WELLS FARGO AND FIRST INTERSTATE
PRO FORMA COMBINED FINANCIAL INFORMATION
(unaudited)
On January 23, 1996, Wells Fargo & Company ("Wells Fargo") and First
Interstate Bancorp ("First Interstate") entered into a definitive agreement to
merge ("the Merger"). The purchase price of the transaction was approximately
$11.3 billion based on Wells Fargo's share price on January 19, the last trading
day before Wells Fargo and First Interstate agreed on an exchange ratio. The
Merger was consummated on April 1, 1996.
The following unaudited pro forma combined statements of income were
prepared in connection with the Merger (in which each outstanding share of First
Interstate Common Stock was exchanged for two-thirds of a share of Wells Fargo
Common Stock) and give effect to the adjustments described in the accompanying
notes. The Merger was accounted for as a purchase. The unaudited pro forma
combined statements of income are based on the consolidated statement of income
of Wells Fargo for the nine months ended September 30, 1996, the consolidated
statement of income of First Interstate for the three months ended March 31,
1996 and the consolidated statements of income of Wells Fargo and First
Interstate for the year ended December 31, 1995. The pro forma adjustments to
income and expense are the net result of the pro forma amounts that assume a
January 1, 1995 merger date, less the actual amounts booked by Wells Fargo and
First Interstate. The actual amount of goodwill, and related amortization,
recorded by Wells Fargo may change as certain estimates and contingencies are
finalized, although any adjustments are not expected to have a significant
effect on the ultimate amount of goodwill.
Wells Fargo expects to meet its pre-merger objective of realizing net
annual cost savings of $700 million ($800 million of noninterest expenses, less
$100 million of revenues) not later than 18 months after the date of the Merger.
About 50% of the cost savings are anticipated to be achieved within the first
nine months. The unaudited pro forma combined statements of income do not
reflect the full impact of the anticipated cost savings.
These unaudited pro forma combined statements of income and the
accompanying notes should be read in conjunction with and are qualified in their
entirety by the consolidated financial statements, including the accompanying
notes, of Wells Fargo in its Annual Report on Form 10-K for the year ended
December 31, 1995 and in its quarterly reports on Form 10-Q for the quarters
ended March 31, June 30, and September 30, 1996. These unaudited pro forma
combined statements of income and the accompanying notes should also be read in
conjunction with and are qualified in their entirety by the consolidated
financial statements, including the accompanying notes, of First Interstate in
its Annual Report on Form 10-K for the year ended December 31, 1995 and by the
First Interstate financial information for the quarter ended March 31, 1996
included in a filing by Wells Fargo on Form 8-K dated April 16, 1996.
The pro forma data are presented for comparative purposes only and are not
necessarily indicative of the combined results of operations in the future. The
pro forma data are also not necessarily indicative of the combined results of
operations which would have been realized had the Merger been in effect during
the periods for which the pro forma financial statements are presented. In
addition, this Form 8-K includes forward-looking statements that involve
inherent risks and uncertainties. Wells Fargo cautions readers that a number of
important factors could cause actual results to differ materially from those in
the forward-looking statements. Those factors include fluctuations in interest
rates, inflation, government regulations, the progress of integrating First
Interstate and economic conditions and competition in the geographic and
business areas in which Wells Fargo conducts its operations.
1
WELLS FARGO AND FIRST INTERSTATE
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995 (A)
Historical
----------------------------------
Pro Forma Pro Forma
Wells Fargo First Interstate Adjustments (B) Combined
------------- ---------------- --------------- -------------
(in millions)
INTEREST INCOME
Investment securities $ 599 $ 609 $ - $ 1,208
Loans 3,403 3,052 11 (C) 6,466
Other 83 47 - 130
------------- ---------------- --------------- -------------
Total interest income 4,085 3,708 11 7,804
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INTEREST EXPENSE
Deposits 997 975 (20) (D) 1,952
Federal funds purchased and securities
sold under repurchase agreements 199 74 - 273
Senior and subordinated debt 203 119 (12) (E) 310
Other 32 3 - 35
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Total interest expense 1,431 1,171 (32) 2,570
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NET INTEREST INCOME 2,654 2,537 43 5,234
Provision for loan losses - - - -
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Net interest income after provision for
loan losses 2,654 2,537 43 5,234
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NONINTEREST INCOME
Service charges on deposit accounts 478 597 - 1,075
Fees and commissions 433 215 - 648
Trust and investment services income 241 170 - 411
Other 172 137 (15) (F) 294
------------- ---------------- --------------- -------------
Total noninterest income 1,324 1,119 (15) 2,428
------------- ---------------- --------------- -------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,026 1,061 - 2,087
Net occupancy 211 235 (30) (G) 416
Equipment 193 154 - 347
Core deposit intangible 42 3 269 (H) 314
Goodwill 35 54 234 (I) 323
Merger related - 28 (28) (J) -
Other 694 678 20 (K) 1,392
------------- ---------------- --------------- -------------
Total noninterest expense 2,201 2,213 465 4,879
------------- ---------------- --------------- -------------
INCOME BEFORE INCOME TAXES 1,777 1,443 (437) 2,783
Income tax expense 745 558 (95) 1,208
------------- ---------------- --------------- -------------
NET INCOME $ 1,032 $ 885 $ (342) $ 1,575
------------- ---------------- --------------- -------------
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NET INCOME APPLICABLE TO
COMMON STOCK $ 990 $ 852 $ (342) $ 1,500
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------------- ---------------- --------------- -------------
PER COMMON SHARE
Net income $ 20.37 $ 15.14 (L)
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Dividends declared $ 4.60 $ 4.60
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Average common shares outstanding 48.6 50.5 99.1 (L)
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See notes to Pro Forma Combined Financial Statements
2
WELLS FARGO AND FIRST INTERSTATE
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (A)
Historical
----------------------------------
Wells Fargo First Interstate
For The Nine For The Three
Months Ended Months Ended
September 30, March 31,
1996 1996 Pro Forma Pro Forma
(As Reported) (As Reported) Adjustments (B) Combined
------------- ---------------- --------------- -------------
(in millions)
INTEREST INCOME
Investment securities $ 568 $ 123 $ - $ 691
Loans 4,106 749 4 (C) 4,859
Other 37 14 - 51
------------- ---------------- --------------- -------------
Total interest income 4,711 886 4 5,601
------------- ---------------- --------------- -------------
INTEREST EXPENSE
Deposits 1,140 241 6 (D) 1,387
Federal funds purchased and securities
sold under repurchase agreements 72 4 - 76
Senior and subordinated debt 217 27 1 (E) 245
Other 11 1 - 12
------------- ---------------- --------------- -------------
Total interest expense 1,440 273 7 1,720
------------- ---------------- --------------- -------------
NET INTEREST INCOME 3,271 613 (3) 3,881
Provision for loan losses 35 - - 35
------------- ---------------- --------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 3,236 613 (3) 3,846
------------- ---------------- --------------- -------------
NONINTEREST INCOME
Service charges on deposit accounts 634 150 - 784
Fees and commissions 534 63 - 597
Trust and investment services income 267 41 - 308
Other 201 51 (1) (F) 251
------------- ---------------- --------------- -------------
Total noninterest income 1,636 305 (1) 1,940
------------- ---------------- --------------- -------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,367 274 - 1,641
Net occupancy 257 60 (14) (G) 303
Equipment 269 43 - 312
Core deposit intangible 170 1 35 (H) 206
Goodwill 170 14 58 (I) 242
Merger related 142 251 (393) (J) -
Other 774 165 3 (K) 942
------------- ---------------- --------------- -------------
Total noninterest expense 3,149 808 (311) 3,646
------------- ---------------- --------------- -------------
INCOME BEFORE INCOME TAXES 1,723 110 307 2,140
Income tax expense 775 133 52 960
------------- ---------------- --------------- -------------
NET INCOME $ 948 $ (23) $ 255 $ 1,180
------------- ---------------- --------------- -------------
------------- ---------------- --------------- -------------
NET INCOME APPLICABLE TO
COMMON STOCK $ 901 $ (31) $ 255 $ 1,125
------------- ---------------- --------------- -------------
------------- ---------------- --------------- -------------
PER COMMON SHARE
Net income $ 11.42 $ 12.11 (L)
------------- -------------
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Dividends declared $ 3.90 $ 3.90
------------- -------------
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Average common shares outstanding 78.8 14.1 92.9 (L)
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See notes to Pro Forma Combined Financial Statements
3
WELLS FARGO AND FIRST INTERSTATE
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A: BASIS OF PRESENTATION
The unaudited pro forma combined statements of income are presented as if
the Merger had become effective on January 1, 1995. The unaudited pro forma
combined statement of income for the nine months ended September 30, 1996
combines Wells Fargo's historical results of operations for the nine months
ended September 30, 1996, which include the combined operations from April 1,
1996 forward, and First Interstate's results of operations for the period
January 1, 1996 through March 31, 1996. The combined historical results of
operations have been adjusted for amortization of purchase accounting
adjustments and the elimination of merger-related expenses incurred by Wells
Fargo and First Interstate (see Note J). The pro forma purchase accounting
adjustments for the nine months ended September 30, 1996 represent the
amortization that would have taken place from the beginning of the period, less
the actual amortization recorded by Wells Fargo in the second and third quarters
of 1996. The unaudited pro forma combined statement of income for the year
ended December 31, 1995 combines the historical results of operations of Wells
Fargo and First Interstate for the year ended December 31, 1995, after giving
effect to the amortization of purchase accounting adjustments. Certain amounts
in the historical financial statements of First Interstate have been
reclassified in the unaudited pro forma combined financial statements to conform
to Wells Fargo's historical financial statements.
The Merger was accounted for as a purchase. Under this method of
accounting, assets and liabilities of First Interstate are adjusted to their
estimated fair value and combined with the recorded book values of the assets
and liabilities of Wells Fargo. Applicable income tax effects of such
adjustments are included as a component of Wells Fargo's net deferred tax asset
with a corresponding offset to goodwill. Such asset and liability values are
reflected in Wells Fargo's September 30, 1996 unaudited consolidated balance
sheet included in the financial information for the quarter ended September 30,
1996 filed in its Form 10-Q dated November 14, 1996. Certain transactions
conducted in the ordinary course of business between Wells Fargo and First
Interstate are immaterial and, accordingly, have not been eliminated.
As a condition of the merger, Wells Fargo was required by regulatory
agencies to divest 61 First Interstate branches in California. In September,
the Company completed the required divestiture of 61 branches to Home Savings of
America. These branches had aggregate deposits of approximately $1.9 billion
and loans of approximately $1.1 billion. The selling price of the divested
branches represents a premium of 8.11% on the deposits. In addition, Wells
Fargo completed the sale of First Interstate banks in Wyoming and Montana
effective October 1, 1996. Also, Wells Fargo has entered into a definitive
agreement to sell the bank subsidiary in Alaska and expects the sale to close on
or about November 30, 1996, subject to regulatory approval. The aggregate
assets and deposits of these banks at September 30, 1996 were $647 million and
$505 million, respectively. Each of the banks have three branches. The branch
divestitures and bank sales have not been reflected in the pro forma financial
data since they are not expected to have a material impact on net income.
The combined company expects to achieve substantial operating cost savings
through consolidation of certain operations and the elimination of redundant
costs. The combined company expects to realize such operating cost savings
primarily through reductions in staff, consolidation and elimination of certain
branches and office facilities and consolidation of certain data processing and
other support services. The combined company ultimately expects to achieve
Wells Fargo's pre-merger objective of net annual cost savings of approximately
$700 million ($800 million of noninterest expenses, less $100 million of
revenues) not later than 18 months after the closing of the Merger. About 50%
of the cost savings are anticipated to be achieved within the first nine months.
No adjustment has been included in the unaudited pro forma combined statements
of income for future operating cost savings.
4
WELLS FARGO AND FIRST INTERSTATE
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE B: PURCHASE ACCOUNTING ADJUSTMENTS - FIVE YEAR ESTIMATES
Purchase accounting adjustments are made to reflect the recording of
intangibles, including goodwill, as well as to eliminate any intangible balances
previously recorded by First Interstate in accordance with the purchase method
of accounting. Purchase accounting adjustments also include adjusting to fair
value First Interstate's assets and liabilities as of April 1, 1996.
The incremental effect of the purchase accounting adjustments is estimated
to be a net after-tax expense of approximately $370 million for the first
12-month period subsequent to the Merger, approximately $350 million for the
second 12-month period subsequent to the Merger, approximately $335 million for
the third 12-month period subsequent to the Merger, approximately $325 million
for the fourth 12-month period subsequent to the Merger and approximately $310
million for the fifth 12-month period subsequent to the Merger. These amounts
are in addition to the amortization of goodwill and identifiable intangibles of
First Interstate existing prior to the Merger.
NOTE C: INTEREST INCOME - LOANS
First Interstate's loans were recorded at their estimated fair values on
April 1, 1996. The resulting fair value discount, which was primarily due to
changes in interest rates, has been amortized using an accelerated method to
increase interest income based on the estimated remaining maturities of the
related loans, which range from one month to 30 years.
NOTE D: INTEREST EXPENSE - DEPOSITS
First Interstate's deposits have been recorded at their estimated fair
values on April 1, 1996. The resulting fair value premium has been amortized
using an accelerated method to offset interest expense over the remaining
maturities of the deposits, which range from one month to 10 years. However,
for the nine months ended September 30, 1996, the actual amortization of $13
million recorded by Wells Fargo in the second and third quarters of 1996 more
than offsets the amortization of $7 million that would have been recorded
assuming a January 1, 1995 merger date (see Note A).
NOTE E: INTEREST EXPENSE - SENIOR AND SUBORDINATED DEBT
First Interstate's senior and subordinated debt has been recorded at its
estimated fair value on April 1, 1996. The resulting fair value premium
includes the effect resulting from interest rate swaps used to hedge certain
long-term debt instruments. The fair value premium has been amortized to offset
interest expense over the estimated lives of the instruments, which range from
approximately one month to nine years.
NOTE F: NONINTEREST INCOME - OTHER
Mortgage servicing rights amortization expense (included in other
noninterest income) of $9 million and $15 million has been included in the
unaudited pro forma combined statements of income for the nine months ended
September 30, 1996 and the year ended December 31, 1995, respectively. The
amounts were calculated using an accelerated method over 9 years. In addition,
First Interstate's historical mortgage servicing rights amortization of less
than $1 million included in both the three months ended March 31, 1996 and the
year ended December 31, 1995 has been reversed.
5
WELLS FARGO AND FIRST INTERSTATE
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE G: NONINTEREST EXPENSE - NET OCCUPANCY
Net amortization related to reserve for disposal of leased properties and
net lease intangible assets (due to adjusting leases to market rates at April 1,
1996) of $26 million and $30 million for the nine months ended September 30,
1996 and the year ended December 31, 1995, respectively, has been included in
the unaudited pro forma combined statements of income as an offset to net
occupancy expense. These amounts were calculated based on amortizing the
reserve for disposal of leased properties and the net lease intangible assets
over the remaining term of the leases.
NOTE H: NONINTEREST EXPENSE - AMORTIZATION OF CORE DEPOSIT INTANGIBLE
Core deposit intangible amortization expense of $177 million and $272
million has been included in the unaudited pro forma combined statements of
income for the nine months ended September 30, 1996 and the year ended December
31, 1995, respectively. The amounts were calculated using an accelerated method
over 15 years. In addition, First Interstate's historical core deposit
intangible amortization of $1 million included in the three months ended March
31, 1996 and $3 million for the year ended December 31, 1995 has been reversed.
NOTE I: NONINTEREST EXPENSE - AMORTIZATION OF GOODWILL
Goodwill of $7.2 billion was derived by taking the $11.3 billion base
purchase price plus $.2 billion related to the fair value of First Interstate
stock options outstanding at April 1, 1996 and legal, investment banking and
other direct acquisition costs minus $4.3 billion for the fair value of net
assets acquired.
Amortization expense related to goodwill of $216 million and $288 million
for the nine months ended September 30, 1996 and the year ended December 31,
1995, respectively, has been included in the unaudited pro forma combined
statements of income. These amounts were calculated using the straight-line
method over 25 years. In addition, First Interstate's historical goodwill
amortization of $14 million included in the three months ended March 31, 1996
and $54 million for the year ended December 31, 1995 has been reversed.
Goodwill, and related amortization, may change as certain estimates and
contingencies are finalized, although any adjustments are not expected to have a
significant effect on the ultimate amount of goodwill.
NOTE J: NONINTEREST EXPENSE - MERGER RELATED
Wells Fargo's merger-related expenses of $142 million ($84 million after
tax) for the nine months ended September 30, 1996 and First Interstate's
merger-related expenses of $251 million ($245 million after tax) and $28 million
($28 million after tax) for the nine months ended September 30, 1996 and the
year ended December 31, 1995, respectively, have been eliminated from the
combined historical results of income, as these expenses do not represent
ongoing expenses of Wells Fargo.
NOTE K: NONINTEREST EXPENSE - OTHER
Amortization expense related to purchased credit card relationships (PCCRs)
of $16 million and $24 million for the nine months ended September 30, 1996 and
the year ended December 31, 1995, respectively, has been included in the
unaudited pro forma combined statements of income. The amounts were calculated
using an accelerated method over 15 years.
In addition, First Interstate's historical amortization of PCCRs and other
intangibles of $1 million included in the three months ended March 31, 1996 and
$4 million for the year ended December 31, 1995 has been reversed.
6
WELLS FARGO AND FIRST INTERSTATE
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE L: EARNINGS PER SHARE
Pro forma combined earnings per common share for the nine months ended
September 30, 1996 was calculated based on pro forma combined net income
applicable to common stock divided by the actual number of common shares
outstanding at September 30, 1996 of 92.9 million shares (as an approximation of
average common shares outstanding if the Merger had taken place on January 1,
1995).
Pro forma combined earnings per common share for the year ended December
31, 1995 was calculated based on pro forma combined net income applicable to
common stock divided by the sum of the average common shares outstanding of
Wells Fargo for 1995 of 48.6 million shares, plus the equivalent of the average
common shares outstanding of First Interstate for 1995 of 50.5 million shares
(75.7 million shares multiplied by the exchange ratio of two-thirds).
7