Business Context and Reporting Period
Company: First Bank System, Inc. (d/b/a US Bancorp)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 1996
Overview: The Company is a diversified financial services organization operating through Retail Banking, Payment Systems, Business Banking, Commercial Banking, and Corporate Trust segments. The period was significantly impacted by the acquisition of FirsTier Financial, Inc., the sale of mortgage banking operations, and a one-time FDIC special assessment.
Key Financial Metrics
| Metric ($ Millions) | Q3 1996 | Q3 1995 | 9M 1996 | 9M 1995 |
|---|---|---|---|---|
| Net Income | $137.5 | $145.7 | $568.4 | $417.4 |
| Operating Income (Excl. Nonrecurring) | $169.1 | $145.7 | $496.3 | $417.4 |
| Diluted EPS (Net Income) | $0.98 | $1.06 | $4.01 | $2.99 |
| Diluted EPS (Operating) | $1.20 | $1.06 | $3.50 | $2.99 |
| Net Interest Income (TEB) | $391.3 | $360.5 | $1,162.4 | $1,090.3 |
| Noninterest Income | $220.3 | $216.5 | $963.7 | $585.8 |
| Noninterest Expense | $355.5 | $311.1 | $1,086.1 | $918.6 |
| Provision for Credit Losses | $35.0 | $31.0 | $101.0 | $84.0 |
| Total Assets | $36,843 | $33,874 | $36,843 | $33,874 |
| Total Loans | $27,037 | $26,400 | $27,037 | $26,400 |
| Shareholders' Equity | $3,181 | $2,725 | $3,181 | $2,725 |
Performance Ratios
- Return on Average Assets (ROA): 1.55% (Q3 1996) vs. 1.76% (Q3 1995); 2.14% (9M 1996) vs. 1.70% (9M 1995).
- Return on Average Common Equity (ROE): 17.4% (Q3 1996) vs. 21.2% (Q3 1995); 24.4% (9M 1996) vs. 20.9% (9M 1995).
- Net Interest Margin (TEB): 4.91% (Q3 1996) vs. 4.85% (Q3 1995); 4.89% (9M 1996) vs. 4.94% (9M 1995).
- Efficiency Ratio: 58.1% (Q3 1996) vs. 53.9% (Q3 1995); 51.4% (9M 1996) vs. 54.8% (9M 1995).
- Efficiency Ratio (Excl. Nonrecurring): 49.8% (Q3 1996) vs. 51.3% (Q3 1995); 50.2% (9M 1996) vs. 54.0% (9M 1995).
- Capital Ratios (Sept 30, 1996): Tier 1 Capital 6.7%; Total Risk-Based Capital 11.4%; Leverage Ratio 6.4%.
Material Changes vs. Prior Period
Operating Performance: Operating earnings (excluding nonrecurring items) increased 16% in Q3 1996 and 19% year-to-date compared to 1995. This growth was driven by a 9% increase in net interest income and a 19% increase in noninterest income (excluding nonrecurring items), primarily due to credit card and trust fee growth and the FirsTier acquisition.
Nonrecurring Items: Reported net income was significantly impacted by nonrecurring items:
- Charges: A $51 million one-time special assessment by the FDIC on SAIF deposits reduced Q3 net income. Year-to-date nonrecurring charges totaled $177.8 million, including merger/integration costs ($31.3M), branch resizing ($38.6M), and intangible asset valuation adjustments ($29.5M).
- Gains: Year-to-date nonrecurring gains totaled $315.8 million, including a $190 million termination fee from the First Interstate Bancorp merger, a $65 million state tax refund, and a $45.8 million gain on the sale of mortgage banking operations.
Balance Sheet: Total assets grew 8.8% to $36.8 billion, and loans increased 2.4% to $27.0 billion. The loan portfolio growth was driven by core commercial and consumer loans and the FirsTier acquisition, partially offset by the securitization of $1.3 billion in residential mortgages.
Guidance, Outlook, and Risks
Management Commentary: Management highlighted strong credit quality, controlled operating expenses (efficiency ratio improved on an operating basis), and effective capital management. The Company continues to focus on growing fee-based businesses and integrating acquisitions.
Future Transactions: On September 26, 1996, the Company announced the acquisition of the bond indenture services and paying agency business of Comerica Incorporated, expected to close in Q1 1997.
Risks and Contingencies:
- Interest Rate Risk: The Company maintains a low interest rate risk position using swaps, caps, and floors. As of Sept 30, 1996, it held $2.7 billion in notional interest rate swaps (receiving fixed, paying variable).
- Credit Risk: Nonperforming assets decreased to $145.7 million (0.54% of loans + OREO). The allowance for credit losses was $521 million, covering nonperforming loans at 431%.
- Regulatory: The Company faces ongoing FDIC assessments, including the one-time SAIF charge and future FICO bond assessments starting in 1997.
Investor Verification Checklist
- Nonrecurring Impact: Verify the sustainability of earnings by analyzing "Operating Income" ($169.1M Q3) versus reported "Net Income" ($137.5M Q3) to isolate the $51M FDIC charge and other one-time items.
- Acquisition Integration: Assess the progress of the FirsTier Financial integration and the expected benefits from the pending Comerica acquisition.
- Credit Quality Trends: Monitor the ratio of allowance for credit losses to nonperforming loans (currently 431%) and the trend in consumer loan net charge-offs, which increased 27% in Q3.
- Capital Adequacy: Confirm that Tier 1 and Total Risk-Based capital ratios remain well above regulatory minimums despite the FDIC assessment and stock repurchases.
- Interest Rate Sensitivity: Review the effectiveness of the $2.7 billion swap portfolio in protecting net interest income against rising rates.