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 June 30, 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: 1-800-411-4932
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
July 31, 1997
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Common stock, $5 par value 87,912,628
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
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Consolidated Statement of Income. . . . . . . . . . . . . . . . . 2
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statement of Changes in Stockholders' Equity. . . . . 4
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . 5
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Summary Financial Data . . . . . . . . . . . . . . . . . . . . . . 10
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Line of Business Results . . . . . . . . . . . . . . . . . . . . . 14
Earnings Performance . . . . . . . . . . . . . . . . . . . . . . . 19
Net Interest Income. . . . . . . . . . . . . . . . . . . . . . . 19
Noninterest Income . . . . . . . . . . . . . . . . . . . . . . . 22
Noninterest Expense. . . . . . . . . . . . . . . . . . . . . . . 24
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Earnings/Ratios Excluding Goodwill and Nonqualifying CDI . . . . 26
Balance Sheet Analysis . . . . . . . . . . . . . . . . . . . . . . 27
Investment Securities. . . . . . . . . . . . . . . . . . . . . . 27
Loan Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . 29
Commercial real estate . . . . . . . . . . . . . . . . . . . . 29
Nonaccrual and Restructured Loans and Other Assets . . . . . . . 30
Changes in total nonaccrual loans. . . . . . . . . . . . . . . 30
Changes in foreclosed assets . . . . . . . . . . . . . . . . . 33
Loans 90 days past due and still accruing. . . . . . . . . . . 33
Allowance for Loan Losses. . . . . . . . . . . . . . . . . . . . 34
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Capital Adequacy/Ratios. . . . . . . . . . . . . . . . . . . . . 37
Asset/Liability Management . . . . . . . . . . . . . . . . . . . 39
Derivative Financial Instruments . . . . . . . . . . . . . . . . 40
Liquidity Management . . . . . . . . . . . . . . . . . . . . . . 41
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 43
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
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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 Six months
ended June 30, ended June 30,
--------------------- --------------------
(in millions) 1997 1996 1997 1996
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INTEREST INCOME
Federal funds sold and securities
purchased under resale agreements $ 6 $ 8 $ 11 $ 10
Investment securities 190 225 398 353
Loans 1,507 1,618 3,057 2,494
Other 13 7 24 7
------ ------ ------ ------
Total interest income 1,716 1,858 3,490 2,864
------ ------ ------ ------
INTEREST EXPENSE
Deposits 429 454 851 695
Federal funds purchased and securities sold under
repurchase agreements 34 21 65 57
Commercial paper and other short-term borrowings 3 3 6 8
Senior and subordinated debt 78 80 159 128
Guaranteed preferred beneficial interests in
Company's subordinated debentures 25 -- 50 --
------ ------ ------ ------
Total interest expense 569 558 1,131 888
------ ------ ------ ------
NET INTEREST INCOME 1,147 1,300 2,359 1,976
Provision for loan losses 140 -- 245 --
------ ------ ------ ------
Net interest income after provision for loan losses 1,007 1,300 2,114 1,976
------ ------ ------ ------
NONINTEREST INCOME
Service charges on deposit accounts 214 258 434 380
Fees and commissions 234 211 448 329
Trust and investment services income 112 104 221 164
Investment securities gains 3 3 7 2
Other 116 63 209 118
------ ------ ------ ------
Total noninterest income 679 639 1,319 993
------ ------ ------ ------
NONINTEREST EXPENSE
Salaries 316 400 656 581
Incentive compensation 49 61 89 93
Employee benefits 81 102 176 157
Equipment 98 111 192 167
Net occupancy 95 108 196 161
Goodwill 81 81 164 89
Core deposit intangible 67 82 129 91
Operating losses 180 27 222 42
Other 279 305 539 463
------ ------ ------ ------
Total noninterest expense 1,246 1,277 2,363 1,844
------ ------ ------ ------
INCOME BEFORE INCOME TAX EXPENSE 440 662 1,070 1,125
Income tax expense 212 299 502 498
------ ------ ------ ------
NET INCOME $ 228 $ 363 $ 568 $ 627
------ ------ ------ ------
------ ------ ------ ------
NET INCOME APPLICABLE TO COMMON STOCK $ 222 $ 344 $ 551 $ 598
------ ------ ------ ------
------ ------ ------ ------
PER COMMON SHARE
Net income $ 2.49 $ 3.61 $ 6.12 $ 8.39
------ ------ ------ ------
------ ------ ------ ------
Dividends declared $ 1.30 $ 1.30 $ 2.60 $ 2.60
------ ------ ------ ------
------ ------ ------ ------
Average common shares outstanding 89.0 95.6 89.9 71.3
------ ------ ------ ------
------ ------ ------ ------
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2
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
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JUNE 30, December 31, June 30,
(in millions) 1997 1996 1996
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ASSETS
Cash and due from banks $ 8,037 $ 11,736 $ 8,882
Federal funds sold and securities
purchased under resale agreements 224 187 1,344
Investment securities at fair value 11,530 13,505 13,692
Loans 65,689 67,389 70,541
Allowance for loan losses 1,850 2,018 2,273
-------- -------- --------
Net loans 63,839 65,371 68,268
-------- -------- --------
Due from customers on acceptances 97 197 210
Accrued interest receivable 519 665 591
Premises and equipment, net 2,262 2,406 2,400
Core deposit intangible 1,835 2,038 2,208
Goodwill 7,231 7,322 7,479
Other assets 4,606 5,461 3,512
-------- -------- --------
Total assets $100,180 $108,888 $108,586
-------- -------- --------
-------- -------- --------
LIABILITIES
Noninterest-bearing deposits $ 24,284 $ 29,073 $ 27,535
Interest-bearing deposits 49,464 52,748 56,333
-------- -------- --------
Total deposits 73,748 81,821 83,868
Federal funds purchased and securities
sold under repurchase agreements 4,237 2,029 944
Commercial paper and other short-term borrowings 208 401 262
Acceptances outstanding 97 197 210
Accrued interest payable 196 171 177
Other liabilities 2,869 3,947 2,865
Senior debt 1,734 2,120 2,586
Subordinated debt 2,686 2,940 2,644
Guaranteed preferred beneficial interests in
Company's subordinated debentures 1,299 1,150 --
STOCKHOLDERS' EQUITY
Preferred stock 275 600 839
Common stock - $5 par value,
authorized 150,000,000 shares; issued and outstanding
88,078,690 shares, 91,474,425 shares and
94,912,532 shares 440 457 475
Additional paid-in capital 9,305 10,287 11,207
Retained earnings 3,064 2,749 2,586
Cumulative foreign currency translation adjustments -- (4) (4)
Investment securities valuation allowance 22 23 (73)
-------- -------- --------
Total stockholders' equity 13,106 14,112 15,030
-------- -------- --------
Total liabilities and stockholders' equity $100,180 $108,888 $108,586
-------- -------- --------
-------- -------- --------
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3
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
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Six months ended June 30,
-------------------------
(in millions) 1997 1996
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PREFERRED STOCK
Balance, beginning of period $ 600 $ 489
Preferred stock issued to First Interstate stockholders -- 350
Preferred stock redeemed (325) --
------- -------
Balance, end of period 275 839
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COMMON STOCK
Balance, beginning of period 457 235
Common stock issued to First Interstate stockholders -- 260
Common stock issued under employee benefit and
dividend reinvestment plans 1 2
Common stock repurchased (18) (22)
------- -------
Balance, end of period 440 475
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ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period 10,287 1,135
Preferred stock issued to First Interstate stockholders -- 10
Common stock issued to First Interstate stockholders -- 11,039
Common stock issued under employee benefit and
dividend reinvestment plans 44 53
Common stock repurchased (1,026) (1,141)
Fair value adjustment related to First Interstate stock option -- 111
------- -------
Balance, end of period 9,305 11,207
------- -------
RETAINED EARNINGS
Balance, beginning of period 2,749 2,174
Net income 568 627
Preferred stock dividends (17) (29)
Common stock dividends (236) (186)
------- -------
Balance, end of period 3,064 2,586
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CUMULATIVE FOREIGN CURRENCY
TRANSLATION ADJUSTMENTS
Balance, beginning of period (4) (4)
Translation adjustments 4 --
------- -------
Balance, end of period -- (4)
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INVESTMENT SECURITIES VALUATION ALLOWANCE
Balance, beginning of period 23 26
Change in unrealized net gain, after applicable taxes (1) (99)
------- -------
Balance, end of period 22 (73)
------- -------
Total stockholders' equity $13,106 $15,030
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------- -------
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4
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
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Six months ended June 30,
------------------------
(in millions) 1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 568 $ 627
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 245 --
Depreciation and amortization 414 323
Deferred income tax provision 52 146
Increase (decrease) in net deferred loan fees 1 (21)
Net decrease in accrued interest receivable 146 25
Net increase in accrued interest payable 25 5
Other, net 228 38
------- -------
Net cash provided by operating activities 1,679 1,143
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities at fair value
Proceeds from sales 255 763
Proceeds from prepayments and maturities 2,224 2,435
Purchases (505) (469)
Cash acquired from First Interstate -- 6,030
Net decrease in loans resulting from originations and collections 1,553 49
Proceeds from sales (including participations) of loans 108 184
Purchases (including participations) of loans (128) (43)
Proceeds from sales of foreclosed assets 85 61
Net (increase) decrease in federal funds sold and securities
purchased under resale agreements (37) 907
Other, net 246 (93)
------- -------
Net cash provided by investing activities 3,801 9,824
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits (8,073) (2,566)
Net increase (decrease) in short-term borrowings 2,015 (2,116)
Proceeds from issuance of senior debt -- 760
Repayment of senior debt (375) (300)
Proceeds from issuance of subordinated debt -- 500
Repayment of subordinated debt (251) --
Proceeds from issuance of guaranteed preferred beneficial
interests in Company's subordinated debentures 149 --
Proceeds from issuance of common stock 45 55
Redemption of preferred stock (325) --
Repurchase of common stock (1,044) (1,163)
Payment of cash dividends on preferred stock (17) (21)
Payment of cash dividends on common stock (236) (186)
Other, net (1,067) (423)
------- -------
Net cash used by financing activities (9,179) (5,460)
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM BANKS) (3,699) 5,507
Cash and cash equivalents at beginning of period 11,736 3,375
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,037 $ 8,882
------- -------
------- -------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,106 $ 796
Income taxes $ 450 $ 185
Noncash investing and financing activities:
Transfers from loans to foreclosed assets $ 53 $ 72
Acquisition of First Interstate:
Common stock issued $ -- $11,299
Fair value of preferred stock issued -- 360
Fair value of stock options -- 111
Fair value of assets acquired -- 55,797
Fair value of liabilities assumed -- 51,214
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5
WELLS FARGO & COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. DERIVATIVE FINANCIAL INSTRUMENTS
In response to recent rule amendments of the Securities and Exchange
Commission (see page 41), the following is an enhanced description of the
derivative financial instruments accounting policy contained in the Company's
1996 Form 10-K.
Interest Rate Derivatives:
The Company uses interest rate derivative financial instruments (futures, caps,
floors and swaps) primarily to hedge mismatches in the rate maturity of loans
and their funding sources. These instruments serve to reduce rather than
increase the Company's exposure to movements in interest rates. At the
inception of the hedge, the Company identifies an individual asset or liability,
or an identifiable group of essentially similar assets or liabilities that
expose the Company to interest rate risk at the consolidated or enterprise
level. Interest rate derivatives are accounted for by the deferral or accrual
method only if they are designated as a hedge and are expected to be and are
effective in substantially reducing interest rate risk arising from the assets
and liabilities identified as exposing the Company to risk. Futures contracts
must meet specific correlation tests (i.e., the change in their fair values must
be within 80 to 120 percent of the opposite change in the fair values of the
hedged assets or liabilities). For caps, floors and swaps, their notional
amount, interest rate index and life must closely match the related terms of the
hedged assets or liabilities. Further, for futures, if the underlying financial
instrument differs from the hedged asset or liability, there must be a clear
economic relationship between the prices of the two financial instruments. If
periodic assessment indicates derivatives no longer provide an effective hedge,
the derivatives are closed out or settled; previously unrecognized hedge results
and the net settlement upon close-out or termination that offset changes in
value of the hedged asset or liability are deferred and amortized over the life
of the asset or liability with excess amounts recognized in noninterest income.
Gains and losses on futures contracts result from the daily settlement of their
open positions and are deferred and classified on the balance sheet with the
hedged asset or liability. They are recognized in income when the effects of
the related fair value changes of the hedged asset or liability are recognized
(e.g., amortized as a component of the interest income or expense reported on
the hedged asset or liability). Amounts payable or receivable for swaps, caps
and floors are accrued with the passage of time, the effect of which is included
in the interest income or expense reported on the hedged asset or liability.
Fees associated with these financial contracts are included on the balance sheet
at the time that the fee is paid and are classified with the hedged asset or
liability. These fees are amortized over their contractual life as a component
of the interest reported on the hedged asset or liability. If a hedged asset or
liability settles before maturity of the hedging interest rate derivatives, the
derivatives are closed out or settled, and previously unrecognized hedge results
and the net settlement upon close-out or termination are accounted for as part
of the gains and losses on the hedged asset
6
or liability. If interest rate derivatives used in an effective hedge are
closed out or terminated before the hedged item settles, previously unrecognized
hedge results and the net settlement upon close-out or termination are deferred
and amortized over the life of the hedged asset or liability. Cash flows
resulting from interest rate derivatives (including any related fees) that are
accounted for as hedges of assets and liabilities are classified in the cash
flow statement in the same category as the cash flows from the items being
hedged and are reflected in that statement when the cash receipts or payments
due under the terms of the instruments are collected, paid or settled.
Interest rate derivatives entered into as an accommodation to customers and
interest rate derivatives used to offset the interest rate risk of those
contracts are carried at fair value with unrealized gains and losses recorded
in noninterest income. Cash flows resulting from interest rate derivative
financial instruments carried at fair value are classified in the cash flow
statement as operating cash flows and are reflected in that statement when
the cash receipts or payments due under the terms of the instruments are
collected, paid or settled.
Credit risk related to interest rate derivative financial instruments is
considered and, if material, provided for separately from the allowance for loan
losses.
Foreign Exchange Derivatives:
The Company 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 derivatives. All contracts are carried at fair value with
unrealized gains and losses recorded in noninterest income. Cash flows
resulting from foreign exchange derivatives are classified in the cash flow
statement as operating cash flows and are reflected in that statement when
the cash receipts or payments due under the terms of the foreign exchange
derivatives are collected, paid or settled. Credit risk related to foreign
exchange derivatives is considered and, if material, provided for separately
from the allowance for loan losses.
7
2. 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 175 branch
closures during 1996, five branch closures in the first quarter of 1997 and
31 branch closures in the second quarter of 1997. In addition, 10 branch
dispositions have been completed or are scheduled to be completed by year-end
1997, with another 14 branches to be closed in 1998. 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 completed in the first quarter of
1997. The sales of the remaining three branches are expected to be completed
in 1998. The out-of-state dispositions included 17 branch closures that were
completed in the first quarter of 1997 and 23 branch closures that were
completed in the second quarter of 1997. In addition, 51 branch closures have
been completed or are scheduled to be completed by year-end 1997, with
another 58 closures to be completed in 1998. The Company also entered into
definitive agreements with several institutions to sell 87 former First
Interstate out-of-state branches, including deposits. The sales of five of
these branches were completed in the second quarter of 1997 and the sales of
the remaining 82 have been completed or will be completed in the third
quarter of 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 $253 million were
paid since the second quarter of 1996, including $39 million in the second
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.
During the second quarter, the Bank signed a definitive agreement to sell its
Institutional Custody businesses to The Bank of New York and its affiliate, BNY
Western Trust Company. Transfer of the accounts will occur in several stages
beginning in the third quarter of 1997. The sales price will be settled
subsequent to these transfers, starting in the fourth quarter of 1997.
Substantially all of the businesses were acquired as part of the acquisition of
First Interstate; therefore, the excess of proceeds over the cost of the net
assets sold on that portion of the sale will be deducted from goodwill. The net
income for the first half of 1997 generated by the Institutional Custody
businesses was approximately $6 million.
8
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.
9
FINANCIAL REVIEW
SUMMARY FINANCIAL DATA
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% Change
Quarter ended June 30, 1997 from Six months ended
----------------------------- ------------------ ----------------
JUNE 30, Mar. 31, June 30, Mar. 31, June 30, JUNE 30, June 30, %
(in millions) 1997 1997 1996 1997 1996 1997 1996 Change
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FOR THE PERIOD
Net income $ 228 $ 339 $ 363 (33)% (37)% $ 568 $ 627 (9)%
Net income applicable to common stock 222 329 344 (33) (35) 551 598 (8)
Per common share
Net income $ 2.49 $ 3.62 $ 3.61 (31) (31) $ 6.12 $ 8.39 (27)
Dividends declared 1.30 1.30 1.30 -- -- 2.60 2.60 --
Average common shares outstanding 89.0 90.8 95.6 (2) (7) 89.9 71.3 26
Profitability ratios (annualized)
Net income to average total assets (ROA) .92% 1.31% 1.35% (30) (32) 1.12% 1.60% (30)
Net income applicable to common stock to
average common stockholders' equity (ROE) 6.88 10.02 9.77 (31) (30) 8.46 13.52 (37)
Efficiency ratio (1) 68.2% 60.3% 65.8% 13 4 64.2% 62.1% 3
Average loans $ 64,618 $ 65,493 $ 70,734 (1) (9) $ 65,053 $ 52,880 23
Average assets 99,739 105,430 108,430 (5) (8) 102,569 78,782 30
Average core deposits 73,524 77,622 83,356 (5) (12) 75,562 60,087 26
Net interest margin 5.93% 6.14% 6.03% (3) (2) 6.03% 6.08% (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 $ 338 $ 443 $ 468 (24) (28) $ 781 $ 730 7
Net income per common share 3.79 4.88 4.89 (22) (22) 8.69 10.24 (15)
ROA 1.51% 1.90% 1.96% (21) (23) 1.71% 2.05% (17)
ROE 29.27 36.67 33.43 (20) (12) 33.06 33.18 --
Efficiency ratio 60.6 52.9 58.0 15 4 56.7 56.7 --
AT PERIOD END
Investment securities $ 11,530 $ 12,634 $ 13,692 (9) (16) $ 11,530 $ 13,692 (16)
Loans 65,689 65,436 70,541 -- (7) 65,689 70,541 (7)
Allowance for loan losses 1,850 1,922 2,273 (4) (19) 1,850 2,273 (19)
Goodwill 7,231 7,312 7,479 (1) (3) 7,231 7,479 (3)
Assets 100,180 101,863 108,586 (2) (8) 100,180 108,586 (8)
Core deposits 73,545 76,156 83,331 (3) (12) 73,545 83,331 (12)
Common stockholders' equity 12,831 13,170 14,191 (3) (10) 12,831 14,191 (10)
Stockholders' equity 13,106 13,595 15,030 (4) (13) 13,106 15,030 (13)
Tier 1 capital (3) 6,101 6,407 6,346 (5) (4) 6,101 6,346 (4)
Total capital (Tiers 1 and 2) (3) 9,329 9,891 9,591 (6) (3) 9,329 9,591 (3)
Capital ratios
Common stockholders' equity to assets 12.81% 12.93% 13.07% (1) (2) 12.81% 13.07% (2)
Stockholders' equity to assets 13.08 13.35 13.84 (2) (5) 13.08 13.84 (5)
Risk-based capital (3)
Tier 1 capital 7.49 7.80 7.40 (4) 1 7.49 7.40 1
Total capital 11.45 12.05 11.18 (5) 2 11.45 11.18 2
Leverage (3) 6.67 6.61 6.37 1 5 6.67 6.37 5
Book value per common share $ 145.68 $ 146.37 $ 149.52 -- (3) $ 145.68 $ 149.52 (3)
Staff (active, full-time equivalent) 33,216 34,486 41,548 (4) (20) 33,216 41,548 (20)
COMMON STOCK PRICE
High $ 287.88 $ 319.25 $ 264.50 (10) 9 $ 319.25 $ 264.50 21
Low 246.00 271.00 232.13 (9) 6 246.00 203.13 21
Period end 269.50 284.13 239.13 (5) 13 269.50 239.13 13
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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 $35 million and
$1,034 million, respectively, for the quarter ended June 30, 1997 and $66
million and $1,064 million, respectively, for the six months ended June 30,
1997. Goodwill amortization and average balance (which are not tax
effected) were $81 million and $7,271 million, respectively, for the
quarter ended June 30, 1997 and $164 million and $7,288 million,
respectively, for the six months ended June 30, 1997.
(3) See the Capital Adequacy/Ratios section for additional information.
10
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 all periods reflects the effects of the
acquisition subsequent to the Merger's consummation. Since the Company's
results of operations subsequent to the Merger's consummation reflect amounts
recognized from 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, the increases in the
amounts reported for the first six months of 1997 compared to the amounts
reported for the same period in 1996 resulted from the Merger. Other significant
factors affecting the Company's results of operations are described in the
applicable sections below.
Net income for the second quarter of 1997 was $228 million, compared with $363
million for the second quarter of 1996, a decrease of 37%. Per share earnings
for the second quarter of 1997 were $2.49, compared with $3.61 in the second
quarter of 1996, a decrease of 31%. Net income for the first six months of 1997
was $568 million, or $6.12 per share, compared with $627 million, or $8.39 per
share, for the first six months of 1996.
Return on average assets (ROA) was .92% and 1.12% in the second quarter and
first half of 1997, respectively, compared with 1.35% and 1.60% in the same
periods of 1996. Return on average common equity (ROE) was 6.88% and 8.46% in
the second quarter and first half of 1997, respectively, compared with 9.77% and
13.52%, respectively, in the same periods of 1996.
Earnings before the amortization of goodwill and nonqualifying core deposit
intangible ("cash" or "tangible" earnings) in the second quarter and first half
of 1997 were $3.79 and $8.69 per share, respectively, compared with $4.89 and
$10.24 per share in the same periods of 1996. On the same basis, ROA was 1.51%
and 1.71% in the second quarter and first half of 1997, respectively, compared
with 1.96% and 2.05% in the same periods of 1996; ROE was 29.27% and 33.06% in
the second quarter and first half of 1997, respectively, compared with 33.43%
and 33.18% in the same periods of 1996.
Net interest income on a taxable-equivalent basis was $1,150 million and $2,366
million in the second quarter and first half of 1997, respectively, compared
with $1,304 million and $1,980 million in the same periods of 1996. The decrease
in net interest income for the second quarter of 1997 compared with the same
period of 1996 was predominantly due to a decline in average earning assets. The
Company's net interest margin was 5.93% for the second quarter of 1997, compared
with 6.03% in the same quarter of 1996 and 6.14% in the first quarter of 1997.
11
Noninterest income was $679 million and $1,319 million in the second quarter and
first half of 1997, respectively, compared with $639 million and $993 million in
the same periods of 1996.
Noninterest expense in the second quarter and first half of 1997 was $1,246
million and $2,363 million, respectively, compared with $1,277 million and
$1,844 million for the same periods of 1996. The decrease in noninterest
expense in the second quarter of 1997 resulted from cost savings achieved
subsequent to the Merger, substantially offset by an increase in operating
losses (see page 24 for additional information).
The Company expects to meet its pre-merger objective of realizing annual cost
savings of $800 million by the fourth quarter of 1997. The Company also expects
revenue growth to resume in the fourth quarter of 1997. For additional
discussion of the Company's plan for branch closures and consolidations, see
Note 2 to Financial Statements.
The provision for loan losses in the second quarter and first half of 1997 was
$140 million and $245 million, respectively, compared with no provision for the
same periods in 1996. During the second quarter of 1997, net charge-offs
totaled $212 million, or 1.32% of average loans (annualized). This compared with
$201 million, or 1.23%, during the first quarter of 1997 and $178 million, or
1.01%, during the second quarter of 1996. The allowance for loan losses of
$1,850 million was 2.82% of total loans at June 30, 1997, compared with 2.94% at
March 31, 1997 and 3.22% at June 30, 1996.
Total nonaccrual and restructured loans were $612 million at June 30, 1997,
compared with $724 million at December 31, 1996 and $742 million at June 30,
1996. Foreclosed assets amounted to $194 million at June 30, 1997, $219 million
at December 31, 1996 and $238 million at June 30, 1996.
Common stockholders' equity to total assets was 12.81% at June 30, 1997,
compared with 12.93% and 13.07% at March 31, 1997 and June 30, 1996,
respectively. The Company's total risk-based capital ratio at June 30, 1997 was
11.45% and its Tier 1 risk-based capital ratio was 7.49%, 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
March 31, 1997, the risk-based capital ratios were 12.05% and 7.80%,
respectively; at June 30, 1996, these ratios were 11.18% and 7.40%,
respectively. The Company's leverage ratios were 6.67%, 6.61% and 6.37% at
June 30, 1997, March 31, 1997 and June 30, 1996, respectively, exceeding the
minimum regulatory guideline of 3% for bank holding companies and the "well
capitalized" guideline of 5% for banks.
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 two programs, the Company
has repurchased a total of 8.2 million shares (net of shares issued) since April
1996, including 1.9 million shares (net of shares issued) in the second quarter
of 1997. The Company currently expects to continue repurchasing shares in each
of the last two quarters of 1997, although not at the same level as the second
quarter.
12
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 quarter
and six-month period ended June 30, 1997 would not differ materially from the
existing primary and fully diluted EPS under APB 15.
In June 1997, the FASB issued FAS 130, Reporting Comprehensive Income. This
Statement establishes standards for reporting and displaying comprehensive
income and its components in the financial statements. It requires that a
company classify items of other comprehensive income, as defined by accounting
standards, by their nature (e.g., unrealized gains or losses on securities) in a
financial statement, but does not require a specific format for that statement.
The Company is in the process of determining its preferred format. The
accumulated balance of other comprehensive income is to be displayed separately
from retained earnings and additional paid-in capital in the equity section of
the balance sheet.
This Statement is effective with the year-end 1998 financial statements;
however, a total for comprehensive income is required in the financial
statements of interim periods beginning with the first quarter of 1998.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
13
LINE OF BUSINESS RESULTS (ESTIMATED)
- ----------------------------------------------------------------------------------------------------
(income/expense in millions, Retail Business
average balances in billions) Distribution Banking Investment
Group Group Group
--------------------------------------------------------
1997 1996 1997 1996 1997 1996
QUARTER ENDED JUNE 30,
Net interest income (1) $ 265 $ 242 $ 198 $ 176 $ 199 $ 228
Provision for loan losses (2) -- -- 33 20 1 1
Noninterest income (3) 301 325 66 66 138 142
Noninterest expense (3) 469 498 124 124 165 181
----- ----- ----- ----- ----- -----
Income before income
tax expense (benefit) 97 69 107 98 171 188
Income tax expense (benefit) (4) 40 28 44 40 70 77
----- ----- ----- ----- ----- -----
Net income (loss) $ 57 $ 41 $ 63 $ 58 $ 101 $ 111
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
Average loans $ 0.0 $ 0.0 $ 5.5 $ 4.6 $ 2.0 $ 2.0
Average assets 1.8 2.3 7.3 6.5 2.7 2.7
Average core deposits 18.7 18.8 12.1 13.1 34.0 37.8
Return on equity (5) 22% 15% 32% 36% 58% 59%
Risk-adjusted efficiency ratio (6) 91% 97% 70% 70% 59% 59%
SIX MONTHS ENDED JUNE 30,
Net interest income (1) $ 534 $ 360 $ 387 $ 274 $ 396 $ 325
Provision for loan losses (2) -- -- 64 36 2 2
Noninterest income (3) 596 485 134 111 272 207
Noninterest expense (3) 951 758 241 198 329 272
----- ----- ----- ----- ----- -----
Income before income
tax expense (benefit) 179 87 216 151 337 258
Income tax expense (benefit) (4) 73 36 88 63 138 107
----- ----- ----- ----- ----- -----
Net income (loss) $ 106 $ 51 $ 128 $ 88 $ 199 $ 151
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
Average loans $ 0.0 $ 0.0 $ 5.4 $ 3.8 $ 1.9 $ 1.3
Average assets 1.9 1.5 7.3 5.3 2.9 1.7
Average core deposits 19.2 14.1 12.3 9.7 34.6 28.0
Return on equity (5) 20% 13% 34% 33% 57% 53%
Risk-adjusted efficiency ratio (6) 93% 99% 68% 71% 59% 61%
- ----------------------------------------------------------------------------------------------------
(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 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 $90 million and $112 million for the quarters
ended June 30, 1997 and 1996, respectively, and $180 million and
$161 million for the six months ended June 30, 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 line of business results show the financial performance of the
Company's major business units. The table presents the second quarter and
six months ended June 30, 1997 and the same periods of 1996. First
Interstate results prior to April 1, 1996 are not included and, therefore,
the results for the six months ended June 30, 1997 are not comparable to
the same period of 1996.
14
- ----------------------------------------------------------------------------------------------------------------------------------
Wholesale
(income/expense in millions, Real Estate Products Consumer Consolidated
average balances in billions) Group Group Lending Other Company
-----------------------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
QUARTER ENDED JUNE 30,
Net interest income (1) $ 85 $ 106 $ 180 $ 212 $ 283 $ 285 $ (63) $ 51 $1,147 $1,300
Provision for loan losses (2) 11 12 19 21 112 111 (36) (165) 140 --
Noninterest income (3) 30 14 81 83 106 75 (43) (66) 679 639
Noninterest expense (3) 33 29 113 126 119 130 223 189 1,246 1,277
----- ----- ----- ----- ----- ----- ----- ----- ------ ------
Income before income
tax expense (benefit) 71 79 129 148 158 119 (293) (39) 440 662
Income tax expense (benefit) (4) 29 33 53 61 65 49 (89) 11 212 299
----- ----- ----- ----- ----- ----- ----- ----- ------ ------
Net income (loss) $ 42 $ 46 $ 76 $ 87 $ 93 $ 70 $(204) $ (50) $ 228 $ 363
----- ----- ----- ----- ----- ----- ----- ----- ------ ------
----- ----- ----- ----- ----- ----- ----- ----- ------ ------
Average loans $ 9.4 $10.5 $16.6 $18.8 $23.7 $24.4 $ 7.4 $10.4 $ 64.6 $ 70.7
Average assets 10.2 11.1 20.0 23.1 24.5 25.1 33.2 37.6 99.7 108.4
Average core deposits 0.3 0.3 8.0 10.0 0.4 0.4 -- 3.0 73.5 83.4
Return on equity (5) 17% 18% 19% 19% 25% 19% --% --% 7% 10%
Risk-adjusted efficiency ratio (6) 76% 72% 79% 77% 68% 81% --% --% --% --%
SIX MONTHS ENDED JUNE 30,
Net interest income (1) $ 196 $ 172 $ 375 $ 315 $ 561 $ 469 $ (90) $ 61 $2,359 $1,976
Provision for loan losses (2) 21 20 37 31 227 184 (106) (273) 245 --
Noninterest income (3) 48 38 164 122 198 134 (93) (104) 1,319 993
Noninterest expense (3) 54 51 219 176 232 205 337 184 2,363 1,844
----- ----- ----- ----- ----- ----- ----- ----- ------ ------
Income before income
tax expense (benefit) 169 139 283 230 300 214 (414) 46 1,070 1,125
Income tax expense (benefit) (4) 69 58 116 95 123 89 (105) 50 502 498
----- ----- ----- ----- ----- ----- ----- ----- ------ ------
Net income (loss) $ 100 $ 81 $ 167 $ 135 $ 177 $ 125 $(309) $ (4) $ 568 $ 627
----- ----- ----- ----- ----- ----- ----- ----- ------ ------
----- ----- ----- ----- ----- ----- ----- ----- ------ ------
Average loans $ 9.4 $ 8.8 $16.8 $13.8 $24.0 $18.1 $ 7.6 $ 7.1 $ 65.1 $ 52.9
Average assets 10.2 9.3 21.1 16.6 25.0 18.7 34.2 25.7 102.6 78.8
Average core deposits 0.3 0.2 8.6 6.3 0.4 0.3 0.2 1.5 75.6 60.1
Return on equity (5) 21% 19% 20% 21% 24% 22% --% --% 8% 14%
Risk-adjusted efficiency ratio (6) 65% 70% 76% 73% 70% 75% --% --% --% --%
- ----------------------------------------------------------------------------------------------------------------------------------
(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.
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.
15
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 June 30, 1997, there were 1,126 traditional branches and 772 in-store
branches and banking centers with 2,759 ATM locations throughout the Western
United States.
Retail Distribution Group's net income for the second quarter of 1997 increased
$16 million, or 39%, over second quarter 1996. Net interest income increased
due to wider spreads on core deposits. Noninterest income for the quarter
reflected lower sales and service charges to the product groups and higher
losses on the disposition of premises due to branch closures, which was partly
offset by higher external fees and commissions. Noninterest expense decreased in
the quarter due to branch closures and merger-related cost savings,
significantly offset by higher operating losses during the period.
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.
Business Banking's net income for the second quarter of 1997 increased $5
million, or 9%. The increase in net interest income was due to higher volume and
spreads on commercial loans and higher spreads on core deposits. This was
partially offset by lower deposit balances. The provision was higher due to the
volume of loans acquired through direct market mailings.
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 second quarter, the Bank signed a definitive agreement to sell its
Institutional Custody businesses to The Bank of New York and its affiliate, BNY
Western Trust Company.
In July 1997, the Bank announced a partnership with Morgan Stanley, Dean Witter,
Discover & Co., whereby Dean Witter would provide technology, investment
products, services and
16
sales and marketing support to Wells Fargo Securities and its clients. The full
range of Dean Witter's services is expected to be available to Wells Fargo
customers by the first quarter of 1998.
The Investment Group's net income for the second quarter of 1997 decreased by
$10 million, or 9%. Net interest income decreased by $29 million primarily
due to a decline in core deposits which was partially offset by wider deposit
spreads. Noninterest expense decreased as a result of cost savings from the
sale of Corporate Trust, lower personnel expense (including incentive
compensation) and lower distribution costs from lower deposit sales.
Assets under management at June 30, 1997 were $59.2 billion, compared with
$56.3 billion at June 30, 1996.
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 debt, origination of permanent loans for
securitization, loan syndications and commercial real estate loan servicing.
The Real Estate Group's net income for the second quarter of 1997 decreased by
$4 million, or 9%, from 1996. Net interest income decreased by $21 million due
to lower loan balances, lower interest recoveries and narrower spreads.
Noninterest income increased by $16 million due to sales of loans and commercial
mortgage-backed securities, trading of high yield debt and higher income from
real estate investments. Noninterest expense increased by $4 million due to
higher operating losses and lower gains on the sale of foreclosed assets.
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 net income for the second quarter of 1997
decreased by $11 million, or 13%, from 1996. Net interest income decreased by
$32 million due to lower loan and deposit balances. Lower service charges on
deposit accounts in second quarter 1997 were offset partially by higher foreign
exchange income. Noninterest expense decreased by $13 million due to
merger-related cost savings.
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
17
credit and installment loans. The loan portfolio for second quarter 1997
averaged $23.7 billion, consisting of $5.2 billion in credit cards, $11.6
billion in equity/unsecured loans and $6.9 billion in transportation
financing. This compares with $5.2 billion in credit cards, $12.2 billion in
equity/unsecured loans and $7.0 billion in transportation financing in 1996.
Consumer Lending's net income for the second quarter of 1997 increased $23
million, or 33%. Net interest income was lower due to higher interest losses
related to an increase in loans charged off in the consumer portfolio, which
was partially offset by a 29% increase in auto lease balances. The increase
in noninterest income was due to higher fee income on credit cards and
mortgage servicing. The decrease in noninterest expense was due to lower
distribution expense.
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.
The net loss for the Other category for the quarter ended June 30, 1997
increased by $154 million from 1996. Net interest income during the second
quarter of 1997 reflects the impact of lower investment securities and higher
short-term borrowing. Noninterest income in second quarter 1997 benefited from
unusual gains on equity investments. Noninterest expense includes substantially
all of the operating losses for second quarter 1997 related to resolving various
merger-related operations and back office issues (see page 24 for additional
information). The operating losses are partially offset by merger-related cost
savings in the systems and other support groups.
In June 1997, the FASB issued FAS 131, Disclosures about Segments of an
Enterprise and Related Information. The Statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments on the basis that is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. This Statement is effective for the year-end 1998 audited financial
statements.
18
EARNINGS PERFORMANCE
NET INTEREST INCOME
Net interest income on a taxable-equivalent basis was $1,150 million in the
second quarter of 1997, compared with $1,304 million in the second quarter of
1996. The decrease in net interest income was predominantly due to a decline
in average earning assets. The Company's net interest margin was 5.93% in
the second quarter of 1997, compared with 6.03% in the second quarter of 1996
and 6.14% in the first quarter of 1997. Net interest income on a
taxable-equivalent basis was $2,366 million in the first six months of 1997,
compared with $1,980 million in the first six months of 1996. The Company's
net interest margin was 6.03% in the first six months of 1997, compared with
6.08% in the first six months of 1996. The Company expects the net interest
margin to be essentially flat in the second half of 1997.
Interest income included hedging income of $21 million in the second quarter
of 1997, compared with $24 million in the second quarter of 1996. Interest
expense included hedging expense of $3 million in the second quarter of 1997
and 1996.
Individual components of net interest income and the net interest margin are
presented in the rate/yield table on pages 20 and 21.
Loans averaged $64.6 billion in the second quarter of 1997, compared with
$70.7 billion in the second quarter of 1996, and $65.1 billion in the first
six months of 1997, compared with $52.9 billion in the first six months of
1996. The decrease in average loans from the second quarter of 1996 was
largely due to runoff. In addition, a significant portion of the decrease was
due to the divestitures and sales of former First Interstate branches and
banks in 1996, which included $1.5 billion of loans. The Company expects
growth in the commercial loan portfolio in the second half of 1997.
Investment securities averaged $11.9 billion during the second quarter of
1997, compared with $14.9 billion in the second quarter of 1996, and $12.5
billion in the first six months of 1997, compared with $11.8 billion in the
first six months of 1996.
Average core deposits were $73.5 billion and $83.4 billion in the second
quarter of 1997 and 1996, respectively, and funded 74% and 77% of the
Company's average total assets in the same quarter of 1997 and 1996,
respectively. For the first six months of 1997 and 1996, average core
deposits were $75.6 billion and $60.1 billion, respectively, and funded 74%
and 76% of the Company's average total assets in the same period of 1997 and
1996, respectively. The decrease in average core deposits from the second
quarter of 1996 was largely due to net runoff. In addition, a significant
portion of the decrease was due to the divestitures and sales of former First
Interstate branches and banks in 1996, including $2.3 billion of core deposits.
The Company expects core deposits to decrease in the second half of 1997 as a
result of additional branch sales (see Note 2 to Financial Statements).
19
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) (2)
- ----------------------------------------------------------------------------------------------------------------------------
Quarter ended June 30,
--------------------------------------------------------------------
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 $ 451 5.67% $ 6 $ 588 5.36% $ 8
Investment securities at fair value (3):
U.S. Treasury securities 2,688 6.06 41 3,177 5.52 44
Securities of U.S. government agencies
and corporations 5,926 6.44 96 8,434 6.07 129
Private collateralized mortgage obligations 2,939 6.64 49 2,653 6.23 42
Other securities 322 6.50 4 668 6.83 10
-------- ------ -------- ------
Total investment securities at fair value 11,875 6.40 190 14,932 6.01 225
Loans:
Commercial 18,432 9.10 418 19,460 8.75 424
Real estate 1-4 family first mortgage 9,927 7.53 187 11,924 7.50 224
Other real estate mortgage 11,573 9.23 266 13,006 9.32 300
Real estate construction 2,262 10.03 57 2,385 10.07 60
Consumer:
Real estate 1-4 family junior lien mortgage 6,035 9.37 141 6,790 8.96 152
Credit card 5,164 14.44 186 5,183 14.61 189
Other revolving credit and monthly payment 7,835 9.35 183 9,151 9.35 213
-------- ------ -------- ------
Total consumer 19,034 10.74 510 21,124 10.51 554
Lease financing 3,264 8.65 71 2,599 8.76 57
Foreign 126 6.43 2 236 4.72 3
-------- ------ -------- ------
Total loans 64,618 9.37 1,511 70,734 9.20 1,622
Other 721 6.84 13 396 6.62 7
-------- ------ -------- ------
Total earning assets $77,665 8.87 1,720 $ 86,650 8.62 1,862
-------- ------ -------- ------
-------- --------
FUNDING SOURCES
Deposits:
Interest-bearing checking $ 1,895 1.33 6 $ 7,060 1.24 22
Market rate and other savings 32,519 2.60 211 32,921 2.68 220
Savings certificates 15,669 5.09 199 16,779 4.84 201
Other time deposits 165 4.51 2 483 5.89 7
Deposits in foreign offices 833 5.45 11 303 5.17 4
-------- ------ -------- ------
Total interest-bearing deposits 51,081 3.37 429 57,546 3.17 454
Federal funds purchased and securities sold
under repurchase agreements 2,492 5.42 34 1,667 5.08 21
Commercial paper and other short-term borrowings 216 7.11 4 296 4.19 3
Senior debt 1,751 6.36 28 2,289 6.07 35
Subordinated debt 2,884 6.94 50 2,580 7.03 45
Guaranteed preferred beneficial interests in Company's
subordinated debentures 1,299 7.81 25 -- -- --
-------- ------ -------- ------
Total interest-bearing liabilities 59,723 3.83 570 64,378 3.49 558
Portion of noninterest-bearing funding sources 17,942 -- -- 22,272 -- --
-------- ------ -------- ------
Total funding sources $77,665 2.94 570 $ 86,650 2.59 558
-------- ------ -------- ------
-------- ------ -------- ------
NET INTEREST MARGIN AND NET INTEREST INCOME ON
A TAXABLE-EQUIVALENT BASIS (4) 5.93% $1,150 6.03% $1,304
---- ------ ---- ------
---- ------ ---- ------
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 7,654 $ 8,569
Goodwill 7,271 7,238
Other 7,149 5,973
------- --------
Total noninterest-earning assets $22,074 $ 21,780
------- --------
------- --------
NONINTEREST-BEARING FUNDING SOURCES
Deposits $23,441 $ 26,596
Other liabilities 3,273 2,414
Preferred stockholders' equity 371 839
Common stockholders' equity 12,931 14,203
Noninterest-bearing funding sources used to
fund earning assets (17,942) (22,272)
------- --------
Net noninterest-bearing funding sources $22,074 $ 21,780
------- --------
------- --------
TOTAL ASSETS $99,739 $108,430
------- --------
------- --------
- ----------------------------------------------------------------------------------------------------------------------------
(1) The average prime rate of Wells Fargo Bank was 8.50% and 8.25% for the
quarters ended June 30, 1997 and 1996, respectively, and 8.38% and 8.29%
for the six months ended June 30, 1997 and 1996, respectively. The
average three-month London Interbank Offered Rate (LIBOR) was 5.81% and
5.52% for the quarters ended June 30, 1997 and 1996, respectively, and
5.69% and 5.46% for the six months ended June 30, 1997 and 1996,
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 $11,897 million
and $15,012 million for the quarters ended June 30, 1997 and 1996,
respectively, and $12,503 million and $11,814 million for the six months
ended June 30, 1997 and 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 periods
presented.
20
- ----------------------------------------------------------------------------------------------------------------------------
Six months ended June 30,
-------------------------------------------------------------------
1997 1996
------------------------------- -------------------------------
INTEREST Interest
AVERAGE YIELDS/ INCOME/ Average Yields/ income/
BALANCE RATES EXPENSE balance rates expense
- ----------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Federal funds sold and securities purchased
under resale agreements $ 413 5.56% $ 11 $ 357 5.42% $ 10
Investment securities at fair value (3):
U.S. Treasury securities 2,801 6.05 84 2,266 5.52 62
Securities of U.S. government agencies
and corporations 6,313 6.42 203 6,712 6.02 203
Private collateralized mortgage obligations 3,036 6.61 101 2,366 6.15 73
Other securities 345 6.42 10 447 7.03 15
-------- ------ ------- ------
Total investment securities at fair value 12,495 6.38 398 11,791 5.99 353
Loans:
Commercial 18,419 9.04 827 14,384 9.15 655
Real estate 1-4 family first mortgage 10,080 7.47 376 8,162 7.52 307
Other real estate mortgage 11,562 10.06 576 10,602 9.28 489
Real estate construction 2,280 9.89 112 1,856 10.04 93
Consumer:
Real estate 1-4 family junior lien mortgage 6,102 9.34 283 5,062 8.81 222
Credit card 5,247 14.25 374 4,558 15.02 343
Other revolving credit and monthly payment 8,052 9.30 372 5,875 9.76 285
-------- ------ ------- ------
Total consumer 19,401 10.65 1,029 15,495 10.99 850
Lease financing 3,172 8.74 139 2,248 8.95 101
Foreign 139 6.93 5 133 4.98 3
-------- ------ ------- ------
Total loans 65,053 9.47 3,064 52,880 9.48 2,498
Other 713 6.55 24 231 6.57 7
-------- ------ ------- ------
Total earning assets $ 78,674 8.93 3,497 $65,259 8.82 2,868
-------- ------ ------- ------
-------- -------
FUNDING SOURCES
Deposits:
Interest-bearing checking $ 1,904 1.24 12 $ 3,958 1.21 24
Market rate and other savings 33,307 2.57 425 25,456 2.62 332
Savings certificates 15,594 5.07 392 12,707 4.98 315
Other time deposits 171 4.21 4 412 6.46 13
Deposits in foreign offices 697 5.32 18 414 5.33 11
-------- ------ ------- ------
Total interest-bearing deposits 51,673 3.32 851 42,947 3.25 695
Federal funds purchased and securities sold
under repurchase agreements 2,459 5.30 65 2,186 5.25 57
Commercial paper and other short-term borrowings 223 6.06 6 350 4.81 8
Senior debt 1,876 6.27 58 2,000 6.15 61
Subordinated debt 2,911 6.93 101 1,923 6.97 67
Guaranteed preferred beneficial interests in Company's
subordinated debentures 1,275 7.83 50 -- -- --
-------- ------ ------- ------
Total interest-bearing liabilities 60,417 3.77 1,131 49,406 3.61 888
Portion of noninterest-bearing funding sources 18,257 -- -- 15,853 -- --
-------- ------ ------- ------
Total funding sources $ 78,674 2.90 1,131 $65,259 2.74 888
-------- ------ ------- ------
-------- ------ ------- ------
NET INTEREST MARGIN AND NET INTEREST INCOME ON
A TAXABLE-EQUIVALENT BASIS (4) 6.03% $2,366 6.08% $1,980
---- ------ ---- ------
---- ------ ---- ------
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 8,799 $ 5,721
Goodwill 7,288 3,808
Other 7,808 3,994
-------- -------
Total noninterest-earning assets $ 23,895 $13,523
-------- -------
-------- -------
NONINTEREST-BEARING FUNDING SOURCES
Deposits $ 24,757 $17,966
Other liabilities 3,819 1,846
Preferred stockholders' equity 459 664
Common stockholders' equity 13,117 8,900
Noninterest-bearing funding sources used to
fund earning assets (18,257) (15,853)
-------- -------
Net noninterest-bearing funding sources $ 23,895 $13,523
-------- -------
-------- -------
TOTAL ASSETS $102,569 $78,782
-------- -------
-------- -------
- ----------------------------------------------------------------------------------------------------------------------------
21
NONINTEREST INCOME
- --------------------------------------------------------------------------------------------------------------------
Quarter Six months
ended June 30, ended June 30,
-------------- % -------------- %
(in millions) 1997 1996 Change 1997 1996 Change
- --------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $214 $258 (17)% $ 434 $380 14%
Fees and commissions:
Credit card membership and other credit card fees 55 26 112 100 53 89
Debit and credit card merchant fees 24 37 (35) 46 52 (12)
Charges and fees on loans 33 32 3 64 50 28
Shared ATM network fees 43 27 59 82 39 110
Mutual fund and annuity sales fees 16 18 (11) 32 27 19
All other 63 71 (11) 124 108 15
---- ---- ------ ----
Total fees and commissions 234 211 11 448 329 36
Trust and investment services income:
Asset management and custody fees 61 60 2 122 95 28
Mutual fund management fees 45 34 32 84 55 53
All other 6 10 (40) 15 14 7
---- ---- ------ ----
Total trust and investment services income 112 104 8 221 164 35
Investment securities gains 3 3 -- 7 2 250
Income from equity investments accounted for by the:
Cost method 40 20 100 91 55 65
Equity method 15 8 88 30 10 200
Check printing charges 18 15 20 36 24 50
Gains on sales of loans 7 1 600 13 5 160
Gains from dispositions of operations 1 1 -- 8 5 60
Losses on dispositions of premises and equipment (6) (5) 20 (36) (17) 112
All other 41 23 78 67 36 86
---- ---- ------ ----
Total $679 $639 6% $1,319 $993 33%
---- ---- --- ------ ---- ---
---- ---- --- ------ ---- ---
- --------------------------------------------------------------------------------------------------------------------
"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 $25 million and $21 million for the
second quarter of 1997 and 1996, respectively, and $49 million and $37
million for the first half of 1997 and 1996, respectively. The related
amortization expense was $18 million and $16 million for the second quarter
of 1997 and 1996, respectively, and $35 million and $27 million for the
first half of 1997 and 1996, respectively. The balance of purchased
mortgage servicing rights was $280 million and $230 million at June 30,
1997 and 1996, respectively. The purchased mortgage loan servicing
portfolio totaled $24 billion at June 30, 1997, compared with $20 billion
at June 30, 1996.
A major portion of the increase in trust and investment services income for
the first half of 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. In the second
quarter of 1997, this increase was substantially offset by a reduction in
income due to the sale of the Corporate Trust business to The Bank of New
York in the first quarter of 1997. The Company managed 28 of the
Stagecoach family of funds consisting of $15.0 billion of assets at June
30, 1997, compared with 17 Stagecoach funds and 18 Pacifica funds that
together consisted of $13.2 billion of assets at June 30, 1996. The Company
also manages the Overland Express family of 14 funds, which had $5.3
billion of assets under management at June 30, 1997,
22
compared with $4.4 billion at June 30, 1996, and is sold through brokers
around the country. In addition to managing Stagecoach and Overland
Express Funds, the Company managed or maintained personal trust,
employee benefit trust and agency assets of approximately $208 billion
and $285 billion (including $235 billion from First Interstate) at June
30, 1997 and 1996, respectively, including $84 billion of assets managed
by the Institutional Custody businesses, which will be sold to The Bank
of New York in several stages beginning in the third quarter of 1997.
The decrease in assets under management is due to the sale of the
Corporate Trust business in the first quarter of 1997.
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 branches not acquired as a result of
the Merger (see Note 2 to Financial Statements for other, former First
Interstate branch dispositions). 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
10 branches, 9 of which were closed in the first quarter of 1997 and one
that is expected to be sold in the third quarter of 1997. At December 31,
1996, the remaining balance consisted of a fourth quarter 1996 accrual of
$96 million for the disposition of 137 traditional branches in California.
Of the $96 million, $31 million was associated with 41 branches that were
closed in the second quarter of 1997. The remaining $65 million liability
at June 30, 1997 was related to 28 branches which have been closed or are
scheduled to be closed by year-end 1997 and 68 branches that are expected
to be closed in 1998.
At June 30, 1997, the Company had 1,898 retail outlets, comprised of 1,126
traditional branches, 394 supermarket branches and 378 banking centers, in
10 Western states.
23
NONINTEREST EXPENSE
- --------------------------------------------------------------------------------------------------------------------
Quarter Six months
ended June 30, ended June 30,
-------------- % -------------- %
(in millions) 1997 1996 Change 1997 1996 Change
- -------------------------------------------------------------------------------------------------------------------
Salaries $ 316 $ 400 (21)% $ 656 $ 581 13%
Incentive compensation 49 61 (20) 89 93 (4)
Employee benefits 81 102 (21) 176 157 12
Equipment 98 111 (12) 192 167 15
Net occupancy 95 108 (12) 196 161 22
Goodwill 81 81 -- 164 89 84
Core deposit intangible:
Nonqualifying (1) 59 72 (18) 113 72 57
Qualifying 8 10 (20) 16 19 (16)
Operating losses 180 27 567 222 42 429
Contract services 59 66 (11) 115 108 6
Telecommunications 36 28 29 73 44 66
Postage 22 26 (15) 45 41 10
Security 22 17 29 44 23 91
Outside professional services 21 31 (32) 36 44 (18)
Stationery and supplies 16 21 (24) 36 31 16
Advertising and promotion 21 21 -- 34 34 --
Check printing 14 10 40 30 16 88
Travel and entertainment 15 16 (6) 29 26 12
Outside data processing 13 15 (13) 26 18 44
Foreclosed assets 5 1 400 (4) 3 --
All other 35 53 (34) 75 75 --
------ ------ ------ ------
Total $1,246 $1,277 (2)% $2,363 $1,844 28%
------ ------ --- ------ ------ ---
------ ------ --- ------ ------ ---
- --------------------------------------------------------------------------------------------------------------------
(1) Amortization of core deposit intangible acquired after February 1992 that
is subtracted from stockholders' equity in computing regulatory capital
for bank holding companies.
The decrease in noninterest expense in the second quarter of 1997 resulted
from cost savings achieved subsequent to the Merger, substantially offset by
an increase in operating losses. The operating losses for the second quarter
were predominantly a result of back-office problems which arose subsequent to
certain systems conversions and other changes to operating processes that
were part of the First Interstate integration. These problems were related
to clearing accounts with other banks, misposting of deposits and loan
payments to customer accounts and processing of returned items. Since the
inception of these problems, management dedicated resources to resolve the
increasing volume of ensuing suspense items. In the second quarter of 1997,
based on the age and volume of suspense items as well as additional research
and better insight, management determined that many of the items would not be
cleared or collected. Consequently, it was determined that there was a need
to record an operating loss related to the outstanding items. Most of these
items are expected to be written off in the third quarter.
Salaries, incentive compensation and employee benefits expense decreased $117
million from the second quarter of 1996 due to staff reductions after the
Merger. Salaries and employee benefits expense for the second and first quarters
of 1997 included merger-related severance expense of $12 million and $10
million, respectively. 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 33,216 at June
30,
24
1997, compared with 41,548 at June 30, 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 $73 million and $59
million, respectively, for the second quarter of 1997, compared with $72 million
and $72 million, respectively, for the second quarter of 1996. 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. 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 48% and 47% for the second quarter and
first half of 1997, respectively, compared with 45% and 44% for the same periods
of 1996, respectively. The increase in the effective tax rate for the second
quarter was mostly due to the impact of a constant amount of goodwill
amortization related to the Merger, which is not tax deductible, relative to
lower pretax income. The increase in the effective rate in the first half of
1997 was substantially due to increased goodwill amortization related to the
Merger, which started in the second quarter of 1996.
25
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 June 30, 1997:
- ------------------------------------------------------------------------------
Quarter ended
(in millions) June 30, 1997
- ------------------------------------------------------------------------------
Amortization
---------------------
Nonqualifying
Reported core deposit "Cash"
earnings Goodwill intangible earnings
- ------------------------------------------------------------------------------
Income before income tax expense $ 440 $ 81 $ 59 $ 580
Income tax expense 212 -- 24 236
----- ---- ---- -----
Net income 228 81 35 344
Preferred dividends 6 -- -- 6
----- ---- ---- -----
Net income applicable to common stock $ 222 $ 81 $ 35 $ 338
----- ---- ---- -----
----- ---- ---- -----
Per common share $2.49 $.91 $.39 $3.79
----- ---- ---- -----
----- ---- ---- -----
- ------------------------------------------------------------------------------
The ROA, ROE and efficiency ratios excluding goodwill and nonqualifying core
deposit intangible amortization and balances for the quarter ended June 30, 1997
were calculated as follows:
- ----------------------------------------------------------------------------------------------------
Quarter ended
(in millions) June 30, 1997
- ----------------------------------------------------------------------------------------------------
ROA: A*/ (C-E) = 1.51%
ROE: B*/ (D-E) = 29.27%
Efficiency: (F-G) / H = 60.57%
Net income $ 344 (A)
Net income applicable to common stock 338 (B)
Average total assets 99,739 (C)
Average common stockholders' equity 12,931 (D)
Average goodwill ($7,271) and after-tax nonqualifying core deposit intangible ($1,034) 8,305 (E)
Noninterest expense 1,246 (F)
Amortization expense for goodwill and nonqualifying core deposit intangible 140 (G)
Net interest income plus noninterest income 1,826 (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.
26
BALANCE SHEET ANALYSIS
INVESTMENT SECURITIES
- ------------------------------------------------------------------------------------------------------------------------
JUNE 30, December 31, June 30,
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 $ 2,613 $ 2,618 $ 2,824 $ 2,837 $ 2,626 $ 2,624
Securities of U.S. government
agencies and corporations (1) 5,696 5,711 7,043 7,050 7,928 7,847
Private collateralized mortgage obligations (2) 2,897 2,884 3,237 3,230 2,790 2,716
Other 261 262 342 343 439 443
------- ------- ------- ------- ------- -------
Total debt securities 11,467 11,475 13,446 13,460 13,783 13,630
Marketable equity securities 26 55 18 45 31 62
------- ------- ------- ------- ------- -------
Total $11,493 $11,530 $13,464 $13,505 $13,814 $13,692
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
(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 June 30, 1997, the available-for-sale securities portfolio
had an unrealized net gain of $37 million, or less than 1% of the cost of
the portfolio, comprised of unrealized gross gains of $84 million and
unrealized gross losses of $47 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 June 30, 1996, the available-for-sale
securities portfolio had an unrealized net loss of $122 million, comprised
of unrealized gross losses of $185 million and unrealized gross gains of
$63 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 June 30, 1997, the valuation allowance amounted
to an unrealized net gain of $22 million, compared with an unrealized net
gain of $23 million at December 31, 1996 and an unrealized net loss of $73
million at June 30, 1996.
During the first half of 1997, realized gross gains and losses resulting
from the sale of available-for-sale securities were $8 million and $1
million, respectively. During the first half of 1996, realized gross gains
and losses resulting from the sale of available-for-sale securities were $4
million and $2 million, respectively.
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).
27
The following table provides the expected remaining maturities and yields
(taxable-equivalent basis) of debt securities within the investment portfolio.
- -----------------------------------------------------------------------------------------------------
June 30, 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 $ 2,613 6.05% 1-8 $ 807 5.88%
Securities of U.S. government
agencies and corporations 5,696 6.61 2-4 2,380 6.80
Private collateralized mortgage
obligations 2,897 6.66 2-1 927 6.96
Other 261 6.65 2-3 81 7.11
------- ------
TOTAL COST OF DEBT SECURITIES $11,467 6.49% 2-2 $4,195 6.67%
------- ---- --- ------ ----
------- ---- --- ------ ----
ESTIMATED FAIR VALUE $11,475 $4,197
------- ------
------- ------
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
June 30, 1997
-------------------------------------------------------------------
Expected remaining principal maturity
-------------------------------------------------------------------
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 $1,800 6.12% $ 6 6.30% $-- 6.90%
Securities of U.S. government
agencies and corporations 2,559 6.49 663 6.58 94 5.13
Private collateralized mortgage
obligations 1,836 6.51 133 6.76 1 8.30
Other 171 6.42 7 6.70 2 6.98
------ ---- ---
TOTAL COST OF DEBT SECURITIES $6,366 6.39% $809 6.61% $97 5.20%
------ ---- ---- ---- --- ----
------ ---- ---- ---- --- ----
ESTIMATED FAIR VALUE $6,370 $810 $98
------ ---- ---
------ ---- ---
- -----------------------------------------------------------------------------------------------------------------
(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 2 months at June 30, 1997, compared with 2 years
and 3 months at March 31, 1997 and 2 years and 2 months at December
31, 1996. The short-term debt securities portfolio serves to maintain
asset liquidity and to fund loan growth.
At June 30, 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 $8,595 million, or 75%, of the Company's
investment securities portfolio at June 30, 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 $8,595 million
to $8,285 million and the expected remaining maturity of these securities
would increase from 2 years and 3 months to 2 years and 7 months.
28
LOAN PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
% Change
June 30, 1997 from
--------------------
JUNE 30, Dec. 31, June 30, Dec. 31, June 30,
(in millions) 1997 1996 1996 1996 1996
- -------------------------------------------------------------------------------------------------------------
Commercial (1)(2) $19,464 $19,515 $19,575 --% (1)%
Real estate 1-4 family first mortgage 9,757 10,425 11,811 (6) (17)
Other real estate mortgage (3) 11,747 11,860 12,920 (1) (9)
Real estate construction 2,378 2,303 2,401 3 (1)
Consumer:
Real estate 1-4 family junior lien mortgage 6,008 6,278 6,736 (4) (11)
Credit card 5,090 5,462 5,276 (7) (4)
Other revolving credit and monthly payment 7,749 8,374 9,075 (7) (15)
------- ------- -------
Total consumer 18,847 20,114 21,087 (6) (11)
Lease financing 3,373 3,003 2,689 12 25
Foreign 123 169 58 (27) 112
------- ------- -------
Total loans (net of unearned income,
including net deferred loan fees,
of $712, $654 and $528) $65,689 $67,389 $70,541 (3)% (7)%
------- ------- ------- --- ---
------- ------- ------- --- ---
- --------------------------------------------------------------------------------------------------------------
(1) Includes loans (primarily unsecured) to real estate developers and real
estate investment trusts (REITs) of $1,129 million, $1,070 million and
$905 million at June 30, 1997, December 31, 1996 and June 30, 1996,
respectively.
(2) Includes agricultural loans (loans to finance agricultural production and
other loans to farmers) of $1,393 million, $1,409 million and
$1,493 million at June 30, 1997, December 31, 1996 and June 30, 1996,
respectively.
(3) Includes agricultural loans that are secured by real estate of $325
million, $325 million and $370 million at June 30, 1997, December 31, 1996
and June 30, 1996, respectively.
The table below presents comparative period-end commercial real estate loans.
- -------------------------------------------------------------------------------------------------------------
% Change
June 30, 1997 from
--------------------
JUNE 30, Dec. 31, June 30, Dec. 31, June 30,
(in millions) 1997 1996 1996 1996 1996
- -------------------------------------------------------------------------------------------------------------
Commercial loans to real
estate developers and REITs (1) $ 1,129 $ 1,070 $ 905 6% 25%
Other real estate mortgage 11,747 11,860 12,920 (1) (9)
Real estate construction 2,378 2,303 2,401 3 (1)
------- ------- -------
Total $15,254 $15,233 $16,226 --% (6)%
------- ------- ------- ---- ----
------- ------- ------- ---- ----
Nonaccrual loans $ 303 $ 376 $ 425 (19)% (29)%
------- ------- ------- ---- ----
------- ------- ------- ---- ----
Nonaccrual loans as a % of total 2.0% 2.5% 2.6%
------- ------- -------
------- ------- -------
- --------------------------------------------------------------------------------------------------------------
(1) Included in commercial loans.
29
NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS (1)
- -------------------------------------------------------------------------------
JUNE 30, Dec. 31, June 30,
(in millions) 1997 1996 1996
- -------------------------------------------------------------------------------
Nonaccrual loans:
Commercial (2)(3) $179 $223 $208
Real estate 1-4 family first mortgage 102 99 87
Other real estate mortgage (4) 283 349 363
Real estate construction 19 25 47
Consumer:
Real estate 1-4 family junior lien mortgage 17 15 22
Other revolving credit and monthly payment 2 1 1
Lease financing -- 2 3
---- ---- ----
Total nonaccrual loans (5) 602 714 731
Restructured loans (6) 10 10 11
---- ---- ----
Nonaccrual and restructured loans 612 724 742
As a percentage of total loans .9% 1.1% 1.1%
Foreclosed assets 194 219 238
Real estate investments (7) 5 4 7
---- ---- ----
Total nonaccrual and restructured loans
and other assets $811 $947 $987
---- ---- ----
---- ---- ----
- --------------------------------------------------------------------------------
(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 $1 million, $2 million and $15 million at June 30, 1997, December 31,
1996 and June 30, 1996, respectively.
(3) Includes agricultural loans of $17 million, $13 million and $30 million at
June 30, 1997, December 31, 1996 and June 30, 1996, respectively.
(4) Includes agricultural loans secured by real estate of $17 million, $10
million and $6 million at June 30, 1997, December 31, 1996 and June 30,
1996, respectively.
(5) Of the total nonaccrual loans, $376 million, $493 million and $553 million
at June 30, 1997, December 31, 1996 and June 30, 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 $49 million, $50 million and $50 million at June 30, 1997,
December 31, 1996 and June 30, 1996, respectively, that were purchased at
a steep discount whose contractual terms were modified after acquisition.
The modified terms did not affect the book balance nor the yields expected
at the date of purchase. Of the total restructured loans and loans
purchased at a steep discount, $49 million, $50 million and $50 million
were considered impaired under FAS 114 at June 30, 1997, December 31, 1996
and June 30, 1996, respectively.
(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 $124 million at June 30, 1997, December 31, 1996 and June
30, 1996, respectively.
The table below summarizes the changes in total nonaccrual loans.
- --------------------------------------------------------------------------------
JUNE 30, June 30,
(in millions) 1997 1996
- --------------------------------------------------------------------------------
BALANCE, BEGINNING OF QUARTER $ 645 $ 525
Nonaccrual loans of First Interstate -- 201
New loans placed on nonaccrual 112 173
Charge-offs (39) (48)
Payments (109) (87)
Transfers to foreclosed assets (2) (19)
Loans returned to accrual (5) (14)
------ -----
BALANCE, END OF QUARTER $ 602 $ 731
------ -----
------ -----
- --------------------------------------------------------------------------------
30
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 $432 million and $456
million during the second quarter and first half of 1997, respectively, and $613
million and $523 million during the second quarter and first half of 1996,
respectively. Total interest income recognized on impaired loans was $4 million
and $9 million during the second quarter and first half of 1997, respectively,
and $5 million and $9 million during the second quarter and first half of 1996,
respectively, substantially all of which was recorded using the cash method.
31
The table below shows the recorded investment in impaired loans by loan category
at June 30, 1997, December 31, 1996 and June 30, 1996:
- --------------------------------------------------------------------------------
JUNE 30, December 31, June 30,
(in millions) 1997 1996 1996
- --------------------------------------------------------------------------------
Commercial $106 $155 $166
Real estate 1-4 family first mortgage 1 1 2
Other real estate mortgage (1) 298 362 386
Real estate construction 18 24 47
Other 2 1 2
---- ---- ----
Total (2) $425 $543 $603
---- ---- ----
---- ---- ----
Impairment measurement based on:
Collateral value method $321 $416 $433
Discounted cash flow method 80 101 135
Historical loss factors 24 26 35
---- ---- ----
$425 $543 $603
---- ---- ----
---- ---- ----
- --------------------------------------------------------------------------------
(1) Includes accruing loans of $49 million, $50 million and $50 million
purchased at a steep discount at June 30, 1997, December 31, 1996 and June
30, 1996, respectively, whose contractual terms were modified after
acquisition. The modified terms did not affect the book balance nor the
yields expected at the date of purchase.
(2) Includes $24 million, $27 million and $39 million of impaired loans with a
related FAS 114 allowance of $2 million, $2 million and $4 million at June
30, 1997, December 31, 1996 and June 30, 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 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.
32
The table below summarizes the changes in foreclosed assets.
- --------------------------------------------------------------------------------
JUNE 30, June 30,
(in millions) 1997 1996
- --------------------------------------------------------------------------------
BALANCE, BEGINNING OF QUARTER $207 $198
Foreclosed assets of First Interstate -- 51
Additions 27 37
Sales (31) (33)
Charge-offs (3) (12)
Write-downs (2) (1)
Other deductions (4) (2)
---- ----
BALANCE, END OF QUARTER $194 $238
---- ----
---- ----
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
JUNE 30, Dec. 31, June 30,
(in millions) 1997 1996 1996
- --------------------------------------------------------------------------------
Commercial $ 36 $ 65 $ 83
Real estate 1-4 family first mortgage 33 42 31
Other real estate mortgage 10 59 31
Real estate construction 2 4 15
Consumer:
Real estate 1-4 family junior lien mortgage 34 23 11
Credit card 127 120 105
Other revolving credit and monthly payment 16 20 7
---- ---- ----
Total consumer 177 163 123
Lease financing 1 -- 1
---- ---- ----
Total $259 $333 $284
---- ---- ----
---- ---- ----
- --------------------------------------------------------------------------------
33
ALLOWANCE FOR LOAN LOSSES
- -----------------------------------------------------------------------------------------------
Quarter ended Six months ended
------------------ ------------------
JUNE 30, June 30, JUNE 30, June 30,
(in millions) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD $1,922 $1,681 $2,018 $1,794
Allowance of First Interstate -- 770 -- 770
Provision for loan losses 140 -- 245 --
Loan charge-offs:
Commercial (1) (60) (48) (129) (61)
Real estate 1-4 family first mortgage (5) (5) (10) (9)
Other real estate mortgage (2) (13) (10) (16)
Real estate construction (2) (4) (3) (5)
Consumer:
Real estate 1-4 family junior lien mortgage (6) (13) (12) (17)
Credit card (133) (101) (248) (187)
Other revolving credit and monthly payment (57) (51) (113) (71)
------ ------ ------ ------
Total consumer (196) (165) (373) (275)
Lease financing (10) (8) (20) (14)
------ ------ ------ ------
Total loan charge-offs (275) (243) (545) (380)
------ ------ ------ ------
Loan recoveries:
Commercial (2) 20 8 33 13
Real estate 1-4 family first mortgage 1 2 2 5
Other real estate mortgage 8 19 30 23
Real estate construction -- 4 1 5
Consumer:
Real estate 1-4 family junior lien mortgage 1 4 3 5
Credit card 11 11 22 16
Other revolving credit and monthly payment 19 15 35 18
------ ------ ------ ------
Total consumer 31 30 60 39
Lease financing 3 2 6 4
------ ------ ------ ------
Total loan recoveries 63 65 132 89
------ ------ ------ ------
Total net loan charge-offs (212) (178) (413) (291)
------ ------ ------ ------
BALANCE, END OF PERIOD $1,850 $2,273 $1,850 $2,273
------ ------ ------ ------
------ ------ ------ ------
Total net loan charge-offs as a percentage
of average loans (annualized) 1.32% 1.01% 1.28% 1.10%
------ ------ ------ ------
------ ------ ------ ------
Allowance as a percentage of total loans 2.82% 3.22% 2.82% 3.22%
------ ------ ------ ------
------ ------ ------ ------
- -----------------------------------------------------------------------------------------------
(1) Charge-offs of loans to real estate developers were none and $1 million for
the quarters ended June 30, 1997 and 1996, respectively, and none and $1
million for the six months ended June 30, 1997 and 1996, respectively.
(2) Includes recoveries from loans to real estate developers of none and $1
million for the quarters ended June 30, 1997 and 1996, respectively, and $1
million and $1 million for the six months ended June 30, 1997 and 1996,
respectively.
34
The table below presents net charge-offs by loan category.
- -----------------------------------------------------------------------------------------------------------------------
Quarter ended Six Months Ended
----------------------------------- ------------------------------------
JUNE 30, 1997 June 30, 1996 JUNE 30, 1997 June 30, 1996
--------------- ---------------- ---------------- ----------------
% OF % of % OF % of
AVERAGE average AVERAGE average
(in millions) AMOUNT LOANS(1) Amount loans(1) AMOUNT LOANS(1) Amount loans(1)
- -----------------------------------------------------------------------------------------------------------------------
Commercial $ 40 .89% $ 40 .80% $ 96 1.05% $ 48 .65%
Real estate 1-4 family first mortgage 4 .15 3 .10 8 .15 4 .10
Other real estate mortgage (6) (.19) (6) (.20) (20) (.33) (7) (.14)
Real estate construction 2 .36 -- -- 2 .15 -- --
Consumer:
Real estate 1-4 family
junior lien mortgage 5 .30 9 .54 9 .28 12 .50
Credit card 122 9.47 90 7.03 226 8.68 171 7.56
Other revolving credit
and monthly payment 38 1.96 36 1.59 78 1.95 53 1.82
---- ---- ---- ----
Total consumer 165 3.47 135 2.58 313 3.26 236 3.07
Lease financing 7 .81 6 .84 14 .84 10 .88
---- ---- ---- ----
Total net loan charge-offs $212 1.32% $178 1.01% $413 1.28% $291 1.10%
---- ---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ---- ----
- -----------------------------------------------------------------------------------------------------------------------
(1) Calculated on an annualized basis.
Included in the Commercial loan category in the second quarter of 1997 were
small business commercial loan net charge-offs of $23 million (or 2.43% of
average small business loans), compared with $19 million (or 2.18%) in the first
quarter of 1997 and $12 million (or 1.85%) in the second 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 all periods presented was credit card
loans, comprising more than 50% of total net charge-offs in each period. During
the second quarter of 1997, credit card gross charge-offs due to bankruptcies
were $59 million, or 45%, of total credit card gross charge-offs, compared with
$45 million, or 39%, in the first quarter of 1997 and $41 million, or 40%, in
the second quarter of 1996. In addition, credit card loans 30 to 89 days past
due and still accruing totaled $172 million at June 30, 1997, compared with
$189 million at March 31, 1997 and $160 million at June 30, 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 $1,850 million adequate
to cover losses inherent in loans, commitments to extend credit and standby
letters of credit at June 30, 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 $140 million provision in the second quarter 1997. The Company
anticipates that it will continue making incremental increases to the provision
of approximately $30 to $40 million through the fourth quarter of 1997, when it
is expected that the provision will approximate net charge-offs.
35
OTHER ASSETS
- -----------------------------------------------------------------------------
JUNE 30, December 31, June 30,
(in millions) 1997 1996 1996
- -----------------------------------------------------------------------------
Nonmarketable equity investments $ 952 $ 937 $ 691
Net deferred tax asset 465 437 551
Certain identifiable intangible assets 478 471 462
Foreclosed assets 194 219 238
Other 2,517 3,397 1,570
------ ------ ------
Total other assets $4,606 $5,461 $3,512
------ ------ ------
------ ------ ------
- -----------------------------------------------------------------------------
The Company estimates that approximately $421 million of the $465 million net
deferred tax asset at June 30, 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 $44 million primarily relates to
approximately $581 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 second quarter 1997 and second
quarter 1996 were $11 million and $76 million (including $72 million from First
Interstate), 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 and
$16 million for the quarters ended June 30, 1997 and 1996, respectively.
Purchased mortgage servicing rights included in certain identifiable intangible
assets were $280 million, $257 million and $230 million at June 30, 1997,
December 31, 1996 and June 30, 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 and $25 million for the
quarters ended June 30, 1997 and 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
second or 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 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.
36
DEPOSITS
- -----------------------------------------------------------------------------
JUNE 30, December 31, June 30,
(in millions) 1997 1996 1996
- -----------------------------------------------------------------------------
Noninterest-bearing $24,284 $29,073 $27,535
Interest-bearing checking 2,271 2,792 6,984
Market rate and other savings 31,088 33,947 32,302
Savings certificates 15,902 15,769 16,510
------- ------- -------
Core deposits 73,545 81,581 83,331
Other time deposits 162 186 472
Deposits in foreign offices 41 54 65
------- ------- -------
Total deposits $73,748 $81,821 $83,868
------- ------- -------
------- ------- -------
- -----------------------------------------------------------------------------
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 ratios at June 30, 1997 compared with
December 31, 1996 resulted substantially from the repurchase of common stock.
37
The table below presents the Company's risk-based capital and leverage ratios.
- -------------------------------------------------------------------------------------------------
JUNE 30, December 31, June 30,
(in billions) 1997 1996 1996
- -------------------------------------------------------------------------------------------------
Tier 1:
Common stockholders' equity $12.8 $13.5 $14.2
Preferred stock (1) .3 .4 .8
Guaranteed preferred beneficial interests in
Company's subordinated debentures 1.3 1.2 --
Goodwill and other deductions (2) (8.3) (8.5) (8.7)
----- ----- -----
Total Tier 1 capital 6.1 6.6 6.3
----- ----- -----
Tier 2:
Mandatory convertible debt .2 .2 .2
Subordinated debt and unsecured senior debt 2.0 2.1 2.0
Allowance for loan losses allowable in Tier 2 1.0 1.1 1.1
----- ----- -----
Total Tier 2 capital 3.2 3.4 3.3
----- ----- -----
Total risk-based capital $ 9.3 $10.0 $ 9.6
----- ----- -----
----- ----- -----
Risk-weighted balance sheet assets $78.7 $82.2 $83.3
Risk-weighted off-balance sheet items:
Commitments to make or purchase loans 9.7 10.1 9.5
Standby letters of credit 1.7 2.1 2.4
Other .6 .5 .4
----- ----- -----
Total risk-weighted off-balance sheet items 12.0 12.7 12.3
----- ----- -----
Goodwill and other deductions (2) (8.3) (8.5) (8.7)
Allowance for loan losses not included in Tier 2 (.9) (.9) (1.2)
----- ----- -----
Total risk-weighted assets $81.5 $85.5 $85.7
----- ----- -----
----- ----- -----
Risk-based capital ratios:
Tier 1 capital (4% minimum requirement) 7.49% 7.68% 7.40%
Total capital (8% minimum requirement) 11.45 11.70 11.18
Leverage ratio (3% minimum requirement) (3) 6.67% 6.65% 6.37%
- ----------------------------------------------------------------------------------------------------
(1) Excludes $175 million of Series D preferred stock at 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 June
30, 1997, the Bank had a Tier 1 RBC ratio of 8.46%, a combined Tier 1 and
Tier 2 ratio of 11.11% and a leverage ratio of 7.12%.
38
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 June 30, 1997, the under-one-year cumulative gap was a $338 million
(0.3% of total assets) net liability position, compared with net liability
positions of $1,851 million (1.8% of total assets) at March 31, 1997 and
$1,402 million (1.3% of total assets) at December 31, 1996. The decrease in the
net liability position from March 31, 1997 was primarily due to an increase in
consumer loans repricing within one year and a decrease in market rate savings
repricing within one year.
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 $9.4 billion, $11.9 billion and $12.5 billion at June 30, 1997, March 31,
1997 and December 31, 1996, respectively.
39
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.
DERIVATIVE FINANCIAL INSTRUMENTS
The following table summarizes the aggregate notional or contractual amounts,
credit risk amount and net fair value for the Company's derivative financial
instruments at June 30, 1997 and December 31, 1996.
- -------------------------------------------------------------------------------------------------------------
JUNE 30, 1997 December 31, 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 $ 5,249 $ -- $-- $ 5,188 $ -- $ --
Floors purchased (1) 22,439 47 47 20,640 101 101
Caps purchased (1) 422 3 3 435 3 3
Swap contracts (1) 16,391 121 4 16,661 217 117
Foreign exchange contracts:
Forward contracts (1) 47 -- -- 64 -- --
CUSTOMER ACCOMMODATIONS
Interest rate contracts:
Futures contracts 3 -- -- 10 -- --
Floors written 692 -- (8) 405 -- (10)
Caps written 1,828 -- (4) 2,174 -- (4)
Floors purchased (1) 697 8 8 404 9 9
Caps purchased (1) 1,796 4 4 2,088 4 4
Swap contracts (1) 2,246 12 2 2,325 12 2
Foreign exchange contracts (2):
Forward and spot contracts (1) 1,485 19 2 1,313 14 1
Option contracts purchased (1) 89 1 1 65 1 1
Option contracts written 88 -- (1) 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.
40
The Company also enters into foreign exchange derivative positions (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.
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.
In February 1997, the Securities and Exchange Commission (SEC) published
rule amendments to clarify and expand existing disclosure requirements
for derivative financial instruments. The amendments require enhanced
disclosure of accounting policies for derivative financial instruments
in the notes to the financial statements. In addition, the amendments
expand existing disclosure requirements to include quantitative and
qualitative information about market risk inherent in market risk
sensitive instruments. The required quantitative and qualitative
information should be disclosed outside the financial statements and
related notes thereto. The enhanced accounting policy disclosure
requirements are effective for the quarterly period ended June 30, 1997;
accordingly, see Note 1 to Financial Statements in this Form 10-Q. The
rule amendments that require expanded disclosure of quantitative and
qualitative information about market risk are effective with the 1997
Form 10-K.
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 with the SEC 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 June 30, 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
41
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 separate
trust, Wells Fargo Capital II. At June 30, 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.
42
PART II - OTHER INFORMATION
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.
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 1.73 and 2.11
for the quarters ended June 30, 1997 and 1996,
respectively, and 1.90 and 2.19 for the six months
ended June 30, 1997 and 1996, respectively. The
ratios of earnings to fixed charges, excluding
interest on deposits, were 3.57 and 5.73 for the
quarters ended June 30, 1997 and 1996, respectively, and
4.11 and 5.55 for the six months ended June 30, 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 1.70 and 2.00
for the quarters ended June 30, 1997 and 1996,
respectively, and 1.85 and 2.08 for the six months
ended June 30, 1997 and 1996, respectively. The
ratios of earnings to fixed charges and preferred
dividends, excluding interest on deposits, were
3.34 and 4.58 for the quarters ended June 30, 1997
and 1996, respectively, and 3.76 and 4.59 for the
six months ended June 30, 1997 and 1996,
respectively.
(b) The Company filed the following reports on Form 8-K during the
second quarter of 1997 and through the date hereof:
(1) May 21, 1997 under Item 5, containing the Press Release
that announced the retirement of William F. Zuendt as
President and Chief Operating Officer of Wells Fargo &
Company in 1997
(2) July 9, 1997 under Item 5, containing the Press Release
that announced that Wells Fargo & Company's second
quarter 1997 earnings would not meet analysts'
expectations
(3) July 15, 1997 under Item 5, containing the Press
Release that announced the Company's financial results
for the quarter ended June 30, 1997
43
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 13, 1997.
WELLS FARGO & COMPANY
By: /s/ Frank A. Moeslein
--------------------------------
Frank A. Moeslein
Executive Vice President and Controller
(Principal Accounting Officer)
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