SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994 Commission file number 1-6214
------------------------------------------
WELLS FARGO & COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 13-2553920
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
420 Montgomery Street, San Francisco, California 94163
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 415-477-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
April 30, 1994
------------------
Common stock, $5 par value 55,180,391
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Consolidated Statement of Income . . . . . . . . . . . . . . . . . 2
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statement of Changes in Stockholders' Equity . . . . . 4
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Summary Financial Data . . . . . . . . . . . . . . . . . . . . . . 6
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Earnings Performance . . . . . . . . . . . . . . . . . . . . . . . 8
Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . 8
Noninterest Income . . . . . . . . . . . . . . . . . . . . . . . 11
Noninterest Expense . . . . . . . . . . . . . . . . . . . . . . . 14
Balance Sheet Analysis . . . . . . . . . . . . . . . . . . . . . . 16
Investment Securities . . . . . . . . . . . . . . . . . . . . . . 16
Loan Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . 19
Commercial real estate . . . . . . . . . . . . . . . . . . . . 19
Real estate loans by state and type . . . . . . . . . . . . . . 21
Nonaccrual and Restructured Loans and Other Assets . . . . . . . 23
Quarterly trend of changes in nonaccrual loans . . . . . . . . 24
Changes in nonaccrual loans by loan category . . . . . . . . . 25
Foreclosed assets by state and type . . . . . . . . . . . . . . 26
Quarterly trend of changes in foreclosed assets . . . . . . . . 26
Changes in foreclosed assets by property type . . . . . . . . . 27
Nonaccrual loans by performance category . . . . . . . . . . . 27
Loans 90 days past due and still accruing . . . . . . . . . . . 28
Allowance for Loan Losses . . . . . . . . . . . . . . . . . . . . 30
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Capital Adequacy/Ratios . . . . . . . . . . . . . . . . . . . . . 33
Asset/Liability Management . . . . . . . . . . . . . . . . . . . 35
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . 36
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 37
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
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The information furnished in these interim statements reflects all adjustments
which are, in the opinion of management, necessary for a fair statement of the
results for such periods. Such adjustments are of a normal recurring nature,
unless otherwise disclosed in this Form 10-Q. The results of operations in the
interim statements are not necessarily indicative of the results that may be
expected for the full year. The interim financial information should be read in
conjunction with the Company's 1993 Annual Report on Form 10-K.
1
PART I - FINANCIAL INFORMATION
------------------------------
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
- ------------------------------------------------------------------------------
Quarter
ended March 31,
----------------
(in millions) 1994 1993
- ------------------------------------------------------------------------------
INTEREST INCOME
Loans $ 705 $ 814
Investment securities 185 152
Federal funds sold and securities
purchased under resale agreements 4 4
Other 1 --
----- -----
Total interest income 895 970
----- -----
INTEREST EXPENSE
Deposits 196 232
Federal funds purchased and securities sold under
repurchase agreements 8 7
Commercial paper and other short-term borrowings 1 2
Senior and subordinated debt 48 51
----- -----
Total interest expense 253 292
----- -----
NET INTEREST INCOME 642 678
Provision for loan losses 60 210
----- -----
Net interest income after provision for loan losses 582 468
----- -----
NONINTEREST INCOME
Service charges on deposit accounts 117 100
Fees and commissions 85 88
Trust and investment services income 50 46
Investment securities gains 4 --
Other 44 25
----- -----
Total noninterest income 300 259
----- -----
NONINTEREST EXPENSE
Salaries 189 183
Employee benefits 57 55
Net occupancy 55 53
Equipment 39 34
Federal deposit insurance 26 32
Other 157 182
----- -----
Total noninterest expense 523 539
----- -----
INCOME BEFORE INCOME TAX EXPENSE 359 188
Income tax expense 157 80
----- -----
NET INCOME $ 202 $ 108
===== =====
NET INCOME APPLICABLE TO COMMON STOCK $ 190 $ 95
===== =====
PER COMMON SHARE
Net income $3.41 $1.72
===== =====
Dividends declared $1.00 $ .50
===== =====
Average common shares outstanding 56 55
===== =====
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2
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
(in millions) 1994 1993 1993
- -------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 2,702 $ 2,644 $ 2,488
Investment securities:
At cost (estimated fair
value $10,606, $9,978 and $10,906) 10,710 9,887 10,685
At fair value 3,056 3,171 --
------- ------- -------
Total investment securities 13,766 13,058 10,685
Federal funds sold and securities
purchased under resale agreements 126 1,668 499
Loans 33,452 33,099 35,152
Allowance for loan losses 2,121 2,122 2,122
------- ------- -------
Net loans 31,331 30,977 33,030
------- ------- -------
Due from customers on acceptances 66 70 74
Accrued interest receivable 314 297 337
Premises and equipment, net 888 898 924
Goodwill 468 477 513
Other assets 2,515 2,424 2,605
------- ------- -------
Total assets $52,176 $52,513 $51,155
======= ======= =======
LIABILITIES
Noninterest-bearing deposits $ 9,611 $ 9,719 $ 8,568
Interest-bearing deposits 31,993 31,925 32,406
------- ------- -------
Total deposits 41,604 41,644 40,974
Federal funds purchased and securities
sold under repurchase agreements 1,532 1,079 952
Commercial paper and other short-term borrowings 156 188 171
Acceptances outstanding 66 70 74
Accrued interest payable 98 63 120
Other liabilities 1,011 933 862
Senior debt 2,074 2,256 2,224
Subordinated debt 1,446 1,965 1,882
------- ------- -------
Total liabilities 47,987 48,198 47,259
------- ------- -------
STOCKHOLDERS' EQUITY
Preferred stock 489 639 639
Common stock - $5 par value,
authorized 150,000,000 shares;
issued and outstanding 55,337,248 shares,
55,812,592 shares and 55,475,281 shares 277 279 277
Additional paid-in capital 485 551 525
Retained earnings 2,963 2,829 2,459
Cumulative foreign currency translation adjustments (4) (4) (4)
Investment securities valuation allowance (21) 21 --
-------- ------- -------
Total stockholders' equity 4,189 4,315 3,896
------- ------- -------
Total liabilities and stockholders' equity $52,176 $52,513 $51,155
======= ======= =======
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3
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Quarter ended March 31,
------------------------
(in millions) 1994 1993
- -------------------------------------------------------------------------------
PREFERRED STOCK
Balance, beginning of quarter $ 639 $ 639
Preferred stock redeemed (150) --
------ ------
Balance, end of quarter 489 639
------ ------
COMMON STOCK
Balance, beginning of quarter 279 276
Common stock issued under employee benefit and
dividend reinvestment plans 1 1
Common stock repurchased (3) --
------ ------
Balance, end of quarter 277 277
------ ------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of quarter 551 506
Common stock issued under employee benefit and
dividend reinvestment plans 7 19
Common stock repurchased (73) --
------ ------
Balance, end of quarter 485 525
------ ------
RETAINED EARNINGS
Balance, beginning of quarter 2,829 2,392
Net income 202 108
Preferred stock dividends (12) (13)
Common stock dividends (56) (28)
------ ------
Balance, end of quarter 2,963 2,459
------ ------
CUMULATIVE FOREIGN CURRENCY
TRANSLATION ADJUSTMENTS
Balance, beginning and end of quarter (4) (4)
------ ------
INVESTMENT SECURITIES VALUATION ALLOWANCE
Balance, beginning of quarter 21 --
Change in unrealized net gains, after applicable taxes (42) --
------ ------
Balance, end of quarter (21) --
------ ------
Total stockholders' equity $4,189 $3,896
====== ======
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4
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------
Quarter
ended March 31,
------------------
(in millions) 1994 1993
- -------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 202 $ 108
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 60 210
Depreciation and amortization 61 74
Deferred income tax benefit (17) (1)
Net increase (decrease) in net deferred loan fees 3 (10)
Net increase in accrued interest receivable (17) (36)
Net increase in accrued interest payable 35 32
Other, net 41 154
------- -------
Net cash provided by operating activities 368 531
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities:
At cost:
Proceeds from prepayments and maturities 1,277 181
Purchases (2,100) (1,528)
At fair value:
Proceeds from sales 15 --
Proceeds from prepayments and maturities 279 --
Purchases (245) --
Net (increase) decrease in loans resulting from
originations and collections (459) 1,253
Proceeds from sales (including participations) of loans 28 229
Purchases (including participations) of loans (64) (16)
Proceeds from sales of foreclosed assets 48 49
Net decrease in federal funds sold and securities
purchased under resale agreements 1,542 684
Other, net -- (41)
------- -------
Net cash provided by investing activities 321 811
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits (40) (1,270)
Net increase (decrease) in short-term borrowings 421 (390)
Proceeds from issuance of senior debt -- 265
Repayment of senior debt (166) (199)
Repayment of subordinated debt (526) --
Proceeds from issuance of common stock 8 20
Repurchase of common stock (76) --
Redemption of preferred stock (150) --
Payment of cash dividends (68) (41)
Other, net (34) 71
------- -------
Net cash used by financing activities (631) (1,544)
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM BANKS) 58 (202)
Cash and cash equivalents at beginning of quarter 2,644 2,690
------- -------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 2,702 $ 2,488
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest $ 218 $ 260
======= =======
Income taxes $ 114 $ 29
======= =======
Noncash investing activities:
Transfers from loans to foreclosed assets $ 62 $ 90
======= =======
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5
FINANCIAL REVIEW
SUMMARY FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------------
% Change
Quarter ended March 31, 1994 from
-------------------------------------- ---------------------
MARCH 31, Dec. 31, March 31, Dec. 31, March 31,
(in millions) 1994 1993 1993 1993 1993
- ------------------------------------------------------------------------------------------------------------------------------
FOR THE QUARTER
Net income $ 202 $ 190 $ 108 6 % 87 %
Per common share
Net income $ 3.41 $ 3.18 $ 1.72 7 98
Dividends declared 1.00 .75 .50 33 100
Average common shares outstanding 56 56 55 -- 2
Profitability ratios (annualized)
Net income to average total assets (ROA) 1.60% 1.46% .86% 10 86
Net income applicable to common stock to
average common stockholders' equity (ROE) 21.09 19.85 12.10 6 74
Average loans $ 32,848 $ 33,149 $ 35,836 (1) (8)
Average assets 51,220 51,597 50,961 (1) 1
Average core deposits 40,385 40,691 40,386 (1) --
Net interest margin 5.56% 5.69% 5.90% (2) (6)
AT QUARTER END
Investment securities $ 13,766 $ 13,058 $ 10,685 5 29
Loans 33,452 33,099 35,152 1 (5)
Allowance for loan losses 2,121 2,122 2,122 -- --
Assets 52,176 52,513 51,155 (1) 2
Core deposits 41,145 41,291 40,628 -- 1
Common stockholders' equity 3,700 3,676 3,257 1 14
Stockholders' equity 4,189 4,315 3,896 (3) 8
Tier 1 capital (1) 3,722 3,776 3,354 (1) 11
Total capital (Tiers 1 and 2)(1) 5,397 5,446 5,220 (1) 3
Capital ratios
Common stockholders' equity to assets 7.09% 7.00% 6.37% 1 11
Stockholders' equity to assets 8.03 8.22 7.62 (2) 5
Risk-based capital(1)
Tier 1 capital 10.23 10.48 8.78 (2) 17
Total capital 14.83 15.12 13.67 (2) 8
Leverage(1) 7.34 7.39 6.65 (1) 10
Book value per common share $ 66.87 $ 65.87 $ 58.72 2 14
COMMON STOCK PRICE
High $147-1/2 $133 $109-1/2 11 35
Low 127-5/8 105-7/8 75-1/2 21 69
Quarter end 139-3/8 129-3/8 108-5/8 8 28
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<FN>
(1) See the Capital Adequacy/Ratios section for additional information.
6
OVERVIEW
- --------
Wells Fargo & Company (Parent) is a bank holding company whose principal
subsidiary is Wells Fargo Bank N.A. (Bank). In this Form 10-Q, Wells Fargo &
Company and its subsidiaries are referred to as the Company.
Net income in the first quarter of 1994 was $202 million, or $3.41 per share,
compared with $108 million, or $1.72 per share, in the first quarter of 1993.
The increase in earnings in the first quarter of 1994 compared with 1993 was
substantially due to a $150 million, or 71%, decrease in the loan loss provision
to $60 million.
Return on average assets (ROA) was 1.60% and return on average common equity
(ROE) was 21.09% in the first quarter of 1994, compared with .86% and 12.10%,
respectively, in the first quarter of 1993.
Net interest income on a taxable-equivalent basis decreased to $642 million in
the first quarter of 1994 from $679 million a year ago. This decline resulted
from both a lower average loan balance and a lower net interest margin.
The Company's net interest margin was 5.56% for the first quarter of 1994, down
from 5.90% in the same quarter of 1993. The decrease was largely due to lower
yields on earning assets.
Noninterest income increased $41 million, or 16%, to $300 million in the first
quarter of 1994, compared with $259 million in the first quarter of 1993. A
significant portion of the increase was due to growth in service charges on
deposit accounts.
Noninterest expense decreased from $539 million in the first quarter of 1993 to
$523 million in the first quarter of 1994, a decrease of 3%. The decrease
primarily resulted from a decline in foreclosed assets expense.
The Company's provision for loan losses was $60 million in the first quarter of
1994, compared with $80 million in the fourth quarter of 1993 and $210 million
in the first quarter of 1993. During the first quarter of 1994, net charge-offs
totaled $61 million, or .74% of average total loans. This compared with $81
million, or .97%, during the fourth quarter of 1993 and $155 million, or 1.75%,
during the first quarter of 1993. The allowance for loan losses was 6.34% of
total loans at March 31, 1994, compared with 6.41% at December 31, 1993 and
6.04% at March 31, 1993.
Total nonaccrual and restructured loans were $900 million, or 2.7% of total
loans, at March 31, 1994, compared with $1,200 million, or 3.6%, at December 31,
1993 and $1,974 million, or 5.6%, at March 31, 1993. Loans new to nonaccrual in
the first quarter of 1994 were $52 million, as compared with $113 million in the
fourth quarter of 1993 and $249 million in the first quarter of 1993. At
March 31, 1994, an estimated $489 million, or 55%, of nonaccrual loans were less
than 90 days past due, compared with an estimated $704 million, or 59%, at
December 31, 1993. Foreclosed assets amounted to $354 million at
March 31, 1994, $348 million at December 31, 1993 and $510 million at March 31,
1993.
7
Common equity to total assets was 7.09% at March 31, 1994, compared with 7.00%
and 6.37% at December 31, 1993 and March 31, 1993, respectively. The Company's
total risk-based capital ratio at March 31, 1994 was 14.83% and its Tier 1 risk-
based capital ratio was 10.23%, exceeding the minimum guidelines of 8.00% and
4.00%, respectively. At December 31, 1993, these risk-based capital ratios were
15.12% and 10.48%, respectively. The decrease in total and Tier 1 risk-based
capital ratios between December 31, 1993 and March 31, 1994 resulted primarily
from the redemption of $150 million in Series A preferred stock (at its
liquidation preference carrying amount) and secondarily from the repurchase of
555,853 shares of common stock during the quarter. The Company expects to
continue to repurchase common stock in relation to shares issued or expected to
be issued under employee benefit and dividend reinvestment plans and for other
corporate purposes. Total and Tier 1 risk-based capital ratios at March 31,
1993 were 13.67% and 8.78%, respectively. The leverage ratios were 7.34%, 7.39%
and 6.65% at March 31, 1994, December 31, 1993 and March 31, 1993, respectively.
During the first quarter of 1994, the California economy showed some signs of
improvement, an indication that the recession is in the process of bottoming
out. The improvement is centered on a small increase in jobs, the first
quarterly gain since mid-1990. Employment improved in the service, construction
and retail industries. In addition, home sales in much of the state remained
brisk and consumer spending edged higher from a year ago.
EARNINGS PERFORMANCE
- --------------------
NET INTEREST INCOME
Net interest income on a taxable-equivalent basis was $642 million in the first
quarter of 1994, compared with $679 million in the first quarter of 1993.
Individual components of net interest income and net interest margin are
presented in the rate/yield table on page 10.
The Company's net interest margin was 5.56% for the first quarter of 1994,
compared with 5.90% for the first quarter of 1993. The decrease was largely due
to lower yields on earning assets, in part reflecting lower hedging income.
Hedging income from derivative contracts decreased approximately $22 million
from the first quarter of 1993 due to the maturity of contracts, resulting in a
19 basis point decline in the net interest margin. The interest rate derivative
contracts that are maturing, primarily purchased interest rate floor contracts
and interest rate swaps in which the Company receives a fixed rate, were entered
into during a higher interest rate environment and have benefited from the
subsequent decline in rates. These maturing contracts may be replaced by new
derivative contracts based on the Company's ongoing assessment of its overall
interest rate sensitivity position. However, any new replacement contracts are
not expected to result in the same hedging income as the maturing contracts due
to the comparatively lower rate environment.
8
Loans averaged $32.8 billion in the first quarter of 1994, an 8% decrease from
$35.8 billion in the first quarter of 1993. The two largest decreases occurred
in commercial and other real estate mortgage loans. Most of these decreases
indicated in the rate/yield table were due to loan repayments. Loans totaled
$33.5 billion at March 31, 1994, up 1% from December 31, 1993. This is the
first quarterly increase in loan balances since 1990. The Company expects growth
to continue during 1994 in total outstanding loans. Substantially all of this
growth will be from 1-4 family first mortgage loans, consumer loans and small
business and middle market loans.
Investment securities averaged $12.9 billion during the first quarter of 1994, a
32% increase from $9.8 billion in the first quarter of 1993. This increase was
primarily a result of cash provided by loan repayments; such cash was
predominantly invested in private collaterized mortgage obligations and U.S.
Treasury securities.
Average core deposits were $40.4 billion and funded 79% of the Company's average
total assets in the first quarters of 1994 and 1993.
The net interest margin in the second quarter of 1994 is expected to remain
about the same as the first quarter, assuming that there is no significant
increase in deposit rates. However, net interest income is likely to increase
modestly due to expected growth in average earning assets.
9
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1)
- ------------------------------------------------------------------------------------------------------------------------
Quarter ended March 31,
-------------------------------------------------------------
1994 1993
------------------------------- ---------------------------
Interest Interest
Average Yields/ Income/ Average Yields/ income/
(in millions) Balance Rates Expense balance rates expense
- ------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Investment securities:
At cost:
U.S. Treasury securities $ 2,575 4.88% $ 31 $ 2,155 5.24% $ 28
Securities of U.S. government agencies
and corporations 6,163 6.13 95 7,448 6.55 122
Obligations of states and political subdivisions 18 -- -- 24 -- --
Private collateralized mortgage obligations 950 5.24 12 -- -- --
Other securities 117 5.46 2 147 5.38 2
------- ---- ------- ----
Total investment securities at cost 9,823 5.71 140 9,774 6.25 152
At fair value (2):
Securities of U.S. government agencies
and corporations 1,681 6.02 25 -- -- --
Private collateralized mortgage obligations 1,289 5.45 18 -- -- --
Other securities 83 14.09 2 -- -- --
------- ---- ------- ----
Total investment securities at fair value 3,053 5.90 45 -- -- --
------- ---- ------- ----
Total investment securities 12,876 5.76 185 9,774 6.25 152
Federal funds sold and securities purchased
under resale agreements 576 3.16 4 537 3.29 4
Loans:
Commercial 6,629 8.91 146 7,693 9.69 184
Real estate 1-4 family first mortgage 7,766 6.94 135 6,681 8.52 142
Other real estate mortgage 8,157 8.37 168 10,042 7.87 196
Real estate construction 1,059 8.32 22 1,492 9.00 33
Consumer:
Real estate 1-4 family junior lien mortgage 3,494 7.27 63 4,103 7.52 77
Credit card 2,540 15.34 97 2,702 15.79 107
Other revolving credit and monthly payment 1,939 9.28 45 1,944 9.60 46
------- ---- ------- ----
Total consumer 7,973 10.33 205 8,749 10.53 230
Lease financing 1,230 9.36 29 1,178 10.10 30
Foreign 34 -- -- 1 -- --
------- ---- ------- ----
Total loans 32,848 8.65 705 35,836 9.15 815
Other 52 6.00 1 -- -- --
------- ---- ------- ----
Total earning assets $46,352 7.77 895 $46,147 8.47 971
======= ---- ======= ----
FUNDING SOURCES
Interest-bearing liabilities:
Deposits:
Interest-bearing checking $ 4,712 .98 11 $ 4,624 1.44 16
Savings deposits 2,565 1.99 13 2,913 2.41 17
Market rate savings 17,157 2.22 94 16,035 2.42 97
Savings certificates 7,042 4.14 72 8,716 4.43 95
Certificates of deposit 208 7.76 4 238 8.20 5
Other time deposits 104 6.56 2 122 6.67 2
Deposits in foreign offices 56 -- -- 7 -- --
------- ---- ------- ----
Total interest-bearing deposits 31,844 2.50 196 32,655 2.88 232
Federal funds purchased and securities sold
under repurchase agreements 1,077 3.05 8 1,083 2.80 7
Commercial paper and other short-term borrowings 150 3.00 1 222 2.95 2
Senior debt 2,202 4.52 25 2,193 5.03 27
Subordinated debt 1,678 5.59 23 1,878 5.16 24
------- ---- ------- ----
Total interest-bearing liabilities 36,951 2.78 253 38,031 3.11 292
Portion of noninterest-bearing funding sources 9,401 -- -- 8,116 -- --
------- ---- ------- ----
Total funding sources $46,352 2.21 253 $46,147 2.57 292
======= ----- ---- ======= ----
NET INTEREST MARGIN AND NET INTEREST INCOME ON
A TAXABLE-EQUIVALENT BASIS (3) 5.56% $642 5.90% $679
===== ==== ===== ====
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 2,557 $ 2,416
Other 2,311 2,398
------- -------
Total noninterest-earning assets $ 4,868 $ 4,814
======= =======
NONINTEREST-BEARING FUNDING SOURCES
Deposits $ 8,909 $ 8,098
Other liabilities 1,086 1,008
Preferred stockholders' equity 620 639
Common stockholders' equity 3,654 3,185
Noninterest-bearing funding sources used to
fund earning assets (9,401) (8,116)
------- -------
Net noninterest-bearing funding sources $ 4,868 $ 4,814
======= =======
TOTAL ASSETS $51,220 $50,961
======= =======
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<FN>
(1) The average prime rate of Wells Fargo Bank was 6.02% and 6.00% for the quarters ended March 31, 1994 and 1993,
respectively. The average three-month London Interbank Offered Rate (LIBOR) was 3.57% and 3.26% for the same quarters,
respectively.
(2) Yields are based on amortized cost balances.
(3) Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt
from federal and applicable state income taxes. The federal statutory tax rate was 35% and 34% for the quarters ended
March 31, 1994 and 1993, respectively.
10
NONINTEREST INCOME
The table below shows the major components of noninterest income.
- ------------------------------------------------------------------------------------------
Quarter
ended March 31,
---------------- %
(in millions) 1994 1993 Change
- ----------------------------------------------------------------------------------------
Service charges on deposit accounts $117 $100 17 %
Fees and commissions:
Credit card membership and other credit card fees 16 17 (6)
Debit and credit card merchant fees 12 19 (37)
Charges and fees on loans 10 11 (9)
Mutual fund and annuity sales fees 9 11 (18)
Shared ATM network fees 9 9 --
All other 29 21 38
---- ----
Total fees and commissions 85 88 (3)
Trust and investment services income:
Asset management and custody fees 31 31 --
Mutual fund management fees 11 8 38
All other 8 7 14
---- ----
Total trust and investment services income 50 46 9
Investment securities gains 4 -- --
Income from equity investments accounted
for by the:
Equity method 9 8 13
Cost method 8 14 (43)
Check printing charges 10 9 11
Gains from dispositions of operations 10 -- --
Real estate investment gains (losses) 2 (7) --
Gains on sales of loans 1 3 (67)
All other 4 (2) --
---- ----
Total $300 $259 16 %
==== ==== ===
- ------------------------------------------------------------------------------------------
The growth in service charges on deposit accounts in the first quarter of 1994
compared with the first quarter of 1993 was primarily due to increased fees for
overdrafts and higher business checking charges.
The decrease in the total fees and commissions in the first quarter of 1994
compared with the first quarter of 1993 was substantially due to a decline in
debit and credit card merchant fees and mutual fund and annuity sales fees.
The decrease in debit and credit card merchant fees was due to an alliance that
the Company entered into in November 1993. The agreement with Card
Establishment Services (CES) formed an alliance for merchant credit and debit
card processing services. Under this agreement, the Company is responsible for
marketing and sales, initial merchant credit analysis and customer service; CES
provides technology and processing operations. The Company retains an interest
11
in the net revenues from processing the transactions that are now reported as
income from equity investments accounted for by the equity method, rather than
reported as income from debit and credit card merchant fees. As a result,
income from the alliance contributed approximately $2 million to income from
equity investments.
The decrease in mutual fund and annuity sales fees in the first quarter of 1994
compared with the same period of 1993 reflected a shift to other investment
products. The change in the mix of products sold compared to the first quarter
of 1993 reflected a combination of influences, including the introduction of new
non-commission retail products and a shift in investor preferences away from
bond-oriented mutual funds due to rising interest rates. Sales of mutual funds
and annuities contributed to fees and commissions income through sales fee
revenues and to trust and investment services income through mutual fund
management fees.
The decrease in debit and credit merchant fees and mutual fund annuity sales
fees was substantially offset by an increase in "all other" fees and
commissions, which was primarily due to lower amortization expense for purchased
mortgage servicing rights. This amortization expense totaled $1 million in the
first quarter of 1994, compared with $8 million in the same period of 1993. At
March 31, 1994, the balance of purchased mortgage servicing rights was $39
million, compared with $21 million at March 31, 1993. The increase in the
balance was due to a $25 million purchase of additional servicing rights on
March 31, 1994.
The increase in trust and investment services income in the first quarter of
1994 compared with the first quarter of 1993 was largely due to greater mutual
fund investment management fees, reflecting growth in the funds' net assets.
The Overland Express family of 13 funds, which had $3.8 billion of assets under
management at March 31, 1994, compared with $3.9 billion at March 31, 1993, is
sold through brokers around the country. The Stagecoach family of 24 funds had
$4.4 billion of assets under management at March 31, 1994, compared with $2.9
billion at March 31, 1993. The family is divided into three segments:
Stagecoach Funds, Inc., Stagecoach Inc. and Stagecoach Trust. The Stagecoach
Funds, introduced in 1992, are primarily distributed to retail customers through
the branch network. These 12 funds had $3.8 billion under management at March
31, 1994, compared with $2.9 billion at March 31, 1993. Stagecoach Inc.,
introduced in mid-1993 and formerly known as WellsFunds until February 28, 1994,
is a group of funds that are offered to selected groups of investors, such as
participants in certain employee benefit plans, certain IRA investors and
certain corporations, partnerships and other business entities. These 7
institutional funds had $539 million under management at March 31, 1994.
Stagecoach Trust, introduced in March 1994, currently consists of a fund series
called LifePath Funds. These 5 funds, each consisting of retail and
institutional classes, had $29 million of assets under management at March 31,
1994. In addition to managing Overland Express Funds and all the funds in the
Stagecoach family, the Company also managed or maintained personal trust,
employee benefit trust and agency assets of approximately $46 billion at March
31, 1994, compared with $42 billion at March 31, 1993. Mutual fund management
fees are expected to continue to increase in 1994 from 1993 levels.
The investment securities gains reflected the sale of corporate debt securities
from the available-for-sale portfolio.
12
Income from cost method equity investments was largely due to net gains on the
sales of and distributions from investments in highly leveraged transactions of
$6 million in the first quarter of 1994. In the first quarter of 1993, income
from cost method equity investments was substantially due to an $8 million gain
on a sale of an investment and net gains on the sales of and distributions from
investments in highly leveraged transactions of $4 million.
Gains from disposition of operations included an $8 million payment that was
contingent on performance in relation to the alliance formed with CES.
Additional payments from the CES agreement are also contingent upon future
performance.
Noninterest income is expected to continue to increase in 1994, reflecting
growth from fee-based products, such as mutual funds and deposit-related
services.
13
NONINTEREST EXPENSE
The table below shows the major components of noninterest expense.
- ----------------------------------------------------------------------------------------
Quarter
ended March 31,
---------------- %
(in millions) 1994 1993 Change
- ----------------------------------------------------------------------------------------
Salaries $189 $183 3 %
Employee benefits 57 55 4
Net occupancy 55 53 4
Equipment 39 34 15
Federal deposit insurance 26 32 (19)
Contract services 19 12 58
Certain identifiable intangibles 16 23 (30)
Advertising and promotion 15 15 --
Operating losses 14 16 (13)
Telecommunications 11 11 --
Postage 11 11 --
Outside professional services 9 10 (10)
Goodwill 9 10 (10)
Check printing 8 9 (11)
Stationery and supplies 7 7 --
Travel and entertainment 7 6 17
Foreclosed assets 6 26 (77)
Escrow and collection agency fees 5 7 (29)
Security 5 5 --
Outside data processing 3 4 (25)
All other 12 10 20
---- ----
Total $523 $539 (3)%
==== ==== ===
- ----------------------------------------------------------------------------------------
Salaries expense increased 3% in the first quarter of 1994 compared with the
same period of 1993 predominantly due to increases in incentive pay, partially
offset by a decline in average full-time equivalent (FTE) staff. The Company's
FTE staff, including hourly employees, averaged approximately 19,400 in the
first quarter of 1994, compared with approximately 21,200 in the first quarter
of 1993.
Federal deposit insurance decreased compared with the first quarter of 1993 due
to a decline in the federal deposit insurance rate.
The increase in contract services expense in the first quarter of 1994 was
predominantly due to the development of new products and services and system
upgrades throughout the Company.
14
The table below shows the major components of foreclosed assets expense.
- ---------------------------------------------------------------------------
Quarter
ended March 31,
---------------
(in millions) 1994 1993
- ---------------------------------------------------------------------------
Operating expenses $13 $13
Operating revenues (7) (9)
Net losses from write-downs/sales -- 22
--- ---
Total $ 6 $26
--- ---
--- ---
- ---------------------------------------------------------------------------
The 77% decrease in foreclosed assets expense compared with the first quarter of
1993 was largely due to a decrease in write-downs of office and industrial
buildings and agricultural properties and increased gains on sales. The Company
intends to continue to emphasize disposing of its foreclosed assets.
The Company expects total noninterest expense in 1994 to be lower than 1993
primarily due to expected decreases in foreclosed assets expense, personnel-
related expense and FDIC expense.
15
BALANCE SHEET ANALYSIS
INVESTMENT SECURITIES
The table below provides the major components of investment securities and a
comparison of cost and estimated fair value.
- -------------------------------------------------------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
1994 1993 1993
----------------- ---------------- ----------------
ESTIMATED Estimated Estimated
FAIR fair fair
(in millions) COST VALUE Cost value Cost value
- -------------------------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES
AT COST:
U.S. Treasury securities $ 2,787 $ 2,769 $ 2,365 $ 2,383 $ 2,253 $ 2,287
Securities of U.S. government
agencies and corporations (1) 6,539 6,492 6,570 6,644 8,133 8,320
Obligations of states and political subdivisions 18 18 18 18 24 24
Securities issued by foreign governments 89 89 90 91 92 92
Private collateralized mortgage obligations 1,250 1,212 815 813 -- --
Corporate debt securities 27 26 29 29 131 131
------- ------- ------- ------- ------- -------
Total debt securities 10,710 10,606 9,887 9,978 10,633 10,854
Corporate and Federal Reserve Bank stock -- -- -- -- 52 52
------- ------- ------- ------- ------- -------
Total $10,710 $10,606 $ 9,887 $ 9,978 $10,685 $10,906
======= ======= ======= ======= ======= =======
AVAILABLE-FOR-SALE SECURITIES
AT FAIR VALUE:
Securities of U.S. government
agencies and corporations (1) $ 1,751 $ 1,718 $ 1,747 $ 1,749
Private collateralized mortgage obligations 1,300 1,261 1,340 1,334
Corporate debt securities 24 39 31 48
------- ------- ------- -------
Total debt securities 3,075 3,018 3,118 3,131
Marketable equity securities 17 38 17 40
------- ------- ------- -------
Total $ 3,092 $ 3,056 $ 3,135 $ 3,171
======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) All securities of U.S. government agencies and corporations are mortgage-backed securities.
Investment securities were $13.8 billion at March 31, 1994, a 29% increase from
$10.7 billion at March 31, 1993. The investment securities portfolio at March
31, 1994 was comprised of $10.7 billion of held-to-maturity at cost securities
and $3.1 billion of available-for-sale at fair value securities. There were no
trading securities at March 31, 1994. The Company's classification of
available-for-sale securities was influenced by accounting and regulatory
requirements related to certain mortgage-backed securities. The increase was
due to the cash provided by loan repayments used to purchase securities. The
relatively high levels of investment securities are likely to continue until
loan demand recovers.
16
At March 31, 1994, the held-to-maturity securities portfolio had an estimated
unrealized net loss of $104 million (which reflected estimated unrealized gross
gains of $36 million), or 1% of the cost of the portfolio. At December 31,
1993, the held-to-maturity portfolio had an estimated unrealized net gain of $91
million (which reflected estimated gross unrealized losses of $23 million), or
.9% of the cost of the portfolio.
At March 31, 1994, the available-for-sale securities portfolio had an unrealized
net loss of $21 million, net of tax, reported as a separate component of
stockholders' equity, compared with an unrealized net gain of $21 million at
December 31, 1993. The unrealized net loss at March 31, 1994 was comprised of
unrealized gross pretax gains of $23 million and unrealized gross pretax losses
of $80 million on debt securities and unrealized gross pretax gains of $23
million and unrealized gross pretax losses of $2 million on marketable equity
securities. The change from an unrealized net gain at December 31, 1993 to an
unrealized net loss at March 31, 1994 reflected an increasing interest rate
environment.
Realized gross gains and losses from the available-for-sale securities portfolio
were $5 million and $1 million, respectively, in the first quarter of 1994. The
realized gross gain resulted from the sale of corporate debt securities and the
realized gross loss resulted from a write-down due to other-than-temporary
impairment in the fair value of certain securities.
17
The following table provides the expected remaining maturities and yields
(taxable-equivalent basis) of debt securities within the investment portfolio.
- -----------------------------------------------------------------------------------------------------------------------------------
March 31, 1994
-----------------------------------------------------------------------------------------------
Expected remaining principal maturity
-----------------------------------------------------------------------------------------------
Weighted
average
expected
remaining After one year After five years
Weighted maturity One year or less through five years through ten years After ten years
Total average (in yrs. ---------------- ------------------ ----------------- ---------------
(in millions) amount yield - mos.) Amount Yield Amount Yield Amount Yield Amount Yield
- -----------------------------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES:
U.S. Treasury securities $ 2,787 4.85% 1-4 $1,335 5.14% $1,452 4.59% $ -- --% $ -- --%
Securities of U.S. government
agencies and corporations 6,539 6.04 3-3 1,729 5.72 3,657 5.83 895 7.10 258 7.31
Obligations of states and political
subdivisions 18 6.49 4-3 3 6.42 11 6.53 2 6.44 2 6.39
Securities issued by
foreign governments 89 5.17 1-8 26 4.52 63 5.43 -- -- -- --
Private collateralized mortgage
obligations 1,250 6.17 2-8 313 6.40 854 6.00 83 7.04 -- --
Corporate debt securities 27 6.18 2-4 5 6.27 22 6.16 -- -- -- --
------- ------ ------ ------ ----
Total cost $10,710 5.74% 2-8 $3,411 5.55% $6,059 5.56% $ 980 7.09% $260 7.30%
======= ===== ====== ==== ====== ==== ====== ===== ==== ====
ESTIMATED FAIR VALUE $10,606 $3,404 $5,976 $ 969 $257
======= ====== ====== ====== ====
AVAILABLE-FOR-SALE SECURITIES (1):
Securities of U.S. government
agencies and corporations $ 1,751 5.57% 2-8 $ 494 6.51% $1,157 5.19% $ 100 5.26% $ -- --%
Private collateralized mortgage
obligations 1,300 6.35 3-2 343 6.32 680 6.45 277 6.15 -- --
Corporate debt securities 24 11.00 6-8 -- -- -- -- 24 11.00 -- --
------- ------ ------ ------ ----
Total cost $ 3,075 5.94% 2-11 $ 837 6.43% $1,837 5.66% $ 401 6.21% $ -- --%
======= ===== ====== ==== ====== ==== ====== ===== ==== ====
ESTIMATED FAIR VALUE $ 3,018 $ 830 $1,787 $ 401 $ --
======= ====== ====== ====== ====
TOTAL COST OF DEBT SECURITIES $13,785 5.78% 2-9 $4,248 5.72% $7,896 5.58% $1,381 6.84% $260 7.30%
======= ==== === ====== ==== ====== ==== ====== ===== ==== ====
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) The weighted average yield is computed using the amortized cost of available-for-sale investment securities carried at fair
value.
The weighted average expected remaining maturity of the debt securities
portfolio was 2 years and 9 months at March 31, 1994 and 2 years and 7 months at
December 31, 1993. The lengthening of the expected remaining maturity reflected
an increasing interest rate environment, in which prepayments are likely to slow
down. The Company has purchased short-term debt securities to maintain asset
liquidity and to fund potential loan growth.
18
LOAN PORTFOLIO
The table below presents comparative period-end loans.
- -----------------------------------------------------------------------------------------------------------
% Change
March 31, 1994 from
-------------------
MARCH 31, Dec. 31, March 31, Dec. 31, March 31,
(in millions) 1994 1993 1993 1993 1993
- -----------------------------------------------------------------------------------------------------------
Commercial (1)(2) $ 6,934 $ 6,912 $ 7,505 -- % (8)%
Real estate 1-4 family first mortgage 8,180 7,458 6,567 10 25
Other real estate mortgage (3) 8,160 8,286 9,925 (2) (18)
Real estate construction 923 1,110 1,367 (17) (32)
Consumer:
Real estate 1-4 family junior lien mortgage 3,412 3,583 4,053 (5) (16)
Credit card 2,556 2,600 2,640 (2) (3)
Other revolving credit and monthly payment 1,988 1,920 1,914 4 4
------- ------- -------
Total consumer 7,956 8,103 8,607 (2) (8)
Lease financing 1,253 1,212 1,180 3 6
Foreign 46 18 1 156 --
------- ------- -------
Total loans (net of unearned income,
including net deferred loan fees,
of $333, $336 and $344) $33,452 $33,099 $35,152 1 % (5)%
======= ======= ======= ===== ===
- -----------------------------------------------------------------------------------------------------------
<FN>
(1) Includes loans to real estate developers of $491 million, $505 million and $657 million at March 31, 1994,
December 31, 1993 and March 31, 1993, respectively.
(2) Includes agricultural loans (loans to finance agricultural production and other loans to farmers) of
$576 million, $643 million and $552 million at March 31, 1994, December 31, 1993 and March 31, 1993,
respectively.
(3) Includes agricultural loans secured by real estate of $223 million, $225 million and $276 million at
March 31, 1994, December 31, 1993 and March 31, 1993, respectively.
The real estate 1-4 family first mortgage portfolio grew by 10% in the first
quarter of 1994. The majority of the growth was due to the shift in
originations from 30-year fixed rate loans to adjustable rate loans, which are
generally held for portfolio purposes.
The table below presents comparative period-end commercial real estate loans.
- -----------------------------------------------------------------------------------------------------------
% Change
March 31, 1994 from
-------------------
MARCH 31, Dec. 31, March 31, Dec. 31, March 31,
(in millions) 1994 1993 1993 1993 1993
- -----------------------------------------------------------------------------------------------------------
Commercial loans to
real estate developers (1) $ 491 $ 505 $ 657 (3)% (25)%
Other real estate mortgage 8,160 8,286 9,925 (2) (18)
Real estate construction 923 1,110 1,367 (17) (32)
------ ------ -------
Total $9,574 $9,901 $11,949 (3)% (20)%
====== ====== ======= === ===
- -----------------------------------------------------------------------------------------------------------
<FN>
(1) Included in commercial loans.
19
The Company's commercial real estate loan portfolio was $9.6 billion at
March 31, 1994, compared with $9.9 billion at December 31, 1993 and $11.9
billion at March 31, 1993, a 3% and 20% decrease, respectively. These decreases
were primarily due to reduced lending and payments received.
Over the years, the Company has prospered as an active commercial real estate
lender. However, as a result of the recession and overbuilt real estate
markets, the Company's earnings during the past three years were significantly
affected by its relatively high levels of commercial real estate loans. The
Company's real estate borrowers with properties located in Southern California
have been particularly affected. At March 31, 1994, $3,305 million, or 36%, of
the Company's combined other real estate mortgage and real estate construction
loans were in Southern California and $284 million, or 9%, of that amount were
on nonaccrual. The Company has responded to the recession and the commercial
real estate slump by strengthening its lending practices and working to limit
the degree of the portfolio concentration in any product type or location, or to
any individual borrower.
The U.S. (particularly California) is still suffering from an oversupply of
certain types of commercial real estate which could last for a number of years.
However, there are signs that a substantial amount of liquidity is returning to
the real estate markets, mostly in shopping centers and apartments. An
increasing number of developers are successfully financing acquisition or
development programs through the capital markets and some banks are showing
interest in financing certain product types. This liquidity contributed
significantly to the Company's progress in reducing both nonaccrual loans and
its overall concentration level in commercial real estate.
20
The following table summarizes the other real estate mortgage loans by state and
property type at March 31, 1994.
REAL ESTATE MORTGAGE LOANS BY STATE AND TYPE
(excluding 1-4 family first mortgage loans)
- --------------------------------------------------------------------------------------------------
March 31, 1994
- --------------------------------------------------------------------------------------------------
California Arizona Minnesota Texas
--------------- ----------- --------- --------------
Total Non- Total Non- Total Total Non-
(in millions) loans accrual loans accrual loans(2) loans accrual
- --------------------------------------------------------------------------------------------------
Office buildings $2,049 $116 $ 20 $-- $47 $37 $20
Industrial 1,214 36 6 -- 26 2 --
Shopping centers 662 56 31 -- 5 34 15
Apartments 881 22 28 3 9 1 --
Hotels/motels 334 24 31 -- -- 8 --
Retail buildings
(other than
shopping centers) 420 22 1 -- 4 -- --
Institutional 320 15 1 -- 1 -- --
Land 161 6 3 -- -- -- --
Agricultural 223 4 1 -- -- -- --
1-4 family (1):
Structures 46 -- 1 -- -- -- --
Land 39 -- -- -- -- -- --
Other 158 7 -- -- -- -- --
------ ---- ---- --- --- --- ---
Total by state $6,507 $308 $123 $3 $92 $82 $35
====== ==== ==== === === === ===
% of total loans 80% 2% 1% 1%
====== ==== === ===
Nonaccruals as a %
of total by state 5% 2% 43%
==== === ===
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
March 31, 1994
- --------------------------------------------------------------------------------------------------
Non-
Other States(3) Non- accruals
------------- Total % of accrua as a %
Total Non- by total loans of total
loans accrual type loans by type by type
- --------------------------------------------------------------------------------------------------
Office buildings $ 230 $ 8 $2,383 30% $144 6%
Industrial 38 3 1,286 16 39 3
Shopping centers 505 16 1,237 15 87 7
Apartments 86 -- 1,005 12 25 2
Hotels/motels 134 39 507 6 63 12
Retail buildings
(other than
shopping centers) 5 -- 430 5 22 5
Institutional 8 -- 330 4 15 5
Land 61 -- 225 3 6 3
Agricultural -- -- 224 3 4 2
1-4 family (1):
Structures -- -- 47 1 -- --
Land -- -- 39 -- -- --
Other 289(4) -- 447 5 7 2
------ ----- ------ --- ----
Total by state $1,356 $ 66(5) $8,160 100% $412 5%
====== ===== ====== === ==== ===
% of total loans 16% 100%
====== ======
Nonaccruals as a %
of total by state 5%
=====
- --------------------------------------------------------------------------------------------------
<FN>
(1) Represents loans to real estate developers secured by 1-4 family residential developments.
(2) There were no loans on nonaccrual status at March 31, 1994.
(3) Consists of 29 states; no state had loans in excess of $78 million at March 31, 1994.
(4) Includes loans secured by collateral pools of approximately $179 million (where the pool is a
mixture of various real estate property types located in various states, non real estate-related
assets and other guarantees).
(5) Includes $17 million, $12 million and $2 million in Ohio, Illinois and Georgia, respectively.
Total loans in these three states were $42 million, $32 million and $31 million, respectively.
At March 31, 1994, 80% of other real estate mortgage loans were in California,
compared with 78% at December 31, 1993. No other state comprised more than 2%
of the portfolio at March 31, 1994. The largest property type was office
buildings, representing 30% of the portfolio at March 31, 1994, compared with
28% at December 31, 1993.
At March 31, 1994, $3,007 million, or 37%, of the Company's other real estate
mortgage loans were in Southern California, compared with $2,991 million, or
36%, at December 31, 1993. Of these amounts, $228 million, or 8%, were on
nonaccrual at March 31, 1994, compared with $300 million, or 10%, at December
31, 1993. The largest property type in Southern California was office
buildings, representing 30% and 28% of the Southern California portfolio at
March 31, 1994 and December 31, 1993, respectively.
21
The following table summarizes the real estate construction loans by state and
project type at March 31, 1994.
REAL ESTATE CONSTRUCTION LOANS BY STATE AND TYPE
- -----------------------------------------------------------------------------------------------------------------------------
March 31, 1994
---------------------------------------------------------------------------------------------------------
Non-
California Nevada Virginia Other States (2) Non- accruals
--------------- ------ --------------- --------------- Total % of accrual as a %
Total Non- Total Total Non- Total Non- by total loans of total
(in millions) loans accrual loans(1) loans accrual loans accrual type loans by type by type
- -----------------------------------------------------------------------------------------------------------------------------
1-4 family:
Land $373 $116 $55 $-- $-- $31 $-- $459 49% $116 25%
Structures 166 16 5 -- -- -- -- 171 19 16 9
Land (excluding
1-4 family) 92 -- 6 47 47 28 15 173 19 62 36
Office buildings 38 1 -- -- -- -- -- 38 4 1 3
Apartments 30 5 -- 1 1 -- -- 31 3 6 19
Shopping centers 14 1 -- -- -- -- -- 14 2 1 7
Industrial 12 -- 2 -- -- -- -- 14 2 -- --
Hotels/motels 8 -- -- -- -- -- -- 8 1 -- --
Institutional 6 -- -- -- -- -- -- 6 1 -- --
Agricultural 4 -- -- -- -- -- -- 4 -- -- --
Retail buildings
(other than
shopping centers) 3 -- -- 1 -- -- -- 4 -- -- --
Other 1 -- -- -- -- -- -- 1 -- -- --
---- ---- --- --- --- --- --- ---- --- ----
Total by state $747 $139 $68 $49 $48 $59 $15 $923 100% $202 22%
==== ==== === === === === === ==== === ==== ====
% of total loans 82% 7% 5% 6% 100%
==== === === === ====
Nonaccruals as a %
of total by state 19% 98% 25%
==== === ===
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
(1) There were no loans on nonaccrual status at March 31, 1994.
(2) Consists of 7 states; no state had loans in excess of $29 million at March 31, 1994.
At March 31, 1994 and December 31, 1993, 82% of real estate construction loans
were in California. No other state comprised more than 7% of the portfolio at
March 31, 1994. The largest project type was 1-4 family land, representing 49%
of the portfolio at March 31, 1994, compared with 43% at December 31, 1993.
At March 31, 1994, $298 million, or 32%, of the Company's real estate
construction loans were in Southern California, compared with $365 million, or
33%, at December 31, 1993. Of these amounts, $56 million, or 19%, were on
nonaccrual at March 31, 1994, compared with $86 million, or 23%, at December 31,
1993. The largest project type in Southern California was 1-4 family land,
representing 46% and 40% of the Southern California portfolio at March 31, 1994
and December 31, 1993, respectively.
22
NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS
The table below presents comparative period-end nonaccrual and restructured
loans and other assets.
- ----------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 1994 1993 1993
- ----------------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial (1)(2) $ 165 $ 252 $ 558
Real estate 1-4 family first mortgage 90 99 97
Other real estate mortgage (3) 413 578 1,071
Real estate construction 202 235 204
Consumer:
Real estate 1-4 family junior lien mortgage 22 27 30
Other revolving credit and monthly payment 3 3 6
------ ------ ------
Total nonaccrual loans 895 1,194 1,966
Restructured loans 5 6 8
------ ------ ------
Nonaccrual and restructured loans 900 1,200 1,974
As a percentage of total loans 2.7% 3.6% 5.6%
Foreclosed assets (4)(5) 354 348 510
Real estate investments (6) 11 15 26
------ ------ ------
Total nonaccrual and restructured loans
and other assets $1,265 $1,563 $2,510
====== ====== ======
- ----------------------------------------------------------------------------------------------------
<FN>
(1) Includes loans to real estate developers of $47 million, $91 million and $64 million at March 31,
1994, December 31, 1993 and March 31, 1993, respectively.
(2) Includes agricultural loans of $2 million, $9 million and $26 million at March 31, 1994,
December 31, 1993 and March 31, 1993, respectively.
(3) Includes agricultural loans secured by real estate of $4 million, $24 million and $28 million at
March 31, 1994, December 31, 1993 and March 31, 1993, respectively.
(4) Includes agricultural properties of $25 million, $26 million and $44 million at March 31, 1994,
December 31, 1993 and March 31, 1993, respectively.
(5) Excludes in-substance foreclosures (ISFs) of $99 million reclassified to nonaccrual loans at
June 30, 1993 due to clarification of criteria used in determining when a loan is in-substance
foreclosed. Complete information is not available for prior periods; however, any ISFs that would
be reclassified in prior periods would not be materially higher than $99 million.
(6) Represents the amount of real estate investments (contingent interest loans accounted for as
investments) that would be classified as nonaccrual if such assets were loans. Real estate
investments totaled $29 million, $34 million and $56 million at March 31, 1994, December 31, 1993
and March 31, 1993, respectively.
23
Nonaccrual loans at March 31, 1994 declined for the sixth consecutive quarter
following nine quarters of increases. The general decline of nonaccrual loans
over the last six quarters largely resulted from loan payments and loans
returned to accrual, together with a reduction in new loans placed on
nonaccrual. This decline is expected to continue throughout 1994. The
placement of commercial and real estate loans on nonaccrual, as well as
transfers to foreclosed assets, are likely to continue to occur, although at a
declining rate, until, and for a period after, the current economic environment
improves and the oversupply of properties is reduced with resulting increases in
occupancy and rental rates. It may take years to absorb the surplus office
capacity in certain geographic markets (particularly in Southern California)
where the Company has commercial real estate outstandings.
The table below summarizes the quarterly trend of the changes in total
nonaccrual loans.
- ------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(in millions) 1994 1993 1993 1993 1993
- ------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF QUARTER $1,194 $1,696 $1,898 $1,966 $2,134
New loans placed on nonaccrual 52 113 195 264 249
Charge-offs (35) (55) (90) (71) (109)
Payments (121) (309) (188) (144) (156)
Transfers to foreclosed assets (37) (64) (32) (104) (41)
Transfers from foreclosed assets (1) -- -- -- 99 --
Loans returned to accrual (157) (188) (81) (107) (82)
Loans sold (3) -- (2) (5) (26)
Other additions (deductions) 2 1 (4) -- (3)
------ ------ ------ ------ ------
BALANCE, END OF QUARTER $ 895 $1,194 $1,696 $1,898 $1,966
====== ====== ====== ====== ======
- ------------------------------------------------------------------------------------------------------
<FN>
(1) Reclassification due to clarification of criteria used in determining when a loan is in-substance
foreclosed. Complete information is not available for prior periods; however, any ISFs that would
be reclassified in prior periods would not be materially higher than $99 million.
24
The table below summarizes the changes in nonaccrual loans by loan category for
the quarters ended March 31, 1994 and December 31, 1993.
- -------------------------------------------------------------------------------------------------------------------
Real estate
1-4 family Other real
first estate Real estate
(in millions) Commercial mortgage mortgage construction Consumer Total
- -------------------------------------------------------------------------------------------------------------------
QUARTER ENDED MARCH 31, 1994
Balance, beginning of quarter $252 $99 $578 $235 $30 $1,194
New loans placed on nonaccrual 15 9 25 2 1 52
Charge-offs (22) -- (12) (1) -- (35)
Payments:
Principal (32) (6) (45) (18) (3) (104)
Interest applied to principal (5) -- (8) (4) -- (17)
Transfers to foreclosed assets -- (6) (16) (12) (3) (37)
Loans returned to accrual (43) (3) (111) -- -- (157)
Loans sold -- (3) -- -- -- (3)
Other additions (deductions) -- -- 2 -- -- 2
---- --- ---- ---- --- ------
Balance, end of quarter $165 $90 $413 $202 $25 $ 895
==== === ==== ==== === ======
QUARTER ENDED DECEMBER 31, 1993
Balance, beginning of quarter $441 $96 $850 $278 $31 $1,696
New loans placed on nonaccrual (1) 22 14 69 5 3 113
Charge-offs (25) (1) (16) (12) (1) (55)
Payments:
Principal (117) (6) (134) (22) (2) (281)
Interest applied to principal (12) (1) (12) (3) -- (28)
Transfers to foreclosed assets (1) (4) (48) (11) -- (64)
Loans returned to accrual (50) -- (137) (1) -- (188)
Other additions (deductions) (6) 1 6 1 (1) 1
---- --- ---- ---- --- ------
Balance, end of quarter $252 $99 $578 $235 $30 $1,194
==== === ==== ==== === ======
- -------------------------------------------------------------------------------------------------------------------
<FN>
(1) Additions to other real estate mortgage loans include $23 million for commercial buildings and $22 million for shopping centers.
25
The table below summarizes foreclosed assets by state and type at March 31,
1994.
- ------------------------------------------------------------------------------------------------------
March 31, 1994
---------------------------------------------------------------------------
% of total
Washington Other Total foreclosed
(in millions) California D.C. Arizona Texas states(1) by type assets
- -----------------------------------------------------------------------------------------------------
Land (excluding
1-4 family) $73 $12 $15 $5 $22 127 37%
1-4 family 63 -- 2 1 3 69 19
Office buildings 50 -- -- -- 1 51 14
Industrial buildings 33 -- -- -- -- 33 9
Agricultural 25 -- -- -- -- 25 7
Shopping centers 9 7 -- 8 -- 24 7
Apartments 14 -- 1 -- -- 15 4
Hotels/motels -- -- -- -- 3 3 1
Other 6 -- -- -- 1 7 2
---- --- --- --- --- ---- ---
Total by state $273 $19 $18 $14 $30 $354 100%
==== === === === === ==== ===
% of total foreclosed
assets 78% 5% 5% 4% 8% 100%
==== === === === === ====
- ------------------------------------------------------------------------------------------------------
<FN>
(1) Consists of 13 states; foreclosed assets in each of these states were less than $10 million at
March 31, 1994.
At March 31, 1994, $197 million, or 56%, of the Company's foreclosed assets were
in Southern California, compared with $177 million, or 51%, at December 31,
1993. The largest property type in Southern California was land, representing
32% and 30% of the Southern California portfolio at March 31, 1994 and December
31, 1993, respectively.
The table below summarizes the quarterly trend of the changes in foreclosed
assets.
- -------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(in millions) 1994 1993 1993 1993 1993
- -------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF QUARTER $348 $357 $391 $510 $510
Additions 62 100 65 150 90
Sales (42) (89) (76) (117) (46)
Charge-offs (8) (10) (8) (23) (8)
Write-downs (6) (7) (10) (18) (26)
Transfers to nonaccrual loans (1) -- -- -- (99) --
Other deductions -- (3) (5) (12) (10)
---- ---- ---- ---- ----
BALANCE, END OF QUARTER $354 $348 $357 $391 $510
==== ==== ==== ==== ====
- -------------------------------------------------------------------------------------------
<FN>
(1) Reclassification due to clarification of criteria used in determining when a loan is
in-substance foreclosed. Complete information is not available for prior periods;
however, any ISFs that would be reclassified in prior periods would not be materially
higher than $99 million.
26
The table below summarizes the changes in foreclosed assets by property type for
the quarters ended March 31, 1994 and December 31, 1993.
- -----------------------------------------------------------------------------------------------------------------------------
Beginning Charge- Write- Ending
(in millions) Balance Additions Sales offs(1) downs Other Balance
- -----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDED
MARCH 31, 1994
Land (excluding
1-4 family) $119 $ 14 $ -- $ (4) $ (2) $ -- $127
1-4 family 69 31 (25) (3) (3) -- 69
Office buildings 51 3 (3) (1) -- 1 51
Industrial buildings 27 6 -- -- -- -- 33
Agricultural 26 1 (2) -- -- -- 25
Shopping centers 27 2 (4) -- (1) -- 24
Apartments 15 5 (5) -- -- -- 15
Hotels/motels 6 -- (3) -- -- -- 3
Other 8 -- -- -- -- (1) 7
---- ---- ---- ---- ---- ---- ----
Total $348 $ 62 $(42) $ (8) $ (6) $ -- $354
==== ==== ==== ==== ==== ==== ====
QUARTER ENDED
DECEMBER 31, 1993
Land (excluding
1-4 family) $ 98 $ 47 $ (2) $ (1) $ (1) $(22) $119
1-4 family 79 23 (43) (5) (5) 20 69
Office buildings 53 4 (4) (1) -- (1) 51
Industrial buildings 37 1 (10) (1) -- -- 27
Agricultural 23 5 (2) -- -- -- 26
Shopping centers 41 14 (27) -- (1) -- 27
Apartments 11 5 (1) (2) -- 2 15
Hotels/motels 6 -- -- -- -- -- 6
Other 9 1 -- -- -- (2) 8
---- ---- ---- ---- ---- ---- ----
Total $357 $100 $(89) $(10) $ (7) $ (3) $348
==== ==== ==== ==== ==== ==== ====
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Charge-offs to the allowance for loan losses may occur up to 90 days after foreclosed assets have been transferred from
loans.
Approximately 62% of the foreclosed assets at March 31, 1994 have been in the
Company's portfolio less than one year. Land and agricultural properties
represented a majority of the foreclosed assets greater than one year old at
March 31, 1994.
NONACCRUAL LOANS BY PERFORMANCE CATEGORY
The table on the following page presents the amount of nonaccrual loans that
were contractually past due and those that were contractually current at the end
of March 31, 1994 and December 31, 1993 as well as the amount of cash interest
payments received while the loans were on nonaccrual. Both book and contractual
principal balances are presented in the table, the difference reflecting charge-
offs and interest applied to principal.
At March 31, 1994, an estimated $489 million, or 55%, of nonaccrual loans were
less than 90 days past due, including an estimated $363 million, or 41%, that
were current (less than 30 days past due) as to payment of principal and
interest. This compares with an estimated $704 million,
27
or 59%, of nonaccrual loans that were less than 90 days past due at December 31,
1993, including an estimated $595 million, or 50%, that were current.
The ratio of book to contractual principal balance was 68% at March 31, 1994,
compared with 66% at December 31, 1993.
For all loans on nonaccrual during the first quarter of 1994 and the fourth
quarter of 1993 (including loans no longer on nonaccrual at March 31, 1994 and
December 31, 1993), cash interest payments of $23 million and $34 million,
respectively, were received while the loans were on nonaccrual status. Of the
$23 million received in the first quarter, $6 million was recognized as interest
income and $17 million was applied to principal. Of the $34 million received in
the fourth quarter, $8 million was recognized as interest income and $26 million
was applied to principal. The average nonaccrual book principal loan balances
(net of charge-offs and interest applied to principal) were $1,094 million and
$1,498 million for the quarters ended March 31, 1994 and December 31, 1993,
respectively.
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
The following table shows loans contractually past due 90 days or more as to
interest or principal, but not included in the nonaccrual or restructured
categories. All loans in this category are both well-secured and in the process
of collection or are consumer loans or real estate 1-4 family first mortgage
loans that are exempt under regulatory rules from being classified as
nonaccrual.
- ------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 1994 1993 1993
- ------------------------------------------------------------------------------------------
Commercial $ 6 $ 4 $ 9
Real estate 1-4 family first mortgage 19 19 25
Other real estate mortgage 68 14 21
Real estate construction 11 8 7
Consumer:
Real estate 1-4 family junior lien mortgage 6 6 6
Credit card 40 43 53
Other revolving credit and monthly payment 1 1 2
---- --- ----
Total consumer 47 50 61
Lease financing 1 -- --
---- --- ----
Total $152 $95 $123
==== === ====
- ------------------------------------------------------------------------------------------
28
NONACCRUAL LOANS BY PERFORMANCE CATEGORY (ESTIMATED)(1)
- ------------------------------------------------------------------------------------------------------------------
Cash interest
Cumulative payments applied as:
cash -----------------------
Book interest Contractual Reduction
principal Cumulative applied to principal Interest of
(in millions) balance charge-offs(6) principal(6) balance Income(7) principal(7)
- ------------------------------------------------------------------------------------------------------------------
MARCH 31, 1994 FIRST QUARTER 1994
------------------------------------------------------ -----------------------
Contractually past due (2):
Payments not made (3):
90 days or more past due $ 136 $ 4 $ -- $ 140 $ -- $ --
Less than 90 days past due 4 6 -- 10 -- --
----- ---- ----- ------ ---- ----
140 10 -- 150 -- --
----- ---- ----- ------ ---- ----
Payments made (4):
90 days or more past due 270 127 38 435 -- 4
Less than 90 days past due 122 61 36 219 1 1
----- ---- ----- ------ ---- ----
392 188 74 654 1 5
----- ---- ----- ------ ---- ----
Total past due 532 198 74 804 1 5
Contractually current (5) 363 102 55 520 2 7
----- ---- ----- ------ ---- ----
Total nonaccrual loans $ 895 $300 $ 129 $1,324 $ 3 $ 12
===== ==== ===== ====== ==== ====
- ------------------------------------------------------------------------------------------------------------------
December 31, 1993 Fourth quarter 1993
--------------------------------------------------- -------------------
Contractually past due (2):
Payments not made (3):
90 days or more past due $ 161 $ 22 $ -- $ 183 $ -- $ --
Less than 90 days past due 23 -- -- 23 -- --
----- ---- ----- ------ ----- ----
184 22 -- 206 -- --
----- ---- ----- ------ ----- ----
Payments made (4):
90 days or more past due 329 171 41 541 -- 6
Less than 90 days past due 86 29 16 131 -- 2
----- ---- ----- ------ ----- ----
415 200 57 672 -- 8
----- ---- ----- ------ ----- ----
Total past due 599 222 57 878 -- 8
Contractually current (5) 595 214 120 929 1 14
----- ---- ----- ------ ----- ----
Total nonaccrual loans $1,194 $436 $ 177 $1,807 $ 1 $ 22
====== ==== ===== ====== ===== ====
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) There can be no assurance that individual borrowers will continue to perform at the level indicated or that the
performance characteristics will not change significantly.
(2) Contractually past due is defined as a borrower whose loan principal or interest payment is 30 days or more past
due.
(3) Borrower has made no payments since being placed on nonaccrual.
(4) Borrower has made some payments since being placed on nonaccrual. Approximately $283 million and $314 million
of these loans had some payments made on them during the first quarter of 1994 and the fourth quarter of 1993,
respectively.
(5) Contractually current is defined as a loan for which principal and interest are being paid in accordance with the
terms of the loan. Approximately $52 million and $113 million of loans, both current and past due, were placed
on nonaccrual in the first quarter of 1994 and the fourth quarter of 1993, respectively, of which approximately
$2 million and $15 million were contractually current at March 31, 1994 and December 31, 1993, respectively. All
of the contractually current loans were placed on nonaccrual due to uncertainty of receiving full timely
collection of interest or principal.
(6) Cumulative amounts recorded since inception of the loan.
(7) Includes only those interest payments received subsequent to a borrower being placed on nonaccrual. Therefore,
these amounts do not include interest received before these loans were placed on nonaccrual. There were no interest
payments received that were recorded as recoveries on partially charged-off loans because payments on such loans
were applied as a reduction of loan principal or recognized as interest income.
29
ALLOWANCE FOR LOAN LOSSES
The table below presents net charge-offs by loan category.
NET CHARGE-OFFS (RECOVERIES) BY LOAN CATEGORY
- ------------------------------------------------------------------------------------------------------------------------
Quarter ended
-----------------------------------------------------------------------
MARCH 31, 1994 December 31, 1993 March 31, 1993
------------------- ------------------- -------------------
% OF % of % of
AVERAGE average average
(in millions) AMOUNT LOANS(1) Amount loans(1) Amount loans(1)
- ------------------------------------------------------------------------------------------------------------------------
Commercial $17 1.01 % $ 7 .41% $ 7 .39%
Real estate 1-4 family first mortgage 2 .10 8 .42 5 .31
Other real estate mortgage 3 .18 5 .21 58 2.34
Real estate construction (1) (.31) 10 3.20 24 6.50
Consumer:
Real estate 1-4 family junior lien mortgage 7 .78 8 .80 7 .69
Credit card 35 5.39 34 5.53 42 6.25
Other revolving credit and monthly payment 5 1.18 6 1.49 10 2.17
---- ---- ----
Total consumer 47 2.35 48 2.43 59 2.68
Lease financing (7) (2.36) 3 1.08 2 .57
---- ---- ----
Total net loan charge-offs $61 .74 % $81 .97% $155 1.75%
=== ==== === ==== ==== ====
- ------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Calculated on an annualized basis.
Total net charge-offs for the first quarter of 1994 were .74% of average total
loans on an annualized basis. Net charge-offs were predominantly due to credit
card loans and commercial loans. The high level of credit card charge-offs was
mostly due to bankruptcies and the current economic environment (particularly in
Southern California). The commercial net charge-offs were mostly due to loans
related to an office building and the manufacturing industry. Substantially all
of these loans were located in Southern California.
Although net charge-offs during 1991 and 1992 have been higher than historical
norms, they steadily declined during 1993 and are expected to continue declining
in 1994 due to the improvement in the credit quality of the Company's loan
portfolio.
30
The table below presents changes in the allowance for loan losses.
CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
- ----------------------------------------------------------------------------------------------------
Quarter ended
----------------------------------------
MARCH 31, December 31, March 31,
(in millions) 1994 1993 1993
- ----------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF QUARTER $2,122 $2,123 $2,067
Provision for loan losses 60 80 210
Loan charge-offs:
Commercial (1) (25) (29) (29)
Real estate 1-4 family first mortgage (5) (8) (5)
Other real estate mortgage (13) (21) (66)
Real estate construction (4) (13) (24)
Consumer:
Real estate 1-4 family junior lien mortgage (8) (9) (8)
Credit card (40) (40) (47)
Other revolving credit and monthly payment (8) (9) (13)
------ ------ ------
Total consumer (56) (58) (68)
Lease financing (4) (5) (5)
------ ------ ------
Total loan charge-offs (107) (134) (197)
------ ------ ------
Loan recoveries:
Commercial (2) 8 22 22
Real estate 1-4 family first mortgage 3 -- --
Other real estate mortgage 10 16 8
Real estate construction 5 3 --
Consumer:
Real estate 1-4 family junior lien mortgage 1 1 1
Credit card 5 6 5
Other revolving credit and monthly payment 3 3 3
------ ------ ------
Total consumer 9 10 9
Lease financing 11 2 3
------ ------ ------
Total loan recoveries 46 53 42
------ ------ ------
Total net loan charge-offs (61) (81) (155)
------ ------ ------
BALANCE, END OF QUARTER $2,121 $2,122 $2,122
====== ====== ======
Total net loan charge-offs as a percentage
of average total loans (annualized) .74% .97% 1.75%
====== ====== ======
Allowance as a percentage of total loans 6.34% 6.41% 6.04%
====== ====== ======
- ----------------------------------------------------------------------------------------------------
<FN>
(1) Includes charge-offs of loans to real estate developers of $10 million, $15 million and
$4 million in the quarters ended March 31, 1994, December 31, 1993 and March 31, 1993,
respectively.
(2) Includes recoveries from loans to real estate developers of none, $1 million and $1 million in
the quarters ended March 31, 1994, December 31, 1993 and March 31, 1993, respectively.
31
The Company considers the allowance for loan losses of $2,121 million adequate
to cover losses inherent in loans, loan commitments and standby letters of
credit at March 31, 1994. The Company's determination of the level of the
allowance and, correspondingly, the provision for loan losses rests upon various
judgments and assumptions, including general (particularly California) economic
conditions, loan portfolio composition, prior loan loss experience and the
Company's ongoing examination process and that of its regulators.
Statement of Financial Accounting Standards No. 114 (FAS 114), Accounting by
Creditors for Impairment of a Loan, addresses the accounting treatment of
certain impaired loans and amends FASB Statements No. 5 and 15; however, it does
not address the overall adequacy of the allowance for loan losses. The
Statement is effective January 1, 1995, and can only be applied prospectively.
The Company does not currently intend to implement the Statement before its
effective date. Based on the information available at March 31, 1994 and the
Company's current interpretations of FAS 114, the allowance will not increase as
a result of adopting this Statement.
OTHER ASSETS
The table below presents comparative period-end detail of other assets.
- ----------------------------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
(in millions) 1994 1993 1993
- ----------------------------------------------------------------------------------------------------
Net deferred tax asset (1) $ 932 $ 884 $ 760
Nonmarketable equity investments 399 396 349
Certain identifiable intangible assets 379 373 437
Foreclosed assets 354 348 510
Other 451 423 549
------ ------ ------
Total other assets $2,515 $2,424 $2,605
====== ====== ======
- ----------------------------------------------------------------------------------------------------
<FN>
(1) Net of a valuation allowance of $2 million, $2 million and $5 million at March 31, 1994,
December 31, 1993 and March 31, 1993, respectively.
The Company estimates that approximately $810 million of the $932 million net
deferred tax asset at March 31, 1994 could be realized by the recovery of
previously paid federal taxes; however, the Company expects to actually realize
the federal net deferred tax asset by claiming deductions against future taxable
income. The balance of approximately $122 million relates to approximately $1.6
billion of net deductions that are expected to reduce future California taxable
income (California tax law does not permit recovery of previously paid taxes).
The Company believes that it is more likely than not that it will have
sufficient future California taxable income to fully utilize these deductions.
The identifiable intangible assets are generally amortized using an accelerated
method, which is based on estimated useful lives ranging from 5 to 15 years.
Amortization expense was $19 million, $20 million and $32 million for the
quarters ended March 31, 1994, December 31, 1993 and March 31, 1993,
respectively.
32
DEPOSITS
The table below presents comparative period-end detail of total deposits.
- ----------------------------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
(in millions) 1994 1993 1993
- ----------------------------------------------------------------------------------------------------
Noninterest-bearing $ 9,611 $ 9,719 $ 8,568
Interest-bearing checking 4,737 4,789 4,592
Savings 2,595 2,544 2,867
Market rate savings 17,288 17,084 16,203
Savings certificates 6,914 7,155 8,398
------- ------- -------
Core deposits 41,145 41,291 40,628
Other 459 353 346
------- ------- -------
Total deposits $41,604 $41,644 $40,974
======= ======= =======
- ----------------------------------------------------------------------------------------------------
CAPITAL ADEQUACY/RATIOS
Risk-based capital (RBC) guidelines issued by the Federal Reserve Board (FRB)
establish a risk-adjusted ratio relating capital to different categories of
assets and off-balance sheet exposures. The table on the following page
presents the Company's Tier 1 and Tier 2 capital components. The guidelines
require a minimum total RBC ratio of 8%, with at least half of the total capital
in the form of Tier 1 capital.
The decrease in the Company's Tier 1 and total RBC ratios at March 31, 1994
compared with December 31, 1993 resulted primarily from the redemption of $150
million in Series A preferred stock (at its liquidation preference carrying
amount) on March 21, 1994 and secondarily from the repurchase of 555,853 shares
of common stock during the quarter.
To supplement the RBC guidelines, the FRB established a minimum leverage ratio
guideline of 3%. The leverage ratio consists of Tier 1 capital divided by
quarterly average total assets (excluding goodwill and other items which were
deducted to arrive at Tier 1 capital). The Company's leverage ratio was 7.34%
at March 31, 1994, compared with 7.39% and 6.65% at December 31, 1993 and March
31, 1993, respectively.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a "well
capitalized" bank must have a Tier 1 RBC ratio of at least 6%, a combined Tier 1
and Tier 2 ratio of at least 10% and a leverage ratio of at least 5% (and not be
subject to a capital directive order). At March 31, 1994, the Bank had a Tier 1
RBC ratio of 10.85%, a combined Tier 1 and Tier 2 ratio of 14.07% and a leverage
ratio of 7.75%.
33
RISK-BASED CAPITAL/RATIOS
- ----------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, March 31,
(in billions) 1994 1993 1993
- ----------------------------------------------------------------------------------------------------
Tier 1:
Common stockholders' equity $ 3.7 $ 3.7 $ 3.3
Preferred stock (1) .5 .6 .6
Less goodwill and other deductions (2) (.5) (.5) (.5)
------ ------ ------
Total Tier 1 capital 3.7 3.8 3.4
------ ------ ------
Tier 2:
Mandatory convertible debt (3) .1 .1 .1
Subordinated debt and unsecured senior debt (4) 1.1 1.1 1.2
Allowance for loan losses allowable in Tier 2 .5 .4 .5
------ ------ ------
Total Tier 2 capital 1.7 1.6 1.8
------ ------ ------
Total risk-based capital $ 5.4 $ 5.4 $ 5.2
====== ====== ======
Risk-weighted balance sheet assets $ 36.3 $ 36.1 $ 37.7
Risk-weighted off-balance sheet items:
Commitments to make or purchase loans 1.4 1.3 1.7
Standby letters of credit .6 .6 .7
Other .2 .2 .3
------ ------ ------
Total risk-weighted off-balance sheet items 2.2 2.1 2.7
------ ------ ------
Goodwill and other deductions (2) (.5) (.5) (.6)
Allowance for loan losses not included in Tier 2 (1.6) (1.7) (1.6)
------ ------ ------
Total risk-weighted assets $ 36.4 $ 36.0 $ 38.2
====== ====== ======
Risk-based capital ratios:
Tier 1 capital (4.00% minimum requirement) 10.23% 10.48% 8.78%
Total capital (8.00% minimum requirement) 14.83 15.12 13.67
- ----------------------------------------------------------------------------------------------------
<FN>
(1) During the first quarter of 1994, $150 million of Series A preferred stock was redeemed at its
liquidation preference carrying amount.
(2) Other deductions include the unrealized net gain (loss) on available-for-sale investment securities
carried at fair value, as currently required by federal regulatory agencies.
(3) Net of note fund and designated stockholders' equity.
(4) Discounted based on remaining maturity.
34
ASSET/LIABILITY MANAGEMENT
As is typical in the banking industry, most of the Company's assets and
liabilities are sensitive to fluctuations in interest rates. Accordingly, an
essential objective of asset/liability management is to control interest rate
risk.
The Company manages portfolio assets by matching them with funding sources that
have similar repricing characteristics. The Company uses various asset/liability
strategies to manage the repricing characteristics of its assets, liabilities
and off-balance sheet financial instruments to ensure that exposure to interest
rate fluctuations is limited within Company guidelines of acceptable levels of
risk-taking. Hedging strategies, including the use of interest rate contracts,
are used to reduce mismatches in interest rate maturities of portfolio assets
and their funding sources.
One way to measure the impact that future changes in interest rates will have on
net interest income is through a cumulative gap measure. The gap represents the
net position of assets and liabilities subject to repricing in specified time
periods. Generally, a liability sensitivity gap indicates that there would be a
net positive impact on the net interest margin of the Company over the next year
in a declining interest rate environment since the Company's liabilities would
reprice to lower market interest rates before its assets would. A net negative
impact would result from an increasing interest rate environment. At March 31,
1994, the under-one-year cumulative gap was a $236 million (.5% of total assets)
net liability position, compared with a net asset position of $1,402 million
(2.7% of total assets) at December 31, 1993. The shift to a net liability
position at March 31, 1994 from a net asset position at December 31, 1993 was
significantly due to a decrease in federal funds sold and securities purchased
under resale agreements, primarily offset by a decrease in the under-one-year
balance of senior and subordinated debt.
Two adjustments to the cumulative gap provide comparability with banks that
present interest rate sensitivity in an alternative manner. However, management
does not believe that these adjustments necessarily depict its interest rate
risk. The first adjustment excludes noninterest earning assets, noninterest-
bearing liabilities and stockholders' equity from the cumulative gap calculation
so only earning assets, interest-bearing liabilities and interest rate financial
contracts are reported. The second adjustment moves interest-bearing checking
and savings deposits from the nonmarket, over-one-year liability category to the
shortest rate maturity category. The second adjustment reflects the
availability of the deposits for immediate withdrawal. The resulting adjusted
under-one-year cumulative gap (net liability position) was $7.5 billion and $5.9
billion at March 31, 1994 and December 31, 1993, respectively.
Since interest rate changes do not affect all categories of assets and
liabilities equally or simultaneously, a cumulative gap analysis alone cannot be
used to evaluate the Company's interest rate sensitivity position. To
supplement traditional gap analysis, the Company performs simulation modeling to
estimate the potential effects of changing interest rates. The process allows
the Company to fully explore the complex relationships within the gap over time
and various interest rate environments.
35
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on April 19, 1994.
(b) Each of the persons named in the Proxy Statement as a nominee for
director was elected; the adoption of the new Long-Term Incentive
Plan and the new Senior Executive Performance Plan was approved; and
the selection of KPMG Peat Marwick as the Company's independent
auditors for 1994 was ratified. The following are the voting
results on each of these matters:
Against
or Broker
For Withheld Abstentions Non-votes
--- -------- ----------- ----------
(1) ELECTION OF DIRECTORS:
H. Jesse Arnelle 46,864,490 101,001 -- --
William R. Bruener 46,873,410 92,081 -- --
William S. Davila 46,858,443 107,048 -- --
Rayburn S. Dezember 46,870,487 95,004 -- --
Paul Hazen 46,877,824 87,667 -- --
Robert J. Jaedicke 46,865,992 99,499 -- --
Paul A. Miller 46,869,129 96,362 -- --
Ellen M. Newman 46,877,452 88,039 -- --
Carl E. Reichardt 46,877,662 87,829 -- --
Donald B. Rice 46,875,628 89,863 -- --
Chang-Lin Tien 46,857,387 108,104 -- --
John A. Young 46,870,902 94,589 -- --
(2) Adoption of a new
Long-Term Incentive
Plan. 43,505,294 3,244,104 216,093 --
(3) Adoption of a new
Senior Executive
Performance Plan. 42,458,892 4,234,035 272,564 --
(4) Ratification of the
selection of KPMG
Peat Marwick as the
Company's indepen-
dent auditors for 1994. 46,706,286 82,376 176,829 --
36
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4 The Company hereby agrees to furnish upon request to the
Commission a copy of each instrument defining the rights of
holders of securities of the Company.
10 (a) Long-Term Incentive Plan, incorporated by reference to
Exhibit A of the Proxy Statement filed March 14, 1994*
(b) Senior Executive Performance Plan, incorporated by
reference to Exhibit B of the Proxy Statement filed
March 14, 1994*
* Compensatory Plan or Arrangement.
11 Computation of Earnings Per Common Share
99 Computation of Ratios of Earnings to Fixed Charges -- the
ratios of earnings to fixed charges, including interest on
deposits, were 2.34 and 1.62 for the quarters ended
March 31, 1994 and 1993, respectively. The ratios of
earnings to fixed charges, excluding interest on deposits,
were 6.06 and 3.58 for the quarters ended March 31, 1994 and
1993, respectively.
(b) The Company filed the following reports on Form 8-K during the
first quarter of 1994 and through the date hereof:
(1) January 20, 1994 under Item 5, containing the Press Releases
that announced the Company's financial results for the
quarter and year ended December 31, 1993 and the increase in
the Company's common stock dividend
(2) April 19, 1994 under Item 5, containing the Press Release
that announced the Company's financial results for the
quarter ended March 31, 1994
37
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, thereunto duly authorized, on May 13, 1994.
WELLS FARGO & COMPANY
By: FRANK A. MOESLEIN
------------------------------------
Frank A. Moeslein
Executive Vice President and Controller
(Principal Accounting Officer)
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