UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997 Commission file number 1-6214
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WELLS FARGO & COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 13-2553920
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
420 Montgomery Street, San Francisco, California 94163
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 415-477-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
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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, 1997
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Common stock, $5 par value 89,420,878
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
Note to Financial Statements. . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Summary Financial Data. . . . . . . . . . . . . . . . . . . . . . 8
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Line of Business Results. . . . . . . . . . . . . . . . . . . . . 11
Earnings Performance. . . . . . . . . . . . . . . . . . . . . . . 15
Net Interest Income. . . . . . . . . . . . . . . . . . . . . . 15
Noninterest Income . . . . . . . . . . . . . . . . . . . . . . 18
Noninterest Expense. . . . . . . . . . . . . . . . . . . . . . 20
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 21
Earnings/Ratios Excluding Goodwill and Nonqualifying CDI . . . 22
Balance Sheet Analysis. . . . . . . . . . . . . . . . . . . . . . 23
Investment Securities. . . . . . . . . . . . . . . . . . . . . 23
Loan Portfolio . . . . . . . . . . . . . . . . . . . . . . . . 25
Commercial real estate . . . . . . . . . . . . . . . . . . . 25
Nonaccrual and Restructured Loans and Other Assets . . . . . . 26
Changes in total nonaccrual loans. . . . . . . . . . . . . . 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. . . . . . . . . . . . . . . . . 38
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
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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. In addition, this Form 10-Q includes
forward-looking statements that involve inherent risks and uncertainties. The
Company cautions readers that a number of important factors could cause actual
results to differ materially from those in the forward-looking statements.
Those factors include fluctuations in interest rates, inflation, government
regulations, the progress of integrating First Interstate Bancorp and economic
conditions and competition in the geographic and business areas in which the
Company conducts its operations. The interim financial information should be
read in conjunction with the Company's 1996 Annual Report on Form 10-K.
1
PART I - FINANCIAL INFORMATION
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
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Quarter
ended March 31,
--------------------
(in millions) 1997 1996
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INTEREST INCOME
Federal funds sold and securities
purchased under resale agreements $ 5 $ 2
Investment securities 208 128
Loans 1,549 875
Other 11 1
------ ------
Total interest income 1,773 1,006
------ ------
INTEREST EXPENSE
Deposits 422 241
Federal funds purchased and securities sold under
repurchase agreements 31 36
Commercial paper and other short-term borrowings 2 5
Senior and subordinated debt 81 48
Guaranteed preferred beneficial interests in
Company's subordinated debentures 25 --
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Total interest expense 561 330
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NET INTEREST INCOME 1,212 676
Provision for loan losses 105 --
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Net interest income after provision for loan losses 1,107 676
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NONINTEREST INCOME
Service charges on deposit accounts 221 122
Fees and commissions 214 118
Trust and investment services income 109 59
Investment securities gains 4 --
Other 92 55
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Total noninterest income 640 354
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NONINTEREST EXPENSE
Salaries 341 181
Incentive compensation 41 32
Employee benefits 95 54
Equipment 94 55
Net occupancy 102 53
Goodwill 83 9
Core deposit intangible 62 10
Other 299 173
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Total noninterest expense 1,117 567
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INCOME BEFORE INCOME TAX EXPENSE 630 463
Income tax expense 291 199
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NET INCOME $ 339 $ 264
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------ ------
NET INCOME APPLICABLE TO COMMON STOCK $ 329 $ 254
------ ------
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PER COMMON SHARE
Net income $ 3.62 $ 5.39
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Dividends declared $ 1.30 $ 1.30
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Average common shares outstanding 90.8 47.0
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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) 1997 1996 1996
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ASSETS
Cash and due from banks $ 8,530 $ 11,736 $ 2,721
Federal funds sold and securities
purchased under resale agreements 209 187 49
Investment securities at fair value 12,634 13,505 8,435
Loans 65,436 67,389 35,167
Allowance for loan losses 1,922 2,018 1,681
-------- -------- -------
Net loans 63,514 65,371 33,486
-------- -------- -------
Due from customers on acceptances 96 197 79
Accrued interest receivable 611 665 316
Premises and equipment, net 2,310 2,406 859
Core deposit intangible 1,901 2,038 156
Goodwill 7,312 7,322 373
Other assets 4,746 5,461 2,504
-------- -------- -------
Total assets $101,863 $108,888 $48,978
-------- -------- -------
-------- -------- -------
LIABILITIES
Noninterest-bearing deposits $ 25,337 $ 29,073 $ 9,740
Interest-bearing deposits 51,090 52,748 28,066
-------- -------- -------
Total deposits 76,427 81,821 37,806
Federal funds purchased and securities
sold under repurchase agreements 1,685 2,029 2,243
Commercial paper and other short-term borrowings 241 401 225
Acceptances outstanding 96 197 79
Accrued interest payable 242 171 110
Other liabilities 3,400 3,947 1,166
Senior debt 1,940 2,120 1,881
Subordinated debt 2,938 2,940 1,266
Guaranteed preferred beneficial interests in
Company's subordinated debentures 1,299 1,150 --
STOCKHOLDERS' EQUITY
Preferred stock 425 600 489
Common stock - $5 par value,
authorized 150,000,000 shares; issued and outstanding
89,977,610 shares, 91,474,425 shares and
46,999,455 shares 450 457 235
Additional paid-in capital 9,801 10,287 1,136
Retained earnings 2,959 2,749 2,366
Cumulative foreign currency translation adjustments -- (4) (4)
Investment securities valuation allowance (40) 23 (20)
-------- -------- -------
Total stockholders' equity 13,595 14,112 4,202
-------- -------- -------
Total liabilities and stockholders' equity $101,863 $108,888 $48,978
-------- -------- -------
-------- -------- -------
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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) 1997 1996
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PREFERRED STOCK
Balance, beginning of quarter $ 600 $ 489
Preferred stock redeemed (175) --
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Balance, end of quarter 425 489
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COMMON STOCK
Balance, beginning of quarter 457 235
Common stock issued under employee benefit and
dividend reinvestment plans 1 --
Common stock repurchased (8) --
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Balance, end of quarter 450 235
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ADDITIONAL PAID-IN CAPITAL
Balance, beginning of quarter 10,287 1,135
Common stock issued under employee benefit and
dividend reinvestment plans 23 7
Common stock repurchased (509) (6)
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Balance, end of quarter 9,801 1,136
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RETAINED EARNINGS
Balance, beginning of quarter 2,749 2,174
Net income 339 264
Preferred stock dividends (10) (10)
Common stock dividends (119) (62)
------- ------
Balance, end of quarter 2,959 2,366
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CUMULATIVE FOREIGN CURRENCY
TRANSLATION ADJUSTMENTS
Balance, beginning of quarter (4) (4)
Translation adjustments 4 --
------- ------
Balance, end of quarter -- (4)
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INVESTMENT SECURITIES VALUATION ALLOWANCE
Balance, beginning of quarter 23 26
Change in unrealized net gain, after applicable taxes (63) (46)
------- ------
Balance, end of quarter (40) (20)
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Total stockholders' equity $13,595 $4,202
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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) 1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 339 $ 264
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 105 --
Depreciation and amortization 223 71
Deferred income tax provision 3 --
Increase (decrease) in net deferred loan fees (3) 1
Net (increase) decrease in accrued interest receivable 54 (8)
Net increase in accrued interest payable 71 25
Other, net 382 75
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Net cash provided by operating activities 1,174 428
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CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities at fair value
Proceeds from sales 150 --
Proceeds from prepayments and maturities 1,100 419
Purchases (478) (14)
Net decrease in loans resulting from originations and collections 1,833 258
Proceeds from sales (including participations) of loans 81 51
Purchases (including participations) of loans (39) (37)
Proceeds from sales of foreclosed assets 48 21
Net (increase) decrease in federal funds sold and securities
purchased under resale agreements (22) 128
Other, net 272 (245)
------- -------
Net cash provided by investing activities 2,945 581
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits (5,394) (1,176)
Net decrease in short-term borrowings (504) (508)
Proceeds from issuance of senior debt -- 100
Repayment of senior debt (175) --
Proceeds from issuance of guaranteed preferred beneficial interests
in Company's subordinated debentures 149 --
Proceeds from issuance of common stock 24 7
Redemption of preferred stock (175) --
Repurchase of common stock (517) (6)
Payment of cash dividends on preferred stock (10) (10)
Payment of cash dividends on common stock (119) (62)
Other, net (604) (8)
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Net cash used by financing activities (7,325) (1,663)
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NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM BANKS) (3,206) (654)
Cash and cash equivalents at beginning of quarter 11,736 3,375
------- -------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 8,530 $ 2,721
------- -------
------- -------
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest $ 490 $ 305
Income taxes $ 73 $ 75
Noncash investing activities:
Transfers from loans to foreclosed assets $ 26 $ 35
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5
WELLS FARGO & COMPANY AND SUBSIDIARIES
NOTE TO FINANCIAL STATEMENTS
MERGER WITH FIRST INTERSTATE BANCORP (MERGER)
On April 1, 1996, the Company completed its acquisition of First Interstate
Bancorp (First Interstate). The Merger was accounted for as a purchase
transaction. Accordingly, the results of operations of First Interstate are
included with those of the Company for periods subsequent to the date of the
Merger.
The major components of management's plan for the combined company include the
realignment of First Interstate's businesses to reflect Wells Fargo's structure,
consolidation of retail branches and administrative facilities and reduction in
staffing levels. As a result of this plan, the adjustments to goodwill since
April 1, 1996 included accruals totaling approximately $324 million ($191
million after tax) related to the disposition of premises, including an accrual
of $127 million ($75 million after tax) associated with the dispositions of
traditional former First Interstate branches in California and out of state.
The California dispositions included 176 branch closures during 1996 and five
branch closures in the first quarter of 1997. In addition, 31 branch
dispositions have been or are scheduled to be completed in the second quarter of
1997. The Company also entered into definitive agreements with several
institutions to sell 20 former First Interstate branches, including deposits,
located in California. The sales of 17 of these branches were closed in the
first quarter of 1997. The sales of the remaining three branches are expected
to be completed in the third quarter of 1997. The out-of-state dispositions
include 17 branch closures that were completed in the first quarter of 1997, as
well as 23 branch closures which have been or are scheduled to be completed in
the second quarter of 1997. The Company also entered into definitive agreements
with several institutions to sell 88 former First Interstate out-of-state
branches, including deposits. The remaining 24 California and 108 out-of-state
dispositions associated with the goodwill adjustment are expected to be
completed in 1997. (See Noninterest Income section for information on other,
Wells Fargo branch dispositions.) Additionally, the adjustments to goodwill
included accruals of approximately $481 million ($284 million after tax) related
to severance of former First Interstate employees throughout the Company who
will be displaced. Severance payments totaling $214 million were paid since the
second quarter of 1996, including $63 million in the first quarter of 1997.
In the first quarter of 1997, the Company completed the sale of the Corporate
and Municipal Bond Administration (Corporate Trust) business to the Bank of New
York.
The $7,267 million excess purchase price over fair value of First Interstate's
net assets acquired (goodwill) is amortized using the straight-line method over
25 years.
6
[THIS PAGE INTENTIONALLY LEFT BLANK]
7
FINANCIAL REVIEW
SUMMARY FINANCIAL DATA
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% Change
Quarter ended Mar. 31, 1997 from
-------------------------------------- ------------------
MAR. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31,
(in millions) 1997 1996 1996 1996 1996
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FOR THE QUARTER
Net income $ 339 $ 123 $ 264 176% 28%
Net income applicable to common stock 329 103 254 219 30
Per common share
Net income $ 3.62 $ 1.12 $ 5.39 223 (33)
Dividends declared 1.30 1.30 1.30 -- --
Average common shares outstanding 90.8 92.2 47.0 (2) 93
Profitability ratios (annualized)
Net income to average total assets (ROA) 1.31% 0.45% 2.16% 191 (39)
Net income applicable to common stock to
average common stockholders' equity (ROE) 10.02 2.99 28.34 235 (65)
Efficiency ratio (1) 60.3% 82.0% 55.1% (26) 9
Average loans $ 65,493 $ 67,097 $35,025 (2) 87
Average assets 105,430 107,308 49,134 (2) 115
Average core deposits 77,622 80,776 36,819 (4) 111
Net interest margin 6.14% 6.14% 6.18% -- (1)
NET INCOME AND RATIOS EXCLUDING
GOODWILL AND NONQUALIFYING CORE DEPOSIT
INTANGIBLE AMORTIZATION AND BALANCES
("CASH" OR "TANGIBLE") (2)
Net income applicable to common stock $ 443 $ 222 $ 262 100 69
Net income per common share 4.88 2.41 5.58 102 (13)
ROA 1.90% 0.97% 2.25% 96 (16)
ROE 36.67 16.99 32.74 116 12
Efficiency ratio 52.9 74.0 54.3 (29) (3)
AT QUARTER END
Investment securities $ 12,634 $ 13,505 $ 8,435 (6) 50
Loans 65,436 67,389 35,167 (3) 86
Allowance for loan losses 1,922 2,018 1,681 (5) 14
Goodwill 7,312 7,322 373 -- --
Assets 101,863 108,888 48,978 (6) 108
Core deposits 76,156 81,581 37,414 (7) 104
Common stockholders' equity 13,170 13,512 3,713 (3) 255
Stockholders' equity 13,595 14,112 4,202 (4) 224
Tier 1 capital (3) 6,407 6,565 3,856 (2) 66
Total capital (Tiers 1 and 2) (3) 9,891 10,000 5,353 (1) 85
Capital ratios
Common stockholders' equity to assets 12.93% 12.41% 7.58% 4 71
Stockholders' equity to assets 13.35 12.96 8.58 3 56
Risk-based capital (3)
Tier 1 capital 7.80 7.68 9.40 2 (17)
Total capital 12.05 11.70 13.04 3 (18)
Leverage (3) 6.61 6.65 7.91 (1) (16)
Book value per common share $ 146.37 $ 147.72 $ 79.01 (1) 85
Staff (active, full-time equivalent) 34,486 36,902 18,748 (7) 84
COMMON STOCK PRICE
High $ 319.25 $ 289.88 $261.25 10 22
Low 271.00 250.25 203.13 8 33
Quarter end 284.13 269.75 261.25 5 9
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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) Nonqualifying core deposit intangible (CDI) amortization and average
balance excluded from these calculations are, with the exception of the
efficiency ratio, net of applicable taxes. The after-tax amounts for the
amortization and average balance of nonqualifying CDI were $31 million and
$1,095 million, respectively, for the quarter ended March 31, 1997.
Goodwill amortization and average balance (which are not tax effected) were
$83 million and $7,306 million, respectively, for the quarter ended
March 31, 1997.
(3) See the Capital Adequacy/Ratios section for additional information.
8
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.
On April 1, 1996, the Company completed its acquisition (Merger) of First
Interstate Bancorp (First Interstate). As a result, the financial information
presented in this Form 10-Q for the first quarter of 1996 does not reflect the
effects of the acquisition. Since the Company's results of operations for the
periods subsequent to the Merger's consummation reflect amounts recognized from
the combined operations, they cannot be divided between or attributed directly
to either of the two former entities.
In most of the Company's income and expense categories and net income, the
increases in the amounts reported for the first quarter of 1997 compared to the
amounts reported for the same quarter of 1996 resulted from the Merger. The
increases in substantially all of the categories of the Company's balance sheet
between amounts reported at March 31, 1997 and those reported at March 31, 1996
also resulted from the Merger. Other significant factors affecting the
Company's results of operations and financial position are described in the
applicable sections below.
Net income for the first quarter of 1997 was $339 million, compared with $123
million for the fourth quarter of 1996 and $264 million for the first quarter of
1996. Net income per share for the first quarter of 1997 was $3.62, compared
with $1.12 in the fourth quarter of 1996 and $5.39 in the first quarter of 1996.
Return on average assets (ROA) was 1.31% and return on average common equity
(ROE) was 10.02% for the first quarter of 1997, compared with .45% and 2.99%,
respectively, for the fourth quarter of 1996, and 2.16% and 28.34%,
respectively, for the first quarter of 1996.
Earnings before the amortization of goodwill and nonqualifying CDI ("cash" or
"tangible" earnings) for the first quarter of 1997 were $4.88 per share,
compared with $2.41 per share in the fourth quarter of 1996 and $5.58 per share
for the first quarter of 1996. On the same basis, ROA was 1.90% and ROE was
36.67% in the first quarter of 1997, compared with .97% and 16.99%,
respectively, in the fourth quarter of 1996 and 2.25% and 32.74%, respectively,
in the first quarter of 1996.
Following the Merger, "cash" earnings, as well as "cash" ROA and ROE, are the
measures of performance which will be most comparable with prior quarters. They
are also the most relevant measures of financial performance for shareholders
because they measure the Company's ability to support growth, pay dividends and
repurchase stock. (See page 22 for additional information.)
The increase in reported EPS and "cash" EPS from the fourth quarter of 1996 is
substantially due to the fourth quarter 1996 estimated expenses related to the
First Interstate integration of about $300 million and the $96 million accrual
related to the disposition of operations associated with scheduled branch
closures, partially offset by an increase of $35 million in the loan loss
provision in the first quarter of 1997.
9
Net interest income on a taxable-equivalent basis was $1,216 million, $1,253
million and $676 million in the first quarter of 1997, fourth quarter and first
quarter of 1996, respectively. The increase in net interest income in the first
quarter of 1997 compared with the same period of 1996 was predominantly due to
an increase in average earning assets as a result of the Merger. The Company's
net interest margin was 6.14% for the first quarter of 1997, compared with 6.18%
in the same quarter of 1996 and 6.14% in the fourth quarter of 1996.
Noninterest income was $640 million in the first quarter of 1997, compared with
$354 million in the same period of 1996.
Noninterest expense in the first quarter of 1997 was $1,117 million, compared
with $567 million for the same period of 1996. In addition to the effect of
combining operations of First Interstate with the Company, the increase
reflected goodwill and nonqualifying CDI amortization, severance for Wells Fargo
employees and other integration expenditures.
The Company expects to meet its pre-merger objective of realizing annual cost
savings of $800 million not later than 18 months after the date of the
Merger. About 50% ($100 million, or $400 million annualized) of the cost
savings were realized in the first quarter of 1997. The Company believes
that substantially all of the impact of revenue losses due to the Merger was
recognized by the first quarter of 1997, with revenue growth expected to
resume in the second half of 1997. For additional discussion of the
Company's plan for branch closures and consolidations, see Note to Financial
Statements.
The provision for loan losses in the first quarter of 1997 was $105 million,
compared with no provision for the same period in 1996. During the first
quarter of 1997, net charge-offs totaled $201 million, or 1.23% of average loans
(annualized). This compared with $178 million, or 1.04%, during the fourth
quarter of 1996 and $113 million, or 1.30%, during the first quarter of 1996.
The allowance for loan losses was 2.94% of total loans at March 31, 1997,
compared with 3.00% at December 31, 1996 and 4.78% at March 31, 1996.
Total nonaccrual and restructured loans were $655 million, or 1.0% of total
loans, at March 31, 1997, compared with $724 million, or 1.1%, at December 31,
1996 and $537 million, or 1.5%, at March 31, 1996. Foreclosed assets amounted
to $207 million at March 31, 1997, compared with $219 million at December 31,
1996 and $198 million at March 31, 1996.
Common stockholders' equity to total assets was 12.93% at March 31, 1997,
compared with 12.41% and 7.58% at December 31, 1996 and March 31, 1996,
respectively. The Company's total risk-based capital (RBC) ratio at
March 31, 1997 was 12.05% and its Tier 1 RBC ratio was 7.80%, 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, 1996, the Company's ratios were 11.70% and 7.68%, respectively; at
March 31, 1996, these ratios were 13.04% and 9.40%, respectively. The
Company's leverage ratios were 6.61%, 6.65% and 7.91% at March 31, 1997,
December 31, 1996 and March 31, 1996, respectively, exceeding the minimum
regulatory guideline of 3% for bank holding companies and the "well capitalized"
guideline for banks of 5%.
10
The Company has bought in the past, and will continue to buy, shares to offset
common stock issued or expected to be issued under the Company's employee
benefit and dividend reinvestment plans. In addition to these shares, the Board
of Directors authorized in April 1996 the repurchase of up to 9.6 million shares
of the Company's outstanding common stock. Under these programs, the Company has
repurchased a total of 6.3 million shares (net of shares issued) since April
1996, including 1.5 million shares (net of shares issued) in the first quarter
of 1997. The Company currently expects to repurchase approximately 1.5 million
shares (net of shares issued) per quarter in 1997.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 (FAS 128), Earnings per
Share. This Statement establishes standards for computing and presenting
earnings per share (EPS). It replaces the presentation of primary EPS (net
income applicable to common stock divided by average common shares outstanding
and, if dilution is 3% or more, common stock equivalents) with a presentation of
basic EPS (net income applicable to common stock divided by average common
shares outstanding), which the Company currently presents. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
and a reconciliation of the numerator and denominator of both EPS computations.
This Statement is effective with the year-end 1997 financial statements.
Earlier application is not permitted; however, the Statement requires
restatement of all prior period EPS data presented, including interim periods.
The basic and diluted EPS under FAS 128 for the Company's first quarter 1997
would not differ materially from the existing primary and fully diluted EPS
under APB 15.
LINE OF BUSINESS RESULTS
The line of business results show the financial performance of the Company's
major business units. The table on pages 12 and 13 presents the line of business
results for the quarters ended March 31, 1997 and 1996. First Interstate
results prior to April 1, 1996 are not included and, therefore, the 1997 quarter
is not comparable to 1996.
The results incorporate estimates of cost allocations, transfers and assignments
reflecting management's current understanding of the First Interstate
businesses. The cost allocations are based on estimates of the steady state
level of expenses.
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 (and have been) restated to allow comparability from one
period to the next.
The Company believes that cash earnings is the most relevant measure of
financial performance for shareholders. For this reason, goodwill and
nonqualifying core deposit intangible have not been allocated to the business
units in this presentation and are reported in "Other."
11
The following table provides the line of business results (estimated) for the
Company's six major business units.
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(income/expense in millions, Retail Business
average balances in billions) Distribution Banking Investment
Group Group Group
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QUARTER ENDED MARCH 31, 1997 1996 1997 1996 1997 1996
Net interest income (1) $ 267 $113 $ 187 $ 97 $ 202 $ 99
Provision for loan losses (2) -- -- 30 16 1 --
Noninterest income (3) 298 160 66 44 134 65
Noninterest expense (3) 493 265 119 70 153 85
----- ----- ----- ----- ----- -----
Income before income
tax expense (benefit) 72 8 104 55 182 79
Income tax expense (benefit) (4) 29 3 43 23 74 33
----- ----- ----- ----- ----- -----
Net income $ 43 $ 5 $ 61 $ 32 $ 108 $ 46
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
Average loans $ -- $ -- $ 5.2 $3.0 $ 1.9 $ 0.5
Average assets 2.0 1.0 7.3 4.1 3.1 0.8
Average core deposits 19.4 9.3 12.3 6.3 35.4 18.2
Return on equity (5) 16% 4% 32% 31% 62% 47%
Risk-adjusted efficiency ratio (6) 96% 106% 70% 72% 55% 63%
- --------------------------------------------------------------------------------
(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 the 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 in 1997 and 1996 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 $97 million and $50 million for the quarters
ended March 31, 1997 and 1996, respectively. These charges are eliminated
in the Other category in arriving at the Consolidated Company totals for
noninterest income and expense.
The following describes the major business units.
The Retail Distribution Group sells and services a complete line of retail
financial products for consumers and small businesses. In addition to the
24-hour Telephone Banking Centers and Wells Fargo's Online Financial Services
(the Company's personal computer banking services), the Group encompasses
Physical Distribution's network of traditional branches, in-store branches,
banking centers and ATMs. Retail Distribution also includes the consumer
checking business, which primarily uses the network as a source of new
customers.
At March 31, 1997, there were 1,216 traditional branches and 723 in-store
branches and banking centers with 2,723 ATM locations throughout the Western
United States.
Average consumer checking core deposits for the first quarter 1997 were $18.7
billion, compared with $8.8 billion in 1996.
The Business Banking Group provides a full range of credit products and
financial services to small businesses and their owners. These include lines of
credit, receivables and inventory financing, equipment loans and leases, real
estate financing, SBA financing, cash management, deposit and investment
accounts, payroll services, retirement plans and credit and debit card
processing. Business Banking customers are small businesses with annual sales
up to $10 million in which the owner of the business is also the principal
financial decision maker.
12
- --------------------------------------------------------------------------------
Wholesale
Real Estate Products Consumer Consolidated
Group Group Lending Other Company
- -------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
$ 111 $ 66 $ 195 $ 104 $ 278 $ 184 $ (28) $ 13 $1,212 $ 676
10 8 19 10 133 73 (88) (107) 105 --
18 24 82 38 93 58 (51) (35) 640 354
21 22 105 50 114 75 112 -- 1,117 567
----- ----- ----- ----- ----- ----- ----- ----- ------ -----
98 60 153 82 124 94 (103) 85 630 463
40 25 63 35 51 40 (9) 40 291 199
----- ----- ----- ----- ----- ----- ----- ----- ------ -----
$ 58 $ 35 $ 90 $ 47 $ 73 $ 54 $ (94) $ 45 $ 339 $ 264
----- ----- ----- ----- ----- ----- ----- ----- ------ -----
----- ----- ----- ----- ----- ----- ----- ----- ------ -----
$ 9.4 $7.0 $17.0 $ 8.9 $24.3 $11.8 $ 7.7 $ 3.8 $ 65.5 $35.0
10.1 7.5 22.4 10.0 25.4 12.2 35.1 13.5 105.4 49.1
0.3 0.1 9.6 2.6 0.4 0.2 0.2 0.1 77.6 36.8
24% 20% 24% 25% 19% 28% --% --% 10% 28%
56% 68% 68% 64% 79% 66% --% --% --% --%
- --------------------------------------------------------------------------------
(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.
Core deposits for the first quarter 1997 averaged $12.3 billion, compared with
$6.3 billion in 1996. Loans averaged $5.2 billion, compared with $3.0 billion
in 1996.
The Investment Group is responsible for the sales and management of savings and
investment products, investment management and fiduciary and brokerage services
to institutions, retail customers and high net worth individuals. This includes
the Stagecoach and Overland Express families of mutual funds as well as personal
trust, employee benefit trust and agency assets. It also includes product
management for market rate accounts, savings deposits, Individual Retirement
Accounts (IRAs) and time deposits. Within this Group, Private Client Services
operates as a fully integrated financial services organization focusing on
banking/credit, trust services, investment management and full service and
discount brokerage.
During the first quarter, the Group established Wells Capital Management, a
registered investment advisor and wholly owned subsidiary of Wells Fargo Bank,
N.A. Wells Capital Management will focus on the management of institutional
accounts, mutual funds and collective investment funds. In addition, the Bank
closed the sale of the Corporate and Municipal Bond Administration (Corporate
Trust) business to The Bank of New York in March 1997.
Assets under management at March 31, 1997 were $57.6 billion, compared with
$36.1 billion at March 31, 1996. For the first quarter ending 1997, average
loans were $1.9 billion and average core deposits were $35.4 billion, compared
with average loans of $0.5 billion and average core deposits of $18.2 billion
for the same period in 1996.
13
The Real Estate Group provides a complete line of services supporting the
commercial real estate market. Products and services include construction loans
for commercial and residential development, land acquisition and development
loans, secured and unsecured lines of credit, interim financing arrangements for
completed structures, rehabilitation loans, affordable housing loans and letters
of credit. Secondary market services are provided through the Real Estate
Capital Markets Group. Its business includes senior loan financing, mezzanine
financing, financing for leveraged transactions, purchasing distressed real
estate loans and high yield bonds, origination of permanent loans for
securitization, loan syndications and commercial real estate loan servicing. The
Real Estate Group's loans averaged $9.4 billion in first quarter 1997, compared
with $7.0 billion in the same period of 1996.
The Wholesale Products Group serves businesses with annual sales in excess of
$5 million and maintains relationships with major corporations throughout the
United States. The Group is responsible for soliciting and maintaining credit
and noncredit relationships with businesses by offering a variety of products
and services, including traditional commercial loans and lines, letters of
credit, international trade facilities, foreign exchange services, cash
management and electronic products. The Group includes the majority ownership
interest in the Wells Fargo HSBC Trade Bank that provides trade financing,
letters of credit and collection services. The Wholesale Products Group's loans
averaged $17.0 billion in first quarter 1997, compared with $8.9 billion in
1996, and average core deposits were $9.6 billion, compared with $2.6 billion in
1996.
Consumer Lending offers a full array of consumer loan products, including credit
cards, transportation (auto, recreational vehicle, marine) financing, home
equity lines and loans, lines of credit and installment loans. The loan
portfolio for first quarter 1997 averaged $24.3 billion, consisting of $5.3
billion in credit cards, $11.9 billion in equity/unsecured loans and $7.1
billion in transportation financing. This compares with $3.9 billion in credit
cards, $5.5 billion in equity/unsecured loans and $2.4 billion in transportation
financing in 1996.
The Other category includes the Company's 1-4 family first mortgage portfolio,
the investment securities portfolio, goodwill and the nonqualifying core deposit
intangible, 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.
14
EARNINGS PERFORMANCE
NET INTEREST INCOME
Net interest income on a taxable-equivalent basis was $1,216 million in the
first quarter of 1997, compared with $676 million in the first quarter of 1996.
The Company's net interest margin was 6.14% in the first quarter of 1997,
compared with 6.18% in the first quarter of 1996.
Interest income included hedging income of $25 million in the first quarter of
1997, compared with $10 million in the first quarter of 1996. Interest expense
included hedging income of $2 million in the first quarter of 1997, compared
with $1 million in the same quarter of 1996.
Individual components of net interest income and the net interest margin are
presented in the rate/yield table on pages 16 and 17.
Loans averaged $65.5 billion in the first quarter of 1997, compared with $67.1
billion and $35.0 billion in the fourth quarter and first quarter of 1996,
respectively. A major portion of the decrease in average loan balance from the
fourth quarter of 1996 was due to intentional runoff in the corporate banking
side of commercial loans acquired in the Merger, as well as payments and payoffs
of other real estate mortgages, including those acquired in the Merger. The
decrease is also partially due to normal and service-related attrition,
seasonality and a de-emphasis of direct auto lending in revolving credit and
monthly payments, as well as the expected runoff in the real estate 1-4 family
mortgage portfolio.
Investment securities averaged $13.1 billion during the first quarter of 1997,
compared with $13.2 billion and $8.7 billion in the fourth quarter and first
quarter of 1996, respectively.
Average core deposits were $77.6 billion, $80.8 billion and $36.8 billion and
funded 74%, 75% and 75% of the Company's average total assets in the first
quarter of 1997, fourth quarter and first quarter of 1996, respectively. The
decrease in average core deposits from the fourth quarter of 1996 was primarily
due to customer attrition due to service-related issues and a decline in
interest-bearing checking deposits related to moving customer deposits to off-
balance sheet sweep products.
15
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS)(1)(2)
- ---------------------------------------------------------------------------------------------------------------------------------
Quarter Ended
----------------------------------------------------------------------------------
MARCH 31, December 31,
1997 1996
-------------------------------------- -------------------------------------
INTEREST Interest
AVERAGE YIELDS/ INCOME/ Average Yields/ income/
(in millions) BALANCE RATES EXPENSE balance rates expense
- ---------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Federal funds sold and securities
purchased under resale agreements $ 374 5.43% $ 5 $ 570 5.88% $ 8
Investment securities at fair value (3):
U.S. Treasury securities 2,916 6.04 43 2,624 6.06 40
Securities of U.S. government agencies
and corporations 6,703 6.41 107 7,017 6.41 112
Private collateralized mortgage
obligations 3,134 6.57 52 3,105 6.67 52
Other securities 368 6.35 6 440 6.83 7
-------- ------ --------- --------
Total investment securities at
fair value 13,121 6.36 208 13,186 6.42 211
Loans:
Commercial 18,406 8.98 409 18,897 8.93 424
Real estate 1-4 family first mortgage 10,236 7.41 189 10,535 7.42 196
Other real estate mortgage 11,550 10.89 310 12,039 9.54 288
Real estate construction 2,299 9.75 55 2,311 10.52 61
Consumer:
Real estate 1-4 family junior
lien mortgage 6,170 9.30 142 6,348 9.45 151
Credit card 5,330 14.07 188 5,335 14.65 195
Other revolving credit and
monthly payment 8,271 9.27 189 8,522 9.47 203
-------- ------ --------- --------
Total consumer 19,771 10.57 519 20,205 10.83 549
Lease financing 3,079 8.84 68 2,936 8.71 64
Foreign 152 7.34 3 174 7.80 3
-------- ------ --------- --------
Total loans 65,493 9.57 1,553 67,097 9.42 1,585
Other 706 6.25 11 709 6.15 11
-------- ------ --------- --------
Total earning assets $ 79,694 8.99 1,777 $ 81,562 8.88 1,815
-------- ------ --------- --------
-------- ---------
FUNDING SOURCES
Deposits:
Interest-bearing checking $ 1,913 1.14 5 $ 3,000 1.28 10
Market rate and other savings 34,103 2.55 214 34,012 2.66 227
Savings certificates 15,518 5.05 193 15,785 5.07 201
Other time deposits 180 3.94 2 331 6.79 5
Deposits in foreign offices 559 5.13 7 227 4.85 3
-------- ------ --------- --------
Total interest-bearing deposits 52,273 3.27 421 53,355 3.33 446
Federal funds purchased and securities
sold under repurchase agreements 2,425 5.18 31 1,493 5.29 20
Commercial paper and other short-term
borrowings 230 5.07 2 416 3.66 4
Senior debt 2,001 6.19 31 2,240 6.19 35
Subordinated debt 2,939 6.92 51 2,941 6.90 51
Guaranteed preferred beneficial interests
in Company's subordinated debentures 1,251 7.85 25 326 7.86 6
-------- ------ --------- --------
Total interest-bearing
liabilities 61,119 3.72 561 60,771 3.68 562
Portion of noninterest-bearing
funding sources 18,575 -- -- 20,791 -- --
-------- ------ --------- --------
Total funding sources $ 79,694 2.85 561 $ 81,562 2.74 562
-------- ------ --------- --------
-------- ---------
NET INTEREST MARGIN AND NET INTEREST
INCOME ON A TAXABLE-EQUIVALENT
BASIS (4) 6.14% $1,216 6.14% $ 1,253
--------- ------ --------- --------
--------- ------ --------- --------
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 9,956 $ 10,539
Goodwill 7,306 7,362
Other 8,474 7,845
-------- ---------
Total noninterest-earning assets $ 25,736 $ 25,746
-------- ---------
-------- ---------
NONINTEREST-BEARING FUNDING SOURCES
Deposits $ 26,088 $ 27,979
Other liabilities 4,370 3,917
Preferred stockholders' equity 548 934
Common stockholders' equity 13,305 13,707
Noninterest-bearing funding sources
used to fund earning assets (18,575) (20,791)
-------- ---------
Net noninterest-bearing
funding sources $ 25,736 $ 25,746
-------- ---------
-------- ---------
TOTAL ASSETS $105,430 $107,308
-------- ---------
-------- ---------
- ---------------------------------------------------------------------------------------------------------------------------------
(1) The average prime rate of Wells Fargo Bank was 8.27%, 8.25% and 8.33% for
the quarters ended March 31, 1997, December 31, 1996 and March 31, 1996,
respectively. The average three-month London Interbank Offered Rate
(LIBOR) was 5.57%, 5.53% and 5.40% 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 liability categories.
(3) Yields are based on amortized cost balances. The average amortized cost
balances for investment securities at fair value totaled $13,116 million,
$13,145 million and $8,614 million for the quarters ended March 31, 1997,
December 31, 1996 and March 31, 1996, respectively.
(4) 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 all quarters
presented.
16
--------------------------------------
Quarter ended
--------------------------------------
March 31,
1996
--------------------------------------
Interest
Average Yields/ income/
(in millions) balance rates expense
- -------------------------------------------------------------------------------
EARNING ASSETS
Federal funds sold and securities
purchased under resale agreements $ 125 5.68% $ 2
Investment securities at fair value (3):
U.S. Treasury securities 1,356 5.52 18
Securities of U.S. government agencies
and corporations 4,991 5.95 75
Private collateralized mortgage
obligations 2,078 6.05 31
Other securities 225 7.70 4
------- ------
Total investment securities at
fair value 8,650 5.95 128
Loans:
Commercial 9,308 9.96 231
Real estate 1-4 family first mortgage 4,400 7.56 83
Other real estate mortgage 8,197 9.23 188
Real estate construction 1,327 9.98 33
Consumer:
Real estate 1-4 family junior
lien mortgage 3,334 8.50 71
Credit card 3,933 15.56 153
Other revolving credit and
monthly payment 2,598 11.19 71
------- ------
Total consumer 9,865 12.02 295
Lease financing 1,897 9.20 44
Foreign 31 6.96 1
------- ------
Total loans 35,025 10.03 875
Other 69 6.34 1
------- ------
Total earning assets $43,869 9.21 $1,006
------- ------
------- ------
FUNDING SOURCES
Deposits:
Interest-bearing checking $ 856 .99 2
Market rate and other savings 17,991 2.52 113
Savings certificates 8,636 5.24 113
Other time deposits 341 7.26 6
Deposits in foreign offices 524 5.42 7
------- ------
Total interest-bearing deposits 28,348 3.41 241
Federal funds purchased and securities
sold under repurchase agreements 2,706 5.36 36
Commercial paper and other short-term
borrowings 405 5.27 5
Senior debt 1,710 6.26 26
Subordinated debt 1,266 6.85 22
Guaranteed preferred beneficial interests
in Company's subordinated debentures -- -- --
------- ------
Total interest-bearing
liabilities 34,435 3.86 330
Portion of noninterest-bearing
funding sources 9,434 -- --
------- ------
Total funding sources $43,869 3.03 330
------- ------
-------
NET INTEREST MARGIN AND NET INTEREST 6.18% $ 676
INCOME ON A TAXABLE-EQUIVALENT --------- ------
BASIS (4) --------- ------
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 2,873
Goodwill 377
Other 2,015
-------
Total noninterest-earning
assets $ 5,265
-------
-------
NONINTEREST-BEARING FUNDING SOURCES
Deposits $ 9,336
Other liabilities 1,277
Preferred stockholders' equity 489
Common stockholders' equity 3,597
Noninterest-bearing funding sources
used to fund earning assets (9,434)
Net noninterest-bearing -------
funding sources $ 5,265
-------
-------
TOTAL ASSETS $49,134
-------
-------
- ---------------------------------------------------
17
NONINTEREST INCOME
- -----------------------------------------------------------------------------------------------------
Quarter
ended March 31,
------------------------
%
(in millions) 1997 1996 Change
- -----------------------------------------------------------------------------------------------------
Service charges on deposit accounts $221 $122 81%
Fees and commissions:
Credit card membership and other
credit card fees 45 26 73
Shared ATM network fees 39 13 200
Charges and fees on loans 31 17 82
Debit and credit card merchant fees 22 15 47
Mutual fund and annuity sales fees 16 8 100
All other 61 39 56
---- ----
Total fees and commissions 214 118 81
Trust and investment services income:
Asset management and custody fees 61 35 74
Mutual fund management fees 40 21 90
All other 8 3 167
---- ----
Total trust and investment services income 109 59 85
Investment securities gains 4 -- --
Income from equity investments accounted for by the:
Cost method 51 35 46
Equity method 16 2 700
Check printing charges 17 9 89
Gains from dispositions of operations 7 5 40
Gains on sales of loans 6 4 50
Losses on dispositions of premises and equipment (30) (11) 173
All other 25 11 127
---- ----
Total $640 $354 81%
---- ---- ----
---- ---- ----
- -----------------------------------------------------------------------------------------------------
The overall increase in noninterest income reflected the impact of the
Merger.
"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 $24 million and $16 million for the
first quarter of 1997 and 1996, respectively. The related amortization
expense was $18 million and $11 million for the first quarter of 1997 and
1996, respectively. The balance of purchased mortgage servicing rights was
$287 million and $170 million at March 31, 1997 and 1996, respectively.
The purchased mortgage loan servicing portfolio totaled $27 billion at
March 31, 1997, compared with $16 billion at March 31, 1996.
A major portion of the increase in trust and investment services income for
the first quarter ended March 31, 1997 was due to greater mutual fund
management fees, reflecting the overall growth in the fund families' net
assets, including the Pacifica funds previously managed by First
Interstate. The Company managed 28 of the Stagecoach family of mutual
funds consisting of $14.4 billion of assets at March 31, 1997, compared
with 16 funds consisting of $7.5 billion of assets at March 31, 1996. The
Company also manages the Overland Express family of 14 mutual funds, which
had $5.2 billion of assets under management at March 31, 1997, compared
with $3.9 billion at March 31, 1996, and is sold through brokers around the
country. In addition
18
to managing Stagecoach and Overland Express Funds, the Company also managed
or maintained personal trust, employee benefit trust and agency assets of
approximately $191 billion (including $136 billion from First Interstate)
and $52 billion at March 31, 1997 and 1996, respectively.
At December 31, 1996, the Company had a liability of $111 million related
to the disposition of premises and, to a lesser extent, severance and
miscellaneous expenses associated with branch closures. Of this amount,
$15 million represented the balance of the 1995 accrual for the sale of 12
traditional branches, including deposits, that closed in February 1997 and
for the disposition of 11 branches, 10 of which were closed in the first
quarter of 1997, and one which is expected to be sold in the third quarter
of 1997. At December 31, 1996 and March 31, 1997, the remaining balance
associated with branch dispositions not acquired as a result of the Merger
consisted of a fourth quarter 1996 accrual of $96 million for the
disposition of 137 traditional branches in California in 1997, of which 44
branches have been or are scheduled to be closed in the second quarter of
1997. The remaining 93 branch dispositions are expected to be completed by
the fourth quarter of 1997.
At March 31, 1997, the Company had 1,939 retail outlets, comprised of 1,216
traditional branches, 342 supermarket branches and 381 banking centers, in
10 Western states.
19
NONINTEREST EXPENSE
- -----------------------------------------------------------------------------------------------------
Quarter
ended March 31,
------------------------ %
(in millions) 1997 1996 Change
- -----------------------------------------------------------------------------------------------------
Salaries $ 341 $181 88%
Incentive compensation 41 32 28
Employee benefits 95 54 76
Equipment 94 55 71
Net occupancy 102 53 92
Goodwill 83 9 822
Core deposit intangible:
Nonqualifying (1) 54 -- --
Qualifying 8 10 (20)
Contract services 56 42 33
Operating losses 42 14 200
Telecommunications 38 16 138
Postage 23 15 53
Security 22 6 267
Stationery and supplies 21 10 110
Check printing 15 7 114
Outside professional services 15 13 15
Travel and entertainment 14 9 56
Outside data processing 13 3 333
Advertising and promotion 13 13 --
Foreclosed assets (9) 2 --
All other 36 23 57
--------- ---------
Total $1,117 $567 97%
--------- --------- ---------
--------- --------- ---------
- -----------------------------------------------------------------------------------------------------
(1) Amortization of core deposit intangibles acquired after February 1992 that
are subtracted from stockholders' equity in computing regulatory capital
for bank holding companies.
In addition to the effect of combining operations of First Interstate with the
Company, the overall increase in noninterest expense primarily reflected
integration expenses, including intangible amortization, severance and higher
expenses for contract services.
Salaries, incentive compensation and employee benefits expense increased
$210 million in the first quarter of 1997 due to higher staff levels after the
consummation of the Merger. Salaries and employee benefits expense for the
first quarter of 1997 included integration-related severance expense of
$10 million. Additional severance expense may be incurred in future quarters as
the Company continues the integration process. The Company's active full-time
equivalent (FTE) staff, including hourly employees, was 34,486 at March 31,
1997, compared with 18,748 at March 31, 1996. The Company currently expects to
have about 32,000 active FTE by the fourth quarter of 1997.
Goodwill and CDI amortization resulting from the Merger were $74 million and
$54 million, respectively, for the quarter ended March 31, 1997. The core
deposit intangible is amortized on an accelerated basis based on an estimated
useful life of 15 years. The impact on noninterest expense from the amortization
of the nonqualifying core deposit intangible in 1998, 1999 and 2000 is expected
to be $199 million, $178 million and $162 million, respectively.
20
The related impact on income tax expense is expected to be a benefit of
$82 million, $73 million and $66 million in 1998, 1999 and 2000, respectively.
INCOME TAXES
The Company's effective tax rate was 46% for the first quarter of 1997, compared
with 43% for the same period of 1996. The increase in the effective tax rate for
the first quarter of 1997 was due to goodwill amortization related to the
Merger, which is not tax deductible, partially offset by a decline in state
income taxes.
21
EARNINGS/RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CDI
The following table reconciles reported earnings to net income excluding
goodwill and nonqualifying core deposit intangible ("cash" or "tangible") for
the quarter ended March 31, 1997:
- ---------------------------------------------------------------------------------------------------
Quarter ended
(in millions) March 31,
1997
- ---------------------------------------------------------------------------------------------------
Amortization
-----------------------
Nonqualifying
Reported core deposit "Cash"
earnings Goodwill intangible earnings
- ----------------------------------------------------------------------------------------------------
Income before income tax expense $ 630 $ 83 $ 54 $ 767
Income tax expense 291 -- 23 314
----- ---- ---- -----
Net income 339 83 31 453
Preferred stock dividends 10 -- -- 10
----- ---- ---- -----
Net income applicable to common stock $ 329 $ 83 $ 31 $ 443
----- ---- ---- -----
----- ---- ---- -----
Per common share $3.62 $.91 $.35 $4.88
----- ---- ---- -----
----- ---- ---- -----
- ---------------------------------------------------------------------------------------------------
The ROA, ROE and efficiency ratios excluding goodwill and nonqualifying core
deposit intangible amortization and balances for the quarter ended March 31,
1997 were calculated as follows:
- ----------------------------------------------------------------------------------------------------
Quarter ended
(in millions) March 31,
1997
- ----------------------------------------------------------------------------------------------------
ROA: A*/ (C-E) = 1.90%
ROE: B*/ (D-E) = 36.67%
Efficiency: (F-G) / H = 52.9%
Net income $ 453(A)
Net income applicable to common stock 443(B)
Average total assets 105,430(C)
Average common stockholders' equity 13,305(D)
Average goodwill ($7,306) and after-tax nonqualifying core deposit intangible ($1,095) 8,401(E)
Noninterest expense 1,117(F)
Amortization expense for goodwill and nonqualifying core deposit intangible 137(G)
Net interest income plus noninterest income 1,852(H)
- ----------------------------------------------------------------------------------------------------
*Annualized
These calculations were specifically formulated by the Company and may not be
comparable to similarly titled measures reported by other companies. Also,
"cash" or "tangible" earnings are not entirely available for use by management.
See the Consolidated Statement of Cash Flows on page 5 for other information
regarding funds available for use by management.
22
BALANCE SHEET ANALYSIS
INVESTMENT SECURITIES
- ----------------------------------------------------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
1997 1996 1996
------------------- ------------------- -------------------
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 $ 2,847 $ 2,830 $ 2,824 $ 2,837 $1,347 $1,350
Securities of U.S. government
agencies and corporations (1) 6,423 6,388 7,043 7,050 4,866 4,823
Private collateralized mortgage
obligations (2) 3,102 3,065 3,237 3,230 2,056 2,032
Other 310 309 342 343 170 180
------- ------- ------- ------- ------ -------
Total debt securities 12,682 12,592 13,446 13,460 8,439 8,385
Marketable equity securities 18 42 18 45 29 50
------- ------- ------- ------- ------ -------
Total $12,700 $12,634 $13,464 $13,505 $8,468 $8,435
------- ------- ------- ------- ------ -------
------- ------- ------- ------- ------ -------
- ----------------------------------------------------------------------------------------------------------------------------
(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.
The available-for-sale portfolio includes both debt and marketable equity
securities. At March 31, 1997, the available-for-sale securities
portfolio had an unrealized net loss of $66 million, or less than 1%
of the cost of the portfolio, comprised of unrealized gross losses of
$120 million and unrealized gross gains of $54 million. At December
31, 1996, the available-for-sale securities portfolio had an unrealized
net gain of $41 million, comprised of unrealized gross gains of $107
million and unrealized gross losses of $66 million. At March 31, 1996,
the available-for-sale securities portfolio had an unrealized net loss of
$33 million, comprised of unrealized gross losses of $95 million and
unrealized gross gains of $62 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, 1997, the
valuation allowance amounted to an unrealized net loss of $40 million,
compared with an unrealized net gain of $23 million at December 31, 1996
and an unrealized net loss of $20 million at March 31, 1996.
The unrealized net loss in the available-for-sale portfolio at March 31,
1997 was predominantly 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).
During the first three months of 1997, realized gross gains resulting
from the sale of available-for-sale securities were $4 million (realized
gross losses were zero). During the first three months of 1996, there
were no sales of available-for-sale securities.
23
The following table provides the expected remaining maturities and yields
(taxable-equivalent basis) of debt securities within the investment
portfolio.
- ----------------------------------------------------------------------------------------------------------------------------
March 31,
1997
-------------------------------------------------------------------------------------
Expected remaining principal maturity
-------------------------------------------------------------------------------------
Weighted
average
expected
Weighted remaining One year or less
Total average maturity ---------------------
(in millions) amount yield (in yrs.-mos.) Amount Yield
- ------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES (1):
U.S. Treasury securities $ 2,847 6.02% 1-11 $ 730 5.85%
Securities of U.S. government
agencies and corporations 6,423 6.60 2-5 2,405 6.72
Private collateralized mortgage
obligations 3,102 6.71 2-2 933 6.58
Other 310 6.56 2-1 93 6.49
------- -------
TOTAL COST OF DEBT SECURITIES $12,682 6.50% 2-3 $4,161 6.53%
------- ---- ---- ------- ----
------- ---- ---- ------- ----
ESTIMATED FAIR VALUE $12,592 $4,132
------- -------
------- -------
After one year After five years
through five years through ten years After ten years
--------------------- --------------------- ---------------------
(in millions) Amount Yield Amount Yield Amount Yield
- ----------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES (1):
U.S. Treasury securities $2,111 6.08% $ 6 6.30% $-- 6.88%
Securities of U.S. government
agencies and corporations 3,107 6.54 808 6.70 103 5.21
Private collateralized mortgage
obligations 1,956 6.78 211 6.69 2 6.98
Other 195 6.59 22 6.66 -- 6.98
------ ------ ----
TOTAL COST OF DEBT SECURITIES $7,369 6.47% $1,047 6.69% $105 5.24%
------ ---- ------ ---- ---- ----
------ ---- ------ ---- ---- ----
ESTIMATED FAIR VALUE $7,317 $1,039 $104
------ ------ ----
------ ------ ----
- -----------------------------------------------------------------------------------------------------------------------------
(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 3 months at March 31, 1997, compared with 2
years and 2 months at December 31, 1996 and 2 years and 1 month at March
31, 1996. The short-term debt securities portfolio serves to maintain
asset liquidity and to fund loan growth.
At March 31, 1997, 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 $9,453 million, or
75%, of the Company's investment securities portfolio at March 31, 1997.
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
$9,453 million to $9,072 million and the expected remaining maturity of
these securities would increase from 2 years and 3 months to 2 years and
7 months.
24
LOAN PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------
% Change
Mar. 31,
1997 from
------------------
MAR. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31,
(in millions) 1997 1996 1996 1996 1996
- --------------------------------------------------------------------------------------------------------------------------
Commercial (1)(2) $19,025 $19,515 $ 9,393 (3) % 103 %
Real estate 1-4 family first mortgage 10,032 10,425 4,346 (4) 131
Other real estate mortgage (3) 11,497 11,860 8,274 (3) 39
Real estate construction 2,243 2,303 1,312 (3) 71
Consumer:
Real estate 1-4 family junior lien mortgage 6,112 6,278 3,303 (3) 85
Credit card 5,232 5,462 3,928 (4) 33
Other revolving credit and monthly payment 7,984 8,374 2,590 (5) 208
------- ------- -------
Total consumer 19,328 20,114 9,821 (4) 97
Lease financing 3,152 3,003 1,991 5 58
Foreign 159 169 30 (6) 430
------- ------- -------
Total loans (net of unearned income,
including net deferred loan fees,
of $598, $654 and $504) $65,436 $67,389 $35,167 (3) % 86 %
------- ------- ------- --- ---
------- ------- ------- --- ---
- --------------------------------------------------------------------------------------------------------------------------
(1) Includes loans (primarily unsecured) to real estate developers and real
estate investment trusts (REITs) of $968 million, $1,070 million and
$576 million at March 31, 1997, December 31, 1996 and March 31, 1996,
respectively.
(2) Includes agricultural loans (loans to finance agricultural production and
other loans to farmers) of $1,282 million, $1,409 million and $927 million
at March 31, 1997, December 31, 1996 and March 31, 1996, respectively.
(3) Includes agricultural loans that are secured by real estate of
$332 million, $325 million and $252 million at March 31, 1997,
December 31, 1996 and March 31, 1996, respectively.
The table below presents comparative period-end commercial real estate loans.
- ------------------------------------------------------------------------------------------------------------
% Change
Mar. 31,
1997 from
---------------------
MAR. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31,
(in millions) 1997 1996 1996 1996 1996
- ------------------------------------------------------------------------------------------------------------
Commercial loans to real
estate developers and REITs (1) $ 968 $ 1,070 $ 576 (10)% 68 %
Other real estate mortgage 11,497 11,860 8,274 (3) 39
Real estate construction 2,243 2,303 1,312 (3) 71
------- ------- -------
Total $14,708 $15,233 $10,162 (3)% 45 %
------- ------- ------- ---- ---
------- ------- ------- ---- ---
Nonaccrual loans $ 330 $ 376 $ 349 (12)% (5)%
------- ------- ------- ---- ---
------- ------- ------- ---- ---
Nonaccrual loans as a % of total 2.2% 2.5% 3.4%
------- ------- -------
------- ------- -------
- ------------------------------------------------------------------------------------------------------------
(1) Included in commercial loans.
25
NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS (1)
- --------------------------------------------------------------------------------------------------
MAR. 31, Dec. 31, Mar. 31,
(in millions) 1997 1996 1996
- --------------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial (2)(3) $199 $223 $120
Real estate 1-4 family first mortgage 97 99 61
Other real estate mortgage (4) 306 349 289
Real estate construction 24 25 44
Consumer:
Real estate 1-4 family junior lien mortgage 16 15 11
Other revolving credit and monthly payment 1 1 --
Lease financing 2 2 --
---- ---- ----
Total nonaccrual loans (5) 645 714 525
Restructured loans (6) 10 10 12
---- ---- ----
Nonaccrual and restructured loans 655 724 537
As a percentage of total loans 1.0% 1.1% 1.5%
Foreclosed assets 207 219 198
Real estate investments (7) 5 4 7
---- ---- ----
Total nonaccrual and restructured loans
and other assets $867 $947 $742
---- ---- ----
---- ---- ----
- --------------------------------------------------------------------------------------------------
(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 (primarily unsecured) to real estate developers and REITs of
none, $2 million and $16 million at March 31, 1997, December 31, 1996 and
March 31, 1996, respectively.
(3) Includes agricultural loans of $18 million, $13 million and $6 million at
March 31, 1997, December 31, 1996 and March 31, 1996, respectively.
(4) Includes agricultural loans secured by real estate of $10 million,
$10 million and $1 million at March 31, 1997, December 31, 1996 and
March 31, 1996, respectively.
(5) Of the total nonaccrual loans, $419 million, $493 million and $392 million
at March 31, 1997, December 31, 1996 and March 31, 1996, 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 at March 31, 1997, December 31, 1996 and March
31, 1996 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
were considered impaired under FAS 114 at March 31, 1997, December 31, 1996
and March 31, 1996.
(7) 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 $158 million, $154
million and $115 million at March 31, 1997, December 31, 1996 and March 31,
1996, respectively.
The table below summarizes the changes in total nonaccrual loans.
- -------------------------------------------------------------------
MARCH 31, March 31,
(in millions) 1997 1996
- -------------------------------------------------------------------
BALANCE, BEGINNING OF QUARTER $714 $538
New loans placed on nonaccrual 107 113
Charge-offs (52) (9)
Payments (120) (54)
Transfers to foreclosed assets (1) (30)
Loans returned to accrual (3) (33)
---- ----
BALANCE, END OF QUARTER $645 $525
---- ----
---- ----
- -------------------------------------------------------------------
26
The Company generally identifies loans to be evaluated for impairment under FAS
114 (Accounting by Creditors for Impairment of a Loan) 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 under FAS 114, 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.
The average recorded investment in impaired loans was $480 million during the
first quarter of 1997 and $439 million during the first quarter of 1996. Total
interest income recognized on impaired loans was $5 million during the first
quarter of 1997 and $4 million during the first quarter of 1996. The interest
income for all periods was recorded using the cash method.
27
The table below shows the recorded investment in impaired loans by loan
category at March 31, 1997, December 31, 1996 and March 31, 1996:
- ----------------------------------------------------------------------------------------
MAR. 31, Dec. 31, Mar. 31,
(in millions) 1997 1996 1996
- ----------------------------------------------------------------------------------------
Commercial $122 $155 $ 81
Real estate 1-4 family first mortgage 2 1 3
Other real estate mortgage (1) 320 362 314
Real estate construction 23 24 44
Other 2 1 --
---- ---- ----
Total (2) $469 $543 $442
---- ---- ----
---- ---- ----
Impairment measurement based on:
Collateral value method $362 $416 $355
Discounted cash flow method 79 101 70
Historical loss factors 28 26 17
---- ---- ----
$469 $543 $442
---- ---- ----
---- ---- ----
- ----------------------------------------------------------------------------------------
(1) Includes accruing loans of $50 million purchased at a steep discount at
March 31, 1997, December 31, 1996 and March 31, 1996 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 $28 million, $27 million and $21 million of impaired loans with a
related FAS 114 allowance of $2 million, $2 million and $2 million at March
31, 1997, December 31, 1996 and March 31, 1996, respectively.
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.
- --------------------------------------------------------------------------
MARCH 31, March 31,
(in millions) 1997 1996
- --------------------------------------------------------------------------
BALANCE, BEGINNING OF QUARTER $219 $186
Additions 25 35
Sales (34) (18)
Charge-offs (3) (3)
Write-downs (1) (1)
Other 1 (1)
---- ----
BALANCE, END OF QUARTER $207 $198
---- ----
---- ----
- --------------------------------------------------------------------------
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 such nonaccrual loans are excluded from the
following table.
- -------------------------------------------------------------------------------------------------
MAR. 31, Dec. 31, Mar. 31,
(in millions) 1997 1996 1996
- -------------------------------------------------------------------------------------------------
Commercial $ 29 $ 65 $ 10
Real estate 1-4 family first mortgage 45 42 8
Other real estate mortgage 28 59 3
Real estate construction 3 4 --
Consumer:
Real estate 1-4 family junior lien mortgage 32 23 3
Credit card 139 120 97
Other revolving credit and monthly payment 20 20 1
---- ---- ---
Total consumer 191 163 101
---- ---- ---
Total $296 $333 $122
---- ---- ----
---- ---- ----
- -------------------------------------------------------------------------------------------------
29
ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------------------------
Quarter ended
------------------------------
MARCH 31, March 31,
(in millions) 1997 1996
- --------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF QUARTER $2,018 $1,794
Provision for loan losses 105 --
Loan charge-offs:
Commercial (1) (69) (13)
Real estate 1-4 family first mortgage (5) (4)
Other real estate mortgage (8) (3)
Real estate construction (1) (1)
Consumer:
Real estate 1-4 family junior lien mortgage (6) (4)
Credit card (115) (86)
Other revolving credit and monthly payment (56) (20)
------- ---------
Total consumer (177) (110)
Lease financing (10) (6)
------- ---------
Total loan charge-offs (270) (137)
------- ---------
Loan recoveries:
Commercial (2) 13 5
Real estate 1-4 family first mortgage 1 3
Other real estate mortgage 22 4
Real estate construction 1 1
Consumer:
Real estate 1-4 family junior lien mortgage 2 1
Credit card 11 5
Other revolving credit and monthly payment 16 3
------- ---------
Total consumer 29 9
Lease financing 3 2
------- ---------
Total loan recoveries 69 24
------- ---------
Total net loan charge-offs (201) (113)
------- ---------
BALANCE, END OF QUARTER $1,922 $1,681
------- ---------
------- ---------
Total net loan charge-offs as a percentage
of average loans (annualized) 1.23% 1.30%
------- ---------
------- ---------
Allowance as a percentage of total loans 2.94% 4.78%
------- ---------
------- ---------
- --------------------------------------------------------------------------------------------------
(1) There were no charge-offs of loans (primarily unsecured) to real estate
developers and REITs for either quarter presented.
(2) Includes recoveries from loans (primarily unsecured) to real estate
developers and REITs of $1 million for both quarters presented.
30
The table below presents net charge-offs by loan category.
- --------------------------------------------------------------------------------------------------------------
Quarter Ended
------------------------------------------------
MARCH 31, March 31,
1997 1996
-------------------- ------------------
% OF % of
AVERAGE average
(in millions) AMOUNT LOANS(1) Amount loans(1)
- ---------------------------------------------------------------------------------------------------------------
Commercial $ 56 1.17 % $ 8 .34 %
Real estate 1-4 family first mortgage 4 .16 1 .10
Other real estate mortgage (14) (.47) (1) (.05)
Real estate construction -- -- -- --
Consumer:
Real estate 1-4 family junior lien mortgage 4 .26 3 .41
Credit card 104 7.92 81 8.25
Other revolving credit and monthly payment 40 1.94 17 2.64
---- ----
Total consumer 148 3.05 101 4.12
Lease financing 7 .86 4 .93
---- ----
Total net loan charge-offs $201 1.23 % $113 1.30 %
---- ---- ---- ----
---- ---- ---- ----
- ---------------------------------------------------------------------------------------------------------------
(1) Calculated on an annualized basis.
Included in the Commercial loan category in the first quarter of 1997 were
small business commercial loan net charge-offs of $19 million (or 2.18%
of average small business loans), compared with $15 million (or 1.89%) in
the fourth quarter of 1996 and $9 million (or 1.90%) in the first quarter
of 1996. The target market for small business loans is expected to
experience higher loss rates on a recurring basis than is the case with
loans to middle market and corporate borrowers, and such loans are priced
at appropriately higher spreads.
The largest category of net charge-offs in the first quarter of 1997 and
1996 was credit card loans, comprising more than 50% of total net
charge-offs in each period. During the first quarter of 1997, credit card
gross charge-offs due to bankruptcies were $45 million, or 39%, of total
credit card gross charge-offs, compared with $46 million, or 41%, in the
fourth quarter of 1996 and $29 million, or 34%, in the first quarter of
1996. In addition, credit card loans 30 to 89 days past due and still
accruing totaled $189 million at March 31, 1997, compared with $199 million
at December 31, 1996 and $135 million at March 31, 1996. The total amount
of credit card charge-offs and the percentage of net charge-offs to average
credit card loans are expected to continue for the remainder of 1997 at a
level consistent with that experienced over the past year.
The Company considers the allowance for loan losses of $1,922 million
adequate to cover losses inherent in loans, commitments to extend credit
and standby letters of credit at March 31, 1997. 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. The Company made a
$105 million provision in the first quarter 1997. The Company anticipates
that it will continue making incremental increases to the provision of
approximately $35 million through the fourth quarter of 1997, when it is
expected that the provision will approximate net charge-offs.
31
OTHER ASSETS
- ---------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
(in millions) 1997 1996 1996
- ---------------------------------------------------------------------------------
Nonmarketable equity investments $ 932 $ 937 $ 424
Net deferred tax asset (1) 540 437 879
Certain identifiable intangible assets 493 471 236
Foreclosed assets 208 219 198
Other 2,573 3,397 767
------ ------ -------
Total other assets $4,746 $5,461 $2,504
------ ------ -------
------ ------ -------
- ---------------------------------------------------------------------------------
(1) Net of a valuation allowance of none at March 31, 1997, December 31, 1996
and March 31, 1996.
The Company estimates that approximately $490 million of the $540 million net
deferred tax asset at March 31, 1997 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 $50 million primarily relates to
approximately $684 million 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 $1.5 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.
Mortgage servicing rights purchased during first quarter 1997, fourth quarter
1996 and first quarter 1996 were $48 million, $28 million and $25 million,
respectively. There were no retained servicing rights recognized 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 $18 million, $17 million and $11 million
for the quarters ended March 31, 1997, December 31, 1996 and March 31, 1996,
respectively. Purchased mortgage servicing rights included in certain
identifiable intangible assets were $287 million, $257 million and $170 million
at March 31, 1997, December 31, 1996 and March 31, 1996, 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 $26 million, $25 million and $24 million for
the quarters ended March 31, 1997, December 31, 1996 and March 31, 1996,
respectively.
In January 1997, the Company adopted Statement of Financial Accounting
Standards No. 125 (FAS 125), Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, for those provisions that
became effective at that date. The adoption did not have a material effect on
the Company's first quarter 1997 financial statements. Also, in December 1996,
the FASB issued FAS 127, Deferral of the Effective Date of Certain Provisions
of FASB Statement 125, which deferred to January 1, 1998 those provisions of
FAS 125 related to
32
repurchase agreements, dollar-rolls, securities lending and similar
transactions. The adoption of FAS 127 is not expected to have a material
effect on the Company's financial statements.
DEPOSITS
- ---------------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
(in millions) 1997 1996 1996
- ---------------------------------------------------------------------------------------
Noninterest-bearing $25,337 $29,073 $ 9,740
Interest-bearing checking 2,350 2,792 745
Market rate and other savings 33,055 33,947 18,260
Savings certificates 15,414 15,769 8,669
------- ------- -------
Core deposits 76,156 81,581 37,414
Other time deposits 173 186 245
Deposits in foreign offices 98 54 147
------- ------- -------
Total deposits $76,427 $81,821 $37,806
------- ------- -------
------- ------- -------
- ---------------------------------------------------------------------------------------
CAPITAL ADEQUACY/RATIOS
Risk-based capital (RBC) guidelines issued by the Federal Reserve Board (FRB)
establish a risk-adjusted ratio relating capital to different categories of
assets and off-balance sheet exposures. The Company's Tier 1 and Tier 2 capital
components are presented on the following page. The guidelines require a
minimum total RBC ratio of 8%, with at least half of the total capital in the
form of Tier 1 capital. To supplement the RBC guidelines, the FRB established a
minimum leverage ratio guideline of 3% of Tier 1 capital to average total
assets.
The decrease in the Company's RBC and leverage ratios at March 31, 1997
compared with March 31, 1996 resulted primarily from an overall increase in
risk-weighted assets due to the Merger. The increase in the Company's RBC
ratios at March 31, 1997 compared with December 31, 1996 resulted primarily
from a decrease in total risk-weighted assets. However, the decrease in the
average (nonrisk-weighted) assets used in the leverage ratio did not decrease
as significantly as risk-weighted assets. Substantially due to the repurchase
of common stock and redemption of preferred stock, the leverage ratio
decreased slightly.
In April 1997, the Company announced that it will redeem all outstanding
depositary shares representing its Series G preferred stock, totaling $150
million, on May 29, 1997. This stock was included in the risk-based capital
and leverage ratios as of March 31, 1997.
33
The table below presents the Company's risk-based capital and leverage ratios.
- -----------------------------------------------------------------------------------------------
MAR. 31, Dec. 31, Mar. 31,
(in billions) 1997 1996 1996
- -----------------------------------------------------------------------------------------------
Tier 1:
Common stockholders' equity $13.2 $ 13.5 $ 3.7
Preferred stock (1) .4 .4 .5
Guaranteed preferred beneficial interests in
Company's subordinated debentures 1.2 1.2 --
Goodwill and other deductions (2) (8.4) (8.5) (.3)
----- ------ ------
Total Tier 1 capital 6.4 6.6 3.9
----- ------ ------
Tier 2:
Preferred securities in excess of Tier 1 limitation .1 -- --
Mandatory convertible debt .2 .2 --
Subordinated debt and unsecured senior debt 2.2 2.1 1.0
Allowance for loan losses allowable in Tier 2 1.0 1.1 .5
----- ------ ------
Total Tier 2 capital 3.5 3.4 1.5
----- ------ ------
Total risk-based capital $ 9.9 $ 10.0 $ 5.4
----- ------ ------
----- ------ ------
Risk-weighted balance sheet assets $79.0 $ 82.2 $ 38.9
Risk-weighted off-balance sheet items:
Commitments to make or purchase loans 10.1 10.1 2.8
Standby letters of credit 1.7 2.1 .6
Other .6 .5 .3
----- ------ ------
Total risk-weighted off-balance sheet items 12.4 12.7 3.7
----- ------ ------
Goodwill and other deductions (2) (8.4) (8.5) (.4)
Allowance for loan losses not included in Tier 2 (.9) (.9) (1.2)
----- ------ ------
Total risk-weighted assets $82.1 $ 85.5 $ 41.0
----- ------ ------
----- ------ ------
Risk-based capital ratios:
Tier 1 capital (4% minimum requirement) 7.80% 7.68% 9.40%
Total capital (8% minimum requirement) 12.05 11.70 13.04
Leverage ratio (3% minimum requirement) (3) 6.61% 6.65% 7.91%
- -----------------------------------------------------------------------------------------------
(1) Excludes $175 million of Series D preferred stock at March 31, 1997 and
December 31, 1996 due to the Company's December 1996 announcement to
redeem this series in March 1997.
(2) Other deductions include CDI acquired after February 1992 (nonqualifying
CDI) and the unrealized net gain (loss) on available-for-sale investment
securities carried at fair value.
(3) Tier 1 capital divided by quarterly average total assets (excluding
goodwill, nonqualifying CDI and other items which were deducted to arrive
at Tier 1 capital).
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, 1997, the Bank had a Tier 1 RBC ratio of 8.64%, a combined Tier 1 and
Tier 2 ratio of 11.26% and a leverage ratio of 6.85%.
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,
receive-fixed rate swaps are used to convert fixed-rate debt to a floating-rate
liability.
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, 1997, the under-one-year cumulative gap was a $1,851 million
(1.8% of total assets) net liability position, compared with a net liability
position of $1,402 million (1.3% of total assets) at December 31, 1996. The
increase in the net liability position was due to decreases in securities, real
estate 1-4 family first mortgage and consumer loans, most of which was offset by
decreases in interest-bearing deposits and short-term borrowings.
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 $11.9 billion and $12.5 billion at March 31, 1997 and December 31, 1996,
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 Company performs simulation modeling to estimate
the potential effects of changing interest rates.
35
DERIVATIVE FINANCIAL INSTRUMENTS
The following table summarizes the aggregate notional or contractual
amounts, credit risk amount and net fair value of the Company's derivative
financial instruments at March 31, 1997 and December 31, 1996.
- -----------------------------------------------------------------------------------------------------------------------
MARCH 31, December 31,
1997 1996
--------------------------------------- -----------------------------------------
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 $ 5,331 $ -- $ -- $ 5,188 $ -- $ --
Floors purchased (1) 21,639 37 37 20,640 101 101
Caps purchased (1) 425 4 4 435 3 3
Futures options purchased 9 -- -- -- -- --
Swap contracts (1) 16,528 78 (191) 16,661 217 117
Foreign exchange contracts:
Forward contracts (1) 64 2 2 64 -- --
CUSTOMER ACCOMMODATIONS
Interest rate contracts:
Futures contracts 7 -- -- 10 -- --
Floors written 409 -- (5) 405 -- (10)
Caps written 1,796 -- (6) 2,174 -- (4)
Floors purchased (1) 410 5 5 404 9 9
Caps purchased (1) 1,684 6 6 2,088 4 4
Swap contracts (1) 2,217 17 2 2,325 12 2
Foreign exchange contracts (2):
Forward and spot contracts (1) 1,391 19 2 1,313 14 1
Option contracts purchased (1) 91 1 1 65 1 1
Option contracts written 91 -- (2) 59 -- (1)
- ------------------------------------------------------------------------------------------------------------------------
(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.
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
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 but an
end-user of these instruments and does not use them speculatively. The
Company also offers contracts to its customers, but offsets such contracts
by purchasing other financial contracts or uses the contracts for
asset/liability management.
The Company also enters into foreign exchange derivative financial
instruments (forward and spot contracts and options) primarily as an
accommodation to customers and offsets the related foreign exchange risk
with other foreign exchange derivative financial instruments.
36
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 and floor, cap and 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 counterparties, losses associated with counterparty
nonperformance on derivative financial instruments have been immaterial.
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. In
1996, the Company filed a shelf registration that allows for the issuance of
$3.5 billion of senior or subordinated debt or preferred stock. The proceeds
from the sale of any securities will be used for general corporate purposes. As
of March 31, 1997, the Company had issued $.2 billion of preferred stock under
this shelf registration and $3.3 billion of securities remained unissued. No
additional securities have been issued under this shelf registration.
In 1996, the Company also filed a universal shelf registration statement of
$750 million with the SEC which includes senior and subordinated debt,
preferred stock and common stock of the Company and preferred securities of
special purpose subsidiary trusts. The registration allows each special
purpose subsidiary to issue trust preferred securities which qualify as Tier
1 capital of the Company for regulatory purposes. The special purpose
subsidiary will hold junior subordinated deferrable interest debentures
(debentures) of the Company. Interest paid on these debentures will be
distributed to the holders of the trust preferred securities. As a result,
distributions to the holders of the trust preferred securities will be tax
deductible and treated as interest expense in the consolidated statement of
income. This provides the Company with a more cost-effective means of
obtaining Tier 1 capital than if the Company itself were to issue additional
preferred stock. In December 1996, the Company issued $400 million in trust
preferred securities through one trust, Wells Fargo Capital I. In January
1997, the Company issued an additional $150 million in trust preferred
securities through a new trust, Wells Fargo Capital II. At March 31, 1997,
$200 million remained unissued under this shelf registration. In addition to
the publicly registered trust preferred securities, the Company established
in 1996 three special purpose trusts, which collectively issued $750 million
of trust preferred securities in private placements. Similar to the
registered trust preferred securities, these preferred securities qualify as
Tier 1 capital for regulatory purposes and the interest on the debentures is
paid as tax deductible distributions to the trust preferred security holders.
The proceeds from the publicly registered and private placement issuances were
invested in debentures of the Company. The proceeds from the sale of these
debentures were used by the Company for general corporate purposes.
37
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on April 15, 1997.
(b) Each of the persons named in the Proxy Statement as a nominee for
director was elected; and the selection of KPMG Peat Marwick LLP
as the Company's independent auditors for 1997 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 77,877,060 338,642 --
Michael R. Bowlin 77,446,178 769,524 --
Edward M. Carson 77,884,889 330,813 --
William S. Davila 77,882,728 332,974 --
Rayburn S. Dezember 77,888,360 327,342 --
Paul Hazen 77,878,034 337,668 --
Robert K. Jaedicke 77,882,393 333,309 --
Thomas L. Lee 77,891,691 324,011 --
Ellen M. Newman 77,889,597 326,105 --
Philip J. Quigley 77,888,380 327,322 --
Carl E. Reichardt 77,886,294 329,408 --
Donald B. Rice 77,892,079 323,623 --
Richard J. Stegemeier 77,881,278 334,424 --
Susan G. Swenson 77,860,343 355,359 --
Daniel M. Tellep 77,887,102 328,600 --
Chang-Lin Tien 77,884,596 331,106 --
John A. Young 77,886,961 328,741 --
William F. Zuendt 77,886,417 329,285 --
(2) Ratification of KPMG
Peat Marwick LLP as
independent auditors for
1997. 77,912,638 112,319 190,745
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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.
38
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 2.06 and 2.33 for the
quarters ended March 31, 1997 and 1996, respectively.
The ratios of earnings to fixed charges, excluding
interest on deposits, were 4.66 and 5.33 for the
quarters ended March 31, 1997 and 1996, respectively.
(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 2.00 and 2.22 for the quarters ended
March 31, 1997 and 1996, respectively. The ratios of
earnings to fixed charges and preferred dividends,
excluding interest on deposits, were 4.20 and 4.56 for
the quarters ended March 31, 1997 and 1996,
respectively.
(b) The Company filed the following reports on Form 8-K during the
first quarter of 1997 and through the date hereof:
(1) January 21, 1997 under Item 5, containing the Press
Release that announced the Company's financial results
for the quarter and year ended December 31, 1996
(2) April 15, 1997 under Item 5, containing the Press
Release that announced the Company's financial results
for the quarter ended March 31, 1997
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 14, 1997.
WELLS FARGO & COMPANY
By: /s/ Frank A. Moeslein
-------------------------
Frank A. Moeslein
Executive Vice President and
Controller
(Principal Accounting Officer)
39