SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994 Commission file number 1-6214
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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
July 31, 1994
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Common stock, $5 par value 53,915,181
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
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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 . . . . . . . . . . . . . . . . . . . . . 12
Noninterest Expense. . . . . . . . . . . . . . . . . . . . . 14
Balance Sheet Analysis . . . . . . . . . . . . . . . . . . . . 16
Investment Securities. . . . . . . . . . . . . . . . . . . . 16
Loan Portfolio . . . . . . . . . . . . . . . . . . . . . . . 19
Commercial real estate . . . . . . . . . . . . . . . . . . 19
Nonaccrual and Restructured Loans and Other Assets . . . . . 21
Quarterly trend of changes in nonaccrual loans . . . . . . 22
Changes in nonaccrual loans by loan category . . . . . . . 22
Quarterly trend of changes in foreclosed assets. . . . . . 23
Nonaccrual loans by performance category . . . . . . . . . 23
Loans 90 days past due and still accruing. . . . . . . . . 25
Allowance for Loan Losses. . . . . . . . . . . . . . . . . . 26
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . 28
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Capital Adequacy/Ratios. . . . . . . . . . . . . . . . . . . 29
Asset/Liability Management . . . . . . . . . . . . . . . . . 31
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 32
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
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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
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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
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Quarter Six months
ended June 30, ended June 30,
-------------------- --------------------
(in millions) 1994 1993 1994 1993
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INTEREST INCOME
Loans $ 733 $ 763 $1,438 $1,577
Investment securities 197 168 382 320
Federal funds sold and securities
purchased under resale agreements 1 5 5 9
Other 1 -- 2 --
----- ----- ------ ------
Total interest income 932 936 1,827 1,906
----- ----- ------ ------
INTEREST EXPENSE
Deposits 210 216 406 448
Federal funds purchased and securities sold under
repurchase agreements 18 9 26 16
Commercial paper and other short-term borrowings 2 1 3 3
Senior and subordinated debt 47 52 95 103
----- ----- ------ ------
Total interest expense 277 278 530 570
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NET INTEREST INCOME 655 658 1,297 1,336
Provision for loan losses 60 140 120 350
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Net interest income after provision for loan losses 595 518 1,177 986
----- ----- ------ ------
NONINTEREST INCOME
Service charges on deposit accounts 119 105 236 205
Fees and commissions 92 99 177 187
Trust and investment services income 50 48 100 94
Investment securities gains 3 -- 7 --
Other 35 23 79 48
----- ----- ------ ------
Total noninterest income 299 275 599 534
----- ----- ------ ------
NONINTEREST EXPENSE
Salaries 196 198 385 381
Employee benefits 51 54 108 109
Net occupancy 53 57 108 110
Equipment 41 34 80 68
Federal deposit insurance 25 26 51 58
Other 160 162 317 344
----- ----- ------ ------
Total noninterest expense 526 531 1,049 1,070
----- ----- ------ ------
INCOME BEFORE INCOME TAX EXPENSE 368 262 727 450
Income tax expense 162 113 319 193
----- ----- ------ ------
NET INCOME $ 206 $ 149 $ 408 $ 257
----- ----- ------ ------
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NET INCOME APPLICABLE TO COMMON STOCK $ 195 $ 137 $ 385 $ 232
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PER COMMON SHARE
Net income $3.57 $2.46 $ 6.98 $ 4.18
----- ----- ------ ------
----- ----- ------ ------
Dividends declared $1.00 $ .50 $ 2.00 $ 1.00
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----- ----- ------ ------
Average common shares outstanding 55 56 55 55
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2
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
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JUNE 30, December 31, June 30,
(in millions) 1994 1993 1993
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ASSETS
Cash and due from banks $ 2,653 $ 2,644 $ 2,535
Investment securities:
At cost (estimated fair value
$9,996, $9,978 and $11,921) 10,261 9,887 11,700
At fair value 3,067 3,171 --
------- ------- -------
Total investment securities 13,328 13,058 11,700
Federal funds sold and securities
purchased under resale agreements 55 1,668 551
Loans 34,172 33,099 34,353
Allowance for loan losses 2,120 2,122 2,124
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Net loans 32,052 30,977 32,229
------- ------- -------
Due from customers on acceptances 69 70 79
Accrued interest receivable 316 297 310
Premises and equipment, net 886 898 917
Goodwill 459 477 504
Other assets 2,469 2,424 2,504
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Total assets $52,287 $52,513 $51,329
------- ------- -------
------- ------- -------
LIABILITIES
Noninterest-bearing deposits $ 9,475 $ 9,719 $ 9,047
Interest-bearing deposits 31,730 31,925 31,887
------- ------- -------
Total deposits 41,205 41,644 40,934
Federal funds purchased and securities
sold under repurchase agreements 2,331 1,079 1,145
Commercial paper and other short-term borrowings 195 188 153
Acceptances outstanding 69 70 79
Accrued interest payable 68 63 86
Other liabilities 848 933 838
Senior debt 1,990 2,256 2,163
Subordinated debt 1,455 1,965 1,920
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Total liabilities 48,161 48,198 47,318
------- ------- -------
STOCKHOLDERS' EQUITY
Preferred stock 489 639 639
Common stock - $5 par value,
authorized 150,000,000 shares;
issued and outstanding 54,255,187 shares,
55,812,592 shares and 55,544,255 shares 271 279 278
Additional paid-in capital 330 551 530
Retained earnings 3,103 2,829 2,568
Cumulative foreign currency translation adjustments (4) (4) (4)
Investment securities valuation allowance (63) 21 --
------- ------- -------
Total stockholders' equity 4,126 4,315 4,011
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Total liabilities and stockholders' equity $52,287 $52,513 $51,329
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3
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
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Six months ended June 30,
-------------------------
(in millions) 1994 1993
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PREFERRED STOCK
Balance, beginning of period $ 639 $ 639
Preferred stock redeemed (150) --
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Balance, end of period 489 639
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COMMON STOCK
Balance, beginning of period 279 276
Common stock issued under employee benefit and
dividend reinvestment plans 1 2
Common stock repurchased (9) --
------ ------
Balance, end of period 271 278
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ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period 551 506
Common stock issued under employee benefit and
dividend reinvestment plans 12 24
Common stock repurchased (233) --
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Balance, end of period 330 530
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RETAINED EARNINGS
Balance, beginning of period 2,829 2,392
Net income 408 257
Preferred stock dividends (23) (25)
Common stock dividends (111) (56)
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Balance, end of period 3,103 2,568
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CUMULATIVE FOREIGN CURRENCY
TRANSLATION ADJUSTMENTS
Balance, beginning and end of period (4) (4)
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INVESTMENT SECURITIES VALUATION ALLOWANCE
Balance, beginning of period 21 --
Change in unrealized net gain, after applicable
taxes (84) --
------ ------
Balance, end of period (63) --
------ ------
Total stockholders' equity $4,126 $4,011
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4
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
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Six months ended June 30,
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(in millions) 1994 1993
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 408 $ 257
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 120 350
Depreciation and amortization 120 139
Deferred income tax provision (benefit) 5 (44)
Decrease in net deferred loan fees (2) (3)
Net increase in accrued interest receivable (19) (9)
Net increase (decrease) in accrued interest payable 5 (2)
Other, net (47) 153
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Net cash provided by operating activities 590 841
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities:
At cost:
Proceeds from prepayments and maturities 2,066 709
Purchases (2,440) (3,071)
At fair value:
Proceeds from sales 17 --
Proceeds from prepayments and maturities 494 --
Purchases (545) --
Net (increase) decrease in loans resulting from
originations and collections (1,244) 1,958
Proceeds from sales (including participations) of loans 61 192
Purchases (including participations) of loans (154) (18)
Proceeds from sales of foreclosed assets 121 165
Net decrease in federal funds sold and securities
purchased under resale agreements 1,613 632
Other, net (19) (93)
------- -------
Net cash provided (used) by investing activities (30) 474
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits (439) (1,310)
Net increase (decrease) in short-term borrowings 1,259 (215)
Proceeds from issuance of senior debt -- 365
Proceeds from issuance of subordinated debt -- 150
Repayment of senior debt (261) (401)
Repayment of subordinated debt (526) (100)
Proceeds from issuance of common stock 13 26
Repurchase of common stock (242) --
Redemption of preferred stock (150) --
Payment of cash dividends (134) (81)
Other, net (71) 96
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Net cash used by financing activities (551) (1,470)
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NET CHANGE IN CASH AND CASH EQUIVALENTS
(DUE FROM BANKS) 9 (155)
Cash and cash equivalents at beginning of period 2,644 2,690
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,653 $ 2,535
------- -------
------- -------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 525 $ 572
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------- -------
Income taxes $ 346 $ 217
------- -------
------- -------
Noncash investing activities:
Transfers from loans to foreclosed assets $ 125 $ 240
------- -------
------- -------
Transfers from foreclosed assets to nonaccrual loans $ -- $ 99
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5
FINANCIAL REVIEW
SUMMARY FINANCIAL DATA
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% Change
Quarter ended June 30, 1994 from Six months ended
------------------------------- ------------------ ------------------
JUNE 30, Mar. 31, June 30, Mar. 31, June 30, JUNE 30, June 30, %
(in millions) 1994 1994 1993 1994 1993 1994 1993 Change
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FOR THE PERIOD
Net income $ 206 $ 202 $ 149 2 % 38 % $ 408 $ 257 59 %
Per common share
Net income $ 3.57 $ 3.41 $ 2.46 5 45 $ 6.98 $ 4.18 67
Dividends declared 1.00 1.00 .50 -- 100 2.00 1.00 100
Average common shares outstanding 55 56 56 (2) (2) 55 55 --
Profitability ratios (annualized)
Net income to average total assets (ROA) 1.59% 1.60% 1.18% (1) 35 1.59% 1.02% 56
Net income applicable to common stock to
average common stockholders' equity (ROE) 21.67 21.09 16.73 3 30 21.38 14.46 48
Efficiency ratio (1) 55.2% 55.5% 56.9% (1) (3) 55.3% 57.2% (3)
Average loans $ 33,630 $ 32,848 $ 34,582 2 (3) $ 33,242 $ 35,205 (6)
Average assets 52,013 51,220 50,866 2 2 51,619 50,913 1
Average core deposits 40,232 40,385 40,203 -- -- 40,309 40,295 --
Net interest margin 5.56% 5.56% 5.71% -- (3) 5.56% 5.81% (4)
Average staff (full-time equivalent) 19,500 19,400 21,300 1 (8) 19,500 21,200 (8)
AT PERIOD END
Investment securities $ 13,328 $ 13,766 $ 11,700 (3) 14 $ 13,328 $ 11,700 14
Loans 34,172 33,452 34,353 2 (1) 34,172 34,353 (1)
Allowance for loan losses 2,120 2,121 2,124 -- -- 2,120 2,124 --
Assets 52,287 52,176 51,329 -- 2 52,287 51,329 2
Core deposits 40,249 41,145 40,592 (2) (1) 40,249 40,592 (1)
Common stockholders' equity 3,637 3,700 3,372 (2) 8 3,637 3,372 8
Stockholders' equity 4,126 4,189 4,011 (2) 3 4,126 4,011 3
Tier 1 capital (2) 3,711 3,722 3,493 -- 6 3,711 3,493 6
Total capital (Tiers 1 and 2) (2) 5,372 5,397 5,375 -- -- 5,372 5,375 --
Capital ratios
Common stockholders' equity to assets 6.96% 7.09% 6.57% (2) 6 6.96% 6.57% 6
Stockholders' equity to assets 7.89 8.03 7.82 (2) 1 7.89 7.82 1
Risk-based capital (2)
Tier 1 capital 10.06 10.23 9.31 (2) 8 10.06 9.31 8
Total capital 14.56 14.83 14.33 (2) 2 14.56 14.33 2
Leverage (2) 7.20 7.34 6.94 (2) 4 7.20 6.94 4
Book value per common share $ 67.04 $ 66.87 $ 60.72 -- 10 $ 67.04 $ 60.72 10
COMMON STOCK PRICE
High $159-1/2 $147-1/2 $120-0/0 8 33 $159-1/2 $120-0/0 33
Low 136-5/8 127-5/8 95-3/4 7 43 127-5/8 75-1/2 69
Period end 150-3/8 139-3/8 110-1/4 8 36 150-3/8 110-1/4 36
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<FN>
(1) The efficiency ratio is defined as noninterest expense divided by the total of net interest income and noninterest income.
(2) See the Capital Adequacy/Ratios section for additional information.
6
OVERVIEW
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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 second quarter of 1994 was $206 million, or $3.57 per share,
compared with $149 million, or $2.46 per share, in the second quarter of 1993.
Net income for the first six months of 1994 was $408 million, or $6.98 per
share, compared with $257 million, or $4.18 per share, in the first six months
of 1993.
The increase in earnings in the second quarter of 1994 compared with 1993 was
primarily due to an $80 million, or 57%, decrease in the loan loss provision to
$60 million.
Return on average assets (ROA) was 1.59% in the second quarter and first half of
1994, compared with 1.18% and 1.02% in the same periods of 1993, respectively.
Return on average common equity (ROE) was 21.67% and 21.38% in the second
quarter and first half of 1994, respectively, compared with 16.73% and 14.46%,
in the same periods of 1993, respectively.
Net interest income on a taxable-equivalent basis was $656 million in the second
quarter of 1994, roughly flat with $658 million a year ago.
The Company's net interest margin was 5.56% for the second quarter of 1994, down
from 5.71% in the same quarter of 1993. The decrease was substantially due to
lower yields on earning assets.
Noninterest income increased $24 million, or 9%, to $299 million in the second
quarter of 1994, compared with $275 million in the second quarter of 1993. A
significant portion of the increase was due to growth in service charges on
deposit accounts.
Noninterest expense decreased from $531 million in the second quarter of 1993 to
$526 million in the second quarter of 1994, a decrease of 1%. A decline in
foreclosed assets expense contributed to the drop.
The Company's provision for loan losses was $60 million in the second quarter of
1994, compared with $60 million in the first quarter of 1994 and $140 million in
the second quarter of 1993. The provision was $120 million in the first half of
1994, compared with $350 million in the first half of 1993. During the second
quarter of 1994, net charge-offs totaled $61 million, or .73% of average total
loans (annualized). This compared with $61 million, or .74%, during the first
quarter of 1994 and $138 million, or 1.60%, during the second quarter of 1993.
The allowance for loan losses was 6.20% of total loans at June 30, 1994,
compared with 6.34% at March 31, 1994 and 6.18% at June 30, 1993.
Total nonaccrual and restructured loans were $717 million, or 2.1% of total
loans, at June 30, 1994, compared with $900 million, or 2.7%, at March 31, 1994
and $1,905 million, or 5.5%, at June 30, 1993. Loans new to nonaccrual in the
second quarter of 1994 were $133 million, as compared with $52 million in the
first quarter of 1994 and $264 million in the second quarter
7
of 1993. At June 30, 1994, an estimated $336 million, or 47%, of nonaccrual
loans were less than 90 days past due, compared with an estimated $489 million,
or 55%, at March 31, 1994. Foreclosed assets amounted to $344 million at June
30, 1994, $354 million at March 31, 1994 and $391 million at June 30, 1993.
Common equity to total assets was 6.96% at June 30, 1994, compared with 7.09%
and 6.57% at March 31, 1994 and June 30, 1993, respectively. The Company's
total risk-based capital ratio at June 30, 1994 was 14.56% and its Tier 1 risk-
based capital ratio was 10.06%, exceeding the minimum guidelines of 8% and 4%,
respectively. At March 31, 1994, these risk-based capital ratios were 14.83%
and 10.23%, respectively. The decrease in total and Tier 1 risk-based capital
ratios between March 31, 1994 and June 30, 1994 resulted primarily from the
repurchase of 1,124,856 shares of common stock during the second quarter. The
Company has bought in the past, and will continue to buy, shares to offset stock
issued or expected to be issued under the Company's employee benefit and
dividend reinvestment plans. In addition to these shares, the Board of
Directors authorized in July 1994 the repurchase of up to 5.4 million shares of
the Company's outstanding common stock, representing 10% of the Company's shares
as of June 30, 1994. This action reflects the Company's strong capital position
and will allow the Company to effectively manage its overall capital position in
the best interest of its shareholders. There is no scheduled date for
completion of the program; the Company will purchase shares from time to time,
subject to market conditions. Total and Tier 1 risk-based capital ratios at
June 30, 1993 were 14.33% and 9.31%, respectively. The leverage ratios were
7.20%, 7.34% and 6.94% at June 30, 1994, March 31, 1994 and June 30, 1993,
respectively.
A weak recovery appears to have taken hold in the California economy. During
the second quarter of 1994, business conditions continued to show moderate and
erratic gains. The unemployment rate stabilized at 8.3% in May and June,
compared to an average of 9% in the previous four months. A survey of small
businesses indicated a continued improvement in the level of confidence,
reflecting somewhat more buoyant sales. Home sales, however, declined because
of a rise in mortgage interest rates, and the job level fell, with the biggest
drop in manufacturing.
EARNINGS PERFORMANCE
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NET INTEREST INCOME
Net interest income on a taxable-equivalent basis was $656 million in the second
quarter of 1994, compared with $658 million in the second quarter of 1993.
Taxable-equivalent net interest income was $1,298 million in the first six
months of 1994, compared with $1,337 million in the same period of 1993.
Individual components of net interest income and net interest margin are
presented in the rate/yield table on pages 10 and 11.
The Company's net interest margin was 5.56% for the second quarter of 1994,
compared with 5.71% for the second quarter of 1993. The decrease was
substantially due to lower yields on earning assets, reflecting lower hedging
income, a significant portion of which was offset by a decrease in nonaccrual
loans.
8
Hedging income from derivative contracts decreased approximately $40 million, or
35 basis points of the net interest margin, from the second quarter of 1993 and
$62 million, or 27 basis points, from the first half of 1993 due to the maturity
of contracts. 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.
Loans averaged $33.6 billion in the second quarter of 1994, a 3% decrease from
$34.6 billion in the second quarter of 1993. The two largest decreases occurred
in other real estate mortgage loans and 1-4 family junior lien mortgage loans.
Most of the decreases indicated in the rate/yield table were due to loan
repayments. Loans totaled $34.2 billion at June 30, 1994, up 2% from March 31,
1994 and up 3% from December 31, 1993. This is the second consecutive 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, consumer, and small business, middle market
and other commercial loans.
Investment securities averaged $13.4 billion during the second quarter of 1994,
a 22% increase from $11.0 billion in the second quarter of 1993. This increase
was primarily a result of cash provided by loan repayments; such cash was
predominantly invested in private collateralized mortgage obligations and U.S.
Treasury securities. Investment securities are expected to decrease as the cash
received from their maturities is used to fund loan growth.
Average core deposits were $40.2 billion and funded 77% and 79% of the Company's
average total assets in the second quarters of 1994 and 1993, respectively.
Despite the recent rise in interest rates, the net interest margin and net
interest income for the last half of 1994 are expected to remain about the same
as the first half of 1994, assuming that there are no significant increases in
deposit rates. In the long-term, the net interest margin is expected to decline
modestly, assuming deposit rates will gradually increase in response to rising
market interest rates. However, net interest income is not currently expected
to change significantly.
9
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1)
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Quarter ended June 30,
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1994 1993
-------------------------------- ----------------------------------
INTEREST Interest
AVERAGE YIELDS/ INCOME/ Average Yields/ income/
(in millions) BALANCE RATES EXPENSE balance rates expense
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EARNING ASSETS
Investment securities:
At cost:
U.S. Treasury securities $ 2,734 4.84% $ 33 $ 2,287 5.13% $ 29
Securities of U.S. government agencies
and corporations 6,155 6.02 93 8,041 6.44 129
Obligations of states and political subdivisions 18 -- -- 24 7.11 1
Private collateralized mortgage obligations 1,337 6.14 21 433 5.82 6
Other securities 118 5.50 2 171 5.32 3
------- ---- ------- ----
Total investment securities at cost 10,362 5.72 149 10,956 6.12 168
At fair value (2):
U.S. Treasury securities 97 6.84 2 -- -- --
Securities of U.S. government agencies
and corporations 1,594 5.79 24 -- -- --
Private collateralized mortgage obligations 1,230 6.91 22 -- -- --
Other securities 72 13.77 1 -- -- --
------- ---- ------- ----
Total investment securities at fair value 2,993 6.40 49 -- -- --
------- ---- ------- ----
Total investment securities 13,355 5.87 198 10,956 6.12 168
Federal funds sold and securities purchased
under resale agreements 60 4.03 1 581 3.15 5
Loans:
Commercial 6,854 9.26 157 7,314 9.05 165
Real estate 1-4 family first mortgage 8,463 6.76 143 6,585 8.20 135
Other real estate mortgage 8,089 8.52 172 9,653 8.04 193
Real estate construction 910 8.92 20 1,319 8.69 29
Consumer:
Real estate 1-4 family junior lien mortgage 3,385 7.59 64 4,012 6.65 67
Credit card 2,614 15.27 100 2,600 15.62 101
Other revolving credit and monthly payment 2,016 9.27 47 1,917 9.20 44
------- ---- ------- ----
Total consumer 8,015 10.52 211 8,529 9.96 212
Lease financing 1,261 9.21 29 1,182 9.84 29
Foreign 38 4.72 1 -- -- --
------- ---- ------- ----
Total loans 33,630 8.74 733 34,582 8.84 763
Other 52 6.00 1 1 -- --
------- ---- ------- ----
Total earning assets $47,097 7.91 933 $46,120 8.13 936
------- ---- ------- ----
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FUNDING SOURCES
Interest-bearing liabilities:
Deposits:
Interest-bearing checking $ 4,679 .98 11 $ 4,596 1.23 15
Savings deposits 2,600 1.99 13 2,797 2.24 16
Market rate savings 16,974 2.34 99 16,366 2.28 91
Savings certificates 7,022 4.18 73 8,118 4.39 89
Certificates of deposit 202 7.58 4 218 8.01 4
Other time deposits 108 6.70 2 113 2.58 1
Deposits in foreign offices 780 4.06 8 10 -- --
------- ---- ------- ----
Total interest-bearing deposits 32,365 2.60 210 32,218 2.70 216
Federal funds purchased and securities sold
under repurchase agreements 1,876 3.86 18 1,141 2.79 9
Commercial paper and other short-term borrowings 176 3.78 2 163 2.68 1
Senior debt 2,034 5.05 26 2,187 4.92 27
Subordinated debt 1,449 5.87 21 1,974 5.11 25
------- ---- ------- ----
Total interest-bearing liabilities 37,900 2.93 277 37,683 2.96 278
Portion of noninterest-bearing funding sources 9,197 -- -- 8,437 -- --
------- ---- ------- ----
Total funding sources $47,097 2.35 277 $46,120 2.42 278
------- ---- ------- ----
------- -------
NET INTEREST MARGIN AND NET INTEREST INCOME ON
A TAXABLE-EQUIVALENT BASIS (3) 5.56% $656 5.71% $658
------ ---- ----- ----
------ ---- ----- ----
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 2,613 $ 2,454
Other 2,303 2,292
------- -------
Total noninterest-earning assets $ 4,916 $ 4,746
------- -------
------- -------
NONINTEREST-BEARING FUNDING SOURCES
Deposits $ 8,957 $ 8,326
Other liabilities 1,049 941
Preferred stockholders' equity 489 639
Common stockholders' equity 3,618 3,277
Noninterest-bearing funding sources used to
fund earning assets (9,197) (8,437)
------- -------
Net noninterest-bearing funding sources $ 4,916 $ 4,746
------- -------
------- -------
TOTAL ASSETS $52,013 $50,866
------- -------
------- -------
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) The average prime rate of Wells Fargo Bank was 6.90% and 6.00% for the quarters ended June 30, 1994 and 1993, respectively, and
6.46% and 6.00% for the six months ended June 30, 1994 and 1993, respectively. The average three-month London Interbank Offered
Rate (LIBOR) was 4.46% and 3.24% for the quarters ended June 30, 1994 and 1993, respectively, and 4.02% and 3.25% for the six
months ended June 30, 1994 and 1993, 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% for the quarter and six months ended June
30, 1994 and 34% for the respective periods in 1993.
10
- ----------------------------------------------------------------
Six months ended June 30,
- ----------------------------------------------------------------
1994 1993
- --------------------------- --------------------------------
INTEREST Interest
AVERAGE YIELDS/ INCOME/ Average Yields/ income/
BALANCE RATES EXPENSE balance rates expense
- ----------------------------------------------------------------
$ 2,655 4.86% $ 64 $ 2,221 5.19% $ 57
6,159 6.08 187 7,746 6.49 251
18 7.20 1 24 7.62 1
1,144 5.76 33 218 5.80 6
118 5.48 3 159 5.32 5
------- ------ ------- ------
10,094 5.71 288 10,368 6.18 320
49 6.84 2 -- -- --
1,637 5.91 49 -- -- --
1,259 6.18 40 -- -- --
78 13.94 3 -- -- --
------- ------ ------- ------
3,023 6.15 94 -- -- --
------- ------ ------- ------
13,117 5.82 382 10,368 6.18 320
316 3.24 5 560 3.22 9
6,742 9.09 303 7,502 9.38 349
8,117 6.84 278 6,633 8.36 277
8,124 8.45 341 9,846 7.95 389
984 8.60 42 1,405 8.85 62
3,439 7.43 128 4,057 7.09 144
2,577 15.31 197 2,650 15.71 208
1,978 9.27 91 1,931 9.40 90
------- ------ ------- ------
7,994 10.43 416 8,638 10.25 442
1,245 9.29 58 1,180 9.97 59
36 4.54 1 1 -- --
------- ------ ------- ------
33,242 8.69 1,439 35,205 9.00 1,578
52 6.00 2 -- -- --
------- ------ ------- ------
$46,727 7.84 1,828 $46,133 8.30 1,907
------- ------ ------- ------
------- -------
$ 4,695 .98 23 $ 4,610 1.34 31
2,583 1.99 26 2,855 2.33 33
17,065 2.28 193 16,202 2.35 188
7,032 4.16 145 8,415 4.41 184
205 7.67 8 228 8.11 9
106 6.63 3 117 4.69 3
420 4.01 8 8 -- --
------- ------ ------- ------
32,106 2.55 406 32,435 2.79 448
1,478 3.57 26 1,112 2.80 16
163 3.42 3 192 2.84 3
2,118 4.77 50 2,191 4.97 54
1,563 5.72 45 1,926 5.13 49
------- ------ ------- ------
37,428 2.85 530 37,856 3.03 570
9,299 -- -- 8,277 -- --
------- ------ ------- ------
$46,727 2.28 530 $46,133 2.49 570
------- ------ ------- ------
------- -------
5.56% $1,298 5.81% $1,337
---- ------ ------ ------
---- ------ ------ ------
$ 2,585 $ 2,435
2,307 2,345
------- -------
$ 4,892 $ 4,780
------- -------
------- -------
$ 8,934 $ 8,213
1,067 974
554 639
3,636 3,231
(9,299) (8,277)
------- -------
$ 4,892 $ 4,780
------- -------
------- -------
$51,619 $50,913
------- -------
------- -------
- ----------------------------------------------------------------
11
NONINTEREST INCOME
- ------------------------------------------------------------------------------------------------------------------
Quarter Six months
ended June 30, ended June 30,
-------------- % -------------- %
(in millions) 1994 1993 Change 1994 1993 Change
- ------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $119 $105 13 % $236 $205 15 %
Fees and commissions:
Credit card membership and other credit card fees 15 18 (17) 31 35 (11)
Debit and credit card merchant fees 13 22 (41) 25 41 (39)
Charges and fees on loans 11 12 (8) 21 23 (9)
Mutual fund and annuity sales fees 12 12 -- 21 23 (9)
Shared ATM network fees 11 9 22 20 18 11
All other 30 26 15 59 47 26
---- ---- ---- ----
Total fees and commissions 92 99 (7) 177 187 (5)
Trust and investment services income:
Asset management and custody fees 32 32 -- 63 63 --
Mutual fund management fees 11 9 22 22 17 29
All other 7 7 -- 15 14 7
---- ---- ---- ----
Total trust and investment services income 50 48 4 100 94 6
Investment securities gains 3 -- -- 7 -- --
Income (loss) from equity investments accounted
for by the:
Cost method 9 (1) -- 17 13 31
Equity method 7 5 40 16 13 23
Check printing charges 10 10 -- 20 19 5
Gains from dispositions of operations -- 1 (100) 10 1 900
Real estate investment gains (losses) 1 -- -- 3 (7) --
Gains on sales of loans 1 3 (67) 2 6 (67)
All other 7 5 40 11 3 267
---- ---- ---- ----
Total $299 $275 9 % $599 $534 12 %
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
- ------------------------------------------------------------------------------------------------------------------
The growth in service charges on deposit accounts in the second quarter of 1994
compared with the second quarter of 1993 was largely due to increased fees for
overdrafts and higher business checking charges.
The decrease in the total fees and commissions in the second quarter of 1994
compared with the second quarter of 1993 was primarily due to a decline in debit
and credit card merchant fees.
The decrease in debit and credit card merchant fees was primarily 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 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 in the second quarter of 1994.
12
A significant portion of the decrease in debit and credit card merchant fees was
offset by an increase in "all other" fees and commissions, which includes
amortization expense for purchased mortgage servicing rights. This amortization
expense totaled $2 million in the second quarter of 1994, compared with $3
million in the same period of 1993. At June 30, 1994, the balance of purchased
mortgage servicing rights was $38 million, compared with $18 million at June 30,
1993. The increase in the balance was due to a $25 million purchase of
additional servicing rights in March 1994.
The increase in trust and investment services income in the second quarter of
1994 compared with the second quarter of 1993 was due to greater mutual fund
investment management fees, reflecting the overall growth in the fund families'
net assets. The Overland Express family of 16 funds, which had $3.7 billion of
assets under management at June 30, 1994, compared with $4.0 billion at June 30,
1993, is sold through brokers around the country. The Stagecoach family of 24
funds had $4.8 billion of assets under management at June 30, 1994, compared
with $3.3 billion at June 30, 1993. The Stagecoach family consists of both
retail and institutional funds. The retail funds, first introduced in 1992, are
primarily distributed through the branch network. These funds had $4.1 billion
under management at June 30, 1994, compared with $3.3 billion at June 30, 1993.
The institutional funds, first introduced in mid-1993, are offered primarily to
selected groups of investors and certain corporations, partnerships and other
business entities. At June 30, 1994, these funds had $700 million of assets
under management. 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 $45 billion at
June 30, 1994, compared with $43 billion at June 30, 1993. Mutual fund
management fees are expected to continue to be higher in 1994 than 1993 levels.
The investment securities gains for the second quarter of 1994 resulted from the
sale of marketable equity securities from the available-for-sale portfolio.
Income from cost method equity investments was predominantly due to net gains on
the sales of and distributions from investments in nonmarketable equity
investments of $8 million in the second quarter of 1994. In the second quarter
of 1993, there were $5 million in write-downs of nonmarketable equity
investments.
Noninterest income is expected to continue to increase as compared with 1993,
reflecting growth from fee-based products, such as mutual funds and deposit-
related services.
13
NONINTEREST EXPENSE
- ---------------------------------------------------------------------------------------------------------------------------------
Quarter Six months
ended June 30, ended June 30,
--------------- % --------------- %
(in millions) 1994 1993 Change 1994 1993 Change
- ---------------------------------------------------------------------------------------------------------------------------------
Salaries $196 $198 (1)% $ 385 $ 381 1 %
Employee benefits 51 54 (6) 108 109 (1)
Net occupancy 53 57 (7) 108 110 (2)
Equipment 41 34 21 80 68 18
Federal deposit insurance 25 26 (4) 51 58 (12)
Contract services 25 14 79 44 26 69
Advertising and promotion 18 19 (5) 33 34 (3)
Certain identifiable intangibles 16 19 (16) 32 42 (24)
Operating losses 11 10 10 25 26 (4)
Telecommunications 12 11 9 23 22 5
Postage 11 11 -- 22 22 --
Outside professional services 10 11 (9) 19 21 (10)
Goodwill 9 9 -- 18 19 (5)
Check printing 7 8 (13) 15 17 (12)
Stationery and supplies 8 8 -- 15 15 --
Travel and entertainment 8 7 14 15 13 15
Escrow and collection agency fees 5 6 (17) 10 13 (23)
Security 5 4 25 10 9 11
Foreclosed assets -- 9 (100) 6 35 (83)
Outside data processing 2 4 (50) 5 8 (38)
All other 13 12 8 25 22 14
---- ---- ----- ------ ------
Total $526 $531 (1)% $1,049 $1,070 (2)%
---- ---- ----- ------ ------ -----
---- ---- ----- ------ ------ -----
- ---------------------------------------------------------------------------------------------------------------------------------
Salaries expense and employee benefits decreased in the second quarter of 1994
compared with the same period of 1993 primarily due to lower full-time
equivalent (FTE) staff. The Company's FTE staff, including hourly employees,
averaged approximately 19,500 in the second quarter of 1994, compared with
approximately 21,300 in the second quarter of 1993.
Equipment expense increased 21% in the second quarter of 1994 compared with the
same quarter of 1993 primarily due to increased systems expenditures,
particularly new software.
The increase in contract services expense in the second quarter of 1994 compared
with the same quarter of 1993 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 Six months
ended June 30, ended June 30,
-------------- ---------------
(in millions) 1994 1993 1994 1993
- -------------------------------------------------------------------------------
Operating expenses $14 $ 15 $ 27 $ 28
Operating revenues (8) (12) (15) (21)
Net (gains) losses from write-downs/sales (6) 6 (6) 28
--- ---- ---- ----
Total $-- $ 9 $ 6 $ 35
--- ---- ---- ----
--- ---- ---- ----
- -------------------------------------------------------------------------------
The decline in foreclosed assets expense compared with the second quarter of
1993 was substantially due to a decrease in write-downs from $18 million in the
second quarter of 1993 to $3 million in the second quarter of 1994. 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
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, December 31, June 30,
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 $ 2,684 $2,646 $2,365 $2,383 $ 2,272 $ 2,300
Securities of U.S. government
agencies and corporations (1) 6,053 5,886 6,570 6,644 8,120 8,312
Obligations of states and political subdivisions 18 18 18 18 23 23
Securities issued by foreign governments 88 87 90 91 91 92
Private collateralized mortgage obligations (2) 1,388 1,330 815 813 1,117 1,117
Corporate debt securities 30 29 29 29 23 23
------- ------ ------ ------ ------- -------
Total debt securities 10,261 9,996 9,887 9,978 11,646 11,867
Corporate and Federal Reserve Bank stock -- -- -- -- 54 54
------- ------ ------ ------ ------- -------
Total $10,261 $9,996 $9,887 $9,978 $11,700 $11,921
------- ------ ------ ------ ------- -------
------- ------ ------ ------ ------- -------
AVAILABLE-FOR-SALE SECURITIES
AT FAIR VALUE:
U.S. Treasury securities $ 197 $ 197 $ -- $ -- $ -- $ --
Securities of U.S. government
agencies and corporations (1) 1,611 1,552 1,747 1,749 -- --
Private collateralized mortgage obligations (2) 1,328 1,252 1,340 1,334 -- --
Corporate debt securities 24 37 31 48 -- --
------- ------ ------ ------ ------- -------
Total debt securities 3,160 3,038 3,118 3,131
Marketable equity securities 16 29 17 40 -- --
------- ------ ------ ------ ------- -------
Total $ 3,176 $3,067 $3,135 $3,171 $ -- $ --
------- ------ ------ ------ ------- -------
------- ------ ------ ------ ------- -------
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) All securities of U.S. government agencies and corporations are mortgage-backed securities.
(2) All private collateralized mortgage obligations are AAA rated bonds collateralized by 1-4 family residential first mortgages.
Investment securities were $13.3 billion at June 30, 1994, a 3% decrease from
$13.8 billion at March 31, 1994 and a 14% increase from $11.7 billion at June
30, 1993. The investment securities portfolio at June 30, 1994 was comprised of
$10.3 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
for any of the periods presented.) The Company's classification of available-
for-sale securities was influenced by accounting and regulatory requirements
related to certain mortgage-backed securities. The increase from June 30, 1993
was due to the cash provided by loan repayments used to purchase securities.
Investment securities are expected to decrease as the cash received from their
maturities is used to fund loan growth.
16
At June 30, 1994, the held-to-maturity securities portfolio had an estimated
unrealized net loss of $265 million (which reflected estimated unrealized gross
gains of $10 million), or 2.6% 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 unrealized gross losses of $23 million), or
.9% of the cost of the portfolio.
At June 30, 1994, the available-for-sale securities portfolio had an unrealized
net loss of $63 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 pretax loss of $109 million, or 3.4% of
the cost of the portfolio, at June 30, 1994 was comprised of unrealized gross
pretax losses of $139 million and unrealized gross pretax gains of $17 million
on debt securities and unrealized gross pretax losses of $4 million and
unrealized gross pretax gains of $17 million on marketable equity securities.
The unrealized net loss in both the held-to-maturity and available-for-sale
portfolios was predominantly due to investments in mortgage-backed securities.
These unrealized net losses reflected an increasing interest rate environment.
As interest rates rise, the Company expects the unrealized losses to increase
and prepayments to decrease. Although those securities classified as available-
for-sale can be sold, the Company currently has no intention of selling these
securities and expects to collect the full amount due for both interest and
principal.
Realized gross gains from the available-for-sale securities portfolio amounted
to $3 million in the second quarter of 1994. The realized gross gain resulted
from the sale of marketable equity securities. There were no realized losses in
the second quarter of 1994. There were $284 thousand of investment securities
sold in the second quarter of 1993, resulting in a $10 thousand gain.
17
The following table provides the expected remaining maturities and yields
(taxable-equivalent basis) of debt securities within the investment portfolio.
- ----------------------------------------------------------------------------------------------------------------------------------
June 30, 1994
----------------------------------------------------------------------------------------------
Expected remaining principal maturity
----------------------------------------------------------------------------------------------
Weighted
average
expected After one year
remaining through five After five years
Weighted maturity One year or less years through ten years After ten years
Total average (yrs.- ---------------- -------------- ----------------- ---------------
(in millions) amount yield mos.) Amount Yield Amount Yield Amount Yield Amount Yield
- ----------------------------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES:
U.S. Treasury securities $ 2,684 4.76% 1-2 $1,435 4.91% $1,249 4.59% $ -- --% $ -- --%
Securities of U.S. government
agencies and corporations 6,053 6.07 3-7 1,254 5.60 3,635 5.92 900 7.00 264 7.20
Obligations of states and political
subdivisions 18 6.48 4-0 3 6.42 11 6.53 2 6.44 2 6.37
Securities issued by
foreign governments 88 5.17 1-5 36 4.63 52 5.54 -- -- -- --
Private collateralized mortgage
obligations 1,388 6.10 2-10 202 5.55 1,083 6.19 103 6.26 -- --
Corporate debt securities 30 6.33 2-1 6 6.11 24 6.38 -- -- -- --
------- ------ ------ ------ ----
Total cost $10,261 5.73% 2-10 $2,936 5.25% $6,054 5.69% $1,005 6.92% $266 7.19%
------- ----- ------ ----- ------ ---- ------ ---- ---- ----
------- ----- ------ ----- ------ ---- ------ ---- ---- ----
ESTIMATED FAIR VALUE $ 9,996 $2,913 $5,858 $ 969 $256
------- ------ ------ ------ ----
------- ------ ------ ------ ----
AVAILABLE-FOR-SALE SECURITIES (1):
U.S. Treasury securities $ 197 6.81% 4-4 $ -- --% $ 197 6.81% $ -- --% $ -- --%
Securities of U.S. government
agencies and corporations 1,611 5.56 2-11 232 6.73 1,253 5.35 126 5.50 -- --
Private collateralized mortgage
obligations 1,328 6.28 4-4 121 5.71 766 6.32 431 6.35 10 6.48
Corporate debt securities 24 22.46 6-2 -- -- -- -- 24 22.46 -- --
------- ------ ------ ------ ----
Total cost $ 3,160 6.07% 3-7 $ 353 6.38% $2,216 5.82% $ 581 6.83% $ 10 6.48%
------- ----- ------ ---- ------ ---- ------ ----- ---- ----
------- ----- ------ ---- ------ ---- ------ ----- ---- ----
ESTIMATED FAIR VALUE $ 3,038 $ 348 $2,122 $ 558 $ 10
------- ------ ------ ------ ----
------- ------ ------ ------ ----
TOTAL COST OF DEBT SECURITIES $13,421 5.81% 3-0 $3,289 5.37% $8,270 5.73% $1,586 6.89% $276 7.17%
------- ----- ------ ------ ---- ------ ---- ------ ----- ---- ----
------- ----- ------ ------ ---- ------ ---- ------ ----- ---- ----
- ----------------------------------------------------------------------------------------------------------------------------------
<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 3 years at June 30, 1994, compared with 2 years and 9 months at
March 31, 1994 and 2 years and 7 months at December 31, 1993. The increase in
the expected remaining maturity reflects a higher interest rate environment, in
which prepayments are likely to slow down. The short-term debt securities
portfolio serves to maintain asset liquidity and to fund loan growth.
18
LOAN PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
% Change
June 30, 1994 from
----------------------
JUNE 30, Dec. 31, June 30, Dec. 31, June 30,
(in millions) 1994 1993 1993 1993 1993
- -------------------------------------------------------------------------------------------------------------------
Commercial (1)(2) $ 7,184 $ 6,912 $ 7,323 4 % (2)%
Real estate 1-4 family first mortgage 8,681 7,458 6,634 16 31
Other real estate mortgage (3) 7,965 8,286 9,510 (4) (16)
Real estate construction 985 1,110 1,290 (11) (24)
Consumer:
Real estate 1-4 family junior lien mortgage 3,355 3,583 3,946 (6) (15)
Credit card 2,706 2,600 2,569 4 5
Other revolving credit and monthly payment 1,998 1,920 1,899 4 5
------- ------- -------
Total consumer 8,059 8,103 8,414 (1) (4)
Lease financing 1,267 1,212 1,181 5 7
Foreign 31 18 1 72 --
------- ------- -------
Total loans (net of unearned income,
including net deferred loan fees,
of $337, $336 and $352) $34,172 $33,099 $34,353 3 % (1)%
------- ------- ------- --- ----
------- ------- ------- --- ----
- -------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes loans to real estate developers of $415 million, $505 million and $598 million at June 30, 1994,
December 31, 1993 and June 30, 1993, respectively.
(2) Includes agricultural loans (loans to finance agricultural production and other loans to farmers) of $673
million, $643 million and $590 million at June 30, 1994, December 31, 1993 and June 30, 1993, respectively.
(3) Includes agricultural loans secured by real estate of $236 million, $225 million and $270 million at June 30,
1994, December 31, 1993 and June 30, 1993, respectively.
The real estate 1-4 family first mortgage portfolio grew by 16% in the first six
months of 1994. The majority of the growth was due to the shift in originations
of 30-year fixed rate loans into adjustable rate mortgage loans, which are
generally held for portfolio purposes.
The table below presents comparative period-end commercial real estate loans.
- -------------------------------------------------------------------------------------------------------------------
% Change
June 30, 1994 from
----------------------
JUNE 30, Dec. 31, June 30, Dec. 31, June 30,
(in millions) 1994 1993 1993 1993 1993
- -------------------------------------------------------------------------------------------------------------------
Commercial loans to
real estate developers (1) $ 415 $ 505 $ 598 (18)% (31)%
Other real estate mortgage 7,965 8,286 9,510 (4) (16)
Real estate construction 985 1,110 1,290 (11) (24)
------ ------ -------
Total $9,365 $9,901 $11,398 (5)% (18)%
------ ------ ------- --- ---
------ ------ ------- --- ---
- -------------------------------------------------------------------------------------------------------------------
<FN>
(1) Included in commercial loans.
19
The Company's commercial real estate loan portfolio was $9.4 billion at June 30,
1994, compared with $9.9 billion at December 31, 1993 and $11.4 billion at June
30, 1993, a 5% and 18% 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. 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, a substantial amount of liquidity has returned to the real estate
markets, mostly in apartments and shopping centers and, to a lesser degree, in
other property types. Many 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 is contributing
significantly to the Company's progress in reducing its nonaccrual loans and
foreclosed assets.
20
NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS
- -------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in millions) 1994 1994 1993 1993 1993
- -------------------------------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial (1)(2) $ 121 $ 165 $ 252 $ 441 $ 486
Real estate 1-4 family first mortgage 88 90 99 96 95
Other real estate mortgage (3) 410 413 578 850 1,035
Real estate construction 72 202 235 278 241
Consumer:
Real estate 1-4 family junior lien mortgage 19 22 27 25 28
Other revolving credit and monthly payment 2 3 3 6 13
------ ------ ------ ------ ------
Total nonaccrual loans 712 895 1,194 1,696 1,898
Restructured loans 5 5 6 6 7
------ ------ ------ ------ ------
Nonaccrual and restructured loans 717 900 1,200 1,702 1,905
As a percentage of total loans 2.1% 2.7% 3.6% 5.1% 5.5%
Foreclosed assets (4) 344 354 348 357 391
Real estate investments (5) 11 11 15 15 23
------ ------ ------ ------ ------
Total nonaccrual and restructured loans
and other assets $1,072 $1,265 $1,563 $2,074 $2,319
------ ------ ------ ------ ------
------ ------ ------ ------ ------
- -------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes loans to real estate developers of $41 million, $47 million, $91 million, $116 million and $115
million at June 30, 1994, March 31, 1994, December 31, 1993, September 30, 1993 and June 30, 1993,
respectively.
(2) Includes agricultural loans of $2 million, $2 million, $9 million, $24 million and $35 million at June 30,
1994, March 31, 1994, December 31, 1993, September 30, 1993 and June 30, 1993, respectively.
(3) Includes agricultural loans secured by real estate of $3 million, $4 million, $24 million, $24 million and $26
million at June 30, 1994, March 31, 1994, December 31, 1993, September 30, 1993 and June 30, 1993,
respectively.
(4) Includes agricultural properties of $25 million, $25 million, $26 million, $23 million and $31 million at June
30, 1994, March 31, 1994, December 31, 1993, September 30, 1993 and June 30, 1993, respectively.
(5) 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 $28 million, $29
million, $34 million, $39 million and $51 million at June 30, 1994, March 31, 1994, December 31, 1993,
September 30, 1993 and June 30, 1993, respectively.
Nonaccrual loans at June 30, 1994 declined for the seventh consecutive quarter
following nine quarters of increases. This decline is expected to continue
throughout 1994. The general decline of nonaccrual loans over the last seven
quarters largely resulted from loan payments and loans returned to accrual,
together with a reduction in new loans placed on nonaccrual. New loans placed
on nonaccrual in the second quarter of 1994 increased for the first time since
the second quarter of 1993. While the overall credit quality of the loan
portfolio continues to improve, the Company anticipates that the amount of new
loans placed on nonaccrual will fluctuate from quarter to quarter. The
placement of commercial and real estate loans on nonaccrual, as well as
transfers to foreclosed assets, are likely to continue to occur, although not at
levels seen in the last three years, 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.
21
The table below summarizes the quarterly trend of the changes in total
nonaccrual loans.
- -------------------------------------------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30,
(in millions) 1994 1994 1993 1993 1993
- -------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF QUARTER $895 $1,194 $1,696 $1,898 $1,966
New loans placed on nonaccrual 133 52 113 195 264
Charge-offs (27) (35) (55) (90) (71)
Payments (91) (121) (309) (188) (144)
Transfers to foreclosed assets (27) (37) (64) (32) (104)
Transfers from foreclosed assets (1) -- -- -- -- 99
Loans returned to accrual (172) (157) (188) (81) (107)
Loans sold -- (3) -- (2) (5)
Other additions (deductions) 1 2 1 (4) --
---- ------ ------ ------ ------
BALANCE, END OF QUARTER $712 $ 895 $1,194 $1,696 $1,898
---- ------ ------ ------ ------
---- ------ ------ ------ ------
- -------------------------------------------------------------------------------------------------------------------
<FN>
(1) Reclassification due to clarification of criteria used in determining when a loan is in-substance foreclosed.
The table below summarizes the changes in nonaccrual loans by loan category for
the quarters ended June 30, 1994 and March 31, 1994.
- -------------------------------------------------------------------------------------------------------------------
Real estate
1-4 family Other real
first estate Real estate
(in millions) Commercial mortgage mortgage construction Consumer Total
- -------------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, 1994
Balance, beginning of quarter $165 $90 $ 413 $202 $25 $ 895
New loans placed on nonaccrual (1) 19 9 90 14 1 133
Charge-offs (4) (1) (22) -- -- (27)
Payments:
Principal (21) (9) (19) (26) (4) (79)
Interest applied to principal (5) -- (6) -- (1) (12)
Transfers to foreclosed assets (6) -- (19) (2) -- (27)
Loans returned to accrual (27) (1) (35) (109) -- (172)
Other additions (deductions) -- -- 8 (7) -- 1
---- --- ----- ---- --- ------
Balance, end of quarter $121 $88 $ 410 $ 72 $21 $ 712
---- --- ----- ---- --- ------
---- --- ----- ---- --- ------
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 -- -- 2 -- -- 2
---- --- ----- ---- --- ------
Balance, end of quarter $165 $90 $ 413 $202 $25 $ 895
---- --- ----- ---- --- ------
---- --- ----- ---- --- ------
- -------------------------------------------------------------------------------------------------------------------
<FN>
(1) Additions to other real estate mortgage loans include $28 million for land (excluding 1-4 family land) and $22
million for office buildings.
22
The table below summarizes the quarterly trend of the changes in foreclosed
assets.
- ----------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in millions) 1994 1994 1993 1993 1993
- ----------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF QUARTER $354 $348 $357 $391 $510
Additions 63 62 100 65 150
Sales (63) (42) (89) (76) (117)
Charge-offs (3) (8) (10) (8) (23)
Write-downs (3) (6) (7) (10) (18)
Transfers to nonaccrual loans (1) -- -- -- -- (99)
Other deductions (4) -- (3) (5) (12)
---- ---- ---- ---- ----
BALANCE, END OF QUARTER $344 $354 $348 $357 $391
---- ---- ---- ---- ----
---- ---- ---- ---- ----
- ----------------------------------------------------------------------------------------------------
<FN>
(1) Reclassification due to clarification of criteria used in determining when a loan is in-substance
foreclosed.
Approximately 52% of the foreclosed assets at June 30, 1994 have been in the
Company's portfolio less than one year.
Nonaccrual Loans by Performance Category
- ----------------------------------------
At June 30, 1994, an estimated $336 million, or 47%, of nonaccrual loans were
less than 90 days past due, including an estimated $242 million, or 34%, that
were current (less than 30 days past due) as to payment of principal and
interest. This compares with an estimated $489 million, or 55%, of nonaccrual
loans that were less than 90 days past due at March 31, 1994, including an
estimated $363 million, or 41%, that were current.
For all loans on nonaccrual during the second and first quarter of 1994
(including loans no longer on nonaccrual at June 30, 1994 and March 31, 1994),
cash interest payments of $18 million and $23 million, respectively, were
received while the loans were on nonaccrual status. Of the $18 million received
in the second quarter, $7 million was recognized as interest income and $11
million was applied to principal. Of the $23 million received in the first
quarter, $6 million was recognized as interest income and $17 million was
applied to principal. The average nonaccrual book principal loan balances (net
of charge-offs and interest applied to principal) were $830 million and $1,094
million for the quarters ended June 30, 1994 and March 31, 1994, respectively.
The table on the following page presents the estimated amount of nonaccrual
loans that were contractually past due and those that were contractually current
at the end of the second and first quarters of 1994. 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. Both book
and contractual principal balances are presented in the table, the difference
reflecting
23
charge-offs and interest applied to principal. The ratio of book to contractual
principal balance was 66% at June 30, 1994, compared with 68% at March 31, 1994.
- --------------------------------------------------------------------------------------------------------------
Cumulative
cash
Book interest Contractual
principal Cumulative applied to principal
(in millions) balance charge-offs(5) principal(5) balance
- --------------------------------------------------------------------------------------------------------------
JUNE 30, 1994
------------------------------------------------------
Contractually past due (1):
Payments not made (2):
90 days or more past due $ 155 $ 4 $ -- $ 159
Less than 90 days past due 14 1 -- 15
----- ----- ------ ------
169 5 -- 174
----- ----- ------ ------
Payments made (3):
90 days or more past due 221 80 27 328
Less than 90 days past due 80 43 20 143
----- ----- ------ ------
301 123 47 471
----- ----- ------ ------
Total past due 470 128 47 645
Contractually current (4) 242 125 61 428
----- ----- ------ ------
Total nonaccrual loans $ 712 $ 253 $ 108 $1,073
----- ----- ------ ------
----- ----- ------ ------
March 31, 1994
----------------------------------------------------
Contractually past due (1):
Payments not made (2):
90 days or more past due $ 136 $ 4 $ -- $ 140
Less than 90 days past due 4 6 -- 10
----- ----- ------ ------
140 10 -- 150
----- ----- ------ ------
Payments made (3):
90 days or more past due 270 127 38 435
Less than 90 days past due 122 61 36 219
----- ----- ------ ------
392 188 74 654
----- ----- ------ ------
Total past due 532 198 74 804
Contractually current (4) 363 102 55 520
----- ----- ------ ------
Total nonaccrual loans $ 895 $ 300 $ 129 $1,324
----- ----- ------ ------
----- ----- ------ ------
- --------------------------------------------------------------------------------------------------------------
<FN>
(1) Contractually past due is defined as a borrower whose loan principal or interest payment is 30 days or
more past due.
(2) Borrower has made no payments since being placed on nonaccrual.
(3) Borrower has made some payments since being placed on nonaccrual. Approximately $239 million and $283
million of these loans had some payments made on them during the second and first quarters of 1994,
respectively.
(4) Contractually current is defined as a loan for which principal and interest are being paid in accordance
with the terms of the loan. All of the contractually current loans were placed on nonaccrual due to
uncertainty of receiving full timely collection of interest or principal.
(5) Cumulative amounts recorded since inception of the loan.
24
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. The balance at June 30, 1994 does not include $38 million for 1-4
family first mortgage loan customers and $2 million for 1-4 family junior lien
mortgage loan customers affected by the January 1994 Northridge earthquake who
applied for and received a deferment of payments, ranging from three to six
months. These loans are considered current under the new terms of the deferment
agreement.
- -------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in millions) 1994 1994 1993 1993 1993
- -------------------------------------------------------------------------------------------------------------------
Commercial $ 7 $ 6 $ 4 $ 10 $ 2
Real estate 1-4 family first mortgage 25 19 19 31 21
Other real estate mortgage 53 68 14 28 53
Real estate construction 4 11 8 4 8
Consumer:
Real estate 1-4 family junior lien mortgage 7 6 6 8 9
Credit card 33 40 43 42 46
Other revolving credit and monthly payment 2 1 1 2 2
---- ---- --- ---- ----
Total consumer 42 47 50 52 57
Lease financing -- 1 -- -- --
---- ---- --- ---- ----
Total $131 $152 $95 $125 $141
---- ---- --- ---- ----
---- ---- --- ---- ----
- -------------------------------------------------------------------------------------------------------------------
25
ALLOWANCE FOR LOAN LOSSES
- -------------------------------------------------------------------------------------------------------------------
Quarter ended Six months ended
----------------------------------- ----------------------
JUNE 30, March 31, June 30, JUNE 30, June 30,
(in millions) 1994 1994 1993 1994 1993
- -------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD $2,121 $2,122 $2,122 $2,122 $2,067
Provision for loan losses 60 60 140 120 350
Loan charge-offs:
Commercial (1) (5) (25) (29) (30) (58)
Real estate 1-4 family first mortgage (6) (5) (7) (11) (12)
Other real estate mortgage (22) (13) (49) (35) (115)
Real estate construction (1) (4) (16) (5) (40)
Consumer:
Real estate 1-4 family junior lien mortgage (7) (8) (6) (15) (14)
Credit card (35) (40) (48) (75) (95)
Other revolving credit and monthly payment (10) (8) (10) (18) (23)
------ ------ ------ ------ ------
Total consumer (52) (56) (64) (108) (132)
Lease financing (4) (4) (5) (8) (10)
------ ------ ------ ------ ------
Total loan charge-offs (90) (107) (170) (197) (367)
------ ------ ------ ------ ------
Loan recoveries:
Commercial (2) 12 8 15 20 37
Real estate 1-4 family first mortgage 1 3 1 4 1
Other real estate mortgage 2 10 4 12 12
Real estate construction 2 5 1 7 1
Consumer:
Real estate 1-4 family junior lien mortgage 1 1 -- 2 1
Credit card 7 5 6 12 11
Other revolving credit and monthly payment 2 3 3 5 6
------ ------ ------ ------ ------
Total consumer 10 9 9 19 18
Lease financing 2 11 2 13 5
------ ------ ------ ------ ------
Total loan recoveries 29 46 32 75 74
------ ------ ------ ------ ------
Total net loan charge-offs (61) (61) (138) (122) (293)
------ ------ ------ ------ ------
BALANCE, END OF PERIOD $2,120 $2,121 $2,124 $2,120 $2,124
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total net loan charge-offs as a percentage
of average total loans (annualized) .73% .74% 1.60% .74% 1.67%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Allowance as a percentage of total loans 6.20% 6.34% 6.18% 6.20% 6.18%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
- -------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes charge-offs of loans to real estate developers of none, $10 million and none in the quarters ended
June 30, 1994, March 31, 1994 and June 30, 1993, respectively, and $10 million and $4 million in the six months
ended June 30, 1994 and 1993, respectively.
(2) Includes recoveries from loans to real estate developers of none in the quarters ended June 30, 1994, March 31,
1994 and June 30, 1993, and none and $1 million in the six months ended June 30, 1994 and 1993, respectively.
26
The table below presents net charge-offs by loan category.
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended
------------------------------------------------------------------
JUNE 30, 1994 March 31, 1994 June 30, 1993
------------------- ------------------ -------------------
% OF % of % of
AVERAGE average average
(in millions) AMOUNT LOANS(1) Amount loans(1) Amount loans(1)
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial $(7) (.41)% $17 1.01 % $ 14 .78%
Real estate 1-4 family first mortgage 5 .24 2 .10 6 .36
Other real estate mortgage 20 1.00 3 .18 45 1.89
Real estate construction (1) (.57) (1) (.31) 15 4.46
Consumer:
Real estate 1-4 family junior lien mortgage 6 .71 7 .78 6 .57
Credit card (2) 28 4.49 35 5.39 42 6.49
Other revolving credit and monthly payment 8 1.39 5 1.18 7 1.46
--- --- ----
Total consumer 42 2.11 47 2.35 55 2.57
Lease financing 2 .68 (7) (2.36) 3 .97
--- --- ----
Total net loan charge-offs $61 .73 % $61 .74 % $138 1.60%
--- ---- --- ----- ---- ----
--- ---- --- ----- ---- ----
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Calculated on an annualized basis.
(2) The second quarter of 1994 includes $2 million of recoveries from the sale of previously charged off loans.
Total net charge-offs for the second quarter of 1994 were .73% of average total
loans on an annualized basis. Net charge-offs were largely due to credit card
loans and other real estate mortgage loans. Credit card net charge-offs were
primarily due to bankruptcies and the current economic environment (particularly
in Southern California). The other real estate mortgage net charge-offs were
substantially due to loans related to land (excluding 1-4 family land) and
shopping centers.
Although net charge-offs during 1991 and 1992 were higher than historical norms,
they steadily declined during 1993 and are expected to remain lower in 1994 than
1993 due to the improvement in the credit quality of the Company's loan
portfolio.
The Company considers the allowance for loan losses of $2,120 million adequate
to cover losses inherent in loans, loan commitments and standby letters of
credit at June 30, 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 June 30, 1994 and the
Company's current interpretations of FAS 114, the allowance will not increase as
a result of adopting this Statement.
27
OTHER ASSETS
- --------------------------------------------------------------------------------------------------------------
JUNE 30, December 31, June 30,
(in millions) 1994 1993 1993
- --------------------------------------------------------------------------------------------------------------
Net deferred tax asset (1) $ 942 $ 884 $ 806
Nonmarketable equity investments 399 396 348
Certain identifiable intangible assets 361 373 413
Foreclosed assets 344 348 391
Other 423 423 546
------ ------ ------
Total other assets $2,469 $2,424 $2,504
------ ------ ------
------ ------ ------
- --------------------------------------------------------------------------------------------------------------
<FN>
(1) Net of a valuation allowance of $2 million, $2 million and $5 million at June 30, 1994, December 31, 1993
and June 30, 1993, respectively.
The Company estimates that approximately $819 million of the $942 million net
deferred tax asset at June 30, 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 $123 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 $23 million for the
quarters ended June 30, 1994, December 31, 1993 and June 30, 1993, respectively.
DEPOSITS
- --------------------------------------------------------------------------------------------------------------
JUNE 30, December 31, June 30,
(in millions) 1994 1993 1993
- --------------------------------------------------------------------------------------------------------------
Noninterest-bearing $ 9,475 $ 9,719 $ 9,047
Interest-bearing checking 4,498 4,789 4,474
Savings 2,577 2,544 2,690
Market rate savings 16,663 17,084 16,514
Savings certificates 7,036 7,155 7,867
------- ------- -------
Core deposits 40,249 41,291 40,592
Other 956 353 342
------- ------- -------
Total deposits $41,205 $41,644 $40,934
------- ------- -------
------- ------- -------
- --------------------------------------------------------------------------------------------------------------
28
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 Company's Tier 1 and Tier 2 capital
components are presented on the following page. 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. To supplement the RBC guidelines, the FRB established a
minimum leverage ratio guideline of 3% of Tier 1 capital to average total
assets.
The decrease in the Company's RBC and leverage ratios at June 30, 1994 compared
with December 31, 1993 resulted primarily from the repurchase of 555,853 shares
of common stock during the first quarter of 1994 and 1,124,856 shares of common
stock in the second quarter of 1994 and secondarily from the redemption of $150
million in Series A preferred stock (at its liquidation preference carrying
amount) in the first quarter of 1994.
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%. At June
30, 1994, the Bank had a Tier 1 RBC ratio of 10.81%, a combined Tier 1 and Tier
2 ratio of 14.01% and a leverage ratio of 7.68%.
29
The table below presents the Company's risk-based capital and leverage ratios.
- --------------------------------------------------------------------------------------------------------------
JUNE 30, Dec. 31, June 30,
(in billions) 1994 1993 1993
- --------------------------------------------------------------------------------------------------------------
Tier 1:
Common stockholders' equity $ 3.6 $ 3.7 $ 3.4
Preferred stock .5 .6 .6
Less goodwill and other deductions (1) (.4) (.5) (.5)
------ ------ ------
Total Tier 1 capital 3.7 3.8 3.5
------ ------ ------
Tier 2:
Mandatory convertible debt .1 .1 .1
Subordinated debt and unsecured senior debt 1.1 1.1 1.3
Allowance for loan losses allowable in Tier 2 .5 .4 .5
------ ------ ------
Total Tier 2 capital 1.7 1.6 1.9
------ ------ ------
Total risk-based capital $ 5.4 $ 5.4 $ 5.4
------ ------ ------
------ ------ ------
Risk-weighted balance sheet assets $ 36.6 $ 36.1 $ 37.3
Risk-weighted off-balance sheet items:
Commitments to make or purchase loans 1.6 1.3 1.4
Standby letters of credit .6 .6 .7
Other .1 .2 .2
------ ------ ------
Total risk-weighted off-balance sheet items 2.3 2.1 2.3
------ ------ ------
Goodwill and other deductions (1) (.4) (.5) (.5)
Allowance for loan losses not included in Tier 2 (1.6) (1.7) (1.6)
------ ------ ------
Total risk-weighted assets $ 36.9 $ 36.0 $ 37.5
------ ------ ------
------ ------ ------
Risk-based capital ratios:
Tier 1 capital (4% minimum requirement) 10.06% 10.48% 9.31%
Total capital (8% minimum requirement) 14.56 15.12 14.33
Leverage ratio (3% minimum requirement) (2) 7.20% 7.39% 6.94%
- --------------------------------------------------------------------------------------------------------------
<FN>
(1) 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.
(2) Tier 1 capital divided by quarterly average total assets (excluding goodwill and other items which were
deducted to arrive at Tier 1 capital).
30
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 negative impact on the net interest margin of the Company over the next year
in an increasing interest rate environment since the Company's liabilities would
reprice to higher market interest rates before its assets would. A net positive
impact would result from a decreasing interest rate environment. At June 30,
1994, the under-one-year cumulative gap was a $415 million (.8% of total assets)
net liability position, compared with a $236 million (.5% of total assets) net
liability position at March 31, 1994 and a $1,402 million (2.7% of total assets)
net asset position at December 31, 1993. The increase in the net liability
position at June 30, 1994 compared with March 31, 1994 was significantly due to
an increase in short-term borrowings and deposits in foreign offices, as well as
a lower level of investment securities that are expected to mature or prepay
within a year due to the increasing interest rate environment. This was
primarily offset by a decrease in market rate savings and an increase in the
under-one-year balance of the real estate 1-4 family first mortgage portfolio.
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 $7.4 billion, $7.5
billion and $5.9 billion at June 30, 1994, 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.
31
PART II - OTHER INFORMATION
---------------------------
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.
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 2.26 and 1.90 for the quarters ended June 30,
1994 and 1993, respectively, and 2.30 and 1.76 for the six
months ended 1994 and 1993, respectively. The ratios of
earnings to fixed charges, excluding interest on deposits,
were 5.54 and 4.49 for the quarters ended June 30, 1994 and
1993, respectively, and 5.78 and 4.04 for the first half of
1994 and 1993, respectively.
(b) The Company filed the following reports on Form 8-K during the second
quarter of 1994 and through the date hereof:
(1) April 19, 1994 under Item 5, containing the Press Release
that announced the Company's financial results for the quarter
ended March 31, 1994
(2) July 20, 1994 under Item 5, containing the Press Releases that
announced the Company's financial results for the quarter
ended June 30, 1994, the share repurchase program, the
quarterly common stock dividend and the retirement of Chairman
Carl E. Reichardt on December 31, 1994
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 August 11, 1994.
WELLS FARGO & COMPANY
By:FRANK A. MOESLEIN
------------------------------------
Frank A. Moeslein
Executive Vice President and Controller
(Principal Accounting Officer)
32