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, 1996 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, 1996
------------------
Common stock, $5 par value 95,901,593
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements
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 ................................................ 7
Overview .............................................................. 8
Merger with First Interstate Bancorp .................................. 9
Line of Business Results .............................................. 12
Earnings Performance .................................................. 15
Net Interest Income .............................................. 15
Noninterest Income ............................................... 17
Noninterest Expense .............................................. 19
Income Taxes ..................................................... 20
Balance Sheet Analysis ................................................ 21
Investment Securities ............................................ 21
Loan Portfolio ................................................... 24
Commercial real estate ...................................... 24
Nonaccrual and Restructured Loans and Other Assets ............... 25
Changes in total nonaccrual loans ........................... 26
Changes in nonaccrual loans by loan category ................ 26
Changes in foreclosed assets ................................ 29
Loans 90 days past due and still accruing ................... 29
Allowance for Loan Losses ........................................ 30
Other Assets ..................................................... 32
Deposits ......................................................... 33
Capital Adequacy/Ratios .......................................... 33
Asset/Liability Management ....................................... 35
Derivative Financial Instruments ................................. 36
Liquidity Management ............................................. 37
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders .............. 38
Item 6. Exhibits and Reports on Form 8-K ................................. 39
SIGNATURE .................................................................. 40
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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 1995 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) 1996 1995
- -----------------------------------------------------------------
INTEREST INCOME
Federal funds sold and securities
purchased under resale agreements $ 2 $ 1
Investment securities 128 165
Loans 875 858
Other 1 1
------ ------
Total interest income 1,006 1,025
------ ------
INTEREST EXPENSE
Deposits 241 242
Federal funds purchased and securities sold under
repurchase agreements 36 56
Commercial paper and other short-term borrowings 5 10
Senior and subordinated debt 48 52
------ ------
Total interest expense 330 360
------ ------
NET INTEREST INCOME 676 665
Provision for loan losses -- --
------ ------
Net interest income after provision
for loan losses 676 665
------ ------
NONINTEREST INCOME
Service charges on deposit accounts 122 118
Fees and commissions 118 101
Trust and investment services income 59 55
Investment securities gains (losses) -- (15)
Other 55 (17)
------ ------
Total noninterest income 354 242
------ ------
NONINTEREST EXPENSE
Salaries 181 172
Incentive compensation 32 27
Employee benefits 54 53
Equipment 55 47
Net occupancy 53 53
Federal deposit insurance 1 24
Other 191 161
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Total noninterest expense 567 537
------ ------
INCOME BEFORE INCOME TAX EXPENSE 463 370
Income tax expense 199 137
------ ------
NET INCOME $ 264 $ 233
------ ------
------ ------
NET INCOME APPLICABLE TO COMMON STOCK $ 254 $ 223
------ ------
------ ------
PER COMMON SHARE
Net income $ 5.39 $ 4.41
------ ------
------ ------
Dividends declared $ 1.30 $ 1.15
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------ ------
Average common shares outstanding 47.0 50.5
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2
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
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MARCH 31, December 31, March 31,
(in millions) 1996 1995 1995
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ASSETS
Cash and due from banks $ 2,721 $ 3,375 $ 2,708
Federal funds sold and securities
purchased under resale agreements 49 177 39
Investment securities:
At fair value 8,435 8,920 2,403
At cost (estimated fair value $7,928) -- -- 8,173
------- ------- --------
Total investment securities 8,435 8,920 10,576
Mortgage loans held for sale -- -- 3,940
Loans 35,167 35,582 32,737
Allowance for loan losses 1,681 1,794 2,017
------- ------- --------
Net loans 33,486 33,788 30,720
------- ------- --------
Due from customers on acceptances 79 98 74
Accrued interest receivable 316 308 316
Premises and equipment, net 859 862 892
Goodwill 373 382 408
Other assets 2,660 2,406 2,651
------- ------- --------
Total assets $48,978 $50,316 $52,324
------- ------- --------
------- ------- --------
LIABILITIES
Noninterest-bearing deposits $ 9,740 $10,391 $ 9,431
Interest-bearing deposits 28,066 28,591 29,566
------- ------- --------
Total deposits 37,806 38,982 38,997
Federal funds purchased and securities
sold under repurchase agreements 2,243 2,781 4,770
Commercial paper and other short-term
borrowings 225 195 526
Acceptances outstanding 79 98 74
Accrued interest payable 110 85 105
Other liabilities 1,166 1,071 1,074
Senior debt 1,881 1,783 1,454
Subordinated debt 1,266 1,266 1,484
------- ------- --------
Total liabilities 44,776 46,261 48,484
------- ------- --------
STOCKHOLDERS' EQUITY
Preferred stock 489 489 489
Common stock - $5 par value,
authorized 150,000,000 shares;
issued and outstanding 46,999,455 shares,
46,973,319 shares and 49,579,908 shares 235 235 248
Additional paid-in capital 1,136 1,135 590
Retained earnings 2,366 2,174 2,572
Cumulative foreign currency translation
adjustments (4) (4) (4)
Investment securities valuation allowance (20) 26 (55)
------- ------- --------
Total stockholders' equity 4,202 4,055 3,840
------- ------- --------
Total liabilities and stockholders' equity $48,978 $50,316 $52,324
------- ------- --------
------- ------- --------
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3
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
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Quarter ended March 31,
(in millions) 1996 1995
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PREFERRED STOCK
Balance, beginning and end of quarter $ 489 $ 489
------ ------
COMMON STOCK
Balance, beginning of quarter 235 256
Common stock issued under employee benefit and
dividend reinvestment plans -- 3
Common stock repurchased -- (11)
------ ------
Balance, end of quarter 235 248
------ ------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of quarter 1,135 871
Common stock issued under employee benefit and
dividend reinvestment plans 7 34
Common stock repurchased (6) (315)
------ ------
Balance, end of quarter 1,136 590
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RETAINED EARNINGS
Balance, beginning of quarter 2,174 2,409
Net income 264 233
Preferred stock dividends (10) (10)
Common stock dividends (62) (60)
------ ------
Balance, end of quarter 2,366 2,572
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CUMULATIVE FOREIGN CURRENCY
TRANSLATION ADJUSTMENTS
Balance, beginning and end of quarter (4) (4)
------ ------
INVESTMENT SECURITIES VALUATION ALLOWANCE
Balance, beginning of quarter 26 (110)
Change in unrealized net gain (loss), after applicable taxes (46) 55
------ ------
Balance, end of quarter (20) (55)
------ ------
Total stockholders' equity $4,202 $3,840
------ ------
------ ------
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4
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
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Quarter ended March 31,
(in millions) 1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 264 $ 233
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses -- --
Depreciation and amortization 71 63
Deferred income tax benefit -- (44)
Increase in net deferred loan fees 1 --
Net (increase) decrease in accrued interest receivable (8) 12
Write-down of mortgage loans held for sale -- 83
Net increase in accrued interest payable 25 45
Other, net 75 23
------- -------
Net cash provided by operating activities 428 415
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities:
At cost:
Proceeds from prepayments and maturities -- 470
Purchases -- (24)
At fair value:
Proceeds from sales -- 670
Proceeds from prepayments and maturities 419 52
Purchases (14) (57)
Net (increase) decrease in loans resulting from originations
and collections 258 (589)
Proceeds from sales (including participations) of loans 51 191
Purchases (including participations) of loans (37) (109)
Proceeds from sales of foreclosed assets 21 43
Net decrease in federal funds sold and securities
purchased under resale agreements 128 221
Other, net (245) (71)
------- -------
Net cash provided by investing activities 581 797
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits (1,176) (3,335)
Net increase (decrease) in short-term borrowings (508) 2,085
Proceeds from issuance of senior debt 100 500
Repayment of senior debt -- (440)
Proceeds from issuance of common stock 7 37
Repurchase of common stock (6) (326)
Payment of cash dividends on preferred stock (10) (20)
Payment of cash dividends on common stock (62) (60)
Other, net (8) 81
------- -------
Net cash used by financing activities (1,663) (1,478)
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM BANKS) (654) (266)
Cash and cash equivalents at beginning of quarter 3,375 2,974
------- -------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 2,721 $ 2,708
------- -------
------- -------
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest $ 305 $ 315
------- -------
------- -------
Income taxes $ 75 $ 49
------- -------
------- -------
Noncash investing activities:
Transfers from loans to foreclosed assets $ 35 $ 42
------- -------
------- -------
Transfer from loans to mortgage loans held for sale $ -- $ 4,023
------- -------
------- -------
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5
[THIS PAGE INTENTIONALLY LEFT BLANK]
FINANCIAL REVIEW
SUMMARY FINANCIAL DATA
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% Change
Quarter ended March 31, 1996 from
------------------------------------- -------------------
MARCH 31, Dec. 31, March 31, Dec. 31, March 31,
(in millions) 1996 1995 1995 1995 1995
- ------------------------------------------------------------------------------------------------------------
FOR THE QUARTER
Net income $ 264 $ 306 $ 233 (14)% 13%
Per common share
Net income $ 5.39 $ 6.29 $ 4.41 (14) 22
Dividends declared 1.30 1.15 1.15 13 13
Average common shares outstanding 47.0 47.0 50.5 -- (7)
Profitability ratios (annualized)
Net income to average total assets (ROA) 2.16% 2.47% 1.80% (13) 20
Net income applicable to common stock to
average common stockholders' equity (ROE) 28.34 34.98 26.89 (19) 5
Efficiency ratio (1) 55.1% 51.1% 59.1% 8 (7)
Average loans $ 35,025 $ 34,423 $ 36,334 2 (4)
Average assets 49,134 49,169 52,390 -- (6)
Average core deposits 36,819 36,943 36,699 -- --
Net interest margin 6.18% 6.08% 5.59% 2 11
Average staff (full-time equivalent) 19,120 19,535 19,493 (2) (2)
AT QUARTER END
Investment securities $ 8,435 $ 8,920 $ 10,576 (5) (20)
Loans (2) 35,167 35,582 32,737 (1) 7
Allowance for loan losses 1,681 1,794 2,017 (6) (17)
Assets 48,978 50,316 52,324 (3) (6)
Core deposits 37,414 37,858 36,975 (1) 1
Common stockholders' equity 3,713 3,566 3,351 4 11
Stockholders' equity 4,202 4,055 3,840 4 9
Tier 1 capital (3) 3,856 3,635 3,437 6 12
Total capital (Tiers 1 and 2) (3) 5,353 5,141 5,034 4 6
Capital ratios
Common stockholders' equity to assets 7.58% 7.09% 6.40% 7 18
Stockholders' equity to assets 8.58 8.06 7.34 6 17
Risk-based capital (3)
Tier 1 capital 9.40 8.81 8.73 7 8
Total capital 13.04 12.46 12.78 5 2
Leverage (3) 7.91 7.46 6.61 6 20
Book value per common share $ 79.01 $ 75.93 $ 67.59 4 17
COMMON STOCK PRICE
High $ 261-1/4 $ 229 $ 160-5/8 14 63
Low 203-1/8 190 143-3/8 7 42
Quarter end 261-1/4 216 156-3/8 21 67
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(1) The efficiency ratio is defined as noninterest expense divided by the
total of net interest income and noninterest income.
(2) Loans exclude mortgage loans held for sale at March 31, 1995 of
$3,940 million.
(3) See the Capital Adequacy/Ratios section for additional information.
7
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 1996 was $264 million, compared with $233
million in the first quarter of 1995, an increase of 13%. Per share earnings
for the first quarter of 1996 were $5.39 per share, compared with $4.41 per
share in the first quarter of 1995, an increase of 22%.
First quarter 1996 results were higher than a year ago, reflecting an increase
in noninterest income of $112 million, partially offset by an increase in income
taxes.
Return on average assets (ROA) was 2.16% and return on average common equity
(ROE) was 28.34% in the first quarter of 1996, compared with 1.80% and 26.89%,
respectively, in the same quarter of 1995.
Net interest income on a taxable-equivalent basis was $676 million and $665
million in the first quarter of 1996 and 1995, respectively. The Company's net
interest margin for the first quarter of 1996 was 6.18%, compared with 5.59% in
the same quarter of 1995. The increase in the margin was substantially
attributable to a favorable change in the mix of earning assets, including
reduced levels of lower-yielding securities and single family loans, partially
offset by increased rates on consumer deposits.
Noninterest income in the first quarter of 1996 was $354 million, compared with
$242 million in the same quarter of 1995, an increase of 46%. The increase was
largely due to an $83 million write-down to lower of cost or estimated market in
1995 for certain product types within the real estate 1-4 family first mortgage
portfolio that were reclassified to mortgage loans held for sale.
Noninterest expense in the first quarter of 1996 was $567 million, up 6% from
$537 million. The increase was primarily due to higher expenses for contract
services as well as higher salary levels and equipment expense, largely offset
by a reduction in federal deposit insurance expense.
During the first quarter of 1996, net charge-offs totaled $113 million, or 1.30%
of average loans (annualized). This compared with $78 million, or .90%, during
the fourth quarter of 1995 and $65 million, or .72%, during the first quarter of
1995. The allowance for loan losses was 4.78% of total loans at March 31, 1996,
compared with 5.04% at December 31, 1995 and 6.16% (excluding mortgage loans
held for sale) at March 31, 1995.
Total nonaccrual and restructured loans were $537 million at March 31, 1996,
compared with $552 million at December 31, 1995 and $581 million at March 31,
1995. Foreclosed assets amounted to $198 million at March 31, 1996, $186
million at December 31, 1995 and $273 million at March 31, 1995.
8
The Company's effective tax rate for the first quarter of 1996 was 43%, compared
with 37% for the first quarter of 1995. The increase in the effective tax rate
was due to a $22 million reduction of income tax expense in 1995 related to the
settlement with the Internal Revenue Service of certain audit issues pertaining
to auto leases.
Common stockholders' equity to total assets was 7.58% at March 31, 1996,
compared with 7.09% and 6.40% at December 31, 1995 and March 31, 1995,
respectively. The Company's total risk-based capital ratio at March 31, 1996
was 13.04% and its Tier 1 risk-based capital ratio was 9.40%, exceeding
minimum guidelines of 8% and 4%, respectively, for bank holding companies and
the "well capitalized" guidelines for banks of 10% and 6%, respectively. At
December 31, 1995, these risk-based capital ratios were 12.46% and 8.81%,
respectively; at March 31, 1995, these ratios were 12.78% and 8.73%,
respectively. The Company's leverage ratios were 7.91%, 7.46% and 6.61% at
March 31, 1996, December 31, 1995 and March 31, 1995, respectively, exceeding
the minimum regulatory guideline of 3% for bank holding companies and the "well
capitalized" guideline of 5% for banks.
MERGER WITH FIRST INTERSTATE BANCORP
On April 1, 1996, the Company completed its acquisition of First Interstate
Bancorp, creating the eighth largest bank holding company in the United States
based on total assets as of March 31, 1996. The purchase price of the
transaction was approximately $11 billion based on Wells Fargo's share price on
January 19, the last trading day before Wells Fargo and First Interstate agreed
on an exchange ratio. First Interstate shareholders received two-thirds of a
share of Wells Fargo common stock for each share of common stock owned. The
merger is being accounted for as a purchase transaction. Accordingly, the
results of operations of First Interstate will be included with that of the
Company for periods subsequent to the date of the merger (i.e., the first
quarter 1996 financial information included in this Form 10-Q excludes First
Interstate). The name of the newly combined company is Wells Fargo & Company.
The combined company has assets of approximately $111 billion, loans of $71
billion and deposits of $85 billion.
As a condition of the merger, Wells Fargo was required by regulatory agencies to
divest 61 First Interstate branches in California. In the first quarter of
1996, the Company entered into a contract with Home Savings of America,
principal subsidiary of H.F. Ahmanson & Company, to sell the 61 First
Interstate branches with aggregate deposits of about $2.5 billion and loans of
about $1.3 billion. The selling price of the divested branches represents a
premium of 8.11% on the deposits. The transaction is expected to close during
the third quarter of 1996. The impact of the divestitures has not been included
in the pro forma financial data presented on the next page.
9
The following pro forma combined financial data shows the pro forma effects of
the merger. The pro forma combined summary of income gives effect to the
combination as if the merger was consummated on January 1, 1995 and the selected
pro forma combined balance sheet data gives effect to the merger as if it was
consummated on March 31, 1996.
The pro forma amounts in the table below are presented for informational
purposes and are not necessarily indicative of the financial position or the
results of operations of the combined company for the periods presented. The
pro forma amounts are also not necessarily indicative of the future financial
position or future results of operations of the combined company. In
particular, the Company expects to achieve significant operating cost savings as
a result of the merger, which have not been included in the pro forma amounts.
PRO FORMA COMBINED FINANCIAL DATA
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Quarter ended March 31,
----------------------
(in millions, except per share data) 1996 1995
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SUMMARY OF INCOME
Net interest income $ 1,287 $ 1,295
Provision for loan losses -- --
Noninterest income 659 510
Noninterest expense (1) 1,242 1,213
Net income (1) 394 349
PER COMMON SHARE
Net income (1) $ 3.84 $ 3.29
Dividends declared 1.30 1.15
AVERAGE COMMON SHARES OUTSTANDING 98.0 100.5
SELECTED BALANCE SHEET DATA
(AT QUARTER END)
Investment securities $ 16,088
Loans 70,850
Assets 111,387
Deposits 85,251
Senior and subordinated debt 4,372
Stockholders' equity 15,850
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(1) Noninterest expense for the quarter ended March 31, 1996 excludes $251
million ($245 million after tax) of nonrecurring merger-related
expenses recorded by First Interstate.
The pro forma combined net income of $394 million consists of first quarter
1996 net income of the Company of $264 million and a net loss of First
Interstate of $(23) million, plus pro forma expense adjustments of $153
million. The pro forma combined net income of $349 million consists of first
quarter 1995 net income of the Company of $233 million and First Interstate
of $212 million, less pro forma expense adjustments of $96 million. The pro
forma expense adjustments for both periods include amortization of $66
million relating to a
10
preliminary estimate of approximately $6,600 million excess purchase price
over fair value of First Interstate's net assets acquired (goodwill).
It is anticipated that the Company will incur merger-related costs of about
$700 million related to premises, severance and other costs. To the extent
these costs relate to First Interstate's premises, employees and operations,
they will affect the final amount of goodwill as of the consummation of the
merger. The remaining costs relating to the Company's premises, employees
and operations as well as all costs relating to systems conversions and other
indirect, integration costs will be expensed, either upon consummation of the
merger or as incurred. With respect to timing, it is assumed that the
integration would be completed and that such costs would be incurred not
later than 18 months after the closing of the merger. No adjustment has been
included in the pro forma amounts for these merger-related costs.
The foregoing estimate is based on the assumption that the equivalent of
approximately 85% (or 350) of First Interstate's California branches will be
consolidated (by closing or divesting both First Interstate and Wells Fargo
branches) following consummation of the merger.
The following discussions included in the Line of Business Results, Earnings
Performance and Balance Sheet Analysis sections of this report do not reflect
the expected impact of the Company's merger with First Interstate.
11
LINE OF BUSINESS RESULTS (ESTIMATED)
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(income/expense in millions, average balances in billions)
- --------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995
--------------------- ----------------- ----------------
Retail Business
Distribution Banking Investment
Group Group Group
------------------------------------------------------------------
Net interest income (1) $ 109 $ 108 $ 96 $ 87 $ 99 $ 119
Provision for loan losses (2) -- -- 11 8 -- --
Noninterest income (3) 163 159 44 32 65 73
Noninterest expense (3) 267 228 72 65 89 112
----- ----- ----- ----- ----- -----
Income before income
tax expense (benefit) 5 39 57 46 75 80
Income tax expense (benefit) (4) 3 18 25 20 33 35
----- ----- ----- ----- ----- -----
Net income $ 2 $ 21 $ 32 $ 26 $ 42 $ 45
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
Average loans $ -- $ -- $ 3.0 $ 2.1 $ .5 $ .5
Average assets .9 1.2 4.2 3.3 .9 1.0
Average core deposits 9.1 9.7 6.4 6.4 18.3 18.1
Return on equity (5) 3% 43% 34% 34% 39% 42%
Risk-adjusted efficiency ratio (6) 102% 89% 69% 71% 67% 69%
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(1) Net interest income is the difference between actual interest earned
on assets (and interest paid on liabilities) owned by a group and a
funding charge (and credit) based on the Company's cost of funds.
Groups are charged a cost to fund any assets (e.g., loans) and are
paid a funding credit for any funds provided (e.g., deposits). The
interest spread is the difference between interest rate earned on an
asset or paid on a liability and the Company's cost of funds rate.
(2) The provision allocated to the line groups is based on management's
current assessment of the normalized net charge-off ratio for each
line of business. In any particular year, the actual net charge-offs
can be higher or lower than the normalized provision allocated to the
lines of business. The difference between the normalized provision
and the Company provision is included in Other.
(3) The Retail Distribution Group's charges to the product groups are
shown as noninterest income to the branches and noninterest expense to
the product groups. They amounted to $50 million and $48 million in
the first quarter of 1996 and 1995, respectively. These charges are
eliminated in the Other category in arriving at the Consolidated
Company totals for noninterest income and expense.
The line of business results show financial performance of the major
business units comparing the first quarter of 1996 with the first
quarter of 1995. Changes in management structure and/or the allocation
process may result in changes in allocations, transfers and
assignments. In that case, results for prior periods would be restated
to allow comparability from one period to the next.
The Retail Distribution Group's net income in the first quarter of
1996 decreased $19 million, or 90%. Noninterest expense increased
substantially due to higher expenditures on alternative distribution
channels, including supermarket branches and banking centers. A
significant portion of the increase was offset by cost savings from
branch closures and the reduction of FDIC expense.
The Business Banking Group's net income in the first quarter of 1996
increased $6 million, or 23%. Net interest income increased substantially
due to higher balances and spreads on commercial loans, of which a major
portion was offset by narrower spreads on core deposits.
12
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Quarter ended March 31,
- ---------------------------------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995 1996 1995 1996 1995
-------------- -------------- -------------- ------------- -------------
Wholesale
Real Estate Products Consumer Consolidated
Group Group Lending Other Company
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$ 67 $ 58 $ 106 $ 99 $ 184 $ 148 $ 15 $ 46 $ 676 $ 665
8 7 10 10 63 50 (92) (75) -- --
24 7 38 45 58 47 (38) (121) 354 242
22 14 50 46 75 72 (8) -- 567 537
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
61 44 84 88 104 73 77 -- 463 370
26 19 36 37 44 31 32 (23) 199 137
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
$ 35 $ 25 $ 48 $ 51 $ 60 $ 42 $ 45 $ 23 $ 264 $ 233
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
$ 7.0 $ 6.4 $ 8.9 $ 8.7 $11.8 $10.1 $ 3.8 $ 8.5 $35.0 $36.3
7.5 6.8 9.8 9.5 12.2 10.3 13.6 19.7 49.1 52.4
.2 .1 2.5 2.2 .3 .2 -- -- 36.8 36.7
19 % 16 % 27 % 29 % 31 % 25 % -- % -- % 28 % 27 %
68 % 77 % 62 % 60 % 63 % 72 % -- % -- % -- % -- %
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(4) Businesses are taxed at the Company's marginal (statutory)
tax rate, adjusted for any nondeductible expenses. Any
differences between the marginal and effective tax rates are in
Other.
(5) Equity is allocated to the lines of business based on an
assessment of the inherent risk associated with each business so
that the returns on allocated equity are on a risk-adjusted basis
and comparable across business lines.
(6) The risk-adjusted efficiency ratio is defined as
noninterest expense plus the cost of capital divided by
revenues (net interest income and noninterest income)
less normalized loan losses.
Noninterest income increased substantially due to the recognition of a gain
resulting from the Card Establishment Services (CES) alliance, higher sweep
account balances and activity, and increased fees from mass market loan
products. Noninterest expense increased largely due to higher expenses
associated with increased mass market lending volumes, a significant portion of
which was offset by the reduction in FDIC expense.
The Investment Group's net income in the first quarter of 1996 decreased $3
million, or 7%. Net interest income decreased due to narrower spreads on core
deposits, partially offset by higher deposit balances. The decrease in
noninterest income was substantially due to income received in 1995 from the
joint venture interest in Wells Fargo Nikko Investment Advisors (WFNIA) and the
MasterWorks division (which were sold in December 1995) and lower fixed annuity
sales. A major portion of this decrease was offset by higher management fees on
higher assets under management. Noninterest expense decreased mostly from the
reduction of FDIC expense and expenses related to WFNIA and MasterWorks.
13
The Real Estate Group's net income in the first quarter of 1996
increased $10 million, or 40%. Net interest income increased primarily
due to higher loan balances in the Real Estate Capital Markets Group.
Noninterest income increased substantially due to gains on the sale of
cost method equity investments. Noninterest expense increased
substantially due to lower foreclosed asset gains on sales and the
expansion of the Real Estate Capital Markets Group.
The Wholesale Products Group's net income in the first quarter of
1996 decreased $3 million, or 6%. Net interest income increased
primarily due to recoveries on loans where interest had been previously
applied to principal. Noninterest income reflected lower gains from
loan sales. The increase in noninterest expense was primarily related
to the Wells Fargo HSBC Trade Bank which was established in October
1995.
Consumer Lending's net income in the first quarter of 1996 increased
$18 million, or 43%. The increase in net interest income was largely
due to higher credit card, auto lease and consumer loan balances.
Noninterest income increased primarily due to higher credit card fee
income. Noninterest expense increased substantially due to the cost of
servicing a higher number of open accounts. Consumer Lending has
assumed the responsibility for servicing the Company's remaining 1-4
family first mortgage loan portfolio and mortgage loans owned by third
parties (previously included in the Mortgage Business Group),
contributing net income of $1 million in the first quarter for both
years. This organizational change is due to the Company exiting the 1-
4 family first mortgage loan origination business in October 1995, and
is reflected in both current and prior periods.
The Other category includes the Company's 1-4 family first mortgage
portfolio (previously included in the Mortgage Business Group), the
investment securities portfolio, the difference between the normalized
provision for the line groups and the Company provision for loan
losses, the net impact of transfer pricing loan and deposit balances,
the cost of external debt, the elimination of intergroup noninterest
income and expense, and any residual effects of unallocated systems and
other support groups. It also includes the impact of asset/liability
strategies the Company has put in place to manage the sensitivity of
net interest spreads.
Net income for the Other category in first quarter of 1996 increased
$22 million, or 96%. The increase was due to the write-down of first
mortgages booked in the first quarter of 1995 and a higher loan loss
provision credit. Net interest income decreased predominantly due to
lower investment securities and lower first mortgage balances, of which
a major portion was offset by lower funding costs and higher hedging
income. Tax expense was higher due to the reduction in 1995 tax
expense related to the settlement with the Internal Revenue Service of
certain audit issues pertaining to auto leases.
14
EARNINGS PERFORMANCE
NET INTEREST INCOME
Net interest income on a taxable-equivalent basis was $676 million in
the first quarter of 1996, compared with $665 million in the first
quarter of 1995. The Company's net interest margin was 6.18% for the
first quarter of 1996, compared with 5.59% for the first quarter of
1995.
The increase in the margin reflected a change in the mix of average
earning assets, including reduced levels of lower-yielding securities
and single family loans, partially offset by increased rates on
consumer deposits.
Interest income included hedging income of $10 million in the first
quarter of 1996, compared with $1 million in the first quarter of 1995.
Interest expense included hedging income of $1 million in the same
quarters of 1996 and 1995.
Individual components of net interest income and net interest margin
are presented in the rate/yield table on page 16.
Loans averaged $35.0 billion in the first quarter of 1996, a 4%
decrease from $36.3 billion in the first quarter of 1995. The
decrease was substantially in real estate 1-4 family first mortgage
loans due to the Company's decision at year-end 1994 to cease the
origination of first mortgages. A major portion of this decrease was
offset by a $1.3 billion increase in commercial loans, primarily
due to increased small business loans resulting from ongoing marketing
efforts.
Investment securities averaged $8.7 billion during the first quarter
of 1996, a 22% decrease from $11.1 billion in the first quarter of
1995. The decrease was due to the maturity of investment securities.
Cash received from future maturities of investment securities is
expected to be used to fund loan growth.
Average core deposits were $36.8 billion and $36.7 billion in the
first quarters of 1996 and 1995, respectively, and funded 75% and 70%
of the Company's average total assets in the same quarters of 1996 and
1995, respectively.
15
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) (2)
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Quarter ended March 31,
-------------------------------------------------------------------
1996 1995
-------------------------------------------------------------------
INTEREST Interest
AVERAGE YIELDS/ INCOME/ Average Yields/ income/
(in millions) BALANCE RATES EXPENSE balance rates expense
- --------------------------------------------------------------------------------------------
EARNING ASSETS (3)
Federal funds sold and
securities purchased
under resale agreements $ 125 5.68% $ 2 $ 48 5.58% $ 1
Investment securities:
At fair value (4):
U.S. Treasury securities 1,356 5.52 18 385 6.69 6
Securities of U.S. government
agencies and corporations 4,991 5.95 75 1,211 5.75 18
Private collateralized mortgage
obligations 2,078 6.05 31 1,090 6.35 20
Other securities 225 7.70 4 65 14.56 1
------- ------ ------- ------
Total investment securities
at fair value 8,650 5.95 128 2,751 6.24 45
At cost:
U.S. Treasury securities -- -- -- 1,647 4.83 20
Securities of U.S. government
agencies and corporations -- -- -- 5,234 6.03 78
Private collateralized mortgage
obligations -- -- -- 1,285 5.92 19
Other securities -- -- -- 164 6.67 3
------- ------ ------- ------
Total investment securities at
cost -- -- -- 8,330 5.79 120
------- ------ ------- ------
Total investment securities 8,650 5.95 128 11,081 5.90 165
Loans:
Commercial 9,308 9.96 231 8,055 9.77 194
Real estate 1-4 family first
mortgage 4,400 7.56 83 9,042 7.12 161
Other real estate mortgage 8,197 9.23 188 8,123 9.59 192
Real estate construction 1,327 9.98 33 1,019 10.17 26
Consumer:
Real estate 1-4 family junior
lien mortgage 3,334 8.50 71 3,323 8.65 72
Credit card 3,933 15.56 153 3,125 15.78 123
Other revolving credit and
monthly payment 2,598 11.19 71 2,268 10.42 59
------- ------ ------- ------
Total consumer 9,865 12.02 295 8,716 11.67 254
Lease financing 1,897 9.20 44 1,351 9.17 31
Foreign 31 6.96 1 28 -- --
------- ------ ------- ------
Total loans 35,025 10.03 875 36,334 9.51 858
Other 69 6.34 1 58 5.60 1
------- ------ ------- ------
Total earning assets $43,869 9.21 1,006 $47,521 8.65 1,025
------- ------ ------- ------
------- -------
FUNDING SOURCES
Interest-bearing liabilities:
Deposits:
Interest-bearing checking (5) $ 856 .99 2 $4,365 1.00 11
Market rate and other
savings (5) 17,991 2.52 113 16,121 2.56 101
Savings certificates 8,636 5.24 113 7,346 4.89 89
Other time deposits 341 7.26 6 358 2.45 2
Deposits in foreign offices 524 5.42 7 2,665 5.87 39
------- ------ ------- ------
Total interest-bearing
deposits 28,348 3.41 241 30,855 3.18 242
Federal funds purchased and
securities sold under repurchase
agreements 2,706 5.36 36 3,887 5.82 56
Commercial paper and other
short-term borrowings 405 5.27 5 687 5.89 10
Senior debt 1,710 6.26 26 1,640 6.93 28
Subordinated debt 1,266 6.85 22 1,469 6.60 24
------- ------ ------- ------
Total interest-bearing
liabilities 34,435 3.86 330 38,538 3.78 360
Portion of noninterest-bearing
funding sources 9,434 -- -- 8,983 -- --
------- ------ ------- ------
Total funding sources $43,869 3.03 330 $47,521 3.06 360
------- ------ ------- ------
------- -------
NET INTEREST MARGIN AND NET
INTEREST INCOME ON
A TAXABLE-EQUIVALENT BASIS (6) 6.18% $ 676 5.59% $ 665
----- ------ ----- ------
----- ------ ----- ------
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 2,873 $ 2,587
Other 2,392 2,282
------- -------
Total noninterest-earning
assets $ 5,265 $ 4,869
------- -------
------- -------
NONINTEREST-BEARING FUNDING
SOURCES
Deposits $ 9,336 $ 8,867
Other liabilities 1,277 1,141
Preferred stockholders' equity 489 489
Common stockholders' equity 3,597 3,355
Noninterest-bearing funding
sources used to fund earning
assets (9,434) (8,983)
------- -------
Net noninterest-bearing
funding sources $ 5,265 $ 4,869
------- -------
------- -------
TOTAL ASSETS $49,134 $52,390
------- -------
------- -------
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
(1) The average prime rate of Wells Fargo Bank was 8.33% and 8.83%
for the quarters ended March 31, 1996 and 1995, respectively.
The average three-month London Interbank Offered Rate (LIBOR)
was 5.40% and 6.29% for the same quarters, respectively.
(2) Interest rates and amounts include the effects of hedge and
risk management activities associated with the respective
asset and liabilities categories.
(3) There was no average balance or related interest income on
Mortgage Loans Held for Sale as they were reclassified from
Loans on March 31, 1995 and subsequently sold by year-end
1995.
(4) Yields are based on amortized cost balances. The average
amortized cost balances for investment securities at fair
value totaled $8,614 million and $2,880 million for the
quarters ended March 31, 1996 and 1995, respectively.
(5) Due to the limited transaction activity on existing NOW
(negotiable order withdrawal) account customers, $3.4 billion
of interest-bearing checking deposits at December 31, 1995
was reclassified to market rate and other savings deposits.
(6) 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 quarters ended March 31,
1996 and 1995.
16
NONINTEREST INCOME
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Quarter
ended March 31,
--------------- %
(in millions) 1996 1995 Change
- --------------------------------------------------------------------------------
Service charges on deposit accounts $122 $118 3%
Fees and commissions:
Credit card membership and other credit card fees 26 19 37
Charges and fees on loans 17 11 55
Debit and credit card merchant fees 15 14 7
Shared ATM network fees 13 12 8
Mutual fund and annuity sales fees 8 10 (20)
All other 39 35 11
---- ----
Total fees and commissions 118 101 17
Trust and investment services income:
Asset management and custody fees 35 31 13
Mutual fund management fees 21 14 50
All other 3 10 (70)
---- ----
Total trust and investment services income 59 55 7
Investment securities gains (losses) -- (15) 100
Income from equity investments accounted for
by the:
Cost method 35 19 84
Equity method 2 8 (75)
Check printing charges 9 11 (18)
Gains (losses) from dispositions of operations 5 (1) --
Gains (losses) on sales of loans 4 (67) --
All other -- 13 (100)
---- ----
Total $354 $242 46%
---- ---- ---
---- ---- ---
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The overall increase in noninterest income reflected a broad-based increase in
revenue from the Company's core products and services.
The increase in credit card membership and other credit card fees for the first
quarter of 1996 compared with the same period of 1995 was predominantly due to
late fees and other transaction fees incurred by customers.
"All other" fees and commissions include mortgage loan servicing fees and the
related amortization expense for purchased mortgage servicing rights. Mortgage
loan servicing fees totaled $16 million and $10 million for the first quarter of
1996 and 1995, respectively. The related amortization expense was $11 million
and $6 million for the same periods, respectively. The balance of purchased
mortgage servicing rights was $170 million and $127 million at March 31, 1996
and 1995, respectively. The purchased mortgage loan servicing portfolio totaled
$16 billion at March 31, 1996, compared with $11 billion at March 31, 1995.
The increase in trust and investment services income for the first quarter ended
March 31, 1996 was primarily due to greater mutual fund investment management
fees, reflecting the overall growth in the fund families' net assets. The
Company managed 16 of the Stagecoach family of funds consisting of $7.5 billion
of assets at March 31, 1996, compared with 28 funds
17
consisting of $7.6 billion at March 31, 1995. For the first quarter of 1995,
the Stagecoach family consisted of both retail and institutional funds. The
retail funds are primarily distributed through the branch network. The
institutional funds were offered primarily to selected groups of investors
and certain corporations, partnerships and other business entities. As a
result of the sale of the Company's joint venture interest in WFNIA and the
sale of the MasterWorks division at year-end 1995, $.5 billion of the retail
funds and all the institutional funds were no longer under the Company's
management at March 31, 1996. The Overland Express family of 12 funds, which
is sold nationwide through brokers, had $3.9 billion of assets under
management at March 31, 1996, compared with 12 funds consisting of $3.1
billion at March 31, 1995. In addition to managing Overland Express Funds
and the funds in the Stagecoach family, the Company also managed or
maintained personal trust, employee benefit trust and agency assets of
approximately $52.2 billion at March 31, 1996, compared with $48.9 billion at
March 31, 1995.
The Company's joint venture interest in WFNIA was accounted for as an equity
investment under the equity method in 1995. The income from the equity
investment in WFNIA included in noninterest income was $5 million in the first
quarter of 1995.
For the first quarter of 1996, income from cost method equity investments
reflected both net gains on the sales of and distributions from nonmarketable
equity investments. Income from cost method equity investments in the first
quarter of 1996 reflected a $16 million gain on the sale of an investment.
At December 31, 1995, the Company had a liability of $83 million related to the
disposition of premises and, to a lesser extent, severance and miscellaneous
expenses associated with scheduled branch closures. Of this amount, $13 million
represented a third quarter 1995 accrual for the closures of 21 branches
scheduled for March 1996. The remaining amount consisted of a fourth quarter
accrual for the closures of 120 branches which were expected to be completed by
year-end 1996. However, due to the merger with First Interstate, the completion
of the 120 branch closures is expected to be delayed until the first quarter of
1997. The liability associated with branch closures at March 31, 1996 was $74
million. Additional accruals may be made in 1996 for branch closures or
relocations as the Company continues to open more supermarket branches and
banking centers.
In the first quarter of 1995, gains and losses on sales of loans included an
estimated $83 million write-down to the lower of cost or estimated market
resulting from the reclassification of certain types of products within the real
estate 1-4 family first mortgage loan portfolio to mortgage loans held for sale.
This write-down was partially offset by gains on sales of two loans, resulting
from the assumption of the borrowers' loans by third parties.
"All Other" noninterest income in the first quarter of 1995 included
$8 million of interest income recorded as a result of a settlement with the
Internal Revenue Service of certain audit issues pertaining to auto leases for
the years 1987 through 1992.
18
NONINTEREST EXPENSE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Quarter
ended March 31,
--------------- %
(in millions) 1996 1995 Change
- --------------------------------------------------------------------------------
Salaries $181 $172 5%
Incentive compensation 32 27 19
Employee benefits 54 53 2
Equipment 55 47 17
Net occupancy 53 53 --
Contract services 42 25 68
Telecommunications 16 13 23
Postage 15 12 25
Operating losses 14 15 (7)
Advertising and promotion 13 14 (7)
Outside professional services 13 10 30
Certain identifiable intangibles 12 14 (14)
Stationery and supplies 10 9 11
Goodwill 9 9 --
Travel and entertainment 9 7 29
Check printing 7 7 --
Security 6 5 20
Escrow and collection agency fees 4 4 --
Outside data processing 3 3 --
Foreclosed assets 2 (4) --
Federal deposit insurance 1 24 (96)
All other 16 18 (11)
---- ----
Total $567 $537 6%
---- ---- ---
---- ---- ---
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The increase in salaries expense in the first quarter of 1996 reflects increased
temporary help expense and higher salary levels. The Company's full-time
equivalent staff, including hourly employees, averaged approximately 19,120 in
the first quarter of 1996, compared with approximately 19,493 in the first
quarter of 1995.
Increases in equipment expense in the first quarter of 1996 compared with the
same quarter of 1995 was substantially due to a higher level of spending on
software and technology for product development and increased depreciation
expense on equipment related to business initiatives and system upgrades.
The increase in contract services for the first quarter 1996 compared with the
same period of 1995 was largely due to new product development and marketing
initiatives.
The decrease in federal deposit insurance for the first quarter 1996 compared
with the same period of 1995 was predominantly due to the FDIC's reduction of
deposit insurance premiums. Effective January 1, 1996, the best-rated
institutions insured by the Bank Insurance Fund pay the statutory minimum annual
assessment of $2,000.
19
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (FAS 123), Accounting for
Stock-Based Compensation. This Statement establishes a new fair value based
accounting method for stock-based compensation plans and encourages (but does
not require) employers to adopt the new method in place of the provisions of
Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued
to Employees. In accordance with FAS 123, the Company has decided to continue
to apply the accounting provisions of APB 25 in determining net income; however,
it will apply the disclosure requirements in the 1996 Annual Report.
INCOME TAXES
The Company's effective tax rate for the first quarter of 1996 was 43%, compared
with 37% for the first quarter of 1995. The increase in the effective tax rate
was due to a $22 million reduction of income tax expense during the first
quarter of 1995 related to the settlement with the Internal Revenue Service of
certain audit issues pertaining to auto leases for the years 1987 through 1992.
20
BALANCE SHEET ANALYSIS
INVESTMENT SECURITIES
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
1996 1995 1995
------------------ ------------------ ------------------
ESTIMATED Estimated Estimated
FAIR fair fair
(in millions) COST VALUE Cost value Cost value
- ------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES
AT FAIR VALUE:
U.S. Treasury securities $1,347 $1,350 $1,347 $1,357 $ 422 $ 421
Securities of U.S. government
agencies and corporations (1) 4,866 4,823 5,218 5,223 1,040 984
Private collateralized mortgage obligations (2) 2,056 2,032 2,121 2,122 996 937
Other 170 180 169 181 25 35
------ ------ ------ ------ ------ ------
Total debt securities 8,439 8,385 8,855 8,883 2,483 2,377
Marketable equity securities 29 50 18 37 16 26
------ ------ ------ ------ ------ ------
Total $8,468 $8,435 $8,873 $8,920 $2,499 $2,403
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
HELD-TO-MATURITY SECURITIES
AT COST:
U.S. Treasury securities $ -- $ -- $ -- $ -- $1,572 $1,543
Securities of U.S. government
agencies and corporations (1) -- -- -- -- 5,163 4,997
Private collateralized mortgage obligations (2) -- -- -- -- 1,275 1,224
Other -- -- -- -- 163 164
------ ------ ------ ------ ------ ------
Total debt securities $ -- $ -- $ -- $ -- $8,173 $7,928
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
(1) All securities of U.S. government agencies and corporations are
mortgage-backed securities.
(2) Substantially all private collateralized mortgage obligations (CMOs)
are AAA rated bonds collateralized by 1-4 family residential first
mortgages.
In November 1995, the FASB permitted a one-time opportunity for
companies to reassess by December 31, 1995 their classification of
securities under FAS 115, Accounting for Certain Investments in Debt
and Equity Securities. As a result, on November 30, 1995, the Company
reclassified all of its held-to maturity securities at cost portfolio
of $6.5 billion to the available-for-sale securities at fair value
portfolio in order to provide increased liquidity flexibility to meet
anticipated loan growth.
The available-for-sale portfolio includes both debt and marketable
equity securities. At March 31, 1996, the available-for-sale
securities portfolio had an unrealized net loss of $33 million, or
less than 1% of the cost of the portfolio, comprised of unrealized
gross losses of $95 million and unrealized gross gains of $62 million.
At December 31, 1995, the available-for-sale securities portfolio had
an unrealized net gain of $47 million, comprised of unrealized gross
gains of $88 million and unrealized gross losses of $41 million. At
March 31, 1995, the available-for-sale securities portfolio had an
unrealized net loss of $96 million, comprised of unrealized gross
losses of $124 million and unrealized gross gains of $28 million. The
unrealized net gain or loss on available-for-sale securities is
reported on an after-tax basis as a separate component of
stockholders' equity. At March 31, 1996, the valuation allowance
21
amounted to an unrealized net loss of $20 million, compared with an
unrealized net gain of $26 million at December 31, 1995 and an
unrealized net loss of $55 million at March 31, 1995.
At March 31, 1995, the held-to-maturity securities portfolio had an
estimated unrealized net loss of $245 million (which reflected
estimated unrealized gross gains of $7 million).
The unrealized net loss in the available-for-sale portfolio at March
31, 1996 was primarily due to investments in mortgage-backed
securities. This unrealized net loss reflected current interest rates
that were higher than those at the time the investments were
purchased. The decline in the fair value of the investment securities
portfolio is not considered to be an other-than-temporary impairment.
The Company may decide to sell certain of the available-for-sale
securities to manage the level of earning assets (for example, to
offset loan growth that may exceed expected maturities and prepayments
of securities).
There were no sales of available-for-sale securities in the first
quarter of 1996. In the first quarter of 1995, the Company sold $397
million of securities of U.S. government agencies and corporations and
$288 million of private collateralized mortgage obligations from the
available-for-sale portfolio for asset/liability management purposes.
These sales resulted in realized losses of $15 million (realized gross
gains were zero).
Cash received from future maturities of investment securities is
expected to be used to fund loan growth.
22
The following table provides the expected remaining maturities and
yields (taxable-equivalent basis) of debt securities within the
investment portfolio.
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
March 31, 1996
-----------------------------------------------------------------------------------------------------------
Expected remaining principal maturity
-----------------------------------------------------------------------------------------------------------
Weighted
average
expected
remaining After one year After five years
Weighted maturity Within one year 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
- -----------------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE
SECURITIES (1):
U.S. Treasury
securities $1,347 5.51% 1-1 $ 899 5.14% $448 6.25% $ -- --% $ -- --%
Securities of U.S.
government agencies and
corporations 4,866 6.06 2-3 1,537 5.76 2,831 5.96 433 7.48 65 7.84
Private collateralized
mortgage obligations 2,056 6.29 2-5 550 6.03 1,343 6.24 153 6.63 10 21.38
Other 170 8.72 2-3 50 5.99 118 9.90 -- -- 2 6.37
------ ------ ------ ----- ----
TOTAL COST OF DEBT
SECURITIES $8,439 6.08% 2-1 $3,036 5.63% $4,740 6.17% $ 586 7.26% $ 77 9.56%
------ ---- ---- ------ ---- ------ ---- ----- ---- ---- ----
------ ---- ---- ------ ---- ------ ---- ----- ---- ---- ----
ESTIMATED FAIR VALUE $8,385 $3,019 $4,700 $ 587 $ 79
------ ------ ------ ----- ----
------ ------ ------ ----- ----
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
(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 1 month at March 31, 1996,
compared with 2 years and 1 month at December 31, 1995 and 2 years and
10 months at March 31, 1995. The short-term debt securities portfolio
serves to maintain asset liquidity and to fund loan growth.
At March 31, 1996, mortgage-backed securities included in Securities
of U.S. government agencies and corporations primarily consisted of
pass-through securities and collateralized mortgage obligations (CMOs)
and substantially all were issued or backed by federal agencies. These
securities, along with the Private CMOs, represented $6,855 million,
or 81% of the Company's investment securities portfolio at March 31,
1996. The CMO securities held by the Company (including the private
issues) are primarily shorter-maturity class bonds that were
structured to have more predictable cash flows by being less sensitive
to prepayments during periods of changing interest rates. As an
indication of interest rate risk, the Company has estimated the impact
of a 200 basis point increase in interest rates on the value of the
mortgage-backed securities and the corresponding expected remaining
maturities. Based on this rate scenario, mortgage-backed securities
would decrease in fair value from $6,855 million to $6,543 million and
the expected remaining maturity of these securities would increase
from 2 years and 3 months to 2 years and 7 months.
23
LOAN PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
% Change
Mar. 31, 1996 from
-----------------------
MAR. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31,
(in millions) 1996 1995 1995 1995 1995
- -------------------------------------------------------------------------------------------------------------------------
Commercial (1)(2) $ 9,393 $ 9,750 $ 8,348 (4)% 13 %
Real estate 1-4 family first mortgage (3) 4,346 4,448 5,025 (2) (14)
Other real estate mortgage (4) 8,274 8,263 8,078 -- 2
Real estate construction 1,312 1,366 1,036 (4) 27
Consumer:
Real estate 1-4 family junior lien mortgage 3,303 3,358 3,312 (2) --
Credit card 3,928 4,001 3,220 (2) 22
Other revolving credit and monthly payment 2,590 2,576 2,305 1 12
------- ------- -------
Total consumer 9,821 9,935 8,837 (1) 11
Lease financing 1,991 1,789 1,382 11 44
Foreign 30 31 31 (3) (3)
------- ------- -------
Total loans (net of unearned income,
including net deferred loan fees,
of $504, $463 and $375) $35,167 $35,582 $32,737 (1)% 7 %
------- ------- ------- --- ---
------- ------- ------- --- ---
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
(1) Includes loans to real estate developers of $576 million, $700 million and
$519 million at March 31, 1996, December 31, 1995 and March 31, 1995,
respectively.
(2) Includes agricultural loans (loans to finance agricultural production and
other loans to farmers) of $927 million, $1,029 million and $721 million at
March 31, 1996, December 31, 1995 and March 31, 1995, respectively.
(3) Excludes mortgage loans held for sale at March 31, 1995 of $3,940 million,
net of an estimated $83 million write-down to the lower of cost or
estimated market.
(4) Includes agricultural loans that are secured by real estate of $252
million, $250 million and $256 million at March 31, 1996, December 31, 1995
and March 31, 1995, respectively.
The increase in the credit card loan portfolio for the first quarter of 1996 as
compared to the same period of 1995 was due to new accounts resulting from
nationwide direct mail campaigns, originations in retail outlets and increased
loan balances from the Company's existing cardholders.
The table below presents comparative period-end commercial real estate loans.
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
% Change
Mar. 31, 1996 from
----------------------
MAR. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31,
(in millions) 1996 1995 1995 1995 1995
- --------------------------------------------------------------------------------------------------------------
Commercial loans to
real estate developers (1) $ 576 $ 700 $ 519 (18)% 11 %
Other real estate mortgage 8,274 8,263 8,078 -- 2
Real estate construction 1,312 1,366 1,036 (4) 27
------- ------- ------
Total $10,162 $10,329 $9,633 (2)% 5 %
------- ------- ------ --- ---
------- ------- ------ --- ---
Nonaccrual loans $ 349 $ 371 $ 429 (6)% (19)%
------- ------- ------ --- ---
------- ------- ------ --- ---
Nonaccrual loans as a % of total 3.4% 3.6% 4.5%
------- ------- ------
------- ------- ------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
(1) Included in commercial loans.
24
NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS (1)
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
MAR. 31, Dec. 31, Mar. 31,
(in millions) 1996 1995 1995
- ------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial (2)(3) $ 120 $ 112 $ 79
Real estate 1-4 family first mortgage 61 64 71
Other real estate mortgage (4) 289 307 324
Real estate construction 44 46 77
Consumer:
Real estate 1-4 family junior lien mortgage 11 8 12
Other revolving credit and monthly payment -- 1 3
----- ----- -----
Total nonaccrual loans (5) 525 538 566
Restructured loans (6) 12 14 15
----- ----- -----
Nonaccrual and restructured loans 537 552 581
As a percentage of total loans (7) 1.5% 1.6% 1.8%
Foreclosed assets (8) 198 186 273
Real estate investments (9) 7 12 17
----- ----- -----
Total nonaccrual and restructured loans
and other assets $ 742 $ 750 $ 871
----- ----- -----
----- ----- -----
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
(1) Excludes loans that are contractually past due 90 days or more as to
interest or principal, but are both well-secured and in the process of
collection or are real estate 1-4 family first mortgage loans or consumer
loans that are exempt under regulatory rules from being classified as
nonaccrual.
(2) Includes loans to real estate developers of $16 million, $18 million and
$28 million at March 31, 1996, December 31, 1995 and March 31, 1995,
respectively.
(3) Includes agricultural loans of $6 million or less for all periods
presented.
(4) Includes agricultural loans secured by real estate of $3 million or less
for all periods presented.
(5) Of the total nonaccrual loans, $392 million, $408 million and $442 million
at March 31, 1996, December 31, 1995 and March 31, 1995, respectively, were
considered impaired under FAS 114 (Accounting by Creditors for Impairment
of a Loan).
(6) In addition to originated loans that were subsequently restructured, there
were loans of $50 million, $50 million and none at March 31, 1996, December
31, 1995 and March 31, 1995, respectively, that were purchased at a steep
discount whose contractual terms were modified after acquisition. The
modified terms did not affect the book balance nor the yields expected at
the date of purchase. Of the total restructured loans and loans purchased
at a steep discount, $50 million, $50 million and none were considered
impaired under FAS 114 at March 31, 1996, December 31, 1995 and March 31,
1995.
(7) Total loans exclude mortgage loans held for sale at March 31, 1995.
(8) Includes agricultural properties of $23 million or less for all periods
presented.
(9) 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 $115 million, $95
million and $64 million at March 31, 1996, December 31, 1995 and March 31,
1995, respectively.
25
The table below summarizes the changes in total nonaccrual loans.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MAR. 31, Dec. 31, Mar. 31,
(in millions) 1996 1995 1995
- --------------------------------------------------------------------------------
BALANCE, BEGINNING OF QUARTER $538 $586 $567
New loans placed on nonaccrual 113 106 127
Loans purchased -- -- 13
Charge-offs (9) (27) (28)
Payments (54) (71) (55)
Transfers to foreclosed assets (30) (22) (36)
Loans returned to accrual (33) (34) (24)
Other additions -- -- 2
---- ---- ----
BALANCE, END OF QUARTER $525 $538 $566
---- ---- ----
---- ---- ----
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The table below summarizes the changes in nonaccrual loans by loan category
for the quarters ended March 31, 1996 and December 31, 1995.
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Real estate
1-4 family Other real
first estate Real estate
(in millions) Commercial mortgage mortgage construction Consumer Total
- -----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDED MARCH 31, 1996
BALANCE, BEGINNING OF QUARTER $112 $ 64 $307 $ 46 $ 9 $538
New loans placed on nonaccrual (1) (2) 30 27 51 -- 5 113
Charge-offs (6) (1) (1) (1) -- (9)
Payments:
Principal (11) (4) (27) (1) (2) (45)
Interest applied to principal (3) -- (6) -- -- (9)
Transfers to foreclosed assets -- (15) (14) -- (1) (30)
Loans returned to accrual (2) (10) (21) -- -- (33)
---- ---- ---- ---- --- ----
BALANCE, END OF QUARTER $120 $ 61 $289 $ 44 $11 $525
---- ---- ---- ---- --- ----
---- ---- ---- ---- --- ----
QUARTER ENDED DECEMBER 31, 1995
Balance, beginning of quarter $128 $ 56 $335 $ 55 $12 $586
New loans placed on nonaccrual (1) (2) 35 28 41 -- 2 106
Charge-offs (18) (1) (2) (6) -- (27)
Payments:
Principal (29) (4) (22) (3) (3) (61)
Interest applied to principal (3) -- (7) -- -- (10)
Transfers to foreclosed assets -- (9) (12) -- (1) (22)
Loans returned to accrual (1) (6) (26) -- (1) (34)
---- ---- ---- ---- --- ----
Balance, end of quarter $112 $ 64 $307 $ 46 $ 9 $538
---- ---- ---- ---- --- ----
---- ---- ---- ---- --- ----
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
(1) No commercial loan placed on nonaccrual status during the first quarter of
1996 and fourth quarter of 1995 exceeded $13 million.
(2) Of the other real estate mortgage loans placed on nonaccrual status in the
first quarter of 1996, $45 million related to a single loan located in
Southern California. For the fourth quarter of 1995, no other real estate
mortgage loan placed on nonaccrual status exceeded $13 million.
26
Effective January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114 (FAS 114), Accounting by Creditors for Impairment of a Loan,
as amended by FAS 118 (collectively referred to as FAS 114). These Statements
address the accounting treatment of certain impaired loans and amend FASB
Statement Nos. 5 and 15. However, these Statements do not address the overall
adequacy of the allowance for loan losses and do not apply to large groups of
smaller-balance homogeneous loans, such as most consumer, real estate 1-4 family
first mortgage and small business loans, unless they have been involved in a
restructuring.
The adoption of FAS 114 has not affected the Company's policy for placing loans
on nonaccrual status. The Company generally identifies loans to be evaluated
for impairment when such loans are on nonaccrual or have been restructured.
However, not all nonaccrual loans are impaired. Generally, a loan is placed on
nonaccrual status upon becoming 90 days past due as to interest or principal
(unless both well-secured and in the process of collection), when the full
timely collection of interest or principal becomes uncertain or when a portion
of the principal balance has been charged off. Real estate 1-4 family loans
(both first liens and junior liens) are placed on nonaccrual status within 150
days of becoming past due as to interest or principal, regardless of security.
In contrast, under FAS 114, loans are considered impaired when it is probable
that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement, including scheduled interest payments.
For a loan that has been restructured, the contractual terms of the loan
agreement refer to the contractual terms specified by the original loan
agreement, not the contractual terms specified by the restructuring agreement.
Not all impaired loans are necessarily placed on nonaccrual status. That is,
restructured loans performing under restructured terms beyond a specified
performance period are classified as accruing but may still be deemed impaired
under FAS 114.
For loans covered by this Statement, the Company makes an assessment for
impairment when and while such loans are on nonaccrual, or the loan has been
restructured. When a loan with unique risk characteristics has been identified
as being impaired, the amount of impairment will be measured by the Company
using discounted cash flows, except when it is determined that the sole
(remaining) source of repayment for the loan is the operation or liquidation of
the underlying collateral. In such cases, the current fair value of the
collateral, reduced by costs to sell, will be used in place of discounted cash
flows. Additionally, some impaired loans with commitments of less than $1
million are aggregated for the purpose of measuring impairment using historical
loss factors as a means of measurement.
If the measurement of the impaired loan is less than the recorded investment in
the loan (including accrued interest, net deferred loan fees or costs and
unamortized premium or discount), an impairment is recognized by creating or
adjusting an existing allocation of the allowance for loan losses. FAS 114 does
not change the timing of charge-offs of loans to reflect the amount ultimately
expected to be collected.
27
The table below shows the recorded investment in impaired loans by loan category
at March 31, 1996, December 31, 1995 and March 31, 1995:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
(in millions) 1996 1995 1995
- --------------------------------------------------------------------------------
Commercial $ 81 $ 77 $ 56
Real estate 1-4 family first mortgage 3 2 7
Other real estate mortgage (1) 314 330 299
Real estate construction 44 46 77
Other -- 3 3
----- ----- -----
Total (2) $ 442 $ 458 $ 442
----- ----- -----
----- ----- -----
Impairment measurement based on:
Collateral value method $ 355 $ 374 $ 314
Discounted cash flow method 70 66 106
Historical loss factors 17 18 22
----- ----- -----
$ 442 $ 458 $ 442
----- ----- -----
----- ----- -----
Average recorded investment $ 439 $ 446 $ 432
Interest income recognized (3) $ 4 $ 2 $ 4
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(1) Includes accruing loans of $50 million, $50 million and none purchased at a
steep discount at March 31, 1996, December 31, 1995 and March 31, 1995,
respectively, whose contractual terms were modified after acquisition. The
modified terms did not affect the book balance nor the yields expected at
the date of purchase.
(2) Includes $21 million, $22 million and $23 million of impaired loans with a
related FAS 114 allowance of $2 million, $3 million and $4 million at March
31, 1996, December 31, 1995 and March 31, 1995, respectively.
(3) Interest income recognized was primarily recorded using the cash method.
The Company uses either the cash or cost recovery method to record cash receipts
on impaired loans that are on nonaccrual. Under the cash method, contractual
interest is credited to interest income when received. This method is used when
the ultimate collectibility of the total principal is not in doubt. Under the
cost recovery method, all payments received are applied to principal. This
method is used when the ultimate collectibility of the total principal is in
doubt. Loans on the cost recovery method may be changed to the cash method when
the application of the cash payments has reduced the principal balance to a
level where collection of the remaining recorded investment is no longer in
doubt.
The Company anticipates normal influxes of nonaccrual loans as it further
increases its lending activity as well as resolutions of loans in the nonaccrual
portfolio. The performance of any individual loan can be impacted by external
factors, such as the interest rate environment or factors particular to a
borrower such as actions taken by a borrower's management. In addition, from
time to time, the Company purchases loans from other financial institutions that
may be classified as nonaccrual based on its policies.
28
The table below summarizes the changes in foreclosed assets.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MAR. 31, Dec. 31, Mar. 31,
(in millions) 1996 1995 1995
- --------------------------------------------------------------------------------
BALANCE, BEGINNING OF QUARTER $186 $214 $272
Additions 35 24 42
Sales (18) (49) (29)
Charge-offs (3) (2) (2)
Write-downs (1) (1) (3)
Other deductions (1) -- (7)
---- ---- ----
BALANCE, END OF QUARTER $198 $186 $273
---- ---- ----
---- ---- ----
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Approximately 75% of the foreclosed assets at March 31, 1996 have been in the
Company's portfolio three years or less.
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 real estate 1-4 family first mortgage loans or consumer
loans that are exempt under regulatory rules from being classified as nonaccrual
because they are automatically charged off after being past due for a prescribed
period (generally, 180 days). Notwithstanding, real estate 1-4 family loans
(first liens and junior liens) are placed on nonaccrual within 150 days of
becoming past due and are excluded from the following table.
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
MAR. 31, Dec. 31, Mar. 31,
(in millions) 1996 1995 1995
- ------------------------------------------------------------------------------------------
Commercial $ 10 $ 12 $9
Real estate 1-4 family first mortgage 8 8 14
Other real estate mortgage 3 24 58
Real estate construction -- -- 1
Consumer:
Real estate 1-4 family junior lien mortgage 3 4 4
Credit card 97 95 46
Other revolving credit and monthly payment 1 1 --
---- ---- ----
Total consumer 101 100 50
---- ---- ----
Total $122 $144 $132
---- ---- ----
---- ---- ----
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
29
ALLOWANCE FOR LOAN LOSSES
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Quarter ended
--------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 1996 1995 1995
- --------------------------------------------------------------------------------
BALANCE, BEGINNING OF QUARTER $1,794 $1,872 $2,082
Loan charge-offs:
Commercial (1) (13) (23) (7)
Real estate 1-4 family first mortgage (4) (3) (3)
Other real estate mortgage (3) (3) (22)
Real estate construction (1) (5) (2)
Consumer:
Real estate 1-4 family junior lien mortgage (4) (4) (3)
Credit card (86) (69) (38)
Other revolving credit and monthly payment (20) (17) (10)
------ ------ ------
Total consumer (110) (90) (51)
Lease financing (6) (4) (4)
------ ------ ------
Total loan charge-offs (137) (128) (89)
------ ------ ------
Loan recoveries:
Commercial (2) 5 7 9
Real estate 1-4 family first mortgage 3 -- 1
Other real estate mortgage 4 33 6
Real estate construction 1 -- --
Consumer:
Real estate 1-4 family junior lien mortgage 1 1 1
Credit card 5 3 3
Other revolving credit and monthly payment 3 5 2
------ ------ ------
Total consumer 9 9 6
Lease financing 2 1 2
------ ------ ------
Total loan recoveries 24 50 24
------ ------ ------
Total net loan charge-offs (113) (78) (65)
------ ------ ------
BALANCE, END OF QUARTER $1,681 $1,794 $2,017
------ ------ ------
------ ------ ------
Total net loan charge-offs as a percentage
of average loans (annualized) (3) 1.30% .90% .72%
------ ------ ------
------ ------ ------
Allowance as a percentage of total loans (3) 4.78% 5.04% 6.16%
------ ------ ------
------ ------ ------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) There were no charge-offs of loans to real estate developers for all
periods presented.
(2) Includes recoveries from loans to real estate developers of $1 million, $1
million and none in the quarters ended March 31, 1996, December 31, 1995
and March 31, 1995, respectively.
(3) Average and total loans exclude first mortgage loans that were reclassified
to a held-for-sale category on March 31, 1995 and subsequently sold by
year-end 1995.
30
The table below presents net charge-offs by loan category.
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Quarter ended
---------------------------------------------------------
MARCH 31, 1996 December 31, 1995 March 31, 1995
--------------- ----------------- ----------------
% OF % of % of
AVERAGE average average
(in millions) AMOUNT LOANS(1) Amount loans(1) Amount loans(1)
- -----------------------------------------------------------------------------------------------------
Commercial $ 8 .34% $ 16 .66% $ (2) (.12)%
Real estate 1-4 family first mortgage 1 .10 3 .27 2 .10
Other real estate mortgage (1) (.05) (30) (1.52) 16 .82
Real estate construction -- -- 5 1.59 2 .90
Consumer:
Real estate 1-4 family junior lien mortgage 3 .41 3 .41 2 .26
Credit card 81 8.25 66 6.63 35 4.52
Other revolving credit and monthly payment 17 2.64 12 2.15 8 1.40
---- ---- ----
Total consumer 101 4.12 81 3.33 45 2.08
Lease financing 4 .93 3 .73 2 .43
---- ---- ----
Total net loan charge-offs $113 1.30% $ 78 .90% $ 65 .72%
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
(1) Calculated on an annualized basis.
The largest category of net charge-offs in the first quarter of
1996 was credit card loans, comprising more than 70% of total net
charge-offs. During the first half of 1995, the Company grew its
credit card loan portfolio through nationwide direct mail
campaigns as well as through retail outlets. The objective of
the direct mail campaigns was higher yielding loans to higher-
risk cardholders. As these loans continue to mature, the total
amount of credit card charge-offs and the percentage of net
charge-offs to average credit card loans is expected to continue
at a level higher than experienced in the past. The Company
continuously evaluates and monitors its selection criteria for
direct mail campaigns and other account acquisition methods to
accomplish the desired risk/customer mix within the credit card
portfolio.
The Company considers the allowance for loan losses of $1,681 million
adequate to cover losses inherent in loans, loan commitments and
standby letters of credit at March 31, 1996. 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. There was no provision for loan losses in the first
quarter of 1996 or during 1995. However, as loan growth continues,
the Company anticipates that it will resume making a provision in the
latter part of 1996.
31
OTHER ASSETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
(in millions) 1996 1995 1995
- --------------------------------------------------------------------------------
Net deferred tax asset (1) $ 879 $ 854 $1,002
Nonmarketable equity investments 424 428 400
Certain identifiable intangible assets 392 386 404
Foreclosed assets 198 186 273
Other 767 552 572
------ ------ ------
Total other assets $2,660 $2,406 $2,651
------ ------ ------
------ ------ ------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Net of a valuation allowance of none, none and $2 million at March 31,
1996, December 31, 1995 and March 31, 1995, respectively.
The Company estimates that approximately $764 million of the $879 million net
deferred tax asset at March 31, 1996 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 $115 million relates to approximately
$1.7 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's California taxable income has averaged approximately
$1.3 billion for each of the last three years. The Company believes that it is
more likely than not that it will have sufficient future California taxable
income to fully utilize these deductions.
On October 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 122 (FAS 122), Accounting for Mortgage Servicing Rights. This
Statement amends FAS 65, Accounting for Certain Mortgage Banking Activities, to
require that, for mortgage loans originated for sale with servicing rights
retained, the right to service those loans be recognized as a separate asset,
similar to purchased mortgage servicing rights. This Statement also requires
that capitalized mortgage servicing rights be assessed for impairment based on
the fair value of those rights. Mortgage servicing rights purchased during
first quarter 1996, fourth quarter 1995 and first quarter 1995 were $25 million,
$7 million and $37 million, respectively, and no originated mortgage servicing
rights were capitalized during the same periods. Purchased mortgage servicing
rights are amortized in proportion to and over the period of estimated net
servicing income. Amortization expense, recorded in noninterest income, totaled
$11 million, $11 million and $6 million for the quarters ended March 31, 1996,
December 31, 1995 and March 31, 1995, respectively. Purchased mortgage
servicing rights included in certain identifiable intangible assets were $170
million, $152 million and $127 million at March 31, 1996, December 31, 1995 and
March 31, 1995, respectively.
Other 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 $24 million, $25 million and $21 million for
the quarters ended March 31, 1996, December 31, 1995 and March 31, 1995,
respectively.
32
DEPOSITS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
(in millions) 1996 1995 1995
- --------------------------------------------------------------------------------
Noninterest-bearing $ 9,740 $ 10,391 $ 9,431
Interest-bearing checking (1) 745 887 4,372
Market rate and other savings (1) 18,260 17,944 15,584
Savings certificates 8,669 8,636 7,588
-------- -------- --------
Core deposits 37,414 37,858 36,975
Other time deposits 245 248 262
Deposits in foreign offices (2) 147 876 1,760
-------- -------- --------
Total deposits $ 37,806 $ 38,982 $ 38,997
-------- -------- --------
-------- -------- --------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Due to the limited transaction activity of existing NOW (negotiable
order of withdrawal) account customers, $3.4 billion of interest-bearing
checking deposits at December 31, 1995 was reclassified to market rate
and other savings deposits.
(2) Short-term (under 90 days) interest-bearing deposits used to fund short-
term borrowing needs.
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 increase in the Company's RBC and leverage ratios at March 31, 1996
compared with December 31, 1995 and March 31, 1995 resulted from an increase in
retained earnings and from the cessation of the common stock repurchase program
after the October 1995 announcement of the proposed merger with First Interstate
Bancorp. Common stock repurchases for the first and fourth quarters of 1995
were 2.1 million shares and .5 million shares, respectively. The program
resumed in late March.
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 March
31, 1996, the Bank had a Tier 1 RBC ratio of 10.13%, a combined Tier 1 and
Tier 2 ratio of 13.24% and a leverage ratio of 7.83%.
33
The table below presents the Company's risk-based capital and leverage ratios.
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
(in billions) 1996 1995 1995
- ---------------------------------------------------------------------------------------------
Tier 1:
Common stockholders' equity $ 3.7 $ 3.6 $ 3.4
Preferred stock .5 .5 .5
Less goodwill and other deductions (1) (.3) (.5) (.5)
------- ------- -------
Total Tier 1 capital 3.9 3.6 3.4
------- ------- -------
Tier 2:
Mandatory convertible debt -- -- .1
Subordinated debt and unsecured senior debt 1.0 1.0 1.0
Allowance for loan losses allowable in Tier 2 .5 .5 .5
------- ------- -------
Total Tier 2 capital 1.5 1.5 1.6
------- ------- -------
Total risk-based capital $ 5.4 $ 5.1 $ 5.0
------- ------- -------
------- ------- -------
Risk-weighted balance sheet assets $ 38.9 $ 39.2 $ 38.4
Risk-weighted off-balance sheet items:
Commitments to make or purchase loans 2.8 2.7 2.0
Standby letters of credit .6 .7 .6
Other .3 .4 .4
------- ------- -------
Total risk-weighted off-balance sheet items 3.7 3.8 3.0
------- ------- -------
Goodwill and other deductions (1) (.4) (.5) (.5)
Allowance for loan losses not included in Tier 2 (1.2) (1.3) (1.5)
------- ------- -------
Total risk-weighted assets $ 41.0 $ 41.2 $ 39.4
------- ------- -------
------- ------- -------
Risk-based capital ratios:
Tier 1 capital (4% minimum requirement) 9.40% 8.81% 8.73%
Total capital (8% minimum requirement) 13.04 12.46 12.78
Leverage ratio (3% minimum requirement) (2) 7.91% 7.46% 6.61%
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
(1) Other deductions include the unrealized net gain (loss) on available-for-
sale investment securities carried at fair value.
(2) Tier 1 capital divided by quarterly average total assets (excluding
goodwill and other items which were deducted to arrive at Tier 1 capital).
34
ASSET/LIABILITY MANAGEMENT
As is typical in the banking industry, most of the Company's assets and
liabilities are sensitive to fluctuation in interest rates. Accordingly, an
essential objective of asset/liability management is to control interest rate
risk.
Interest rate risk occurs when assets and liabilities reprice at different times
as interest rates change. For example, if fixed-rate assets are funded with
floating-rate debt, the spread between the two will decline or turn negative if
rates increase. The Company refers to this type of risk as "term structure
risk." Another source of interest rate risk, "basis risk," results from
changing spreads between loan and deposit rates. More difficult to quantify and
manage, this type of risk is not highly correlated to changes in the level of
interest rates, and is driven by other market conditions.
The Company employs various asset/liability strategies, including the use of
interest rate derivative products, to ensure that exposure to interest rate
fluctuations is limited within Company guidelines of acceptable levels of risk-
taking. The Company uses interest rate derivatives as an asset/liability
management tool to hedge mismatches in interest rate maturities. For example,
futures are used to shorten the rate maturity of market rate savings to better
match the maturity of prime-based loans.
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 sensitive gap indicates that there would be a
negative impact on the net interest margin from an increasing rate environment.
At March 31, 1996, the under-one-year cumulative gap was a $258 million
(0.5% of total assets) net liability position, compared with a net liability
position of $394 million (0.8% of total assets) at December 31, 1995. The
decrease in the net liability position was largely due to a decrease in foreign
deposits and short-term borrowings, a major portion of which was offset by an
increase in market rate savings deposits and a decrease in commercial loans.
Two adjustments to the cumulative gap provide comparability with those bank
holding companies that present interest rate sensitivity in an alternative
manner. However, management does not believe that these adjustments depict its
interest rate risk. The first adjustment excludes noninterest-earning assets,
noninterest-bearing liabilities and stockholders' equity from the reported
cumulative gap. The second adjustment moves interest-bearing checking, savings
deposits and Wells Extra Savings (included in market rate savings) from the
nonmarket category to the shortest possible 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 $4.7 billion and $8.7 billion at March 31, 1996 and December 31, 1995,
respectively.
The gap analysis provides a useful framework to measure the term structure risk.
To more fully explore the complex relationships within the gap over time and
interest rate environments, the
35
Company performs simulation modeling to estimate the potential effects of
changing interest rates.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into a variety of financial contracts, which include interest
rate futures and forward contracts, interest rate floors and caps and interest
rate swap agreements. The contract or notional amounts of interest rate
derivatives do not represent amounts exchanged by the parties and therefore are
not a measure of exposure through the use of derivatives. The amounts exchanged
are determined by reference to the notional amounts and the other terms of the
derivatives. The contract or notional amounts do not represent exposure to
liquidity risk. The Company is not a dealer in these instruments and does not
use them speculatively. The Company offers contracts to its customers, but
hedges such contracts by purchasing other financial contracts or uses the
contracts for asset/liability management. The contracts that are used primarily
to hedge mismatches in interest rate maturities serve to reduce rather than
increase the Company's exposure to movements in interest rates.
The Company also enters into foreign exchange positions, such as forward, spot
and option contracts, primarily as customer accommodations.
The Company is exposed to credit risk in the event of nonperformance by
counterparties to financial instruments. The Company controls the credit
risk of its financial contracts (except futures contracts, interest rate cap
contracts written and foreign exchange option contracts written for which
credit risk is DE MINIMUS) through credit approvals, limits and monitoring
procedures. Credit risk related to derivative financial instruments is
considered and, if material, provided for separately from the allowance for
loan losses. As the Company generally enters into transactions only with
high quality institutions, losses associated with counterparty nonperformance
on derivative financial instruments have been immaterial.
36
The following table summarizes the aggregate notional or contractual
amounts, credit risk amount and net fair value for the Company's derivative
financial instruments at March 31, 1996 and December 31, 1995.
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
MARCH 31, 1996 December 31, 1995
----------------------------------------- -----------------------------------------
NOTIONAL OR CREDIT ESTIMATED Notional or Credit Estimated
CONTRACTUAL RISK FAIR contractual risk fair
(in millions) AMOUNT AMOUNT (3) VALUE amount amount (3) value
- ------------------------------------------------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT HEDGES
Interest rate contracts:
Futures contracts $ 5,475 $ -- $ -- $ 5,372 $ -- $ --
Floors purchased (1) 15,324 87 87 15,522 206 206
Caps purchased (1) 486 3 3 391 1 1
Swap contracts (1) 6,481 85 57 6,314 185 175
Foreign exchange contracts:
Forward contracts (1) 25 -- -- 25 -- --
CUSTOMER ACCOMMODATIONS
Interest rate contracts:
Futures contracts 13 -- -- 23 -- --
Floors written 156 -- (1) 105 -- (1)
Caps written 1,518 -- (7) 1,170 -- (4)
Floors purchased (1) 156 1 1 105 1 1
Caps purchased (1) 1,506 7 7 1,139 4 4
Swap contracts (1) 1,681 10 1 1,518 5 1
Foreign exchange contracts: (2)
Forward and spot contracts (1) 1,057 8 1 909 10 1
Option contracts purchased (1) 32 -- -- 29 -- --
Option contracts written 25 -- -- 23 -- --
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
(1) The Company anticipates performance by substantially all of the
counterparties for these financial instruments.
(2) The Company has immaterial trading positions in these contracts.
(3) Credit risk amounts reflect the replacement cost for those contracts in a
gain position in the event of nonperformance by counterparties.
LIQUIDITY MANAGEMENT
Liquidity for the Parent Company and its subsidiaries is generated
through its ability to raise funds in a variety of domestic and
international money and capital markets, and through dividends from
subsidiaries and lines of credit. A shelf registration statement
filed in 1995 with the Securities and Exchange Commission allows the
issuance of up to $2.3 billion of senior or subordinated debt or
preferred stock. The proceeds from the sale of any securities will be
used for general corporate purposes. At March 31, 1996, $1.8 billion
of securities remained unissued. In April 1996, the Company issued
$.5 billion of subordinated debt under this shelf registration.
37
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders
I. (a) The Special Meeting of Shareholders was held on March 28, 1996.
(b) The Agreement and Plan of Merger (Merger Agreement) dated as of
January 23, 1996, by and between Wells Fargo and First Interstate
Bancorp, as amended, was adopted, and the transactions
contemplated thereby were approved.
Against
For or Withheld Abstentions
---------- ----------- -----------
(1) Adoption of Merger
Agreement and approval
of transactions
contemplated thereby 36,340,003 144,347 126,464
II. (a) The Annual Meeting of Shareholders was held on April 16, 1996.
(b) Each of the persons named in the Proxy Statement as a nominee for
director was elected; the increase in authorized common stock was
approved; the adoption of the new employee stock purchase plan
was approved; and the selection of KPMG Peat Marwick LLP as the
Company's independent auditors for 1996 was ratified. The
following are the voting results on each of the matters:
Against
For or Withheld Abstentions
---------- ----------- -----------
(1) ELECTION OF DIRECTORS
H. Jesse Arnelle 39,786,386 136,085 --
Edward M. Carson 39,793,451 129,020 --
William S. Davila 39,792,331 130,140 --
Rayburn S. Dezember 39,801,428 121,043 --
Myron Du Bain 39,788,664 133,807 --
Don C. Frisbee 39,776,520 145,951 --
Paul Hazen 39,804,272 118,199 --
Robert K. Jaedicke 39,790,773 131,698 --
Thomas L. Lee 39,791,238 131,233 --
William F. Miller 39,786,687 135,784 --
Ellen M. Newman 39,795,239 127,232 --
Philip J. Quigley 39,795,925 126,546 --
Carl E. Reichardt 39,799,134 123,337 --
Donald B. Rice 39,802,378 120,093 --
Richard J. Stegemeier 39,792,499 129,972 --
Susan G. Swenson 39,784,759 137,712 --
Daniel M. Tellep 39,789,501 132,970 --
Chang-Lin Tien 39,789,042 133,429 --
John A. Young 39,793,120 129,351 --
William F. Zuendt 39,802,318 120,153 --
38
Against
For or Withheld Abstentions
---------- ----------- -----------
(2) Increase in Authorized
Common Stock 31,818,390 7,955,278 148,803
(3) Approval of the new
Employee Stock
Purchase Plan 39,108,798 631,373 182,300
(4) Ratification of KPMG
Peat Marwick LLP as
independent auditors
for 1996. 39,777,729 50,785 93,957
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3(i) Articles of Incorporation
3(ii) By-Laws
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 1996 Employee Stock Purchase Plan, incorporated by
reference to Exhibit A of the Proxy statement dated March
13, 1996.
11 Computation of Earnings Per Common Share
27 Financial Data Schedule
99(a) Computation of Ratios of Earnings to Fixed Charges -- the
ratios of earnings to fixed charges, including interest on
deposits, were 2.33 and 1.98 for the quarters ended March
31, 1996 and 1995, respectively. The ratios of earnings to
fixed charges, excluding interest on deposits, were 5.32
and 3.74 for the quarters ended March 31, 1996 and 1995,
respectively.
99(b) Computation of Ratios of Earnings to Fixed Charges and
Preferred Dividends -- the ratios of earnings to fixed
charges and preferred dividends, including interest on
deposits, were 2.21 and 1.90 for the quarters ended March
31, 1996 and 1995, respectively. The ratios of earnings to
fixed charges and preferred dividends, excluding interest
on deposits, were 4.55 and 3.34 for the quarters ended
March 31, 1996 and 1995, respectively.
(b) The Company filed the following reports on Form 8-K during the
first quarter of 1996 and through the date hereof:
(1) January 16, 1996 under Item 5, containing the Press
Releases that announced the Company's financial results for
the quarter and year ended December 31, 1995 and the
increase in the Company's common stock dividend
39
(2) January 24, 1996 under Item 5, containing the January 24
Press Release that announced that the Company and First
Interstate Bancorp have reached a definitive agreement to
merge the two companies
(3) January 31, 1996 under Item 5, containing the Agreement and
Plan of Merger with First Interstate Bancorp, pursuant to
which First Interstate will merge with and into the Company
(4) February 29, 1996 under Item 5, containing the February 28
Press Release that announced that the joint proxy statement
of the Company and First Interstate Bancorp had been
declared effective by the Securities and Exchange
Commission and that the Company had reached agreement with
the Department of Justice and the Office of the Attorney
General for California regarding divestitures
(5) April 1, 1996 under Item 5, containing the April 1 Press
Release that announced that Wells Fargo & Company had
completed its acquisition of First Interstate Bancorp
(6) April 5, 1996 under Item 7, containing unaudited pro forma
combined financial information of the Company and First
Interstate Bancorp for 1995, the Consent of Independent
Accountants for First Interstate and audited financial
statements of First Interstate Bancorp as of December 31,
1995 and 1994 and for each of the years in the three-year
period ended December 31, 1995
(7) April 10, 1996 under Items 2 and 7, describing the
Company's acquisition of First Interstate Bancorp in
accordance with the terms of the Merger Agreement and
containing the unaudited pro forma combined financial
information of the Company and First Interstate Bancorp for
1995 and audited financial statements of First Interstate
Bancorp as of December 31, 1995 and 1994 and for each of
the years in the three-year period ended December 31, 1995
(8) April 16, 1996 under Item 5, containing the Press Releases
that announced the Company's financial results for the
quarter ended March 31, 1996, the Company's share
repurchase program and the quarterly common stock dividend
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 9, 1996.
WELLS FARGO & COMPANY
By:/s/ FRANK A. MOESLEIN
----------------------------
Frank A. Moeslein
Executive Vice President and
Controller
(Principal Accounting Officer)
40