-----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, WWpKvEa1AlddgvyYLlYGcY+0ilBtsiqumXXwinxtO98a00+4nrp83iX2UfQ3SUpG 3i2h+ARtnBCnoV9QBdbWVg== 0000950131-95-003274.txt : 19951120 0000950131-95-003274.hdr.sgml : 19951120 ACCESSION NUMBER: 0000950131-95-003274 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951115 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19951116 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST BANK SYSTEM INC CENTRAL INDEX KEY: 0000036104 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 410255900 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06880 FILM NUMBER: 95594105 BUSINESS ADDRESS: STREET 1: FIRST BANK PL STREET 2: 601 SECOND AVE S CITY: MINNEAPOLIS STATE: MN ZIP: 55402-4302 BUSINESS PHONE: 6129731111 FORMER COMPANY: FORMER CONFORMED NAME: FIRST BANK STOCK CORP DATE OF NAME CHANGE: 19720317 8-K 1 FORM 8-K 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 -------- ------ ---------- (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 -------------- (Former name or former address, if changed since last report) 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 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 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 EX-23.1 2 CONSENT OF ERNST & YOUNG 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 EX-99.1 3 CERTAIN FI HISTORICAL FINANCIAL INFORMATION 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.
Consolidated Statement of Cash Flows FIRST INTERSTATE BANCORP Year Ended December 31 (in millions) 1994 1993 1992 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.
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 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.
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
____________________________________________________________________________________________________________________________________ CONSOLIDATED BALANCE SHEET (unaudited) 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 unaudited notes to consolidated financial statements
____________________________________________________________________________________________________________________________________ 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 - ------------------------------------------------------------------------------------------------------------------------------------ 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
_____________________________________________________________________________________________________ CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) 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 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
___________________________________________________________________________________________________________________________________ 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 - ----------------------------------------------------------------------------------------------------------------------------------- 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
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. EX-99.2 4 PRO FORMA FINANCIAL INFORMATION 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
PAGE ---- 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
F-1
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 - ---------------------------------- ------------ ---------- ------------ ---------- ----------- ------------ ---------- 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 =========== =========== =========== =========== =========== =========== ===========
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements F-2 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
FirsTier -------------------------- FBS First Interstate Purchase Pro Forma (In Millions, Except Per Share Data) Consolidated Consolidated Historical Adjustments Combined - --------------------------------------------- ------------ ---------------- ------------ ------------ --------- 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 =========== ===========
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements F-3 FIRST BANK SYSTEM, INC. MERGER WITH FIRST INTERSTATE BANCORP UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1994
FirsTier -------------------------- FBS First Interstate Purchase Pro Forma (In Millions, Except Per Share Data) Consolidated Consolidated Historical Adjustments Combined - --------------------------------------------- ------------ ---------------- ------------ ------------ --------- 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 ============ ===========
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements F-4
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 - ------------------------------------------------------ ------------ ---------------- ----------- 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 ============ ===========
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements F-5
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 - --------------------------------------------------------- ---------------- ---------------- ----------- 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 ================ ===========
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements F-6 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 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 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 -----END PRIVACY-ENHANCED MESSAGE-----