01—Abstract
Summary
Summary of the 10-K filed February 28, 1997. Cited figures are marked; the original filing is the authoritative source.
First Bank System, Inc. (FBS), a Minneapolis-based regional bank holding company operating in 11 Midwestern and Rocky Mountain states, reported record 1996 net income of $739.8 milliona, up 30% from $568.1 million in 1995.
Fully diluted EPS was $5.25b (up 27.7%). Excluding nonrecurring items, which netted to a $72.1 million after-tax gain (including a $190 million First Interstate termination fee, a $65 million state tax refund, and a $45.8 million gain on the mortgage banking sale, offset by various charges including a $51 million SAIF special assessment), operating earnings rose 18% to $667.7 million, and fully diluted operating EPS rose 15.3% to $4.74. Investors should weigh the reported growth against the one-time items, which account for a meaningful share of the headline improvement.
Operating performance was strong. Return on average assets before nonrecurring items was 1.88%c and return on average common equity was 21.4%, with the efficiency ratio falling below 50% (49.9%) for the first time. Growth was driven by fee businesses, especially Payment Systems (corporate and purchasing cards, co-branded cards) and Corporate Trust, which was bolstered by the BankAmerica corporate trust acquisition and the FirsTier Financial acquisition in Nebraska and Iowa.
Net interest margin was steady at 4.89%, while the loan book grew modestly to $27.1 billiond. Credit quality remained sound, with nonperforming assets falling to 0.51% of loans plus other real estate, though net charge-offs rose to 0.57% of average loans, driven by consumer and credit card losses. Capital and shareholder returns were also emphasized.
Tier 1 capital rose to 7.2% and total risk-based capital to 12.0%. The company issued $300 million of trust preferred securities, repurchased roughly 15 million shares under a 1996-1997 authorization, and raised its quarterly dividend 12.7% to $0.465 in February 1997. Management targets 12-15% annual EPS growth excluding acquisitions and aims to lower the efficiency ratio to the mid-40s over the next few years.
02—Key points
Key Highlights
- Record 1996 net income of $739.8 million (+30%); fully diluted EPS of $5.25 (+27.7%), though nonrecurring items contributed $72.1 million after tax (about $0.51 per diluted share).
- Operating (pre-nonrecurring) earnings rose 17.5% to $667.7 million; fully diluted operating EPS was $4.74, up 15.3%.
- Efficiency ratio before nonrecurring items fell below 50% for the first time, to 49.9% (from 53.3% in 1995).
- Return on average assets of 1.88% (operating basis) ranked first among a peer group of 23 regional bank holding companies.
- Noninterest income excluding nonrecurring items rose 16% to $869.9 million, led by credit card fees (+26%) and trust fees (+32%).
- Credit quality stayed sound: nonperforming assets fell to 0.51% of loans plus OREO, but net charge-offs rose to $152.8 million (0.57% of average loans) on higher consumer and credit card losses.
- Capital position strengthened with Tier 1 ratio of 7.2%, a $300 million trust preferred issue, about 15 million shares repurchased, and a 12.7% dividend increase to $0.465 quarterly.
03—Questions
Frequently Asked Questions
How much of 1996's record earnings came from one-time items?
Nonrecurring items added a net $72.1 million after tax ($138.0 million pre-tax, or $0.53 per share primary). The largest gains were a $190 million net termination fee from the terminated First Interstate merger, a $65 million state tax refund, a $45.8 million gain on the sale of mortgage banking operations, and $15 million in securities gains. These were partly offset by charges including a $51 million FDIC SAIF special assessment, $38.6 million in branch resizing costs, $31.3 million in merger and integration charges, and a $29.5 million intangibles write-down. Excluding these items, earnings grew 18% rather than 30%.
What drove growth in the business?
Fee-based businesses led growth. Payment Systems, the fastest-growing unit and largest source of fee income, saw noninterest income rise 23.8%, driven by corporate and purchasing card volume. Corporate Trust roughly doubled its revenue and profit with the BankAmerica corporate trust acquisition, and it added Comerica's bond indenture business in January 1997. Net interest income grew 7% to $1.6 billion, mainly on average loan growth, including the FirsTier acquisition, which added $3.7 billion in assets and 63 offices in Nebraska and Iowa.
How healthy is the loan portfolio and credit quality?
Total loans were $27.1 billion at year-end, up 2.8%, but the increase was modest because $1.3 billion of residential mortgages were securitized and reclassified to securities. Excluding residential mortgages, loans grew about $2.6 billion. Nonperforming assets declined 10% to $137.7 million, and the allowance for credit losses rose to $516.5 million, or 1.90% of loans. Consumer net charge-offs rose to 1.24% of average consumer loans from 0.98%, reflecting credit card and unsecured consumer losses, so investors should watch consumer credit trends.
What is management's outlook and capital return plan?
Management targets 12% to 15% annual EPS growth over the next several years, excluding acquisitions, and aims to reduce the efficiency ratio to the mid-40s through technology investment and revenue growth. On capital, the company authorized repurchases of up to 25.4 million shares through December 1997, with about 15.1 million already bought back by year-end 1996. The board raised the quarterly dividend 12.7% to $0.465 per share on February 19, 1997, the sixth consecutive annual increase. Tier 1 capital reached 7.2%, leaving room for continued buybacks and acquisitions.
04—Continue