-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kxhj8mWlikMPhn1jSUxWwgsMC724qVi4wBkw5VJHX/c+3mS1GeMX/Q/0i7ID/PEt 50bwVP2xZU8JFboNjRKCbQ== 0000105982-95-000058.txt : 19951118 0000105982-95-000058.hdr.sgml : 19951118 ACCESSION NUMBER: 0000105982-95-000058 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951109 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST INTERSTATE BANCORP /DE/ CENTRAL INDEX KEY: 0000105982 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 951418530 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04114 FILM NUMBER: 95588855 BUSINESS ADDRESS: STREET 1: 633 W FIFTH ST-T8-19 STREET 2: PO BOX 54068 CITY: LOS ANGELES STATE: CA ZIP: 90054 BUSINESS PHONE: 2136143001 FORMER COMPANY: FORMER CONFORMED NAME: WESTERN BANCORPORATION DATE OF NAME CHANGE: 19911124 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period ended September 30, 1995 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 1-4114 FIRST INTERSTATE BANCORP (Exact name of registrant as specified in its charter) DELAWARE 95-1418530 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 633 WEST FIFTH STREET LOS ANGELES, CALIFORNIA 90071 (Address of principal executive offices) (Zip Code) (213) 614-3001 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant has been required to file such (reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: CLASS OUTSTANDING AT OCTOBER 31, 1995 Common stock, $2 par value 75,744,254 shares FIRST INTERSTATE BANCORP FORM 10-Q Quarter Ended September 30, 1995 CONTENTS PAGE Part I Item 1. Financial Financial Statements Information Consolidated Balance Sheet 2 Consolidated Statement of Income 3 Consolidated Statement of Cash Flows 4 Consolidated Statement of Shareholders' Equity 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Average Balances, Interest and Average Rates 20 Part II Item 6. Other Exhibits and Reports on Form 8-K 22 Information Signatures 23 Exhibit 11 Computation of Earnings Per Share 24 Exhibit 12 Computation of Ratio of Earnings to Fixed Charges 25 Exhibit 27 Financial Data Schedule 26 PART 1. FINANCIAL INFORMATION Item 1: Financial Statements --------------------
____________________________________________________________________________________________________________________________________ CONSOLIDATED BALANCE SHEET First Interstate Bancorp - ------------------------------------------------------------------------------------------------------------------------------------ 1995 1994 ------------------------------------- -------------------------- (dollar amounts in millions) September 30 June 30 March 31 December 31 September 30 - ------------------------------------------------------------------------------------------------------------------------------------ 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 notes to consolidated financial statements
____________________________________________________________________________________________________________________________________ CONSOLIDATED STATEMENT OF INCOME 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 - ------------------------------------------------------------------------------------------------------------------------------------ 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 notes to consolidated financial statements
_____________________________________________________________________________________________________ CONSOLIDATED STATEMENT OF CASH FLOWS First Interstate Bancorp - ----------------------------------------------------------------------------------------------------- Nine Months Ended ----------------------------- September 30 September (dollar amounts in millions) 1995 1994 - ------------------------------------------------------------------------------------------------------ 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 originations (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 notes to consolidated financial statements
___________________________________________________________________________________________________________________________________ CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY 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 - ----------------------------------------------------------------------------------------------------------------------------------- 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 notes to consolidated financials
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. MANAGEMENT'S DISCUSSION AND ANALYSIS First Interstate Bancorp Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations COMPARISON OF THIRD QUARTER RESULTS: The Corporation recorded net income for the third quarter of 1995 of $237.8 million ($2.96 per share). This includes the effect of a $23.9 million net benefit from the Federal Deposit Insurance Corporation (FDIC) refund for previously paid deposit insurance premiums ($14.4 million after taxes, or $0.19 per share) and $6.6 million of restructuring charges ($3.9 million after taxes, or $0.05 per share). Net income of $130.0 million ($1.49 per share) for the 1994 third quarter included the effect of a $139.0 million restructuring charge ($86.2 million after taxes, or $1.05 per share). Before the effect of restructuring charges in both third quarters and the FDIC refund in the 1995 third quarter, income after taxes in the 1995 third quarter amounted to $227.3 million ($2.82 per share), an increase of 5.1% from $216.2 million ($2.54 per share) in the 1994 third quarter. Taxable-equivalent net interest income was $636.4 million in the third quarter of 1995, an increase of 5.7% from a year earlier. This increase resulted primarily from expansion of the net interest margin, up 23 basis points to 5.45%. Average earning assets in the third quarter of 1995 reflect loan growth of $6.1 billion (21.0%), largely offset by a decline in investment securities of $5.7 billion (35.9%). The net interest margin in the 1995 third quarter was unchanged from the second quarter margin of 5.45%, reflecting a lower level of investment securities and corporate purchased funds. Given current economic conditions, the Corporation expects a relatively stable net interest margin over the near term. Average loans and leases increased $6.1 billion (21.0%) from the 1994 third quarter and declined $83 million from the second quarter to $35.4 billion in the 1995 third quarter. Instalment loans averaged $12.6 billion in the third quarter of 1995, up $670 million (5.6%) from a year earlier and up $174 million (1.4%) from the second quarter of 1995. Average commercial loans outstanding were up $1.2 billion (13.6%) from a year earlier and down $150 million (1.5%) from the 1995 second quarter to an average of $9.7 billion. Residential real estate mortgages averaged $6.6 billion, up $2.5 billion (62.7%) from a year ago and down $116 million (1.7%) from the 1995 second quarter level. Commercial real estate mortgages averaged $4.7 billion, $1.1 billion (30.0%) above a year ago and essentially flat with the 1995 second quarter. Average construction loans increased $367 million (47.1%) from the 1994 third quarter and $27 million (2.4%) from the 1995 second quarter to $1.1 billion in the latest period. At September 30, 1995, loans and leases totaled $36.0 billion, up $5.6 billion (18.6%) from a year earlier and up $63 million from June 30, 1995. Instalment loans totaled $12.7 billion at September 30, 1995, an increase of $520 million (4.3%) from a year earlier and an increase of $101 million from June 30, 1995. At the same time, commercial loans were $10.2 billion, up $1.2 billion (13.7%) from a year earlier and up $156 million (1.5%) from the end of the 1995 second quarter. Residential real estate mortgages totaled $6.5 billion, $2.3 billion (53.1%) above a year ago and $125 million (1.9%) below the June 30, 1995, level. Commercial real estate mortgages amounted to $4.7 billion at September 30, 1995, $1.0 billion (26.2%) above a year ago and $98 million (2.0%) below June 30, 1995. Construction loans were $1.2 billion at September 30, 1995, up $339 million (41.6%) from a year earlier and up $9 million from the end of the second quarter. As a result of maturities and paydowns, investment securities held to maturity declined $5.3 billion (36.3%) from a year earlier and declined $1.5 billion (13.7%) from June 30, 1995, to $9.3 billion at September 30, 1995. These proceeds supported the growth in loans between the 1994 and 1995 third quarters. Between the second and third quarters of 1995, these proceeds were used to reduce corporate purchased funds. U.S. Treasury and agency-backed securities declined $5.0 billion (38.2%) from a year earlier to $8.0 billion at September 30, 1995. Of the remaining balance, $2.7 billion were U.S. Treasury securities and $5.3 billion were government agency securities. Of the $5.3 billion of government agency securities at September 30, 1995, the majority were backed by mortgages. All other investment securities amounted to $1.3 billion at the end of September 1995, down $336 million (20.8%) from a year earlier and down $129 million (9.1%) from June 30, 1995. Total deposits averaged $47.8 billion in the 1995 third quarter, up $1.2 billion (2.6%) from the 1994 third quarter and up slightly from the second quarter. Average deposits in consumer savings, time and net transaction accounts increased $584 million (1.4%) from the 1994 third quarter to an average of $41.0 billion in the 1995 third quarter. These deposits increased $250 million from $40.7 billion in the 1995 second quarter. The Corporation's CDs over $100,000 increased $266 million (26.6%) from the 1994 third quarter and declined $181 million (12.5%) from the 1995 second quarter to an average of $1.3 billion. At the same time, short term borrowings, primarily federal funds purchased, averaged $672 million, up $60 million from the 1994 third quarter and down $1.2 billion from the 1995 second quarter. Based on an assessment of the Corporation's current risk profile, no provision for credit losses for the Corporation has been recorded since the fourth quarter of 1993. Loans charged off, net of recoveries, were $32.1 million (0.36% of average loans) in the third quarter of 1995, compared to $22.4 million (0.30%) reported for the comparable 1994 quarter. The Corporation continued to experience a strong level of recoveries on prior period chargeoffs. Noninterest income totaled $280.5 million in the third quarter of 1995, compared to $281.0 million reported for the 1994 third quarter. Noninterest income in the 1995 third quarter included $5.8 million of venture capital gains. The 1994 third quarter included $14.7 million of venture capital gains, of which $11.6 million were included in the other income category and $3.1 million were included with investment securities gains. Service charges on deposit accounts rose $11.4 million (8.1%) from the 1994 level to $151.9 million, while trust fees declined $4.9 million (10.2%) to $43.3 million. The decline in trust fees reflects the previously announced disposition of Denver Investment Advisors (DIA), a subsidiary of First Interstate Bank of Denver. Since the disposition of DIA, trust fees have increased on a consecutive quarterly basis, with third quarter 1995 trust fees up $3.9 million (9.9%) from the 1995 first quarter. Among the other components of noninterest income, revenues from sales of investment products have increased $4.1 million (43.4%) over the 1994 third quarter to a total of $13.6 million in the 1995 third quarter. Total noninterest expenses amounted to $532.7 million in the 1995 third quarter, including $6.6 million of restructuring charges and the $23.9 million net benefit from the FDIC refund, as previously noted. Excluding restructuring charges and the net benefit from the FDIC refund, noninterest expenses were flat with the 1995 second quarter. Noninterest expenses before the effect of restructuring charges and including the effect of completed acquisitions were $526.1 million, a decline of $2.7 million from the comparable 1994 quarter. Due to acquisitions completed since September 1994, expenses arising from the amortization of goodwill and other intangibles increased $6.4 million from the year earlier quarter to a total of $15.4 million in the 1995 third quarter. The Corporation's efficiency ratio for the 1995 third quarter was 57.3%, which reflects noninterest expenses before restructuring charges and ORE expenses as a percent of taxable-equivalent net interest income plus noninterest income. This compares to 59.6% in the 1995 second quarter and 60.0% in the 1994 third quarter. In the third quarter of 1995, the Corporation recorded income tax expense of $141.5 million, resulting in an effective income tax rate of 37.3%. This compares to an effective tax rate of 38.0% in the comparable 1994 quarter. COMPARISON OF NINE MONTHS RESULTS: The Corporation recorded net income for the first nine months of 1995 of $669.7 million, or $8.36 per share. This includes the effect of $15.7 million of restructuring charges ($9.5 million after taxes, or $0.12 per share) and represents an increase in earnings per share of 37.3% from the first nine months of 1994. Net income of $522.3 million ($6.09 per share) in the comparable 1994 period included a restructuring charge of $139.0 million ($86.2 million after taxes, or $1.05 per share), as well as a benefit from the recognition of nonrecurring items of $45 million ($27.9 million after taxes, or $0.34 per share). Before the effect of restructuring charges in 1995 and 1994 and nonrecurring items in 1994, income after taxes in the first nine months of 1995 amounted to $679.2 million ($8.48 per share), representing an increase in earnings per share of 24.7% from $6.80 per share in the first nine months of 1994. Taxable-equivalent net interest income was $1,921.4 million in the first nine months of 1995, up 11.3% from a year earlier. This increase resulted from expansion of the net interest margin to 5.41% from 5.09% in the 1994 period, together with average earning asset growth of $2.2 billion (4.9%). Average loans increased $7.6 billion (27.5%) from the first nine months of 1994 to $35.2 billion in the 1995 period. Instalment loans averaged $12.5 billion in the first nine months of 1995, up $1.0 billion (8.7%) from the year earlier. Residential real estate mortgages averaged $6.6 billion, $3.1 billion (89.8%) above the first nine months of 1994. Commercial real estate mortgages averaged $4.7 billion, $1.2 billion (33.8%) above a year ago. Average commercial loans were up $1.6 billion (19.9%) from the first nine months of 1994 to $9.7 billion in the 1995 period. Average construction loans increased $326 million (42.1%) from the first nine months of 1994 to $1.1 billion. Total deposits averaged $47.8 billion in the first nine months of 1995, up $2.0 billion (4.3%) from the comparable 1994 period. Consumer savings, time and net transaction accounts increased $1.3 billion (3.2%) from the first nine months of 1994 to an average of $41.0 billion in the 1995 period. The Corporation's CDs over $100,000 increased $402 million (41.5%) from the year earlier. At the same time, short term borrowings, primarily federal funds purchased, averaged $1.7 billion, up $1.1 billion. The higher level of short term borrowings, together with maturing securities and deposits, supported loan growth in the first nine months of 1995. No provision for credit losses for the consolidated Corporation has been recorded since the fourth quarter of 1993. Loans charged off, net of recoveries, were $111.9 million (0.43% of average loans) for the current year to date, compared to $94.8 million (0.46%) in the 1994 period. Noninterest income totaled $823.3 million for the first nine months of 1995, an increase of $31.3 million (4.0%) from a year earlier. Service charges on deposit accounts increased $27.9 million (6.7%) from the 1994 period to $446.3 million and trust fees declined $20.8 million (14.4%) to $123.3 million. The decline in trust fees reflects the previously announced disposition of Denver Investment Advisors, a subsidiary of First Interstate Bank of Denver. Among the other components of noninterest income, revenues from sales of investment products have increased $10.4 million (40.1%) over the first nine months of 1994 to a total of $36.4 million in the 1995 period. Noninterest expenses totaled $1,638.3 million for the first nine months of 1995. This includes $15.7 million of restructuring charges in the current year, versus $139.0 million in the 1994 period, as previously noted. Noninterest expenses before the effect of these charges and including the effect of completed acquisitions were $1,622.6 million in the current year, an increase of $102.0 million (6.7%) from the first nine months of 1994. Approximately $41.8 million of the increase represents higher outside contract fees, $29.6 million reflects higher occupancy and equipment expenses, and $21.8 million represents higher charges resulting from the amortization of intangibles. These increases were partially offset by the $23.9 million net benefit from the FDIC refund. For the first nine months of 1995, the Corporation recorded income tax expense of $419.9 million, resulting in an effective income tax rate of 38.5%. This compares to an effective tax rate of 38.0% in the comparable 1994 period. LIQUIDITY MANAGEMENT: Liquidity refers to the Corporation's ability to adjust its future cash flows to meet the needs of depositors and borrowers and to fund operations on a timely and cost effective basis. The Corporation continues to utilize the core deposits gathered through its extensive interstate retail banking network as a key source of low-cost funding. Core deposits, defined as demand deposits, interest bearing consumer deposits under $100,000 and noninterest bearing time deposits, together with corporate purchased funds and equity are the primary sources for funding earning assets. During the third quarter of 1995, core deposits represented 88% of average earning assets, compared to 88% in the third quarter of 1994 and 86% in the second quarter of 1995. At the same time, average corporate purchased funds increased $429 million from the 1994 third quarter to $3.3 billion, but declined $1.4 billion from the 1995 second quarter level. Average short term borrowings rose $60 million from the third quarter of 1994 but declined $1.2 billion from the 1995 second quarter level. Cash and cash equivalents were virtually unchanged from December 31, 1994. Net cash provided by investing activities during the first nine months of 1995 totaled $3,127 miillion. Maturities of investment securities in the held-to-maturity portfolio, net of purchases, provided cash of $4,328 million. Maturities and sales of investment securities in the available-for-sale portfolio, net of purchases, provided $710 million. Loan originations, net of repayments, used cash of $2,401 million. Proceeds from sales of loans provided $975 million while purchases of loans used $261 million. Net cash used by financing activities totaled $3,872 million during the first nine months of 1995. Deposits, excluding the purchase of $187 million from the Federal Deposit Insurance Corporation as part of the Corporation's ongoing acquisition program, experienced a net decrease of $2,278 million. The Corporation also reported a net decrease of $1,543 in short term borrowings. The Corporation continues to have no commercial paper outstanding. Proceeds from the issuance of long term debt provided $100 million while repayments required cash of $120 million. Issuance of common stock provided cash of $52 million while dividends paid totaled $201 million. Cash provided by operations during the first nine months of 1995 totaled $856 million. Net income totaled $670 million and noncash adjustments to reconcile net income totaled $248 million. Net changes in other assets and other liabilities decreased cash from operations by $62 million The Corporation's other sources of liquidity include maturing securities in addition to those which are available for sale or repurchase activity. In addition, subsidiary banks may directly access funds placed by them through existing agency agreements for the placement of federal funds and may also access the Federal Reserve for short term liquidity needs. SOURCE OF FUNDS: The Parent Corporation is a legal entity, separate and distinct from its subsidiary banks. The principal source of the Parent Corporation's revenue is dividends from the subsidiary banks. During the first nine months of 1995, the subsidiary banks paid a total of $474 million in dividends to the Parent Corporation. Various statutory provisions limit the timing and amount of dividends the subsidiary banks and certain non-bank subsidiaries can pay. As of October 1, 1995, approximately $243 million were free of dividend restrictions under such statutory limitations. In addition, federal statutes limit the ability of the subsidiary banks to make loans to the Parent Corporation. At September 30, 1995, the Parent Corporation had no external short term borrowings outstanding. Immediate liquidity available to the Corporation includes a $500 million senior revolving credit facility, as well as cash and other short term financial instruments at the Parent Corporation totaling $300 million at September 30, 1995. At current rates, interest on long term debt and preferred stock dividend requirements from October 1, 1995 through yearend 1995 total $45 million. In addition, from October 1, 1995 through yearend 1995, $11 million of the Parent Corporation's long term debt will mature. The Parent Corporation has access to regional, national and international capital and money markets, through its $2.3 billion shelf registration on file with the Securities and Exchange Commission. RISK ELEMENTS: Nonperforming Assets - At September 30, 1995, nonperforming assets totaled $206 million, down $85 million (29.2%) from the year ago level of $291 million, and down $43 million (17.3%) from $249 million reported at June 30, 1995. The current level of nonperforming assets represents 0.37% of total assets, versus 0.54% and 0.45% of total assets a year earlier and at June 30, 1995, respectively. Nonperforming loans totaled $140 million at September 30, 1995, down $70 million (33.3%) from $210 million reported a year earlier, and down $40 million (22.2%) from $180 million at June 30, 1995. ORE totaled $66 million at September 30, 1995, versus $81 million a year ago and $69 million at June 30, 1995. The following table is a reconciliation of nonperforming asset activity for the quarter and nine months ended September 30, 1995 (in millions): Nine Months Ended Third Quarter 1995 September 30, 1995 --------------------------- --------------------------- Nonperforming Nonperforming Loans ORE Total Loans ORE Total ------------------------------------------------------- Beginning balance $ 180 $ 69 $ 249 $ 186 $ 72 $ 258 In-migration (1) 64 - 64 285 - 285 Return to accrual (9) - (9) (27) - (27) Valuation adjustment - - - - 2 2 Payments and sales (53) (15) (68) (213) (53) (266) Net chargeoffs and writedowns (29) (1) (30) (69) (4) (73) Transfers within (13) 13 - (35) 35 - Acquisitions - - - 13 14 27 ------ ----- ------ ------ ----- ------ Ending balance $ 140 $ 66 $ 206 $ 140 $ 66 $ 206 ====== ===== ====== ====== ===== ====== (1) Includes disbursements on loans previously reported as nonperforming. In addition to credit assets classified as nonperforming, the Corporation reported accruing loans that were past due 90 days or more of $98 million at September 30, 1995, versus $56 million a year earlier and $72 million at June 30, 1995. The current level of past due loans represents 0.18% of total assets. Allowance for Credit Losses - At September 30, 1995, the allowance for credit losses totaled $847 million, or 2.35% of total loans. This compares to an allowance of $952 million, or 3.14% of loans, a year ago and $878 million, or 2.45% of loans, at June 30, 1995. Historical and projected allowances for credit losses reflect management's assessment of the credit risk inherent in the Corporation's loan portfolio, as well as the possible impact of known and potential problems in certain off- balance sheet financial instruments and uncertain events. Consistent with regulatory guidelines, the allowance is maintained at the level that is adequate to absorb estimated credit losses associated with the total loan and lease portfolio, including all binding commitments to lend. For the past thirteen quarters, the Corporation has provided less than net chargeoffs, with the credit provision over the past seven quarters being zero. Despite zero credit provisions, improving economic conditions and lower levels of problem assets have caused reserves to remain in the upper range of key measures of adequacy. Management continues to evaluate the Corporation's reserve adequacy strategy on a quarterly basis, with the expectation that further reductions in reserve levels will be considered as long as the Corporation's risk profile supports that conclusion. During the first quarter of 1995, the Corporation adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan." The adoption resulted in no material change in unallocated reserves of the allowance for credit losses. Refer to Footnote 3 to the financial statements for further information. Derivatives - The Corporation continues to engage in a minimum of derivative activities for risk management purposes. The Corporation does not engage in any trading or speculative derivative activities. At September 30, 1995, the notional value of derivatives outstanding was $5.3 billion, including $4.2 billion in which the Corporation is an intermediary and $1.1 billion in which the Corporation entered into transactions to hedge interest rate sensitivity. Of the $4.2 billion in which the Corporation is an intermediary, $3.1 billion of notional value has been sold to Standard Chartered, which has assumed the market risk of these instruments, and the Corporation retains only the credit risk. CAPITAL AND OTHER FINANCIAL STATISTICS: At September 30, 1995, total shareholders' equity represented 7.23% of total assets, versus 6.55% a year earlier and 6.92% at June 30, 1995. On the same dates, common equity equaled 6.59%, 5.90% and 6.29% of total assets, respectively. The Corporation's various capital ratios include the effects of the common stock repurchase programs and completed acquisitions. The tangible common equity ratio was 5.32% at September 30, 1995, compared to 5.30% a year earlier and 5.01% at June 30, 1995. The regulatory leverage ratio was 6.00% at September 30, 1995, versus 6.08% a year ago and 5.67% at June 30, 1995. The Corporation's Tier 1 and Total Capital ratios at September 30, 1995, were 7.48% and 10.48%, respectively. On July 18, 1995, the Board of Directors increased the quarterly cash dividend on the Corporation's $2 par value Common Stock to $0.80 per share, payable on August 31, 1995, to shareholders of record on August 7, 1995. On August 1, 1995, the Preferred Stock Committee of the Board of Directors declared dividends on the Corporation's outstanding preferred stock. During the first nine months of 1995, the Corporation recorded common stock dividends of $175.4 million and preferred stock dividends of $24.9 million. On October 17, 1995, the Corporation's Board of Directors declared a quarterly cash dividend of $0.80 on the Corporation's $2 par value Common Stock, payable on November 30, 1995, to shareholders of record on November 6, 1995. On November 1, 1995, the Preferred Stock Committee of the Board of Directors declared dividends on the Corporation's outstanding preferred stock. 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 various employee benefit and stock option plans and through the 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. Total intangibles amounted to $740 million at September 30, 1995, versus $348 million a year earlier and $753 million at June 30, 1995. The higher recent levels reflect the completion of seven acquisitions after September 30, 1994. As a result, goodwill increased to $697 million at September 30, 1995, from $309 million a year earlier. The common shares used in the calculation of 1995 third quarter and first nine months results per share were 77,515,893 and 77,153,179, respectively. During the first quarter, 1.3 million of the Corporation's treasury shares were issued in conjunction with the acquisition of Levy Bancorp in February 1995, of which 1.1 million represent shares repurchased for such purpose. RESTRUCTURING: As previously announced, the Corporation has adopted a Restructuring Plan (Plan) to improve efficiency and to better position the company for the introduction of full interstate banking. The restructuring activity related to the Plan is summarized in the following table (in millions): Early Severance and Facility and Retirement Outplacement Equipment Program Services Valuations Other Total ------- -------- ---------- ------ ------- 1994 ---- 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 forthe period Cash 0.4 4.7 6.8 2.3 14.2 Noncash 81.6 - - - 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 1995 ---- Restructuring provision Ongoing - - - 15.7 15.7 Utilization for the period Cash - 14.6 2.5 17.7 34.8 Noncash - - 1.1 - 1.1 ------- ------- ------- ----- ------- Total $ - $ 14.6 $ 3.6 $17.7 $ 35.9 ------- ------- ------- ----- ------- Balance at September 30, 1995 $ - $ 20.7 $ 4.6 $ - $ 25.3 ======= ======= ======= ==== ======= As of September 30, 1995, restructuring efforts have been substantially completed. The remaining employees impacted by the Plan generally have been notified and will be relocated or separated within the next several months The balance of the restructuring charge will be funded out of operating cash flows with the majority of payments for severance and outplacement services to be completed by the end of 1995. In addition, restructuring charges of another $8 million for relocation of staff and facilities, as well as retention payments for certain personnel displaced in the restructuring program, will be substantially completed by the end of 1995. The total expected cost of the Plan, therefore, will be approximately $165 million, as previously estimated. BUSINESS COMBINATIONS: On July 12, 1995, First Interstate Bank of Texas, N.A. completed the acquisition of Tomball National Bancshares and its principal subsidiary, Texas National Bank, for $7.7 million in cash. At June 30, 1995, Texas National Bank reported assets of $95 million and deposits of $81 million. On October 18, 1995, the Corporation anounced that it had received an unsolicited merger proposal from Wells Fargo & Co. (Wells). The proposal by Wells, which is based in San Francisco, contemplated a merger of the two companies in which each share of First Interstate Common Stock would have been converted into 0.625 shares of Wells Fargo Common Stock. The Corporation's Board of Directors rejected the merger offer from Wells. The Corporation and members of its Board of Directors have been named as defendants in several putative shareholder class actions in California and Delaware, alleging in substance that the Corporation's Board of Directors will breach, or has breached, its fiduciary duties to the shareholders of the Corporation in responding to the Wells merger proposal. Both injunctive relief and damages are being sought in the class actions. The Corporation and the individual directors intend to defend vigorously against the claims. On November 6, 1995, after exploring a wide range of strategic alternatives, the Corporation announced that it had agreed to merge with First Bank System, Inc. (FBS), pursuant to an Agreement and Plan of Merger, dated as of November 5, 1995 (Merger Agreement), by and among the Corporation, FBS and Eleven Acquisition Corp, a wholly owned subsidiary of FBS. It is expected that the transaction will qualify as a tax-free reorganization and will be accounted for as a pooling of interests. Pursuant to the Merger Agreement, each share of common stock of the Corporation outstanding immediately prior to the merger will be converted into 2.60 shares of common stock of FBS (and cash in lieu of fractional shares). In addition, pursuant to the Merger Agreement, each share of the 9.875% preferred stock, Series F, and each share of the 9.0% preferred stock, Series G (collectively, the Preferred Stock), of the Corporation, outstanding immediately prior to the merger shall be converted into one share of 9.875% preferred stock or 9.0% preferred stock, respectively, of FBS (New Preferred Stock) with substantially the same terms as the corresponding series of the Preferred Stock, except that the New Preferred Stock will have such voting rights as are necessary to ensure that the merger constitutes a tax- free reorganization. The transaction is subject to shareholder and regulatory approvals and is expected to close in the second quarter of 1996. The Merger Agreement, together with certain related agreements providing for the payment of certain fees and the grant of options to acquire stock under certain circumstances, will be filed shortly with the Commission on the Corporation's Form 8-K. The new institution, which will retain the First Interstate name, will have approximately $90 billion in assets and $7 billion in shareholders' equity. John F. Grundhofer, 56, chairman, president and chief executive officer of First Bank System, will become chairman and chief executive officer of the new First Interstate. First Interstate chairman and chief executive officer, William E. B. Siart, 48, will serve as president and chief operating officer of the combined companies. Richard A. Zona, 51, FBS vice chairman and chief financial officer will serve in that capacity for the new First Interstate. FBS vice chairman of Retail Products and Technology, Philip G. Heasley, 46, also will serve in that same capacity. Linnet F. Deily, 50, who currently serves as chief executive officer of First Interstate's Texas Region, will become vice chairman of Retail Banking. First Interstate chief executive officer of the California Region, Bruce G. Willison, 47, will serve as vice chairman of Corporate Banking. The new First Interstate will have its corporate headquarters in Minneapolis, and will direct its core business lines--including Retail, Corporate, Private Banking, Payment Systems, and Trust and Investment Management--from Los Angeles. The 20-member Board of Directors of the new institution will reflect equal representation from both companies. RECENT DEVELOPMENTS: On August 31, 1995, First Interstate Bank and PHH Corporation announced the signing of a joint venture agreement to market and originate residential mortgage loans. The newly formed enterprise will be known as First Interstate Residential Mortgage, L.L.C. (FIRM). Under the terms of the agreement, commencing in the fourth quarter of 1995, FIRM will market and originate residential mortgage loans to First Interstate customers and other applicants across First Interstate's 13-state territory. This origination capability will be augmented by First Interstate field loan officers dedicated to low-to-moderate income communities and private banking customers. In September 1995, the Corporation recognized a net benefit of $23.9 million from the refund from the Federal Deposit Insurance Corporation for overpayment of deposit insurance premiums in the 1995 second and third quarters. This action was a result of the FDIC's August 8, 1995, decision to reduce annual insurance rates for deposits of well capitalized institutions insured by the Bank Insurance Fund. Deposits insured by the Savings Association Insurance Fund (SAIF), which represent approximately 9% of the Corporation's deposits, will continue to be assessed at the rate of $0.23 per $100 of deposits. However, federal banking regulators have proposed making a one-time assessment on SAIF deposits to recapitalize the SAIF. The impact to the Corporation of such an assessment is not quantifiable at the present time.
AVERAGE BALANCES, INTEREST, AND AVERAGE RATES First Interstate Bancorp - ---------------------------------------------------------------------------------------------------------------------------------- Quarter Ended September 30 1995 1994 ---------------------------- ---------------------------- Balance Interest Rate Balance Interest Rate -------------------------------------------------------------- (dollar amounts in millions; interest and average rates on a taxable-equivalent basis) Earning Assets Loans 1 : Commercial, financial and agricultural $ 9,660 $ 198 8.19% $ 8,504 $ 147 6.86% Real estate construction 1,147 31 10.69 780 19 9.67 Real estate mortgage 11,331 231 8.14 7,698 149 7.64 Instalment 12,648 304 9.53 11,978 277 9.16 Other loans and leases 626 11 7.23 312 5 6.69 ------- -------- ------- -------- Total Loans 35,412 775 8.72 29,272 597 8.07 Trading account securities 180 3 6.05 105 1 3.89 Investment Securities: Held-to-maturity securities 10,083 139 5.48 15,749 209 5.36 Available-for-sale securities 130 1 5.04 173 3 6.28 ------- -------- ------- -------- Total Investment Securities 10,213 140 5.47 15,922 212 5.37 Federal funds, repurchases 479 7 5.92 353 4 4.55 Time deposits, due from banks 27 0 5.73 186 2 3.83 Other assets held for sale 157 2 3.99 48 1 7.29 ------- -------- ------- -------- Total Earning Assets 46,468 927 7.94 45,886 817 7.08 Interest Bearing Liabilities: Regular savings 5,627 31 2.19 5,903 31 2.07 NOW accounts and demand - market interest 6,351 21 1.31 6,685 21 1.24 Savings - market interest 9,991 77 3.04 11,675 70 2.42 Other savings and time under $100,000 8,079 107 5.26 5,595 52 3.66 ------- -------- ------- -------- Total Interest Bearing Consumer Funds 30,048 236 3.11 29,858 174 2.32 Large CDs, other money market funds 1,266 16 5.02 1,000 8 3.30 Short term borrowings 672 9 5.45 612 7 4.33 Long term debt 1,382 30 8.64 1,279 26 8.17 ------- -------- ------- -------- Total Corporate Purchased Funds 3,320 55 6.61 2,891 41 5.67 ------- -------- ------- -------- Total Interest Bearing LIabilities 33,368 291 3.46 32,749 215 2.62 -------- ----- -------- ---- Net Interest Income and Gross Spread $ 636 4.48% $ 602 4.46% ======== ===== ======== ===== Noninterest Liabilities, Equity and Assets Demand and noninterest bearing time deposits 16,460 15,711 Other liabilites 1,069 1,115 Preferred equity capital 350 350 Common equity capital 3,554 3,229 ------- ------- Total Noninterest Liabilities and Equity 21,433 20,405 Cash and due from banks 5,534 5,179 Allowance for credit losses (865) (962) Bank premises and equipment 1,269 1,081 Other assets 2,395 1,970 ------- ------- Total Noninterest Assets 8,333 7,268 Net Noninterest Sources 13,100 13,137 ------- ------- Total Assets $54,801 $53,154 ======= ======= Interest income as a percentage of average earning assets 7.94% 7.08% Interest expense as a percentage of average earning assets 2.49 1.86 ----- ----- 5.45% 5.22% ===== ===== - ---------------------------------------------------------------------------------------------------------------------------------- Certain prior year balances have been reclassifieed to conform to current year classifications. 1 Loans include nonaccrual and renegotiated loans and are net of unearned income and deferred fees.
AVERAGE BALANCES, INTEREST, AND AVERAGE RATES First Interstate Bancorp - ---------------------------------------------------------------------------------------------------------------------------------- Nine Months Ended September 30 1995 1994 ---------------------------- ---------------------------- Balance Interest Rate Balance Interest Rate -------------------------------------------------------------- (dollar amounts in millions; interest and average rates on a taxable-equivalent basis) Earning Assets Loans 1 : Commercial, financial and agricultural $ 9,677 $ 599 8.27% $ 8,068 $ 395 6.53% Real estate construction 1,101 86 10.39 775 53 9.08 Real estate mortgage 11,295 682 8.05 6,970 396 7.58 Instalment 12,497 896 9.59 11,501 795 9.24 Other loans and leases 587 32 7.37 267 13 6.64 ------- -------- ------- -------- Total Loans 35,157 2,295 8.72 27,581 1,652 7.99 Trading account securities 141 6 5.79 111 3 4.27 Investment Securities: Held-to-maturity securities 11,501 477 5.53 16,069 644 5.36 Available-for-sale securities 186 8 5.98 358 12 4.61 ------- -------- ------- -------- Total Investment Securities 11,687 485 5.54 16,427 656 5.34 Federal funds, repurchases 308 13 5.89 557 16 3.78 Time deposits, due from banks 34 2 6.35 480 13 3.53 Other assets held for sale 124 5 5.33 95 5 7.20 ------- -------- ------- -------- Total Earning Assets 47,451 2,806 7.90 45,251 2,345 6.92 Interest Bearing Liabilities: Regular savings 5,802 95 2.20 5,804 89 2.05 NOW accounts and demand - market interest 6,543 66 1.34 6,605 61 1.23 Savings - market interest 10,365 233 3.00 11,439 195 2.28 Other savings and time under $100,000 7,601 279 4.90 5,632 151 3.59 ------- -------- ------- -------- Total Interest Bearing Consumer Funds 30,311 673 2.96 29,480 496 2.25 Large CDs, other money market funds 1,370 50 4.84 968 23 3.14 Short term borrowings 1,651 72 5.77 542 19 4.74 Long term debt 1,412 90 8.54 1,417 81 7.63 ------- -------- ------- -------- Total Corporate Purchased Funds 4,433 212 6.36 2,927 123 5.61 ------- -------- ------- -------- Total Interest Bearing LIabilities 34,744 885 3.40 32,407 619 2.55 -------- ----- -------- ----- Net Interest Income and Gross Spread $ 1,921 4.50% $ 1,726 4.37% ======== ===== ======== ===== Noninterest Liabilities, Equity and Assets Demand and noninterest bearing time deposits 16,111 15,376 Other liabilites 1,030 1,040 Preferred equity capital 350 350 Common equity capital 3,394 3,307 ------- ------- Total Noninterest Liabilities and Equity 20,885 20,073 Cash and due from banks 5,459 5,170 Allowance for credit losses (905) (987) Bank premises and equipment 1,233 1,044 Other assets 2,391 2,002 ------- ------- Total Noninterest Assets 8,178 7,229 Net Noninterest Sources 12,707 12,844 ------- ------- Total Assets $55,629 $52,480 ======= ======= Interest income as a percentage of average earning assets 7.90% 6.92% Interest expense as a percentage of average earning assets 2.49 1.83 ----- ----- 5.41% 5.09% ===== ===== - ---------------------------------------------------------------------------------------------------------------------------------- Certain prior year balances have been reclassifieed to conform to current year classifications. 1 Loans include nonaccrual and renegotiated loans and are net of unearned income and deferred fees.
PART II. OTHER INFORMATION First Interstate Bancorp Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (11) Computation of Earnings Per Share (12) Computation of Ratio of Earnings to Fixed Charges for the nine-month period ending September 30, 1995. (27) Financial Data Schedule for the three-month and nine-month period ending September 30, 1995 (b) Reports on Form 8-K A report on Form 8-K dated February 17, 1995 announced the date, time and place of the Corporation's 1995 Annual Meeting of Stockholders. A report on Form 8-K dated March 25, 1995 announced that the Corporation has entered into a Dealer Agreement dated December 9, 1994 among the Corporation and various dealers named therein. Copies of related documents were included in such filing. A report on Form 8-K dated May 1, 1995 announced the Corporation's repurchase program for up to 7,600,000 shares of Common Stock. Copies of related documents were included in such filing. A report on Form 8-K/A dated May 26, 1995 announced the Corporation's amendment to Item 7(c), Financial Statements, Pro Forma Financial Information and Exhibits, of its Form 8-K dated March 25, 1995. SIGNATURES First Interstate Bancorp 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 thereunto duly authorized. FIRST INTERSTATE BANCORP REGISTRANT DATE: NOVEMBER 9, 1995 By /s/ William S. Randall -------------------------- William S.Randall President (Principal Financial Officer) DATE: NOVEMBER 9, 1995 By /s/ David S. Belles ------------------------- David S. Belles Executive Vice President and Controller (Principal Accounting Officer) EX-11 2
EXHIBIT (11) COMPUTATION OF EARNINGS PER SHARE First Interstate Bancorp - ----------------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Six Months Ended September 30 September 30 ------------------------ ------------------------ (dollar amounts in millions, except per share amounts) 1995 1994 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stock Net income $ 237.8 $ 130.0 $ 669.7 $ 522.3 Less dividends on preferred stock 8.3 8.3 24.9 24.9 --------- --------- --------- --------- Net income, as adjusted, for calculation of primary and fully diluted earnings per share $ 229.5 $ 121.7 $ 644.8 $ 497.4 ========= ========= ========= ========= Weighted average number of shares (in thousands) Weighted average number of shares outstanding 75,954 80,058 75,699 80,083 Dilutive effect of outstanding stock options (as determined by application of the treasury stock method) 1,539 1,622 1,432 1,588 Stock units under Management Incentive Plan 23 20 22 19 --------- --------- --------- --------- Weighted average number of shares, as adjusted, for calculation of primary earnings per share 77,516 81,700 77,153 81,690 Additional dilutive effect of outstanding stock options 247 88 354 121 ---------- --------- --------- --------- Weighted average number of shares, as adjusted, for calculation of fully diluted earnings per share 77,763 81,788 77,507 81,811 ========= ========= ========= ========= Primary and fully diluted earnings per share 1 Net income $ 2.96 $ 1.49 $ 8.36 $ 6.09 ========= ========= ========= ========= - ------------------------------------------------------------------------------------------------------------------------------ 1 Fully diluted earnings per share are considered equal to primary earnings per share because the addition of potentially dilutive securities which are not common stock equivalents resulted in dilution of less than three percent.
EX-12 3
EXHIBIT (12) COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES First Interstate Bancorp - ----------------------------------------------------------------------------------------- Nine Months Ended (dollar amounts in millions) September 30, 1995 - ----------------------------------------------------------------------------------------- A. First Interstate Bancorp and Subsidiaries (Consolidated): Earnings: 1.Income before income taxes $1,090 2.Plus interest expense (a) 925 ------ 3.Earnings including interest on deposits 2,015 4.Less interest on deposits 722 ------ 5.Earnings excluding interest on deposits $1,293 ====== Fixed Charges: 6.Including interest on deposits (Line 2) $ 925 7.Less interest on deposits (Line 4) 722 ------ 8.Excluding interest on deposits $ 203 ====== Ratio of Earnings to Fixed Charges: Including interest on deposits (Line 3 divided by Line 6) 2.18 ====== Excluding interest on deposits (Line 5 divided by Line 8) 6.37 ====== B. First Interstate Bancorp (Parent Corporation): Earnings: 9.Income before income taxes and equity in undistributed income of subsidiaries $ 335 10. Plus interest expense (a) 85 ------ 11. Earnings including interest expense $ 420 ====== Fixed Charges: 12. Interest expense (Line 10) $ 85 ======= Ratio of Earnings to Fixed Charges: (Line 11 divided by Line 12) 4.93 ======= - ----------------------------------------------------------------------------------------- (a) Includes amounts representing the estimated interest component of net rental payments.
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9 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FIRST INTERSTATE BANCORP FINANCIAL STATEMENTS AND NOTES THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS 9-MOS DEC-31-1995 DEC-31-1995 JUL-01-1995 JAN-01-1995 SEP-30-1995 SEP-30-1995 5,889 5,889 27 27 470 470 116 116 112 112 9,320 9,320 9,214 9,214 35,967 35,967 847 847 55,067 55,067 48,236 48,236 376 376 1,052 1,052 1,368 1,368 169 169 0 0 350 350 3,462 3,462 55,067 55,067 772 2,283 141 486 9 20 923 2,789 252 722 291 885 632 1,905 0 0 2 6 533 1,638 379 1,090 238 670 0 0 0 0 238 670 2.96 8.36 2.96 8.36 5.45 5.41 140 140 98 98 1 1 0 0 878 934 83 235 51 124 847 847 379 379 0 0 468 468
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