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 September 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
October 31, 1997
-------------------
Common stock, $5 par value 86,698,870
FORM 10-Q
TABLE OF CONTENTS
Page
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PART I-- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Income............................................................ 2
Consolidated Balance Sheet.................................................................. 3
Consolidated Statement of Changes in Stockholders' Equity................................... 4
Consolidated Statement of Cash Flows........................................................ 5
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
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
- --------------------------------------------------------------------------------------------------
Quarter Nine months
ended September 30, ended September 30,
------------------ ------------------
(in millions) 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------
INTEREST INCOME
Federal funds sold and securities
purchased under resale agreements $ 3 $ 11 $ 15 $ 21
Investment securities 175 215 573 568
Loans 1,513 1,612 4,570 4,106
Other 16 9 39 16
------ ------ ------ ------
Total interest income 1,707 1,847 5,197 4,711
------ ------ ------ ------
INTEREST EXPENSE
Deposits 430 446 1,280 1,140
Federal funds purchased and securities sold under
repurchase agreements 44 15 109 72
Commercial paper and other short-term borrowings 5 3 12 11
Senior and subordinated debt 75 88 234 217
Guaranteed preferred beneficial interests in
Company's subordinated debentures 25 -- 75 --
------ ------ ------ ------
Total interest expense 579 552 1,710 1,440
------ ------ ------ ------
NET INTEREST INCOME 1,128 1,295 3,487 3,271
Provision for loan losses 175 35 420 35
------ ------ ------ ------
Net interest income after provision for loan losses 953 1,260 3,067 3,236
------ ------ ------ ------
NONINTEREST INCOME
Service charges on deposit accounts 214 254 649 634
Fees and commissions 246 205 694 534
Trust and investment services income 117 104 338 267
Investment securities gains (losses) (1) -- 6 2
Other 101 80 309 199
------ ------ ------ ------
Total noninterest income 677 643 1,996 1,636
------ ------ ------ ------
NONINTEREST EXPENSE
Salaries 308 378 964 960
Incentive compensation 54 53 143 146
Employee benefits 80 105 256 261
Equipment 97 103 289 269
Net occupancy 96 96 292 257
Goodwill 81 81 245 170
Core deposit intangible 64 78 193 170
Operating losses 40 31 262 72
Other 267 380 806 844
------ ------ ------ ------
Total noninterest expense 1,087 1,305 3,450 3,149
------ ------ ------ ------
INCOME BEFORE INCOME TAX EXPENSE 543 598 1,613 1,723
Income tax expense 253 277 756 775
------ ------ ------ ------
NET INCOME $ 290 $ 321 $ 857 $ 948
------ ------ ------ ------
------ ------ ------ ------
NET INCOME APPLICABLE TO COMMON STOCK $ 285 $ 302 $ 836 $ 901
------ ------ ------ ------
------ ------ ------ ------
PER COMMON SHARE
Net income $ 3.26 $ 3.23 $ 9.38 $11.42
------ ------ ------ ------
------ ------ ------ ------
Dividends declared $ 1.30 $ 1.30 $ 3.90 $ 3.90
------ ------ ------ ------
------ ------ ------ ------
Average common shares outstanding 87.5 93.7 89.1 78.8
------ ------ ------ ------
------ ------ ------ ------
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2
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 30,
(in millions) 1997 1996 1996
- -------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 7,823 $ 11,736 $ 11,622
Federal funds sold and securities
purchased under resale agreements 188 187 284
Investment securities at fair value 10,737 13,505 13,433
Loans 65,104 67,389 69,233
Allowance for loan losses 1,823 2,018 2,137
------- -------- --------
Net loans 63,281 65,371 67,096
------- -------- --------
Due from customers on acceptances 104 197 356
Accrued interest receivable 537 665 590
Premises and equipment, net 2,173 2,406 2,380
Core deposit intangible 1,771 2,038 2,130
Goodwill 7,149 7,322 7,407
Other assets 3,892 5,461 3,878
------- -------- --------
Total assets $97,655 $108,888 $109,176
------- -------- --------
------- -------- --------
LIABILITIES
Noninterest-bearing deposits $23,005 $ 29,073 $ 29,512
Interest-bearing deposits 47,917 52,748 54,225
------- -------- --------
Total deposits 70,922 81,821 83,737
Federal funds purchased and securities
sold under repurchase agreements 4,268 2,029 1,033
Commercial paper and other short-term borrowings 458 401 350
Acceptances outstanding 104 197 356
Accrued interest payable 245 171 215
Other liabilities 2,574 3,947 3,151
Senior debt 2,280 2,120 2,470
Subordinated debt 2,585 2,940 2,941
Guaranteed preferred beneficial interests in
Company's subordinated debentures 1,299 1,150 --
STOCKHOLDERS' EQUITY
Preferred stock 275 600 1,039
Common stock - $5 par value,
authorized 150,000,000 shares; issued and outstanding
86,780,522 shares, 91,474,425 shares and
92,875,661 shares 434 457 464
Additional paid-in capital 8,925 10,287 10,674
Retained earnings 3,235 2,749 2,766
Cumulative foreign currency translation adjustments -- (4) (4)
Investment securities valuation allowance 51 23 (16)
------- -------- --------
Total stockholders' equity 12,920 14,112 14,923
------- -------- --------
Total liabilities and stockholders' equity $97,655 $108,888 $109,176
------- -------- --------
------- -------- --------
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3
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------
Nine months ended September 30,
-------------------------------
(in millions) 1997 1996
- --------------------------------------------------------------------------------------
PREFERRED STOCK
Balance, beginning of period $ 600 $ 489
Preferred stock issued to First Interstate
stockholders -- 350
Preferred stock issued -- 200
Preferred stock redeemed (325) --
------- -------
Balance, end of period 275 1,039
------- -------
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 3 3
Common stock repurchased (26) (34)
------- -------
Balance, end of period 434 464
------- -------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period 10,287 1,135
Preferred stock issued to First Interstate
stockholders -- 10
Preferred stock issuance costs -- (3)
Common stock issued to First Interstate
stockholders -- 11,037
Common stock issued under employee benefit
and dividend reinvestment plans 64 85
Common stock repurchased (1,426) (1,701)
Fair value adjustment related to First
Interstate stock options -- 111
------- -------
Balance, end of period 8,925 10,674
------- -------
RETAINED EARNINGS
Balance, beginning of period 2,749 2,174
Net income 857 948
Preferred stock dividends (21) (47)
Common stock dividends (350) (309)
------- -------
Balance, end of period 3,235 2,766
------- -------
CUMULATIVE FOREIGN CURRENCY
TRANSLATION ADJUSTMENTS
Balance, beginning of period (4) (4)
Translation adjustments 4 --
------- -------
Balance, end of period -- (4)
------- -------
INVESTMENT SECURITIES VALUATION ALLOWANCE
Balance, beginning of period 23 26
Change in unrealized net gain, after applicable
taxes 28 (42)
------- -------
Balance, end of period 51 (16)
------- -------
Total stockholders' equity $12,920 $14,923
------- -------
------- -------
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4
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------------
Nine months ended September 30,
--------------------------------
(in millions) 1997 1996
- --------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 857 $ 948
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 420 35
Depreciation and amortization 683 560
Deferred income tax provision 119 165
Increase (decrease) in net deferred loan
fees 11 (14)
Net decrease in accrued interest receivable 128 26
Net increase in accrued interest payable 74 43
Other, net 968 208
-------- -------
Net cash provided by operating activities 3,260 1,971
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities at fair value
Proceeds from sales 275 763
Proceeds from prepayments and maturities 3,270 3,601
Purchases (726) (1,347)
Cash acquired from First Interstate -- 6,030
Net decrease in loans resulting from
originations and collections 1,755 804
Proceeds from sales (including participations)
of loans 158 301
Purchases (including participations) of loans (210) (93)
Proceeds from sales of foreclosed assets 116 111
Net (increase) decrease in federal funds sold
and securities purchased under resale agreements (1) 1,967
Other, net 62 (411)
-------- -------
Net cash provided by investing activities 4,699 11,726
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits (10,899) (2,693)
Net increase (decrease) in short-term borrowings 2,296 (1,939)
Proceeds from issuance of senior debt 700 1,260
Repayment of senior debt (525) (816)
Proceeds from issuance of subordinated debt -- 800
Repayment of subordinated debt (351) --
Proceeds from issuance of guaranteed preferred
beneficial interests in Company's subordinated
debentures 149 --
Proceeds from issuance of preferred stock -- 197
Proceeds from issuance of common stock 67 88
Redemption of preferred stock (325) --
Repurchase of common stock (1,452) (1,735)
Payment of cash dividends on preferred stock (21) (56)
Payment of cash dividends on common stock (350) (309)
Other, net (1,161) (247)
-------- -------
Net cash used by financing activities (11,872) (5,450)
-------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS
(DUE FROM BANKS) (3,913) 8,247
Cash and cash equivalents at beginning of period 11,736 3,375
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,823 $11,622
-------- -------
-------- -------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,636 $ 1,310
Income taxes $ 558 $ 269
Noncash investing and financing activities:
Transfers from loans to foreclosed assets $ 76 $ 108
Acquisition of First Interstate:
Common stock issued $ -- $11,297
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
The following is an enhanced description of the derivative financial
instruments accounting policy contained in the Company's 1996 Form 10-K, as
also shown in the Company's second quarter 1997 Form 10-Q.
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 and 45 branch closures during the first nine months of
1997, of which 9 occurred in the third quarter. In addition, one branch is
scheduled to be closed 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 82 branch closures that were completed in the first nine months of
1997, of which 42 occurred in the third quarter. In addition, 6 branch
closures have been completed or are scheduled to be completed in the fourth
quarter of 1997, with another 61 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 remaining 82 were 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 have been or
will be displaced. Severance payments totaling $341 million were paid since
the second quarter of 1996, including $39 million in the third 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 is occurring in several
stages, the first of which was during 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 nine months of 1997 generated by
the Institutional Custody businesses was approximately $10 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 Sept. 30, 1997 from Nine months ended
------------------------------- ------------------- --------------------
SEPT. 30, June 30, Sept. 30, June 30, Sept. 30, SEPT. 30, Sept. 30, %
(in millions) 1997 1997 1996 1997 1996 1997 1996 Change
- ----------------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
Net income $ 290 $ 228 $ 321 27% (10)% $ 857 $ 948 (10)%
Net income applicable to common stock 285 222 302 28 (6) 836 901 (7)
Per common share
Net income $ 3.26 $ 2.49 $ 3.23 31 1 $ 9.38 $ 11.42 (18)
Dividends declared 1.30 1.30 1.30 -- -- 3.90 3.90 --
Average common shares outstanding 87.5 89.0 93.7 (2) (7) 89.1 78.8 13
Profitability ratios (annualized)
Net income to average total assets (ROA) 1.18% .92% 1.18% 28 -- 1.14% 1.43% (20)
Net income applicable to common stock to
average common stockholders' equity (ROE) 8.94 6.88 8.64 30 3 8.62 11.36 (24)
Efficiency ratio (1) 60.2% 68.2% 67.3% (12) (11) 62.9% 64.2% (2)
Average loans $ 63,865 $64,618 $ 69,274 (1) (8) $ 64,653 $ 58,384 11
Average assets 97,032 99,739 108,378 (3) (10) 100,703 88,719 14
Average core deposits 70,744 73,524 82,378 (4) (14) 73,937 67,572 9
Net interest margin 5.94% 5.93% 6.15% -- (3) 6.00% 6.11% (2)
NET INCOME AND RATIOS EXCLUDING
GOODWILL AND NONQUALIFYING CORE DEPOSIT
INTANGIBLE AMORTIZATION AND BALANCES
("CASH" OR "TANGIBLE") (2)
Net income applicable to common stock $ 400 $ 338 $ 424 18 (6) $ 1,181 $ 1,154 2
Net income per common share 4.57 3.79 4.52 21 1 13.25 14.64 (9)
ROA 1.81% 1.51% 1.77% 20 2 1.74% 1.94% (10)
ROE 35.44 29.27 31.91 21 11 33.83 32.70 3
Efficiency ratio 52.6 60.6 59.6 (13) (12) 55.4 57.8 (4)
AT PERIOD END
Investment securities $ 10,737 $11,530 $ 13,433 (7) (20) $ 10,737 $ 13,433 (20)
Loans 65,104 65,689 69,233 (1) (6) 65,104 69,233 (6)
Allowance for loan losses 1,823 1,850 2,137 (1) (15) 1,823 2,137 (15)
Goodwill 7,149 7,231 7,407 (1) (3) 7,149 7,407 (3)
Assets 97,655 100,180 109,176 (3) (11) 97,655 109,176 (11)
Core deposits 70,580 73,545 83,308 (4) (15) 70,580 83,308 (15)
Common stockholders' equity 12,645 12,831 13,884 (1) (9) 12,645 13,884 (9)
Stockholders' equity 12,920 13,106 14,923 (1) (13) 12,920 14,923 (13)
Tier 1 capital (3) 6,005 6,101 6,111 (2) (2) 6,005 6,111 (2)
Total capital (Tiers 1 and 2) (3) 9,153 9,329 9,588 (2) (5) 9,153 9,588 (5)
Capital ratios
Common stockholders' equity to assets 12.95% 12.81% 12.71% 1 2 12.95% 12.71 2
Stockholders' equity to assets 13.23 13.08 13.66 1 (3) 13.23 13.66 (3)
Risk-based capital (3)
Tier 1 capital 7.53 7.49 7.04 1 7 7.53 7.04 7
Total capital 11.47 11.45 11.05 -- 4 11.47 11.05 4
Leverage (3) 6.76 6.67 6.12 1 10 6.76 6.12 10
Book value per common share $ 145.72 $145.68 $ 149.44 -- (2) $ 145.72 $ 149.44 (2)
Staff (active, full-time equivalent) 32,663 33,216 38,859 (2) (16) 32,663 38,859 (16)
COMMON STOCK PRICE
High $ 279.88 $287.88 $ 264.00 (3) 6 $ 319.25 $ 264.50 21
Low 250.13 246.00 220.13 2 14 246.00 203.13 21
Period end 275.00 269.50 260.00 2 6 275.00 260.00 6
- -----------------------------------------------------------------------------------------------------------------------------------
(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 $34 million and
$1,000 million, respectively, for the quarter ended September 30,1997 and
$100 million and $1,043 million, respectively, for the nine months ended
September 30, 1997. Goodwill amortization and average balance (which are
not tax effected) were $81 million and $7,190 million, respectively, for
the quarter ended September 30, 1997 and $245 million and $7,255 million,
respectively, for the nine months ended September 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 the majority of the Company's income and expense categories, the increases
in the amounts reported for the first nine months of 1997 compared with 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 third quarter of 1997 was $290 million, compared with $321
million for the third quarter of 1996, a decrease of 10%. Per share earnings
for the third quarter of 1997 were $3.26, compared with $3.23 in the third
quarter of 1996, an increase of 1%. Net income for the first nine months of
1997 was $857 million, or $9.38 per share, compared with $948 million, or
$11.42 per share, for the first nine months of 1996.
Return on average assets (ROA) was 1.18% and 1.14% in the third quarter and
first nine months of 1997, respectively, compared with 1.18% and 1.43% in the
same periods of 1996. Return on average common equity (ROE) was 8.94% and
8.62% in the third quarter and first nine months of 1997, respectively,
compared with 8.64% and 11.36%, respectively, in the same periods of 1996.
Earnings before the amortization of goodwill and nonqualifying core deposit
intangible ("cash" or "tangible" earnings) in the third quarter and first
nine months of 1997 were $4.57 and $13.25 per share, respectively, compared
with $4.52 and $14.64 per share in the same periods of 1996. On the same
basis, ROA was 1.81% and 1.74% in the third quarter and first nine months of
1997, respectively, compared with 1.77% and 1.94% in the same periods of
1996; ROE was 35.44% and 33.83% in the third quarter and first nine months of
1997, respectively, compared with 31.91% and 32.70% in the same periods of
1996.
Net interest income on a taxable-equivalent basis was $1,132 million and
$3,497 million in the third quarter and first nine months of 1997,
respectively, compared with $1,299 million and $3,278 million in the same
periods of 1996. The decrease in net interest income for the third quarter of
1997 compared with the same period of 1996 was primarily due to a decline in
earning assets. The Company's net interest margin was 5.94% for the third
quarter of 1997, compared with 6.15% in the same quarter of 1996 and 5.93% in
the second quarter of 1997.
11
The lowest monthly average balance for total loans in the third quarter of
1997 was $63.6 billion in August. The average was $64.3 billion in September
and $64.5 billion in October. The lowest monthly average balance for
noninterest-bearing deposit accounts in the third quarter of 1997 was $22.2
billion in August. The average was $22.3 billion in September and $22.2
billion in October.
Noninterest income was $677 million and $1,996 million in the third quarter
and first nine months of 1997, respectively, compared with $643 million and
$1,636 million in the same periods of 1996.
Noninterest expense in the third quarter and first nine months of 1997 was
$1,087 million and $3,450 million, respectively, compared with $1,305 million
and $3,149 million for the same periods of 1996. The major portion of the
decrease in noninterest expense in the third quarter of 1997 resulted from
cost savings achieved subsequent to the Merger.
The Company expects to meet its pre-merger objective of realizing annual cost
savings of about $800 million by the fourth quarter of 1997, except for
expenses unrelated to the Merger, such as approximately $10 million each in
the fourth quarter for computer conversion costs related to the Year 2000 and
the rollout of a debit card product, and higher operating losses that are
expected to remain at about the third quarter level. 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 third quarter and first nine months of
1997 was $175 million and $420 million, respectively, compared with $35
million for each of the same periods in 1996. During the third quarter of
1997, net charge-offs totaled $202 million, or 1.25% of average loans
(annualized). This compared with $212 million, or 1.32%, during the second
quarter of 1997 and $171 million, or .98%, during the third quarter of 1996.
The allowance for loan losses of $1,823 million was 2.80% of total loans at
September 30, 1997, compared with 2.82% at June 30, 1997 and 3.09% at
September 30, 1996.
Total nonaccrual and restructured loans were $574 million at September 30,
1997, compared with $724 million at December 31, 1996 and $728 million at
September 30, 1996. Foreclosed assets amounted to $196 million at September
30, 1997, $219 million at December 31, 1996 and $227 million at September 30,
1996.
Common stockholders' equity to total assets was 12.95% at September 30, 1997,
compared with 12.81% and 12.71% at June 30, 1997 and September 30, 1996,
respectively. The Company's total risk-based capital ratio at September 30,
1997 was 11.47% and its Tier 1 risk-based capital ratio was 7.53%,
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 June 30, 1997, the risk-based capital ratios were 11.45%
and 7.49%, respectively; at September 30, 1996, these ratios were 11.05% and
7.04%, respectively. The Company's leverage ratios were 6.76%, 6.67% and
6.12% at September 30, 1997, June 30, 1997 and September 30, 1996,
respectively, exceeding the minimum regulatory guideline of 3% for bank
holding companies and the "well capitalized" guideline of 5% for banks.
12
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 9.5 million shares (net
of shares issued) since April 1996, including 1.3 million shares (net of
shares issued) in the third quarter of 1997. In October 1997, the Board of
Directors authorized the repurchase from time to time of up to an additional
8.6 million shares of the Company's outstanding stock. The Company currently
expects to continue repurchasing shares in the last quarter of 1997, although
not at the same level as the third quarter.
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 nine-month period ended September 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 SEPTEMBER 30,
Net interest income (1) $ 240 $ 236 $ 198 $ 182 $ 191 $ 223
Provision for loan losses (2) -- -- 36 26 1 1
Noninterest income (3) 294 319 67 67 138 134
Noninterest expense (3) 461 502 112 124 158 186
------ ------ ----- ----- ----- -----
Income before income tax expense (benefit) 73 53 117 99 170 170
Income tax expense (benefit) (4) 30 22 48 41 70 70
------ ------ ----- ----- ----- -----
Net income (loss) $ 43 $ 31 $ 69 $ 58 $ 100 $ 100
------ ------ ----- ----- ----- -----
------ ------ ----- ----- ----- -----
Average loans $ -- $ 0.2 $ 5.7 $ 4.8 $ 2.0 $ 2.0
Average assets 2.8 3.9 7.5 7.3 2.6 2.8
Average core deposits 17.9 18.9 11.7 13.1 33.0 37.2
Return on equity (5) 17% 11% 36% 34% 57% 57%
Risk-adjusted efficiency ratio (6) 96% 100% 65% 70% 58% 62%
NINE MONTHS ENDED SEPTEMBER 30,
Net interest income (1) $ 744 $ 575 $ 583 $ 456 $ 587 $ 550
Provision for loan losses (2) -- -- 99 64 4 3
Noninterest income (3) 877 797 201 179 410 341
Noninterest expense (3) 1,402 1,258 352 322 488 458
------ ------ ----- ----- ----- -----
Income before income tax expense (benefit) 219 114 333 249 505 430
Income tax expense (benefit) (4) 90 47 136 103 207 177
------ ------ ----- ----- ----- -----
Net income (loss) $ 129 $ 67 $ 197 $ 146 $ 298 $ 253
------ ------ ----- ----- ----- -----
------ ------ ----- ----- ----- -----
Average loans $ -- $ 0.1 $ 5.5 $ 4.1 $ 2.0 $ 1.5
Average assets 3.0 2.9 7.4 6.0 2.8 2.1
Average core deposits 18.8 15.7 12.0 10.8 34.0 31.3
Return on equity (5) 17% 10% 34% 33% 57% 55%
Risk-adjusted efficiency ratio (6) 96% 101% 67% 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 $88 million and $112 million for the quarters
ended September 30, 1997 and 1996, respectively, and $267 million and $273
million for the nine months ended September 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 third quarter and nine months
ended September 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 nine months ended September 30, 1997 are not comparable to the same
period of 1996.
14
- ----------------------------------------------------------------------------------------------------------------------------
Wholesale
Real Estate Products Consumer Consolidated
Group Group Lending Other Company
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
$ 95 $ 99 $ 172 $ 214 $ 282 $ 276 $ (50) $ 65 $1,128 $1,295
11 11 19 20 113 118 (5) (141) 175 35
46 18 84 87 122 86 (74) (68) 677 643
26 26 109 107 121 145 100 215 1,087 1,305
----- ----- ----- ----- ----- ----- ----- ----- ------ ------
104 80 128 174 170 99 (219) (77) 543 598
43 32 53 71 69 41 (60) -- 253 277
----- ----- ----- ----- ----- ----- ----- ----- ------ ------
$ 61 $ 48 $ 75 $ 103 $ 101 $ 58 $(159) $ (77) $ 290 $ 321
----- ----- ----- ----- ----- ----- ----- ----- ------ ------
----- ----- ----- ----- ----- ----- ----- ----- ------ ------
$ 9.3 $10.2 $16.5 $18.1 $23.4 $24.4 $ 7.0 $ 9.6 $ 63.9 $ 69.3
10.3 10.9 20.0 22.7 24.4 25.4 29.4 35.4 97.0 108.4
0.4 0.5 7.4 10.3 0.5 0.4 (0.2) 2.0 70.7 82.4
25% 18% 18% 22% 27% 15% -- % --% 9% 9%
56% 71% 80% 70% 66% 90% -- % --% --% --%
$ 293 $ 275 $ 551 $ 526 $ 833 $ 727 $(104) $ 162 $3,487 $3,271
32 31 56 52 340 303 (111) (418) 420 35
94 56 249 208 332 226 (167) (171) 1,996 1,636
80 77 323 266 364 352 441 416 3,450 3,149
----- ----- ----- ----- ----- ----- ----- ----- ------ ------
275 223 421 416 461 298 (601) (7) 1,613 1,723
113 92 172 172 189 123 (151) 61 756 775
----- ----- ----- ----- ----- ----- ----- ----- ------ ------
$ 162 $ 131 $ 249 $ 244 $ 272 $ 175 $(450) $ (68) $ 857 $ 948
----- ----- ----- ----- ----- ----- ----- ----- ------ ------
----- ----- ----- ----- ----- ----- ----- ----- ------ ------
$ 9.4 $ 9.2 $16.7 $15.3 $23.8 $20.2 $ 7.3 $ 8.0 $ 64.7 $ 58.4
10.2 9.8 20.8 18.7 24.9 21.0 31.6 28.2 100.7 88.7
0.4 0.4 8.2 7.6 0.5 0.4 -- 1.4 73.9 67.6
22% 19% 19% 22% 24% 18% --% --% 9% 11%
61% 70% 77% 71% 70% 82% --% --% --% --%
- ----------------------------------------------------------------------------------------------------------------------------
(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, business centers and ATMs. Retail Distribution also
includes the consumer checking business, which primarily uses the network as
a source of new customers.
At September 30, 1997, there were 971 traditional branches and 864 in-store
branches, banking centers and business centers with 2,757 ATM locations
throughout the Western United States.
Retail Distribution Group's net income for the third quarter of 1997
increased $12 million, or 39%, over third quarter 1996. Noninterest income
for the quarter reflected lower sales and service charges to the product
groups and lower service charges on deposit accounts, which were partly
offset by higher external fees and commissions. Noninterest expense
decreased in the quarter due to branch closures and merger-related cost
savings.
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 third quarter of 1997 increased $11
million, or 19%. 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. Noninterest
expense improved from the same quarter of 1996 due to lower distribution
expense.
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 an alliance with Morgan Stanley, Dean
Witter, Discover & Co., whereby Dean Witter would provide technology,
investment products, services and sales
16
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 third quarter of 1997 was unchanged
from the same quarter in 1996. Net interest income decreased by $32 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 September 30, 1997 were $63.2 billion, compared
with $57.2 billion at September 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 third quarter of 1997 increased by
$13 million, or 27%, from 1996. Net interest income decreased by $4 million
due to lower loan balances. Noninterest income increased by $28 million
predominantly due to sales of loans.
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 third quarter of 1997
decreased by $28 million, or 27%, from 1996. Net interest income decreased
by $42 million due to lower loan and deposit balances. Noninterest income
declined due to lower service charges on deposit accounts which were offset
partially by higher income from foreign exchange and trust and investment
services.
Consumer Lending offers a full array of consumer loan products, including
credit cards, transportation (auto, recreational vehicle, marine) financing,
home equity lines and loans, lines of credit and installment loans. The loan
portfolio for third quarter 1997 averaged $23.4 billion, consisting of $5.1
billion in credit cards, $11.4 billion in equity/unsecured loans and $6.9
billion in
17
transportation financing. This compares with $5.3 billion in credit cards,
$12.1 billion in equity/unsecured loans and $7.0 billion in transportation
financing in 1996.
Consumer Lending's net income for the third quarter of 1997 increased $43
million, or 74%. Net interest income increased due to higher auto lease
balances which were partially offset by higher interest losses related to an
increase in loans charged off in the consumer portfolio. The increase in
noninterest income was due largely to higher fee income on credit cards. 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 September 30, 1997
increased by $82 million from 1996. Net interest income during the third
quarter of 1997 reflects the impact of lower investment securities and higher
short-term borrowing. Noninterest expense improved due to 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 $1,132 million in the
third quarter of 1997, compared with $1,299 million in the third quarter of
1996. The decrease in net interest income was primarily due to a decline in
earning assets. The Company's net interest margin was 5.94% in the third
quarter of 1997, compared with 6.15% in the third quarter of 1996 and 5.93%
in the second quarter of 1997. Net interest income on a taxable-equivalent
basis was $3,497 million in the first nine months of 1997, compared with
$3,278 million in the first nine months of 1996. The Company's net interest
margin was 6.00% in the first nine months of 1997, compared with 6.11% in the
first nine months of 1996. The Company expects the net interest margin to be
essentially flat in the fourth quarter of 1997 compared with the third
quarter of 1997.
Interest income included hedging income of $16 million in the third quarter
of 1997, compared with $24 million in the third quarter of 1996. Interest
expense included hedging expense of $4 million in the third quarter of 1997,
compared with $3 million in the third quarter of 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 $63.9 billion and $69.3 billion in the third quarter of 1997
and 1996, respectively, and $64.7 billion and $58.4 billion in the first nine
months of 1997 and 1996, respectively. The decrease in average loans from
the third 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.
Investment securities averaged $11.0 billion and $13.6 billion in the third
quarter of 1997 and 1996, respectively, and $12.0 billion and $12.4 billion
in the first nine months of 1997 and 1996, respectively.
Average core deposits were $70.7 billion and $82.4 billion in the third
quarter of 1997 and 1996, respectively, and funded 73% and 76% of the
Company's average total assets in the same quarter of 1997 and 1996,
respectively. For the first nine months of 1997 and 1996, average core
deposits were $73.9 billion and $67.6 billion, respectively, and funded 73%
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 third
quarter of 1996 was primarily due to net runoff. In addition, a significant
portion of the decrease was due to the divestitures of branches and sales of
former First Interstate banks which occurred in 1996, and the sales of
branches in 1996 and 1997, including $3.9 billion of core deposits.
19
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) (2)
- -------------------------------------------------------------------------------------------------------------
Quarter ended September 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 $ 229 5.63% $ 3 $ 800 5.44% $ 11
Investment securities at fair value (3):
U.S. Treasury securities 2,634 6.00 40 2,678 5.92 40
Securities of U.S. government agencies
and corporations 5,303 6.42 85 7,473 6.32 119
Private collateralized mortgage obligations 2,737 6.68 46 2,920 6.49 48
Other securities 330 6.41 4 489 6.49 8
-------- ------- -------- ------
Total investment securities at fair value 11,004 6.38 175 13,560 6.28 215
Loans:
Commercial 18,283 9.11 419 18,848 8.92 422
Real estate 1-4 family first mortgage 9,543 7.52 180 11,514 7.32 211
Other real estate mortgage 11,421 9.35 269 12,614 9.15 290
Real estate construction 2,304 10.90 63 2,345 10.97 65
Consumer:
Real estate 1-4 family junior lien
mortgage 5,946 9.35 140 6,716 9.17 154
Credit card 5,073 14.66 186 5,295 14.84 196
Other revolving credit and monthly payment 7,638 9.26 178 9,011 9.44 214
-------- ------- -------- ------
Total consumer 18,657 10.75 504 21,022 10.71 564
Lease financing 3,533 8.99 79 2,791 8.75 61
Foreign 124 6.88 2 140 8.25 3
-------- ------- -------- ------
Total loans 63,865 9.45 1,516 69,274 9.30 1,616
Other 883 7.18 16 550 6.25 9
-------- ------- -------- ------
Total earning assets $ 75,981 8.97 1,710 $ 84,184 8.76 1,851
-------- ------- -------- ------
-------- --------
FUNDING SOURCES
Deposits:
Interest-bearing checking $ 1,736 1.45 6 $ 6,022 1.31 20
Market rate and other savings 31,098 2.64 207 32,918 2.64 218
Savings certificates 15,602 5.17 203 16,496 4.74 197
Other time deposits 253 4.83 3 381 6.89 7
Deposits in foreign offices 731 5.48 10 293 5.08 4
-------- ------- -------- ------
Total interest-bearing deposits 49,420 3.45 429 56,110 3.15 446
Federal funds purchased and securities sold
under repurchase agreements 3,211 5.48 44 1,217 5.01 15
Commercial paper and other short-term
borrowings 343 5.82 5 361 3.37 3
Senior debt 1,770 6.47 29 2,607 6.05 40
Subordinated debt 2,604 7.12 46 2,816 6.92 48
Guaranteed preferred beneficial interests in
Company's subordinated debentures 1,299 7.81 25 -- -- --
-------- ------- -------- ------
Total interest-bearing liabilities 58,647 3.92 578 63,111 3.48 552
Portion of noninterest-bearing funding sources 17,334 -- -- 21,073 -- --
-------- ------- -------- ------
Total funding sources $ 75,981 3.03 578 $ 84,184 2.61 552
-------- ------- -------- ------
-------- --------
NET INTEREST MARGIN AND NET INTEREST INCOME ON
A TAXABLE-EQUIVALENT BASIS (4) 5.94% $ 1,132 6.15% $1,299
----- ------- ----- ------
----- ------- ----- ------
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 7,299 $ 9,877
Goodwill 7,190 7,439
Other 6,562 6,878
-------- --------
Total noninterest-earning assets $ 21,051 $ 24,194
-------- --------
-------- --------
NONINTEREST-BEARING FUNDING SOURCES
Deposits $ 22,308 $ 26,942
Other liabilities 3,135 3,551
Preferred stockholders' equity 275 854
Common stockholders' equity 12,667 13,920
Noninterest-bearing funding sources used to
fund earning assets (17,334) (21,073)
-------- --------
Net noninterest-bearing funding
sources $ 21,051 $ 24,194
-------- --------
-------- --------
TOTAL ASSETS $ 97,032 $108,378
-------- --------
-------- --------
- -------------------------------------------------------------------------------------------------------------
(1) The average prime rate of the Bank was 8.50% and 8.25% for the quarters
ended September 30, 1997 and 1996, respectively, and 8.42% and 8.28% for
the nine months ended September 30, 1997 and 1996, respectively. The
average three-month London Interbank Offered Rate (LIBOR) was 5.73% and
5.59% for the quarters ended September 30, 1997 and 1996, respectively, and
5.71% and 5.51% for the nine months ended September 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 $10,931 million
and $13,651 million for the quarters ended September 30, 1997 and 1996,
respectively, and $11,973 million and $12,431 million for the nine months
ended September 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
- --------------------------------------------------------------------------------------------------------------
Nine months ended September 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 $ 351 5.58% $ 15 $ 505 5.43% $ 21
Investment securities at fair value (3):
U.S. Treasury securities 2,745 6.03 124 2,405 5.67 102
Securities of U.S. government agencies
and corporations 5,972 6.43 287 6,968 6.13 322
Private collateralized mortgage obligations 2,935 6.63 147 2,552 6.28 122
Other securities 340 6.42 15 460 6.84 22
-------- ------ -------- ------
Total investment securities at fair value 11,992 6.39 573 12,385 6.09 568
Loans:
Commercial 18,373 9.07 1,246 15,883 9.05 1,077
Real estate 1-4 family first mortgage 9,899 7.49 555 9,287 7.43 518
Other real estate mortgage 11,514 9.82 846 11,277 9.23 778
Real estate construction 2,288 10.23 175 2,020 10.40 157
Consumer:
Real estate 1-4 family junior lien
mortgage 6,049 9.34 423 5,617 8.95 377
Credit card 5,188 14.39 560 4,805 14.95 539
Other revolving credit and monthly payment 7,913 9.29 550 6,929 9.62 499
-------- ------ -------- ------
Total consumer 19,150 10.69 1,533 17,351 10.88 1,415
Lease financing 3,295 8.83 218 2,430 8.87 162
Foreign 134 6.91 7 136 6.11 6
-------- ------ -------- ------
Total loans 64,653 9.46 4,580 58,384 9.40 4,113
Other 770 6.79 39 339 6.39 16
-------- ------ -------- ------
Total earning assets $ 77,766 8.94 5,207 $ 71,613 8.79 4,718
-------- ------ -------- ------
-------- --------
FUNDING SOURCES
Deposits:
Interest-bearing checking $ 1,847 1.30 18 $ 4,651 1.26 44
Market rate and other savings 32,562 2.59 632 27,962 2.63 550
Savings certificates 15,596 5.10 595 13,979 4.88 511
Other time deposits 201 4.47 7 402 6.59 20
Deposits in foreign offices 708 5.38 28 373 5.26 15
-------- ------ -------- ------
Total interest-bearing deposits 50,914 3.36 1,280 47,367 3.21 1,140
Federal funds purchased and securities sold
under repurchase agreements 2,712 5.37 109 1,861 5.20 72
Commercial paper and other short-term
borrowings 264 5.96 12 354 4.32 11
Senior debt 1,840 6.33 87 2,204 6.11 101
Subordinated debt 2,808 6.99 147 2,222 6.94 116
Guaranteed preferred beneficial interests in
Company's subordinated debentures 1,283 7.82 75 -- -- --
-------- ------ -------- ------
Total interest-bearing liabilities 59,821 3.82 1,710 54,008 3.56 1,440
Portion of noninterest-bearing funding sources 17,945 -- -- 17,605 -- --
-------- ------ -------- ------
Total funding sources $ 77,766 2.94 1,710 $ 71,613 2.68 1,440
-------- ------ -------- ------
-------- --------
NET INTEREST MARGIN AND NET INTEREST INCOME ON
A TAXABLE-EQUIVALENT BASIS (4) 6.00% $3,497 6.11% $3,278
----- ------ ----- ------
----- ------ ----- ------
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 8,293 $ 7,116
Goodwill 7,255 5,027
Other 7,389 4,963
-------- --------
Total noninterest-earning assets $ 22,937 $ 17,106
-------- --------
-------- --------
NONINTEREST-BEARING FUNDING SOURCES
Deposits $ 23,932 $ 20,980
Other liabilities 3,588 2,418
Preferred stockholders' equity 397 728
Common stockholders' equity 12,965 10,585
Noninterest-bearing funding sources used to
fund earning assets (17,945) (17,605)
-------- --------
Net noninterest-bearing funding
sources $ 22,937 $ 17,106
-------- --------
-------- --------
TOTAL ASSETS $100,703 $ 88,719
-------- --------
-------- --------
------------------------------------------------------------------------------
21
NONINTEREST INCOME
- ---------------------------------------------------------------------------------------------------------
Quarter Nine months
ended Sept. 30, ended Sept. 30,
-------------- % ---------------- %
(in millions) 1997 1996 Change 1997 1996 Change
- ---------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $214 $254 (16)% $ 649 $ 634 2%
Fees and commissions:
Credit card membership and other credit card fees 62 30 107 162 83 95
Shared ATM network fees 43 28 54 125 67 87
Charges and fees on loans 37 32 16 100 81 23
Debit and credit card merchant fees 25 33 (24) 72 85 (15)
Mutual fund and annuity sales fees 18 17 6 51 44 16
All other (1) 61 65 (6) 184 174 6
---- ---- ------ ------
Total fees and commissions 246 205 20 694 534 30
Trust and investment services income:
Asset management and custody fees 64 59 8 186 154 21
Mutual fund management fees 47 34 38 131 89 47
All other 6 11 (45) 21 24 (13)
---- ---- ------ ------
Total trust and investment services income 117 104 13 338 267 27
Investment securities gains (losses) (1) -- -- 6 2 200
Income from equity investments accounted for by the:
Cost method 18 37 (51) 109 92 18
Equity method 11 3 267 42 13 223
Check printing charges 17 15 13 53 39 36
Gains on sales of loans 28 6 367 41 11 273
Gains (losses) from dispositions of operations (1) (1) -- 7 5 40
Losses on dispositions of premises and equipment (10) (8) 25 (45) (25) 80
All other 38 28 36 102 64 59
---- ---- ------ ------
Total $677 $643 5% $1,996 $1,636 22%
---- ---- --- ------ ------ ---
---- ---- --- ------ ------ ---
- ---------------------------------------------------------------------------------------------------------
(1) Includes mortgage loan servicing fees totaling $24 million and $21
million for purchased mortgage servicing rights for the third quarter of
1997 and 1996, respectively, and $73 million and $58 million for the
first nine months of 1997 and 1996, respectively. Also includes the
related amortization expense of $16 million and $18 million for the third
quarter of 1997 and 1996, respectively, and $51 million and $44 million
for the first nine months of 1997 and 1996, respectively.
Service charges on deposit accounts decreased $40 million, or 16%, from the
third quarter of 1996 due to a decrease in deposits. (See page 19 for an
additional discussion of the decrease in deposits.) Credit card membership
and other credit card fees increased $32 million, or 107%, from the third
quarter of 1996 reflecting an industry trend of increased fees. The increase
in gain on sales of loans of $22 million, or 367%, from the third quarter of
1996 is predominantly due to real estate loan syndications.
A major portion of the increase in trust and investment services income for
the first nine months 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 and
third quarters 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 30 of the Stagecoach
family of funds consisting of $16.0 billion of assets at September 30, 1997,
compared with 28 Stagecoach funds consisting of $13.7 billion of assets at
September 30, 1996. The Company also manages the Overland Express family of
14 funds, which had $5.6 billion of assets under management at September 30,
1997, compared with $4.7 billion at September 30, 1996, and is sold through
brokers around the country. In the fourth quarter of 1997, the Overland
Express Funds will be merged into the
22
Stagecoach family of mutual funds. The assets and fees generated are
not expected to change significantly as a result of the merging of the
two families of funds. In addition to managing Stagecoach and Overland
Express Funds, the Company managed or maintained personal trust,
employee benefit trust and agency assets of approximately $185 billion
and $299 billion (including $245 billion from First Interstate) at
September 30, 1997 and 1996, respectively. The balance at September 30,
1997 included $62 billion of assets managed by the Institutional Custody
businesses, which is being sold to The Bank of New York in several
stages, the first of which was during the third quarter of 1997. The
decrease in assets under management was mostly due to the sale of the
Corporate Trust business in the first quarter of 1997. In addition, a
major portion of the decrease was due to the sale of assets managed by
the Institutional Custody businesses in the third 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 were completed in February 1997 and for the
disposition of 10 branches, 9 of which were closed in the first quarter of
1997 and one of which was 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 and $15 million was associated with 20 branches
that were closed in the third quarter of 1997. The remaining $50 million
liability at September 30, 1997 was related to 7 branches which have been
closed or are scheduled to be closed by year-end 1997 and 69 branches that
are expected to be closed in 1998.
At September 30, 1997, the Company had 971 traditional branches, 459 supermarket
branches, 380 banking centers and 25 business centers, in 10 Western states.
The Company expects noninterest income in the fourth quarter of 1997 to
be about the same as the third quarter of 1997.
23
NONINTEREST EXPENSE
- ---------------------------------------------------------------------------------------
Quarter Nine months
ended Sept. 30, ended Sept. 30,
--------------- % --------------- %
(in millions) 1997 1996 Change 1997 1996 Change
- ---------------------------------------------------------------------------------------
Salaries $ 308 $ 378 (19)% $ 964 $ 960 --%
Incentive compensation 54 53 2 143 146 (2)
Employee benefits 80 105 (24) 256 261 (2)
Equipment 97 103 (6) 289 269 7
Net occupancy 96 96 -- 292 257 14
Goodwill 81 81 -- 245 170 44
Core deposit intangible:
Nonqualifying (1) 56 69 (19) 169 142 19
Qualifying 8 9 (11) 24 28 (14)
Operating losses 40 31 29 262 72 264
Contract services 56 88 (36) 172 196 (12)
Telecommunications 35 42 (17) 108 85 27
Security 22 16 38 66 38 74
Postage 19 27 (30) 64 68 (6)
Outside professional services 20 32 (38) 56 76 (26)
Stationery and supplies 19 18 6 56 49 14
Advertising and promotion 19 32 (41) 53 66 (20)
Travel and entertainment 15 23 (35) 44 48 (8)
Check printing 12 11 9 42 27 56
Outside data processing 11 17 (35) 37 36 3
Foreclosed assets 1 2 (50) (2) 5 --
All other 38 72 (47) 110 150 (27)
------ ------ ------ ------
Total $1,087 $1,305 (17)% $3,450 $3,149 10%
------ ------ --- ------ ------ ---
------ ------ --- ------ ------ ---
- ---------------------------------------------------------------------------------------
(1) Amortization of core deposit intangible acquired after February 1992 that
is subtracted from stockholders' equity in computing regulatory capital
for bank holding companies.
Salaries and employee benefits expense decreased $95 million from the third
quarter of 1996 due to staff reductions after the Merger. The Company's
active full-time equivalent (FTE) staff, including hourly employees, was
32,663 at September 30, 1997, compared with 38,859 at September 30, 1996.
A significant portion of the increase in noninterest expense in the first
nine months of 1997 resulted from an increase in operating losses. The
operating losses for the second quarter of $180 million 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. Substantially all of these
items were written off in the third quarter.
Goodwill and CDI amortization resulting from the Merger were $73 million and
$56 million, respectively, for the third quarter of 1997, compared with $72
million and $69 million,
24
respectively, for the third 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.
The Company has incurred, and will continue to incur, incremental, out of
pocket costs associated with the Year 2000 computer systems conversion. The
Company currently estimates that it will incur (and expense) conversion costs
of approximately $10 million in the fourth quarter of 1997, approximately $60
million in 1998 and approximately $25 million thereafter.
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 September 30, 1997:
- ---------------------------------------------------------------------------------------------------
Quarter ended
(in millions) September 30, 1997
- ---------------------------------------------------------------------------------------------------
Amortization
--------------------------
Nonqualifying
Reported core deposit "Cash"
earnings Goodwill intangible earnings
- ---------------------------------------------------------------------------------------------------
Income before income tax expense $ 543 $ 81 $ 56 $ 680
Income tax expense 253 -- 22 275
----- ----- ----- -----
Net income 290 81 34 405
Preferred dividends 5 -- -- 5
----- ----- ----- -----
Net income applicable to common stock $ 285 $ 81 $ 34 $ 400
----- ----- ----- -----
----- ----- ----- -----
Per common share $3.26 $ .93 $ .38 $4.57
----- ----- ----- -----
----- ----- ----- -----
- ---------------------------------------------------------------------------------------------------
The ROA, ROE and efficiency ratios excluding goodwill and nonqualifying core
deposit intangible amortization and balances for the quarter ended September 30,
1997 were calculated as follows:
- ---------------------------------------------------------------------------------------------------
Quarter ended
(in millions) September 30, 1997
- ---------------------------------------------------------------------------------------------------
ROA: A*/ (C-E) = 1.81%
ROE: B*/ (D-E) = 35.44%
Efficiency: (F-G) / H = 52.6%
Net income $ 405(A)
Net income applicable to common stock 400(B)
Average total assets 97,032(C)
Average common stockholders' equity 12,667(D)
Average goodwill ($7,190) and after-tax nonqualifying core deposit intangible
($1,000) 8,190(E)
Noninterest expense 1,087(F)
Amortization expense for goodwill and nonqualifying core deposit intangible 137(G)
Net interest income plus noninterest income 1,805(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
- ---------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 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 $ 2,638 $ 2,652 $ 2,824 $ 2,837 $ 2,607 $ 2,611
Securities of U.S. government
agencies and corporations (1) 5,050 5,088 7,043 7,050 7,306 7,264
Private collateralized mortgage
obligations (2) 2,656 2,656 3,237 3,230 3,108 3,084
Other 283 283 342 343 403 408
------- ------- ------- ------- ------- -------
Total debt securities 10,627 10,679 13,446 13,460 13,424 13,367
Marketable equity securities 24 58 18 45 36 66
------- ------- ------- ------- ------- -------
Total $10,651 $10,737 $13,464 $13,505 $13,460 $13,433
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
- ---------------------------------------------------------------------------------------------------------
(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 September 30, 1997, the available-for-sale securities
portfolio had an unrealized net gain of $86 million, or less than 1% of the
cost of the portfolio, comprised of unrealized gross gains of $110 million
and unrealized gross losses of $24 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 September 30, 1996, the available-for-sale
securities portfolio had an unrealized net loss of $27 million, comprised of
unrealized gross losses of $107 million and unrealized gross gains of $80
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 September 30, 1997, the valuation allowance amounted to an
unrealized net gain of $51 million, compared with an unrealized net gain of
$23 million at December 31, 1996 and an unrealized net loss of $16 million at
September 30, 1996.
During the first nine months of 1997, realized gross gains and losses
resulting from the sale of available-for-sale securities were $8 million and
$2 million, respectively. During the first nine months 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.
- -----------------------------------------------------------------------------------------------------------------------------------
September 30, 1997
-----------------------------------------------------------------------------------------------
Expected remaining principal maturity
-----------------------------------------------------------------------------------------------
Weighted
average After one After five
expected One year or year through years through After ten
Weighted remaining less five years ten years years
Total average maturity ------------- ------------- ------------- -------------
(in millions) amount yield (in yrs.-mos.) Amount Yield Amount Yield Amount Yield Amount Yield
- -----------------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES (1):
U.S. Treasury securities $ 2,638 6.02% 1-6 $ 878 5.83% $1,759 6.12% $ 1 6.64% $-- --%
Securities of U.S. government
agencies and corporations 5,050 6.62 2-3 2,072 6.71 2,446 6.53 455 6.93 77 5.44
Private collateralized mortgage
obligations 2,656 6.74 1-10 1,015 6.96 1,579 6.48 49 6.71 13 20.74
Other 283 6.77 2-4 92 7.11 187 6.63 2 7.00 2 4.11
----- ------ ------ ---- ---
TOTAL COST OF DEBT SECURITIES $10,627 6.51% 2-0 $4,057 6.59% $5,971 6.40% $507 6.91% $92 7.57%
------- ---- ---- ------ ---- ------ ---- ---- ---- --- -----
------- ---- ---- ------ ---- ------ ---- ---- ---- --- -----
ESTIMATED FAIR VALUE $10,679 $4,071 $6,004 $512 $92
------- ------ ------ ---- ---
------- ------ ------ ---- ---
- -----------------------------------------------------------------------------------------------------------------------------------
(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 0 months at September 30, 1997, compared with 2
years and 2 months at June 30, 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 September 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 $7,744 million, or 72%, of the Company's
investment securities portfolio at September 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 $7,744 million to $7,459 million
and the expected remaining maturity of these securities would increase from 2
years and 1 month to 2 years and 6 months.
28
LOAN PORTFOLIO
- -----------------------------------------------------------------------------------------------
% Change
Sept. 30, 1997 from
-------------------
SEPT. 30, Dec.31, Sept. 30, Dec.31, Sept.30,
(in millions) 1997 1996 1996 1996 1996
- -----------------------------------------------------------------------------------------------
Commercial (1)(2) $19,512 $19,515 $20,064 -- % (3)%
Real estate 1-4 family first mortgage 9,311 10,425 10,754 (11) (13)
Other real estate mortgage (3) 11,614 11,860 12,462 (2) (7)
Real estate construction 2,351 2,303 2,331 2 1
Consumer:
Real estate 1-4 family junior lien mortgage 5,931 6,278 6,406 (6) (7)
Credit card 5,020 5,462 5,292 (8) (5)
Other revolving credit and monthly payment 7,513 8,374 8,846 (10) (15)
------- ------- -------
Total consumer 18,464 20,114 20,544 (8) (10)
Lease financing 3,754 3,003 2,891 25 30
Foreign 98 169 187 (42) (48)
------- ------- -------
Total loans (net of unearned income,
including net deferred loan fees,
of $781, $654 and $561) $65,104 $67,389 $69,233 (3)% (6)%
------- ------- ------- --- ---
------- ------- ------- --- ---
- -----------------------------------------------------------------------------------------------
(1) Includes loans (primarily unsecured) to real estate developers and real
estate investment trusts (REITs) of $1,397 million, $1,070 million and
$990 million at September 30, 1997, December 31, 1996 and September 30,
1996, respectively.
(2) Includes agricultural loans (loans to finance agricultural production
and other loans to farmers) of $1,464 million, $1,409 million and $1,441
million at September 30, 1997, December 31, 1996 and September 30, 1996,
respectively.
(3) Includes agricultural loans that are secured by real estate of $326
million, $325 million and $349 million at September 30, 1997, December 31,
1996 and September 30, 1996, respectively.
The table below presents comparative period-end commercial real estate loans.
- --------------------------------------------------------------------------------------------------
% Change
Sept. 30, 1997 from
-------------------
SEPT. 30, Dec.31, Sept. 30, Dec.31, Sept.30,
(in millions) 1997 1996 1996 1996 1996
- --------------------------------------------------------------------------------------------------
Commercial loans to real
estate developers and REITs (1) $ 1,397 $ 1,070 $ 990 31 % 41 %
Other real estate mortgage 11,614 11,860 12,462 (2) (7)
Real estate construction 2,351 2,303 2,331 2 1
------- ------- -------
Total $15,362 $15,233 $15,783 1 % (3)%
------- ------- ------- --- ---
------- ------- ------- --- ---
Nonaccrual loans $ 277 $ 376 $ 412 (26)% (33)%
------- ------- ------- --- ---
------- ------- ------- --- ---
Nonaccrual loans as a % of total 1.8% 2.5% 2.6%
------- ------- -------
------- ------- -------
- --------------------------------------------------------------------------------------------------
(1) Included in commercial loans.
29
NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS (1)
- -----------------------------------------------------------------------------------
SEPT. 30, Dec. 31, Sept. 30,
(in millions) 1997 1996 1996
- -----------------------------------------------------------------------------------
Nonaccrual loans:
Commercial (2)(3) $172 $223 $216
Real estate 1-4 family first mortgage 100 99 77
Other real estate mortgage (4) 258 349 370
Real estate construction 18 25 28
Consumer:
Real estate 1-4 family junior lien mortgage 16 15 21
Other revolving credit and monthly payment 1 1 2
Lease financing -- 2 3
---- ---- ----
Total nonaccrual loans (5) 565 714 717
Restructured loans (6) 9 10 11
---- ---- ----
Nonaccrual and restructured loans 574 724 728
As a percentage of total loans .9% 1.1% 1.1%
Foreclosed assets 196 219 227
Real estate investments (7) 4 4 6
Total nonaccrual and restructured loans ---- ---- ----
and other assets $774 $947 $961
---- ---- ----
---- ---- ----
- -----------------------------------------------------------------------------------
(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 $14 million at September 30, 1997,
December 31, 1996 and September 30, 1996, respectively.
(3) Includes agricultural loans of $16 million, $13 million and $15 million
at September 30, 1997, December 31, 1996 and September 30, 1996,
respectively.
(4) Includes agricultural loans secured by real estate of $15 million, $10
million and $5 million at September 30, 1997, December 31, 1996 and
September 30, 1996, respectively.
(5) Of the total nonaccrual loans, $356 million, $493 million and $530
million at September 30, 1997, December 31, 1996 and September 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 $23 million, $50 million and $50 million at
September 30, 1997, December 31, 1996 and September 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,
$23 million, $50 million and $50 million were considered impaired under
FAS 114 at September 30, 1997, December 31, 1996 and September 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
$170 million, $154 million and $128 million at September 30, 1997,
December 31, 1996 and September 30, 1996, respectively.
The table below summarizes the changes in total nonaccrual loans.
- -----------------------------------------------------------------------------------
SEPT. 30, Sept. 30,
(in millions) 1997 1996
- -----------------------------------------------------------------------------------
Balance, beginning of quarter $602 $731
New loans placed on nonaccrual 128 156
Charge-offs (53) (43)
Payments (107) (54)
Transfers to foreclosed assets (1) (36)
Loans returned to accrual (4) (37)
---- ----
Balance, end of quarter $565 $717
---- ----
---- ----
- -----------------------------------------------------------------------------------
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 $394 million and $435
million during the third quarter and first nine months of 1997, respectively,
and $562 million and $542 million during the third quarter and first nine
months of 1996, respectively. Total interest income recognized on impaired
loans was $2 million and $11 million during the third quarter and first nine
months of 1997, respectively, and $5 million and $14 million during the third
quarter and first nine months 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 September 30, 1997, December 31, 1996 and September 30, 1996:
- -------------------------------------------------------------------------------
SEPT. 30, Dec. 31, Sept. 30,
(in millions) 1997 1996 1996
- -------------------------------------------------------------------------------
Commercial $110 $155 $160
Real estate 1-4 family first mortgage 1 1 5
Other real estate mortgage (1) 249 362 386
Real estate construction 17 24 28
Other 2 1 1
---- ---- ----
Total (2) $379 $543 $580
---- ---- ----
---- ---- ----
Impairment measurement based on:
Collateral value method $298 $416 $427
Discounted cash flow method 60 101 126
Historical loss factors 21 26 27
---- ---- ----
$379 $543 $580
---- ---- ----
---- ---- ----
- -------------------------------------------------------------------------------
(1) Includes accruing loans of $23 million, $50 million and $50 million
purchased at a steep discount at September 30, 1997, December 31, 1996
and September 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 $26 million, $27 million and $33 million of impaired loans with
a related FAS 114 allowance of $4 million, $2 million and $4 million at
September 30, 1997, December 31, 1996 and September 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.
- -------------------------------------------------------------------------------
SEPT. 30, Sept. 30,
(in millions) 1997 1996
- -------------------------------------------------------------------------------
BALANCE, BEGINNING OF QUARTER $194 $238
Additions 23 35
Sales (25) (42)
Charge-offs (3) (3)
Write-downs (1) (1)
Other 8 --
---- ----
BALANCE, END OF QUARTER $196 $227
---- ----
---- ----
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
SEPT. 30, Dec. 31, Sept. 30,
(in millions) 1997 1996 1996
- -------------------------------------------------------------------------------
Commercial $ 14 $ 65 $ 78
Real estate 1-4 family first mortgage 42 42 45
Other real estate mortgage 11 59 48
Real estate construction 1 4 4
Consumer:
Real estate 1-4 family junior lien mortgage 37 23 23
Credit card 123 120 111
Other revolving credit and monthly payment 13 20 11
---- ---- ----
Total consumer 173 163 145
---- ---- ----
Total $241 $333 $320
---- ---- ----
---- ---- ----
- -------------------------------------------------------------------------------
33
ALLOWANCE FOR LOAN LOSSES
- -----------------------------------------------------------------------------------------------------------------
Quarter ended Nine months ended
------------------------- --------------------------
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30,
(in millions) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD $1,850 $2,273 $2,018 $1,794
Allowance of First Interstate -- -- -- 770
Provision for loan losses 175 35 420 35
Loan charge-offs:
Commercial (1) (69) (30) (198) (91)
Real estate 1-4 family first mortgage (5) (4) (15) (13)
Other real estate mortgage (2) (13) (13) (29)
Real estate construction -- (5) (3) (9)
Consumer:
Real estate 1-4 family junior lien mortgage (6) (7) (18) (24)
Credit card (124) (105) (372) (292)
Other revolving credit and monthly payment (55) (52) (168) (124)
------ ------ ------ ------
Total consumer (185) (164) (558) (440)
Lease financing (10) (7) (29) (21)
------ ------ ------ ------
Total loan charge-offs (271) (223) (816) (603)
------ ------ ------ ------
Loan recoveries:
Commercial (2) 21 16 53 30
Real estate 1-4 family first mortgage 1 1 3 6
Other real estate mortgage 13 9 42 32
Real estate construction 1 2 3 6
Consumer:
Real estate 1-4 family junior lien mortgage 2 2 6 7
Credit card 12 10 34 26
Other revolving credit and monthly payment 17 10 51 28
------ ------ ------ ------
Total consumer 31 22 91 61
Lease financing 2 2 9 6
------ ------ ------ ------
Total loan recoveries 69 52 201 141
------ ------ ------ ------
Total net loan charge-offs (202) (171) (615) (462)
------ ------ ------ ------
BALANCE, END OF PERIOD $1,823 $2,137 $1,823 $2,137
------ ------ ------ ------
------ ------ ------ ------
Total net loan charge-offs as a percentage
of average loans (annualized) 1.25% .98% 1.27% 1.05%
------ ------ ------ ------
------ ------ ------ ------
Allowance as a percentage of total loans 2.80% 3.09% 2.80% 3.09%
------ ------ ------ ------
------ ------ ------ ------
- -----------------------------------------------------------------------------------------------------------------
(1) There were no charge-offs of loans to real estate developers for any of
the periods presented, except for $1 million in the nine months ended
September 30, 1996.
(2) Includes recoveries from loans to real estate developers of $1 million
and $7 million for the quarters ended September 30, 1997 and 1996,
respectively, and $2 million and $8 million for the nine months ended
September 30, 1997 and 1996, respectively.
34
The table below presents net charge-offs by loan category.
- ---------------------------------------------------------------------------------------------------------------------------
Quarter ended Nine Months Ended
--------------------------------------- ----------------------------------------
SEPTEMBER 30, 1997 September 30, 1996 SEPTEMBER 30, 1997 September 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 $ 48 1.03% $ 14 .28% $145 1.04% $ 61 .50%
Real estate 1-4 family first mortgage 4 .16 3 .09 12 .16 7 .10
Other real estate mortgage (11) (.36) 4 .12 (29) (.34) (3) (.04)
Real estate construction (1) (.21) 3 .46 -- -- 3 .20
Consumer:
Real estate 1-4 family
junior lien mortgage 4 .25 5 .28 12 .27 17 .41
Credit card 112 8.77 95 7.18 338 8.71 266 7.42
Other revolving credit
and monthly payment 38 1.99 42 1.87 117 1.98 96 1.84
---- ---- ---- ----
Total consumer 154 3.28 142 2.70 467 3.26 379 2.92
Lease financing 8 .82 5 .83 20 .83 15 .86
---- ---- ---- ----
Total net loan charge-offs $202 1.25% $171 .98% $615 1.27% $462 1.05%
---- ---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ---- ----
- ---------------------------------------------------------------------------------------------------------------------------
(1) Calculated on an annualized basis.
The commercial loan category includes net charge-offs for the commercial loan
component of small business loans of $33 million (or 3.38% of the average
small business loans in this category), compared with $23 million (or 2.43%)
in the second quarter of 1997 and $14 million (or 1.89%) in the third quarter
of 1996. During the third quarter of 1997, the period for charging off past
due loans for the Business Direct product within this portfolio was changed
from 180 days to 150 days. The impact of this change was an increase in
gross charge-offs of approximately $7 million. 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 third quarter of 1997, credit card gross charge-offs due to
bankruptcies were $54 million, or 44%, of total credit card gross
charge-offs, compared with $59 million, or 45%, in the second quarter of 1997
and $46 million, or 44%, in the third quarter of 1996. In addition, credit
card loans 30 to 89 days past due and still accruing totaled $180 million at
September 30, 1997, compared with $172 million at June 30, 1997 and $174
million at September 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 twelve months.
The Company considers the allowance for loan losses of $1,823 million
adequate to cover losses inherent in loans, commitments to extend credit and
standby letters of credit at September 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 $175 million provision in the
third quarter 1997. The Company expects that the provision will increase to
approximately $205 to $215 million in the fourth quarter of 1997, when it is
anticipated that the provision will approximate net charge-offs.
35
OTHER ASSETS
- -------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 30,
(in millions) 1997 1996 1996
- -------------------------------------------------------------------------------------------
Nonmarketable equity investments $ 981 $ 937 $ 902
Net deferred tax asset 347 437 491
Certain identifiable intangible assets 491 471 469
Foreclosed assets 196 219 227
Other 1,877 3,397 1,789
------ ------ ------
Total other assets $3,892 $5,461 $3,878
------ ------ ------
------ ------ ------
- -------------------------------------------------------------------------------------------
The Company estimates that approximately $306 million of the $347 million net
deferred tax asset at September 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 $41 million primarily
relates to approximately $532 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.
Purchased mortgage servicing rights included in certain identifiable
intangible assets were $301 million, $257 million and $246 million at
September 30, 1997, December 31, 1996 and September 30, 1996, respectively.
The purchased mortgage loan servicing portfolio totaled $29 billion, $22
billion and $21 billion at September 30, 1997, December 31, 1996 and
September 30, 1996, respectively. Mortgage servicing rights purchased during
third quarter 1997 and third quarter 1996 were $39 million and $32 million,
respectively. (For loan sales, 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 $16
million and $18 million for the quarters ended September 30, 1997 and 1996,
respectively.
The other identifiable intangible assets included in other assets are
generally amortized using an accelerated method, which is based on estimated
useful lives ranging from 5 to 15 years. Amortization expense was $8
million and $9 million for the quarters ended September 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 third, 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.
36
The adoption of FAS 127 is not expected to have a material effect on the
Company's financial statements.
DEPOSITS
- --------------------------------------------------------------------------
SEPT. 30, Dec. 31, Sept. 30,
(in millions) 1997 1996 1996
- --------------------------------------------------------------------------
Noninterest-bearing $23,005 $29,073 $29,512
Interest-bearing checking 2,209 2,792 5,460
Market rate and other savings 29,906 33,947 32,332
Savings certificates 15,460 15,769 16,004
------- ------- -------
Core deposits 70,580 81,581 83,308
Other time deposits 288 186 381
Deposits in foreign offices 54 54 48
------- ------- -------
Total deposits $70,922 $81,821 $83,737
------- ------- -------
------- ------- -------
- --------------------------------------------------------------------------
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 September 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.
- ----------------------------------------------------------------------------------------------
SEPT. 30, Dec. 31, Sept. 30,
(in billions) 1997 1996 1996
- ----------------------------------------------------------------------------------------------
Tier 1:
Common stockholders' equity $12.6 $13.5 $13.9
Preferred stock(1) .3 .4 .8
Guaranteed preferred beneficial interests in
Company's subordinated debentures 1.3 1.2 --
Goodwill and other deductions(2) (8.2) (8.5) (8.6)
----- ----- -----
Total Tier 1 capital 6.0 6.6 6.1
----- ----- -----
Tier 2:
Mandatory convertible debt .2 .2 .2
Subordinated debt and unsecured senior debt 2.0 2.1 2.2
Allowance for loan losses allowable in Tier 2 1.0 1.1 1.1
----- ----- -----
Total Tier 2 capital 3.2 3.4 3.5
----- ----- -----
Total risk-based capital $ 9.2 $10.0 $ 9.6
----- ----- -----
----- ----- -----
Risk-weighted balance sheet assets $77.1 $82.2 $83.4
Risk-weighted off-balance sheet items:
Commitments to make or purchase loans 9.4 10.1 10.4
Standby letters of credit 1.7 2.1 2.2
Other .6 .5 .5
----- ----- -----
Total risk-weighted off-balance sheet items 11.7 12.7 13.1
----- ----- -----
Goodwill and other deductions(2) (8.2) (8.5) (8.7)
Allowance for loan losses not included in Tier 2 (.8) (.9) (1.0)
----- ----- -----
Total risk-weighted assets $79.8 $85.5 $86.8
----- ----- -----
----- ----- -----
Risk-based capital ratios:
Tier 1 capital (4% minimum requirement) 7.53% 7.68% 7.04%
Total capital (8% minimum requirement) 11.47 11.70 11.05
Leverage ratio (3% minimum requirement)(3) 6.76% 6.65% 6.12%
- ----------------------------------------------------------------------------------------------
(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 September 30, 1997, the Bank had a Tier 1 RBC ratio of 8.51%, a
combined Tier 1 and Tier 2 ratio of 11.39% and a leverage ratio of 7.23%.
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 September 30, 1997, the under-one-year
cumulative gap was a $117 million (0.1% of total assets) net liability
position, compared with net liability positions of $338 million (0.3% of
total assets) at June 30, 1997 and $1,402 million (1.3% of total assets) at
December 31, 1996. The decrease in the net liability position from June 30,
1997 was primarily due to an increase in commercial loans and interest rate
swaps repricing within one year, a significant portion of which is offset by
a decrease in senior debt 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 $8.2 billion, $9.4 billion and $12.5 billion
at September 30, 1997, June 30, 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 September 30, 1997 and December 31, 1996.
- -------------------------------------------------------------------------------------------------------
SEPTEMBER 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 $ 5,769 $ -- $ -- $ 5,188 $ -- $ --
Floors purchased (1) 21,639 54 54 20,640 101 101
Caps purchased (1) 259 2 2 435 3 3
Futures options purchased 163 -- -- -- -- --
Swap contracts (1) 16,250 190 111 16,661 217 117
Foreign exchange contracts:
Forward contracts (1) 65 -- (1) 64 -- --
CUSTOMER
ACCOMMODATIONS
Interest rate contracts:
Futures contracts 2 -- -- 10 -- --
Floors written 1,020 -- (12) 405 -- (10)
Caps written 2,506 -- (6) 2,174 -- (4)
Floors purchased (1) 1,024 11 11 404 9 9
Caps purchased (1) 2,466 5 5 2,088 4 4
Swap contracts (1) 2,563 13 4 2,325 12 2
Foreign exchange contracts (2):
Forward and spot contracts (1) 1,767 20 3 1,313 14 1
Option contracts purchased (1) 71 2 2 65 1 1
Option contracts written 63 -- (2) 59 -- (1)
- -------------------------------------------------------------------------------------------------------
(1) The Company anticipates performance by substantially all of the
counterparties for these financial instruments.
(2) The Company has immaterial trading positions in these contracts.
(3) Credit risk amounts reflect the replacement cost for those contracts in a
gain position in the event of nonperformance by counterparties.
The Company enters into a variety of financial contracts, which include
interest rate futures and forward contracts, interest rate floors and caps
and interest rate swap agreements. The contract or notional amounts of
derivatives do not represent amounts exchanged by the parties and therefore
are not a measure of exposure through the use of derivatives. The amounts
exchanged are determined by reference to the notional amounts and the other
terms of the derivatives. The contract or notional amounts do not represent
exposure to liquidity risk. The Company is not a dealer but an end-user of
these instruments and does not use them speculatively. The Company
40
also offers contracts to its customers, but offsets such contracts by
purchasing other financial contracts or uses the contracts for
asset/liability management.
The Company also enters into foreign exchange derivative 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 were effective beginning with 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 September 30, 1997, the Company had
issued $.2 billion of preferred stock and $.7 billion of medium-term notes
under this shelf registration with $2.6 billion of securities remaining
unissued.
In 1996, the Company also filed a universal shelf registration statement with
the SEC that allows for the issuance of $750 million of 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
41
Company. Interest paid on these debentures will be distributed to the
holders of the trust preferred securities. As a result, distributions to the
holders of the trust preferred securities will be tax deductible and treated
as interest expense in the consolidated statement of income. This provides
the Company with a more cost-effective means of obtaining Tier 1 capital than
if the Company itself were to issue additional preferred stock. In December
1996, the Company issued $400 million in trust preferred securities through
one trust, Wells Fargo Capital I. In January 1997, the Company issued an
additional $150 million in trust preferred securities through a separate
trust, Wells Fargo Capital II. At September 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(a) Restated Certificate of Incorporation, incorporated by
reference to Exhibit 3(a) of Form 10-K filed March 21, 1994
(b) Certificate of the Voting Powers, Designation, Preferences
and Relative, Participating, Optional or Other Special
Rights, and the Qualifications, Limitations or
Restrictions Thereof, Which Have Not Been Set Forth in
the Certificate of Incorporation or in any Amendment
Thereto, of the Adjustable Rate Cumulative Preferred
Stock, Series B, incorporated by reference to Exhibit 3(c)
of Form 10-K filed March 21, 1994
(c) Certificate of the Voting Powers, Designation, Preferences
and Relative, Participating, Optional or Other Special
Rights, and the Qualifications, Limitations or
Restrictions Thereof, Which Have Not Been Set Forth in
the Certificate of Incorporation or in any Amendment
Thereto, of the Fixed/Adjustable Rate Noncumulative
Preferred Stock, Series H, incorporated by reference to
Exhibit 4(a) of Form 8-K/A filed September 23, 1996
(d) By-Laws, incorporated by reference to Exhibit 3(ii) of
Form 10-Q filed August 13, 1997
4 The Company hereby agrees to furnish upon request to the
Commission a copy of each instrument defining the
rights of holders of securities of the Company.
10 Amendment to 1987 Director Option Plan adopted
September 16, 1997
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 1.89 and 2.02 for the
quarters ended September 30, 1997 and 1996,
respectively, and 1.89 and 2.13 for the nine months
ended September 30, 1997 and 1996, respectively. The
ratios of earnings to fixed charges, excluding interest
on deposits, were 4.02 and 5.34 for the quarters ended
September 30, 1997 and 1996, respectively, and 4.07 and
5.46 for the nine months ended September 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 1.86 and 1.91 for the quarters ended
September 30, 1997 and 1996, respectively, and 1.85 and
2.02 for the nine months ended September 30, 1997 and
1996,
43
respectively. The ratios of earnings to fixed charges
and preferred dividends, excluding interest on
deposits, were 3.83 and 4.28 for the quarters ended
September 30, 1997 and 1996, respectively, and 3.78 and
4.48 for the nine months ended September 30, 1997 and
1996, respectively.
(b) The Company filed the following reports on Form 8-K
during the third quarter of 1997 and through the
date hereof:
(1) 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
(2) July 15, 1997 under Item 5, containing the Press Release
that announced the Company's financial results for the
quarter due June 30, 1997
(3) August 21, 1997 under Item 5, containing the Press Release
that announced that Berkshire Hathaway remained a
substantial stockholder of Wells Fargo & Company
(4) October 21, 1997 under Item 5, containing the Press Release
that announced the Company's financial results for the
quarter ended September 30, 1997
(5) October 22, 1997 under Item 5, containing the Press Release
that announced the Company's additional share repurchase
authorization and quarterly dividend
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 13, 1997.
WELLS FARGO & COMPANY
By: /s/ Frank A. Moeslein
------------------------------
Frank A. Moeslein
Executive Vice President and Controller
(Principal Accounting Officer)
44