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FIRST BANK SYSTEM 1994 INTEGRATED ANNUAL REPORT AND FORM 10-K
(See page 78 for 10-K cover page and cross-reference table)
-COVER-
Locations
[MAP OF UNITED STATES APPEARS ON THIS PAGE]
Iowa, Kansas, Nebraska and Wyoming were added as the result of the Metropolitan
Financial Corporation acquisition in January, 1995.
ABOUT THE COMPANY
First Bank System, Inc., (FBS) is a regional bank holding company serving 11
Midwestern and Rocky Mountain states through more than 300 locations.
Headquartered in Minneapolis, FBS is the 26th largest U.S. commercial bank
holding company with $34.1 billion in assets. Our market capitalization is now
over $5 billion, placing us among the top 20 U.S. banks. This reflects our
January 24, 1995, acquisition of Metropolitan Financial Corporation (MFC).
FBS has four core businesses and a culture that is focused on creating value
for shareholders. Our banking franchise has leading market shares in most of our
region's major markets. We are a leader in electronic payment systems, as the
nation's largest issuer of Visa Corporate and Purchasing Cards, and as the
seventh largest processor of Visa and MasterCard transactions. Our Commercial
Bank's focus on building strong client relationships has translated into
attractive returns for shareholders. We are among the 10 largest providers of
corporate trust services and our investment management services are growing
rapidly. These attributes have made us one of the nation's top performing banks.
The purpose of this report is to reflect FBS's financial condition at December
31, 1994, and therefore it does not include MFC. To obtain a copy of our
supplemental restated financials on Form 8-K, which include MFC, please turn to
the inside back cover for instructions.
FBS is listed on the New York Stock Exchange under the ticker symbol FBS and
FtBkSy.
RETURN ON AVERAGE COMMON EQUITY
(Percent)
[PERFORMANCE BAR GRAPH APPEARS ON THIS PAGE]
EARNINGS PER SHARE
(Dollars)
[PERFORMANCE BAR GRAPH APPEARS ON THIS PAGE]
SHAREHOLDERS' EQUITY TO ASSETS RATIO
(Percent)
[PERFORMANCE BAR GRAPH APPEARS ON THIS PAGE]
[INSIDE FRONT COVER]
Financial Summary
% Change
(Dollars in Millions, Except Per Share Amounts) 1994 1993 1993-1994
- --------------------------------------------------------------------------------
FOR THE YEAR
Income before Merger-related Charges............. $ 419.8 $ 348.0 20.6
Merger-related Charges........................... - (50.0) **
-----------------
Net Income....................................... $ 419.8 $ 298.0 40.9
=================
PER COMMON SHARE
Income before Merger-related Charges............. $ 3.57 $ 2.83 26.1
Merger-related Charges........................... - (.44) **
-----------------
Net Income....................................... $ 3.57 $ 2.39 49.4
=================
Dividends Paid................................... $ 1.16 $ 1.00 16.0
Common Shareholders' Equity...................... $ 19.25 $ 18.09 6.4
-----------------
RETURN ON AVERAGE ASSETS
Before Merger-related Charges.................... 1.63% 1.36% **
Merger-related Charges........................... - (0.19) **
-----------------
Return on Average Assets......................... 1.63% 1.17% **
=================
RETURN ON AVERAGE COMMON EQUITY
Before Merger-related Charges.................... 19.3% 16.4% **
Merger-related Charges........................... - (2.6) **
-----------------
Return on Average Common Equity.................. 19.3% 13.8% **
=================
Net Interest Margin.............................. 5.28% 5.07% **
Efficiency Ratio before Merger-related Charges... 57.2% 59.8% **
AT YEAR END
Loans............................................ $19,281 $18,779 2.7%
Allowance for Credit Losses...................... 434 423 2.6
Assets........................................... 26,219 26,385 (.6)
Total Shareholders' Equity....................... 2,275 2,245 1.3
Common Equity to Total Assets.................... 8.3% 7.5% **
Shareholders' Equity to Total Assets............. 8.7 8.5 **
Tier 1 Capital Ratio............................. 8.0 9.2 **
Total Risk-based Capital Ratio................... 12.5 13.3 **
**Not meaningful
Letter to Shareholders 2
FBS Priorities 4
Management's Discussion & Analysis 14
Consolidated Financial Statements 39
Five-Year Consolidated Financial Statements 70
Quarterly Consolidated Financial Data 74
Form 10-K 78
Executive Officers & Directors 82
FBS Locations 83
Corporate Data 84
RETURN ON AVERAGE ASSETS*
(Percent)
[PERFORMANCE BAR GRAPH APPEARS ON THIS PAGE]
EFFICIENCY RATIO*
(Percent)
[PERFORMANCE BAR GRAPH APPEARS ON THIS PAGE]
ALLOWANCE COVERAGE RATIO OF NONPERFORMING LOANS
(Percent)
[PERFORMANCE BAR GRAPH APPEARS ON THIS PAGE]
To Our Shareholders
- -------------------
When I think about the growth prospects for First Bank System, I am optimistic
because we derive tremendous leverage from our ability to increase revenues
against a low cost structure. While this formula for earnings growth is simple
and straightforward, developing the means to execute it is not.
Over the past several years, we have built an ingrained cost control
discipline that focuses on value in each decision. Strong, fee-generating
payment systems businesses complement our core banking franchise. Our retail
banking paradigm quickly brings new products to market through a multiple
distribution system attuned to customer needs. Innovation, speed, and
productivity permeate our culture, so that our strategic advantages translate
into daily action.
SHAREHOLDER FOCUS As we have said consistently over the past five years, we
strive for profits, not size. We have built shareholder value analysis into our
budgeting and management processes, which provides a disciplined method for
allocating resources to high-growth businesses. Our goal is to build a quality
earnings stream - one that combines stability and diversity- to weather any
industry or economic climate. In short, we are managing First Bank System to be
a superior long-term investment.
Our shareholder focus also guides us in deciding what we won't do. We won't
play the yield curve with bets on the direction of interest rates. Several banks
that did were hurt this past year as rates climbed. Nor will we make
acquisitions that don't make economic sense or don't create value for existing
FBS shareholders. The penalty for overpaying for acquisitions is harsh and long
in terms of lost credibility and diminished financial performance.
GROWTH POTENTIAL First Bank System is sustaining growth in two ways. First, we
are expanding market share in key segments of our core banking businesses, which
operate in a region where employment, household incomes, and loan delinquency
rates are better than the national averages. For example, our portfolio of home
equity loans has grown an average of 26 percent annually over the past five
years. Loans to small- and medium-sized businesses have achieved strong
increases for three consecutive years. The tremendous growth of our
WorldPerks(R) credit card business has created huge cross-selling opportunities.
Investment product sales are growing rapidly. Innovative new products, improved
customer service, and a developing sales culture should fuel continued market
share growth in these core businesses.
New businesses are contributing an important second growth stream. In just
five years, we turned our corporate and purchasing card businesses from test
products into the nation's largest Visa issuers. Merchant processing continues
to grow rapidly, placing First Bank nationally among the industry's largest
providers. This report includes separate financial information on these
increasingly important payment systems products. These and other fee-generating
businesses accounted for more than one-third of our total revenue.
OVER THE PAST FIVE YEARS, THE TOTAL RETURN OF FIRST BANK SYSTEM'S STOCK HAS
GROWN AT A COMPOUNDED ANNUAL RATE OF 19.4 PERCENT.
FIVE-YEAR TOTAL RETURN
(Percent)
[PERFORMANCE GRAPH APPEARS HERE]
2
- -
As for acquisitions, we're content to wait for the right opportunity at the
right price. But once we make an acquisition, we move quickly. Thanks to our
standardized products and centralized operations, we can fully integrate an
acquired bank's products and operations with our own much faster than other
banks. For example, we will complete the integration of the $8 billion-asset
Metropolitan Financial Corporation within just one month of closing. Speedy
integration means we achieve a higher level of cost takeouts and see the results
faster than other banks. We will continue to pursue value-creating acquisitions.
However, if acquisition prices are too high, we will simply continue to buy back
stock, increase dividends, or both. During the past two years, we have
repurchased $700 million of common and preferred stock. In 1995, we increased
the dividend by 25 percent, to $1.45 per share, and announced our intention to
repurchase 16 million shares of common stock by the end of 1996.
COST CONTROL We have fortified the expense side of our leverage equation with
standardized products and centralized operations. Because we support virtually
all products with a single set of systems, we can add significant new business
while adding little incremental cost. Another key factor is our compensation
system, which ties pay to profitable revenue generation. All of our employees
are eligible for variable pay, and nearly a fifth of our people have a
substantial portion of their total compensation based on the performance of FBS,
their business line, and their individual results. In addition, our top 174
managers participate in one of the industry's most aggressive management stock
ownership programs. Linking compensation - by far our largest expense - to
performance places the long-term goal of shareholder value squarely in the realm
of everyday action.
We are among the nation's most efficient banks. Our ratio of noninterest
expenses to revenues fell to 57 percent in 1994 from nearly 80 percent five
years ago. It's still too high, but we're confident that we can drive the
efficiency ratio to the low 50s in the next few years.
This month marks my fifth anniversary with First Bank System. I'm proud of our
accomplishments, but one stands out in my mind as being particularly important.
Our culture has changed from that of a traditional bank to one that highly
values innovation, inspires a sense of urgency, and is dedicated to increasing
productivity. That has made the achievement of every other goal possible. And
that is why I'm confident that First Bank System will continue to win the
loyalty of our customers and the trust of our investors.
/s/ John F. Grundhofer
John F. Grundhofer
Chairman, President and Chief Executive Officer
February 15, 1995
INNOVATION, SPEED, AND PRODUCTIVITY PERMEATE OUR CULTURE, SO THAT OUR STRATEGIC
ADVANTAGES TRANSLATE INTO DAILY ACTION.
3
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Progress on Priorities
- ----------------------
Records. First Bank System set a lot of them in 1994. Record earnings, record
profitability, and record efficiency. The numbers are gratifying not only
because they are among the best in the banking industry, but equally important,
they reflect progress made against long-term management objectives. These
fundamentals may be familiar since we have long held them as guideposts for
creating shareholder wealth. We believe there is great value in this
consistency. Our people know what is expected of them and they in turn can drive
those values deeper into our organization. Our priorities remain: core business
focus, productivity, disciplined acquisitions, asset quality, and effective
capital management.
CORE BUSINESS FOCUS We continue to build our core businesses while investing in
new revenue sources. Our traditional strengths in retail and community banking,
commercial banking, and trust and investment services are now joined by a
fourth: payment systems. Formerly part of retail banking, this fast-growing
collection of card and transaction processing businesses has become a major
focus of First Bank System's future. Together, these four business lines provide
earnings stability over the long term, especially in a changing interest rate
environment.
We are continuously investing in our businesses and assessing new revenue
sources. This long-term vision is reflected in the tremendous technology
investments we've made in recent years to deepen customer relationships and
maximize product profitability.
PRODUCTIVITY Although our stated near-term goal is a ratio of expenses to
revenues in the low 50s, there really is no end point to productivity gains. The
reason is that rapidly evolving technology is creating productivity improvements
that were unthinkable five years ago. More improvements are on the horizon. With
enhancements to our Earnings Analysis System, we are building stronger links
between our management accounting and other computer systems to generate deeper
levels of information about product cost and profitability. This also will
provide a framework for analyzing the profitability of individual customer
segments.
In fact, technology is reshaping the way we deliver financial products and
services. Customers now have the choice of traditional bank branches, automated
teller machines, telephones, and other electronic options. Currently,
approximately half of First Bank System's consumer transactions are initiated
outside of our branch network. We will continue to invest in technology that
maximizes customer convenience and sales productivity.
[PHOTO OF FIRST BANK SENIOR MANAGEMENT TEAM]
FIRST BANK SENIOR MANAGEMENT TEAM:
Front from left: RICHARD A. ZONA, vice chairman and chief financial officer, and
JOHN F. GRUNDHOFER, chairman, president and chief executive officer. Back from
left: WILLIAM F. FARLEY, vice chairman, Distribution Group; J. ROBERT HOFFMANN,
executive vice president and chief credit officer; DANIEL C. ROHR, executive
vice president, Commercial Banking; PHILIP G. HEASLEY, vice chairman and
president, Retail Products Group; JOHN M. MURPHY, JR., chairman and chief
investment officer, First Trust N.A.; MICHAEL J. O'ROURKE, executive vice
president and general counsel; and ROBERT H. SAYRE, executive vice president for
human resources.
4
Acquisitions also present excellent opportunities for economies of scale
through branch consolidation and systems integration. We have a proven
integration model that helps us realize cost savings more quickly than anyone in
the industry. We fully integrated Metropolitan Financial Corporation, an $8
billion institution with 300,000 customer households, within one month of
closing.
DISCIPLINED ACQUISITIONS We expanded our region and strengthened our existing
market presence through acquisitions this past year. In March we entered
Illinois with the acquisition of Boulevard Bancorp, Inc., a $1.6 billion bank
holding company in Chicago. The Metropolitan Financial Corporation acquisition -
the largest in our history - gives us a presence in Iowa, Kansas, Nebraska and
Wyoming, four states contiguous to our existing region. It also strengthened our
share in four of our current states, making Metropolitan an excellent fit both
strategically and economically.
These new states have fragmented banking industries that offer high potential
for building market share through acquisition. We have a strong record of doing
just that. In 1994 we completed or announced five in-market acquisitions in
Colorado, Minnesota, North Dakota, and South Dakota.
We also strengthened our national leadership position as a corporate trust
services provider with the completion of our previously announced acquisition of
J.P. Morgan's domestic corporate trust business.
ASSET QUALITY Despite the rise in interest rates, we expect our asset quality
to continue to remain at a very high level. At year-end, the ratio of
nonperforming assets to loans and other real estate owned was .79 percent.
Higher interest rates may prompt some companies to compromise their credit
standards. First Bank System will not be one of them. Maintaining high standards
and pricing based upon risk is the only way to add profitable business.
Our lending strategy remains unchanged. Led by people with exceptional
backgrounds in credit administration, we continue to focus locally where we can
turn our superior market knowledge into superior credit judgments. These markets
have proven more resilient than other parts of the country during recent
economic downturns.
EFFECTIVE CAPITAL MANAGEMENT We manage our capital to maximize shareholder
value and provide a strong base for acquisitions. During the past two years
we repurchased $700 million of common and preferred stock. We also have
increased our common dividend rate for five consecutive years, including our
most current increase of 25 percent in February, 1995.
THESE FUNDAMENTALS MAY BE FAMILIAR SINCE WE HAVE LONG HELD THEM AS GUIDEPOSTS
FOR CREATING SHAREHOLDER WEALTH. WE BELIEVE THERE IS GREAT VALUE IN THIS
CONSISTENCY.
[TABLE FOR FBS LEADING MARKET SHARES ON THIS PAGE]
[TABLE FOR RECENT ACQUISITION ON THIS PAGE]
5
RETAIL & COMMUNITY BANKING
COMMUNITY BANKING
BUSINESS DESCRIPTION
- --------------------
FBS serves more than 1.4 million households in seven states through 200 banking
locations, 1,055 Fastbank(R) automated teller machines, and 24-hour FastLine(SM)
telephone service. Our core customers - those with checking accounts - have an
average of 3.8 accounts with FBS.
1994 HIGHLIGHTS
- ---------------
. Achieved consumer loan growth of 17 percent to $4 billion. . Increased retail
sales of investment products 21 percent to $428 million. . Deepened core
household penetration to an average of 3.8 accounts from 3.2 accounts a year
ago. . Improved the cross-sell ratio on home equity sales to an average of 2.2
new products per customer, up from 1.8 in the 1993 promotions. . Boosted branch
productivity 17 percent over the past two years to 4,092 monthly transactions
per full-time equivalent teller.
. Serviced more than 24 million customer calls, up 34 percent over 1993, and
increased calls serviced entirely by our audio response unit to 70 percent.
. Improved customer satisfaction with branch bank service to 90 percent from 85
percent. . Opened four new private banking locations in Minnesota.
BUSINESS BANKING
BUSINESS DESCRIPTION
- --------------------
FBS serves approximately 150,000 small and middle-market businesses through 37
business banking hubs and three Mainstreet Loan Centers that are designed to
quickly serve the needs of this important market. At year-end, our portfolio of
$5.2 billion in business loans accounted for 27 percent of FBS's entire loan
portfolio.
1994 HIGHLIGHTS
- ---------------
. Increased business banking loans 16 percent. . Increased business checking
accounts 13 percent. . Earned approval as a Small Business Administration loan
underwriter in every market we serve.
MORTGAGE BANKING
BUSINESS DESCRIPTION
- --------------------
FBS Mortgage is one of the largest residential mortgage lenders in our region.
Home loan origination totaled $1.6 billion in 1994. At year-end, our mortgage
servicing portfolio was $9.8 billion.
1994 HIGHLIGHTS
- ---------------
. Introduced several products, including Combination Lock & Loan, which offers
pre-approval, three-day approval, and rate protection options; a construction-
to-perm loan that provides both construction and permanent mortgage financing
with just one closing; and a "mega-Jumbo" product for borrowers with loan needs
exceeding $1 million.
. Increased loans to low-income households 47 percent and loans to minorities 70
percent. . Improved customer satisfaction rating on loan originations and
servicing to 90 and 88 percent, respectively, from 87 and 74 percent.
. Achieved loan servicing costs that are 12 percent below those of our peer
banks. . Maintained a delinquency rate that was less than half the national
average.
PERCENT OF FBS NET INCOME
EFFICIENCY RATIO (Percent)
NET INTEREST INCOME (Millions)
[THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]
6
- -
LOOKING AHEAD
- -------------
NEW TECHNOLOGY: DEEPENING CUSTOMER RELATIONSHIPS
A sophisticated new management system that focuses on entire customer
relationships across product lines will improve our ability to sell and service
our customers. The Relationship Management System (RMS) leverages our existing
customer data to improve customer service, cross-selling effectiveness, and
productivity. RMS will provide detailed relationship strategies based on four
customer dimensions: profitability, risk, potential for attrition, and
propensity to buy additional products or services.
We are a bank industry leader in broadly applying customer management
practices to our retail business. This new technology will help us better
understand our customers by linking multiple account usage information to
demographics and analysis. It marks an important shift from account management
to relationship management.
DIRECT MARKETING: A POWERFUL SALES TOOL FBS is developing marketing
alternatives to our branch bank system so that customers can conveniently bank
anytime, anywhere. Direct marketing, which includes direct origination of
customer leads for either branch or centralized fulfillment, has been a major
contributor to improved sales results. Last year we converted into new product
sales 35 percent of approximately 680,000 customer calls to our centralized
telephone bank center in response to advertising or direct mail solicitations.
Highly targeted, outbound telemarketing calls resulted in the sale of 68,000
products, a 13 percent conversion rate.
Direct marketing is increasing our household penetration and market share
while lowering the acquisition cost per account and delivering high-quality
service. Over the past four years, retail asset balances originated through
direct marketing have grown rapidly. Last year, nearly 60 percent of our new
retail asset accounts were originated by direct marketing. The number of calls
converted into sales has increased significantly while the cost per new account
has dropped roughly one-third for inbound and outbound calls.
BUSINESS BANKING: AGGRESSIVE PURSUIT OF SALES Aggressive marketing, expansion
of our business banking hubs, and a favorable economy helped spark solid growth
in loans over the past three years to companies with annual sales of $25 million
or less. Excluding acquisitions, our core business banking loans increased 9
percent or $350 million. Growth in loans to businesses with less than $1 million
in annual sales resulted from new performance incentives and standard loan
processing at our Mainstreet Loan Centers. These changes have empowered our
personal bankers to sell business loans. Free of loan under-writing
responsibility, bankers now focus on calling customers.
BRANCH PRODUCTIVITY: USING TECHNOLOGY EFFECTIVELY FBS has steadily improved the
efficiency and productivity of its retail banking operations over the past five
years. Our productivity, as measured by daily transactions per teller, is among
the best at 195, which is substantially above the industry average. We've set
our sights on further productivity gains this year by placing FastLine
telephones in selected branches to shift more customer service inquiries to our
centralized phone bank. We're also encouraging greater use of automatic teller
machines (ATMs) to improve customer service and lower transaction costs. Tests
include extending hours for same-day crediting on ATM deposits and replacing
drive-up tellers with ATMs. Another initiative is the roll-out of Desktop
Expert, a two-way video conferencing system that enhances customer service and
cross-selling. It allows bankers and customers to immediately access a mortgage
or investment specialist when one is unavailable on-site.
NET INCOME (millions)
NONINTEREST INCOME (millions)
[THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]
7
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PAYMENT SYSTEMS
CORPORATE PAYMENT
BUSINESS DESCRIPTION
- --------------------
FBS offers card products to help companies and government entities of all sizes
efficiently manage expenses. Three cards comprise this group:
. Corporate Card, a non-revolving Visa card issued to employees of corporations
with annual travel and entertainment expenses of $1 million or more. National
rank: second. Estimated market: $130 billion annually.
. Purchasing Card, a Visa charge card that reduces the processing cost of small-
dollar purchases and lowers the risk of inappropriate purchases through client-
specified controls. National rank: first. Estimated market: $300-$400 billion
annually.
. Business Card, a revolving Visa credit card for companies with annual travel
and entertainment expenses under $1 million. Estimated market: 8 million
companies.
1994 HIGHLIGHTS
- ---------------
. Increased the number of corporate and purchasing card relationships with
Fortune 100 companies to 43 and with Fortune 500 Industrial and Service
companies to more than 150. . Added more than 1,000 U.S. and state government
entities to our purchasing card program.
. Introduced a new Visa WorldPerks Business Card that provides frequent flier
mileage credit through Northwest Airlines. . Introduced FirstView/SM/, a desk-
top report-writing software that allows purchasing card and corporate card
customers to more closely track their company's expenses.
. Developed and piloted the relocation card product, designed and serviced in
concert with FBS Mortgage, to streamline the relocation process for Fortune 1000
customers.
CREDIT PRODUCTS
BUSINESS DESCRIPTION
- --------------------
FBS is one of the nation's 10 largest issuers of Visa credit cards. We have more
than 2.2 million cards, $2.4 billion in outstanding balances, and annual sales
exceeding $6 billion.
1994 HIGHLIGHTS
- ---------------
. Introduced the new FBSWorldPerks(R) Visa Card and attracted almost 400,000
cardholders and outstanding receiveables of $600 million. Annualized sales
volume is more than $4 billion.
. Increased total credit outstandings 37 percent to $2.4 billion. . Launched a
test of Direct Cash, an unsecured line of credit for low- and moderate-income
customers. . Selected as first U.S. bank to test Visa TravelMoney, an
international prepaid travel card which is an alternative to traveler's cheques.
MERCHANT PROCESSING
BUSINESS DESCRIPTION
- --------------------
FBS is the nation's seventh largest processor of Visa and MasterCard
transactions, serving approximately 60,000 merchant locations nationwide.
1994 HIGHLIGHTS
- ---------------
. Increased merchant processing volume 31 percent to $13.4 billion, our third
year of growth of 25 percent or more. . Completed a conversion of all processing
to an improved merchant system.
AGENT BUSINESSES
BUSINESS DESCRIPTION
- --------------------
FBS is the nation's third largest deployer of off-premise automated teller
machines (ATMs), with more than 1,474 locations in 14 states. FBS distributes
its retail card products through more than 800 independent financial
institutions with more than two million consumer checking accounts. FBS
currently offers two ATM network brands, Fastbank and PEAK, in the Upper Midwest
and Rocky Mountain regions, respectively.
1994 HIGHLIGHTS
- ---------------
. Expanded ATM network with an agreement to place more than 1,000 new machines
in Circle K convenience stores. . Increased ATM transaction volume 8 percent to
66 million.
. Piloted the Visa Interlink program in Colorado, which allows customers to use
their ATM cards to make purchases at selected retailers. . Launched Visa check
card program to Fastbank agents in the Upper Midwest.
PERCENT OF FBS NET INCOME
EFFICIENCY RATIO (Percent)
NET INTEREST INCOME (Millions)
[THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]
8
- -
LOOKING AHEAD
- -------------
PAYMENT SYSTEMS: OPPORTUNITY TO GAIN MARKET SHARE
As banking's historic role as a financial intermediary moves from a physical to
an electronic environment, we see enormous opportunity to further strengthen our
position in the regional payment system. The payment system controls the
processing of transactions between consumers and businesses. It is a highly
profitable volume business with steep barriers to entry. Unlike most financial
institutions, we aggressively pursue both sides of the payment system by
providing both payment vehicles, such as credit, charge, debit, and ATM cards,
as well as payment processing and treasury management services (see page 11). In
addition to generating more fees, "closing the loop" on the payment system
creates competitive advantages by generating a unique level of information,
efficiency and control.
NEW TECHNOLOGY: INCREASING EFFICIENCY AND FLEXIBILITY
We are developing a sophisticated computer system that will consolidate systems
that run our card and credit line products. The Cards and Lines System (CLS)
will cut operating expenses and increase flexibility to enhance or introduce
products. The development of CLS is another example of FBS's commitment to using
technology to improve productivity and profitability.
CORPORATE CARD: A RAPID GROWTH BUSINESS Controlling information about the
business traveller is the key to success in the corporate card business. In this
regard, we have several competitive advantages that bode well for continued
strong growth. One is Visa's unmatched worldwide acceptance. More than 11
million locations means that more data is captured; data is power when managing
costs or negotiating vendor discounts. Widespread presence also allows companies
to eliminate expensive cash advances to travelling employees. Another benefit
for cost-conscious corporate customers is Visa's superior acceptance at more
low- to medium-priced restaurants and hotels. We will expand our entry into the
global market through partnerships with international institutions capable of
extending our product expertise. Development of proprietary technology and
specific product enhancements is expected to limit new competition in this
attractive market.
PURCHASING CARD: EMERGING MARKET, HUGE POTENTIAL The $300-$400 billion annual
market for purchasing cards is still in its infancy, and we intend to continue
to market aggressively and consistently deliver the innovative products that
made us the market leader. We also expect the purchasing card to continue to
help sell our merchant processing business because the large volumes enable us
to offer incentives for signing key vendors to accept Visa. In addition to more
deeply penetrating the Fortune 100 and 500, we are successfully carving a niche
among state governments and federal agencies.
WORLDPERKS VISA CARD: STRONG FEES AND CROSS-SELLING OPPORTUNITIES A key piece
was added to our regional payment systems strategy last year with the award of
the WorldPerks Visa Card partnership with Northwest Airlines. We have already
attracted almost 400,000 cardholders, far exceeding our initial expectations. We
expect to double the WorldPerks card sales volume in five years to approximately
$8 billion. In the meantime, we will pursue the tremendous cross-selling
opportunity that lies in the fact that only about 15 percent of our cardholders
have a pre-existing account relationship with First Bank System.
NET INCOME (Millions)
NONINTEREST INCOME (Millions)
[THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]
9
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COMMERCIAL BANKING
COMMERCIAL LENDING
BUSINESS DESCRIPTION
- --------------------
FBS's Commercial Banking Group takes and manages credit risk and markets
competitively priced products to businesses in our markets with annual revenues
greater than $25 million.
1994 HIGHLIGHTS
- ---------------
. Achieved excellent core loan growth. Average outstanding loans increased
8 percent over 1993. . Reduced nonperforming assets 36 percent to $56 million.
MORTGAGE BANKING SERVICES
BUSINESS DESCRIPTION
- --------------------
FBS is one of the nation's largest providers of credit and other financial
services to mortgage bankers.
1994 HIGHLIGHTS
- ---------------
. Managed business effectively during a cyclical decline in loans to mortgage
bankers and rapid industry consolidation. Previous efforts to strengthen client
relationships reduced turnover.
REAL ESTATE LENDING
BUSINESS DESCRIPTION
- --------------------
FBS provides credit and other financial products and services to selected real
estate developers for the development, renovation, expansion, acquisition or
refinance of their real estate projects.
1994 HIGHLIGHTS
- ---------------
. Continued to build our real estate portfolio and deepen client relationships.
. Continued to build a strong account team. Our relationship managers have an
average of more than 10 years of real estate market experience.
TREASURY MANAGEMENT SERVICES
BUSINESS DESCRIPTION
- --------------------
FBS, one of the region's largest treasury management services providers, helps
companies achieve effective treasury operations through a full range of domestic
and international cash management, information reporting, and trade finance
services.
1994 HIGHLIGHTS
- ---------------
. Achieved a leadership position in the evolving electronic data interchange
business through the introduction of six new EDI services. . Joined EDI Bank
Alliance Network Exchange (EDIBANX), a revolutionary new EDI service. Both moves
broaden our clients' ability to originate and receive financial EDI
transactions. . Worked closely with clients to develop Gallery(TM), an
innovative Windows-based system that enhances the delivery of domestic and
international information reporting and transaction initiation services.
. Established Hong Kong-based subsidiary to issue import letters of credit.
. Introduced Faxport, accelerating the delivery of letters of credit to
exporters through automation. . Enhanced ACH positive pay and cash vault
transaction reporting.
CORPORATE FINANCE AND LOAN SYNDICATIONS
BUSINESS DESCRIPTION
- ---------------------
FBS meets the broad financial needs of our clients by syndicating credit
facilities and placing capital with investors.
1994 HIGHLIGHTS
- ---------------
. Originated and syndicated more than $2.5 billion in loans, meeting the full
credit needs of FBS clients while prudently managing FBS portfolio
concentrations.
PERCENT OF FBS NET INCOME
EFFICIENCY RATIO (Percent)
NET INTEREST INCOME (Millions)
[THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]
10
- --
LOOKING AHEAD
- -------------
COMMERCIAL BANK CULTURE: VALUES FOR SUCCESS Our goal is simple yet ambitious:
to meet our clients' expectations for a superior banking relationship. The
significant characteristics include knowledgeable people, responsiveness,
understanding the client's business, maintaining a long-term commitment to the
client, and competitive pricing.
To accomplish this, we are building a culture that focuses on the client and
rewards initiative, innovation and teamwork. We are continuing to develop strong
leaders to advance the business, not just manage it. Using a rigorous and
disciplined process, based on facts and data, we are embedding core values into
everyday business activity. Only by continuously evaluating and shaping how we
think and act can we make lasting changes that result in consistently superior
performance.
CORPORATE BANKING: A CORE BUSINESS STRENGTH Commercial Banking is a vital part
of FBS's overall strategy of building a balanced earnings stream. By developing
strong client relationships with businesses in our geographic region, we can
translate superior market knowledge into sound credit judgments and, ultimately,
into attractive returns for shareholders.
This past year was one of exceptionally strong growth in our core lending
portfolio, which helped offset a cyclical decline in loans to the rapidly
consolidating mortgage banking industry. Credit quality improved significantly,
which continues a five-year trend that reflects our increasingly strong credit
culture. We will not retreat on credit quality, despite rising competitive
pressures.
We remain committed to our long-term goal of deepening client relationships
through innovative thinking and excellence in client service. As part of these
efforts, we will continue to build our corporate finance expertise as commercial
banking continues its evolution into an advisory business.
ELECTRONIC COMMERCE: THE WAY TO DO BUSINESS FBS has become a leader in the
rapid movement among companies of all sizes from paper-based payments to
electronic payments. Although we have provided electronic data interchange (EDI)
services for five years, we moved into an industry leadership position with our
charter membership in EDI Bank Alliance Network Exchange (EDIBANX). EDIBANX, a
strategic alliance of 13 of the country's leading treasury management banks, is
advancing the future of EDI. The network helps facilitate electronic commerce by
providing clients with an efficient means to exchange EDI transactions with
other EDI-capable businesses.
Our leadership position in EDI ensures that FBS clients will have access to
information and services that will help them effectively implement EDI programs,
thereby taking advantage of cost and operating efficiencies. It also further
strengthens our position as a regional leader in payment systems (see pages 8
and 9 for Payment Systems discussion).
Another important effort to help companies transact business efficiently is
Gallery(TM), one of the first Windows-based computer software services to
combine international and domestic information reporting and transaction
initiation services. Scheduled for introduction in 1995, Gallery enhances the
value of financial information by enabling clients to integrate data into their
systems through the use of client/server technology. Companies also can use
Gallery to initiate ACH transactions, domestic and international wire transfers,
foreign drafts, and letters of credit.
FBS also is introducing image services to deliver check images to clients
through a variety of media. Clients will use these images to assist in the
verification and reconciliation of check processing functions.
NET INCOME (Millions)
NONINTEREST INCOME (Millions)
[THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]
11
--
TRUST & INVESTMENT GROUP
CORPORATE TRUST
BUSINESS DESCRIPTION
- --------------------
FBS is one of the nation's 10 largest providers of domestic trusteeship, paying
agency, and custody services to debt issuers. We have in excess of $250 billion
in administered assets and 12 offices that provide a coast-to-coast presence.
1994 HIGHLIGHTS
- ---------------
. Completed the acquisition of J.P. Morgan's domestic corporate trust
business. . Ranked first nationally in the principal amount ($13.5 billion) of
new long-term municipal issues awarded to trustees in 1994.
. Awarded $5.9 billion in corporate finance issues. . Implemented a new
bondholder recordkeeping system.
INVESTMENT MANAGEMENT
BUSINESS DESCRIPTION
- --------------------
FBS provides asset management services to individuals and institutions through
common, collective, and mutual funds, and individual portfolios.
1994 HIGHLIGHTS
- ---------------
. Increased assets under management 13 percent to $24.5 billion. . Grew
proprietary First American mutual fund assets more than 65 percent to $4.7
billion, despite declining market.
. Introduced five new mutual funds for a total of 27. . Launched B class or
"back-end" load mutual fund shares.
INVESTMENT SERVICES
BUSINESS DESCRIPTION
- --------------------
FBS's full-service brokerage company distributes municipal and government bonds,
equities, mutual funds, and annuities to correspondent banks, corporations,
public agencies, and individuals.
1994 HIGHLIGHTS
- ---------------
. Became one of the first major banks to create a unified sales force, making
one-stop shopping for investment products possible. . Increased investment sales
force to 166 from 135 people.
. Established approximately 23,000 new retail account relationships, an increase
of 83 percent over 1993.
PERSONAL FINANCIAL SERVICES
BUSINESS DESCRIPTION
- --------------------
FBS provides a wide range of investment advisory, administrative, and fiduciary
services for individuals, families, and charitable institutions.
1994 HIGHLIGHTS
- ---------------
. Developed new organizational structure that eliminates internal barriers to
superior client service. . Began creating teams of specialists from trust,
private banking, and investment services to serve affluent households.
INSTITUTIONAL TRUST
BUSINESS DESCRIPTION
- --------------------
FBS provides trustee, investment management, and custodial services, primarily
for 401(k) and other employee benefit plans.
1994 HIGHLIGHTS
- ---------------
. Nearly doubled the size of the Diamond program, our bundled 401(k) product for
small and medium-sized businesses, to 178 plans with $197 million in assets.
. Expanded Diamond program to appeal to companies with up to 1,500 employees.
. Implemented new accounting system and standardized traditional recordkeeping.
. Grew First Stable Fund, which invests in guaranteed investment contracts, 95
percent to $182 million in assets.
. Developed a measurement system that provides custody clients with an
independent, consistent and consolidated performance evaluation.
. Enhanced First Access, a Windows-based, on-line computer system that allows
clients to review their portfolios.
. Expanded institutional trust sales force.
PERCENT OF FBS NET INCOME
EFFICIENCY RATIO (Percent)
NET INTEREST INCOME (Millions)
[THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]
12
- --
LOOKING AHEAD
- -------------
CORPORATE TRUST: TECHNOLOGY INCREASES PROFITABILITY A new bondholder
recordkeeping system installed last year has significantly cut our operating
costs, making us a low-cost provider of domestic corporate trust services. This
single system enables us to handle all types of securities, eliminating the need
for multiple systems that most of our competitors use. It also enables us to
integrate acquisitions quickly and completely. Improved technology and lower
costs are essential in a scale business such as corporate trust.
ASSET MANAGEMENT: THE KEY TO GROWTH One of our long-term goals is to
significantly increase the Trust & Investment Group's revenue contribution to
First Bank System. To help accomplish this, we completed a major study last year
that identified initiatives for quickly growing assets managed for both
individuals and institutions. We intend to leverage our 105 years of money
management experience to capture a larger slice of this rapidly growing
industry:
. RETAIL MARKET. Last year our 83 percent growth in new investment product
accounts easily outpaced the industry. We will continue to strengthen the sales
efforts and build recognition for the 27 First American Investment Funds, our
proprietary mutual fund family. New products, mutual fund wholesaling, and a
significant technology investment in a new workstation for brokers will fuel
future growth.
. AFFLUENT MARKET. FBS is moving toward a fully integrated approach to
serving the complex needs of our most affluent clients with household incomes of
at least $150,000. Our new Private Financial Services group creates client teams
whose expertise spans our traditional trust, private banking, and investment
areas. These teams are designed to satisfy client desire for easy access to a
broad range of financial products and services through a single relationship
manager. Focusing on each client's entire relationship with FBS provides
superior service and cross-selling opportunities in this rapidly growing market.
. INSTITUTIONAL MARKET. We see enormous opportunity in the fact that only 9
percent of U.S. companies with fewer than 100 employees have 401(k) plans. Our
Diamond 401(k) plan, with its standard features, overcomes the primary barrier
of cost. Diamond plan sales nearly doubled last year almost exclusively on
referrals from business banking. We've only begun to tap the cross-selling
potential of FBS's deep regional penetration in the business banking market. We
have begun marketing our ability to customize the Diamond program to appeal to
larger companies, those with up to 1,500 employees. We also are strengthening
our distribution system by training business bankers to sell the Diamond plan,
doubling our sales force, and developing aggressive marketing and advertising
campaigns.
INVESTMENT PERFORMANCE: A COMPETITIVE ADVANTAGE
Despite the dismal year in 1994 for the mutual fund industry, all 12 First
American Investment Funds with a track record of longer than one year
outperformed their peer group average. Nine of those funds ranked among the top
20 percent of their investment category, according to Lipper Analytical
Services, Inc. In addition, our core institutional equity product has
outperformed the Standard & Poor's Index of 500 stocks over the past one, three
and five years. Superior investment performance and a diverse range of
investment styles give us a distinct competitive advantage over other asset
managers.
NET INCOME (Millions)
NONINTEREST INCOME (Millions)
[THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]
13
--
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
- --------
EARNINGS SUMMARY - First Bank System, Inc. (the "Company") reported net income
in 1994 of $419.8 million ($3.57 per share), an increase of $121.8 million, or
40.9 percent, from 1993. Net income for 1993 of $298.0 million ($2.39 per share)
included after-tax merger-related charges of $50.0 million ($.44 per share)
recorded in connection with the acquisition of Colorado National Bankshares,
Inc. ("CNB"). Earnings in 1994 increased $71.8 million, or 20.6 percent, from
1993, excluding merger-related charges. Net income for 1992 of $311.8 million
($2.67 per share) included after-tax merger-related charges of $81.8 million
($.78 per share) related to the acquisitions of Western Capital Investment
Corporation ("WCIC") and Bank Shares Incorporated ("BSI"), in addition to $157.3
million of income related to the cumulative effect of changes in accounting
principles.
Return on average common equity increased to 19.3 percent in 1994 from 13.8
percent in 1993 and return on average assets increased to 1.63 percent from 1.17
percent for the same periods. Excluding merger-related charges, return on
average common equity was 16.4 percent and return on average assets was 1.36 in
1993. The efficiency ratio improved to 57.2 percent in 1994 from 59.8 percent in
1993, excluding merger-related charges.
The improvement in earnings reflects increases in net interest income on a
taxable-equivalent basis of $59.3 million, or 5.2 percent, and noninterest
income of $58.4 million, or 10.3 percent, together with a reduction in provision
for credit losses of $32.2 million, or 25.7 percent, and controlled noninterest
expense growth of $24.8 million, or 2.4 percent (excluding merger-related
charges in 1993). Compared with noninterest expense for 1993, adjusted to
include the operations of Boulevard Bancorp, Inc. ("Boulevard") and the acquired
corporate trust unit of J.P. Morgan and Co., Incorporated, ("J.P. Morgan") on a
pro forma basis, noninterest expense in 1994 declined $33.2 million, or 3.1
percent. For further information on the specific components of the 1994
operating results, see the "Statement of Income Analysis" on page 18.
Nonperforming assets dropped to $153.0 million at December 31, 1994, a
decrease of $73.0 million, or 32.3 percent, from December 31, 1993, despite the
addition of $29.3 million in nonperforming assets from the acquisition of
Boulevard in the first quarter of 1994. The ratio of the allowance for credit
losses to nonperforming loans increased to 385 percent, from 269 percent at
December 31, 1993.
ACQUISITIONS - On January 24, 1995, the Company issued approximately 21.7
million shares in connection with the acquisition of Metropolitan Financial
Corporation ("MFC"), a regional financial services holding company headquartered
in Minneapolis, Minnesota. As of December 31, 1994, MFC had approximately $7.9
billion in assets, $5.5 billion in deposits and 211 offices principally in North
Dakota, Minnesota, Nebraska, lowa, Kansas, South Dakota, Wisconsin, and Wyoming.
The transaction will be accounted for as a pooling-of-interests.
On September 2, 1994, the Company completed the acquisition of the domestic
corporate trust business of J. P. Morgan. This business unit provides trust
services for approximately 650 clients with 3,800 bond issues in the areas of
municipal, revenue, housing and corporate bond indenture trusteeships.
On March 25, 1994, the Company completed the acquisition of Boulevard Bancorp,
Inc., a commercial bank holding company based in Chicago, Illinois, with $1.6
billion in assets and $1.2 billion in deposits. The Company exchanged
approximately 6.2 million shares of its common stock for all of the outstanding
common stock of Boulevard and accounted for the transaction as a purchase. The
Company also repurchased existing shares of its common stock approximately equal
to the number of shares issued at the time of closing of the Boulevard
acquisition.
14 First Bank System, Inc. and Subsidiaries
- --
TABLE 1. Selected Financial Data
(Dollars in Millions, Except Per Share Amounts) 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------------------------
CONDENSED INCOME STATEMENT:
Net interest income (taxable-equivalent basis)......................... $1,209.9 $1,150.6 $1,017.8 $ 941.2 $ 872.7
Provision for credit losses............................................ 93.0 125.2 183.4 202.2 215.4
--------------------------------------------------
Net interest income after provision for credit losses................ 1,116.9 1,025.4 834.4 739.0 657.3
Noninterest income..................................................... 628.0 569.6 535.7 497.7 437.6
Merger-related charges (including $26.4 related to ORE in 1992)........ - 72.2 110.4 - -
Other noninterest expense.............................................. 1,053.1 1,028.3 1,003.9 969.3 981.0
--------------------------------------------------
Income before income taxes and cumulative effect
of changes in accounting principles................................ 691.8 494.5 255.8 267.4 113.9
Taxable-equivalent adjustment.......................................... 15.1 17.7 22.7 34.4 48.1
Income taxes........................................................... 256.9 178.8 78.6 25.9 8.5
--------------------------------------------------
Income before cumulative effect of changes in accounting principles.. 419.8 298.0 154.5 207.1 57.3
Cumulative effect of changes in accounting principles.................. - - 157.3 - -
--------------------------------------------------
Net income........................................................... $ 419.8 $ 298.0 $ 311.8 $ 207.1 $ 57.3
==================================================
Return on average assets............................................... 1.63% 1.17% 1.32% .90% .22%
Return on average common equity........................................ 19.3 13.8 16.4 13.1 2.7
Net interest margin.................................................... 5.28 5.07 4.85 4.50 3.70
Efficiency ratio....................................................... 57.2 64.0 71.8 67.8 75.1
Efficiency ratio, excluding merger-related charges..................... 57.2 59.8 64.7 67.8 75.1
PER SHARE DATA:
Primary income before cumulative effect of accounting changes.......... $ 3.57 $ 2.39 $ 1.18 $ 1.79 $ .36
Cumulative effect of accounting changes.............................. - - 1.49 - -
--------------------------------------------------
Primary net income..................................................... $ 3.57 $ 2.39 $ 2.67 $ 1.79 $ .36
==================================================
Fully diluted income before cumulative effect of accounting changes.... $ 3.52 $ 2.38 $ 1.21 $ 1.78 $ .36
Cumulative effect of accounting changes.............................. - - 1.43 - -
--------------------------------------------------
Fully diluted net income............................................. $ 3.52 $ 2.38 $ 2.64 $ 1.78 $ .36
==================================================
Common dividends paid*................................................. $ 1.16 $ 1.00 $ .88 $ .82 $ .82
--------------------------------------------------
AVERAGE BALANCE SHEET DATA:
Total loans............................................................ $ 18,562 $ 17,756 $ 16,257 $16,341 $18,104
Total earning assets................................................... 22,901 22,695 20,983 20,916 23,597
Total assets........................................................... 25,762 25,575 23,592 23,075 25,856
Total deposits......................................................... 19,142 20,347 18,774 18,215 19,564
Long-term debt......................................................... 1,232 913 927 1,214 1,652
Common equity.......................................................... 2,121 1,957 1,720 1,402 1,246
Total shareholders' equity............................................. 2,252 2,305 2,099 1,684 1,510
YEAR-END BALANCE SHEET DATA:
Total loans............................................................ $ 19,281 $ 18,779 $ 17,076 $16,365 $16,829
Total assets........................................................... 26,219 26,385 26,625 23,851 24,804
Total deposits......................................................... 18,791 21,031 21,188 19,145 19,378
Long-term debt......................................................... 1,483 1,015 822 948 1,506
Common equity.......................................................... 2,169 1,979 1,939 1,474 1,336
Total shareholders' equity............................................. 2,275 2,245 2,318 1,852 1,600
--------------------------------------------------
*Dividends per share have not been restated for the WCIC or CNB mergers. CNB
paid common dividends of $3.2 million in 1992 ($.28 per CNB share), and $1.8
million in 1991 and 1990 ($.16 per CNB share). WCIC did not pay dividends in the
years shown.
First Bank System, Inc. and Subsidiaries 15
--
The Company completed the acquisition of four additional institutions and
announced the planned acquisition of a fifth in markets in which the Company has
an existing presence, serving to strengthen the Company's retail banking market
shares in these communities. On October 18, 1994, the Company announced an
agreement to acquire First Western Corporation ("FWC"), a $323 million bank
holding company based in Sioux Falls, South Dakota. FWC owns Western Bank, which
has nine branches in South Dakota. The acquisition received regulatory approvals
in January 1995 and is expected to close in the first quarter of 1995. On
February 28, 1994, the Company completed the acquisition of American Bancshares
of Mankato, a $116 million bank holding company. On April 29, 1994, the Company
completed the acquisition of First Financial Investors, Inc., which had
approximately $200 million in assets. The United Bank of Bismarck acquisition,
with approximately $121 million in assets, closed on September 9, 1994. Green
Mountain Bancorporation, Inc., located in Lakewood, Colorado, with approximately
$35 million in assets, was acquired on September 30, 1994. For further
information regarding acquisitions, refer to Note C on page 45.
Line of Business Financial Review
- ---------------------------------
Each of the Company's four business lines -- Retail and Community Banking,
Payment Systems, Commercial Banking, and Trust and Investment Group --
contributed to the strong financial performance in 1994. Compared with 1993
results, before merger-related expenses, earnings increases for the four
business lines were 28.6 percent, 32.7 percent, 7.9 percent, and 3.6 percent,
respectively. Each business line made significant productivity improvements, as
measured by its efficiency ratio, and includes the operating results of
Boulevard since its acquisition date.
The Company's business unit profitability reporting system derives business
line results by specifically attributing most assets, deposits and income
statement items to a business line. The Company's internal Funds Transfer
Pricing system allocates a standard cost for funds used or credit for funds
provided to all business line assets and liabilities using a matched funding
concept. Expenses which directly support business line operations are charged to
the business lines based on a standard unit cost and actual volume measurements.
Expenses that indirectly support the business line operations, as well as the
expenses of those departments that primarily support the holding company, are
allocated based on the ratio of the business line's noninterest expense to total
consolidated noninterest expense. The Company calculates business line income
taxes based upon the consolidated effective tax rate.
The business unit profitability system allocates capital based upon credit,
operational and business risks. Asset components subject to credit risk are
assigned risk factors based upon historic loss experience after taking into
consideration changes in business practice which may introduce more or less risk
into the portfolio. Capital is assigned to certain lines of business, such as
the Trust and Investment Group, which have no significant balance sheet
components, after taking into consideration operational risk, capital levels of
independent organizations operating similar businesses and regulatory minimum
requirements. Management accounting system enhancements or product line changes
may affect designations, assignments, and allocations from time to time. During
1994 certain methodologies were changed, and accordingly, results for 1993 have
been restated to conform to the current presentation basis.
RETAIL AND COMMUNITY BANKING - Retail and Community Banking, which includes
consumer, small business and middle market banking services, and residential
mortgage lending, achieved strong revenue growth while containing costs. Net
income increased 28.6 percent to $177.0 million in 1994, with a return on assets
of 1.15 percent compared with .88 percent in 1993. Return on equity increased to
14.9 percent from 12.7 percent for the previous year.
16 First Bank System, Inc. and Subsidiaries
- --
TABLE 2. Line of Business Financial Performance
Retail and Trust and
Community Payment Commercial Investment Consolidated
Banking Systems Banking Group Company
-----------------------------------------------------------------------------------------------------
(Dollars in Millions) 1994 1993 1994 1993 1994 1993 1994 1993 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
CONDENSED INCOME STATEMENT:
Net interest income
(taxable-equivalent basis) $ 780.5 $ 743.9 $184.7 $147.7 $218.5 $227.3 $ 26.2 $ 31.7 $1,209.9 $1,150.6
Provision for credit losses 20.6 42.8 69.4 61.9 3.0 20.5 - - 93.0 125.2
Noninterest income......... 187.1 179.1 195.7 157.2 59.5 60.3 185.7 173.0 628.0 569.6
Noninterest expense*....... 655.3 656.3 158.5 129.2 89.1 97.0 150.2 145.8 1,053.1 1,028.3
Income taxes and
taxable-equivalent
adjustment 114.7 86.3 59.9 44.0 73.1 65.6 24.3 22.8 272.0 218.7
-----------------------------------------------------------------------------------------------------
Income before
merger-related charges.... $ 177.0 $ 137.6 $ 92.6 $ 69.8 $112.8 $104.5 $ 37.4 $ 36.1 419.8 348.0
================================================================================
Merger-related charges
(after tax)............... - 50.0
---------------------
Net income............. $ 419.8 $ 298.0
=====================
AVERAGE BALANCE SHEET DATA:
Commercial loans........... $ 4,755 $ 4,172 $ 505 $ 255 $4,842 $4,902 $ - $ - $ 10,102 $ 9,329
Consumer loans............. 6,406 6,694 2,054 1,733 - - - - 8,460 8,427
Assets..................... 15,417 15,676 3,274 2,649 6,233 6,516 838 734 25,762 25,575
Deposits................... 15,905 16,720 26 16 2,299 2,692 912 919 19,142 20,347
Common equity 1,191 1,087 320 283 437 456 173 131 2,121 1,957
-----------------------------------------------------------------------------------------------------
Return on average assets* 1.15% .88% 2.83% 2.63% 1.81% 1.60% ** ** 1.63% 1.36%
Return on average common
equity*................... 14.9 12.7 28.9 24.7 25.8 22.9 21.6% 27.6% 19.3 16.4
Efficiency ratio*.......... 67.7 71.1 41.7 42.4 32.1 33.7 70.9 71.2 57.2 59.8
=====================================================================================================
*Excluding merger-related charges
**Not meaningful
Note: Preferred dividends are not allocated to the business lines.
Both revenue growth and cost savings contributed to the improved earnings. The
increases in net interest income and noninterest income are attributable to
strong home equity loan promotions, aggressive small- and middle-market business
lending, and growth in mutual fund sales. The decline in average consumer loans
reflects the run off of residential mortgage loans of $204 million and the
reduction in residential mortgages held for sale of $595 million. The decrease
in the provision for credit losses reflects improved credit quality. Noninterest
expense decreased slightly, despite the acquisition of Boulevard in the first
quarter of 1994. The efficiency ratio improved to 67.7 percent in 1994 from 71.1
percent in 1993.
PAYMENT SYSTEMS - Payment Systems, which includes consumer credit card,
corporate and purchasing card services, card-accessed secured and unsecured
lines of credit, ATM processing, and merchant processing, achieved net earnings
of $92.6 million in 1994, up 32.7 percent over 1993. Return on assets increased
to 2.83 percent from 2.63 percent in 1993. Return on equity increased to 28.9
percent from 24.7 percent for the previous year.
The strong growth in earnings is due to higher net interest income and
noninterest income, partially offset by increases in the provision for credit
losses and noninterest expense. The increases in net interest income and fee-
based noninterest income are attributable to growth in the Corporate Card, the
Purchasing Card, the Northwest Airlines WorldPerks credit card, and merchant
processing. The increase in the provision for credit losses reflects growth in
the loan portfolios and an acceleration of the timing of charge-offs for fraud
losses on credit card and other consumer loan balances. Noninterest expense
increased due to the overall growth in the sales volumes and number of products
offered by this business line. Payment Systems continues to be cost effective as
measured by its efficiency ratios of 41.7 percent in 1994 and 42.4 percent in
1993.
First Bank System, Inc. and Subsidiaries 17
--
COMMERCIAL BANKING - Commercial Banking, which provides lending, treasury
management, and other financial services to middle market, large corporate, and
mortgage banking companies, contributed net earnings of $112.8 million in 1994,
a 7.9 percent increase over 1993. Return on assets rose to 1.81 percent in 1994
from 1.60 percent in 1993. Similarly, return on equity increased to 25.8 percent
in 1994 from 22.9 percent in the previous year.
The earnings increase reflects continuing improvement in credit quality and
further reduction of noninterest expense. Commercial Banking's average loans,
excluding loans to mortgage banking companies, increased $319 million, or 9.0
percent from 1993. The efficiency ratio improved to 32.1 percent compared with
33.7 percent in 1993.
TRUST AND INVESTMENT GROUP - Net income for the Trust and Investment Group,
which includes personal, institutional and corporate trust services, investment
management services, and a full-service brokerage company, increased 3.6
percent to $37.4 million in 1994. The return on average equity declined to 21.6
percent in 1994 from 27.6 percent in 1993 due to additional equity assigned to
the business line for 1994 acquisitions.
Much of the gain resulted from stronger noninterest income, which increased
primarily due to growth in corporate trust, investment sales and management
fees. Assets under management totaled $24.5 billion at year-end 1994, up from
$21.6 billion at the previous year-end. Net interest income decreased,
reflecting a reduction in balances from mortgage custody accounts. The increase
in noninterest expense reflects costs associated with recent acquisitions;
however, the efficiency ratio improved to 70.9 percent in 1994 from 71.2 percent
in 1993.
Statement of Income Analysis
- ----------------------------
NET INTEREST INCOME - Net interest income on a taxable-equivalent basis was
$1.21 billion in 1994, compared with $1.15 billion in 1993 and $1.02 billion in
1992. The improvement in net interest income reflects increases in average loan
yields and average loan balances. The average yield on loans for 1994 was 8.19
percent, or 25 basis points higher than the average yield of 7.94 percent in
1993, reflecting the rising rate environment which increased rates on variable
rate loans. Average loans totaled $18.6 billion in 1994, an increase of $806
million, or 4.5 percent, from 1993, reflecting significant growth in both
consumer and commercial loans, partially offset by decreases in the balance of
loans to mortgage bankers and residential first mortgage loans. Excluding these
first mortgage-related balances, average loans for the year increased by $2.0
billion, or 15.7 percent from 1993, reflecting increases in credit cards, home
equity loans, and consumer lines of credit, as well as small business
and middle-market commercial loans, including loans acquired with Boulevard.
The average balance of interest-bearing liabilities in 1994 increased $574
million, or 3.6 percent, over 1993, as short-term borrowings replaced
noninterest-bearing deposits related to loans to mortgage bankers.
The improvement in net interest income from 1992 to 1993 reflects increases in
average earning assets of $1.7 billion, or 8.2 percent, and average noninterest-
bearing deposits of $1.6 billion, or 33.4 percent. The increases in earning
assets and noninterest-bearing deposits were largely a result of the Bank Shares
Incorporated ("BSI") acquisition, higher production in residential mortgage
banking and increases in secured loans to mortgage banking companies. The
decline in nonperforming assets also contributed to the growth in net interest
income in both years.
18 First Bank System, Inc. and Subsidiaries
- --
TABLE 3. Analysis of Net Interest Income
(Dollars in Millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
Net interest income (taxable-equivalent basis)....................... $1,209.9 $1,150.6 $1,017.8
===============================
Average balances of earning assets supported by:
Interest-bearing liabilities....................................... $ 16,688 $ 16,114 $ 15,997
Noninterest-bearing liabilities.................................... 6,213 6,581 4,986
-------------------------------
Total earning assets............................................. $ 22,901 $ 22,695 $ 20,983
===============================
Average yields and weighted average rates (taxable-equivalent basis):
Earning assets yield............................................... 7.69% 7.40% 8.12%
Rate paid on interest-bearing liabilities.......................... 3.31 3.28 4.29
--------------------------------
Gross interest margin................................................ 4.38% 4.12% 3.83%
================================
Net interest margin.................................................. 5.28% 5.07% 4.85%
================================
Net interest margin without taxable-equivalent increments............ 5.22% 4.99% 4.74%
================================
The net interest margin, on a taxable-equivalent basis, was 5.28 percent in
1994, an increase of 21 basis points from 5.07 percent in 1993 and 43 basis
points from 4.85 percent in 1992. The improvement in the net interest margin in
1994 over 1993 resulted from both a shift in the mix of loans and increases in
the reference rate on variable-rate loans. There was a decrease in lower-margin
mortgage-related loans and an increase in higher yield consumer and commercial
loans. The improvement from 1992 to 1993 is attributable to two factors having
approximately equal effects on the Company's ratios. The Company's balance sheet
mix changed, including a decrease in lower yielding short-term investments and a
shift in the loan portfolio mix toward consumer loans, as a result of the BSI
acquisition, and promotional campaigns for the Company's home equity product. In
addition, cyclical economic factors resulted in lower interest rates, increasing
the level of noninterest-bearing deposits and allowing for wider spreads between
prime rates and short-term funding costs.
TABLE 4. Changes in Rate and Volume
1994 COMPARED WITH 1993 1993 COMPARED WITH 1992
---------------------------------------------------------------------
(In Millions) Volume Yield/Rate Total Volume Yield/Rate Total
- --------------------------------------------------------------------------------------------------------------
Increase (decrease) in:
Interest income:
Loans........................... $ 65.2 $ 44.7 $109.9 $126.0 $(151.5) $ (25.5)
Taxable securities.............. (9.8) (4.6) (14.4) 59.5 (27.5) 32.0
Nontaxable securities........... (1.9) (1.1) (3.0) 3.2 (.3) 2.9
Federal funds sold and
resale agreements............. (12.5) 6.7 (5.8) (17.3) (5.5) (22.8)
Other........................... (2.7) (1.3) (4.0) (12.5) 1.4 (11.1)
---------------------------------------------------------------------
Total......................... 38.3 44.4 82.7 158.9 (183.4) (24.5)
Interest expense:
Savings deposits and time
deposits less than $100,000... (16.4) (22.6) (39.0) 9.2 (123.9) (114.7)
Time deposits over $100,000..... (14.5) 2.9 (11.6) (17.6) (12.7) (30.3)
Short-term borrowings........... 49.8 9.1 58.9 7.1 (7.7) (.6)
Long-term debt.................. 18.1 (3.0) 15.1 (1.0) (10.7) (11.7)
---------------------------------------------------------------------
Total......................... 37.0 (13.6) 23.4 (2.3) (155.0) (157.3)
---------------------------------------------------------------------
Increase (decrease) in net
interest income............... $ 1.3 $ 58.0 $ 59.3 $161.2 $ (28.4) $ 132.8
=====================================================================
This table shows the components of the change in net interest income by volume
and rate on a taxable-equivalent basis. The effect of changes in rates on volume
changes is allocated based on the percentage relationship of changes in volume
and changes in rate. This table does not take into account the level of
noninterest-bearing funding, nor does it fully reflect changes in the mix of
assets and liabilities.
First Bank System, Inc. and Subsidiaries 19
--
PROVISION FOR CREDIT LOSSES - The provision for credit losses was $93.0 million
in 1994, down $32.2 million from the provision of $125.2 million in 1993, and
$90.4 million from the provision of $183.4 million in 1992. Improved credit
quality caused the decrease in the provision. Nonperforming assets declined to
$153.0 million at December 31, 1994, from $226.0 million at December 31, 1993,
and $412.1 million at December 31, 1992. Net charge-offs declined to $104.6
million in 1994 from $150.0 million in 1993, and $203.1 million in 1992.
Included in the 1992 provision for credit losses is a merger-related provision
of $13.6 million related principally to the Company's valuation of WCIC's $70
million mobile home loan portfolio.
NONINTEREST INCOME - Noninterest income was $628.0 million in 1994, compared
with $569.6 million in 1993, an increase of $58.4 million, or 10.3 percent.
Noninterest income was $535.7 million in 1992. The increases in both 1994 and
1993 were primarily due to higher credit card and trust fees. Credit card and
trust fees increased $55.0 million, or 19.4 percent, from 1993. From 1992 to
1993, these fees increased by $38.5 million, or 15.7 percent.
Credit card fees were $179.0 million in 1994, up $41.9 million, or 30.6
percent, from $137.1 million in 1993. Credit card fees in 1993 were up $20.2
million, or 17.3 percent higher than 1992 credit card fees which totaled $116.9
million. Most of the 1994 increase in credit card fees is attributable to
increased volumes for the Company's payment systems products, including the
Corporate Card, the Purchasing Card, the Northwest Airlines WorldPerks credit
card, and merchant processing. Most of the 1993 increase is attributable to
increased volumes for the Corporate Card product.
Trust fees in 1994 were $159.2 million, up $13.1 million, or 9.0 percent, from
$146.1 million in 1993. Trust fees in 1994 reflect growth in corporate and
institutional trust fees, including income from the March acquisition of
Boulevard and the September acquisition of the domestic corporate trust business
of J.P. Morgan. Trust fees in 1993 increased $18.3 million, or 14.3 percent,
from $127.8 million in 1992. Trust fees for 1993 reflect growth from the BSI
acquisition and the corporate trust business units purchased from U.S. Bancorp
in March of 1993 and Bankers Trust Company of California in July of 1992. Trust
assets under management were $24.5 billion at December 31, 1994, compared with
$21.6 billion in 1993 and $19.1 billion in 1992.
Service charges on deposit accounts totaled $115.6 million in 1994, compared
with $115.3 million in 1993 and $108.4 million in 1992.
TABLE 5. Noninterest Income
(Dollars in Millions) 1994 1993 1992
- ------------------------------------------------------------------------------------
Credit card fees........................................ $179.0 $137.1 $116.9
Trust fees.............................................. 159.2 146.1 127.8
Services charges on deposit accounts.................... 115.6 115.3 108.4
Insurance commissions................................... 23.8 20.9 27.3
Trading account profits and commissions................. 9.3 10.1 10.5
Securities gains (losses)............................... (3.8) .3 1.9
Other................................................... 144.9 139.8 142.9
------------------------
Total noninterest income.............................. $628.0 $569.6 $535.7
========================
Insurance commissions were $23.8 million in 1994, compared with $20.9 million
in 1993, reflecting increased commission income on annuity sales. In 1992, the
Company decided to reduce its focus on traditional insurance products and
concentrate on other retail and community banking efforts in the regions,
including annuities. The Company sold its Montana insurance agencies in December
1992, and in the first quarter of 1993, the Company sold its Twin Cities Metro
insurance agency.
Trading account profits were $9.3 million in 1994, down slightly from $10.1
million in 1993 and $10.5 million in 1992. Sales of securities resulted in net
losses of $3.8 million in 1994, and sales of investment securities resulted in
net gains of $.3 million in 1993 and $1.9 million in 1992. Sales of available-
for-sale securities are effected to improve the overall return of the portfolio
through the reinvestment of the proceeds at higher rates.
20 First Bank System, Inc. and Subsidiaries
- --
Other noninterest income increased 3.6 percent to $144.9 million in 1994 from
$139.8 million in 1993. Included in 1993 were net charges of approximately $28
million related to the accelerated amortization of mortgage loan servicing
rights due to prepayments in the Company's mortgage servicing portfolio,
partially offset by $11 million in one-time gains from the sale of assets. Other
noninterest income totaled $142.9 million in 1992.
NONINTEREST EXPENSE - Noninterest expense was $1.05 billion, a decrease of $47.4
million, or 4.3 percent, from 1993. Included in 1993 noninterest expense are
merger and integration charges totaling $72.2 million relating to the CNB
acquisition. Noninterest expense in 1992 also included merger-related charges of
$110.4 million associated with the acquisition of WCIC and BSI. These accruals
were made to reflect the disposal of problem assets and to provide for other
merger-related costs.
Excluding the effects of the 1993 merger-related provisions, noninterest
expense for the year increased $24.8 million, or 2.4 percent. The modest
increase in expenses reflects the addition of the operations of Boulevard and
J.P. Morgan domestic corporate trust business, offset by the benefits realized
through integrating recent acquisitions. Compared with noninterest expense for
1993, adjusted to include the expenses of Boulevard and the acquired corporate
trust business on a pro forma basis and excluding merger-related charges,
noninterest expense for the year declined by $33.2 million, or 3.1 percent.
Excluding merger-related charges, noninterest expense in 1993 increased $24.4
million, or 2.4 percent, from $1.00 billion in 1992 due to the December 31,
1992, acquisition of BSI. Compared with noninterest expense for 1992, adjusted
to include the operations of BSI on a pro forma basis, and excluding merger-
related charges, noninterest expense for 1993 declined $76.7 million, or 6.9
percent. This decline reflects the successful integration of the CNB, WCIC and
BSI acquisitions in 1993.
TABLE 6. Noninterest Expense
(Dollars in Millions, Except Per Employee Data) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
Salaries......................................................... $ 395.7 $ 389.1 $ 388.7
Employee benefits................................................ 91.6 86.3 85.5
-------------------------------
Total personnel expense........................................ 487.3 475.4 474.2
Net occupancy.................................................... 86.3 93.4 87.9
Furniture and equipment.......................................... 78.3 72.7 67.2
FDIC insurance................................................... 46.0 46.4 42.2
Advertising...................................................... 29.7 20.5 20.0
Amortization of goodwill and other intangible assets............. 39.6 30.6 25.2
Other personnel costs............................................ 32.2 27.5 20.2
Professional services............................................ 33.8 36.7 38.7
Data processing.................................................. 13.9 21.3 22.4
Printing, stationery and supplies................................ 20.0 21.9 21.0
Postage.......................................................... 19.1 19.4 19.1
Telephone........................................................ 21.1 18.7 16.5
Other real estate (includes $26.4 merger-related charge in 1992). (2.9) 2.2 41.2
Merger and integration........................................... - 72.2 84.0
Other............................................................ 148.7 141.6 134.5
-------------------------------
Total noninterest expense...................................... $1,053.1 $1,100.5 $1,114.3
===============================
Efficiency ratio*................................................ 57.2% 64.0% 71.8%
Efficiency ratio, excluding merger-related charges............... 57.2 59.8 64.7
Average number of full-time equivalent employees**............... 11,997 12,300 12,553
Personnel expense per employee................................... $ 40,619 $ 38,650 $ 37,776
===============================
*Computed as noninterest expense divided by the sum of net interest income on a
taxable-equivalent basis and noninterest income net of securities gains and
losses.
First Bank System, Inc. and Subsidiaries 21
--
The efficiency ratio improved to 57.2 percent in 1994 from 59.8 percent in
1993 and 64.7 percent in 1992, excluding merger-related charges. The Company's
efficiency ratio now ranks among the top five banks of its peer group. The keys
to the high productivity are the tight cost control culture throughout the
organization and the successful integration of acquisitions. Each acquisition
completed has been integrated at a progressively faster pace, enabling the
Company to realize substantial cost reductions.
Salaries and employee benefits expenses in 1994 were $487.3 million, up only
slightly from 1993's total of $475.4 million. Including the operations of
Boulevard and the corporate trust unit of J.P. Morgan on a pro forma basis in
1993, salaries and benefits expense in 1994 decreased $17.6 million, or 3.5
percent. In 1992, salaries and employee benefits expenses were $474.2 million.
Including BSI on a pro forma basis in 1992, salaries and benefits expense in
1993 decreased $36.3 million, or 7.1 percent.
Net occupancy expense totaled $86.3 million in 1994, a decrease of $7.1
million, or 7.6 percent, from 1993, reflecting efforts to improve productivity
in the Company's distribution network by subleasing excess office space.
Furniture and equipment expense increased $5.6 million, or 7.7 percent, from
1993. This increase included costs associated with acquisitions and recent
investments in communication and data processing technology.
FDIC insurance premiums remained relatively constant at $46.0 million in 1994,
compared with $46.4 million and $42.2 million in 1993 and 1992, respectively.
The increase in premiums of $4.2 million, or 10.0 percent, during 1993 resulted
from generally higher deposit levels, primarily related to BSI.
Advertising expense was $29.7 million in 1994, compared with $20.5 million in
1993 and $20.0 million in 1992, reflecting expanded marketing efforts in the
growing consumer asset businesses.
Amortization of goodwill and other intangible assets was $39.6 million in
1994, $30.6 million in 1993, and $25.2 million in 1992. The increases are
primarily attributable to the additional goodwill and intangible assets
resulting from the Boulevard and J.P. Morgan acquisitions in 1994 and the BSI
and the corporate trust unit acquisitions in 1993 and 1992.
Other personnel costs were $32.2 million in 1994, $27.5 million in 1993, and
$20.2 million in 1992. The increased use of temporary labor related to system
improvements and conversions caused the increases in both 1994 and 1993.
The Company recorded merger-related charges of $72.2 million relating to the
CNB acquisition in 1993. The charges relate to the closing of redundant
facilities and consolidation of operations and include $29.7 million in
conversion and required customer communications costs, $22.8 million in
severance, $14.3 million in premises and equipment write-downs, and $5.4 million
in other merger-related costs. Merger-related charges of $84.0 million relating
primarily to the acquisition of WCIC were recorded in 1992. The charges include
$31.2 million in premises and equipment write-downs, $12.6 million in securities
and interest rate swap write-downs, and $40.2 million in severance, system
conversions, and required customer communications costs.
INCOME TAX EXPENSE - The provision for income taxes was $256.9 million in 1994,
compared with $178.8 million in 1993 and $78.6 million in 1992. The increase is
primarily a result of the higher level of taxable income along with a continued
decline in tax-exempt interest income. The provision for 1993 reflects a one
percent increase in the corporate income tax rate, but the effect was partially
offset by the favorable impact of recording the related increase in deferred tax
assets.
At December 31, 1994, the Company's net deferred tax asset was $220.2 million,
net of valuation allowances of $14.0 million, compared with a net deferred tax
asset of $160.0 million, net of valuation allowances of $19.6 million, at
December 31, 1993. The acquisition of Boulevard caused most of the increase over
last year. In determining that realization of the deferred tax asset was more
likely than not, the Company gave consideration to a number of factors,
including its recent earnings history, its expectations for earnings in the
future and, where applicable, the expiration dates associated with tax
carryforwards. For further information on income taxes, refer to Note L on page
57.
Balance Sheet Analysis
- -----------------------
LOANS - On an aggregate basis, the Company's loan portfolio increased $502
million, or 2.7 percent, to $19.3 billion at year-end 1994 from $18.8 billion at
year-end 1993. An increase of $2.8 billion primarily in the commercial, credit
card, and home equity and second mortgage portfolios was offset by a $2.3
billion decrease in loans to mortgage bankers and residential mortgages.
22 First Bank System, Inc. and Subsidiaries
- --
TABLE 7. Loan Portfolio Distribution
1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------------------------
At December 31 (Dollars Percent Percent Percent Percent Percent
in Millions) Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
- ----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL:
Commercial.................... $ 7,196 37.3% $ 6,176 32.8% $ 5,675 33.3% $ 5,842 35.8% $ 6,898 41.0%
Financial institutions........ 787 4.1 2,004 10.7 1,132 6.6 1,001 6.1 568 3.4
Real estate:
Commercial mortgage.......... 1,822 9.4 1,495 8.0 1,539 9.0 1,445 8.8 1,438 8.5
Construction................. 327 1.7 231 1.2 234 1.4 295 1.8 358 2.1
HLTs.......................... 283 1.5 183 1.0 284 1.7 334 2.0 577 3.4
-------------------------------------------------------------------------------------------------
Total commercial............ 10,415 54.0 10,089 53.7 8,864 52.0 8,917 54.5 9,839 58.4
CONSUMER:
Residential mortgage.......... 2,273 11.8 2,422 12.9 2,568 15.0 2,006 12.3 1,967 11.7
Residential mortgage held for
sale......................... 162 .8 1,088 5.8 705 4.1 758 4.6 643 3.8
Home equity and second
mortgage..................... 2,199 11.4 1,755 9.3 1,362 8.0 992 6.1 884 5.3
Credit card................... 2,409 12.5 1,757 9.4 1,782 10.5 1,709 10.4 1,232 7.3
Revolving credit.............. 694 3.6 690 3.7 600 3.5 573 3.5 350 2.1
Automobile.................... 392 2.0 342 1.8 519 3.0 726 4.4 1,124 6.7
Installment................... 401 2.1 376 2.0 430 2.5 444 2.7 572 3.4
Student loans held for sale... 336 1.8 260 1.4 246 1.4 240 1.5 218 1.3
-------------------------------------------------------------------------------------------------
Total consumer.............. 8,866 46.0 8,690 46.3 8,212 48.0 7,448 45.5 6,990 41.6
-------------------------------------------------------------------------------------------------
Total loans................. $19,281 100.0% $18,779 100.0% $17,076 100.0% $16,365 100.0% $16,829 100.0%
=================================================================================================
COMMERCIAL: Commercial loans totaled $7.2 billion at year-end 1994, up $1.0
billion, or 16.5 percent, from year-end 1993. Year-end 1993 commercial loans
were $6.2 billion, up $.5 billion, or 8.8 percent from year-end 1992. The
increase in commercial loans includes growth of $583 million in small and middle
market business lending and $250 million in the Corporate Payment System which
issues Visa corporate, business and purchasing cards to businesses.
At December 31, 1994, the significant industry groups based on commercial
loans outstanding were consumer product manufacturers (29 percent), service
industries, including both business and consumer services (26 percent), and
wholesalers (20 percent). This mix is similar to those in 1993 and 1992.
The geographical distribution of the commercial portfolio is concentrated in
the Company's operating region, with approximately 80 percent of amounts
outstanding to borrowers located in Minnesota, Colorado, Wisconsin, Illinois,
Montana, North Dakota, and South Dakota.
FINANCIAL INSTITUTIONS: The portfolio of loans to financial institutions dropped
to $.8 billion at December 31, 1994, from $2.0 billion at December 31, 1993, and
$1.1 billion at December 31, 1992. The significant decrease from prior years is
attributable to the cyclical nature of the Company's secured loans to mortgage
banking firms. The mortgage banking firms' loan volume has decreased due to a
decline in refinancings related to a rise in market interest rates.
The financial institutions group provides financing to customer institutions
headquartered throughout the United States. Many of these institutions originate
residential mortgages on a national basis. The Company secures these loans
primarily with first liens on single family residences.
COMMERCIAL REAL ESTATE: The Company's portfolio of commercial real estate
mortgages and construction loans grew approximately $400 million to $2.1 billion
at December 31, 1994, compared with $1.7 billion at December 31, 1993, and $1.8
billion at December 31, 1992. The Company has seen increased activity in
commercial real estate loans as market prices stabilized and vacant space
declined, allowing more projects to meet the Company's high credit standards.
First Bank System, Inc. and Subsidiaries 23
--
Commercial mortgages outstanding were $1.8 billion at December 31, 1994,
compared with $1.5 billion at December 31, 1993. Real estate construction loans
outstanding at December 31, 1994, totaled $327 million, compared with $231
million from year-end 1993. The Company maintains the real estate construction
designation on a loan until the project is producing sufficient cash flow to
service traditional mortgage financing, at which time the loan is transferred to
the commercial mortgage portfolio. Approximately $23 million of construction
loans were transferred to the commercial mortgage portfolio in 1994.
The Company's commercial real estate mortgages and construction loans had
combined unfunded commitments of $355 million at December 31, 1994, and $206
million at December 31, 1993. At year-end 1994, real estate interests secured
$176 million of tax-exempt industrial development loans and commitments and $295
million of standby letters of credit. At year-end 1993, these exposures totaled
$218 million and $301 million, respectively. Table 8 shows the breakdown of
these real estate exposures by property type and geographic location.
TABLE 8. Commercial Real Estate Exposure by Property Type and Geography
Percentage of Total
at December 31
-------------------
PROPERTY TYPE 1994 1993
- ------------------------------------------------------------
Mixed-use office........................ 19.3% 18.0%
Retail.................................. 18.8 15.0
Office building......................... 17.2 14.6
Multi-family............................ 10.9 11.3
Hotel/motel............................. 5.8 6.0
Single-family residential............... 5.2 5.4
Land.................................... 2.3 2.5
Other, primarily owner-occupied......... 20.5 27.2
-------------------
100.0% 100.0%
-------------------
GEOGRAPHY
- ------------------------------------------------------------
Minnesota............................... 31.2% 32.5%
Colorado................................ 23.8 28.0
Montana, North Dakota and South Dakota.. 11.9 11.8
Wisconsin............................... 10.5 12.8
Illinois................................ 5.3 .4
-------------------
Total FBS region...................... 82.7 85.5
Other West.............................. 8.3 3.7
Southeast............................... 3.1 3.0
Other Southwest......................... 3.0 3.5
Other Midwest........................... 2.6 4.1
Mid-Atlantic............................ .3 .2
-------------------
100.0% 100.0%
-------------------
Other real estate totaled $39.9 million at December 31, 1994. These
properties are valued at estimated market value, and year-end 1994 book value
represents approximately 32 percent of the aggregate original investment. In-
substance foreclosures, which are included in the other real estate balance at
year-end 1994, are properties held as collateral over which the Company
possesses economic control due to the borrower's inability to repay the related
loan or rebuild equity in the property. The Company does not possess legal title
to these properties. The adoption of SFAS 114,
24 First Bank System, Inc. and Subsidiaries
- --
"Accounting by Creditors for Impairment of a Loan," effective January 1, 1995,
will require the reclassification of certain of the in-substance foreclosure
assets to nonperforming loans. These amounts are not material.
The Company also finances the operations of real estate developers and
other entities with operations related to real estate. These loans are not
secured directly by real estate and are subject to terms and conditions similar
to commercial loans. These loans are included in the commercial category and
totaled $342 million at December 31, 1994, and $286 million at December 31,
1993.
HIGHLY LEVERAGED TRANSACTIONS: The Company's exposure to commercial loans
involving the buyout, recapitalization or acquisition of an existing business,
called highly leveraged transactions ("HLTs"), remained at relatively low
levels. At December 31, 1994, the Company had HLT outstandings totaling $283
million and was committed under definitive loan agreements to lend an additional
amount of approximately $179 million. Total exposure was $233 million at
December 31, 1993, and $375 million at December 31, 1992. The increase in HLT
originations is consistent with industry and economic trends. The Company
continues to have stringent underwriting criteria and monitoring procedures for
its HLT lending.
CONSUMER: Consistent with the Company's strategy, growth in retail lending is of
continuing importance to the Company. Total consumer loan outstandings were $8.9
billion at December 31, 1994, up $176 million from $8.7 billion at year-end
1993. Excluding a $1.1 billion decrease in first mortgage residential loans and
residential mortgage loans held for sale, the other consumer loans increased
$1.3 billion, or 24.2 percent.
Home equity and second mortgages increased $444 million, or 25.3 percent,
primarily due to successful promotions. In addition, credit card loans,
including the new Northwest Airlines WorldPerks credit card, grew $652 million,
or 37.1 percent. Revolving credit loans remained relatively constant at $.7
billion at December 31, 1994, and 1993. During 1994, automobile loans increased
$50 million, or 14.6 percent, to $392 million and installment loans increased
$25 million, or 6.6 percent, to $401 million. At December 31, 1994, student
loans totaled $336 million, up $76 million from the prior year.
The rising interest rate environment in 1994 resulted in decreased activity
in the Company's residential mortgage loan portfolio. Residential mortgage
outstandings decreased $149 million, or 6.2 percent, to $2.3 billion, and
residential mortgages held for sale decreased $926 million, or 85.1 percent.
Loan production was approximately $1.6 billion in 1994, a 76.5 percent decrease
from 1993. Included in 1993 loan production was $3.1 billion related to
correspondent business and $2.0 billion more in refinance business than occurred
in 1994. The Company's decision to exit the correspondent business contributed
to approximately half of the 1994 loan production decline. The effect of this
decision on net income was not material. Table 7 on page 23 shows the breakdown
of the Company's consumer loan portfolio by type of loan.
Consumer lending is based primarily in the Company's operating region of
Minnesota, Colorado, Montana, North Dakota, South Dakota, Illinois, and
Wisconsin. Of total consumer balances outstanding, approximately 80 percent are
to customers located in the Company's operating region. See page 27 for a
discussion of the general economic conditions within the Company's operating
region.
ALLOWANCE FOR CREDIT LOSSES--At December 31, 1994, the allowance for credit
losses was $433.8 million, compared with an allowance of $423.2 million at year-
end 1993 and $448.0 million at year-end 1992. The ratio of the allowance for
credit losses to nonperforming loans increased to 385 percent at December 31,
1994, from 269 percent at December 31, 1993, and 179 percent at December 31,
1992. For further information on the allowance for credit losses, refer to
"Corporate Risk Profile," beginning on page 27.
SECURITIES--At December 31, 1994, the Company's available-for-sale securities
portfolio was $3.15 billion compared with $3.32 billion at December 31, 1993.
Securities sales and attrition more than offset the growth related to
acquisitions, including the $770 million portfolio acquired with the Boulevard
purchase. The relative mix of the securities portfolio has not changed
significantly from the prior years with U.S. Treasury and mortgage-backed
securities representing the majority of the portfolio.
First Bank System, Inc. and Subsidiaries 25
--
TABLE 9. Available-for-sale Securities Portfolio Average Maturity
At December 31, 1994 Average Maturity
- ---------------------------------------------------------------
U.S. Treasury............................. 3 years, 2 months
Other U.S. Agencies....................... 3 years, 0 months
State and Political....................... 14 years, 2 months
Other*.................................... 4 years, 7 months
Total.................................... 4 years, 5 months
====================
*Excludes equity securities which have no stated maturity.
The average effective life of the holdings is expected to be less than the
average contractual maturities shown in the table because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties. The table above does not reflect the average contractual maturity of
mortgage-backed securities.
TABLE 10. Available-for-sale Securities Portfolio Amortized Cost, Fair Value
and Yield by Maturity Date
MATURING: WITHIN 1 YEAR 1-5 YEARS 5-10 YEARS
- -----------------------------------------------------------------------------------------------------------------------------
Amor- Amor- Amor-
At December 31, 1994 tized Fair tized Fair tized Fair
(Dollars in Millions) Cost Value Yield Cost Value Yield Cost Value Yield
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury.............. $ 61.8 $ 61.5 5.06% $ 892.9 $ 863.0 6.24% $207.2 $173.8 5.22%
Mortgage-backed
securities*.............. - - - - - - - - -
Other U.S. Agencies........ 31.0 30.9 5.27 117.4 111.0 5.55 41.8 38.6 6.86
State and Political***..... 3.1 3.1 7.86 20.1 20.2 9.79 39.2 39.1 9.02
Other...................... 13.6 13.5 5.89 83.7 82.5 7.67 39.9 38.8 6.18
--------------------------------------------------------------------------------------------------
$109.5 $109.0 5.30% $1,114.1 $1,076.7 6.34% $328.1 $290.3 6.00%
==================================================================================================
MORTGAGE-BACKED
MATURING: OVER 10 YEARS SECURITIES TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
Amor- Amor- Amor-
At December 31, 1994 tized Fair tized Fair tized Fair
(Dollars in Millions) Cost Value Yield Cost Value Yield Cost Value Yield
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury.............. $ - $ - -% $ - $ - -% $1,161.9 $1,098.3 6.00%
Mortgage-backed
securities*.............. - - - 1,497.4 1,414.3 6.47 1,497.4 1,414.3 6.47
Other U.S. Agencies........ .6 .6 9.51 - - - 190.8 181.1 5.81
State and Political***..... 112.8 116.0 11.35 - - - 175.2 178.4 10.59
Other...................... 137.6 141.4 6.86** - - - 274.8 276.2 7.04**
--------------------------------------------------------------------------------------------------
$251.0 $258.0 10.81%** $1,497.4 $1,414.3 6.47% $3,300.1 $3,148.3 6.51%**
==================================================================================================
*Adjustable rate mortgage securities (ARMs) represent 46% of the balance of
mortgage-backed securities.
**Excludes equity securities which have no stated yield.
***Yields on state and political obligations that are not subject to federal
income tax have been adjusted to taxable-equivalent using a 35% tax rate.
Trading account assets are purchased for resale to customers. Trading account
assets consist primarily of securities of the U.S. Treasury and its agencies,
state and political subdivisions, and short-term obligations of banks. Other
earning assets consist of federal funds sold, reverse repurchase agreements,
deposits with banks, and equity securities that do not have readily determinable
fair values. Trading account and other earning assets averaged $.6 billion in
1994 compared with $1.0 billion in 1993.
DEPOSITS - Noninterest-bearing deposits averaged $6.1 billion in 1994, down $359
million from the 1993 average of $6.4 billion. The decrease in noninterest-
bearing deposits resulted from reduced loan production at mortgage banking firms
that generate noninterest-bearing deposits.
Average interest-bearing deposits include certificates of deposit, savings
certificates, and money market and interest checking products. These deposits
averaged $13.1 billion in 1994 compared with $13.9 billion in 1993. The
relatively low market interest rate environment throughout 1994 caused deposits
to decline.
SHORT-TERM BORROWINGS - Short-term borrowings, which include federal funds
purchased, securities sold under agreements to repurchase and other short-term
borrowings, averaged $2.4 billion in 1994, or $1.1 billion more than in the
prior year. These borrowings were obtained at competitive rates during 1994 and
replaced the lower level of deposits in 1994.
LONG-TERM DEBT - Intermediate- and long-term debt averaged $1.2 billion in 1994,
up from $913 million in 1993. In October 1994, First Bank National Association
("FBNA"), the Company's lead bank, completed a $100 million subordinated debt
issuance in the form of 10-year noncallable notes. The notes were priced at 8.35
percent, or 70 basis points over the 10-year Treasury note. In June 1994, the
Company placed $100 million in subordinated debt in the form of 10-year
noncallable notes. The notes
26 First Bank System, Inc. and Subsidiaries
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were priced at 7.55 percent, or 64 basis points over the 10-year Treasury note.
During 1993, the Company placed three $100 million subordinated debt issuances.
Medium-term notes outstanding totaled $514 million at December 31, 1994,
compared with $248 million at December 31, 1993. During 1994, the Company issued
$355 million of medium-term notes with maturities of one to three years and $50
million of notes with maturities of less than one year. Maturities and
retirement of medium-term notes during 1994 totaled $139 million.
Corporate Risk Profile
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OVERALL RISK PROFILE - Managing risk is an essential part of the operation of a
financial services institution. The most prominent risk exposures are credit
quality, interest rate sensitivity and liquidity risk. Credit quality risk
involves the risk of either not collecting interest when it is due or not
receiving the principal balance of the loan or investment when it matures or
otherwise is due. Interest rate sensitivity risk is the risk of reduced net
interest income because of differences in the repricing characteristics of
assets and liabilities, as well as the change in the market value of assets and
liabilities as interest rates fluctuate. Liquidity risk is the risk that the
Company will not be able to fund its obligations and is largely a function of
how effectively the Company manages its other risks.
CREDIT MANAGEMENT - The Company continued to maintain its high level of credit
quality in 1994. Nonperforming assets declined for the fifth consecutive year
during 1994, reflecting the Company's disciplined credit culture characterized
by individual lender accountability and prudent credit policies, the reduced
risk profile of the loan portfolio, and improved economic conditions in the
Company's lending region. The ratio of nonperform