction as of the announcement date was approximately $714 million. The transaction, which will be accounted for as a purchase, is expected to close in the first quarter of 1996. METROPOLITAN FINANCIAL CORPORATION -- On January 24, 1995, the Company issued 21.7 million shares to complete the merger with Metropolitan Financial Corporation ("MFC"), a regional financial services holding company headquartered in Minneapolis, Minnesota. As of December 31, 1994, MFC had approximately $7.9 billion in assets, $5.5 billion in deposits and 211 offices principally in North Dakota, Minnesota, Nebraska, Iowa, Kansas, South Dakota, Wisconsin, and Wyoming. FBS used the pooling of interests method to account for the transaction. Accordingly, the Company's financial statements have been restated for all periods prior to the merger to include the accounts and operations of MFC. BOULEVARD BANCORP, INC. -- On March 25, 1994, FBS completed the acquisition of Boulevard Bancorp, Inc. ("Boulevard"), a $1.6 billion commercial bank holding company headquartered in Chicago, Illinois, which was accounted for as a purchase. Under the terms of the purchase agreement, 6.2 million shares of the Company's common stock were issued and Boulevard's outstanding stock options and warrants were converted into stock options and warrants for the Company's common stock. The Company bought back existing shares of its common stock approximately equal to the number of shares issued at the time of closing of the Boulevard acquisition. The results of operations of Boulevard are included in the Company's Consolidated Statement of Income since the date of acquisition. OTHER ACQUISITIONS -- On August 22, 1995, FBS announced that it had signed a definitive agreement to acquire the corporate trust business of BankAmerica Corporation. After the acquisition, the Company will be the nation's leading provider of domestic corporate trust services as measured by revenues, which will approximate $145 million. The acquisition requires regulatory approvals and is expected to close on various dates in the fourth quarter of 1995 and the first quarter of 1996. On November 1, 1995, the Company completed the acquisition of two commercial banking holding companies -- Midwestern Services, Inc. and Southwest Holdings, Inc. -- both of Omaha, Nebraska. Together, the two companies have total assets of $424 million, total deposits of $380 million, and 12 branches in Omaha. The Company completed the acquisition of First Western Corporation, parent company of Western Bank, on March 16, 1995, with $317 million in assets and nine branches in and around Sioux Falls, South Dakota. On March 25, 1994, the Company completed the acquisition of Rocky Mountain Financial Corporation, a $537 million savings bank holding company located in Cheyenne, Wyoming. Both of these acquisitions were accounted for as purchases. PLANNED DISVESTITURES -- On September 7, 1995, FBS announced that it will seek a buyer for its mortgage banking company and that it will instead deliver mortgage loan products through its bank branches and telemarketing. The Company announced on September 20, 1995 an agreement to sell Edina Reality, Inc., its real estate brokerage subsidiary, to a local investor group. This subsidiary is accounted for as discontinued operations. NOTE D. Securities The detail of the amortized cost and fair value of available-for-sale securities consisted of the following: SEPTEMBER 30, 1995 DECEMBER 31, 1994 AMORTIZED FAIR AMORTIZED FAIR (IN MILLIONS) COST VALUE COST VALUE U.S. Treasury $919 $911 $1,177 $1,113 Mortgage-backed securities 1,782 1,758 3,400 3,297 Other U.S. agencies 176 175 333 323 State and political 173 178 178 181 Other 257 280 269 271 Total $3,307 $3,302 $5,357 $5,185 NOTE E. Loans The composition of the loan portfolio was as follows: SEPTEMBER 30 DECEMBER 31 (IN MILLIONS) 1995 1994 COMMERCIAL: Commercial $8,311 $7,285 Financial institutions 851 787 Real estate: Commercial mortgage 2,476 2,454 Construction 356 330 Total commercial loans 11,994 10,856 CONSUMER: Residential mortgage 4,772 5,098 Residential mortgage held for sale 357 197 Home equity and second mortgage 2,704 2,453 Credit card 2,397 2,409 Automobile 1,867 1,770 Revolving credit 742 725 Installment 644 712 Student 400 336 Total consumer loans 13,883 13,700 Total loans $25,877 $24,556 At September 30, 1995, FBS had $70 million in loans considered impaired under SFAS 114, included in its nonaccrual loans. Of this amount, $64 million was measured using the fair value of the loans' collateral, and $6 million was below the Company's threshold for valuing individual loans. The carrying value of the impaired loans was less than or equal to the present value of expected future cash flows and, accordingly, no allowance for credit losses was specifically allocated to impaired loans. For the quarter ended September 30, 1995, the average recorded investment in impaired loans was approximately $79 million. No interest income was recognized on these 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:
SEPTEMBER 30 DECEMBER 31 (IN MILLIONS) 1995 1994 Floating-rate subordinated capital notes - due November 29, 1996 $149 $150 Fixed-rate subordinated notes: 8.25% due October 1, 1999 -- 86 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 -- 6.875% due September 15, 2007 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 (4.24% to 7.90%) - maturities to May 2008 1,102 1,385 Medium-term notes (5.7825%to 9.89%) - maturities to November 1997 651 514 Other 93 114 Total $3,127 $2,981
NOTE G. Shareholders' Equity On July 19, 1995, the Board of Directors authorized an 8.3 million common stock repurchase program which is approximately one-half of the number of shares to be issued in the purchase acquisition of FirsTier Financial, Inc. During the first quarter of 1995, the Board of Directors authorized two common stock repurchase programs totaling 16 million shares. A two million share authorization, which provided shares for stock purchase and option plans and for the purchase acquisition of First Western Corporation, was completed during the second quarter. A 14 million share authorization will allow FBS to buy back shares in connection with future excess capital retention expected through December 31, 1996, and is predicated upon such excess capital, as well as for stock purchase and option plans. As of September 30, 1995, approximately 8.0 million shares have been repurchased under the three programs, and approximately 1.8 million of these shares have been reissued for the designated purposes. As discussed in Note C, FBS and First Interstate Bancorp have announced a merger agreement to be accounted for as a pooling. Consistent with the accounting requirements under a pooling, FBS will not purchase treasury shares under its existing authorizations within 90 days of the consummation of the merger (i.e., in the second and third quarters of 1996). After that time, consistent with its prior practice, FBS expects to resume its capital management program to the extent necessary to manage future excess capital retention. At September 30, 1995, approximately 16.3 million shares were available for repurchase under previous authorizations. As previously announced, the Company expects to repurchase approximately 8 million shares in connection with its acquisition of FirsTier. NOTE H. Income Taxes The components of income tax expense were: THREE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 (IN MILLIONS) 1995 1994 FEDERAL: Current tax $65.0 $47.1 Deferred tax provision 11.8 15.7 Federal income tax 76.8 62.8 STATE: Current tax 11.3 10.9 Deferred tax (credit) provision (2.3) .6 State income tax 9.0 11.5 Total income tax provision $85.8 $74.3 The reconciliation between income tax expense and the amount computed by applying the statutory federal income tax rate was as follows: THREE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 (IN MILLIONS) 1995 1994 Tax at statutory rate (35%) $81.0 $67.9 State income tax, net of federal tax benefit 5.8 7.8 Tax effect of: Tax-exempt interest: Loans (1.3) (1.5) Securities (.9) (1.1) Amortization of goodwill 3.0 2.7 Other items (1.8) (1.5) Applicable income taxes $85.8 $74.3 The Company's net deferred tax asset was $244.8 million at September 30, 1995, and $363.0 million at December 31, 1994. 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 manage its interest rate risk and to meet the financing needs of its customers. The contract or notional amounts of these financial instruments were as follows: SEPTEMBER 30 DECEMBER 31 (IN MILLIONS) 1995 1994 Commitments to extend credit: Commercial $6,792 $7,006 Corporate and purchasing cards 8,942 3,210 Consumer credit card 8,690 7,875 Other consumer 3,148 2,628 Letters of credit: Standby 1,374 1,321 Commercial 185 175 Interest rate swap contracts: Hedge 2,974 2,674 Intermediated 169 127 Interest rate option contracts: Hedge interest rate floors purchased 1,250 950 Hedge interest rate caps purchased 200 250 Intermediated interest rate caps and floors purchased 141 127 Intermediated interest rate caps and floors written 141 127 Liquidity support guarantees and forward and option contracts 545 338 Foreign currency commitments: Commitments to purchase 1,304 941 Commitments to sell 1,303 941 Mortgages sold with recourse 246 312 Commitment to sell loans 349 935 Activity for the nine months ending September 30, 1995, with respect to interest rate swaps which the Company uses to hedge commercial loans, 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, 1994 $2,674 Additions 625 Maturities 325 Notional amount outstanding at September 30, 1995 $2,974 The weighted average interest rates paid on interest rate swaps designated as hedges were 5.79 percent and 6.09 percent at September 30, 1995, and December 31, 1994, respectively. At these same dates, the weighted average interest rates received were 6.82 percent and 6.91 percent. FBS receives fixed and pays floating on all hedges as of September 30, 1995. Net unamortized deferred gains were $4.1 million at September 30, 1995, which amortize through 2000. Interest rate floors totaling $950 million with an average remaining maturity of 2.2 years at September 30, 1995, and 3.0 years at December 31, 1994, hedged floating rate commercial loans. Interest rate floors totaling $300 million with an average remaining maturity of 1.0 years at September 30, 1995, hedged the reinvestment risk of fixed rate residential mortgage loans. For interest rate floors designated as hedges, the strike rate ranged from 3.25 percent to 6.36 percent at September 30, 1995, and 3.25 percent to 4.0 percent for December 31, 1994. At September 30, 1995, the total notional amount of interest rate caps purchased was $200 million with a strike level at 6.0 percent. The total notional amount of interest rate caps purchased at December 31, 1994, was $250 million with an average strike level at 6.10 percent. NOTE J. Supplemental Information to the Consolidated Financial Statements CONSOLIDATED BALANCE SHEET -- Time certificates of deposit in denominations of $100,000 or more totaled $1,047 million and $1,318 million at September 30, 1995, and December 31, 1994, respectively. CONSOLIDATED STATEMENT OF CASH FLOWS -- Listed below are supplemental disclosures to the Consolidated Statement of Cash Flows.
NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 (IN MILLIONS) 1995 1994 Income taxes paid $ 168.4 $ 138.2 Interest paid 785.2 595.5 Net noncash transfers to foreclosed property 15.8 30.3 Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $63.5 in 1995 and $48.8 in 1994 103.2 (117.2) Cash acquisitions of businesses: Fair value of noncash assets acquired $ -- $ 805.9 Liabilities assumed -- (698.7) Net $ -- $ 107.2 Stock acquisitions of businesses: Fair value of noncash assets acquired $ 329.3 $ 1,805.8 Net cash acquired 16.3 74.5 Liabilities assumed (288.6) (1,648.0) Net value of common stock issued $ 57.0 $ 232.3
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
1995 1994 % 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 $919 $14.6 6.30% $1,591 $21.0 5.24% (42.2)% Mortgage-backed securities 1,831 31.1 6.74 3,612 58.7 6.45 (49.3) State & political subdivisions 173 4.5 10.32 187 4.9 10.40 (7.5) U.S. agencies and other 433 6.6 6.05 687 9.5 5.49 (37.0) Total securities 3,356 56.8 6.71 6,077 94.1 6.14 (44.8) Unrealized loss on available-for-sale securities (13) (94) Net securities 3,343 5,983 Trading account securities 87 1.2 5.47 72 .9 4.96 20.8 Federal funds sold and resale agreements 263 3.8 5.73 348 4.0 4.56 (24.4) Loans: Commercial: Commercial 8,091 173.5 8.51 7,004 134.0 7.59 15.5 Financial institutions 814 8.7 4.24 919 5.8 2.50 (11.4) Real estate: Commercial mortgage 2,406 55.4 9.14 2,415 52.4 8.61 (.4) Construction 340 8.1 9.45 274 5.6 8.11 24.1 Total commercial 11,651 245.7 8.37 10,612 197.8 7.39 9.8 Consumer: Residential mortgage 4,841 92.0 7.54 5,182 94.0 7.20 (6.6) Residential mortgage held for sale 358 6.8 7.54 298 5.7 7.59 20.1 Home equity and second mortgage 2,679 65.8 9.74 2,335 51.9 8.82 14.7 Credit card 2,347 73.4 12.41 2,185 65.5 11.89 7.4 Other 3,660 92.2 9.99 3,325 78.8 9.40 10.1 Total consumer 13,885 330.2 9.43 13,325 295.9 8.81 4.2 Total loans 25,536 575.9 8.95 23,937 493.7 8.18 6.7 Allowance for credit losses 469 487 (3.7) Net loans 25,067 23,450 6.9 Other earning assets 238 3.2 5.33 253 3.6 5.65 (5.9) Total earning assets* 29,480 640.9 8.63 30,687 596.3 7.71 (3.9) Cash and due from banks 1,659 1,695 (2.1) Other assets 2,111 2,107 .2 Total assets $32,768 $33,908 (3.4)% LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits $5,591 $6,113 (8.5)% Interest-bearing deposits: Interest checking 2,728 10.1 1.47 2,907 11.1 1.51 (6.2) Money market accounts 3,871 36.9 3.78 3,982 27.7 2.76 (2.8) Other savings accounts 1,633 9.7 2.36 2,295 12.8 2.21 (28.8) Savings certificates 7,256 98.9 5.41 7,686 80.4 4.15 (5.6) Certificates over $100,000 1,028 17.4 6.72 1,354 19.5 5.71 (24.1) Total interest-bearing deposits 16,516 173.0 4.16 18,224 151.5 3.30 (9.4) Short-term borrowings 3,928 59.4 6.00 3,245 38.3 4.68 21.0 Long-term debt 2,892 48.0 6.58 2,741 39.5 5.72 5.5 Total interest-bearing liabilities 23,336 280.4 4.77 24,210 229.3 3.76 (3.6) Other liabilities 1,043 817 27.7 Preferred equity 105 118 (11.0) Common equity 2,701 2,710 (.3) Unrealized loss on available-for-sale securities, net of taxes (8) (60) (86.7) Total liabilities and shareholders' equity $32,768 $33,908 (3.4)% Net interest income $360.5 $367.0 Gross interest margin 3.86% 3.95% Gross interest margin without taxable- equivalent increments 3.81% 3.90% Net interest margin 4.85% 4.74% Net interest margin without taxable- equivalent increments 4.81% 4.69%
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
1995 1994 % 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 $990 $46.0 6.21% $1,681 $65.9 5.24% (41.1)% Mortgage-backed securities 2,069 105.8 6.84 3,154 149.6 6.34 (34.4) State & political subdivisions 175 13.9 10.62 192 15.1 10.51 (8.9) U.S. agencies and other 490 22.2 6.06 608 25.0 5.50 (19.4) Total securities 3,724 187.9 6.75 5,635 255.6 6.06 (33.9) Unrealized loss on available-for-sale securities (66) (38) Net securities 3,658 5,597 Trading account securities 87 3.5 5.38 66 2.2 4.46 31.8 Federal funds sold and resale agreements 289 12.8 5.92 420 11.9 3.79 (31.2) Loans: Commercial: Commercial 7,920 515.3 8.70 6,707 362.2 7.22 18.1 Financial institutions 727 22.2 4.08 1,251 23.1 2.47 (41.9) Real estate: Commercial mortgage 2,426 163.8 9.03 2,325 148.2 8.52 4.3 Construction 353 25.0 9.47 254 14.6 7.69 39.0 Total commercial 11,426 726.3 8.50 10,537 548.1 6.95 8.4 Consumer: Residential mortgage 4,970 281.9 7.58 5,465 294.0 7.19 (9.1) Residential mortgage held for sale 248 14.3 7.71 439 22.9 6.97 (43.5) Home equity and second mortgage 2,571 185.7 9.66 2,158 137.6 8.53 19.1 Credit card 2,311 216.9 12.55 1,983 179.7 12.12 16.5 Other 3,641 274.0 10.06 3,173 217.9 9.18 14.7 Total consumer 13,741 972.8 9.47 13,218 852.1 8.62 4.0 Total loans 25,167 1,699.1 9.03 23,755 1,400.2 7.88 5.9 Allowance for credit losses 473 487 (2.9) Net loans 24,694 23,268 6.1 Other earning assets 234 10.1 5.77 248 9.8 5.28 (5.6) Total earning assets* 29,501 1,913.4 8.67 30,124 1,679.7 7.46 (2.1) Cash and due from banks 1,681 1,722 (2.4) Other assets 2,151 2,059 4.5 Total assets $32,794 $33,380 (1.8)% LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits $5,512 $6,407 (14.0)% Interest-bearing deposits: Interest checking 2,849 34.3 1.61 3,081 33.3 1.45 (7.5) Money market accounts 3,846 108.7 3.78 4,099 79.1 2.58 (6.2) Other savings accounts 1,753 32.7 2.49 2,137 36.0 2.25 (18.0) Savings certificates 7,899 308.6 5.22 7,723 226.0 3.91 2.3 Certificates over $100,000 1,089 53.9 6.62 1,409 58.7 5.57 (22.7) Total interest-bearing deposits 17,436 538.2 4.13 18,449 433.1 3.14 (5.5) Short-term borrowings 3,185 144.4 6.06 2,411 78.0 4.33 32.1 Long-term debt 2,901 140.5 6.48 2,521 104.3 5.53 15.1 Total interest-bearing liabilities 23,522 823.1 4.68 23,381 615.4 3.52 .6 Other liabilities 1,022 851 20.1 Preferred equity 106 152 (30.3) Common equity 2,676 2,613 2.4 Unrealized loss on available-for-sale securities, net of taxes (44) (24) 83.3 Total liabilities and shareholders' equity $32,794 $33,380 (1.8)% Net interest income $1,090.3 $1,064.3 Gross interest margin 3.99% 3.94% Gross interest margin without taxable- equivalent increments 3.94% 3.88% Net interest margin 4.94% 4.72% Net interest margin without taxable- equivalent increments 4.89% 4.67%
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, 1995, FBS filed the following reports on Form 8-K: Form 8-K filed July 6, 1995, relating to the completion of distribution agreements with certain underwriters for the public offering of up to $750 million of medium-term notes. Form 8-K filed August 18, 1995, relating to the Company's announcement that it had signed a purchase agreement to acquire FirsTier Financial, Inc. ("FirsTier"). Form 8-K/A filed on August 30, 1995, amending the Form 8-K filed on August 18, 1995, to include FirsTier's historical financial statements and pro forma financial information reflecting the acquisition of FirsTier. Form 8-K filed September 11, 1995, relating to the public offering of $250 million of 6.875 percent subordinated notes. * 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 & Controller (Chief Accounting Officer and Duly Authorized Officer) DATE: November 9, 1995 [LOGO] FIRST BANK SYSTEM P.O. BOX 522 MINNEAPOLIS, MINNESOTA 55480 First Class U.S. Postage PAID Permit No. 2440 Minneapolis, MN SHAREHOLDER INQUIRIES STOCK AND DIVIDEND INFORMATION For matters related specifically to First Bank System stock records or dividend payments, contact the Office of the Corporate Secretary, (612) 973-0334. DIVIDEND REINVESTMENT For information regarding First Bank System's dividend reinvestment plan, contact First Chicago Trust Company of New York, P.O. Box 13531, Newark, New Jersey 07188-0001, (800) 446-2617. FINANCIAL INFORMATION For further information contact John Danielson, Senior Vice President, (612) 973-2261, or Karin Glasgow, Assistant Vice President, (612) 973-2264. EX-11 2 EXHIBIT 11 COMPUTATION OF PRIMARY AND FULLY DILUTED NET INCOME PER COMMON SHARE
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 1995 1994 1995 1994 PRIMARY: Average shares outstanding 131,401,366 135,124,344 133,014,010 133,626,207 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 2,247,576 2,820,264 1,993,509 2,403,603 133,648,942 137,944,608 135,007,519 136,029,810 Income from continuing operations $145.7 $119.5 $417.4 $346.9 Preferred dividends (1.8) (2.2) (5.6) (10.3) Income from continuing operations applicable to common equity $143.9 $117.3 $411.8 $336.6 Income from continuing operations per common share $1.08 $.85 $3.05 $2.47 Loss from discontinued operations -- $(7.0) -- $(6.6) Loss from discontinued operations per common share -- $(.05) -- $(.04) Net income $145.7 $112.5 $417.4 $340.3 Preferred dividends (1.8) (2.2) (5.6) (10.3) Net income applicable to common equity $143.9 $110.3 $411.8 $330.0 Net income per common share $1.08 $.80 $3.05 $2.43 FULLY DILUTED: * Average shares outstanding 131,401,366 135,124,344 133,014,010 133,626,207 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 2,605,311 2,842,639 2,747,842 2,948,206 Assumed conversion of Series 1991A Preferred Stock 3,616,512 3,655,684 3,616,512 3,655,684 137,623,189 141,622,667 139,378,364 140,230,097 Income from continuing operations $145.7 $119.5 $417.4 $346.9 Preferred dividends, excluding 1991A Preferred Stock -- (.3) -- (4.6) Income from continuing operations applicable to common equity $145.7 $119.2 $417.4 $342.3 Income from continuing operations per common share $1.06 $.84 $2.99 $2.44 Loss from discontinued operations -- $(7.0) -- $(6.6) Loss from discontinued operations per common share -- $(.05) -- $(.05) Net income $145.7 $112.5 $417.4 $340.3 Preferred dividends, excluding 1991A Preferred Stock -- (.3) -- (4.6) Net income applicable to common equity $145.7 $112.2 $417.4 $335.7 Net income per common share $1.06 $.79 $2.99 $2.39
* 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 NINE MONTHS MONTHS ENDED ENDED SEPTEMBER 30 SEPTEMBER 30 (DOLLARS IN MILLIONS) 1995 1995 EARNINGS 1. Net income $145.7 $417.4 2. Applicable income taxes 85.8 245.7 3. Net income before taxes (1 + 2) $231.5 $663.1 4. Fixed charges: a. Interest expense excluding interest on deposits $107.4 $284.9 b. Portion of rents representative of interest and amortization of debt expense 6.2 20.8 c. Fixed charges excluding interest on deposits (4a + 4b) 113.6 305.7 d. Interest on deposits 173.0 538.2 e. Fixed charges including interest on deposits (4c + 4d) $286.6 $843.9 5. Amortization of interest capitalized $ 1.2 $3.7 6. Earnings excluding interest on deposits (3 + 4c + 5) 346.3 972.5 7. Earnings including interest on deposits (3 + 4e + 5) 519.3 1,510.7 8. Fixed charges excluding interest on deposits (4c) 113.6 305.7 9. Fixed charges including interest on deposits (4e) 286.6 843.9 RATIO OF EARNINGS TO FIXED CHARGES 10. Excluding interest on deposits (line 6/line 8) 3.05 3.18 11. Including interest on deposits (line 7/line 9) 1.81 1.79
EX-27 4
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST BANK SYSTEM, INC. SEPTEMBER 30, 1995 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 1,586,000 0 260,000 164,000 3,302,000 0 0 25,877,000 468,500 32,958,000 21,895,000 4,156,000 879,000 3,127,000 169,000 0 105,000 2,462,000 32,958,000 1,693,000 183,600 26,400 1,903,000 538,200 823,100 1,079,900 84,000 0 918,600 663,100 417,400 0 0 417,400 3.05 2.99 4.94 117,000 40,700 100 0 474,700 158,200 66,200 468,500 0 0 0
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