<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): NOVEMBER 15, 1995
-----------------
FIRST BANK SYSTEM, INC.
-----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 1-6880 41-0255900
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(State or other jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
601 SECOND AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55402
- ----------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 612-973-1111
------------
NOT APPLICABLE
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(Former name or former address, if changed since last report)
<PAGE>
Item 5. Other Events.
-------------
On November 5, 1995, First Bank System, Inc., a Delaware
corporation ("FBS"), and First Interstate Bancorp, a Delaware
corporation ("FI"), entered into an Agreement and Plan of Merger,
pursuant to which a wholly owned acquisition subsidiary of FBS will be
merged with and into First Interstate.
In connection therewith, FBS hereby files as exhibits to this Form
8-K, which exhibits are incorporated herein by reference, certain
historical financial statements of FI and subsidiaries and pro forma
financial information. The information included in such exhibits is as
follows:
99.1 Financial Statements of First Interstate Bancorp and Subsidiaries:
Consolidated Balance Sheet as of December 31, 1994 and
December 31, 1993
Consolidated Statement of Operations for the years ended
December 31, 1994, 1993 and 1992
Consolidated Statement of Cash Flows for the years ended
December 31, 1994, 1993 and 1992
Statement of Shareholders' Equity for the years ended
December 31, 1994, 1993 and 1992
Notes to Financial Statements for the years ended December
31, 1994, 1993 and 1992
Report of Independent Auditors
Consolidated Balance Sheet - September 30, 1995 (unaudited)
Consolidated Statement of Income - Nine months ended
September 30, 1995 and 1994 (unaudited)
Consolidated Statement of Cash Flows - Nine months ended
September 30, 1995 and 1994 (unaudited)
Consolidated Statement of Shareholders' Equity - Nine
months ended September 30, 1995 (unaudited)
Notes to Consolidated Financial Statements - September 30,
1995 (unaudited)
99.2 Pro Forma Financial Information
Unaudited Pro Forma Condensed Combined Balance Sheet at
September 30, 1995
Unaudited Pro Forma Condensed Combined Statements of
Income - Nine months Ended September 30, 1995 and Years
Ended December 31, 1994, 1993 and 1992
Notes to Unaudited Pro Forma Condensed Combined Financial
Statements
Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits
-----------------------------------------------------------------
(c) Exhibits
23.1 Consent of Ernst & Young LLP
99.1 Financial Statements of First Interstate Bancorp and Subsidiaries
99.2 Pro Forma Financial Information
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FIRST BANK SYSTEM, INC.
By /s/ David J. Parrin
-------------------
David J. Parrin
Senior Vice President and Controller
DATE: November 15, 1995
<PAGE>
INDEX TO EXHIBITS
PAGE
----
23.1 Consent of Ernst & Young LLP
99.1 Financial Statements of First Interstate Bancorp and
Subsidiaries
99.2 Pro Forma Financial Information
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the following Registration
Statements of First Bank System, Inc. and in the related Prospectuses of our
report dated January 16, 1995, with respect to the consolidated financial
statements of First Interstate Bancorp and subsidiaries, included in the Current
Report on Form 8-K of First Bank System, Inc. dated November 13, 1995:
Form S-3 Number 33-51407 Form S-8 Number 2-89224
Form S-3 Number 33-57169 Form S-8 Number 33-16242
Form S-3 Number 33-55485 Form S-8 Number 33-42333
Form S-3 Number 33-52495 Form S-8 Number 33-55932
Form S-3 Number 33-58521 Form S-8 Number 33-42334
Form S-3 Number 33-61667 Form S-8 Number 33-52835
Form S-3 Number 33-62251 Form S-8 Number 33-52959
Form S-8 Number 33-53395
Form S-8 Number 33-59245
Ernst & Young LLP
Los Angeles, California
November 9, 1995
Consolidated Balance Sheet
FIRST INTERSTATE BANCORP December 31
(in millions)
1994 1993
Assets
Cash and due from banks $ 6,070 $ 5,064
Time deposits, due from banks 26 1,157
Federal funds sold and securities purchased under
agreements to resell 179 618
Trading account securities 64 167
Investment securities:
Held-to-maturity securities
(approximate market value: 1994_$13,280; 1993_$16,489)
U.S. Treasury and agencies 12,105 14,894
State and political subdivisions 29 23
Other 1,561 1,456
Total held-to-maturity securities 13,695 16,373
Available-for-sale securities 156 169
Total Investment Securities 13,851 16,542
Loans (net) 33,222 25,988
Less: Allowance for credit losses 934 1,001
Net Loans 32,288 24,987
Other assets held for sale 26 133
Bank premises and equipment 1,147 948
Customers' liability for acceptances 35 48
Other assets 2,127 1,797
Total Assets $55,813 $51,461
Liabilities and Shareholders'Equity
Deposits:
Noninterest bearing $16,599 $15,425
Interest bearing 31,828 29,276
Total Deposits 48,427 44,701
Short term borrowings 1,574 767
Acceptances outstanding 35 48
Accounts payable and accrued liabilities 953 864
Long term debt 1,388 1,533
Total Liabilities 52,377 47,913
Shareholders' equity:
Preferred Stock 350 350
Common Stock, par value $2 a share:
Authorized 250,000,000 shares;
Issued:1994_ 84,285,643 shares; 1993_ 79,100,546 shares 168 158
Capital surplus 1,692 1,673
Retained earnings 1,967 1,437
Unrealized gain on available-for-sale
securities, net of related taxes 1 _
4,178 3,618
Less Common Stock in treasury, at cost:
1994_10,082,163 shares; 1993_1,774,551 shares 742 70
Total Shareholders' Equity 3,436 3,548
Total Liabilities and Shareholders' Equity $55,813 $51,461
See notes to financial statements.
Consolidated Statement of Operations
FIRST INTERSTATE BANCORP Year Ended December 31
(in millions) 1994 1993 1992
Interest Income
Loans, including fees $2,303.7 $1,980.9 $2,238.8
Trading account securities 4.9 5.6 18.0
Investment securities:
Held-to-maturity
Taxable 828.3 837.3 743.1
Exempt from federal income taxes 2.7 2.9 3.9
Available-for-sale 13.3 24.1 3.8
Other interest income 39.1 93.4 182.1
Total Interest Income 3,192.0 2,944.2 3,189.7
Interest Expense
Deposits 725.0 719.9 932.8
Short term borrowings 34.2 16.0 14.4
Long term debt 106.3 136.2 227.9
Total Interest Expense 865.5 872.1 1,175.1
Net Interest Income 2,326.5 2,072.1 2,014.6
Provision for credit losses _ 112.6 314.3
Net Interest Income after
Provision for Credit Losses 2,326.5 1,959.5 1,700.3
Noninterest Income
Service charges on deposit accounts 561.9 513.0 478.9
Trust fees 193.3 177.4 170.3
Other charges, commissions and fees 132.0 149.4 163.6
Merchant credit card fees 39.7 44.1 37.3
Investment securities gains (losses) 21.1 9.7 (1.8)
Trading income 16.8 19.5 19.4
Gain (loss) on sale of loans 2.5 8.0 (3.3)
Loss on sale of subsidiaries _ _ (2.6)
Other income 87.0 33.1 50.3
Total Noninterest Income 1,054.3 954.2 912.1
Noninterest Expenses
Salaries and benefits 1,079.9 975.3 1,035.4
Net occupancy and equipment 356.6 337.2 359.4
FDIC assessments 102.8 100.5 90.6
Communications 117.6 105.0 91.9
Supplies 43.6 40.7 39.4
Outside contract services 91.8 165.2 130.3
Advertising 46.8 52.6 35.2
Other real estate (12.4) 33.6 159.6
Provision for restructuring 141.3 _ _
Other expenses 229.8 222.3 267.4
Total Noninterest Expenses 2,197.8 2,032.4 2,209.2
Income before Income Taxes, Extraordinary Item
and Cumulative Effect of Accounting Changes 1,183.0 881.3 403.2
Applicable income taxes_including taxes (benefit) relating
to investment securities transactions
of $7.9, $4.0 and $(0.7) 449.5 319.9 120.9
Income before Extraordinary Item and Cumulative
Effect of Accounting Changes 733.5 561.4 282.3
Extraordinary Item_Loss on early extinguishment of debt _ (24.8) _
Cumulative Effect of Accounting Changes_
SFAS 106 ($104.9 loss) and SFAS109($305.0 gain) _ 200.1 _
Net Income $ 733.5 $ 736.7 $ 282.3
Earnings per common share:
Income before extraordinary item and cumulative
effect of accounting changes $8.71 $6.68 $3.23
Extraordinary item _ (0.32) _
Cumulative effect of accounting changes _ 2.60 _
Net income
$8.71 $8.96 $3.23
See notes to financial statements.
<TABLE>
<CAPTION>
Consolidated Statement of Cash Flows
FIRST INTERSTATE BANCORP Year Ended December 31
(in millions) 1994 1993 1992
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 734 $ 737 $ 282
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 152 124 141
Provision for credit losses _ 113 314
Provision for foreclosed property losses (4) _ 105
Provision for deferred income taxes (benefit) 127 53 (103)
Provision for restructuring 141 _ _
Cumulative effect of accounting changes _ (200) _
Loss on early extinguishment of debt _ 25 _
Decrease (increase) in trading account securities 103 (41) 169
Decrease (increase) in interest receivable 109 (16) 58
Decrease in interest payable (13) (35) (67)
Other, net 6 215 (328)
Net Cash Provided by Operating Activities 1,355 975 571
Cash Flows from Investing Activities:
Held-to-maturity securities
Proceeds from maturities 6,382 4,728 3,731
Proceeds from sales _ 32 16
Purchases (2,764) (8,211) (8,858)
Available-for-sale securities
Proceeds from maturities 128 969 133
Proceeds from sales 88 _ 1
Purchases (23) (160) (526)
Net loan principal repayments (originations) (5,688) (3,758) 1,019
Proceeds from sales of loans 3,054 2,493 2,173
Loans purchased (1,263) (530) (126)
Acquisition of subsidiaries 355 60 _
Proceeds from sales of subsidiaries and operations _ 939 15
Proceeds from sales of premises and equipment 32 24 18
Purchases of premises and equipment (241) (152) (108)
Proceeds from sales of other real estate 69 121 323
Net Cash Provided (Used) by Investing Activities 129 (3,445) (2,189)
Cash Flows from Financing Activities:
Net increase (decrease) in deposits (1,878) 89 2,243
Deposits purchased 315 443 _
Net decrease (increase) in short term borrowings 580 437 (259)
Proceeds from long term debt issued 125 _ 328
Repayments of long term debt (270) (185) (443)
Reacquisition of long term debt _ (1,022) (272)
Cash dividends paid (251) (172) (143)
Proceeds from Preferred Stock issued _ _ 145
Redemption of Preferred Stock _ (334) (128)
Proceeds from Common Stock issued 43 43 468
Reacquisition of Common Stock (712) _ _
Net Cash Provided (Used) by Financing Activities $(2,048) (701) 1,939
Net Increase (Decrease) in Cash and Cash Equivalents (564) (3,171) 321
Cash and cash equivalents at beginning of year 6,839 10,010 9,689
Cash and Cash Equivalents at End of Year 6,275 6,839 10,010
Interest paid $ 879 $ 905 $1,242
Income taxes paid 345 244 136
Loans transferred to ORE 56 97 194
Loans originated to facilitate sale of ORE 52 7 89
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Shareholders'Equity
FIRST INTERSTATE BANCORP
Class A
Preferred Common Common Stock Capital Retained Treasury
(dollars in millions) Stock Stock Shares Amount Surplus Earnings Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 $594.6 $0.4 62,779,015 $129.1 $1,249.4 $ 736.3 $(70.4) $2,639.4
Net income for the year 282.3 282.3
Cashdividends:
Common Stock_$1.20 a share (82.4) (82.4)
Preferred Stock (59.2) (59.2)
Preferred Stock issued 150.0 (4.7) 145.3
Preferred Stock redeemed (127.5) (0.2) (127.7)
Common Stock issued:
Stock Option Plan 152,767 0.3 4.4 4.7
Restricted Stock Plan (14,660) (0.5) (0.5)
Dividend Reinvestment Plan 12,118,265 24.3 434.1 458.4
Employee Savings Plan 118,835 0.2 4.0 4.2
Incentive Plan 26,992 0.9 0.9
Other changes (0.2) (76) (0.3) (13.8) (14.3)
Balance at December 31, 1992 616.9 0.4 75,181,138 153.9 1,687.1 863.2 (70.4) 3,251.1
Net income for the year 736.7 736.7
Cash dividends:
Common Stock_$1.60 a share (121.3) (121.3)
Preferred Stock (46.6) (46.6)
Preferred Stock redeemed (266.9) (67.4) (334.3)
Common Stock issued:
Stock Option Plan 636,042 1.3 24.4 25.7
Restricted Stock Plan (8,056) (0.4) (0.4)
Dividend Reinvestment Plan 222,152 0.4 11.8 12.2
Employee Savings Plan 56,586 0.1 2.8 2.9
Incentive Plan 45,744 0.1 2.4 2.5
Acquisition of Cal Rep
Bancorp, Inc. 1,188,823 2.4 12.6 4.8 19.8
Conversion of Class A
Common (0.4) 3,566 0.4
Balance at December 31, 1993 350.0 _ 77,325,995 158.2 1,673.7 1,436.8 (70.4) 3,548.3
Net income for the year 733.5 733.5
Cash dividends:
Common Stock_$2.75 a share (218.2) (218.2)
Preferred Stock (33.3) (33.3)
Common Stock issued:
Stock Option Plan 702,033 0.2 (0.1) 30.2 30.3
Restricted Stock Plan (7,568) (0.5) (0.5)
Dividend Reinvestment Plan 152,033 2.9 8.6 11.5
Incentive Plan 18,074 0.4 0.8 1.2
Acquisition of San Diego
Financial Corporation 5,067,513 10.1 3.2 48.5 61.8
Common Stock repurchased (9,054,600) (711.7) (711.7)
Other changes 12.6 0.9 13.5
Balance at December 31, 1994 $350.0 $ _ 74,203,480 $168.5 $1,692.2 $1,968.2 $(742.5) $3,436.4
See notes to financial statements.
</TABLE>
Note A_Accounting Policies
First Interstate Bancorp and its subsidiaries (the Cor
poration) follow generally accepted accounting principles
and reporting practices applicable to the banking industry.
The following is a description of significant policies and
practices:
CONSOLIDATION The consolidated financial statements include
the accounts of the Corporation and all majority-owned
subsidiaries. Such subsidiaries are consolidated on a line
by-line basis, after elimination of intercompany
transactions. Unconsolidated entities are reported in other
assets with related earnings included in noninterest income.
Certain prior year balances have been reclassified to
conform to current year classifications.
SECURITIES Securities are classified based on their purpose
and holding period, taking into account the financial
position, liquidity and future plans of the Corporation.
Securities for which the Corporation has the intent and
ability to hold to maturity are reported at cost, increased
by the accretion of discounts and reduced by the
amortization of premiums, using the interest method. Trading
account securities, representing securities that are held
for a short term and sold in response to market changes, are
carried at market value with gains and losses, both realized
and unrealized, included in noninterest income.
Prior to January 1, 1994, securities to be held for
indefinite periods of time, including securities that
management intended to use for asset/liability management
purposes or that might be sold in response to changes in
interest rates, changes in prepayment risk, the need to
increase regulatory capital or other similar factors, were
classified as held-for-sale and carried at the lower of
aggregate cost or market. The related valuation adjustments
were included in noninterest income. Upon the adoption at
January 1, 1994 of Statement of Financial Accounting
Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities," such securities
are now classified as available-for-sale and are carried at
fair value. Fair values are estimated based on available
market quotations. Unrealized gains and losses are included
as a separate component of shareholders' equity, net of
related income taxes. Realized gains and losses are included
in noninterest income.
The Corporation uses the specific identification method for
calculating gains and losses on securities transactions.
LOANS Loans are carried at the principal amount net of
unearned discounts and deferred origination fees and costs.
Interest income on loans not discounted is computed on the
loan balance outstanding. Interest income on discounted
loans is generally recognized based upon methods that
approximate the interest method. Net loan origination fees
are amortized over the contractual lives of the loans as an
adjustment of the yield using the interest method or the
straight-line method, if not materially different. Loans
identified as held-for-sale are separately classified, and
are carried at the lower of cost or market.
Loans are placed on nonaccrual status when full
collectibility of principal or interest is in doubt or when
they become 90 days past due, whichever occurs earlier.
Previously accrued but unpaid interest is reversed and
charged against interest income and future accruals are
discontinued. If there is doubt as to the ultimate
collectibility of principal, cash received is applied as a
reduction of the loan principal.
In May 1993, the Financial Accounting Standards Board issued
SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," amended in October 1994 by SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan_Income Recognition and
Disclosures." Under SFAS 114, a loan is considered impaired
when, based on current information and events, it is
probable that a creditor will be unable to collect principal
or interest due according to the contractual terms of the
loan. Impaired loans are measured by one of three methods:
present value of expected future cash flows discounted at
the loan's effective interest rate; observable market price;
or the fair value of the collateral if the loan is
collateral-dependent. The pronouncements are effective for
fiscal years beginning after December 15, 1994. The adoption
of these pronouncements is not expected to have a
significant impact on the Corporation's 1995 financial
statements.
ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses
is increased by provisions charged to expense and reduced by
charge-offs, net of recoveries. This is a general reserve
for losses related to the loan portfolio and other
extensions of credit, including off-balance sheet credit
commitments such as standby letters of credit, guarantees
and commitments to extend credit. In evaluating the credit
portfolio, management considers the loss probability of
classified and large credits, a statistical and historical
valuation for small credits and groups of credits with
similar characteristics, as well as prevailing and
anticipated economic conditions.
BANK PREMISES AND EQUIPMENT Bank premises and equipment
are stated at cost less accumulated provisions for
depreciation and amortization, computed primarily on the
straightline method based on estimated useful lives.
Capital leases, less accumulated amortization, are
included in bank premises and equipment and the lease
obligations are included in long term debt. Capital leases
are amortized on the straight-line method over the
equipment's estimated useful life or the lease term,
whichever is shorter, and the amortization is included in
depreciation expense.
OTHER REAL ESTATE (ORE) Real estate acquired in
satisfaction of loans is reported in other assets.
Property acquired by foreclosure or deed in lieu of
foreclosure is transferred to ORE and is recorded at the
lower of the loan balance on the property at the date of
transfer or the fair value of the property received, less
estimated costs to sell. Valuation losses at the date of
transfer are charged to the allowance for credit losses.
Subsequent gains (to the extent allowable) and losses that
result from the ongoing periodic valuation of these
properties are included in ORE expense in the period in
which they are identified.
GOODWILL AND OTHER INTANGIBLE ASSETS The excess of
purchase price over the fair value of net assets of
acquired companies is classified as goodwill and reported
as other assets. Goodwill is amortized using the
straightline method, generally over 15 years.
Purchased mortgage servicing rights represent the right
to service mortgage loans originated and owned by others
and are reported in other assets. Purchased mortgage
servicing rights are generally amortized over eight to
ten years.
PENSION, OTHER POSTRETIREMENT AND POST -
EMPLOYMENT PLANS The Corporation has a
noncontributory defined benefit plan covering all
eligible employees. The plan provides retirement
benefits which are a function of both the years of
service and the highest level of compensation during
any consecutive five-year period within the last ten
years before retirement.
The Corporation also has a contributory
defined contribution savings plan covering
substantially all employees. The Corporation is
required to make contributions to this plan in varying
amounts based on a percentage of amounts
contributed by participating employees.
In addition to these plans, the Corporation also
accrues for certain postretirement and postemployment
costs such as health care and disability benefits. The
costs of these benefits are accrued over the period
for which the employees qualify and are based
upon actuarial assumptions.
The costs of pension, postemployment and
postretirement benefits are charged to salaries and
benefits.
In January 1994, the Corporation adopted SFAS
112, "Employers' Accounting for Post employment
Benefits." Employers are required to record the
obligation for benefits owed to former employees. The
effect of adoption of this pronouncement was not
material to the Corporation's financial statements.
INTEREST RATE AND FOREIGN EXCHANGE RATE CONTRACTS The
Corporation uses interest rate swaps, futures, caps
and floors, options, forward and foreign exchange
rate contracts primarily as part of its overall
interest rate risk management strategy. Gains and
losses on such contracts are deferred and recognized
over the lives of the hedged assets or liabilities
as an adjustment to interest income or expense.
INCOME TAXES Income tax expense is the current
and deferred tax consequences, to the extent permitted,
of all events that have been recognized in the
financial statements, as measured by the provisions of
enacted tax laws.
A consolidated U.S. federal income tax return is filed
by the Parent Corporation and includes all
subsidiaries. State, local and foreign income tax
returns are also filed according to the taxable
activity of each entity. Consolidated or combined
returns are filed, as required by certain states,
including California. Generally, the consolidated and
combined tax liabilities are settled between
subsidiaries as if each had filed a separate
return.
Foreign tax payments are applied, as permitted, to
reduce federal income tax. Investment tax credits
related to
leasing transactions are accounted for by the
deferral method.
EARNINGS PER SHARE CALCULATIONS Earnings per common
share are computed based on the weighted average
number of common shares outstanding during each year,
the dilutive effect of stock options outstanding, and
after deducting from earnings dividends paid on
preferred stock. Fully diluted earnings per common
share are considered equal to primary earnings per
common share in each year because dilution is less
than three percent.
CASH FLOWS For purposes of reporting cash flows, cash
and cash equivalents include cash and due from banks,
time deposits due from banks, federal funds sold and
securities purchased under agreements to resell having
maturities of three months or less. Generally,
federal funds are purchased and sold for one-day
periods. Changes in assets and liabilities are net
of the effects of sales and acquisitions. The
effect of changes in foreign exchange rates on cash
balances is not material.
Note B_Investment Securities
On January 1, 1994, the Corporation adopted SFAS
115, "Accounting for Certain Investments in Debt and
Equity Securities." The adoption of this pronouncement
had no significant impact on the Corporation's
financial statements. Under the provisions of SFAS 115,
securities are to be classified as held-to-maturity,
available-for sale or trading. The following table
provides the major components of investment securities
(in millions):
Estimated
Amortized Gross Unrealized Fair
Cost Gains Losses Value
December 31, 1994
Held-to-Maturity:
U.S. Treasury securities $ 5,199 $ 3 $97 $5,105
U.S. government agency securities:
Mortgage-backed securities
Pass-throughs 2,773 10 110 2,673
CMOs and REMICs 3,652 2 137 3,517
Direct agencies 481 1 8 474
State and political subdivisions 29 1 _ 30
Other mortgage-backed securities 641 _ 37 604
Other debt securities 920 _ 43 877
Total held-to-maturity securities $13,695 $17 $432 $13,280
Available-for-Sale:
U.S. Treasury securities $ 20 $ _ $ _ $ 20
U.S. government agency securities:
Mortgage-backed securities
Pass-throughs 5 _ _ 5
CMOs and REMICs 14 _ _ 14
Direct agencies 3 _ _ 3
Corporate and Federal Reserve
Bank stock 113 1 _ 114
Total available-for-sale securities $ 155 $ 1 $ _ $ 156
December 31, 1993
Held-to-Maturity:
U.S. Treasury securities $ 7,006 $ 69 $ 4 $ 7,071
U.S. government agency securities:
Mortgage-backed securities
Pass-throughs 1,994 41 9 2,026
CMOs and REMICs 5,382 25 21 5,386
Direct agencie 512 9 _ 521
State and political subdivisions 23 2 _ 25
Other mortgage-backed securities 583 2 3 582
Other debt securities 776 7 2 781
Corporate and Federal Reserve
Bank stock 97 _ _ 97
Total held-to-maturity securities $16,373 $155 $ 39 $ 16,489
Available-for-Sale (1) :
U.S. Treasury securities $ 127 $ _ $ _ $ 127
U.S. government securities:
Mortgage-backed securities 42 _ _ 42
Total available-for-sale securities $ 169 $ _ $ _ $ 169
(1)Classified as securities held-for-sale at
December 31, 1993 and carried at the lower of cost or
market.
Maturities of securities classified as held-
to-maturity and available-for-sale as of December 31,
1994 are as follows (in millions):
Amortized Estimated
Cost Fair Value
Held-toMaturity Securities
Due in one year or less $ 3,480 $ 3,467
Due after one year through five years 2,913 2,805
Due after five years through ten years 125 123
Due after ten years 111 91
6,629 6,486
Mortgage-backed securities 7,066 6,794
Total $13,695 $13,280
Available-for-Sale Securities
Due in one year or less $ 16 $ 16
Due after one year through five years 6 6
Due after five years through ten years 1 1
Due in ten years _ _
23 23
Mortgage-backed securities 19 19
Corporate and Federal Reserve
Bank stock 113 114
Total $ 155 $ 156
Mortgage-backed securities included above have a
weighted average contractual maturity of
approximately 12 years. Expected maturity is often
significantly shorter than contractual maturity for
mortgage-backed securities due to scheduled payments
and unscheduled prepayment activity affecting these
securities. The expected average life of the
mortgage-backed securities was 2.6 years.
Securities and other assets carried at $7,316 million
at December 31, 1994 and $6,188 million at December
31, 1993 were pledged to secure public and trust
deposits and for other purposes as required or
permitted by law.
Proceeds from sales of available-for-sale
securities during 1994 were $88 million. Gross gains
of $21 million and no losses were realized on
sales. Proceeds from the sale of securities were $32
million and $17 million, while gross gains were $10
million and $2 million in 1993 and 1992,
respectively. There were no gross losses during 1993
and $4 million of gross losses during 1992.
The net unrealized holding gains on available-for
sale securities reported, net of related taxes, as a
separate component of shareholders' equity is $1
million. The net unrealized holding gains on trading
securities reported in earnings was $5 million for
1994. During 1994 there were no transfers or sales of
heldtomaturity securities, or transfers of
available-forsale securities to trading securities.
Note C_Loans
Loans consist of the following (in millions):
December 31
1994 1993
Commercial, financial and agricultural $ 9,294 $ 7,998
Real estate construction 962 728
Real estate mortgage 10,263 6,237
Instalment 12,272 10,778
Other 566 292
33,357 26,033
Less: Unearned income 107 25
Net deferred fees 28 20
Loans (net) $33,222 $25,988
Loans included in other assets held for sale $ 26 $ 133
Transactions in the allowance for credit losses were
as follows (in millions):
December 31
1994 1993 1992
Balance at beginning of year $1,001 $1,068 $1,273
Provision for the year _ 112 314
Net changes due to
acquisitions (dispositions) 66 39 (60)
1,067 1,219 1,527
Deduct:
Loans charged off 261 399 606
Less recoveries of loans
previously charged-off 128 181 147
Net loans charged-off 133 218 459
Balance at end of year $ 934 $1,001 $1,068
See "Risk Elements'' under the Management's Discussion
& Analysis section of this annual report for a summary
of nonperforming loans, concentrations of credit risk
and other information.
Certain directors and executive officers of the
Parent Corporation and certain of its significant
subsidiaries, including their associates, were loan
customers of the subsidiary banks. These loans were
made in the ordinary course of business at rates and
terms no more favorable than those offered to other
customers with similar credit standings. The aggregate
dollar amounts of those loans exceeding $60,000 (but
excluding loans to the immediate families of
executive officers and directors of subsidiaries)
were $81 million and $86 million at December 31, 1994
and 1993, respectively. During 1994, $23 million of new
loans were made and repayments totaled $28 million.
Note D_Bank Premises and Equipment
Bank premises and equipment consist of the following
(in millions):
December 31
1994 1993
Land $ 188 $ 165
Buildings and improvements:
Owned 1,151 973
Capital leases 45 46
Furniture, fixtures and equipment:
Owned 930 814
Capital leases 5 5
2,319 2,003
Less accumulated depreciation
and amortization:
Owned 1,133 1,017
Capital leases 39 38
$1,147 $ 948
Depreciation and amortization totaled $109 million,
$99 million and $107 million in 1994, 1993 and
1992, respectively.
Note E_Short Term Borrowings
Short term borrowings are detailed as follows
(in
millions):
December 31
1994 1993 1992
Federal funds purchased:
Balance at December 31 $1,436 $ 557 $ 138
Average balance 514 234 111
Maximum amount outstanding
at any month end 1,436 984 275
Average interest rate:
During the year 4.44% 2.78% 3.30%
At December 31 4.29 2.29 2.52
Securities sold under
agreements to repurchase:
Balance at December 31 $ 73 $ 144 $ 135
Average balance 93 149 220
Maximum amount outstanding
at any month end 219 194 325
Average interest rate:
During the year 3.86% 2.50% 3.00%
At December 31 4.75 2.75 2.32
Other liabilities for short term borrowed money
averaged $48 million in 1994, $48 million in 1993
and $56 million in 1992.
Federal funds purchased generally mature the day
following the date of purchase, while
securities sold under agreements to repurchase
generally mature within 30 days from the
various dates of sale. Other short term
borrowings generally mature within twelve months.
During 1994, the Corporation finalized a three year,
$500 million senior revolving credit facility as
part of its liability management plan for the
Parent Corporation. This facility has numerous
interest rate and borrowing options, as well as a
$150 million line of credit for cash management
purposes. As of December 31, 1994 there were no
borrowings outstanding against this facility.
Note F_Long Term Debt and Dividend Restrictions
Following is a description of the Corporation's
senior and subordinated long term debt which, unless
noted otherwise, is not subject to early redemption
by the Corporation (in millions):
December 31
1994 1993
Parent Corporation:
Senior Medium Term Notes, Series A $ 328 $ 335
8.625% Subordinated Capital Notes
due April 1, 1999 182 182
Subordinated Medium Term Notes,
Series C 163 163
9.125% Subordinated Notes
due February 1, 2004 133 133
9.00% Subordinated Notes due
November 15, 2004 125 _
Other Issues (under $100 million each):
Fixed Rate 231 356
Variable Rate 128 255
1,290 1,424
Subsidiaries:
Subordinated notes and debentures _ 7
Other notes _ 1
Mortgages 74 74
Obligations under capital leases 24 27
During 1993, the Corporation repurchased $441 million
of its long term debt in the open market and redeemed
$369 million of its long term debt. In addition,
the Corporation also tendered for $175 million of long
term debt. As a result, an after-tax loss of $25
million was recorded as an extraordinary item on the
Corporation's Consolidated Statement of Operations.
The various indentures of the Corporation, pursuant
to which long term debt is issued, contain covenants
limiting the sale of stock of principal subsidiaries.
The Senior Medium Term Notes, Series A are offered on
a continuing basis by the Corporation and are due
$128 million in 1995, $38 million in 1996, $10 million
in 1997, $111 million in 1998, $6 million in 1999 and
$35 million thereafter. The notes bear interest ranging
from 7.0% to 10.9%.
The 8.625% Subordinated Capital Notes, due April 1,
1999, are subordinated to senior indebtedness
of the Corporation. These notes are considered to
be Total Capital, but not Tier 1 Capital, for
regulatory purposes since, upon maturity, they may be
exchanged at the option of the Corporation for common
stock, perpetual preferred stock, or other eligible
capital securities of the Corporation having a
market value equal to the principal amount of the
notes.
The Subordinated Medium Term Notes, Series C are
offered on a continuing basis by the Corporation and
are due $13 million in 1998, $121 million in 2001 and
$29 million in 2002. The notes bear interest ranging
from 9.375% to 11.25%.
The 9.125% Subordinated Notes, due February 1, 2004,
are subordinated to senior indebtedness of the
Corporation. The 9.00% Subordinated Notes, due
November 15, 2004, are subordinated to senior indebtedness
of the Corporation. These notes are considered to be Total
Capital, but not Tier 1 Capital, for regulatory purposes.
Included in other issues of the Parent Corporation
under $100 million at December 31, 1994 were two
floating rate issues totaling $128 million and four
fixed rate issues totaling $231 million. The
floating rate issues consist of $45 million of
Floating Rate FOREX-Linked Notes due
February 26, 1996 with a current interest rate of
5.125%, and $83 million of floating rate notes due
June 30, 1997 with a current interest rate of
6.8125%. The FOREX Notes bear interest at a rate equal
to 20 basis points per annum above the London interbank offered
rates for six-month Eurodollar deposits, adjusted
semiannually on interest payment dates. The
Corporation currently has two longdated cross
currency contracts outstanding that are used to
hedge the leverage features embedded in the Notes. The fixed
rate issues include $43 million of 5.75% DM100
million Bearer Bonds due May 7, 1996. In conjunction
with these bonds, the Corporation has entered into
separate agreements whereby the DM/US$ exchange
rate is fixed throughout the term of the issue.
The remaining $188 million of fixed rate notes are
due between March 1, 1996 and March 5, 1998 with
interest rates ranging from 10.50% to 12.75%.
Maturities of notes and debentures of the Parent
Corporation for the five years succeeding December 31,
1994 are $128 million in 1995, $192 million in 1996,
$161 million in 1997, $178 million in 1998, $188
million in 1999 and $443 million thereafter.
At December 31, 1994, $1,157 million (90%) of the
Parent Corporation's long term debt had fixed coupon
rates. Of this amount, $566 million is converted to
floating rate debt using interest rate swaps. The
effect of these swaps was to decrease interest
expense on long term debt by $16 million, or 115
basis points, for 1994, and $47 million, or 248 basis
points, for 1993.
The Corporation is prohibited from borrowing from its
bank subsidiaries on less than a fully secured
basis under regulations of the Federal Reserve Board.
Dividends that may be paid by the bank
subsidiaries are restricted by various statutory
limitations. As of January 1, 1995, approximately
$381 million were free of dividend restrictions
under such statutory limitations. Unrestricted net
assets of nonbank subsidiaries are insignificant.
Note G_Contingent Liabilities and Commitments
The Corporation's banking subsidiaries are required
to maintain balances with Federal Reserve Banks based
on a percentage of deposit liabilities. Such balances
averaged approximately $1.0 billion and $1.2 billion
in 1994 and 1993, respectively.
There are presently a number of legal proceedings
pending against the Corporation and certain of its
subsidiaries. While it is not possible to predict the
outcome of these proceedings, it is the opinion of
management, after consulting with counsel, that the
ultimate disposition of potential or existing suits
will not have a material adverse effect on the Corporation's
financial position, results of operations or liquidity.
Note H_Shareholders' Equity
PREFERRED STOCK At December 31, 1994 and 1993,
15,000,000 shares of Preferred Stock (no par value)
were authorized.
At December 31, 1994 and 1993, there were outstanding
8,000,000 Depositary Shares each representing a one-eighth
interest in a share of 9.875% Preferred Stock, Series F.
The Series F Preferred Stock is redeemable at any time on or
after November 15, 1996, at the option of the
Corporation, in whole or in part, at $200.00 per
share (equivalent to $25.00 per Depositary Share)
plus accrued and unpaid dividends to the redemption
date.
At December 31, 1994 and 1993, there were
outstanding 6,000,000 Depositary Shares each
representing a one-eighth interest in a share of 9.0%
Preferred Stock, Series G. The Series G Preferred
Stock is redeemable any time on or after May 29,
1997, at the option of the Corporation, in whole or
in part, at $200.00 per share (equivalent to $25.00
per Depositary Share) plus accrued and unpaid
dividends to the redemption date.
Dividends on both the Series F and Series G
Preferred Stock are cumulative and are paid quarterly
on the last day of March, June, September, and
December of each year.
TREASURY STOCK At December 31, 1994 and December
31, 1993, the cost of Common Stock in the treasury
averaged $73.64 per share and $39.68 per share,
respectively. In January 1994 and April 1994, the
Board of Directors approved the repurchase of up
to 1.5 million and 6.5 million shares of common
stock, respectively, for reissuance through the Corporation's
Dividend Reinvestment and Stock Purchase Plan and stock
performance plans. In addition, in connection with
the acquisition of Levy Bancorp, the Board of
Directors approved in September 1994, the
repurchase of up to an additional 1.2 million
shares of common stock. Such repurchases were
made periodically in the open market or through
privately negotiated transactions, subject to
appropriate regulatory and acquisition accounting
requirements. As of December 31, 1994, the
Corporation had completed the share repurchase
programs.
RIGHTS The Corporation declared a dividend of one
common share purchase right for each outstanding
share of Common Stock, par value $2.00, payable on
December 30, 1988 to shareholders of record on
that date. Such rights also apply to new issuance
of shares after that date. Each right entitles the
registered holders to purchase from the Corporation
one share of its $2.00 par value Common Stock at a
price of $170.00 per share, subject to adjustment.
The rights are not exercisable or separable from
the Common Stock until the earlier of 10 days after a
party acquires beneficial ownership of 20% or
more of the outstanding Common Shares or announces a
tender offer to do so. The rights, which expire on
December 31, 1998, may be redeemed by the Corporation
at any time prior to the acquisition by any party of
beneficial ownership of 20% or more of the Common
Stock at a price of $0.001 per right. When
exercisable, and under certain circumstances, each
right may entitle the holders to purchase Common Stock
of the Corporation at 50% of the then current per
share market price of the Common Stock or common stock of
the acquiring party at 50% of the then current
per share market price of the common stock of the
acquiring party.
Note I_Stock Option Plans
The stock option plans adopted in 1983, as amended,
1988 and 1991 provide for the granting of "non-
qualified'' options and "incentive stock options'' to
key employees of the Corporation to purchase Common
Stock of the Cor poration at a price not less than
100% of the fair market value on the dates of grant.
The First Interstate Bancorp 1991 Director Option
Plan, as amended and restated, provides for the
granting to non-employee directors of the Corporation
of ``non-qualified'' options to purchase Common
Stock of the Corporation at a price not less than
100% of the fair market value on the dates of grant.
Under the plans, options generally become
exercisable over a four-year period beginning one
year after grant. At the time options are
exercised, the excess of the
proceeds over par value is credited to capital
surplus. There are no charges or credits to income
in connection with the grant or exercise of options.
The 1983, 1988 and 1991 Plans also provide for the
sale of restricted Common Stock of the
Corporation to key employees at a minimum purchase
price of $2 per share. Generally, restrictions lapse
on 10%, 30% and 60% of the shares sold on the third,
fourth and fifth anniversaries of the grant, respectively. At
December 31, 1994, 25,497 shares of restricted Common
Stock granted to 17 employees were outstanding.
At December 31, 1994, options for 3,932,430
shares, granted to 712 employees and 14 non-employee
directors, were outstanding with expiration dates
ranging from August 11, 1995 to November 20, 2004
and with exercise prices ranging from $18.50 to
$83.875 per share, an average of $47.70 per share.
During 1994, options for 835,100 shares were granted.
At December 31, 1993, options for 3,877,586
shares, granted to 720 employees and 15 non-employee
directors, were outstanding with expiration dates
ranging from March 18, 1994 to November 15, 2003
and with exercise prices ranging from $18.50 to
$62.625 per share, an average price of $42.36 per
share. During 1993, options for 1,007,600 shares were
granted.
Options exercised in 1994 were 702,033, compared
to 636,042 in 1993 and 152,767 in 1992. Prices
ranged from $18.50 to $62.625 per share.
At December 31, 1994 options for 1,807,830 shares
were exercisable and 1,919,841 shares were reserved
for future grants under the plans.
Note J_Employee Benefit Plans
The Corporation has a noncontributory defined benefit
plan that provides retirement benefits which are a
function of both the years of service and the
highest level of compensation during any
consecutive five-year period within the last 10
years before retirement.
It is the Corporation's policy to fund the plan
sufficient to meet the minimum funding requirements
set forth in the Employee Retirement Income Security
Act of 1974, plus such additional amounts as the Corporation
may determine to be appropriate from time to time.
The following table sets forth the plan's funded
status and amounts recognized in the Corporation's
Consolidated Balance Sheet (in millions):
December 31
1994 1993
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
Vested $582 $535
Nonvested 39 64
$621 $599
Plan assets at fair value, primarily marketable
securities $706 $722
Projected benefit obligation 742 732
Plan assets less than projected
benefit obligation (36) (10)
Unrecognized prior service costs 5 6
Unrecognized net transition asset being
amortized over 13 years (24) (30)
Unrecognized net loss due to past experience
different from assumptions made 23 107
Prepaid pension asset (pension liability) $(32) $ 73
The net pension cost included the following (in millions):
Year ended December 31
1994 1993 1992
Service costs_benefits earned during
the period $ 30 $23 $23
Interest costs on projected benefit
obligation 59 49 43
Net amortization and deferral (76) 23 (23)
13 95 43
Less return on plan assets (10) 89 42
Net pension cost included in salaries
and benefits 23 6 1
Early Retirement Program
expense included in
provision for restructuring 82 _ _
Total pension cost recognized $105 $ 6 $ 1
The weighted average discount rate and increase in
salary levels used in determining the
projected benefit obligation were 8.75% and 4.5% for
1994, 7.375% and 4.0% for 1993 and 8.5% and 4.75%
for 1992, respectively. The expected long term return
on plan assets was 9.25% in 1994 and 1993 and 9.5% in 1992.
Also, the Corporation and its subsidiaries have
several nonqualified noncontributory defined
benefit plans covering certain senior employees'
benefits in excess of those covered under the
Corporation's qualified noncontributory defined benefit plan.
The accumulated benefit obligation under these plans
was $29 million and $18 million and projected benefit
obligation in excess of plan assets was $33 million
and $22 million as of December 31, 1994 and 1993,
respectively. Net pension cost related to these plans
included in salaries and benefits was $16 million in
1994 and $2 million in 1993 and 1992.
The Corporation provides certain health care benefits
to retired employees through the Master Welfare
Benefit Plan for Employees of First Interstate
Bancorp and Affiliates (Plan). Under the terms of the
Plan, employees hired prior to January 1, 1992 and
who retire at or after age 55 with at least 10 years
of service will be eligible for a fixed maximum
contribution from the Corporation. Employees hired on
or after January 1, 1992 will not be eligible for
retiree health care benefits.
Effective in the first quarter of 1993, the
Corporation adopted SFAS 106, "Employers'
Accounting for Postretirement Benefits Other
Than Pensions,'' on an immediate recognition basis.
SFAS 106 requires the Corporation to accrue the estimated
cost of retiree benefit payments, other than
pensions, during employees' active service period.
The cumulative effect of adopting SFAS 106 was the
recognition of accrued postretirement health care costs
totaling $169 million. After related tax benefits of $64
million, net income for 1993 was reduced by $105 million.
The Corporation currently intends to fund
postretirement health care costs as they are
incurred. The following table sets forth the Plan's
accumulated cost included on the Corporation's
consolidated balance sheet (in millions):
December 31
1994 1993
Accumulated postretirement benefit obligation:
Current retirees $117 $137
Active employees fully eligible for benefits 2 3
Other active Plan participants 17 22
Accumulated postretirement benefit
obligation 136 162
Unrecognized prior service costs 8 17
Unrecognized net (gains) losses due to
past experience different from
assumptions made 26 (11)
Accrued postretirement benefit cost $170 $168
Net periodic postretirement benefit cost for 1994 and
1993 included the following components (in millions):
December 31
1994 1993
Service cost $ 1 $ 1
Interest cost 10 14
Amortization of net gains (1) _
Total postretirement benefit cost $ 10 $ 15
A total of $11 million was recognized in 1992 for
expenses related to postretirement benefits. Since the
Plan contains a fixed maximum contribution by the
Corporation, the health care cost trend rate
assumption has no effect on the amounts reported.
Accordingly, increasing the assumed health care
cost trend rates by one percentage point in each
year would not change either the accumulated
postretirement benefit obligation as of
implementation, or the aggregate of the service and
interest cost components of the net periodic
postretirement benefit cost for 1994 and 1993.
In accordance with the Plan, the increase in
the Corporation's fixed maximum contribution for
participants who retired before January 1, 1993 was
10.0% in 1993, 9.0% in 1994, and zero for 1995
and thereafter. For participants who retired on or
after January 1, 1993, there is no increase in the
Corporation's fixed maximum contribution.
The weighted average discount rates used in
determining the accumulated postretirement benefit
obligation were 8.75% for 1994 and 7.375% for 1993.
The Corporation has a savings plan covering
substantially all employees. Savings plan expense was
$14 million for 1994 and $13 million for 1993 and
1992.
Note K_Income Taxes
Effective January 1, 1993, the Corporation changed
its method of accounting for income taxes from the
liability method required by SFAS 96 to the
liability method required by SFAS 109 on a
prospective basis. The cumulative effect of adopting
SFAS 109 increased net income for 1993 by $305 million.
The provision for income taxes (benefit) attributable
to continuing operations consists of the
following (in millions):
State
and
Federal Local Foreign Total
1994:
Current $274.9 $52.4 $(4.6) $322.7
Deferred 103.3 23.5 _ 126.8
$378.2 $75.9 $(4.6) $449.5
1993:
Current $222.7 $44.0 $ _ $266.7
Deferred 41.6 11.6 _ 53.2
$264.3 $55.6 $ _ $319.9
1992:
Current $152.4 $57.1 $14.4 $223.9
Deferred (103.0) _ _ (103.0)
$ 49.4 $57.1 $14.4 $120.9
The deferred tax expense (benefit) represents the
changes in the amounts of temporary differences. The
types of temporary differences that give rise to
significant portions of the deferred tax include
reserves for credit losses, restructuring expenses
and other real estate owned.
The provision for state and local income taxes for
1992 reflects the effect of certain restrictions
imposed by state tax laws limiting the
Corporation's ability to offset losses incurred in
one period against the income of another period.
The effective federal income tax rate varied from
the statutory rate due to a number of factors
including the exemption from tax on interest
income earned on the obligations of state and
political subdivisions. For 1992, the effective
income tax rate varied from the statutory federal
rate due primarily to the recognition of prior years'
federal tax benefits previously limited under SFAS 96,
offset by the limitation of current year's state tax benefits
under that accounting method.
A reconciliation between the statutory federal and
the effective income tax rates follows:
% of Pretax Income
1994 1993 1992
Federal Income tax at statutory rate 35 35 34
Effect of nontaxable interest income (1) (1) (2)
Unrecorded tax benefits _ _ (30)
NOL benefit allocated to goodwill _ _ 8
Enacted statutory tax rate change _ (1) _
Foreign tax credits carryovers _ (1) _
State income taxes 6 6 14
Foreign income taxes (1) _ 4
Other net (1) (2) 2
Effective income tax rate 38 36 30
The tax effects of temporary differences and tax
carryforwards which give rise to significant elements
of deferred tax assets and liabilities are detailed
below (in millions):
December 31
1994 1993
Gross deferred assets:
Allowance for credit losses $373.7 $413.5
Reserves and accruals 109.5 127.6
Compensation and benefits 83.4 68.0
Other real estate 29.3 40.4
Foreign tax credit 13.0 20.0
Other 16.6 1.5
Total gross deferred assets 625.5 671.0
Gross deferred liabilities:
Leases (36.4) (25.2)
Fixed assets (19.2) (31.8)
Acquisition related tax accounting
method changes (15.6) _
State taxes (14.2) (20.7)
Other (17.6) (24.7)
Total gross deferred liabilities (103.0) (102.4)
Valuation allowance (38.0) (45.0)
Net deferred tax asset $484.5 $523.6
The valuation allowance applies to foreign tax credits
and to the uncertainty of the realization of future
deductions to the extent that realization is dependent
on levels of future taxable income in excess of
present levels. During 1994, the valuation
allowance was decreased by $7.0 million, resulting
from the utilization of foreign tax credits on the
1993 federal tax return and refund of foreign taxes
previously available as credits.
For tax return purposes, the Corporation has foreign
tax credit carryforwards of $13.0 million. Of this
total, $2.7 million represents tax return carryforwards
which will expire in the years 1995 through 1998. The remaining
$10.3 million represents foreign taxes paid
by subsidiaries which will be available as a credit
against U.S. taxes when distributions are made to the
U.S. parent.
The income tax benefit for the Parent Corporation
reflects the effect of its separate company loss and
the settlement of intercompany tax amounts in
accordance with the Corporation's tax allocation
policies.
Note L_Leases
At December 31, 1994, the Corporation and its
subsidiaries were obligated under a number of
noncancelable leases for land, buildings and
equipment. Minimum future obligations on leases in
effect at December 31, 1994 were as follows (in
millions):
Capital
Operating Year Ending December 31 Leases Leases
1995 $ 6 $118
1996 6 109
1997 4 93
1998 4 84
1999 4 75
Later years 13 547
Total minimum obligations 37 $1,026
Less executory obligations _
Net minimum obligations 37
Less amount representing interest 13
Present value of net minimum obligations $24
Minimum future rentals receivable under
noncancelable operating subleases at December 31,
1994 were $51 million.
Rental expense for all operating leases was $149
million, $146 million, and $142 million for 1994,
1993 and 1992, respectively.
Note M_Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Corporation
is a party to financial instruments with off-balance
sheet risk to meet the financing needs of its
customers and to reduce its own exposure to
fluctuations in interest rates. These financial
instruments include commitments to extend credit;
standby letters of credit and financial
guarantees; forward and futures contracts; interest
rate and currency swaps; options; and interest rate
caps and floors. These instruments involve, to
varying degrees, elements of credit and market
risk in excess of the amounts recognized in the
Consolidated Balance Sheet.
Credit risk for off-balance sheet financial
instruments is defined as the possibility of
sustaining a loss because any other party to a
financial instrument fails to perform in accordance
with the terms of the contract. The Corporation
uses the same credit policies in making
commitments and conditional obligations as it does for
onbalance sheet financial instruments through
established credit approvals, risk control limits
and monitoring procedures.
Market risk represents the possibility that the value
of financial instruments will change, either
positively or negatively, with changes in market
prices, such as interest rates.
The Corporation requires collateral to support off
balance sheet financial instruments when it is
deemed necessary. Collateral held varies, but may
include deposits held in financial institutions;
U.S. Treasury securities; other marketable
securities; accounts receivable; property,
plant and equipment; and inventory.
Commitments, Standby Letters of Credit
and Financial Guarantees
Commitments are contractual agreements to extend
credit which generally have fixed expiration dates or
other ter mination clauses and may require payment
of a fee. Substantially all of the Corporation's
commitments to extend credit are contingent upon
the customers maintaining specific credit standards at
the time of loan funding. Since many of the commitments are
expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent
future cash requirements.
Standby letters of credit and financial guarantees
are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third
party. Standbys are primarily issued as credit
enhancements for public and private borrowing
arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved in issuing
standby letters of credit is essentially the same as
that involved in extending facilities to customers.
Risks associated with standby letters of credit
are reduced by participation to third parties. At December 31,
1994 approximately $40 million of standby letters of
credit had been participated to others.
A commercial letter of credit represents an extension
of credit by a bank to its customer where the
customer is usually the buyer/importer of goods and the
beneficiary is typically the seller/exporter. Credit
risk is limited as the merchandise shipped serves as
collateral for the transaction.
The Corporation's exposure to credit loss
under commitments to extend credit, standby letters of
credit and financial guarantees as well as commercial
letters of credit is represented by the contractual
amount of these instruments (in millions):
December 31
1994 1993
Commitments to extend credit $28,508 $23,548
Standby letters of credit and financial
guarantees 2,076 1,814
Commercial letters of credit 264 262
The following summarizes the expiration schedule of
the Corporation's loan commitments and standby letters
of credit issued as of December outstanding 31, 1994 (in
millions):
Standby
Letters of
Commitments Credit
1995 $20,332 $1,519
1996 2,407 264
1997 2,158 174
1998 907 21
1999 2,137 43
Thereafter 567 55
$28,508 $2,076
When-issued securities represent a method of trading
in listed or unlisted securities which have not yet
been issued and, therefore, are not deliverable. At
December 31, 1994 the Corporation had no commitments
to purchase when-issued securities, compared to
$100 million at December 31, 1993.
In a typical securities borrowing/lending
arrangement, a broker/dealer or bank borrows
securities from an institution owning the securities. In return,
collateral in the form of U.S. government or
federal agency securities, cash or letters of
credit equal to or in excess of the market value of
the securities lent is given to the lender of the
securities. The Corporation lends its own securities
as well as those of its customers and does, in some
instances, indemnify its customers against
potential losses. Such arrangements expose the
Corporation to potential loss. At December 31, 1994
and 1993, the Corporation's securities lending
transactions amounted to $2.0 billion and $1.9
billion, respectively.
Derivatives and Other Financial Instruments
NATURE OF INSTRUMENTS The Corporation enters
into a variety of derivative financial instruments
in managing its interest rate exposure and as
intermediary for customer accommodations.
Forward and futures contracts are contracts for
delayed delivery of securities or money market
instruments in which the seller agrees to make
delivery at a specified future date of a specified
instrument, at a specified price or yield. Risks
arise from the possible inability of counterparties
to meet the terms of their contracts and from
movements in securities values and interest rates.
Interest rate swap transactions generally involve
the exchange of fixed and floating rate interest
payment obligations without the exchange of the underlying
principal amounts. Though swaps are also used as part
of asset/liability management, most of the interest
rate swap activity arises when the Corporation
acts as an intermediary in arranging interest rate swap
transactions for customers entered into on an over-
thecounter basis. The Corporation typically becomes
a principal in the exchange of interest payments
between the parties and, therefore, is exposed to
loss should one of the parties default. The
Corporation's credit policies provide the measures
to be taken when entering into and subsequently
monitoring these contracts. Exposure to interest rate
risk inherent in intermediary swaps is minimized by
performing normal credit reviews on its swap
customers and by entering into offsetting swap
positions that essentially counterbalance each other.
Currency swap agreements are entered into primarily on
an over-the-counter basis, as a means of protection
against fluctuations in foreign currency.
Interest rate caps and floors written by the
Corporation enable customers to transfer, modify,
or reduce their interest rate risk. Interest rate
options are contracts that allow the holder of the
option to purchase or sell a financial instrument
at a specified price and within a specified period
of time from the seller or ''writer'' of the option.
As a writer of interest rate caps, floors and options,
the Corporation receives a premium at the outset and
then bears the risk of an unfavorable change in the
price of the financial instrument underlying the cap,
floor or option. Exposure to market risk due to such
changes on intermediary transactions is minimized by
purchasing offsetting options transactions
that counterbalance the risk. The Corporation's credit
policies define the procedures associated with
originating and controlling the risks of these
transactions. These instruments are executed
through established market exchanges as well as
overthe-counter sources.
As a matter of policy, neither the Corporation nor
its subsidiary banks are allowed to act as a dealer or
market maker in financial derivative contracts. Thus,
none of the Corporation's derivative activity is
classified as trading activity.
Derivative financial instruments held or issued for
purposes other than trading executed by the
Corporation are divided into three groups based upon
objectives, as described below:
HEDGING TRANSACTIONS The Corporation enters
into financial derivative contracts from time to time to
hedge exposure to changes in the level of interest
rates or the value of currencies. The Boards of
Directors of the subsidiary banks and the
Corporation have delegated oversight responsibility
for such activity to the Asset, Liability and Capital
Committee (ALCCO), and transactions may not be executed
without the approval of ALCCO. The Cor poration's policies
view risk in terms of the overall balance sheet of the banks,
andspecify risk tolerance and instruments to be used for
hedging, as well as governing ongoing review of
hedging efficiency.
Forward and futures rate agreements are primarily used
to hedge the mortgage "pipeline" risk related
to the Corporation's mortgage banking activities. Forward
sales of whole loans and mortgage-backed securities
as well as purchases of put options on mortgage-
backed securities are used to hedge the Corporation's
residential mortgage loan purchase commitments that
have interest rate locks.
Interest rate and currency swap agreements are
primarily used to convert certain long term debt of
the Corporation to floating interest rates payable
in U.S. dollars. Included in the December 31, 1994
notional amounts below is $608 million of receive
fixed interest rate swaps (average receive rate of
8.34% and average pay rate of 5.68%) and $42
million of pay-fixed interest rate swaps (average
receive rate of 5.72% and average pay rate of
9.68%). As discussed in Note F, these swaps
effectively converted $566 million of the
Corporation's fixed rate long term debt to floating
rate debt. The December 31, 1994 amount also
includes $118 million of cross currency contracts
to convert foreign currency denominated
obligations to U.S. dollar denominated obligations and
to offset the foreign exchange leverage feature
embedded in certain debt obligations of the
Corporation. The remaining notional amount of $14
million consists of pay-fixed interest rate swaps
to match the amounts and terms of specific customer loans.
Interest rate caps and floors are primarily used to
hedge certain floating rate debt obligations of the
Corporation and to hedge options embedded in
specific customer loan transactions.
The Corporation also utilizes equity derivative
contracts to manage certain risks in its venture
capital portfolio. During 1994, the Corporation
entered into an equity option collar transaction to
hedge the value of common stock held as part of a
limited partnership.
The accounting for all hedging transactions follows
the accounting for the underlying instrument being
hedged.
INTERMEDIARY TRANSACTIONS: MERCHANT BANKING_SOLD
On January 1, 1993, the Corporation sold its merchant
banking and foreign operations to Standard Chartered
Bank PLC, a London-based multinational banking company.
The transaction included the sale of the market
risk associated with the Corporation's derivative
instruments that were then outstanding as part of its
merchant banking operations. However, the related
credit risk on these instruments was retained.
Reserves for credit losses were recorded at the
time of the sale, and the adequacy of these reserves
is tested quarterly.
Since the cash flows underlying these transactions
have been sold to Standard Chartered Bank, no gain
or loss (with the exception of credit losses in
excess of reserves) is reported on the
Corporation's financial statements for these
transactions.
INTERMEDIARY TRANSACTIONS: CUSTOMER
ACCOMMODATION CONTRACTS Since the sale of the Corporation's
merchant banking activities to Standard Chartered
Bank, the Corporation has not acted as a market
maker or dealer in financial derivatives and does
not pursue the execution of derivatives contracts as a
line of business.
However, from time to time the Corporation's banks
do enter into financial derivative contracts with
their corporate customers. These contracts are
most often executed in conjunction with the provisions
of a loan to the customer, though that is not
always the case. In executing these contracts,
the Corporation takes on minimal market risk of a
short term nature, and takes on no correlation or
basis risk, since the terms of the transactions
are perfectly offset by simultaneously entering
into a matching contract with a market maker with the
exception of a small spread received for the
assumption of credit risk as an intermediary. No
open positions or portfolio hedging techniques are
allowed with the activity and the banks
do not stand ready to buy or sell positions on
their own account, but rather only execute
transactions in response to the specific needs of a
customer.
Activity in these customer accommodation contracts
is further restricted to the most common over-the
counter contracts to ensure that the credit risk that
the banks undertake can be properly managed and monitored.
Customer accommodation contracts are accounted for on
an accrual basis, with the spread taken to cover
credit risk recognized in income over time as it is
earned. Income generated from this activity is immaterial.
The contractual/notional amounts and the credit
risk represented by the replacement cost of
derivatives and other financial instruments in a gain
position follows (in millions):
December 31, 1994
Contractual/Notional Credit Risk
Amount Amount
Forward and futures rate agreements:
Hedging $ 37 $ _
Interest rate and currency swap agreements:
Hedging 782 33
Intermediary: Portfolio Sold 3,226 64
Customer Accommodation 503 12
Interest rate caps and floors:
Written:
Hedging 100 _
Intermediary: Portfolio Sold 759 _
Customer Accommodation 193 _
Purchased:
Hedging 52 _
Intermediary: Portfolio Sold 855 14
Customer Accommodation 188 2
Options:
Written:
Hedging 15 _
Intermediary: Portfolio Sold _ _
Customer Accommodation 7 _
Purchased:
Hedging 117 3
Intermediary: Portfolio Sold _ _
Customer Accommodation 7 _
December 31, 1993
Contractual/Notional Credit Risk
Amount Amount
Forward and futures rate agreements:
Hedging $ 245 $ 7
Interest rate and currency swap agreements:
Hedging 659 69
Intermediary 6,646 341
Interest rate caps and floors:
Written:
Hedging 100 _
Intermediary 1,063 _
Purchased:
Hedging 40 _
Intermediary 1,373 44
Options:
Written:
Intermediary 1 _
Note N_Fair Value of Financial Instruments
The estimated fair value of financial instruments as
of December 31, 1994 is as follows (in
millions):
Carrying Estimated
Amount Fair Value
Financial assets:
Cash and cash equivalents $ 6,275 $ 6,275
Trading account securities 64 64
Held-to-maturity securities 13,695 13,280
Available-for-sale securities 156 156
Loans:
Commercial, financial, agricultural 9,294 9,033
Real estate construction 962 948
Real estate mortgage 10,263 9,638
Instalment 12,272 11,906
Other 566 566
33,357 32,091
Less: Unearned income 107 _
Net deferred fees 28 _
Allowance for credit losses 934 _
Net Loans 32,288 32,091
Other assets held for sale 26 26
Customers' liability for acceptances 35 35
Other assets 344 344
Financial liabilities:
Deposits 48,427 48,256
Short term borrowings 1,574 1,574
Acceptances outstanding 35 35
Other liabilities 86 86
Capital notes and debentures 1,290 1,313
Mortgages 74 93
Off balance sheet financial instruments:
Commitments to extend credit (14) (14)
Standby letters of credit and financial guarantees (4) (4)
Forward and future rate agreements _ _
Interest rate and currency swap agreements _ (20)
Options, interest rate caps and floors _ 3
The estimated fair value of financial instruments as
of December 31, 1993 is as follows (in millions):
Carrying Estimated
Amount Fair Value
Financial assets:
Cash and cash equivalents $ 6,839 $ 6,839
Trading account securities 167 167
Held-to-maturity securities 16,373 16,489
Available-for-sale securities 169 169
Loans:
Commercial, financial, agricultural 7,998 8,039
Real estate construction 728 698
Real estate mortgage 6,237 6,101
Instalment 10,778 10,953
Other 292 293
26,033 26,084
Less: Unearned income 25 _
Net deferred fees 20 _
Allowance for credit losses 1,001 _
Net Loans 24,987 26,084
Other assets held for sale 133 133
Customers' liability for acceptances 48 48
Other assets 421 421
Financial liabilities:
Deposits 44,701 44,723
Short term borrowings 767 767
Acceptances outstanding 48 48
Other liabilities 92 92
Capital notes and debentures 1,432 1,545
Mortgages 74 109
Off balance sheet financial instruments:
Commitments to extend credit (12) (12)
Standby letters of credit and
financial guarantees (3) (3)
Interest rate and currency swap agreements 1 1
The following methods and assumptions were used by
the Corporation to estimate the fair value of each
class of financial instruments:
CASH AND CASH EQUIVALENTS The carrying amounts
reported in the balance sheet for cash and short
term instruments approximate fair values of those assets.
SECURITIES (HELD-TO-MATURITY, AVAILABLE-FOR-SALE
AND TRADING) Fair values are based on quoted market
prices, where available. If quoted market prices are
not available, fair values are based on quoted market
prices of comparable instruments.
LOANS RECEIVABLE For those loans with variable rates
and no fixed maturities, and for loans with
maturities of three months or less, fair value is
considered to be equal to carrying value. The fair
value of other types of loans is estimated by
discounting the future cash flows using the current
rates at which similar loans would be made to borrowers
with similar credit ratings for the same
remaining maturities.
OTHER ASSETS HELD FOR SALE Carrying value is
considered to approximate fair value.
CUSTOMERS' LIABILITY FOR ACCEPTANCES AND
ACCEPTANCES OUTSTANDING Bankers' Acceptances with
maturities of three months or less are reported at their
carrying values. For those instruments with
maturities of more than three months, the fair value
of the portfolio is recorded based on discounted cash
flows.
OTHER ASSETS AND OTHER LIABILITIES The fair value
of financial instruments included in other assets and
other liabilities is considered to be equal to the
carrying value.
DEPOSIT LIABILITIES The carrying value for all
deposits without fixed maturities, and for time
deposits greater than $100,000 with maturities of three
months or less, is considered to be equal to the fair
value. The fair value for time deposits greater than
$100,000 with maturities greater than three months as
well as time deposits less than $100,000 is based upon
the appropriate discount rate for similar pools.
The fair value of demand deposits is the amount payable
on demand, and is not adjusted for any value derived
from retaining those deposits for an expected future
period of time. That component, commonly referred to as
deposit base intangible, was not estimated at December
31, 1994 and 1993, and is not considered in the fair
value amounts.
SHORT-TERM BORROWINGS Carrying amounts of federal
funds purchased, borrowings under repurchase
agreements and other short-term borrowings approximate
fair values.
LONG-TERM DEBT The fair values of long-term borrowings
(other than deposits) are valued at their quoted
market price or are estimated using discounted cash
flow analyses, based on the current incremental
borrowings rates for similar types of borrowing arrangements.
OFF-BALANCE SHEET INSTRUMENTS The fair value of
commitments to extend credit, standby letters of credit
and financial guarantees represent deferred fees. The
fair value of forward and future rate agreements;
interest rate and currency swap agreements; interest
rate caps, floors and collars; and options are based
upon quoted market prices, where available, or
discounted estimated cash flows.
Note O_Parent Corporation
Condensed financial information of the Parent
Corporation is presented as follows (in millions):
Condensed Balance Sheet
December 31,
1994 1993
Assets
Cash and due from banks:
Subsidiary banks $ 7 $ 10
Time deposits, due from banks:
Subsidiary banks 41 3
Other banks _ 480
Securities purchased under agreements to resell:
Subsidiary banks 150 _
Held-to-maturity securities
(approximate market value: 1993 $6 ) _ 6
Available-for-sale securities 33 169
Loans_net 22 22
Due from subsidiaries:
Banks 112 5
Nonbanks 52 139
Investment in subsidiaries:
Banks 4,204 3,855
Nonbanks 41 53
Other assets 377 343
$5,039 $5,085
Liabilities and Shareholders' Equity
Due to subsidiary banks $ 15 $ _
Accounts payable and accrued liabilities 261 92
Other short term borrowings:
Nonbank subsidiaries 37 21
Long term debt 1,290 1,424
Total Liabilities 1,603 1,537
Shareholders' Equity 3,436 3,548
$5,039 $5,085
Condensed Statement of Operations
Year Ended December 31
1994 1993 1992
Income
Dividends from subsidiaries:
Banks $605 $491 $44
Nonbanks _ _ 1
Interest from subsidiaries:
Banks 3 2 8
Nonbanks 5 11 20
Other interest 29 35 72
Noninterest income 30 1 2
672 540 147
Expenses
Interest on:
Long term debt 96 123 197
Short term borrowings 4 _ _
Indebtedness to subsidiaries _ 7 20
Noninterest expenses
Provision for restructuring 141 _ _
Other noninterest expenses 83 99 121
324 229 338
Income (loss) before income tax benefit,
extraordinary item, cumulative effect
of accounting changes and equity
in undistributed income (loss)
of subsidiaries 348 311 (191)
Income tax benefit 96 44 32
Income (loss) before extraordinary item,
cumulative effect of accounting
changes and equity in undistributed
income (loss) of subsidiaries 444 355 (159)
Extraordinary item _ (25) _
Cumulative effect of accounting changes _ 231 _
Income (loss) before equity in
undistributed income (loss) of
subsidiaries 444 561 (159)
Equity in undistributed income (loss)of
subsidiaries:
Banks 283 176 455
Nonbank 7 _ (14)
290 176 441
Net Income $734 $737 $282
Statement of Cash Flows
Year Ended December 31
1994 1993 1992
Cash Flows from Operating Activities
Net income $ 734 $ 737 $ 282
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Equity in undistributed income of
subsidiaries (290) (176) (441)
Depreciation and amortization 17 19 15
Provision for restructuring 141 _ _
Cumulative effect of accounting
changes _ (231) _
Loss on early extinguishment of debt _ 25 _
(Gain) loss on sale of assets (20) (10) _
Decrease (increase) in interest
receivable 6 30 (25)
Decrease in interest payable (2) (24) (2)
Other_net (38) 271 40
Net Cash Provided (Used) by
Operating Activities 548 641 (131)
Cash Flows from Investing Activities:
Held-to-maturity securities
Proceeds from maturities 2 2 37
Proceeds from sales _ 16 _
Purchases (1) (5) _
Available-for-sale securities
Proceeds from maturities 128 969 133
Proceeds from sales 25 _ 1
Purchases (15) (160) (526)
Net (increase) decrease in advances to
subsidiaries (5) (147) 542
Net decrease in loans _ 19 17
Proceeds from sales of loans _ _ 6
Capital contributions to subsidiaries (22) (3) (315)
Return of capital from subsidiaries 83 366 _
Net Cash Provided (Used) by
Investing Activities 195 1,057 (105)
Cash Flows from Financing Activities:
Net increase (decrease) in other short term
borrowings from nonbank subsidiaries 16 (1) 22
Proceeds from long term debt issued 125 _ 285
Repayments of long term debt (259) (171) (392)
Reacquisition of long term debt _ (1,014) (272)
Cash dividends paid (251) (171) (143)
Proceeds from Preferred Stock issued _ _ 145
Redemption of Preferred Stock _ (334) (128)
Repurchase of Common Stock (712) _ _
Proceeds from Common Stock issued 43 43 468
Net Cash Used by
Financing Activities (1,038) (1,648) (15)
Net Increase (Decrease) in Cash
and Cash Equivalents (295) 50 (251)
Cash and cash equivalents at beginning
of year 493 443 694
Cash and Cash Equivalents at
End of Year $ 198 $ 493 $ 443
Note P_Acquisition Activities
During 1993 and 1994, the Corporation, through
its subsidiaries, completed five cash transactions
resulting in the acquisition of deposits totaling $443 million
and $315 million, respectively. The Corporation paid
premiums of $13 million in 1993 and $26 million in 1994
for these deposits, which were acquired from the
Resolution Trust Corporation and the Federal Deposit
Insurance Corporation. In addition, the Corporation
was a party to business combinations with various
operating entities as detailed in the following table:
ClosingPurchase
($ in millions) Date Price Loans Assets Deposits State
1993
Cal Rep Bancorp, Inc. 12/10 $ 68 $ 381 $ 535 $ 495 CA
1994
First State Bank of the Oaks 1/13 23 57 144 130 CA
San Diego Financial Corp. 3/18 340 806 1,939 1,764 CA
BancWest Bancorp 4/29 36 39 240 215 TX
Chase Bank of Arizona 4/29 102 356 610 392 AZ
MNB Bancshares, Inc. 5/30 5 21 47 41 TX
Med Center Bank 7/29 12 53 143 152 TX
Sacramento Savings Bank 11/1 337 2,230 3,010 2,598 CA
Park Forest National Bank 12/16 2 13 23 22 TX
1995
University Savings Bank 1/6 205 154 1,274 929 WA
North Texas Bancshares, Inc. 1/9 65 211 424 387 TX
Levy Bancorp 2/1 92 266 557 506 CA
The acquisitions of Cal Rep Bancorp, Inc. and San
Diego Financial Corporation were accounted for as
poolings of interest, while the remaining acquisitions
were accounted for as purchases. In addition, all the
acquisitions were cash transactions with the exception
of Cal Rep Bancorp, Inc., San Diego Financial
Corporation and Levy Bancorp for which the
Corporation issued 1,188,823 shares, 5,067,513 shares
and 1,308,384 shares of its common stock,
respectively.
The results of operations of companies which were
acquired in 1993 and 1994 were included in the Consolidated
Statement of Operations from the dates of
acquisition shown above. The Corporation's financial
statements have not been restated for the results of
operations of Cal Rep Bancorp, Inc. and San Diego
Financial Corporation prior to the dates of
acquisition due to immateriality.
The following table presents unaudited pro forma
financial information for the Corporation and the
acquired companies accounted for as purchase
transactions as if the acquisitions had been
effective on January 1, 1994 and January 1, 1993,
respectively:
Year Ended December 31
1994 1993
(in millions except per share amounts)
Net interest income $2,384.1 $2,186.6
Provision for credit losses 5.5 119.6
Noninterest income 1,063.1 983.3
Noninterest expense 2,272.7 2,169.8
Applicable income taxes 442.2 334.6
Income before extraordinary
item and cumulative effect of accounting changes 724.8 545.9
Earnings per common share before extraordinary
item and cumulative effect of accounting changes 8.60 6.48
Goodwill and other intangible assets arising from 1994
purchase acquisitions totaled $307 million and $20
million, respectively. Goodwill related to
those acquisitions is being amortized on a straight
line basis over 15 years and the other intangibles on
a straight line basis over periods ranging from 5 to 10 years.
Note Q_Restructuring
On September 20, 1994, the Corporation announced
that management had adopted a Restructuring Plan
(Plan) to improve efficiency and to better position
the company for the introduction of full interstate
banking. This Plan resulted in restructuring
charges in 1994 of $141.3 million.
The restructuring activity during 1994 is
summarized in the following table (in millions):
Early Severance and Facility and
Retirement Outplacement Equipment
Program Services Valuations Other Total
Restructuring provision
Initial charge $82.0 $40.0 $15.0 $2.0 $139.0
Ongoing _ _ _ 2.3 2.3
Total 82.0 40.0 15.0 4.3 141.3
Utilization for the period
Cash 0.4 4.7 6.8 2.3 14.2
Noncash 81.6(1) _ _ _ 81.6
Total 82.0 4.7 6.8 2.3 95.8
Balance at
December 31, 1994 $ _ $35.3 $ 8.2 $2.0 $ 45.5
(1) Noncash amount of $81.6 represents the
amount transferred to the Corporation's pension
liability during 1994. Payment of the cost of the
Early Retirement Program into the Corporation's
qualified retirement plan will depend on the timing
of the Corporation's contributions to the pension
plan. The balance of the restructuring charge will be
funded out of operating cash flows with payments for
severance and outplacement services occurring
approximately ratably over the next year. Payment of
the cost of the Early Retirement Program into the
Corporation's qualified retirement plan will depend
on the timing of the Corporation's
contributions to the plan.
In addition, it is expected that restructuring
charges of another $23.7 million for relocation of
staff and facilities, as well as retention payments for
certain personnel displaced in the restructuring
program, will be incurred and expensed as the program
is implemented. Such costs are expected to be
incurred relatively evenly through the third quarter
of 1995. The total expected cost of the Plan,
therefore, will be approximately $165
million.
The Plan calls for the consolidations of operations
and administrative functions, formation of a company
wide Risk Management Group, and implementation of best
practices in business lines. As part of the Plan,
1,854 personnel took advantage of the Corporation's
Early Retirement Program. In the course
of implementing the Plan, another approximately
3,300 personnel are expected to be
involuntarily terminated. Because some of the
vacancies created by the Early Retirement Program
and by the geographic consolidations will have to be filled,
the total permanent reduction is expected to be
approximately 3,000 full-time equivalent staff.
The Plan is expected to result in annualized
expense savings of $167 million by June 1996; the
savings are expected to be achieved progressively
through this time period. Of the $167 million,
staff savings total $107 million, facilities
savings total $20 million, and other savings
(primarily in the areas of purchasing, appraisals, and
branch savings) total $40 million. As a result, the
Corporation expects to achieve a 58% efficiency ratio
in 1995. The Plan should have limited impact on the
revenues of the Corporation.
The expense savings of this Plan described above
are before the impact of any acquisitions announced
by the Corporation after March 22, 1994. The
Corporation has announced the following acquisitions
since that date: 17 branches from the Resolution
Trust Corporation in Oregon and Washington;
Sacramento Savings Bank and Levy Bancorp in
California; North Texas Bancshares and Park Forest
National Bank in Texas; and University Savings Bank
in Washington.
REPORT OF ERNST &YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
First Interstate Bancorp
We have audited the accompanying consolidated balance
sheets of First Interstate Bancorp and subsidiaries as of
December 31, 1994 and 1993, and the related consolidated
statements of operations, cash flows and shareholders'
equity for each of the three years in the period ended
December 31, 1994. These financial statements are the
responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of First Interstate Bancorp and
subsidiaries at December 31, 1994 and 1993, and the
consolidated results of their operations and their cash
flows for each of the three years in the period ended
December 31, 1994 in conformity with generally accepted
accounting principles.
As discussed in Notes to Financial Statements, in 1994,
the Corporation changed its method of accounting for
investment securities and, in 1993, the Corporation
changed its methods of accounting for income taxes and
for postretirement benefits other than pensions.
Los Angeles, California
January 16, 1995
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CONSOLIDATED BALANCE SHEET (unaudited) First Interstate Bancorp
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994
------------------------------------- --------------------------
(dollar amounts in millions) September 30 June 30 March 31 December 31 September 30
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 5,889 $ 5,898 $ 6,230 $ 6,070 $ 6,240
Time deposits, due from banks 27 27 27 26 57
Federal funds sold and securities
purchased under agreements to resell 470 268 265 179 603
Trading account securities 116 114 52 64 64
Investment Securities:
Held-to-maturity securities 9,320 10,802 12,204 13,695 14,625
Available-for-sale securities 112 107 127 156 119
-------- -------- -------- -------- --------
Total Investment Securities 9,432 10,909 12,331 13,851 14,744
Loans (net) 35,967 35,904 35,096 33,222 30,331
Less: Allowance for credit losses 847 878 921 934 952
-------- -------- -------- -------- --------
Net Loans 35,120 35,026 34,175 32,288 29,379
Bank premises and equipment 1,277 1,237 1,199 1,147 1,081
Customers' liability for acceptances 54 57 31 35 29
Other assets 2,682 2,416 2,646 2,153 2,010
-------- -------- -------- -------- --------
Total Assets $ 55,067 $ 55,952 $ 56,956 $ 55,813 $ 54,207
======== ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 17,044 $ 16,981 $ 16,644 $ 16,599 $ 17,659
Interest bearing 31,192 31,474 31,720 31,828 30,396
-------- -------- -------- -------- --------
Total Deposits 48,236 48,455 48,364 48,427 48,055
Short term borrowings 376 1,328 2,361 1,574 405
Acceptances outstanding 54 57 31 35 29
Accounts payable and accrued liabilities 1,052 797 1,037 953 907
Long term debt 1,368 1,446 1,470 1,388 1,261
-------- -------- -------- -------- --------
Total Liabilities 51,086 52,083 53,263 52,377 50,657
Shareholders' equity:
Preferred Stock 350 350 350 350 350
Common Stock, par value $2 a share: (in thousands)
Authorized: 250,000 shares;
Issue 84,286 shares 169 169 169 168 169
Capital surplus 1,667 1,671 1,683 1,692 1,683
Retained earnings 2,436 2,268 2,113 1,967 1,821
Unrealized gain on available-for-sale securities, net of tax 1 0 1 1 0
-------- -------- -------- -------- --------
4,623 4,458 4,316 4,178 4,023
Less Common Stock in treasury, at cost: (in thousands)
September 30, - 8,559 shares
June 30, 1995 - 8,000 shares
March 31, 1995- 8,452 shares
December 31, 1- 10,082 shares
September 30, - 6,687 shares 642 589 623 742 473
-------- -------- -------- -------- --------
Total Shareholders' Equity 3,981 3,869 3,693 3,436 3,550
-------- -------- -------- -------- --------
Total Liabilities and Shareholders' Equity $ 55,067 $ 55,952 $ 56,956 $ 55,813 $ 54,207
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
See unaudited notes to consolidated financial statements
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<CAPTION>
____________________________________________________________________________________________________________________________________
CONSOLIDATED STATEMENT OF INCOME (unaudited) First Interstate Bancorp
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994 Nine Months Ended
------------------------------ ------------------- September 30
Third Second First Fourth Third ------------------------
(dollar amounts in millions, except per share data) Quarter Quarter Quarter Quarter Quarter 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 772.3 $ 779.9 $ 730.5 $ 662.4 $ 591.4 $ 2,282.7 $ 1,641.3
Trading account 2.7 1.7 1.6 1.6 1.0 6.0 3.4
Investment Securities:
Held-to-maturity securities 137.5 157.0 177.4 192.7 209.4 471.9 638.3
Available-for-sale securities 0.8 2.3 5.1 0.9 2.8 8.2 12.4
Other interest income 9.3 4.1 6.9 4.7 7.3 20.3 34.4
-------- -------- -------- -------- -------- ---------- ----------
Total Interest Income 922.6 945.0 921.5 862.3 811.9 2,789.1 2,329.8
INTEREST EXPENSE
Deposits 251.9 244.7 225.2 205.7 182.6 721.8 519.3
Short term borrowings 9.3 27.7 35.2 14.8 6.8 72.2 19.4
Long term debt 29.9 31.2 29.4 25.2 26.1 90.5 81.1
-------- -------- -------- -------- -------- ---------- ----------
Total Interest Expense 291.1 303.6 289.8 245.7 215.5 884.5 619.8
-------- -------- -------- -------- -------- ---------- ----------
NET INTEREST INCOME 631.5 641.4 631.7 616.6 596.4 1,904.6 1,710.0
Provision for credit losses 0.0 0.0 0.0 0.0 0.0 0.0 0.0
-------- -------- -------- -------- -------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 631.5 641.4 631.7 616.6 596.4 1,904.6 1,710.0
NONINTEREST INCOME
Service charges on deposit accounts 151.9 147.3 147.1 143.4 140.5 446.3 418.4
Trust fees 43.3 40.6 39.4 49.1 48.2 123.3 144.1
Other charges, commissions, and fees 38.5 37.4 34.0 32.5 32.6 109.9 99.5
Merchant credit card fees 15.4 13.7 12.3 10.6 10.8 41.4 29.1
Investment securities gains 1.5 3.6 0.5 14.1 4.1 5.6 7.0
Other income 29.9 31.8 35.1 12.6 44.8 96.8 93.9
-------- -------- -------- -------- -------- ---------- ---------
Total Noninterest Income 280.5 274.4 268.4 262.3 281.0 823.3 792.0
NONINTEREST EXPENSES
Salaries and benefits 262.4 268.4 273.4 270.3 266.7 804.2 809.6
Net occupancy expenses 98.3 95.2 100.1 92.6 91.9 293.6 264.0
Communications 35.1 36.2 33.9 30.2 29.8 105.2 87.4
Outside contract fees 39.6 29.9 34.0 30.0 33.6 103.5 61.7
FDIC assessments 2.7 27.7 27.9 27.8 25.4 58.3 75.0
Amortization of intangibles 15.4 15.0 14.9 11.8 9.0 45.3 23.5
Office supplies 11.4 11.4 14.0 10.5 11.1 36.8 33.1
Advertising 11.9 15.8 10.1 14.6 12.0 37.8 32.2
Other real estate 0.5 0.0 0.0 (6.1) (0.7) 0.5 (6.3)
Provision for restructuring 6.6 4.3 4.8 2.3 139.0 15.7 139.0
Other expenses 48.8 50.0 38.6 54.2 50.0 137.4 140.4
-------- -------- -------- -------- -------- ---------- ---------
Total Noninterest Expenses 532.7 553.9 551.7 538.2 667.8 1,638.3 1,659.6
-------- -------- -------- -------- -------- ---------- ----------
INCOME BEFORE INCOME TAXES 379.3 361.9 348.4 340.7 209.6 1,089.6 842.4
Applicable income taxes 141.5 142.0 136.4 129.4 79.6 419.9 320.1
-------- -------- -------- -------- -------- ---------- ----------
NET INCOME $ 237.8 $ 219.9 $ 212.0 $ 211.3 $ 130.0 $ 669.7 $ 522.3
======== ======== ======== ======== ======== ========== ==========
____________________________________________________________________________________________________________________________________
Net income applicable to common stock $ 229.5 $ 211.6 $ 203.7 $ 203.0 $ 121.6 $ 644.8 $ 497.3
Average number of common
shares outstanding(in thousands) 77,516 77,470 76,464 76,656 81,700 77,153 81,690
Per common share:
Net income $ 2.96 $ 2.73 $ 2.66 $ 2.65 $ 1.49 $ 8.36 $ 6.09
Dividends paid $ 0.80 $ 0.75 $ 0.75 $ 0.75 $ 0.75 $ 2.30 $ 2.00
- ------------------------------------------------------------------------------------------------------------------------------------
Note: Certain prior year balances have been reclassified to conform to current year classifications.
See unaudited notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
_____________________________________________________________________________________________________
CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) First Interstate Bancorp
- -----------------------------------------------------------------------------------------------------
Nine Months Ended
----------------------------
September 30 September
(dollar amounts in millions) 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 670 $ 522
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 144 110
Provision for credit losses - -
Valuation adjustment on foreclosed property (2) (6)
Provision for deferred income taxes 106 102
Decrease (increase) in trading account securities (52) 104
Decrease in interest receivable 25 110
Increase (decrease) in interest payable 38 (3)
Other, net (73) (30)
-------- --------
Net Cash Provided by Operating Activities 856 909
Cash Flows from Investing Activities:
Held-to-maturity securities
Proceeds from maturities 4,510 5,026
Proceeds from sales - -
Purchases (182) (2,312)
Available-for-sale securities
Proceeds from maturities 330 6,089
Proceeds from sales 388 78
Purchases (8) (5,942)
Net loan principal orginations (2,401) (4,065)
Proceeds from sales of loans 975 2,010
Loans purchased (261) (1,116)
Acquisition of subsidiaries (77) 165
Proceeds from sales of premises and equipment 52 33
Purchases of premises and equipment (245) (178)
Proceeds from sales of other real estate 46 46
-------- --------
Net Cash Provided (Used) by Investing Activities 3,127 (166)
Cash Flows from Financing Activities:
Net (decrease) increase in deposits (2,278) 344
Deposits purchased 187 315
Net decrease in short term borrowings (1,543) (490)
Proceeds from long term debt issued 100 -
Repayments of long term debt (120) (271)
Cash dividends paid (201) (186)
Proceeds from Common Stock issued 52 40
Reacquisition of Common Stock (69) (435)
-------- --------
Net Cash Used by Financing Activities (3,872) (683)
-------- --------
Net Decrease in Cash and Cash Equivalents 111 60
Cash and cash equivalents at beginning of year 6,275 6,840
-------- --------
Cash and Cash Equivalents at end of period $6,386 $ 6,900
======== ========
Additional Disclosures
Loans transferred to OREO $ 34 $ 27
Loans originated to facilitate sale of OREO 1 11
Interest paid 846 622
Income taxes paid 316 224
- ---------------------------------------------------------------------------------------------------
See unaudited notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________________________________
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited) First Interstate Bancorp
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized
Net Gains on
Common Stock Available-
Preferred --------------------- Capital Retained for-sale Treasury
(dollar amounts in millions) Stock Shares (000s) Amount Surplus Earnings Securities Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ 350 74,204 $ 168 $ 1,692 $ 1,967 $ 1 $ (742) $ 3,436
Net income for the period 670 670
Cash dividends
Common Stock - $2.30 per share (176) (176)
Preferred Stock (25) (25)
Common Stock issued:
Stock Option and Restricted Stock Plans 751 (20) 54 34
Dividend Reinvestment Plan 222 16 16
Management Incentive Plan 23 2 2
Levy Bancorp acquisition 1,308 (5) 97 92
Common Stock repurchased (781) (69) (69)
Other adjustments 1 1
-------- ------- ------ -------- --------- -------- -------- --------
Balance at September 30, 1995 $ 350 75,727 $ 169 $ 1,667 $ 2,436 $ 1 $ (642) $ 3,981
======== ======= ====== ======== ========= ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------------------
See unaudited notes to consolidated financials
</TABLE>
<PAGE>
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Interstate Bancorp
1. The accompanying unaudited consolidated financial statements
of First Interstate Bancorp are prepared in conformity with
generally accepted accounting principles for interim
financial information. In the opinion of management, all
adjustments (all of which are of a normal recurring nature)
necessary to present fairly the consolidated financial
position and the results of operations for the periods
presented have been included. These unaudited consolidated
financial statements should be read in conjunction with the
audited consolidated financial statements included in the
First Interstate Bancorp Annual Report on Form 10-K for the
year ended December 31, 1994. Certain prior year balances
have been reclassified to conform to current year
classifications.
2. The following table provides the major components of
investment securities (in millions):
Gross Unrealized
Amortized ---------------- Estimated
Cost Gains Losses Fair Value
--------- ------ ------ ----------
September 30, 1995
Held-to-maturity:
U. S. Treasury and agencies $ 8,039 $ 42 $ 97 $ 7,984
State and political subdivisions 22 1 - 23
Other debt securities 1,259 4 56 1,207
-------- ----- ----- --------
Total held-to-maturity $ 9,320 $ 47 $ 153 $ 9,214
======== ===== ===== ========
Available-for-sale:
U. S. Treasury and agencies $ 17 $ - $ - $ 17
State and political subdivisions 2 - - 2
Corporate and Federal Reserve Stock 92 1 - 93
-------- ----- ----- --------
Total available-for-sale $ 111 $ 1 $ - $ 112
======== ===== ===== ========
December 31, 1994
Held-to-maturity:
U. S. Treasury and agencies $ 12,105 $ 16 $ 352 $ 11,769
State and political subdivisions 29 1 - 30
Other debt securities 1,561 - 80 1,481
-------- ----- ----- --------
Total held-to-maturity $ 13,695 $ 17 $ 432 $ 13,280
======== ===== ===== ========
Available-for-sale:
U. S. Treasury and agencies $ 42 $ - $ - $ 42
Corporate and Federal Reserve Stock 113 1 - 114
-------- ----- ----- --------
Total available-for-sale $ 155 $ 1 $ - $ 156
======== ===== ===== ========
During 1994 and the nine months ended September 30, 1995
there were no transfers or sales of held-to-maturity
securities, or transfers of available-for-sale securities to
trading.
The Financial Accounting Standards Board (FASB), at its
October 18, 1995 meeting, approved a proposal to provide
organizations a one-time opportunity to reconsider their
ability and intent to hold securities to maturity and allow
the transfer of securities from their held-to-maturity
portfolios without requiring the remaining portfolio to be
reported at fair value. These transfers would be permitted
during the period from the date of issuance of a Special
Report by the FASB (expected to be mid-November) through
December 31, 1995. The Corporation does not expect any
potential realignment of its securities portfolio to have a
significant impact on its financial statements.
3. In January 1995, the Corporation adopted Statement of
Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan," amended in October 1994
by SFAS No. 118 "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures," hereinafter
collectively referred to as SFAS 114. Under SFAS 114, a loan
is considered impaired when, based on current information
and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms
of the loan. SFAS 114 applies to all loans except large
groups of smaller-balance homogenous loans which are
collectively evaluated, loans measured at fair value or at
the lower of cost or fair value, leases and debt securities.
The statement does not address the overall adequacy of the
allowance for credit losses. When a loan is identified as
"impaired," accrual of interest ceases and any amounts that
are recorded as receivables are reversed out of interest
income.
Impaired loans of the Corporation include only commercial
(including financial and agricultural), real estate
construction and commercial real estate mortgage loans
classified as nonperforming loans. The Corporation measures
its impaired loans by using the fair value of the collateral
if the loan is collateral-dependent and the present value of
the expected future cash flows discounted at the loan's
effective interest rate if the loan is not collateral-
dependent. The difference between the recorded value of the
impaired loan and the fair value of the loan is defined as
the impairment allowance. Impairment allowances, if any, are
considered by the Corporation in determining the overall
adequacy of the allowance for credit losses. The adoption
of SFAS 114 resulted in no material change in unallocated
reserves of the allowance for credit losses.
The following table presents a breakdown of impaired loans
and the SFAS 114 impairment allowance related to impaired
loans (in millions):
September 30, 1995
----------------------
SFAS 114
Recorded Impairment
Investment Allowance
---------- ----------
Impaired loans:
Loans with impairment allowance:
Commercial, financial, and agricultural $ 39 $ 2
Real estate construction - -
Commercial real estate mortgage 11 2
----- -----
Total loans with impairment allowance 50 $ 4
=====
Loans without impairment allowance:
Commercial, financial, and agricultural 53
Real estate construction 6
Commercial real estate mortgage 28
-----
Total loans without impairment allowance 87
-----
Total impaired loans $ 137
=====
For the nine months ending September 30, 1995, impaired
loans averaged $158 million and the total interest income
was $6.8 million, all of which was recognized on a cash
basis. Interest payments received on impaired loans are
recorded as interest income unless there is doubt as to the
collectibility of the recorded investment. In those cases,
cash received is recorded as a reduction of principal.
4. Transactions in the allowance for credit losses were as
follows (in millions):
Quarter Ended Nine Months Ended
---------------------------- -----------------
Sept. 30 Dec. 31 Sept. 30 September 30
1995 1994 1994 1995 1994
-------- ------- -------- ------ -------
Balance at beginning of period $ 878 $ 952 $ 972 $ 934 $ 1,001
Provision for credit losses - - - - -
Other changes - acquisitions 1 20 2 24 46
-------- ------- -------- ------ -------
879 972 974 958 1,047
Deduct:
Loans charged-off 83 66 59 235 195
Less recoveries on loans
previously charged-off 51 28 37 124 100
-------- ------- -------- ------ -------
Net loans charged-off 32 38 22 111 95
-------- ------- -------- ------ -------
Balance at end of period $ 847 $ 934 $ 952 $ 847 $ 952
======== ======= ======== ====== =======
5. Other assets identified as being held for sale are valued at
the lower of cost or market and totaled $154 million at
September 30, 1995, compared to $26 million at December 31,
1994. These balances primarily represent residential and
commercial mortgage loans held for sale and are included in
other assets on the Consolidated Balance Sheet.
6. At September 30, 1995 and December 31, 1994, 15,000,000
shares of Preferred Stock (no par value) were authorized.
At September 30, 1995 and December 31, 1994, there were
outstanding 8,000,000 Depositary Shares, each representing a
one-eighth interest in a share of 9.875% Preferred Stock,
Series F. The Series F Preferred Stock is redeemable at any
time on or after November 15, 1996, at the option of the
Corporation, in whole or in part, at $200.00 per share
(equivalent to $25.00 per Depositary Share) plus accrued and
unpaid dividends to the redemption date.
At September 30, 1995 and December 31, 1994, there were
outstanding 6,000,000 Depositary Shares, each representing a
one-eighth interest in a share of 9.0% Preferred Stock,
Series G. The Series G Preferred Stock is redeemable
anytime on or after May 29, 1997, at the option of the
Corporation, in whole or in part, at $200.00 per share
(equivalent to $25.00 per Depositary Share) plus accrued and
unpaid dividends to the redemption date.
Dividends on both the Series F and Series G Preferred Stock
are cumulative and are paid quarterly on the last day of
March, June, September and December of each year.
At September 30, 1995, the cost of Common Stock in the
treasury averaged $74.98 per share compared to an average of
$73.64 at December 31, 1994. On April 28, 1995, the Board of
Directors authorized the repurchase of up to 7.6 million
shares of issued and outstanding Common Stock, representing
approximately 10% of the total number of shares outstanding,
to be made from time to time through mid-1997 in the open
market or through privately negotiated transactions. The
first 2.5 million shares purchased under the program will be
used for reissuance through the Corporation's various
employee benefit and stock option plans, and Stock Purchase
and Dividend Reinvestment Plan. The Corporation commenced
such purchases in July 1995. As of September 30, 1995, the
Corporation had repurchased 781,300 shares.
7. During the first nine months of 1995, the Corporation was a
party to four business combinations with operating entities
(University Savings Bank, Levy Bancorp, North Texas
Bancshares and Tomball National Bancshares) resulting in the
acquisition of $2.4 billion in assets and $1.9 billion in
deposits. University Savings Bank, North Texas Bancshares
and Tomball National Bancshares were cash transactions, and
the Corporation issued 1,308,388 shares of its common stock
(from its Treasury shares) for the acquisition of Levy
Bancorp. All four acquisitions were accounted for as
purchases.
In addition, the Corporation, through its subsidiary in
California, completed a Federal Deposit Insurance
Corporation assisted cash transaction resulting in the
acquisition of $187 million of deposits and $78 million of
loans from First Trust Bank.
8. For purposes of reporting cash flows, cash and cash
equivalents includes cash on hand, amounts due from banks,
time deposits with banks, federal funds sold and securities
purchased under agreements to resell having maturities of
three months or less. Federal funds are purchased and sold
for one-day periods. The effect of changes in foreign
exchange rates on cash balances is not material.
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Combined Balance Sheet as of
September 30, 1995, combines the historical consolidated balance sheets of First
Bank System, Inc. ("FBS"), First Interstate Bancorp ("FI"), FirsTier Financial,
Inc. ("FirsTier"), Midwestern Services, Inc., and Southwest Holdings, Inc. as if
the merger with FI (the "Merger") and the other acquisitions had been effective
on September 30, 1995, after giving effect to certain adjustments described in
the attached Notes to Unaudited Pro Forma Condensed Combined Financial
Statements. The Unaudited Pro Forma Condensed Combined Statements of Income for
the nine months ended September 30, 1995, and the year ended December 31, 1994,
present the combined results of operations of FBS, FI and FirsTier as if the
Merger and the FirsTier acquisition had been effective at the beginning of each
period, after giving effect to certain adjustments described in the attached
Notes to Unaudited Pro Forma Condensed Combined Financial Statements. The
Unaudited Pro Forma Condensed Combined Statements of Income for the years ended
December 31, 1993 and 1992, present only the combined results of operations of
FBS and FI as if the Merger had been effective at the beginning of each period,
after giving effect to certain adjustments described in the attached Notes to
Unaudited Pro Forma Condensed Combined Financial Statements.
The unaudited pro forma condensed combined financial statements and
accompanying notes reflect the application of the pooling of interests method of
accounting for the Merger. Under this method of accounting, the recorded
assets, liabilities, shareholders' equity, income and expenses of FBS and FI are
combined and recorded at their historical amounts.
The FirsTier acquisition is reflected using the purchase method of
accounting. Under this method of accounting, the purchase price will be
allocated to assets acquired and liabilities assumed based on their estimated
fair values at the closing of the acquisition. The amount of the purchase
accounting adjustments included in these unaudited pro forma condensed combined
financial statements are preliminary estimates. The actual amount of the
adjustments will be based on information available at that time and could be
different from the estimates.
The pro forma combined financial information presented is included for
informational purposes only and is not necessarily indicative of the results of
the future operations of the combined entity or the actual results that would
have been achieved had the Merger and the FirsTier acquisition been consummated
prior to the periods indicated.
The pro forma combined financial information should be read in conjunction
with the financial statements of First Interstate Bancorp and subsidiaries
included herewith and the financial statements of FBS and subsidiaries included
in its Current Report on Form 8-K filed March 3, 1995 and its Form 10-Q
Quarterly Report for the nine months ended September 30, 1995.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Pro Forma Condensed Combined Balance Sheet at September 30, 1995 ....... F-2
Unaudited Pro Forma Condensed Combined Statements of Income:
Nine months ended September 30, 1995 ........................................ F-3
Year ended December 31, 1994 ................................................ F-4
Year ended December 31, 1993 ................................................ F-5
Year ended December 31, 1992 ................................................ F-6
Notes to Unaudited Pro Forma Condensed Combined Financial Statements ............. F-7
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
FIRST BANK SYSTEM, INC.
MERGER WITH FIRST INTERSTATE BANCORP
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1995
First Interstate Bancorp FirsTier
------------------------ ----------------------
FBS Merger Purchase Other Pro Forma
(In Millions) Consolidated Historical Adjustments Historical Adjustments Acquisitions Combined
- ---------------------------------- ------------ ---------- ------------ ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $1,586 $5,916 $208 $10 $7,720
Federal funds sold and securities
purchased under agreements to
resell 260 470 97 12 839
Trading account securities 164 116 280
Held-to-maturity securities 9,320 ($4,000) 741 ($741) 5,320
Available-for-sale securities 3,302 112 261 741 100 4,516
Loans 25,877 35,967 2,191 266 64,301
Less allowance for credit losses 469 847 (250) 52 3 1,121
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loans 25,408 35,120 250 2,139 263 63,180
Bank premises and equipment 410 1,277 (40) 50 11 1,708
Interest receivable 189 326 35 550
Customers' liability on acceptances 165 54 1 220
Other assets 1,474 2,356 85 53 338 208 4,514
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total assets $32,958 $55,067 ($3,705) $3,585 $338 $604 $88,847
=========== =========== =========== =========== =========== =========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $5,779 $17,044 $471 $74 $23,368
Interest-bearing 16,116 31,192 2,305 656 50,269
----------- ----------- ----------- ----------- -----------
Total deposits 21,895 48,236 2,776 730 73,637
Federal funds purchased and
securities sold under agreements
to repurchase 1,602 307 ($2,115) 204 $202 (200) 0
Other short-term funds borrowed 2,554 69 (1,885) 6 4 748
Long-term debt 3,127 1,368 164 10 4,669
Acceptances outstanding 165 54 1 220
Other liabilities 879 1,052 435 58 11 2,435
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities 30,222 51,086 (3,565) 3,209 202 555 81,709
Shareholders' equity:
Preferred stock 105 350 455
Common stock 169 169 77 94 (84) 2 427
Capital surplus 900 1,667 (719) 5 225 45 2,123
Retained earnings 1,837 2,436 (140) 283 (283) 2 4,135
Unrealized (loss) gain on
securities, net of tax (3) 1 4 (4) (2)
Less cost of common stock
in treasury (272) (642) 642 (10) 282 0
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total shareholders' equity 2,736 3,981 (140) 376 136 49 7,138
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity $32,958 $55,067 ($3,705) $3,585 $338 $604 $88,847
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
F-2
<PAGE>
FIRST BANK SYSTEM, INC.
MERGER WITH FIRST INTERSTATE BANCORP
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
FirsTier
--------------------------
FBS First Interstate Purchase Pro Forma
(In Millions, Except Per Share Data) Consolidated Consolidated Historical Adjustments Combined
- --------------------------------------------- ------------ ---------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $1,693.0 $2,282.7 $142.9 $4,118.6
Securities:
Taxable 175.2 478.8 29.0 683.0
Exempt from federal income taxes 8.4 1.3 18.0 27.7
Other interest income 26.4 26.3 5.1 57.8
------------ ---------------- ------------ ------------ ---------
Total interest income 1,903.0 2,789.1 195.0 4,887.1
INTEREST EXPENSE
Deposits 538.2 721.8 78.3 1,338.3
Federal funds purchased and repurchase
agreements 87.6 69.4 8.2 $15.0 180.2
Other short-term funds borrowed 56.8 2.8 1.2 60.8
Long-term debt 140.5 90.5 6.8 237.8
------------ ---------------- ------------ ------------ ---------
Total interest expense 823.1 884.5 94.5 15.0 1,817.1
------------ ---------------- ------------ ------------ ---------
Net interest income 1,079.9 1,904.6 100.5 (15.0) 3,070.0
Provision for credit losses 84.0 0.8 84.8
------------ ---------------- ------------ ------------ ---------
Net interest income after provision for
credit losses 995.9 1,904.6 99.7 (15.0) 2,985.2
NONINTEREST INCOME
Credit card fees 171.0 41.4 7.3 219.7
Trust fees 127.5 123.3 12.6 263.4
Service charges on deposit accounts 93.3 446.3 12.8 552.4
Securities gains 5.6 5.6
Gain on sale of branches 31.0 31.0
Other 163.0 206.7 9.7 379.4
------------ ---------------- ------------ ------------ ---------
Total noninterest income 585.8 823.3 42.4 1,451.5
NONINTEREST EXPENSE
Salaries and benefits 405.9 804.2 41.4 1,251.5
Occupancy and equipment 146.1 293.5 10.7 450.3
Amortization of goodwill and other intangible
assets 42.2 45.3 1.3 12.7 101.5
Restructuring 15.7 15.7
Other 324.4 479.6 30.6 834.6
------------ ---------------- ------------ ------------ ---------
Total noninterest expense 918.6 1,638.3 84.0 12.7 2,653.6
------------ ---------------- ------------ ------------ ---------
Income before income taxes 663.1 1,089.6 58.1 (27.7) 1,783.1
Applicable income taxes 245.7 419.9 15.5 (5.6) 675.5
------------ ---------------- ------------ ------------ ---------
Net Income $417.4 $669.7 $42.6 ($22.1) $1,107.6
============ ================ ============ ============ =========
Net income applicable to common equity $411.8 $644.8 $42.6 ($22.1) $1,077.1
============ ================ ============ ============ =========
EARNINGS PER COMMON SHARE
Average common and common equivalent shares 135,007,519 344,505,319
Net income $3.05 $3.13
=========== ===========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
F-3
<PAGE>
FIRST BANK SYSTEM, INC.
MERGER WITH FIRST INTERSTATE BANCORP
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
FirsTier
--------------------------
FBS First Interstate Purchase Pro Forma
(In Millions, Except Per Share Data) Consolidated Consolidated Historical Adjustments Combined
- --------------------------------------------- ------------ ---------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $1,914.7 $2,303.7 $161.9 $4,380.3
Securities:
Taxable 327.9 841.6 44.3 1,213.8
Exempt from federal income taxes 12.0 2.7 20.5 35.2
Other interest income 33.5 44.0 4.8 82.3
------------ ---------------- ------------ ------------ ---------
Total interest income 2,288.1 3,192.0 231.5 5,711.6
INTEREST EXPENSE
Deposits 597.3 725.0 82.1 1,404.4
Federal funds purchased and repurchase
agreements 103.1 26.5 7.9 $16.8 154.3
Other short-term funds borrowed 20.4 7.7 1.4 29.5
Long-term debt 147.9 106.3 5.7 259.9
------------ ---------------- ------------ ------------ ---------
Total interest expense 868.7 865.5 97.1 16.8 1,848.1
------------ ---------------- ------------ ------------ ---------
Net interest income 1,419.4 2,326.5 134.4 (16.8) 3,863.5
Provision for credit losses 123.6 -- (0.2) 123.4
------------ ---------------- ------------ ------------ ---------
Net interest income after provision for
credit losses 1,295.8 2,326.5 134.6 (16.8) 3,740.1
NONINTEREST INCOME
Credit card fees 179.0 39.7 9.6 228.3
Trust fees 159.2 193.3 16.1 368.6
Service charges on deposit accounts 127.3 561.9 15.6 704.8
Securities (losses) gains (115.0) 21.1 (3.7) (97.6)
Other 208.4 238.3 14.4 461.1
------------ ---------------- ------------ ------------ ---------
Total noninterest income 558.9 1,054.3 52.0 1,665.2
NONINTEREST EXPENSE
Salaries and benefits 556.4 1,079.9 52.8 1,689.1
Occupancy and equipment 192.1 356.6 16.8 565.5
Amortization of goodwill and other
intangible assets 50.4 35.3 1.7 16.9 104.3
Merger and integration 122.7 122.7
Restructuring 141.3 141.3
Other 427.8 584.7 46.8 1,059.3
------------ ---------------- ------------ ------------ ---------
Total noninterest expense 1,349.4 2,197.8 118.1 16.9 3,682.2
------------ ---------------- ------------ ------------ ---------
Income from continuing operations before
income taxes 505.3 1,183.0 68.5 (33.7) 1,723.1
Applicable income taxes 191.8 449.5 17.6 (6.4) 652.5
------------ ---------------- ------------ ------------ ---------
Income from continuing operations $313.5 $733.5 $50.9 ($27.3) $1,070.6
============ ================ ============ ============ =========
Income from continuing operations applicable
to common equity $300.9 $700.2 $50.9 ($27.3) $1,024.7
============ ================ ============ ============ =========
EARNINGS PER COMMON SHARE
Average common and common equivalent shares 136,274,991 353,672,040
Income from continuing operations $2.21 $2.90
============ ===========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
F-4
<PAGE>
<TABLE>
<CAPTION>
FIRST BANK SYSTEM, INC.
MERGER WITH FIRST INTERSTATE BANCORP
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1993
FBS First Interstate Pro Forma
(In Millions, Except Per Share Data) Consolidated Consolidated Combined
- ------------------------------------------------------ ------------ ---------------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Loans $1,730.7 $1,980.9 $3,711.6
Securities:
Taxable 352.1 861.4 1,213.5
Exempt from federal income taxes 14.6 2.9 17.5
Other interest income 37.1 99.0 136.1
------------ ---------------- -----------
Total interest income 2,134.5 2,944.2 5,078.7
INTEREST EXPENSE
Deposits 648.3 719.9 1,368.2
Federal funds purchased and repurchase agreements 31.8 10.2 42.0
Other short-term funds borrowed 20.1 5.8 25.9
Long-term debt 96.1 136.2 232.3
------------ ---------------- -----------
Total interest expense 796.3 872.1 1,668.4
------------ ---------------- -----------
NET INTEREST INCOME 1,338.2 2,072.1 3,410.3
Provision for credit losses 133.1 112.6 245.7
------------ ---------------- -----------
Net interest income after provision for credit losses 1,205.1 1,959.5 3,164.6
NONINTEREST INCOME
Credit card fees 137.1 44.1 181.2
Trust fees 146.1 177.4 323.5
Service charges on deposit accounts 126.0 513.0 639.0
Securities gains 0.3 9.7 10.0
Other 209.4 210.0 419.4
------------ ---------------- -----------
Total noninterest income 618.9 954.2 1,573.1
NONINTEREST EXPENSE
Salaries and benefits 538.9 975.3 1,514.2
Occupancy and equipment 190.4 337.2 527.6
Amortization of goodwill and other intangible assets 41.3 24.2 65.5
Merger and integration 72.2 72.2
Other 421.9 695.7 1,117.6
------------ ---------------- -----------
Total noninterest expense 1,264.7 2,032.4 3,297.1
------------ ---------------- -----------
Income from continuing operations before income taxes,
extraordinary item and cumulative effect of changes
in accounting principles 559.3 881.3 1,440.6
Applicable income taxes 198.6 319.9 518.5
------------ ---------------- -----------
Income from continuing operations before extraordinary
item and cumulative effect of changes in accounting
principles $360.7 $561.4 $922.1
============ ================ ===========
Income from continuing operations before extraordinary
item and cumulative effect of changes in accounting
principles applicable to common equity $331.5 $514.8 $846.3
============ ================ ===========
EARNINGS PER COMMON SHARE
Average common and common equivalent shares 134,588,664 343,147,811
Income from continuing operations before extraordinary
item and cumulative effect of changes in accounting
principles $2.46 $2.47
============ ===========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
F-5
<PAGE>
<TABLE>
<CAPTION>
FIRST BANK SYSTEM, INC.
MERGER WITH FIRST INTERSTATE BANCORP
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1992
FBS First Interstate Pro Forma
(In Millions, Except Per Share Data) Consolidated Consolidated Combined
- --------------------------------------------------------- ---------------- ---------------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Loans $1,687.2 $2,238.8 $3,926.0
Securities:
Taxable 336.5 746.9 1,083.4
Exempt from federal income taxes 12.0 3.9 15.9
Other interest income 70.4 200.1 270.5
---------------- ---------------- -----------
Total interest income 2,106.1 3,189.7 5,295.8
INTEREST EXPENSE
Deposits 797.7 932.8 1,730.5
Federal funds purchased and repurchase agreements 37.1 10.4 47.5
Other short-term funds borrowed 17.1 4.0 21.1
Long-term debt 101.2 227.9 329.1
---------------- ---------------- -----------
Total interest expense 953.1 1,175.1 2,128.2
---------------- ---------------- -----------
Net interest income 1,153.0 2,014.6 3,167.6
Provision for credit losses 191.7 314.3 506.0
---------------- ---------------- -----------
Net interest income after provision for credit losses 961.3 1,700.3 2,661.6
NONINTEREST INCOME
Credit card fees 116.9 37.3 154.2
Trust fees 127.8 170.3 298.1
Service charges on deposit accounts 114.8 478.9 593.7
Securities gains (losses) 46.3 (1.8) 44.5
Other 207.9 227.4 435.3
---------------- ---------------- -----------
Total noninterest income 613.7 912.1 1,525.8
NONINTEREST EXPENSE
Salaries and benefits 521.2 1,035.4 1,556.6
Occupancy and equipment 170.4 359.4 529.8
Amortization of goodwill and other intangible assets 34.0 33.0 67.0
Merger and integration 84.0 84.0
Other real estate 45.1 159.6 204.7
Other 391.6 621.8 1,013.4
---------------- ---------------- -----------
Total noninterest expense 1,246.3 2,209.2 3,455.5
---------------- ---------------- -----------
Income from continuing operations before income taxes
and cumulative effect of changes in accounting principles 328.7 403.2 731.9
Applicable income taxes 115.7 120.9 236.6
---------------- ---------------- -----------
Income from continuing operations before cumulative
effect of changes in accounting principles $213.0 $282.3 $495.3
================ ================ ===========
Income from continuing operations before cumulative
effect of changes in accounting principles applicable
to common equity $181.4 $223.1 $404.5
================ ================ ===========
EARNINGS PER COMMON SHARE
Average common and common equivalent shares 124,670,657 312,722,239
Income from continuing operations before cumulative
effect of changes in accounting principles $1.46 $1.29
================ ===========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
F-6
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Note A: Announced Mergers and Acquisitions
On November 5, 1995, First Bank System, Inc. ("FBS") signed a definitive
agreement with First Interstate Bancorp ("FI") pursuant to which a wholly owned
acquisition subsidiary of FBS will be merged with and into FI, subject to
certain conditions. FI is an interstate financial services holding company based
in Los Angeles, California, with approximately $55.1 billion in assets, $48.2
billion in deposits and $4.0 billion in shareholders' equity. The agreement
calls for a tax-free exchange of 2.6 shares of common stock of FBS for each
common share of FI, or approximately 200 million FBS shares. The merger of FI
and FBS' acquisition subsidiary (the Merger) will be accounted for by FBS under
the pooling of interests method of accounting in accordance with APB No. 16 and,
accordingly, this method has been applied in the unaudited pro forma condensed
combined financial statements. Under this method of accounting, the recorded
assets, liabilities, shareholders' equity, income and expenses of FBS and FI are
combined and recorded at their historical amounts.
On August 6, 1995, FBS signed a definitive purchase agreement to acquire
FirsTier Financial, Inc. ("FirsTier"), a regional financial services holding
company based in Omaha, Nebraska, with approximately $3.6 billion in assets,
$2.8 billion in deposits and $376 million in shareholders' equity. The
agreement calls for a tax-free exchange of .8829 shares of FBS common stock for
each common share of FirsTier, or 16.6 million FBS shares. The acquisition of
FirsTier will be accounted for by FBS under the purchase method of accounting in
accordance with APB No. 16 and, accordingly, this method has been applied in the
unaudited pro forma condensed combined financial statements. Under this method
of accounting, the purchase price will be allocated to assets acquired and
liabilities assumed based on their estimated fair value at the closing of the
transaction. The historical cost of FirsTier's assets and liabilities
approximates fair value, making mark-to-market adjustments immaterial.
Accordingly, the historical cost of FirsTier's assets and liabilities have been
combined with the historical consolidated balance sheet of FBS. Certain
adjustments, primarily to accrue for costs related to the FirsTier acquisition
expected to be incurred within one year of closing, are not material and have
not been reflected in the unaudited pro forma condensed combined financial
statements.
FBS completed the acquisitions of two commercial bank holding companies --
Midwestern Services, Inc. and Southwest Holdings, Inc. -- both in Omaha,
Nebraska on November 1, 1995. Together, the two companies have total assets of
approximately $424 million and deposits of approximately $380 million. The
acquisitions were accounted for under the purchase method of accounting as
described above.
On August 22, 1995, FBS signed a definitive agreement to buy the corporate
trust relationships and accounts of BankAmerica Corporation ("Corporate Trust").
Note B: Basis of Presentation
The Unaudited Pro Forma Condensed Combined Balance Sheet is based on the
unaudited consolidated balance sheets of FBS, FI, FirsTier, Midwestern Services,
Inc. and Southwest Holdings, Inc. as of September 30, 1995. In addition, the
Unaudited Pro Forma Condensed Combined Balance Sheet reflects the intangible
assets related to the purchase of the Corporate Trust relationships and
accounts. The Unaudited Pro Forma Condensed Combined Statements of Income are
based on the unaudited consolidated statements of income of FBS, FI and FirsTier
for the nine months ended September 30, 1995, and the audited consolidated
statements of income for the year ended December 31, 1994. The Unaudited Pro
Forma Condensed Combined Statements of Income for the years ended December 31,
1993, and 1992, are based on the audited consolidated statements of income of
FBS and FI for such years. The Unaudited Pro Forma Condensed Combined Statements
of Income do not include the results of operations of Midwestern Services, Inc.
and Southwest Holdings, Inc., or the fees from Corporate Trust, as they are
immaterial.
FBS expects to achieve operating cost savings by various means including
reductions in staff, consolidation of certain data processing and other back
office operations, and consolidation and elimination of certain duplicate or
excess office facilities in connection with the Merger and the acquisitions.
The operating cost savings are expected to be
F-7
<PAGE>
achieved in various amounts at various times during the year subsequent to the
closing and not ratably over, or at the beginning or end of, such periods. No
adjustment has been included in the unaudited pro forma condensed combined
financial statements for the anticipated operating cost savings. There can be
no assurance that anticipated operating cost savings will be achieved in the
amounts or at the times anticipated.
Certain amounts in the historical financial statements of FI and FirsTier
have been reclassified to conform with FBS's historical financial statement
presentation.
Financial results for FBS for 1994 include merger-related items with an
after-tax effect of $156.9 million ($1.15 per share) associated with the merger
of Metropolitan Financial Corporation. Financial results for FBS in 1993
include merger-related charges with an after-tax effect of $50.0 million ($.37
per share) associated with the merger of Colorado National Bankshares, Inc.
Included in FBS's results of operations in 1992 are after-tax merger-related
charges of $81.8 million ($.66 per share) associated with the merger of Western
Capital Investment Corporation and Bank Shares Incorporated. The FI results of
operations for the nine months ended September 30, 1995, and year ended December
31, 1994, include after-tax charges of $9.5 million and $87.6 million,
respectively, related to the adoption of a restructuring plan to improve
efficiency and better position FI for the introduction of full interstate
banking.
The FBS results of operations in 1992 also include the effect of adopting
two new accounting standards: Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes" and SFAS No. 106, "Employers
Accounting for Postretirement Benefits Other than Pensions". FI's results of
operations in 1993 reflect the adoption of SFAS No. 109 and SFAS No. 106.
Pro forma adjustments related to these business combinations represent
management's best estimate based on all available information at this time.
These adjustments may change as additional information becomes available.
Note C: Securities
FI securities may be reclassified to available for sale in accordance with
the pending one-time reclassification opportunity approved by the Financial
Accounting Standards Board at its October 18, 1995 meeting. Based on this one-
time reclassification and preliminary analysis, FBS anticipates selling
approximately $4.0 billion of securities to reduce excess liquidity based on the
lower expected liquidity requirements of the combined organizations, and
accordingly, this adjustment has been reflected in the unaudited pro forma
condensed combined financial statements. In addition, FBS anticipates recording
FirsTier's investment portfolio as available for sale in connection with the
application of purchase accounting.
Note D: Goodwill and Other Intangible Assets
As explained in Note B, purchase accounting adjustments may change as
additional information becomes available. When the ultimate allocation of the
purchase price for FirsTier is made, remaining intangible assets will be
recorded. Based on current estimates, the amount of intangible assets relating
to FirsTier is $338 million, calculated as the purchase price of $714 million
less FirsTier September 30, 1995 common equity of $376 million.
Amortization expense relating to the FirsTier acquisition has been included
in the Unaudited Pro Forma Condensed Combined Statements of Income for the nine
months ended September 30, 1995 and the year ended December 31, 1994.
Amortization expense was calculated based on the intangible asset balance using
the straight-line method over an average estimated period of benefit of 20 years
which is comprised of 25 years for goodwill and 10 years for other intangible
assets. The final allocation of intangible assets between goodwill and other
intangible assets, as well as the methods of amortization, has not been
determined. Subsequent changes to the purchase adjustments, as well as the final
allocation of the intangible assets between goodwill and other intangible assets
will result in an adjustment to goodwill, which will have a corresponding impact
on amortization expense. Accordingly, pro forma combined income for the nine
month period ended September 30, 1995 and the year ended December 31, 1994,
would also change, as well as the related pro forma combined earnings per share
amounts.
F-8
<PAGE>
Note E: Merger and Integration Accruals
In connection with the Merger, FBS expects to incur merger-related costs as
follows: $175 million for severance, $40 million for occupancy/equipment
write-offs, $210 million for conversion costs, and $50 million for other
merger-related charges. In addition, the combined allowance for credit losses
was reduced by $250 million to conform FI's reserve methodology to that of FBS
following the Merger. These amounts have been reflected in the Unaudited Pro
Forma Condensed Combined Balance Sheet as of September 30, 1995. These amounts
will be recorded in the financial statements in accordance with generally
accepted accounting principles.
The FirsTier definitive agreement requires FirsTier to establish such
additional accruals and reserves as may be necessary to reflect the plans of FBS
with respect to the conduct of FirsTier's business following the acquisition and
to provide for certain costs and expenses relating to the acquisition,
consistent with generally accepted accounting principles. No accruals or
adjustments have been reflected in the pro forma condensed combined financial
statements related to this at this time as these costs are not expected to be
material.
Note F: Shareholders' Equity
In conjunction with the Merger, FBS will exchange 2.6 shares of its common
stock for each outstanding share of the common stock of FI. Common stock in
the Unaudited Pro Forma Condensed Combined Balance Sheet has been adjusted to
reflect the par value of FBS common stock to be issued, with a related
adjustment to capital surplus. FI's treasury stock will be retired in
conjunction with the Merger and has been eliminated in the Unaudited Pro Forma
Condensed Combined Balance Sheet. FI's retained earnings reflects the
adjustments for anticipated merger-related costs as discussed above.
In conjunction with the acquisition of FirsTier, FBS will exchange .8829
shares of its common stock for each share of common stock of FirsTier. As part
of purchase accounting adjustments, retained earnings of FirsTier have been
eliminated. As previously announced, FBS intends to repurchase common shares
equal to approximately one-half of the number of shares to be issued in
connection with the FirsTier acquisition. These shares, as well as all other
treasury shares, will be issued in connection with purchase acquisitions and
other previously authorized purposes. Accordingly, the treasury stock has been
eliminated in the Unaudited Pro Forma Condensed Combined Balance Sheet.
Note G: Income Tax Provisions
The income tax provision for adjustments related to the FirsTier
acquisition reflected in the Unaudited Pro Forma Condensed Combined Statements
of Income has been computed at FBS's effective combined federal and state
marginal tax rate.
F-9
