<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
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/X/ Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
First Bank System, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
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/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
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<PAGE>
[LOGO]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMPARISON
OF THE
PROPOSED FIRST BANK SYSTEM, INC./FIRST INTERSTATE BANCORP MERGER
AND THE
PROPOSED WELLS FARGO & CO. EXCHANGE OFFER
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
DECEMBER 13, 1995
<PAGE>
The participants in this solicitation may include First Bank System, Inc.
("FBS"), the directors of FBS (John F. Grundhofer, Roger L. Hale, Delbert W.
Johnson, Norman M. Jones, John H. Kareken, Richard L. Knowlton, Jerry W. Levin,
Kenneth A. Macke, Marilyn C. Nelson, Edward J. Phillips, James J. Renier, S.
Walter Richey, Richard L. Robinson, Richard L. Schall and Lyle E. Schroeder),
Lester Pollack (Board Observer) and the following executive officers and
employees of FBS: Richard A. Zona (Vice Chairman and Chief Financial Officer),
Philip G. Heasley (Vice Chairman and President, Retail Product Group), Lee R.
Mitau (Executive Vice President, Secretary and General Counsel), Susan E. Lester
(Executive Vice President), Elizabeth A. Malkerson (Senior Vice President,
Corporate Relations), David R. Edstam (Executive Vice President and Treasurer),
David J. Parrin (Senior Vice President and Controller), Arnold C. Hahn (Senior
Vice President, Corporate Development), Andrew Cecere (Senior Vice President,
Management Accounting and Forecasting), John R. Danielson (Senior Vice
President, Investor Relations), Wendy Raway (Vice President and Manager of Media
Relations) and Karin Glasgow (Assistant Vice President, Investor Relations).
FBS and First Interstate Bancorp ("First Interstate" or "FI") are parties to
an Agreement and Plan of Merger, dated as of November 5, 1995, pursuant to which
a wholly owned subsidiary of FBS is to merge with and into First Interstate. In
addition, First Interstate has granted to FBS an option to purchase up to 19.9%
of the outstanding shares of common stock of First Interstate in certain
circumstances. As of October 31, 1995, certain FBS subsidiaries held 54,437
shares of First Interstate common stock in a fiduciary capacity. FBS disclaims
beneficial ownership of shares of First Interstate common stock held in a
fiduciary capacity and any other shares held by any pension plan of FBS or any
affiliates of FBS.
As of November 30, 1995, Marilyn C. Nelson and Richard L. Robinson,
directors of FBS, held 2,000 shares and 150 shares, respectively, of First
Interstate common stock. Lester Pollack is an executive officer of Corporate
Advisors, L.P., the general partner of two shareholders of FBS and the
investment manager for another shareholder of FBS. Corporate Advisors, L.P. may
be deemed to be indirectly controlled by Lazard Freres & Co. LLC, of which Mr.
Pollack is a managing director. Lazard Freres & Co. LLC engages in a full range
of investment banking, securities trading, market-making and brokerage services
for institutional and individual clients. In the normal course of its business,
Lazard Freres & Co. LLC may trade securities of First Interstate for its own
account and the account of its customers and, accordingly, may at any time hold
a long or short position in such securities.
Although J.P. Morgan Securities Inc. does not admit that it or any of its
directors, officers, employees or affiliates is a "participant," as defined in
Schedule 14A promulgated under the Securities Exchange Act of 1934 by the
Securities and Exchange Commission (the "Commission"), or that such Schedule 14A
requires the disclosure of certain information concerning J.P. Morgan Securities
Inc., it may assist FBS in this solicitation. J.P. Morgan Securities Inc.
engages in a full range of investment banking, securities trading, market-making
and brokerage services for institutional and individual clients. In the normal
course of its business, J.P. Morgan Securities Inc. may trade securities of
First Interstate for its own account and the account of its customers and,
accordingly, may at any time hold a long or short position in such securities.
Except as disclosed above, to the knowledge of FBS, none of FBS, the
directors or executive officers of FBS or the employees or other representatives
of FBS named above has any interest, direct or indirect, by security holdings or
otherwise, in First Interstate.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INTRODUCTION.............................................................. 4
SUMMARY COMPARISON OF THE MERGER AND THE WELLS OFFER...................... 5
COMPARISON OF THE MERGER AND THE WELLS OFFER.............................. 9
Value to First Interstate Shareholders.................................... 9
Introduction............................................................ 9
Reported Earnings Per Share Analysis.................................... 9
Wells Fargo's Newfound Optimism......................................... 10
Goodwill Burden......................................................... 11
"Cash Earnings Per Share" Analysis...................................... 13
Stock Price Analysis.................................................... 14
Stock Repurchase Program................................................ 15
Significant Uncertainties and Potential Delays Associated with the Wells
Offer.................................................................... 15
Antitrust and Regulatory Uncertainties and Delays....................... 16
Rights Plan and Section 203 Condition................................... 17
Minimum Tender Condition................................................ 17
Accounting Treatment.................................................... 17
Strategic Advantages...................................................... 18
Introduction............................................................ 18
Efficiency and Growth Prospects......................................... 18
Market Positions........................................................ 20
Risk Elements............................................................. 23
Capital Structure....................................................... 23
Geographic Concentration................................................ 23
Business Mix............................................................ 23
Technological Advantages.................................................. 24
Cost Savings and Associated Revenue Losses................................ 25
Anticipated Expense Reductions.......................................... 25
Sources of Cost Eliminations............................................ 26
Analysis of Net California Savings...................................... 29
Additional Revenue Sources.............................................. 32
</TABLE>
3
<PAGE>
INTRODUCTION
On November 5, 1995, FBS, First Interstate and a wholly owned subsidiary of
FBS ("Merger Sub") entered into a merger agreement (the "Merger Agreement")
pursuant to which Merger Sub will, upon the terms and subject to the conditions
set forth in the Merger Agreement, merge with and into First Interstate (the
"Merger"), with First Interstate surviving the Merger as a wholly owned
subsidiary of FBS. As used in this comparison, "New First Interstate" refers to
FBS after the Merger. Pursuant to the Merger, each outstanding share of common
stock, $2.00 par value ("First Interstate Common Stock"), of First Interstate
will be converted into the right to receive 2.60 shares of common stock of New
First Interstate.
On November 13, 1995, Wells Fargo & Co. ("Wells Fargo" or "WFC") announced
that it intended to commence an exchange offer for each share of First
Interstate Common Stock (the "Wells Offer"). Pursuant to the Wells Offer, Wells
Fargo would exchange two-thirds of a share of Wells Fargo common stock for each
share of First Interstate Common Stock. The terms of the Wells Offer are set
forth in a Registration Statement on Form S-4 filed by Wells Fargo on November
27, 1995 (the "Wells S-4").
On November 20, 1995, First Interstate announced that its board of directors
(the "First Interstate Board") had determined by unanimous vote (with two
directors absent) that the Wells Offer is not in the best interests of First
Interstate and its shareholders. Accordingly, the First Interstate Board
recommended that First Interstate shareholders reject the Wells Offer and not
tender their shares of First Interstate Common Stock pursuant to the Wells
Offer. The First Interstate Board also reaffirmed its determination that the
terms of the Merger are fair to, and in the best interests of, First Interstate
and its shareholders.
------------------------
The comparison contained herein of the Merger of First Interstate with FBS
and the Wells Offer includes certain statements and forecasts with respect to
anticipated future performance of First Interstate, FBS and Wells Fargo.
Although FBS considers such statements and forecasts reasonable to the extent
they relate to FBS and New First Interstate, such statements and forecasts are
necessarily based upon estimates and assumptions that are inherently subject to
significant economic, business, regulatory and other uncertainties and
contingencies, many of which are beyond the control of FBS. Certain statements
and forecasts of Wells Fargo are those presented by Wells Fargo in publicly
available documents or public statements, and, except as otherwise set forth
herein, FBS expresses no opinion with respect thereto. In analyzing the offer of
Wells Fargo described herein, FBS has used estimates and assumptions relating to
Wells Fargo that differ from those used by Wells Fargo in publicly available
documents or public statements for the reasons set forth herein. Actual results
may vary from those set forth herein, and such variances may be material and
adverse. The independent auditors of, and financial advisors to, FBS have
expressed no opinion or other form of assurance with respect to the statements
and forecasts contained herein. The information contained herein should be read
in conjunction with the Registration Statement on Form S-4 (as amended from time
to time, the "FBS Registration Statement") filed by FBS with the Commission on
November 20, 1995.
THIS COMPARISON DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY BY ANYONE IN
ANY STATE IN WHICH SUCH SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH SOLICITATION.
THE DELIVERY OF THIS COMPARISON SHALL NOT IMPLY THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF FBS, FIRST
INTERSTATE OR WELLS FARGO SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
4
<PAGE>
SUMMARY COMPARISON OF THE MERGER AND THE WELLS OFFER
Set forth below is FBS's comparison of the effects of the Merger and the
Wells Offer from the perspective of First Interstate and its shareholders. FBS
believes that the Merger clearly offers better prospects for growth and creates
superior value for First Interstate shareholders for the reasons summarized
below and set forth in detail in the subsequent sections of this document:
- VALUE. As set forth more fully under "Value to First Interstate
Shareholders," the Merger provides the superior value to First Interstate
shareholders, as demonstrated by the following analyses:
REPORTED EARNINGS PER SHARE. The earnings per share accretion to First
Interstate shareholders from the Merger is projected to be 24% in 1997
(the first full year of combined operations), compared with no accretion
for the Wells Offer. Reported earnings per share is the most widely
accepted measurement of financial performance under generally accepted
accounting principles. Based upon current normalized earnings multiples
applied to estimated 1997 earnings, this disparity translates into an
implied purchase price by FBS of $156.31 per share of First Interstate
Common Stock, compared to an implied purchase price by Wells Fargo of
$131.66 per share of First Interstate Common Stock, resulting in a
differential of $24.65 per share. The significant difference in reported
earnings per share is in part attributable to the difference in accounting
treatment for the proposed transactions. The Merger will be accounted for
under the pooling-of-interests method of accounting, whereas the Wells
Offer would be accounted for as a purchase. As a result, Wells Fargo would
penalize future earnings of the combined entity with more than $8 billion
in additional goodwill and other intangibles. The enormous goodwill burden
of the combined entity would depress future reported earnings by
approximately $400 million per year after taxes, reduce Wells Fargo's
financial flexibility in an economic downturn, potentially limit Wells
Fargo's ability to do future acquisitions and will therefore likely be of
concern to investors and receive close scrutiny by regulators. Conversely,
in the Merger, First Interstate shareholders benefit from the
pooling-of-interests accounting treatment of the Merger.
"CASH EARNINGS PER SHARE." Although FBS believes that reported earnings
per share constitutes the most meaningful measure of financial
performance, the Merger is also superior to the Wells Offer based on
estimated "cash earnings per share" (earnings before amortization of
goodwill and other intangibles), the measurement methodology favored by
Wells Fargo. Under this analysis, the Merger provides an expected 15%, 25%
and 25% "cash earnings per share" accretion to First Interstate
shareholders in 1996, 1997 and 1998, respectively, as opposed to 9%, 21%
and 24% for the Wells Offer. The accretion analysis presented by Wells
Fargo in the Wells S-4 is misleading because of its focus on the relative
benefits of the two transactions to shareholders of FBS and Wells Fargo,
instead of to First Interstate shareholders. Further, Wells Fargo's
analysis of future earnings uses mutually exclusive assumptions that raise
serious questions about its future stock price.
EFFECT OF RECENT WELLS FARGO DISCLOSURES. On December 6 and 7, 1995,
Wells Fargo made presentations that led many analysts to project
aggressive 1996 growth rates for Wells Fargo, thereby increasing Wells
Fargo's estimated earnings per share for 1996. The analyses of reported
earnings per share and "cash earnings per share" set forth above give
effect to the revised Wall Street estimates arising out of the asserted
higher growth rates. However, these revised estimates are inconsistent with
the past performance of Wells Fargo and FBS believes such estimates
overstate the future prospects of Wells Fargo. Accordingly, the value
advantages inherent in the Merger demonstrated above would be even more
pronounced using what FBS believes to be more realistic earnings estimates
for Wells Fargo. For example, using such estimates, as more fully described
herein (see "Value to First Interstate Shareholders--Wells Fargo's Newfound
Optimism"), the Wells Offer would result in dilution of 4% in reported
earnings per share and accretion of only 17% in "cash earnings per share"
in 1997 to First
5
<PAGE>
Interstate shareholders. In FBS's view, skepticism with respect to Wells
Fargo's recent growth projections is especially warranted in view of the
reported admissions by Wells Fargo executives regarding its limited growth
environment.
- SIGNIFICANT UNCERTAINTIES AND POTENTIAL DELAYS ASSOCIATED WITH THE WELLS
OFFER. The Wells Offer involves a number of uncertainties that FBS
believes could cause potential delays not faced in the Merger. FBS
believes the divestitures that will be required in connection with the
Wells Offer will significantly exceed the levels assumed by Wells Fargo
and that achieving the required divestitures may entail substantial delays
that will not be encountered in connection with the Merger. Wells Fargo
concedes in its application to the Federal Reserve Board that it must
divest approximately $900 million in deposits to alleviate the adverse
competitive effects that would arise out of any consummation of the Wells
Offer. This figure apparently assumes that thrift institutions will be
given a 50% weighting for competitive purposes. FBS believes that
California thrifts are not large suppliers of business banking services
and, therefore, should be given less effect in assessing the competitive
impact of the Wells Offer. If thrifts were weighted at 20% rather than
50%, for example, Wells Fargo's required divestitures would approximate
$2.3 billion in approximately 20 separate markets. Substantial
divestitures would require increased time to locate buyers and negotiate
sales, particularly if Wells Fargo seeks to divest some of First
Interstate's existing branches that Wells Fargo does not control. The
Merger involves minimal divestitures and therefore would not be subject to
these potential delays. As discussed below under "Significant
Uncertainties and Potential Delays Associated with the Wells
Offer--Antitrust and Regulatory Uncertainties and Delays," in large
transactions announced in 1995, the time from public announcement of the
transaction to regulatory approval for transactions involving substantial
divestitures was significantly longer than for transactions which did not
involve such divestitures. Wells Fargo has also announced plans to close
85% of First Interstate's branches in California. In several recent
transactions that involved large branch overlaps and significant
divestitures and/or potential branch closings, such as would result from
the Wells Offer, the Federal Reserve Board has ordered public hearings to
consider the effect of the transaction on the convenience and needs of the
communities to be served and the performance of the institutions under the
Community Reinvestment Act. The process of scheduling and conducting
regulatory hearings and receiving and reviewing testimony has generally
extended the period of time for regulatory consideration of the related
transactions. Although the Federal Reserve Board has not indicated that it
will hold hearings in connection with either the Wells Offer or the
Merger, the Merger, unlike the Wells Offer, does not involve any
significant branch overlaps, divestitures or branch closings. The Wells
Offer is also subject to other substantial uncertainties, conditions and
contingencies which could adversely affect the Wells Offer and the timing
thereof. These concerns include the First Interstate "poison pill" rights
plan, certain antitakeover provisions of Delaware law and the 62.7%
minimum tender condition of the Wells Offer. The Merger is not subject to
these uncertainties. See "Significant Uncertainties and Potential Delays
Associated with the Wells Offer."
- STRATEGIC ADVANTAGES. FBS is the best strategic partner for First
Interstate in terms of building shareholder value. The Merger will create
significant opportunities for efficiency, revenue growth and risk
diversification. The Merger also offers First Interstate shareholders the
opportunity to participate in the expected future growth of FBS and First
Interstate. FBS has built its franchise by investing in technology,
expanding its core businesses and creating a culture in which day to day
operations are consistently evaluated with a view to maximizing
shareholder value. FBS believes the combined company can successfully
implement these strategies at New First Interstate following the Merger.
See "Strategic Advantages." The following are highlights of the strategic
advantages of the Merger to First Interstate shareholders:
- Because of its proven centralized approach to multi-state banking, FBS
is one of the most efficient banks in the country.
6
<PAGE>
- FBS has considerably expanded its businesses in recent years, both
through internal growth and through acquisitions, especially when
compared with Wells Fargo. In the last three years, FBS has achieved
12% annualized growth in loans and 10.8% annualized growth in
non-interest income, compared with 1.2% and 8.5%, respectively, for
Wells Fargo. This growth has contributed to increases in annualized
net income to common shares and earnings per share of 22.2% and 22.1%,
respectively, since the beginning of 1993, as opposed to 5.0% and
11.6% for Wells Fargo.
- The combination of First Interstate and FBS will result in one of the
leading financial institutions in several high growth, high return
businesses, including consumer credit cards, corporate and purchasing
card services, card-accessed secured and unsecured lines of credit,
automatic teller machines and merchant processing, corporate trust
services and asset management.
- New First Interstate will be ranked as one of the top three financial
institutions in terms of market share in 11 states. A combination of
Wells Fargo and First Interstate would achieve such a ranking in only
four states (three of which are attributable to the pre-combination
rankings of First Interstate).
- New First Interstate will be one of the top three financial
institutions in terms of market share in 39 major metropolitan areas.
- RISK ELEMENTS. Completion of the Wells Offer would result in an
institution with a much higher risk profile than New First Interstate in
terms of capital structure, geographic concentration, business operations
and diversification. An entity comprised of Wells Fargo and First
Interstate would have the most goodwill and other intangibles and the
highest ratio of total goodwill and other intangibles to equity among
large regional banks. Consummation of the Wells Offer would generate more
than $8 billion of additional goodwill and other intangibles and result in
a ratio of goodwill and other intangibles to equity of 65% for the
combined entity. Such entity would also be overly concentrated
geographically, with approximately 70% of its total assets and 78% of its
real estate loan assets located in California. In addition, Wells Fargo is
pursuing a retail strategy that will attempt to force its customers to
abandon traditional branch banking in what FBS believes to be an
unrealistic time frame. Moreover, the revenue stream of Wells Fargo is
highly dependent on real estate lending, one of the most volatile segments
of the banking business. See "Risk Elements."
- TECHNOLOGICAL ADVANTAGES. FBS's technological advantages will allow it to
integrate the operations of First Interstate with its own in one-sixth the
amount of time estimated by Wells Fargo to be required in connection with
its integration of First Interstate's operations. As a result, the
management and other employees of New First Interstate will be able to
more quickly combine operations, enabling New First Interstate to realize
cost savings net of revenue reductions of approximately $250 million in
1996 compared with FBS's estimate of $150 million for Wells Fargo. Unlike
Wells Fargo, FBS currently employs centralized, multi-state operations and
information systems compatible with those of First Interstate. Moreover,
FBS has a proven ability to quickly and efficiently integrate companies
with multi-state operations, and the compatibility of its information
systems with those of First Interstate should enable FBS to realize cost
savings more quickly and minimize service disruptions and customer
inconvenience. Wells Fargo, on the other hand, has not attempted a major
bank acquisition in nearly a decade and has never integrated a bank with
substantial operations outside of California. See "Technological
Advantages."
- COST TAKEOUT AND REVENUE IMPACT. FBS expects to achieve annual savings
net of revenue reductions of approximately $500 million through the
combination of FBS and First Interstate. FBS's projections are achievable
and are based upon realistic, reasonable assumptions reflect-
ing FBS's access to First Interstate's books and records and FBS's
extensive acquisition experience. Wells Fargo has significantly overstated
the cost eliminations and understated the
7
<PAGE>
revenue losses that could reasonably be expected to result from the
consummation of the Wells Offer. Despite the relative advantage of the
overlap between Wells Fargo and First Interstate in California, FBS does
not believe that Wells Fargo can realistically expect to realize more than
$600 million of annual savings net of revenue reductions through the Wells
Offer before intangible amortization. In fact, when the heavy burden of
the amortization of more than $8 billion of additional goodwill and other
intangibles is taken into account, FBS has a net annual advantage of
approximately $250 million in after-tax earnings. In addition, the
significantly greater divestitures that FBS believes will be required in
connection with the Wells Offer will result in significant additional
revenue losses. See "Cost Savings and Associated Revenue Losses."
- WELLS FARGO'S SERIES OF QUESTIONABLE ASSUMPTIONS. In evaluating the
arguments advanced by Wells Fargo in support of the Wells Offer, First
Interstate shareholders need to consider carefully whether each of the
questionable (and, in FBS's view, unjustified) assumptions employed by
Wells Fargo can be believed. Perhaps the most questionable assumption
advanced by Wells Fargo is that the investment community will accept Wells
Fargo's unorthodox reliance on "cash earnings per share" as the critical
measure of financial performance, and ignore the massive amount of
goodwill and associated amortization generated by the purchase accounting
treatment required in connection with the Wells Offer. See "Value to First
Interstate Shareholders--'Cash Earnings Per Share' Analysis." In terms of
projected cost takeouts, Wells Fargo has asserted it can double the
savings advanced by FBS with respect to the Merger, despite having only
the "California overlap" advantage. See "Cost Savings and Associated
Revenue Losses--Analysis of Net California Savings." Similarly, Wells
Fargo's assumed amount of required asset divestitures is less than
one-half of the amount FBS estimates would be required in order for Wells
Fargo to secure regulatory approval of the Wells Offer. See "Significant
Uncertainties and Potential Delays Associated with the Wells Offer."
Moreover, in FBS's view, the Wells Fargo stock repurchase assumptions and
related earnings projections are internally inconsistent and do not appear
to be achievable, as discussed in "Value to First Interstate
Shareholders--Stock Price Analysis." Most recently, Wells Fargo announced
certain projections, which FBS believes are based on exaggerated
assumptions, such as a substantial decrease in traditional branch
distribution capacity by the end of 1996 and a dramatic increase in net
interest income despite flat results in recent years. Wall Street analysts
that revised earnings estimates based on the recently revised Wells Fargo
projections increased their earnings estimate by an average of 8%,
resulting in turn in a substantial increase in Wells Fargo's stock price.
See "Value to First Interstate Shareholders--Wells Fargo's Newfound
Optimism." Even if an investor were to be persuaded by portions of Wells
Fargo's arguments, FBS believes it is implausible that investors will
accept all of these assumptions, as is necessary in order to agree with
the value attributed to the Wells Offer by Wells Fargo.
8
<PAGE>
COMPARISON OF THE MERGER AND THE WELLS OFFER
The following discussion compares the Merger and the Wells Offer from the
perspective of the shareholders of First Interstate, an analysis that Wells
Fargo has, for reasons that will become apparent, in large part avoided.
VALUE TO FIRST INTERSTATE SHAREHOLDERS
INTRODUCTION. Wells Fargo consistently fails to analyze the Merger and the
Wells Offer from the perspective of First Interstate shareholders. For example,
the accretion analysis presented in the Wells S-4 is irrelevant and misleading
to First Interstate shareholders in that it intentionally focuses on the effects
of the Wells Offer on Wells Fargo shareholders and of the Merger on FBS
shareholders, not on the accretion to First Interstate shareholders that would
result from the two transactions. As discussed below, the Merger is expected to
be significantly more accretive to First Interstate shareholders than the Wells
Offer on an earnings per share basis. The Merger is also more accretive to First
Interstate shareholders on the "cash earnings per share" approach advanced by
Wells Fargo as part of its attempt to ignore the negative impact on earnings
that will result from the enormous goodwill expense that the Wells Offer would
generate.
REPORTED EARNINGS PER SHARE ANALYSIS. The Merger provides the superior
value to First Interstate shareholders based on reported earnings per share
(determined in accordance with generally accepted accounting principles), the
most widely accepted measurement of financial performance. As is more fully
described below, based on current 1996 Wall Street consensus estimates of
normalized earnings per share for FBS and Wells Fargo, the Merger produces
superior earnings per share accretion to First Interstate shareholders of 14% in
1996 and 24% in each of 1997 and 1998. In contrast, the Wells Offer would be
dilutive to First Interstate shareholders by 10% in 1996, neutral in 1997 and 5%
accretive in 1998. These projections assume annual savings net of revenue
reductions of $600 million in connection with the Wells Offer and $500 million
of net cost savings as a result of the Merger. See "Cost Savings and Associated
Revenue Losses." Although FBS believes such estimates to be unrealistically
optimistic, the Wells Fargo reported earnings per share estimates described
above are based on the recent aggressive growth projections resulting from
presentations made by Wells Fargo to investors and analysts on December 6 and 7,
1995. As shown below under "Alternative Case Estimates," FBS believes the
accretion to First Interstate shareholders under the Wells Offer would be even
less attractive using what FBS believes to be more realistic assumptions
regarding Wells Fargo's future growth. In this scenario, the Wells Offer would
be dilutive to First Interstate shareholders by 12% and 4% in 1996 and 1997,
respectively, and accretive by only 1% in 1998.
9
<PAGE>
ESTIMATED REPORTED EARNINGS PER SHARE COMPARISON (A)
FIRST INTERSTATE SHAREHOLDER PERSPECTIVE
<TABLE>
<CAPTION>
THE WELLS OFFER
CONSENSUS ALTERNATIVE
THE MERGER (B) ESTIMATES (B) CASE ESTIMATES (C)
1996 1997 1998 1996 1997 1998 1996 1997 1998
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Interstate base EPS..... $10.99 $12.53 $14.31 $10.99 $12.53 $14.31 $10.99 $12.53 $14.31
Post-acquisition EPS.......... $12.50 $15.61 $17.74 $ 9.90 $12.59 $15.09 $ 9.62 $12.07 $14.50
Accretion/(dilution) to First
Interstate shareholders...... 14% 24% 24% (10)% -- 5% (12)% (4)% 1%
</TABLE>
FBS/WELLS FARGO SHAREHOLDER PERSPECTIVE
<TABLE>
<CAPTION>
WFC/THE WELLS OFFER
CONSENSUS ALTERNATIVE
FBS/THE MERGER (B) ESTIMATES (B) CASE ESTIMATES (C)
1996 1997 1998 1996 1997 1998 1996 1997 1998
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Base EPS...................... $ 4.60 $ 5.15 $ 5.75 $18.75 $20.99 $23.44 $17.25 $19.31 $21.56
Post-acquisition EPS.......... $ 4.81 $ 6.00 $ 6.82 $15.28 $18.88 $22.64 $14.48 $18.10 $21.75
Accretion/(dilution) to
acquiror shareholders........ 5% 17% 19% (18)% (10)% (3)% (16)% (6)% 1%
</TABLE>
- ------------------------------
(a) Assumes that (i) each transaction is consummated on March 31, 1996, (ii) the
$500 million in cost savings net of revenue reductions for FBS will be
phased in at $250 million, $500 million and $500 million in 1996, 1997 and
1998, respectively, and (iii) the $600 million in cost savings net of
revenue reductions for Wells Fargo will be phased in on a straight-line
basis over the assumed 18 month integration period ($150 million, $450
million and $600 million in 1996, 1997 and 1998, respectively). The
after-tax benefit of the cost savings net of revenue reductions projected
for each transaction is assumed to be applied to the repurchase of shares in
each case presented. Amortization of goodwill and other intangibles related
to the Wells Offer is estimated to be $423 million annually ($6.8 billion
amortized over 25 years and $1.5 billion amortized over 10 years).
(b) Wells Fargo and First Interstate base EPS are adjusted for a normalized loan
loss provision ($320 million in 1996 for Wells Fargo, as described in its
November 13, 1995 analyst presentation, and 50 basis points of average loans
for First Interstate). Earnings per share is based on brokerage analyst
estimates, published by First Call Corporation ("First Call"), for 1996 as
of December 12, 1995 for FBS. Estimates for Wells Fargo are based on the
average, as reported by First Call, of the nine analyst estimates that were
updated between December 7, 1995 and December 12, 1995. Estimates of
earnings per share for FBS and Wells Fargo for 1997 and 1998 were derived by
applying an approximately 12% annual growth rate to 1996 estimates of
earnings per share. First Interstate earnings per share are assumed to be
$10.99 in 1996 and First Interstate earnings estimates for 1997 and 1998
were derived by applying an approximately 14% annual growth rate to 1996
estimated earnings. The estimates referred to in this footnote (b) are
herein referred to as the "Consensus Estimates."
(c) Earnings per share for 1996 is based on FBS's view of a realistic earnings
estimate (the "Alternative Case Estimate") for Wells Fargo, including a loan
loss provision of approximately $300 million (or 80 basis points of average
loans). Estimated earnings per share for 1997 and 1998 were derived by
applying an approximately 12% annual growth rate to the 1996 Alternative
Case Estimate of Wells Fargo's 1996 earnings per share.
Even using Wells Fargo's assumption that it can achieve $400 million more in
net cost reductions than FBS, which FBS believes is not credible (see "Cost
Savings and Associated Revenue Losses"), applying the Consensus Estimates to the
Wells Offer would result in First Interstate shareholders receiving accretion
amounts inferior to those associated with the Merger (6% dilution in 1996 and
accretion of 9% in 1997 and 16% in 1998).
WELLS FARGO'S NEWFOUND OPTIMISM. For a number of compelling reasons, FBS
believes the Alternative Case Estimates are more realistic than the Consensus
Estimates and should be the focus of the analysis from the viewpoint of First
Interstate shareholders. After a number of reported admissions regarding its
limited growth environment (see "Strategic Advantages"), and within weeks of
presenting the Wells Offer based on earlier analysts' estimates, on December 6
and 7, 1995, Wells Fargo
10
<PAGE>
conveniently scheduled its first New York analyst meetings in years to discuss
its newfound optimism regarding its business prospects. FBS believes these
meetings were calculated attempts to manipulate the price of Wells Fargo's
common stock and interfere with the Merger. The meetings had the effect of
increasing the Consensus Estimates regarding Wells Fargo, and the perceived
value of the Wells Offer, by approximately 8%. FBS believes that First
Interstate shareholders would be well advised to view Wells Fargo's recently
asserted growth prospects with a high degree of skepticism.
The following analysis of Wells Fargo's recent presentation is based on
published analyst reports. Total revenue in the new Wells Fargo presentation is
projected to increase by 8% in 1996, despite the fact that Wells Fargo's total
revenues have increased by only 2.5% annually since 1993. The 8% revenue growth
was attributed in turn to 5% growth in Wells Fargo's net interest income and a
12% increase in its noninterest income.
A 5% growth in net interest income is, at best, implausible in view of the
fact that Wells Fargo has been unable to achieve any net interest income growth
over the last two years. Wells Fargo's annualized 1995 net interest income is
essentially flat with 1993 levels. In addition, such aggressive growth levels
would seem difficult to achieve in light of the current negative industry trends
affecting net interest income, such as deposit pricing pressures and an
increasingly competitive loan pricing environment in both the commercial and
consumer markets. Also, the cost of funding the significant stock repurchase
program announced by Wells Fargo would further increase the difficulty of
achieving these projected growth levels. A supposed basis for the claimed net
interest income growth is the Wells Fargo national small business lending
strategy. However, small business loans constitute less than 6% of Wells Fargo's
total assets, and so it is difficult to see how this consideration could account
for the net interest income levels predicted by Wells Fargo. In fact, even a 20%
growth in Wells Fargo's small business loan portfolio would be offset by the
negative impact on net interest income of the funding costs for the expected
1996 Wells Fargo stock repurchases.
The 12% projected growth in Wells Fargo's noninterest income is also suspect
in light of Wells Fargo's announced decision to exit two fee-generating lines of
business, mortgage banking and its Wells Fargo-Nikko investment advisory
business.
Finally, the projected revenue growth must be achieved while Wells Fargo
expects to be executing a high risk strategy of rapidly downsizing its
traditional branch network. Wells Fargo's projections assume a reduction in the
percentage of its outlets that are traditional branches from the current level
of 94% of total outlets to 28% by the end of 1996. Such a strategy, which
abruptly deprives many customers of their principal means of transacting
business with their bank, should be expected to result in the loss of customers
and associated revenue.
In view of the problematic nature of the newly revised Wells Fargo
estimates, FBS believes First Interstate shareholders should focus instead on
the Alternative Case Estimates prepared by FBS. The Alternative Case Estimates
assume total revenue growth of 3%, which is still above Wells Fargo's historical
levels. The components of this growth are made up of 9% growth in noninterest
income and a flat level of net interest income, consistent with Wells Fargo's
historical results. The result of these assumptions is a 1996 pre-provision
earnings per share estimate of $21.00 ($17.25 normalized for loan losses) or
$1.80 per share lower than the Consensus Estimates. In fact, the Alternative
Case Estimates for 1996 are consistent with the prevailing First Call consensus
estimates for Wells Fargo prior to the December 6 and 7, 1995 analyst meetings.
GOODWILL BURDEN. In an attempt to divert the attention of First
Interstate's shareholders from the substantial goodwill and other intangibles
and the related negative impact on earnings that would result from the Wells
Offer, Wells Fargo has downplayed estimates of reported earnings per share and
has instead focused on projected "cash earnings per share" (earnings before
amortization of goodwill and other intangibles). It is unrealistic to think that
the investment community will ignore reported earnings per share and performance
ratios when analyzing performance and determining stock values. Reported
earnings per share is the most widely accepted measure of financial performance
and must be disclosed by all publicly-held companies. "Cash earnings per share"
are neither routinely
11
<PAGE>
reported nor readily available. In fact, the Commission actively discourages
such reporting. As the Commission stated in Accounting Series Release No. 142,
"per share data other than that relating to net income, net assets and dividends
should be avoided in reporting financial results." By ignoring this
consideration, First Interstate shareholders risk a negative market reaction to
the sharp decline in Wells Fargo's reported earnings per share growth that would
occur following any consummation of the Wells Offer.
As stated by Nancy A. Bush, CFA, of Brown Brothers Harriman & Co.: "The
crucial difference in our mind remains the accounting method; the pooling method
to be used in the First Bank System deal is clearly superior in a deal where
price-to-book value approaches 3X and a massive amount of goodwill will be
created by the purchase method which Wells Fargo will be forced to use. No, we
do not buy the argument that the market will simply ignore low reported earnings
or a low ROE for the supposed attractiveness of cash flow accounting. Our view
remains that Wells Fargo, precluded from doing a pooling by the financial
engineering in which it has been engaged for the last few years, has simply
chosen an argument which bolsters a high price for an equity base which it then
will actively work to liquidate."(1)
The increase in goodwill associated with consummation of the Wells Offer
will also result in a significant negative impact upon the combined entity's
return on assets and return on equity, which are also widely followed measures
of financial performance. The following table compares these key industry
performance ratios on a pro forma basis for the combination of First Interstate
with each of FBS and Wells Fargo for the quarter ended September 30, 1995:
KEY PERFORMANCE RATIOS (A)
<TABLE>
<CAPTION>
FIRST
INTERSTATE FBS/FI @ WFC/FI @
BASE 2.60 .667
------------ ----------- ------------
<S> <C> <C> <C>
Return on assets................................................................... 1.56% 2.09% 1.54%
Return on equity................................................................... 23.2% 28.0% 11.8%
</TABLE>
- ------------------------------
(a) For the quarter ended September 30, 1995. Assumes normalized loan loss
provision ($320 million annually for Wells Fargo, as described in its
November 13, 1995 analyst presentation, and 50 basis points annually for
First Interstate) and full phase-in of cost savings net of revenue
reductions of $500 million for FBS and $600 million for Wells Fargo.
Amortization of goodwill and other intangibles related to the Wells Offer
is estimated to be $423 million annually ($6.8 billion amortized over 25
years and $1.5 billion amortized over 10 years).
Goodwill amortization charges will also negatively affect earnings per share
growth. Assuming a 1995 normalized earnings per share of $9.72 for First
Interstate, the following table compares earnings per share growth for First
Interstate shareholders based on the Merger and the Wells Offer:
ESTIMATED EARNINGS PER SHARE GROWTH (A)
<TABLE>
<CAPTION>
THE WELLS OFFER
FIRST --------------------------------
INTERSTATE THE CONSENSUS ALTERNATIVE
BASE (B) MERGER (B) ESTIMATES (B) CASE ESTIMATES(C)
----------- ----------- ------------- -----------------
<S> <C> <C> <C> <C>
1996 EPS................................................. $ 10.99 $ 12.50 $ 9.90 $ 9.62
Growth................................................... 13.1% 28.6% 1.9% (1.0)%
</TABLE>
- ------------------------------
(a) Wells Fargo and First Interstate base EPS are adjusted for a normalized
loan loss provision ($320 million for Wells Fargo, as described in its
November 13, 1995 analyst presentation and 50 basis points for First
Interstate). Assumes consummation of each of the transactions on March 31,
1996 and net cost takeouts in 1996 of $250 million for FBS and $150 million
for Wells Fargo. Amortization of goodwill and other intangibles related to
the Wells Offer is estimated to be $423 million annually ($6.8 billion
amortized over 25 years and $1.5 billion amortized over 10 years).
(b) Based on the Consensus Estimates.
(c) Based on the Alternative Case Estimates.
- ------------------------
(1) Reprinted herein from "First Bank System," dated November 28, 1995, with the
consent of the author.
12
<PAGE>
"CASH EARNINGS PER SHARE" ANALYSIS. Although FBS believes that reported
earnings per share constitutes the most meaningful measure of financial
performance, the Merger is also superior to the Wells Offer based on estimated
"cash earnings per share," the measurement methodology favored by Wells Fargo,
as demonstrated in the following chart:
ESTIMATED "CASH EARNINGS PER SHARE" COMPARISON (A)
FIRST INTERSTATE SHAREHOLDER PERSPECTIVE
<TABLE>
<CAPTION>
THE WELLS OFFER
CONSENSUS ALTERNATIVE
THE MERGER (B) ESTIMATES (B) CASE ESTIMATES (C)
1996 1997 1998 1996 1997 1998 1996 1997 1998
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Interstate base cash
EPS.......................... $11.81 $13.40 $15.23 $11.81 $13.40 $15.23 $11.81 $13.40 $15.23
Post-acquisition cash EPS..... $13.63 $16.81 $19.02 $12.89 $16.18 $18.92 $12.62 $15.66 $18.34
Accretion to First Interstate
shareholders................. 15% 25% 25% 9% 21% 24% 7% 17% 20%
</TABLE>
FBS/WELLS FARGO SHAREHOLDER PERSPECTIVE
<TABLE>
<CAPTION>
WFC/THE WELLS OFFER
CONSENSUS ALTERNATIVE
FBS/THE MERGER (B) ESTIMATES (B) CASE ESTIMATES (C)
1996 1997 1998 1996 1997 1998 1996 1997 1998
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Base cash EPS................. $ 5.20 $ 5.75 $ 6.36 $20.22 $22.53 $25.04 $18.72 $20.85 $23.16
Post-acquisition cash EPS..... $ 5.24 $ 6.47 $ 7.32 $19.83 $24.27 $28.38 $19.03 $23.49 $27.50
Accretion to acquiror
shareholders................. 1% 13% 15% (2)% 8% 13% 2% 13% 19%
</TABLE>
- ------------------------------
(a) Assumes that (i) each transaction is consummated on March 31, 1996, (ii)
the $500 million in cost savings net of revenue reductions for FBS will be
phased in at $250 million, $500 million and $500 million in 1996, 1997 and
1998, respectively, and (iii) the $600 million in cost savings net of
revenue reductions for Wells Fargo will be phased in on a straight-line
basis over the assumed 18 month integration period ($150 million, $450
million and $600 million in 1996, 1997 and 1998, respectively). The
after-tax benefit of the cost savings net of revenue reductions projected
for each transaction is assumed to be applied to the repurchase of shares
in each case presented.
(b) Based on the Consensus Estimates.
(c) Based on the Alternative Case Estimates.
13
<PAGE>
STOCK PRICE ANALYSIS. The superiority of the Merger in terms of earnings
per share translates directly to shareholder value. The following table shows
the implied purchase price to First Interstate shareholders of the competing
offers based on projected 1997 reported earnings per share using current,
normalized earnings multiples for FBS and Wells Fargo:
IMPLIED PURCHASE PRICE
<TABLE>
<CAPTION>
THE WELLS OFFER
---------------------------
THE CONSENSUS ALTERNATIVE
MERGER ESTIMATES CASE ESTIMATES
--------- ----------- --------------
<S> <C> <C> <C>
1997 estimated reported EPS (a)........................................... $ 6.00 $ 18.88 $ 18.10
Current multiple of estimated 1997 earnings (b)........................... 10.02 10.46 10.46
--------- ----------- --------------
Implied current price..................................................... 60.12 197.48 189.33
Exchange ratio............................................................ 2.60 0.667 0.667
--------- ----------- --------------
Implied First Interstate price per share.................................. $ 156.31 $ 131.66 $ 126.22
--------- ----------- --------------
Superiority of FBS offer.................................................. $ 24.65 $ 30.09
----------- --------------
----------- --------------
</TABLE>
- ------------------------
(a) As shown in the table entitled "Estimated Reported Earnings Per Share
Comparison."
(b) Derived by dividing the closing stock prices of FBS ($51- 5/8) and Wells
Fargo ($219- 1/2) on December 12, 1995 by the related Consensus Estimate of
1997 earnings shown in the table entitled "Estimated Reported Earnings Per
Share Comparison."
Wells Fargo ignores all of the factors described above and argues that the
Wells Offer is superior based on current stock prices. But, as Wells Fargo
itself admits with respect to its own stock price, market uncertainty regarding
which transaction will ultimately be consummated is affecting the stock prices
of each of FBS, Wells Fargo and First Interstate. FBS expects that approval of
the Merger by First Interstate shareholders would have a significant positive
impact on FBS's stock price, as demonstrated by the above chart.
Wells Fargo's analysis and projections are inconsistent in a manner that
raises significant doubt about the prospects for its future stock prices. Wells
Fargo assumes that it will repurchase $7.5 billion of its common stock over the
next five years. However, the assumptions contained in Wells Fargo's November
13, 1995 presentation to analysts in this regard are mutually exclusive. In this
presentation, Wells Fargo assumed that it would repurchase $7.5 billion in
common stock and have earnings per share of over $30 by the year 2000. As stated
by Brent B. Erensel, CFA, of UBS Securities Inc.: "These goals are mutually
exclusive unless one assumes that the stock price stays in the $230-$250 dollar
range [over the five-year period]. If the stock buyback occurs at the 12.5 P/E
that WFC has assumed, then earnings will approach $28 per share, well below
those forecast. When we applied WFC assumptions regarding net income accretion,
including 5% base growth, $818 million in cost cuts, and over $400 million in
goodwill amortization, and then backed into the number of shares required for
purchase to achieve the projected accretion, we found that in order for these
projections to be achieved, the stock price must remain moribund. These are
WFC's publicly stated assumptions. . . . If one applies WFC's purchase target of
12.5 times earnings, then fewer shares can be purchased and the accretion
projections cannot be realized. Thus, there is a logical inconsistency: in order
for WFC to achieve its earnings projections, the stock must stay low. If the
stock price rises, the earnings projections cannot be realized."(1)
- ------------------------
(1) Reprinted herein from "Battling Wells Fargo for First Interstate," dated
November 22, 1995, with the consent of the author.
14
<PAGE>
STOCK REPURCHASE PROGRAM. Wells Fargo has asserted the value of the FBS
proposal is overstated because of FBS stock repurchases. This is another "red
herring." FBS has had a continuing, publicly announced stock repurchase program
throughout 1993, 1994 and 1995. This has not been a clandestine, recently
conceived, merger-related tactic. As publicly reported in its Annual Reports on
Form 10-K for the years ended December 31, 1993 and December 31, 1994, FBS
repurchased 6.2 million and 6.3 million shares in 1993 and 1994, respectively.
On January 19, 1995 and February 15, 1995, FBS announced that its Board of
Directors had authorized programs to repurchase 2 million and 14 million shares,
respectively, by the end of 1996. These programs were described in FBS's
Quarterly Reports on Form 10-Q for the first and second quarters of 1995 and its
press releases announcing first and second quarter financial results. More
recently, on October 10, 1995, FBS further announced that it had repurchased 4.3
million shares in the third quarter pursuant to the authorized repurchase of 8.3
million shares in connection with its proposed acquisition of FirsTier
Financial, Inc. FBS further announced that it expected to repurchase up to an
aggregate of 24.3 million shares during 1995 and 1996 as a result of these
previously announced repurchase programs. The repurchase programs were
reconfirmed at the November 6, 1995 analysts' meeting in connection with the
announcement of the Merger and described in the November 6, 1995 joint press
release announcing the Merger, which was also filed as an Exhibit to FBS's
Current Report on Form 8-K filed November 13, 1995. FBS's Quarterly Report on
Form 10-Q filed with the Commission on November 13, 1995, and the FBS
Registration Statement, each also contains references to such repurchases.
As publicly reported in FBS's 1995 Quarterly Reports on Form 10-Q, FBS
repurchased 1,040,475, 2,644,410 and 4,306,620 shares in the first, second and
third quarters of 1995, respectively. Continuing this pattern in the fourth
quarter, FBS expects to repurchase up to approximately 4 million shares, of
which 3,507,411 have been repurchased as of December 12, 1995. Although, like
other public companies engaged in stock repurchase programs, FBS does not
normally disclose its daily purchase activity, FBS is filing a Current Report on
Form 8-K with the Commission on December 13, 1995 containing a schedule of such
activity in response to the campaign of misinformation regarding this issue
being waged by Wells Fargo. An active stock repurchase program is a long-term
feature of FBS's capital management goal of returning to its shareholders excess
capital that may result from future earnings. Repurchases are assumed in the
forecasted results describing the Merger. FBS will not purchase treasury shares
under its existing authorizations in the 90 days following consummation of the
Merger.
In making these repurchases, FBS strictly adheres to the Commission's
antimanipulation rules. One of these rules provides a safe harbor against any
claim of stock manipulation if the repurchases are limited in terms of timing,
manner of execution and other factors. Another of these rules limits the time
periods during which the repurchases must be made and expressly prohibits
repurchases during the period of merger proxy solicitations. Because of this
rule, FBS was prohibited from repurchasing shares during most of October and
expects to be prohibited from making repurchases for a portion of December 1995
and January 1996 during the solicitation period for its FirsTier merger. More
directly related to the Wells Fargo allegations, this same rule will prohibit
repurchases during a period of at least a month prior to the shareholder vote on
the Merger. This rule was adopted by the Commission expressly to ensure that the
type of manipulation Wells Fargo has accused FBS of conducting cannot occur.
That is, even if Wells Fargo's assertions about the market effect of FBS's
repurchases were true (and they are not), any such effects would necessarily
have dissipated by the time First Interstate shareholders vote on the Merger.
FBS believes that it is Wells Fargo that has violated the Commission's
antimanipulation rules by holding analysts and investor meetings on December 6
and 7, 1995 in an effort to increase its stock price and the perceived value of
the Wells Offer. See "Value to First Interstate Shareholders--Wells Fargo's
Newfound Optimism."
SIGNIFICANT UNCERTAINTIES AND POTENTIAL DELAYS ASSOCIATED WITH THE WELLS OFFER
Wells Fargo has repeatedly asserted that the Wells Offer could be completed
within the same time frame as the Merger. FBS firmly believes that nothing could
be further from the truth. The Wells Offer
15
<PAGE>
is subject to substantial conditions and contingencies, the satisfaction of
which is far less certain than the satisfaction of the customary conditions to
the Merger, and which could result in significant delays.
ANTITRUST AND REGULATORY UNCERTAINTIES AND DELAYS. Any combination of Wells
Fargo and First Interstate would have to overcome substantial regulatory hurdles
that could cause potential delays not faced by the Merger. Such a combination
would raise significant antitrust concerns, as Wells Fargo concedes in its
application to the Federal Reserve Board. Wells Fargo concedes a need to divest
at least $900 million of deposits. Wells Fargo's $900 million of stated
divestitures appears to be based on the assumption that the regulatory
authorities will permit a 50% weighting of the deposits of thrift institutions
for purposes of assessing the competitive effects of the Wells Offer. Based on a
review of available information, California thrifts are not active suppliers of
unsecured business banking credit, and FBS believes that thrifts should be
accorded a much lower (if any) weighting for evaluating the competitive impact
of the Wells Offer. If thrift deposits were weighted at 20% instead of 50%, for
example, the required divestitures under the Wells Offer would be approximately
$2.3 billion of deposits in approximately 20 separate markets. Moreover, in
other transactions where divestitures were required, the Federal Reserve Board
has mandated that branches and other assets to be divested be specifically
identified and that definitive agreements with respect to the required
divestitures be in place before the transaction can be consummated. Indeed, in
one recent transaction involving major divestitures, the Federal Reserve Board
did not consider the transaction for approval until definitive divestiture
agreements had been signed. In order to effect the substantial divestitures that
would be required, Wells Fargo would need to identify branches and assets in
multiple markets, identify suitable buyers and negotiate sales agreements. This
would be further complicated if Wells Fargo seeks to divest some of First
Interstate's existing branches, which Wells Fargo does not control. This process
would be far more time-consuming than would be required in connection with the
Merger, which involves divestiture of only a small amount of assets in three
local markets located outside of California.
Any transaction requiring divestitures of the magnitude of the Wells Offer
will be carefully scrutinized not only by the Federal Reserve Board, but also by
the United States Department of Justice and the California Banking
Superintendent, who is required to consider the competitive impact of such a
transaction upon the State of California. In addition, the Attorney General of
the State of California may well play an active role, as State Attorneys General
have done in other competitively adverse transactions. For example, in the
protracted Bank of America--Security Pacific transaction, the California
Attorney General reportedly required further divestitures beyond those mandated
by the Department of Justice. According to the NEW YORK TIMES, after that
transaction had received Department of Justice clearance, the California
Attorney General required Bank of America to increase the number of branches to
be divested in California by 36 percent.* Similarly, in the Fleet/ Shawmut
transaction, the Attorneys General of Connecticut and Massachusetts each
conducted its own independent investigation, which included extensive subpoena
demands. There is no reason to expect that the regulatory authorities will give
any less scrutiny to the Wells Offer.
The potential impact of significant divestitures on the timing of regulatory
approval is illustrated by transactions selected by Wells Fargo. In the Wells
S-4, Wells Fargo cited a number of large bank transactions announced in 1995 for
purposes of assessing FBS's projected cost savings. What Wells Fargo failed to
mention is the length of time that elapsed before receipt of Federal Reserve
Board approval of those transactions on its list where significant divestitures
were required. For example, in each of the Fleet/Shawmut and U.S. Bancorp/West
One transactions, more than seven months passed from the time the transaction
was publicly announced to the time it received Federal Reserve Board approval.
In sharp contrast, in the transactions selected by Wells Fargo that are known
not to involve significant divestitures--as would be the case for the
Merger--the elapsed time between public announcement and Federal Reserve Board
approval was approximately four months or less.
- ------------------------
* NEW YORK TIMES, March 12, 1992.
16
<PAGE>
Wells has announced plans to close 85% of First Interstate's branches in
California, which FBS believes would have a significant impact on communities
throughout California. In considering whether to approve a transaction under the
Bank Holding Company Act, the Federal Reserve Board is required to consider the
effect of the transaction on the convenience and needs of the communities to be
served and performance under the Community Reinvestment Act ("CRA"). In
connection with several major transactions in recent years, the Federal Reserve
Board has held public hearings to collect information on the effects of those
transactions on the factors of convenience and community needs, including the
CRA performance of the institutions involved. The Federal Reserve Board did not
state the factors that lead it to hold these hearings, but those transactions
generally involved factors such as substantial branch overlap, branch closings
and/or divestitures. The Federal Reserve Board's hearing process--including the
scheduling and conduct of the hearing and evaluating the testimony and
submissions--has generally resulted in additional time being required prior to
regulatory consideration and approval. The Federal Reserve Board has not
indicated that it will hold any such hearing with respect to the Wells Offer or
the Merger. FBS believes that unlike the Wells Offer, however, the Merger does
not involve any substantial branch overlaps, closings or divestitures.
FBS also believes that the more than $8 billion of additional goodwill and
other intangibles that would result from the consummation of the Wells Offer,
and the resultant $400 million in annual amortization expense, raises
substantial regulatory issues relating to the adequacy of earnings, and will be
an entirely separate focus of regulatory scrutiny.
RIGHTS PLAN AND SECTION 203 CONDITION. The Wells Offer is subject to the
inapplicability to its consummation of the First Interstate Rights Plan and the
business combination restrictions set forth in Section 203 of the Delaware
General Corporation Law (the "DGCL"). According to Wells Fargo, a principal
reason that the timing of the Wells Offer would be the same as that of the
Merger is its theory that if the Merger is not approved by First Interstate
shareholders, Wells Fargo would promptly obtain the approval of the Board of
Directors of First Interstate of the Wells Offer (thereby avoiding the
restrictions of Section 203 of the DGCL and the triggering of the First
Interstate Rights Plan) by, if necessary, immediately removing the directors of
First Interstate. FBS believes that commencing such a consent solicitation prior
to receiving the requisite regulatory approval violates federal law and that, as
a result, consummation of the Wells Offer could be delayed for many months after
the meeting of the First Interstate shareholders to vote upon the Merger. The
Merger is not subject to any conditions regarding the First Interstate Rights
Plan or Section 203 of the DGCL.
MINIMUM TENDER CONDITION. Buried in the back of the Wells S-4 is a
description of a "minimum tender condition" that requires that a majority of the
outstanding shares of First Interstate Common Stock, on a fully diluted basis,
be tendered before the Wells Offer can be consummated. Approximately 62.7% of
the currently outstanding shares of First Interstate Common Stock must be
tendered in order to satisfy this condition. Given the superior values for First
Interstate shareholders offered by the Merger, it is doubtful that this
supermajority requirement will be satisfied in a timely manner, or at all.
ACCOUNTING TREATMENT. Wells Fargo also has cited FBS's stock repurchases
and the existence of tainted shares of First Interstate Common Stock in an
effort to cast doubt about FBS's ability to complete the Merger under the
pooling-of-interests method of accounting. In doing so, Wells Fargo states that
it has relied upon the advice of certain unnamed "advisors" who apparently are
not sufficiently confident of such advice to have their names associated with
it. FBS has every confidence that the pooling method is available. Ernst & Young
LLP, the independent auditor for both FBS and First Interstate, has issued a
letter dated December 4, 1995 stating that based upon management's analysis and
representations, they concur with FBS and First Interstate management that the
Merger would qualify as a pooling-of-interests upon consummation of the
transactions contemplated by FBS and First Interstate and the closing of the
Merger in accordance with the Merger Agreement. As is customary, it is a
condition to both parties' obligations to consummate the Merger that a
substantially identical letter be delivered at closing. FBS and First Interstate
fully anticipate receiving such a letter and consider receipt of such a
bringdown letter to be a mere technicality.
17
<PAGE>
It is Wells Fargo's proposed accounting treatment of a transaction with
First Interstate that poses potential difficulties for First Interstate
shareholders. Consummation of the Wells Offer would penalize future earnings
with the amortization of more than $8 billion in additional goodwill and other
intangibles. This enormous goodwill burden will depress future reported
earnings, reduce Wells Fargo's financial flexibility in an economic downturn,
potentially limit Wells Fargo's ability to do future acquisitions and will
likely draw close regulatory scrutiny. With the Merger, First Interstate
shareholders benefit from the pooling-of-interests accounting treatment of the
Merger. Existing capital management programs continue, no additional goodwill is
incurred and strategic flexibility is preserved for future acquisitions.
STRATEGIC ADVANTAGES
INTRODUCTION. FBS is the best strategic partner for First Interstate in
terms of building shareholder value. Over the past six years, FBS's total return
to shareholders has been 41.7% (compounded annual growth rate), compared with
38.9% for Wells Fargo. The Merger will create significant opportunities for
efficiency, revenue growth and risk diversification. The Merger also offers
First Interstate shareholders the opportunity to participate in the expected
future growth of FBS and First Interstate. FBS has built its franchise by
investing in technology, expanding its core businesses and creating a culture in
which day to day operations are consistently evaluated with a view to maximizing
shareholder value. FBS believes it can successfully implement these strategies
at New First Interstate following the Merger.
EFFICIENCY AND GROWTH PROSPECTS. FBS's retail bank franchise is founded on
an efficient, centralized product management and operations structure and
multiple distribution channels. FBS's product and distribution model is designed
to divide its product management efforts from its sales functions, enabling FBS
to contain costs while expanding market share. Investments in technology have
reduced costs and increased productivity, making FBS one of the nation's most
efficient banks with an efficiency ratio for the quarter ended September 30,
1995 of 51.9%. Moreover, contrary to the experience of Wells Fargo, FBS has seen
considerable expansion in its core businesses during recent years.
18
<PAGE>
As part of its growth strategy, FBS has made significant investments in
several high return businesses with attractive income streams. The combination
of First Interstate and FBS will be a leading institution in several high return
businesses, as shown in the chart below:
COMBINED BUSINESS LINES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FIRST NEW FIRST
CREDIT CARDS FBS INTERSTATE INTERSTATE
- -------------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Sales (annualized 1995 volume)...................................... $ 15,000 $ 2,000 $ 17,000
Loans (pro forma September 30, 1995 outstandings)................... $ 2,500 $ 1,200 $ 3,700
<CAPTION>
MERCHANT PROCESSING
- --------------------------------------------------------------------
<S> <C> <C> <C>
Merchants (estimated year end 1995)................................. 65,000 41,000 106,000
Sales (annualized 1995 volume)...................................... $ 16,000 $ 4,000 $ 20,000
<CAPTION>
INDIRECT LENDING
- --------------------------------------------------------------------
<S> <C> <C> <C>
Loans (September 30, 1995).......................................... $ 1,900 $ 3,500 $ 5,400
Dealers (October 1995).............................................. 1,000 900 1,900
Originations (estimated 1995 volume)................................ $ 1,000 $ 2,000 $ 3,000
<CAPTION>
ASSETS UNDER MANAGEMENT AT OCTOBER 31, 1995......................... $29,000 $22,500 $51,500
PROPRIETARY MUTUAL FUNDS
- --------------------------------------------------------------------
<S> <C> <C> <C>
Number (at October 31, 1995)........................................ 25 18(a) 43
Assets under management (at October 31, 1995)....................... $ 7,000 $ 4,800 $ 11,800
</TABLE>
- ------------------------
(a) As adjusted for consolidations occurring after October 31, 1995.
FBS's payment systems business (consumer credit cards, corporate and
purchasing card services, card-accessed secured and unsecured lines of credit
and automatic teller machine and merchant processing) is its largest source of
fee income and a proven source of growth:
FBS PAYMENT SYSTEMS NONINTEREST INCOME
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PERCENT
3Q-94 3Q-95 CHANGE
--------- --------- -----------
<S> <C> <C> <C>
Consumer credit card................................................................. $ 22.9 $ 27.8 21.4%
Corporate card....................................................................... 10.0 14.6 46.0
Purchasing card...................................................................... 5.4 12.1 124.1
Merchant processing.................................................................. 12.4 15.4 24.2
--------- ---------
Total.............................................................................. $ 50.7 $ 69.9 37.9%
--------- --------- -----
--------- --------- -----
</TABLE>
As part of its payment systems business, FBS has relationships with 31 of
the Fortune 100 companies and 121 of the Fortune 500 companies.
19
<PAGE>
FBS's strategies and investments have resulted in superior growth and
revenues when compared to those of Wells Fargo, as shown below:
GROWTH PERFORMANCE COMPARISON (A)
<TABLE>
<CAPTION>
FBS WFC
----------- -----------
<S> <C> <C>
Revenue........................................................................................ 6.0% 2.5%
Noninterest
Income....................................................................................... 10.8 8.5
Loans (b)...................................................................................... 12.0 1.2
Net income applicable to common shares......................................................... 22.2 5.0
Earnings per share............................................................................. 22.1 11.6
</TABLE>
- ------------------------
(a) Compares annual growth rate based on annualized 1995 results for the nine
month period ended September 30, 1995 versus 1993 results. Noninterest
income excludes securities gains and losses, sales of loans and other
assets and income tax settlement. The normalized loan loss provision is 80
basis points for Wells Fargo. FBS's net income excludes merger-related
charges.
(b) Excludes residential first mortgage loans.
In contrast, during the past several years Wells Fargo has pursued a
strategy based on financial engineering, not business growth. Rather than
investing in expansion and high growth businesses, Wells Fargo has focused on
cost cutting and stock buybacks. On page 2 of its 1994 Annual Report, Wells
Fargo states, " . . . much of the improvement from 1993 resulted from a lower
loan loss provision . . . not from growth in our underlying operations." That
trend continues in 1995. According to Wells Fargo's third quarter report on Form
10-Q, "The percentage increase in per share earnings was greater than the
percentage increase in net income due to the Company's continuing stock
repurchase program. . . . The higher third quarter 1995 results were
substantially due to a zero loan loss provision. . . . " These approaches have
only a limited potential for long-term growth and are reflective of a management
view that the value of Wells Fargo's existing franchise has peaked. Indeed, in a
November 22, 1995, interview with the NEW YORK TIMES Paul Hazen, Chairman of
Wells Fargo, stated: "If you hold a hand of cards and have nothing to work with,
you have to wait for the next hand. That's where we are today."(1) This
viewpoint does not seem promising in terms of future growth and increased value
for First Interstate shareholders. In an apparent effort to counteract the
negative effect of these admissions, on December 6 and 7, 1995, Wells Fargo
announced aggressive growth statistics inconsistent with both its recent
performance and these comments. As discussed in "Value to First Interstate
Shareholders--Wells Fargo's Earnings Estimates," FBS believes First Interstate
shareholders should view such revised projections with a high degree of
skepticism.
In short, FBS offers First Interstate shareholders the opportunity to
participate in a dynamic, growing enterprise that is responsive to the current
banking environment and aggressively pursuing a variety of innovative income
opportunities. Wells Fargo apparently expects to achieve earnings growth
principally through cost cutting, share repurchases and other methods of
financial engineering.
MARKET POSITIONS. The Merger would increase First Interstate's geographic
diversification to 21 states from the 13 states where First Interstate currently
does business, thereby lowering its exposure to regionalized economic downturns.
The combination of FBS and First Interstate would have a top three market share
ranking in 11 states, and only 30% of the assets of the combined entity would be
located in California. The Wells Offer would, conversely, further concentrate
operations in California, with approximately 70% of the total assets and 78% of
the real estate loan assets of the combined company located in California. The
territory of the combined entity of Wells Fargo and First Interstate would
remain limited to 13 states, with a top three ranking in only four states.
- ------------------------
(1) Permission to quote this article has not been sought or obtained from the
NEW YORK TIMES or the author.
20
<PAGE>
FBS/FIRST INTERSTATE MARKET SHARES (A)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DEPOSIT
TOTAL MARKET SHARE MARKET
STATE DEPOSITS PERCENTAGE RANK
- ------------------------------------------------------------------------------ --------- ---------------- ------------
<S> <C> <C> <C>
California.................................................................... $ 23,155 9.4% 3
Minnesota..................................................................... 11,219 24.5 1
Arizona....................................................................... 7,073 22.5 3
Colorado...................................................................... 6,615 22.6 1
Texas......................................................................... 5,560 3.8 5
Oregon........................................................................ 5,227 24.1 2
Washington.................................................................... 4,229 11.7 4
Nevada........................................................................ 3,453 30.4 2
Nebraska...................................................................... 3,246 15.5 1
North Dakota.................................................................. 1,989 24.1 1
Montana....................................................................... 1,232 18.7 2
Iowa.......................................................................... 1,068 3.2 5
Illinois...................................................................... 998 0.6 20
South Dakota.................................................................. 873 10.5(b) 2(b)
Utah.......................................................................... 847 7.3 4
Idaho......................................................................... 788 9.3 4
Wyoming....................................................................... 683 14.0 2
Kansas........................................................................ 531 2.0 7
Wisconsin..................................................................... 408 1.0 8
New Mexico.................................................................... 113 1.0 19
Alaska........................................................................ 33 0.9 8
---------
Total....................................................................... $ 79,340
---------
---------
</TABLE>
- ------------------------------
(a) Excluding thrifts and savings banks.
(b) Excluding credit card banks.
Source: FDIC as of June 30, 1994--updated for acquisitions since such date.
According to Wells Fargo, the combined population of the states where it and
First Interstate would rank first, second or third in terms of deposits would be
approximately 40 million, compared with 21 million for the combination of FBS
and First Interstate. This misleading analysis excludes the combined FBS/First
Interstate entity from a top three position in California. California's largest
thrift institution (in terms of total deposits), H.F. Ahmanson, has less than $1
billion in demand deposit accounts, virtually no commercial loans and a loan
portfolio that consists primarily of residential mortgages. Excluding this
institution, New First Interstate would properly have a top three rank in
California. As a result, the combined population of the states where New First
Interstate would rank among the top three banking institutions would be 52
million, versus 40 million for the proposed Wells Fargo and First Interstate
combination.
21
<PAGE>
New First Interstate would maintain a top four market rank in 50
metropolitan areas and 73% of its deposits would be located in areas where the
combined entity maintained a rank of three or higher.
STRONG MARKET POSITION IN METROPOLITAN AREAS (A)
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF TOTAL DEPOSIT AVERAGE
RANK AREAS DEPOSITS PERCENTAGE MARKET SHARE
- -------------------------------------------------- ------------ ---------------- -------------- -------------
(IN BILLIONS)
<S> <C> <C> <C> <C>
1................................................. 14 $ 19.8 25% 34.0%
2................................................. 16 23.5 30 18.5
3................................................. 9 14.2 18 15.8
4................................................. 11 4.4 5 10.3
5 or lower........................................ 33 7.9 10 --
--
----- ---
Subtotal.......................................... 83 $ 69.8 88
--
--
Non MSA........................................... 9.5 12
----- ---
Total........................................... $ 79.3 100%
----- ---
----- ---
</TABLE>
<TABLE>
<CAPTION>
MARKET MARKET
METROPOLITAN SERVICE AREA DEPOSITS SHARE RANK
- -------------------------------------------------- ------------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C>
Minneapolis/St. Paul.............................. $9,137 33.8% 1
Los Angeles/Long Beach............................ 9,114 11.8 2
Denver............................................ 5,598 34.5 1
Phoenix/Mesa...................................... 4,713 22.0 3
Houston........................................... 3,229 10.6 3
Portland/Vancouver................................ 2,848 23.0 2
Seattle/Bellevue/Everett.......................... 2,608 14.5 3
Sacramento........................................ 2,469 24.0 2
San Diego......................................... 2,165 13.6 4
Las Vegas......................................... 2,146 27.1 2
Omaha............................................. 1,798 23.8 2
Orange County..................................... 1,741 8.6 3
Riverside/San Bernardino.......................... 1,145 12.1 2
Tucson............................................ 1,071 21.4 3
</TABLE>
- ------------------------------
(a) Excludes thrifts and savings banks.
22
<PAGE>
RISK ELEMENTS
Completion of the Wells Offer would result in an institution with a
substantially higher risk profile than that created by the Merger.
CAPITAL STRUCTURE. The difference in the accounting treatment of the
proposed transactions results in institutions with dramatically different
capital structures, as demonstrated below:
GOODWILL ANALYSIS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
WFC/FI FBS/FI
----------- ------------------
<S> <C> <C>
Pro forma common equity....................................................... $ 14,170 $ 6,683
Existing goodwill and other intangibles....................................... 832 1,921
Additional goodwill and other intangibles from the transaction:
Goodwill and other intangibles from the transaction......................... 7,876(a) N/A
Transaction-related charges (after tax)(b).................................. 240 N/A(c)
Termination fee (b)......................................................... 100 N/A
Repurchase of FBS stock option (b).......................................... 100 N/A
----------- --------
Subtotal additional goodwill and other intangibles from the
transaction.......................................................... 8,316 N/A
----------- --------
Total goodwill and other intangibles.......................................... 9,148 1,921
----------- --------
Tangible common equity........................................................ $ 5,022 $ 4,762
----------- --------
----------- --------
Pro forma tangible assets..................................................... $ 103,007 $ 87,496
----------- --------
----------- --------
Pro forma goodwill and other intangibles/common equity........................ 65% 29%
----------- --------
----------- --------
Pro forma tangible common equity/tangible assets.............................. 4.88% 5.44%
----------- --------
----------- --------
</TABLE>
- ------------------------------
(a) Source: the Wells S-4.
(b) Such item was not included in goodwill and other intangibles described in
the Wells S-4. However, such charges would, in fact, increase the amount of
goodwill and other intangibles ultimately recorded by Wells upon any
consummation of the Wells Offer. In addition, Wells Fargo has indicated that
an additional $180 million (after tax) of transaction-related charges will
be charged against earnings following any such consummation.
(c) Included in pro forma common equity.
The use of the purchase accounting method by Wells Fargo would result in
more than $8 billion of additional goodwill and other intangibles that will be
amortized against reported earnings at a rate of approximately $400 million,
after tax, per year for many years. In addition, this enormous goodwill burden
will reduce Wells Fargo's financial flexibility in an economic downturn,
potentially limit Wells Fargo's ability to do future acquisitions and will
likely receive close regulatory scrutiny. The $9.1 billion of goodwill and other
intangibles that would result from the Wells Offer would be the largest such
amount in the regional bank peer group. In addition, the 65% pro forma ratio of
goodwill and other intangibles to common equity resulting from the Wells Offer
would be by far the highest such ratio among the regional bank peer group. The
next highest such ratio is approximately 43%.
GEOGRAPHIC CONCENTRATION. From the standpoint of risk, the Merger would
significantly lower First Interstate's risk profile. The Merger would vastly
increase First Interstate's geographic diversification, thereby decreasing
exposure to regionalized economic downturns. From the perspective of First
Interstate shareholders, the Wells Offer would result in further concentration
of assets, particularly real estate loan assets, in California. As Wells Fargo
noted in its Federal Reserve Board application, a benefit of the Wells Offer to
Wells Fargo (not First Interstate) is diversification of its risk portfolio. See
"Strategic Advantages."
BUSINESS MIX. Wells Fargo's mix of business strategies represents a higher
risk profile than that of FBS. These additional risks translate into higher
stock price betas, which are measures of perceived
23
<PAGE>
risk in a company. Based on 104 weeks of data computed by Bridge Information
Systems, Inc., FBS had a stock price beta of .90 and Wells Fargo had a stock
price beta of 1.08 as of December 12, 1995. The higher beta for Wells Fargo is a
result of their higher risk profile. As Henry C. Dickson, CFA, of Smith Barney
Inc. stated: "We believe the disparity in beta coefficients which causes the
difference in discount rates is warranted due to WFC's greater dependence on one
economy, its greater exposure to commercial real estate, its strategy to pursue
higher risk credit, and its lack of experience running a multi-state holding
company."(1) Wells Fargo is counting on a retail strategy that would force its
customers to abandon traditional branch banking in an unrealistic time frame.
Under Wells Fargo's projections Wells Fargo is attempting to reduce the
percentage of its outlets that are traditional branches from the current level
of 94% of total outlets to 28% by the end of 1996. As quoted in a December 5,
1995 article in the AMERICAN BANKER, James M. McCormick, president of First
Manhattan Consulting Group, stated, "We had better be careful in any attempts to
radically downsize the branch system." According to the article by Karen Epper,
"Branch-Only Customers Churn Out Most Retail Profits, Study Suggests," the First
Manhattan Consulting Group research indicates that "[u]sers of alternative
delivery channels may not be as numerous or as profitable as common wisdom says
they are."(2)
Additionally, Wells Fargo's revenue stream is highly dependent on real
estate lending, historically one of the most volatile segments of the banking
business. According to Wells Fargo's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, commercial real estate lending constituted
over 28% of Wells Fargo's total loan portfolio as of such date. FBS, on the
other hand, is reliant on more stable revenue sources and had a ratio of
commercial real estate loans to total loans of only 11% as of September 30,
1995.
TECHNOLOGICAL ADVANTAGES
FBS has made the investment in technology and systems necessary to support
its interstate expansion and to allow the rapid integration of acquired
financial institutions. FBS's systems are based on a standardized
enterprise-wide model and provide a multi-state operating environment. The
household information based nature of its systems enables FBS to focus on the
customer and the product.
FBS's information system utilizes parallel processing, giving FBS an
exceptional capacity to handle additional information volume at a lower cost
than traditional systems. The scalability of the system would allow it to
support eight times more servers than it currently does, and each server on the
network could be upgraded to eight times its current processing power.
Additionally, interruptions in service are virtually eliminated.
FBS's state-of-the-art network infrastructure supports a multi-state
operating environment and currently operates in 24 states, including seven of
the 13 states in which First Interstate does business. FBS and First Interstate
share a number of common systems, including the "Hogan" deposit and customer
information systems, the core information systems for banks.
The ability of two large institutions to successfully integrate their
technology and operations on the most cost effective basis requires: (i) a
software environment for the combined entities that is designed for standardized
product and customer processing in multiple states and capable of handling the
combined volumes of the entities; (ii) a standardized methodology for planning
and implementing the technology integration process, including the necessary
personnel training; and (iii) a process at the senior management level for
monitoring and guiding the integration efforts. FBS has such a software
environment, standardized methodology and process at the senior management level
and has successfully utilized these attributes to integrate 23 acquisitions in
the last four years.
- ------------------------
(1) Reprinted herein from "First Bank System vs. Wells Fargo, The Battle for
First Interstate," dated December 1, 1995, with the consent of the author.
(2) Permission to quote this article has not been sought or obtained from the
AMERICAN BANKER or the author.
24
<PAGE>
FBS has achieved significant operational cost efficiencies through systems
and technology consolidations in numerous prior bank acquisitions. FBS believes,
based upon its acquisition experience, that its systems integration process will
enable it to integrate the systems and operations of First Interstate within
three months of completion of the Merger. This rapid integration will permit
quick realization of the resultant cost savings and enable the management and
employees of New First Interstate to more quickly turn their full attention to
sales and other revenue growth opportunities. Wells Fargo, on the other hand,
has indicated its integration of First Interstate could require more than
eighteen months, resulting in a prolonged period of customer and employee
disruption.
COST SAVINGS AND ASSOCIATED REVENUE LOSSES
ANTICIPATED EXPENSE REDUCTIONS. Based on FBS's extensive acquisition
experience, FBS estimates that the Merger would result in approximately $500
million in expense reductions from First Interstate's expected 1996 expense
base, which corresponds to approximately 22% of First Interstate's total expense
base. This level of savings would result in a marginal efficiency ratio of 45%.
FBS, despite the contentions of Wells Fargo to the contrary, remains confident
that it can achieve these reductions within three months of the consummation of
the Merger. As the following chart demonstrates, FBS's projected cost reductions
and timetable are entirely consistent with its prior experience:
<TABLE>
<CAPTION>
EXPENSE
ELIMINATIONS AS
A PERCENTAGE OF
THE ACQUIRED MONTHS
CLOSING INSTITUTION'S FROM CLOSING
FINANCIAL INSTITUTION ACQUISITIONS DATE ASSET SIZE TOTAL EXPENSES TO INTEGRATION
- -------------------------------------------------- ------- ------------- --------------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
FirsTier Financial, Inc. (pending) (a)............ 1 Q-96 $3,580 34% < 1
Midwestern Services, Inc.......................... 4 Q-95 230 30 < 1
Southwest Holdings, Inc........................... 4 Q-95 200 33 < 1
First Western Corporation......................... 1 Q-95 320 35 3
Metropolitan Financial Corporation................ 1 Q-95 8,000 35 < 1
Green Mountain Bancorporation..................... 3 Q-94 30 50 < 1
First Dakota Financial Corporation................ 3 Q-94 120 40 1
First Financial Investors, Inc.................... 2 Q-94 200 44 2
Boulevard Bancorp, Inc............................ 1 Q-94 1,600 40 1
American Bancshares of Mankato, Inc............... 1 Q-94 120 51 < 1
Colorado National Bankshares, Inc................. 2 Q-93 3,000 35 2
Western Capital Investment Corporation............ 4 Q-92 2,500 35 3
Bank Shares, Incorporated......................... 4 Q-92 2,100 45 5
</TABLE>
- ------------------------------
(a) Projected.
Stock market analysts have commented favorably on FBS's projected expense
reductions. In a November 28, 1995 research report, Nancy A. Bush, CFA, Brown
Brothers Harriman & Co. said "We have perused both sets of cost savings
projections, and while both companies have formidable reputations as cost
cutters, our focus remains the net cost savings numbers--I.E., the revenues
which would likely be lost in the two competing strategies." Ms. Bush further
stated "[T]he most important factor is that [the cost savings] will be
accomplished in a way which is largely transparent to the customer, as opposed
to the Wells strategy, which would involve closure of a massive number of
branches and a massacre of existing personnel (12,000-plus). But we must also
admit that our faith in the FBS strategy and numbers is based upon our
experience with that management, which has simply always delivered the goods as
promised and will have a friendly environment in this deal to do so."(1) Carole
Berger and Jeff Nashek of Salomon Brothers Inc noted: "They use centralized data
processing and
- ------------------------
(1) Reprinted herein from "First Bank System," dated November 28, 1995, with the
consent of the author.
25
<PAGE>
operations and standard products. The cost savings that they are targeting would
represent efficiencies equal to the best practices of either company, but are
not new industry setting standards on a line by line basis. We therefore believe
that their cost savings are credible and doable and will produce significant
upside to First Bank System earnings."(1)
Wells Fargo, despite its lack of common information systems with First
Interstate, its lack of acquisition experience and its incomplete geographic
overlap with First Interstate, projects that consummation of the Wells Offer
would result in $1 billion of cost reductions from First Interstate's expected
1996 expense base, or 44% of First Interstate's total expected expense base for
such year, with only $100 million of attendant revenue loss (including revenues
lost in connection with branch divestitures) and a marginal efficiency ratio of
33%. FBS believes the projections on which these assertions are based are
counter-intuitive, illusory and unattainable. In this regard, the Wells S-4
makes a serious misrepresentation when it claims that Mr. Siart, Chairman and
Chief Executive Officer of First Interstate "agreed with Wells Fargo's cost
savings estimates." FBS has been advised, and the Wells S-4 fails to mention,
that Mr. Siart went on to say that the achievement of the projected reductions
would, however, result in substantially higher revenue losses than the $100
million assumed by Wells Fargo. In FBS's view, the maximum annual savings net of
revenue losses resulting from the Wells Offer is only $600 million, as more
fully explained herein.
SOURCES OF COST ELIMINATIONS. The following table compares the percentage
of the total expected 1996 expense base of First Interstate and of the combined
entity projected to be eliminated by FBS and Wells Fargo, the associated
marginal efficiency ratios and the related timetables for achieving the
estimated savings:
<TABLE>
<CAPTION>
CLAIMED
PERCENTAGE OF TOTAL CLAIMED PERCENTAGE ASSERTED EXPECTED TIME
1996 FIRST INTERSTATE OF THE COMBINED MARGINAL TO ACHIEVE
EXPENSE BASE EXPENSE BASE EFFICIENCY COST
TRANSACTION TO BE ELIMINATED TO BE ELIMINATED RATIO REDUCTIONS
- ------------------------------------------------- ----------------------- ------------------- ------------- --------------
<S> <C> <C> <C> <C>
The Merger....................................... 22% 14% 45% 3 months
The Wells Offer.................................. 44% 22% 33% 18 months
</TABLE>
With regard to the foregoing, FBS does not believe that Wells Fargo can
credibly predict that it will achieve a marginal efficiency ratio of 33%, upon
consummation of the Wells Offer. FBS, which has the second best efficiency ratio
in its peer group, has never achieved a marginal efficiency ratio as low as 33%,
even in the in-market acquisition context. With only 36% of First Interstate's
branches and 44% of its deposits in California, the proposed acquisition of
First Interstate by Wells Fargo must be characterized as only a combined
in-market/market extension acquisition, not an in-market acquisition.
In the Wells S-4, Wells Fargo misleadingly characterizes the amount of
expenses to be eliminated through the Merger by comparing the Merger's expense
eliminations to the expense base of FBS, concluding that the resultant 42%
figure is "two to three times greater" than those projected by other acquirors
in market extension transactions. This analysis is entirely incorrect. The 22%
expense reduction associated with the Merger is completely consistent with the
experience of other acquirors in the transactions described in the Wells S-4.
Michael A. Plodwick of C.J. Lawrence stated, "[W]e believe this level of cost
savings is readily achievable, as First Bank has demonstrated its ability to
reduce costs in out-of-market acquisitions."(2)
In fact, it is Wells Fargo that has unrealistic expense reduction
expectations based on such transactions. Wells Fargo has operations in only one
of the 13 states in which First Interstate operates,
- ------------------------
(1) Reprinted herein from "First Bank System to Acquire First Interstate," dated
November 6, 1995, with the consent of the author.
(2) Reprinted herein from "First Bank System," dated November 7, 1995, with the
consent of the author.
26
<PAGE>
and so FBS believes the Wells Offer should be characterized as a market
extension transaction, which typically result in expense reductions only
one-half the magnitude of those projected by Wells Fargo. In the Wells S-4,
Wells Fargo claims the Wells Offer would be an in-market acquisition and
compares the cost takeout level with other in-market acquisitions. In reality,
as the following chart indicates, the in-market acquisitions cited by Wells
Fargo in the Wells S-4 are generally twice as concentrated in terms of deposits
and branches than the Wells Fargo/First Interstate combination would be.
IN-MARKET ACQUISITION COMPARISON (A)
<TABLE>
<CAPTION>
PERCENTAGE OVERLAP (B)
------------------------
ACQUISITION DEPOSITS BRANCHES
- -------------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Fleet/Shawmut............................................................................... 99.9% 99.5%
PNC/Midlantic............................................................................... 62.2 69.9
Chemical/Chase.............................................................................. 89.6 76.6
UJB/Summit.................................................................................. 100.0 100.0
Corestates/Meridian......................................................................... 81.8 73.0
Proposed Wells Fargo/First Interstate....................................................... 44.2 37.5
</TABLE>
- ------------------------------
(a) Acquisitions shown are those cited by Wells Fargo in the Wells S-4.
(b) Source: SNL Securities
Even viewing the Wells Offer as a mixture of an in-market acquisition and a
market extension transaction, the average expense eliminations cited by Wells
Fargo would suggest cost savings approximating only 29% of First Interstate's
1996 estimated operating expenses ($659 million). Wells Fargo claims it will cut
44% of such expenses. FBS's analysis, as described below, suggests that Wells
Fargo may be able to achieve cost savings totaling $780 million (or 34%) of
First Interstate's 1996 estimated operating expense base, although these savings
will be offset by an estimated $180 million in annual revenue losses.
The following table compares the areas and amounts of the reductions in
First Interstate's 1996 expense base following consummation of the Merger and
the Wells Offer:
PROJECTED EXPENSE REDUCTIONS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FIRST THE MERGER THE WELLS OFFER
INTERSTATE ----------------------------------------- -----------------------------------------
1996 BASE REDUCTION REMAINING REDUCTION REMAINING
EXPENSE REDUCTION PERCENTAGE EXPENSE REDUCTION PERCENTAGE EXPENSE
----------- ----------- --------------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Staff/executive................ $ 172 $ 114 66% $ 58 $ 159 92% $ 13
Data processing................ 214 83 39 131 110 51 104
Operations..................... 439 110 25 329 123 28 316
Occupancy/F&E.................. 394 39 10 355 170 43 224
Business lines:
Retail......................... 682 100 15 582 288 42 394
Payment systems................ 55 27 50 28 29 53 26
Commercial..................... 168 18 10 150 92 55 76
Trust.......................... 79 9 10 70 29 37 50
----------- ----- ----------- ----------- -----------
Total business lines......... 984 154 16 830 438 44 546
----------- ----- ----------- ----------- -----------
Goodwill................... 60 0 0 60 0 0 60
----------- ----- ----------- ----------- -----------
Total expense................ $ 2,263 $ 500 22% $ 1,763 $ 1,000 44% $ 1,263
----------- ----- ----------- ----------- -----------
----------- ----- ----------- ----------- -----------
<CAPTION>
WFC
VS.
FBS
DIFFERENCE
-----------
<S> <C>
Staff/executive................ $ (45)
Data processing................ (27)
Operations..................... (13)
Occupancy/F&E.................. (131)
Business lines:
Retail......................... (188)
Payment systems................ (2)
Commercial..................... (74)
Trust.......................... (20)
-----------
Total business lines......... (284)
-----------
Goodwill................... 0
-----------
Total expense................ $ (500)
-----------
-----------
</TABLE>
27
<PAGE>
Wells Fargo and FBS are each highly centralized, and so neither company
should have an inherent advantage in the number of staff or executive personnel
that can be removed from First Interstate following a transaction. Wells Fargo
nevertheless estimates that it can eliminate 92% of these cost components,
compared to 66% for FBS. In data processing, an area where FBS believes the
compatibility of its multi-state systems with those of First Interstate provide
it with an advantage (see "Technological Advantages"), Wells Fargo forecasts a
51% cost reduction, versus 39% for FBS.
FBS believes that Wells Fargo's projections for achievable cost reductions
in First Interstate's business operations are even more unrealistic. Even though
approximately 36% of First Interstate's branches are in California, Wells Fargo
estimates that it could cut 42% of First Interstate's total retail cost base. In
the customer-sensitive businesses of commercial banking and trust management,
Wells Fargo apparently intends to attempt to eliminate 55% and 37% of the
associated cost bases, respectively. These asserted reductions, which aggregate
$121 million, would necessarily come from First Interstate's line operations,
the primary source of customer relations in these businesses because Wells Fargo
has separately estimated data processing and operations savings. FBS believes
that such an aggressive cost-cutting approach would likely result in
irreversible revenue deterioration. To avoid this result, FBS envisions only
modest 10% expense reductions in First Interstate's commercial and trust
businesses. For its part Wells Fargo proposes to make deep cuts in First
Interstate's commercial lending and corporate trust businesses and nevertheless
claims in the Wells S-4 that it "sees substantial revenue growth opportunities"
in these areas. Despite the assertions of Wells Fargo to the contrary, these
goals are plainly irreconcilable.
Further evidence of the unrealistic nature of Wells Fargo's projected
expense reductions is apparent from an examination of the savings presumed by
Wells Fargo to be generated through the reduction of full-time equivalent
employees ("FTEs"). The following chart summarizes the contrasting assumptions
of FBS and Wells Fargo in this regard:
EMPLOYEE REDUCTION COMPARISON
<TABLE>
<CAPTION>
FIRST FBS WFC (A)
INTERSTATE ---------------------------- ----------------------------
----------- FTE REDUCTION FTE REDUCTION
1996 BASE REDUCTION PERCENTAGE REDUCTION PERCENTAGE
----------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Staff/executive........................................ 1,244 850 68% 1,186 95%
Data processing........................................ 896 450 50 596 67
Operations............................................. 7,946 2,280 29 2,549 32
Business lines:
Retail............................................... 13,216 1,830 14 5,551 42
Payment Systems...................................... 498 250 50 263 53
Commercial........................................... 2,900 290 10 1,635 56
Trust................................................ 1,300 130 10 459 35
----------- ----- -----------
Total business lines................................... 17,914 2,500 14 7,908 44
----------- ----- -----------
Total FTE.............................................. 28,000 6,080 22% 12,239 44%
----------- ----- -----------
----------- ----- -----------
</TABLE>
- ------------------------------
(a) Determined by applying FBS's ratio of FTE reductions to total cost
reductions to Wells Fargo's anticipated total cost reductions in First
Interstate's estimated 1996 expense base.
As indicated above, FBS projects that Wells Fargo would have to terminate
approximately 12,000 First Interstate employees to achieve its published level
of cost reductions. This approach doubles the reductions expected following the
Merger. FBS does not believe that Wells Fargo could effectively operate First
Interstate with just over half of First Interstate's current employees,
particularly when Wells Fargo has no presence in 12 of the 13 states in which
First Interstate conducts business.
Of particular note, Wells Fargo apparently anticipates eliminating 56% of
First Interstate's commercial loan officers (1,635 FTEs). Given that, at
September 30, 1995, FBS (pro forma with
28
<PAGE>
FirsTier Financial, Inc.) had $13.3 billion, Wells Fargo had $18.5 billion and
First Interstate had $16.1 billion of commercial and commercial real estate
loans, it is highly doubtful that Wells Fargo could expect to eliminate more
than five times as many of First Interstate's commercial loan personnel than FBS
without suffering serious client damage and revenue loss. Moreover, the
motivation for significant personnel reductions in an area that Wells Fargo
views as presenting "substantial revenue growth opportunities" is
incomprehensible.
ANALYSIS OF NET CALIFORNIA SAVINGS. FBS recognizes that, because of the
branch overlap between Wells Fargo and First Interstate in California (their
only common state of operations), the Wells Offer does present certain
efficiencies not relevant to the Merger. FBS believes, however, that the net
expense savings that could be realized by Wells Fargo because of this overlap
are, in reality, only a fraction of the amount claimed by Wells Fargo. As the
analysis set forth below demonstrates, even the most aggressive program of
cost-cutting by Wells Fargo would not be likely to achieve expense reductions in
excess of $280 million over those that could be achieved in the Merger. Further,
even reductions at this level are likely to be offset in large part by an
estimated $180 million in associated revenue losses. Accordingly, Wells Fargo's
annual savings net of revenue loss due to its overlap in California with First
Interstate are likely to approximate a maximum of $100 million, one-fourth of
the amount publicized by Wells Fargo.
In analyzing the competing claims by FBS and Wells Fargo regarding possible
California expense reductions, it is important to understand that First
Interstate's California branch and business line expenses only total $495
million. Wells Fargo has reportedly stated that First Interstate's total
California expense base is $1 billion. However, approximately one-half of these
costs are charges originating from cost transfers from non-business line
operations. Potential savings in these operations are already accounted for in
the data processing and operations categories shown in the chart entitled
"Projected Expense Reductions."
Even if Wells Fargo could close every First Interstate branch, it is wholly
unrealistic to expect that First Interstate's California expenses would be
totally eliminated. Although branch closings would eliminate real estate and
associated occupancy costs, the sales and transactions handled by the branches,
and at least some of the associated personnel, must be moved to alternative
locations or other delivery channels if the revenues associated with the closed
branch are to be retained. Simply stated, Wells Fargo cannot realistically
assume that it can close a branch, totally eliminate the associated expense and
retain the related revenue.
Because of this fundamental principle and based on its recent acquisition
experience, FBS estimates that in the extremely unlikely event that Wells Fargo
could close all of First Interstate's California branches, it would eliminate a
maximum of 40% of the personnel expense, 100% of the occupancy costs and 40% of
the other expenses associated with such branches, resulting in total savings of
$275 million. Wells Fargo has reportedly asserted that it will close 85% of
First Interstate's California branches if the Wells Offer is successful.
Assuming Wells Fargo could achieve this aggressive target, the related cost
savings would be, at most, $230 million:
CALIFORNIA BRANCH AND BUSINESS LINE EXPENSE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
TOTAL FIRST ASSUMED
INTERSTATE EXPENSE SAVINGS
BRANCH AND ------------------------
BUSINESS LINE 100%
ITEM EXPENSE BASE CLOSING 85% CLOSING
- ------------------------------------------------------------------------------ --------------- ----------- -----------
<S> <C> <C> <C>
Personnel expense............................................................. $ 290 $ 115 $ 95
Occupancy/equipment expense................................................... 130 130 110
Other expense................................................................. 75 30 25
----- ----- -----
Total expense............................................................... $ 495 $ 275 $ 230
----- ----- -----
----- ----- -----
</TABLE>
29
<PAGE>
Even if Wells Fargo were to achieve an additional $50 million of savings by
eliminating one-half of First Interstate's California advertising and marketing
expenses ($20 million) and through branch divestitures ($30 million), the
efficiencies associated with consolidating the California operations of Wells
Fargo and First Interstate do not approach the $500 million of additional
savings over the cost reductions associated with the Merger asserted by Wells
Fargo.
Moreover, even at the more realistic level of expense reductions described
above, FBS believes the revenue losses associated with combining the California
operations of Wells Fargo and First Interstate would exceed the $100 million per
year projected by Wells Fargo by at least $80 million annually, as shown in the
following table:
ESTIMATED REVENUE LOSS
(DOLLARS IN MILLIONS)
<TABLE>
<S> <C>
Revenue loss due to deposit attrition (a):
Lost interest spread (at 3.5% of deposit attrition)........................ $ 88
Lost service charges (at 1.5% of deposit attrition)........................ 37
---------
125
Revenue loss due to divestitures (b):
Lost interest spread (at 4.6% of divested deposits, including an estimated
1.1% associated with lost loan revenue)................................... 41
Lost service charges (at 1.5% of divested deposits)........................ 14
---------
55
---------
Estimated revenue loss................................................... $ 180
---------
---------
</TABLE>
- ------------------------------
(a) Deposit attrition of $2.5 billion is assumed based upon 15% of the deposits
in closed branches.
(b) Based upon the $900 million of divestitures discussed above. FBS believes
the actual divestitures could be substantially higher).
Further losses could be expected to result from loan attrition, additional
required divestitures and the hostile nature of the Wells Offer and the negative
public relations effect of the massive layoffs and branch closings planned for
California by Wells Fargo if the Wells Offer is successful. FBS believes that
the 15% deposit attrition rate, which corresponds to 12% of the total California
deposit base of First Interstate, is conservative based on Wells Fargo's own
description of deposit attrition after the 1986 Wells Fargo/Crocker National
Bank ("Crocker National") transaction. During the two year period following the
announcement of this acquisition, Wells Fargo experienced a 28.1% demand deposit
attrition rate while closing 62% of the branches of Crocker National. For all
California banks in this time period, demand deposits increased 2.2%. FBS
believes that the demand deposit attrition rate is a reliable indicator of
account losses following an acquisition because demand deposits are considered
to be the true "core" customers of a bank and generally represent its most
profitable accounts. Accordingly, it is unlikely that an acquiror would, absent
regulatory concerns, intentionally seek to divest them.
30
<PAGE>
DEMAND DEPOSIT ATTRITION
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DEMAND
DATE DEPOSITS
- -------------------------------------------------------------------------------------------------------- ---------
<S> <C>
December 31, 1985
Wells Fargo........................................................................................... $ 3,694
Crocker National...................................................................................... 3,655
---------
Total............................................................................................... $ 7,349
---------
---------
December 31, 1986 consolidated.......................................................................... $ 8,029
---------
---------
December 31, 1987 consolidated.......................................................................... $ 6,321
---------
---------
Decline from December 31, 1985 through December 31, 1987 (a)............................................ $ 1,028
---------
---------
Decline as a percentage of Crocker National baseline deposits........................................... 28.1%
---------
---------
</TABLE>
- ------------------------------
(a) Wells Fargo divested approximately $200 million in total deposit accounts
in connection with the Crocker National transaction. The relative amounts
of demand deposits and other deposits composing such divested deposits is
not known. However, even if the entire $200 million of divested deposits
were demand deposits, the resulting $828 million of deposit attrition
corresponds to a 22.7% attrition rate for the remaining base deposits
during the period under consideration.
Source: Documents publicly filed by Wells Fargo.
Further revenue losses will be incurred as a result of Wells Fargo's planned
branch divestitures. Wells Fargo's application with the Federal Reserve Board
regarding the Wells Offer indicates that Wells Fargo plans to divest $900
million in deposits if its proposed transaction with First Interstate is
consummated. Using this assumed $900 million figure, FBS estimates that the
planned divestitures would result in expense savings of approximately $30
million and a corresponding revenue loss of $55 million. The net resulting
negative impact from the divested branches is approximately $25 million.
As a result of the foregoing analysis and as summarized below, FBS believes
that the incremental savings attributable to the overlap in California between
Wells Fargo and First Interstate is $100 million, hundreds of millions less than
the amount claimed by Wells Fargo.
31
<PAGE>
ANALYSIS OF NET CALIFORNIA SAVINGS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
Branch closings (85% of First
Interstate's California branches/offices) (a):
Expense savings...................................................................................... $ 230
Revenue loss......................................................................................... (125)
-----------
Net expense savings................................................................................ 105
-----------
Marketing/advertising expense reduction (50% of First Interstate total expenses)......................... 20
-----------
Branch divestitures (b):
Expense savings........................................................................................ 30
Revenue loss........................................................................................... (55)
-----------
Net expense savings.................................................................................. (25)
-----------
Subtotal expense savings........................................................................... 280
Subtotal revenue losses............................................................................ (180)
-----------
Total net expense savings............................................................................ $ 100
-----------
-----------
</TABLE>
- ------------------------------
(a) Assumes $2.5 billion of lost deposits (15% of the deposits in the closed
branches), related interest spreads of 3.5% and service charge revenues of
1.5% on deposited funds.
(b) Assumes revenue losses on $900 million of divested deposits based on
interest spreads of 3.5% on deposited funds, service charge revenues of
1.5% of deposited funds and associated lost loan revenue approximating 1.1%
of divested deposits.
ADDITIONAL REVENUE SOURCES. FBS has conservatively excluded from its
analysis of the Merger further sources of associated incremental revenue. For
example, FBS believes that merging the balance sheets of FBS and First
Interstate would immediately generate $44 million in additional revenue because
FBS would replace $4 billion of higher-cost wholesale funding with First
Interstate's low-cost deposits, generating $32 million in revenue. An additional
$12 million revenue gain would result from funding FBS's 1996 projected loan
growth of $1.5 billion with First Interstate's core funding. The application of
FBS's cross-product marketing approach across First Interstate's customer base
also represents an area of possible future revenue growth. First Interstate
currently sells approximately 2.6 products per household, as compared to 3.9
products per household for FBS. Assuming the number of products sold to First
Interstate customers could be increased to the same number per household as that
in effect for FBS, the additional annual revenue potential could be as much as
$900 million. This additional revenue figure is based on a variety of FBS
assumptions regarding the mix and profitability of the additional products sold,
which FBS believes to be reasonable, and would take a number of years to
achieve.
32
