<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
Commission file number 1-6214
_____________________________
WELLS FARGO & COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 13-2553920
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
420 Montgomery Street, San Francisco, California 94163
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 415-477-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
October 31, 1994
------------------
Common stock, $5 par value 52,055,652
<PAGE>
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Consolidated Statement of Income . . . . . . . . . . . . . . . . . 2
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statement of Changes in Stockholders' Equity. . . . . 4
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Summary Financial Data . . . . . . . . . . . . . . . . . . . . . . 6
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Earnings Performance . . . . . . . . . . . . . . . . . . . . . . . 8
Net Interest Income. . . . . . . . . . . . . . . . . . . . . . . 8
Noninterest Income . . . . . . . . . . . . . . . . . . . . . . . 12
Noninterest Expense. . . . . . . . . . . . . . . . . . . . . . . 14
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Balance Sheet Analysis . . . . . . . . . . . . . . . . . . . . . . 16
Investment Securities. . . . . . . . . . . . . . . . . . . . . . 16
Loan Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . 18
Commercial real estate . . . . . . . . . . . . . . . . . . . . 18
Nonaccrual and Restructured Loans and Other Assets . . . . . . . 20
Quarterly trend of changes in nonaccrual loans . . . . . . . . 21
Changes in nonaccrual loans by loan category . . . . . . . . . 21
Quarterly trend of changes in foreclosed assets. . . . . . . . 22
Nonaccrual loans by performance category . . . . . . . . . . . 22
Loans 90 days past due and still accruing. . . . . . . . . . . 24
Allowance for Loan Losses. . . . . . . . . . . . . . . . . . . . 25
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Capital Adequacy/Ratios. . . . . . . . . . . . . . . . . . . . . 28
Asset/Liability Management . . . . . . . . . . . . . . . . . . . 30
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 32
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
================================================================================
The information furnished in these interim statements reflects all adjustments
which are, in the opinion of management, necessary for a fair statement of the
results for such periods. Such adjustments are of a normal recurring nature,
unless otherwise disclosed in this Form 10-Q. The results of operations in the
interim statements are not necessarily indicative of the results that may be
expected for the full year. The interim financial information should be read in
conjunction with the Company's 1993 Annual Report on Form 10-K.
1
<PAGE>
PART I - FINANCIAL INFORMATION
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
========================================================================================================
Quarter Nine months
ended September 30, ended September 30,
------------------ ------------------
(in millions) 1994 1993 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 768 $ 745 $2,206 $2,322
Investment securities 185 174 567 494
Federal funds sold and securities
purchased under resale agreements 1 6 6 15
Other -- -- 2 --
----- ----- ------ ------
Total interest income 954 925 2,781 2,831
----- ----- ------ ------
INTEREST EXPENSE
Deposits 218 211 624 659
Federal funds purchased and securities sold under
repurchase agreements 28 7 54 23
Commercial paper and other short-term borrowings 2 2 5 5
Senior and subordinated debt 49 50 144 153
----- ----- ------ ------
Total interest expense 297 270 827 840
----- ----- ------ ------
NET INTEREST INCOME 657 655 1,954 1,991
Provision for loan losses 50 120 170 470
----- ----- ------ ------
Net interest income after provision for loan losses 607 535 1,784 1,521
----- ----- ------ ------
NONINTEREST INCOME
Service charges on deposit accounts 119 106 355 311
Fees and commissions 104 98 281 285
Trust and investment services income 52 48 152 142
Investment securities gains 1 -- 8 --
Other 31 12 110 60
----- ----- ------ ------
Total noninterest income 307 264 906 798
----- ----- ------ ------
NONINTEREST EXPENSE
Salaries 213 193 598 574
Employee benefits 53 63 161 172
Net occupancy 53 56 161 166
Equipment 40 36 120 104
Federal deposit insurance 25 28 76 86
Other 147 159 464 503
----- ----- ------ ------
Total noninterest expense 531 535 1,580 1,605
----- ----- ------ ------
INCOME BEFORE INCOME TAX EXPENSE 383 264 1,110 714
Income tax expense 166 99 485 292
----- ----- ------ ------
NET INCOME $ 217 $ 165 $ 625 $ 422
===== ===== ====== ======
NET INCOME APPLICABLE TO COMMON STOCK $ 207 $ 152 $ 592 $ 384
===== ===== ====== ======
PER COMMON SHARE
Net income $3.86 $2.74 $10.83 $ 6.92
===== ===== ====== ======
Dividends declared $1.00 $ .50 $ 3.00 $ 1.50
===== ===== ====== ======
Average common shares outstanding 53.6 55.7 54.7 55.5
===== ===== ====== ======
========================================================================================================
</TABLE>
2
<PAGE>
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
========================================================================================================
SEPTEMBER 30, December 31, September 30,
(in millions) 1994 1993 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 2,828 $ 2,644 $ 2,490
Investment securities:
At cost (estimated fair value
$8,821, $9,978 and $12,959) 9,120 9,887 12,796
At fair value 3,140 3,171 --
------- ------- -------
Total investment securities 12,260 13,058 12,796
Federal funds sold and securities
purchased under resale agreements 36 1,668 584
Loans 34,951 33,099 33,606
Allowance for loan losses 2,110 2,122 2,123
------- ------- -------
Net loans 32,841 30,977 31,483
------- ------- -------
Due from customers on acceptances 81 70 83
Accrued interest receivable 313 297 318
Premises and equipment, net 883 898 908
Goodwill 450 477 486
Other assets 2,472 2,424 2,431
------- ------- -------
Total assets $52,164 $52,513 $51,579
======= ======= =======
LIABILITIES
Noninterest-bearing deposits $ 9,447 $ 9,719 $ 9,096
Interest-bearing deposits 30,553 31,925 31,769
------- ------- -------
Total deposits 40,000 41,644 40,865
Federal funds purchased and securities
sold under repurchase agreements 3,729 1,079 1,136
Commercial paper and other short-term borrowings 186 188 235
Acceptances outstanding 81 70 83
Accrued interest payable 93 63 100
Other liabilities 861 933 890
Senior debt 1,732 2,256 2,190
Subordinated debt 1,460 1,965 1,928
------- ------- -------
Total liabilities 48,142 48,198 47,427
------- ------- -------
STOCKHOLDERS' EQUITY
Preferred stock 489 639 639
Common stock - $5 par value,
authorized 150,000,000 shares;
issued and outstanding 52,790,062 shares,
55,812,592 shares and 55,786,482 shares 264 279 279
Additional paid-in capital 1,084 551 545
Retained earnings 2,256 2,829 2,693
Cumulative foreign currency translation adjustments (4) (4) (4)
Investment securities valuation allowance (67) 21 --
------- ------- -------
Total stockholders' equity 4,022 4,315 4,152
------- ------- -------
Total liabilities and stockholders' equity $52,164 $52,513 $51,579
======= ======= =======
========================================================================================================
</TABLE>
3
<PAGE>
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
===============================================================================================
Nine months ended September 30,
------------------------------
(in millions) 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
PREFERRED STOCK
Balance, beginning of period $ 639 $ 639
Preferred stock redeemed (150) --
------ ------
Balance, end of period 489 639
------ ------
COMMON STOCK
Balance, beginning of period 279 276
Common stock issued under employee benefit and
dividend reinvestment plans 2 3
Common stock repurchased (17) --
------ ------
Balance, end of period 264 279
------ ------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period 551 506
Common stock issued under employee benefit and
dividend reinvestment plans 34 41
Common stock repurchased (501) (2)
Transfer from retained earnings 1,000 --
------ ------
Balance, end of period 1,084 545
------ ------
RETAINED EARNINGS
Balance, beginning of period 2,829 2,392
Net income 625 422
Preferred stock dividends (33) (38)
Common stock dividends (165) (83)
Transfer to additional paid-in capital (1,000) --
------ ------
Balance, end of period 2,256 2,693
------ ------
CUMULATIVE FOREIGN CURRENCY
TRANSLATION ADJUSTMENTS
Balance, beginning and end of period (4) (4)
------ ------
INVESTMENT SECURITIES VALUATION ALLOWANCE
Balance, beginning of period 21 --
Change in unrealized net gain, after applicable taxes (88) --
------ ------
Balance, end of period (67) --
------ ------
Total stockholders' equity $4,022 $4,152
====== ======
===============================================================================================
</TABLE>
4
<PAGE>
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
===============================================================================================
Nine months ended September 30,
------------------------------
(in millions) 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 625 $ 422
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 170 470
Depreciation and amortization 183 205
Deferred income tax benefit (20) (85)
Decrease in net deferred loan fees (4) (4)
Net increase in accrued interest receivable (16) (17)
Net increase in accrued interest payable 30 12
Other, net (66) 187
------ ------
Net cash provided by operating activities 902 1,190
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities:
At cost:
Proceeds from prepayments and maturities 3,207 1,362
Purchases (2,440) (4,820)
At fair value:
Proceeds from sales 17 --
Proceeds from prepayments and maturities 593 --
Purchases (723) --
Net (increase) decrease in loans resulting from
originations and collections (2,060) 2,470
Proceeds from sales (including participations) of loans 98 239
Purchases (including participations) of loans (243) (20)
Proceeds from sales of foreclosed assets 199 256
Net decrease in federal funds sold and securities
purchased under resale agreements 1,632 599
Other, net (83) (41)
------ ------
Net cash provided by investing activities 197 45
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits (1,644) (1,379)
Net increase (decrease) in short-term borrowings 2,648 (142)
Proceeds from issuance of senior debt -- 565
Proceeds from issuance of subordinated debt -- 150
Repayment of senior debt (517) (522)
Repayment of subordinated debt (526) (100)
Proceeds from issuance of common stock 36 44
Repurchase of common stock (518) (2)
Redemption of preferred stock (150) --
Payment of cash dividends (198) (121)
Other, net (46) 72
------ ------
Net cash used by financing activities (915) (1,435)
------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM BANKS) 184 (200)
Cash and cash equivalents at beginning of period 2,644 2,690
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,828 $2,490
====== ======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 797 $ 828
====== ======
Income taxes $ 542 $ 335
====== ======
Noncash investing activities:
Transfers from loans to foreclosed assets $ 155 $ 305
====== ======
Transfers from foreclosed assets to nonaccrual loans $ -- $ 99
====== ======
===============================================================================================
</TABLE>
5
<PAGE>
FINANCIAL REVIEW
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
==================================================================================================================================
% Change
Quarter ended Sept. 30, 1994 from Nine months ended
-------------------------------- ------------------- --------------------
SEPT. 30, June 30, Sept. 30, June 30, Sept. 30, SEPT. 30, Sept. 30, %
(in millions) 1994 1994 1993 1994 1993 1994 1993 Change
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE PERIOD
Net income $ 217 $ 206 $ 165 5 % 32 % $ 625 $ 422 48 %
Per common share
Net income $ 3.86 $ 3.57 $ 2.74 8 41 $ 10.83 $ 6.92 57
Dividends declared 1.00 1.00 .50 -- 100 3.00 1.50 100
Average common shares outstanding 53.6 54.8 55.7 (2) (4) 54.7 55.5 (1)
Profitability ratios (annualized)
Net income to average total
assets (ROA) 1.65% 1.59% 1.29% 4 28 1.61% 1.11% 45
Net income applicable to common
stock to average common
stockholders' equity (ROE) 22.99 21.67 17.75 6 30 21.91 15.61 40
Efficiency ratio (1) 55.1% 55.2% 58.2% -- (5) 55.3% 57.5% (4)
Average loans $ 34,325 $ 33,630 $ 33,682 2 2 $ 33,607 $ 34,692 (3)
Average assets 52,061 52,013 51,009 -- 2 51,768 50,946 2
Average core deposits 39,466 40,232 40,272 (2) (2) 40,025 40,288 (1)
Net interest margin 5.53% 5.56% 5.65% (1) (2) 5.55% 5.76% (4)
Average staff (full-time equivalent) 19,700 19,500 20,700 1 (5) 19,600 21,000 (7)
AT PERIOD END
Investment securities $ 12,260 $ 13,328 $ 12,796 (8) (4) $ 12,260 $ 12,796 (4)
Loans 34,951 34,172 33,606 2 4 34,951 33,606 4
Allowance for loan losses 2,110 2,120 2,123 -- (1) 2,110 2,123 (1)
Assets 52,164 52,287 51,579 -- 1 52,164 51,579 1
Core deposits 39,097 40,249 40,532 (3) (4) 39,097 40,532 (4)
Common stockholders' equity 3,533 3,637 3,513 (3) 1 3,533 3,513 1
Stockholders' equity 4,022 4,126 4,152 (3) (3) 4,022 4,152 (3)
Tier 1 capital (2) 3,620 3,711 3,639 (2) (1) 3,620 3,639 (1)
Total capital (Tiers 1 and 2) (2) 5,244 5,372 5,360 (2) (2) 5,244 5,360 (2)
Capital ratios
Common stockholders' equity
to assets 6.77% 6.96% 6.81% (3) (1) 6.77% 6.81% (1)
Stockholders' equity to assets 7.71 7.89 8.05 (2) (4) 7.71 8.05 (4)
Risk-based capital (2)
Tier 1 capital 9.62 10.06 9.91 (4) (3) 9.62 9.91 (3)
Total capital 13.93 14.56 14.60 (4) (5) 13.93 14.60 (5)
Leverage (2) 7.01 7.20 7.21 (3) (3) 7.01 7.21 (3)
Book value per common share $ 66.93 $ 67.04 $ 62.98 -- 6 $ 66.93 $ 62.98 6
COMMON STOCK PRICE
High $160-3/8 $159-1/2 $127-3/8 1 26 $160-3/8 $127-3/8 26
Low 145-1/8 136-5/8 107-1/4 6 35 127-5/8 75-1/2 69
Period end 145-1/8 150-3/8 126-3/8 (3) 15 145-1/8 126-3/8 15
==================================================================================================================================
<FN>
(1) The efficiency ratio is defined as noninterest expense divided by the total of net interest income and noninterest income.
(2) See the Capital Adequacy/Ratios section for additional information.
</TABLE>
6
<PAGE>
OVERVIEW
Wells Fargo & Company (Parent) is a bank holding company whose principal
subsidiary is Wells Fargo Bank N.A. (Bank). In this Form 10-Q, Wells Fargo &
Company and its subsidiaries are referred to as the Company.
Net income in the third quarter of 1994 was $217 million, compared with
$165 million in the third quarter of 1993, an increase of 32%. Per share
earnings for the third quarter of 1994 were $3.86 per share, compared with
$2.74 per share in the third quarter of 1993, an increase of 41%. A significant
portion of the increase in earnings from a year ago was due to a lower loan loss
provision. The percentage increase in per share earnings was greater than the
percentage increase in net income due to the Company's continuing stock
repurchase program. Net income for the first nine months of 1994 was
$625 million, or $10.83 per share, compared with $422 million, or $6.92 per
share, in the first nine months of 1993.
Return on average assets (ROA) was 1.65% and 1.61% in the third quarter and
first nine months of 1994, compared with 1.29% and 1.11% in the same periods of
1993, respectively. Return on average common equity (ROE) was 22.99% and 21.91%
in the third quarter and first nine months of 1994, respectively, compared with
17.75% and 15.61% in the same periods of 1993, respectively.
Net interest income on a taxable-equivalent basis was $656 million in the third
quarter of 1994 and 1993. The Company's net interest margin was 5.53% for the
third quarter of 1994, down from 5.65% in the same quarter of 1993. A major
portion of the decrease was due to higher funding costs.
Noninterest income in the third quarter of 1994 was $307 million, compared with
$264 million in the same quarter of 1993, an increase of 16%. The increase was
primarily due to a $36 million accrual related to the disposition of owned and
leased premises that reduced noninterest income in the third quarter of 1993. A
$13 million increase in service charges on deposit accounts and a $12 million
increase in mutual fund and annuity sales fees also contributed to the increase.
Noninterest expense in the third quarter of 1994 was $531 million, down 1% from
$535 million. A decline in foreclosed assets expense was largely offset by a
higher level of incentive compensation.
The Company's provision for loan losses was $50 million in the third quarter of
1994, compared with $60 million in the second quarter of 1994 and $120 million
in the third quarter of 1993. The provision was $170 million in the first nine
months of 1994, compared with $470 million in the first nine months of 1993.
During the third quarter of 1994, net charge-offs totaled $60 million, or .69%
of average total loans (annualized). This compared with $61 million, or .73%,
during the second quarter of 1994 and $121 million, or 1.42%, during the third
quarter of 1993. The allowance for loan losses was 6.04% of total loans at
September 30, 1994, compared with 6.20% at June 30, 1994 and 6.32% at
September 30, 1993.
7
<PAGE>
Loan balances increased 4% since the end of the third quarter of 1993, rising to
$34,951 million at September 30, 1994.
Total nonaccrual and restructured loans were $641 million, or 1.8% of total
loans, at September 30, 1994, compared with $717 million, or 2.1%, at
June 30, 1994 and $1,702 million, or 5.1%, at September 30, 1993. Loans new to
nonaccrual in the third quarter of 1994 were $93 million, compared with $133
million in the second quarter of 1994 and $195 million in the third quarter of
1993. At September 30, 1994, an estimated $319 million, or 50%, of nonaccrual
loans were less than 90 days past due, compared with an estimated $336 million,
or 47%, at June 30, 1994. Foreclosed assets amounted to $306 million at
September 30, 1994, $344 million at June 30, 1994 and $357 million at
September 30, 1993.
Common equity to total assets was 6.77% at September 30, 1994, compared with
6.96% and 6.81% at June 30, 1994 and September 30, 1993, respectively. The
Company's total risk-based capital ratio at September 30, 1994 was 13.93% and
its Tier 1 risk-based capital ratio was 9.62%, exceeding the minimum guidelines
of 8% and 4%, respectively. At June 30, 1994, these risk-based capital ratios
were 14.56% and 10.06%, respectively. The decrease in total and Tier 1 risk-
based capital ratios between June 30, 1994 and September 30, 1994 resulted
primarily from the repurchase of 1,777,598 shares of common stock during the
third quarter. Total and Tier 1 risk-based capital ratios at September 30, 1993
were 14.60% and 9.91%, respectively. The leverage ratios were 7.01%, 7.20% and
7.21% at September 30, 1994, June 30, 1994 and September 30, 1993, respectively.
During the third quarter, business conditions in California continued to
improve, although the pace was moderate and hesitant. Job gains stabilized,
while consumer spending increased moderately. Home sales were still buoyant but
below their peak in the first quarter. Building activity rose somewhat in both
residential and commercial markets. The general belief is that the economic
recovery in California is continuing at a moderate pace.
EARNINGS PERFORMANCE
NET INTEREST INCOME
Net interest income on a taxable-equivalent basis was $656 million in the third
quarter of 1994 and 1993. Taxable-equivalent net interest income was $1,954
million in the first nine months of 1994, compared with $1,993 million in the
same period of 1993. Individual components of net interest income and net
interest margin are presented in the rate/yield table on pages 10 and 11.
The Company's net interest margin was 5.53% for the third quarter of 1994,
compared with 5.65% for the third quarter of 1993. The decrease was
predominantly due to higher funding costs and lower hedging income, primarily
offset by higher yields on earning assets.
Hedging income from derivative contracts decreased approximately $49 million, or
42 basis points of the net interest margin, from the third quarter of 1993 and
$122 million, or 35 basis points, from the nine months ended September 30, 1993,
primarily due to the maturity of contracts. The interest rate derivative
contracts that are maturing, primarily purchased interest
8
<PAGE>
rate floor contracts and interest rate swaps in which the Company receives a
fixed rate, were entered into during a higher interest rate environment and have
benefited from the subsequent decline in rates. Any new replacement contracts
are not expected to result in the same hedging income as the maturing contracts
due to the comparatively lower rate environment.
Loans averaged $34.3 billion in the third quarter of 1994, a 2% increase from
$33.7 billion in the third quarter of 1993. The largest increase occurred in 1-
4 family first mortgage loans. The majority of this increase was due to the
shift in originations from 30-year fixed rate loans to adjustable rate
mortgages, which have generally been held for portfolio purposes. Loans totaled
$35.0 billion at September 30, 1994, up 2% from June 30, 1994 and up 6% from
December 31, 1993. This is the third consecutive quarterly increase in loan
balances since 1990. The Company expects loan balances at December 31, 1994 to
be higher than balances at September 30, 1994.
Investment securities averaged $12.8 billion during the third quarter of 1994,
an 8% increase from $11.9 billion in the third quarter of 1993. However,
investment securities totaled $12.3 billion at September 30, 1994, down 8% from
June 30, 1994 and down 6% from December 31, 1993. Investment securities are
expected to continue to decrease as the cash received from their maturities is
used to fund loan growth.
Average core deposits were $39.5 billion and $40.3 billion in the third quarters
of 1994 and 1993, respectively, and funded 76% and 79% of the Company's average
total assets in the same quarters of 1994 and 1993, respectively.
Despite the recent rise in interest rates, the net interest margin and net
interest income for the fourth quarter of 1994 are expected to remain about the
same as the third quarter of 1994, assuming that there are no significant
increases in deposit rates. In the long-term, the net interest margin is
expected to decline modestly, assuming that deposit rates will gradually
increase in response to rising market interest rates. However, net interest
income is not currently expected to change significantly.
9
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1)
===================================================================================================================================
Quarter ended September 30,
-------------------------------------------------------------------
1994 1993
------------------------------- -------------------------------
INTEREST Interest
AVERAGE YIELDS/ INCOME/ Average Yields/ income/
(in millions) BALANCE RATES EXPENSE balance rates expense
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Investment securities:
At cost:
U.S. Treasury securities $ 2,382 4.66% $ 28 $ 2,323 4.91% $ 29
Securities of U.S. government agencies
and corporations 5,808 6.00 87 8,092 6.31 128
Obligations of states and political subdivisions 16 -- -- 20 -- --
Private collateralized mortgage obligations 1,358 5.74 19 1,265 4.93 16
Other securities 117 5.52 2 173 5.47 2
------- ---- ------- ----
Total investment securities at cost 9,681 5.63 136 11,873 5.88 175
At fair value (2):
U.S. Treasury securities 293 6.65 5 -- -- --
Securities of U.S. government agencies
and corporations 1,503 5.78 23 -- -- --
Private collateralized mortgage obligations 1,245 6.00 20 -- -- --
Other securities 67 14.43 1 -- -- --
------- ---- ------- ----
Total investment securities at fair value 3,108 6.06 49 -- -- --
------- ---- ------- ----
Total investment securities 12,789 5.74 185 11,873 5.88 175
Federal funds sold and securities purchased
under resale agreements 80 4.71 1 804 3.17 6
Loans:
Commercial 7,218 9.20 167 6,917 9.10 159
Real estate 1-4 family first mortgage 8,754 6.80 149 6,726 7.67 129
Other real estate mortgage 7,982 8.74 176 9,357 8.24 194
Real estate construction 969 9.88 24 1,234 8.08 25
Consumer:
Real estate 1-4 family junior lien mortgage 3,342 7.84 66 3,866 6.91 67
Credit card 2,744 15.46 106 2,543 15.53 98
Other revolving credit and monthly payment 2,010 9.75 49 1,846 9.51 44
------- ---- ------- ----
Total consumer 8,096 10.90 221 8,255 10.15 209
Lease financing 1,277 9.15 29 1,190 9.81 29
Foreign 29 -- -- 3 -- --
------- ---- ------- ----
Total loans 34,325 8.89 766 33,682 8.82 745
Other 53 5.94 1 -- -- --
------- ---- ------- ----
Total earning assets $47,247 8.02 953 $46,359 7.96 926
======= ---- ======= ----
FUNDING SOURCES
Interest-bearing liabilities:
Deposits:
Interest-bearing checking $ 4,585 .98 11 $ 4,604 1.08 12
Savings deposits 2,553 1.99 13 2,668 2.08 14
Market rate savings 16,314 2.42 99 16,837 2.23 95
Savings certificates 7,000 4.27 75 7,671 4.33 84
Certificates of deposit 206 7.67 4 211 7.83 4
Other time deposits 92 6.56 2 107 6.65 2
Deposits in foreign offices 1,203 4.52 14 8 -- --
------- ---- ------- ----
Total interest-bearing deposits 31,953 2.71 218 32,106 2.61 211
Federal funds purchased and securities sold
under repurchase agreements 2,427 4.50 28 1,052 2.79 7
Commercial paper and other short-term borrowings 210 4.31 2 243 3.00 2
Senior debt 1,912 5.65 27 2,135 4.57 24
Subordinated debt 1,456 6.07 22 1,921 5.26 26
------- ---- ------- ----
Total interest-bearing liabilities 37,958 3.11 297 37,457 2.86 270
Portion of noninterest-bearing funding sources 9,289 -- -- 8,902 -- --
------- ---- ------- ----
Total funding sources $47,247 2.49 297 $46,359 2.31 270
======= ---- ======= ----
NET INTEREST MARGIN AND NET INTEREST INCOME ON
A TAXABLE-EQUIVALENT BASIS (3) 5.53% $656 5.65% $656
===== ==== ===== ====
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 2,622 $ 2,405
Other 2,192 2,245
------- -------
Total noninterest-earning assets $ 4,814 $ 4,650
======= =======
NONINTEREST-BEARING FUNDING SOURCES
Deposits $ 9,014 $ 8,492
Other liabilities 1,031 1,004
Preferred stockholders' equity 489 639
Common stockholders' equity 3,569 3,417
Noninterest-bearing funding sources used to
fund earning assets (9,289) (8,902)
------- -------
Net noninterest-bearing funding sources $ 4,814 $ 4,650
======= =======
TOTAL ASSETS $52,061 $51,009
======= =======
===================================================================================================================================
<FN>
(1) The average prime rate of Wells Fargo Bank was 7.50% and 6.00% for the quarters ended September 30, 1994 and 1993, respectively,
and 6.81% and 6.00% for the nine months ended September 30, 1994 and 1993, respectively. The average three-month London
Interbank Offered Rate (LIBOR) was 4.97% and 3.26% for the quarters ended September 30, 1994 and 1993, respectively, and 4.34%
and 3.25% for the nine months ended September 30, 1994 and 1993, respectively.
(2) Yields are based on amortized cost balances, which totaled $3,203 million and $3,107 million for the quarter and nine months
ended September 30, 1994, respectively.
(3) Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from
federal and applicable state income taxes. The federal statutory tax rate was 35% for the quarters and nine months ended
September 30, 1994 and 1993.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Nine months ended September 30,
-------------------------------------------------------------------
1994 1993
------------------------------- -------------------------------
INTEREST Interest
AVERAGE YIELDS/ INCOME/ Average Yields/ income/
(in millions) BALANCE RATES EXPENSE balance rates expense
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Investment securities:
At cost:
U.S. Treasury securities $ 2,563 4.80% $ 92 $ 2,256 5.09% $ 86
Securities of U.S. government agencies
and corporations 6,041 6.05 274 7,861 6.43 379
Obligations of states and political subdivisions 18 7.17 1 23 7.44 1
Private collateralized mortgage obligations 1,216 5.75 52 571 5.12 22
Other securities 117 5.49 5 164 5.37 7
------- ------ ------- ------
Total investment securities at cost 9,955 5.69 424 10,875 6.07 495
At fair value (2):
U.S. Treasury securities 131 6.70 7 -- -- --
Securities of U.S. government agencies
and corporations 1,591 5.87 72 -- -- --
Private collateralized mortgage obligations 1,255 6.12 60 -- -- --
Other securities 74 14.10 4 -- -- --
------- ------ ------- ------
Total investment securities at fair value 3,051 6.12 143 -- -- --
------- ------ ------- ------
Total investment securities 13,006 5.79 567 10,875 6.07 495
Federal funds sold and securities purchased
under resale agreements 237 3.41 6 642 3.20 15
Loans:
Commercial 6,902 9.13 472 7,305 9.29 508
Real estate 1-4 family first mortgage 8,332 6.82 426 6,665 8.13 406
Other real estate mortgage 8,076 8.55 517 9,682 8.05 583
Real estate construction 979 9.03 66 1,347 8.61 87
Consumer:
Real estate 1-4 family junior lien mortgage 3,406 7.57 193 3,993 7.03 210
Credit card 2,633 15.36 304 2,614 15.65 307
Other revolving credit and monthly payment 1,989 9.43 140 1,902 9.44 134
------- ------ ------- ------
Total consumer 8,028 10.58 637 8,509 10.22 651
Lease financing 1,256 9.24 87 1,183 9.91 88
Foreign 34 4.78 1 1 -- --
------- ------ ------- ------
Total loans 33,607 8.76 2,206 34,692 8.94 2,323
Other 52 5.98 2 -- -- --
------- ------ ------- ------
Total earning assets $46,902 7.90 2,781 $46,209 8.19 2,833
======= ------ ======= ------
FUNDING SOURCES
Interest-bearing liabilities:
Deposits:
Interest-bearing checking $ 4,658 .98 34 $ 4,608 1.25 43
Savings deposits 2,572 1.99 38 2,792 2.25 47
Market rate savings 16,812 2.33 293 16,416 2.31 283
Savings certificates 7,021 4.19 220 8,164 4.39 268
Certificates of deposit 205 7.67 12 222 8.02 13
Other time deposits 102 6.61 5 114 5.31 5
Deposits in foreign offices 684 4.31 22 8 -- --
------- ------ ------- ------
Total interest-bearing deposits 32,054 2.60 624 32,324 2.73 659
Federal funds purchased and securities sold
under repurchase agreements 1,798 3.99 54 1,092 2.79 23
Commercial paper and other short-term borrowings 179 3.78 5 209 2.90 5
Senior debt 2,048 5.05 77 2,171 4.84 78
Subordinated debt 1,527 5.83 67 1,925 5.17 75
------- ------ ------- ------
Total interest-bearing liabilities 37,606 2.94 827 37,721 2.98 840
Portion of noninterest-bearing funding sources 9,296 -- -- 8,488 -- --
------- ------ ------- ------
Total funding sources $46,902 2.35 827 $46,209 2.43 840
======= ------ ======= ------
NET INTEREST MARGIN AND NET INTEREST INCOME ON
A TAXABLE-EQUIVALENT BASIS (3) 5.55% $1,954 5.76% $1,993
===== ====== ===== ======
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 2,598 $ 2,426
Other 2,268 2,311
------- -------
Total noninterest-earning assets $ 4,866 $ 4,737
======= =======
NONINTEREST-BEARING FUNDING SOURCES
Deposits $ 8,962 $ 8,308
Other liabilities 1,055 984
Preferred stockholders' equity 532 639
Common stockholders' equity 3,613 3,294
Noninterest-bearing funding sources used to
fund earning assets (9,296) (8,488)
------- -------
Net noninterest-bearing funding sources $ 4,866 $ 4,737
======= =======
TOTAL ASSETS $51,768 $50,946
======= =======
===================================================================================================================================
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
NONINTEREST INCOME
==============================================================================================================================
Quarter Nine months
ended September 30, ended September 30,
------------------ % ------------------ %
(in millions) 1994 1993 Change 1994 1993 Change
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts $119 $106 12 % $355 $311 14 %
Fees and commissions:
Credit card membership and other credit card fees 16 16 -- 47 51 (8)
Mutual fund and annuity sales fees 23 11 109 44 34 29
Debit and credit card merchant fees 15 22 (32) 40 63 (37)
Charges and fees on loans 11 13 (15) 32 36 (11)
Shared ATM network fees 11 10 10 31 28 11
All other 28 26 8 87 73 19
---- ---- ---- ----
Total fees and commissions 104 98 6 281 285 (1)
Trust and investment services income:
Asset management and custody fees 30 31 (3) 93 94 (1)
Mutual fund management fees 12 10 20 34 27 26
All other 10 7 43 25 21 19
---- ---- ---- ----
Total trust and investment services income 52 48 8 152 142 7
Investment securities gains 1 -- -- 8 -- --
Income from equity investments accounted for by the:
Equity method 8 7 14 24 20 20
Cost method -- 9 (100) 17 22 (23)
Check printing charges 10 9 11 30 28 7
Gains (losses) from dispositions of operations -- (36) (100) 10 (35) --
Real estate investment gains (losses) -- -- -- 3 (7) --
Gains on sales of loans 1 4 (75) 3 10 (70)
All other 12 19 (37) 23 22 5
---- ---- ---- ----
Total $307 $264 16 % $906 $798 14 %
==== ==== ==== ==== ==== ====
==============================================================================================================================
</TABLE>
The growth in service charges on deposit accounts in the third quarter of 1994
compared with the third quarter of 1993 was primarily due to increased fees for
overdrafts and higher business checking charges.
The increase in the total fees and commissions in the third quarter of 1994
compared with the third quarter of 1993 was predominantly due to growth in
mutual fund and annuity sales fees, primarily offset by a decrease in debit and
credit card merchant fees.
The increase in mutual fund and annuity sales fees was due to a $17 million
growth in annuity sales fees from $5 million in the third quarter of 1993 to $22
million in the third quarter of 1994. Sales volume of annuities grew from $109
million in the third quarter of 1993 to $460 million in the third quarter of
1994. The change in the mix of products sold, from bond-oriented mutual funds
to fixed-rate annuities, reflected a combination of influences, including a
shift in investor preferences due to rising interest rates and the introduction
of new non-commission retail products. Sales of mutual funds and annuities
contributed to fees and commissions income through sales fees and to trust and
investment services income through mutual fund management fees.
12
<PAGE>
The decrease in debit and credit card merchant fees was primarily due to an
alliance that the Company entered into in November 1993. The agreement with
Card Establishment Services (CES) formed an alliance for merchant credit and
debit card processing services. Under this agreement, the Company is
responsible for marketing and sales, initial merchant credit analysis and
customer service; CES provides technology and processing operations. The
Company retains an interest in the net revenues from processing the transactions
that are now reported as income from equity investments accounted for by the
equity method, rather than reported as income from debit and credit card
merchant fees. As a result, income from the alliance contributed approximately
$2 million and $5 million to income from equity investments in the third quarter
and nine months ended September 30, 1994, respectively.
"All other" fees and commissions include amortization expense for purchased
mortgage servicing rights. This amortization expense totaled $2 million in the
third quarter of 1994, compared with $3 million in the same period of 1993. At
September 30, 1994, the balance of purchased mortgage servicing rights was
$36 million, compared with $15 million at September 30, 1993.
The increase in trust and investment services income in the third quarter of
1994 compared with the third quarter of 1993 was significantly due to greater
mutual fund investment management fees, reflecting the overall growth in the
fund families' net assets. The Stagecoach family of 24 funds had $5.8 billion
of assets under management at September 30, 1994, compared with $4.0 billion at
September 30, 1993. The Stagecoach family consists of both retail and
institutional funds. The retail funds, first introduced in 1992, are primarily
distributed through the branch network. These funds had $4.8 billion under
management at September 30, 1994, compared with $3.6 billion at September 30,
1993. The institutional funds, first introduced in mid-1993, are offered
primarily to selected groups of investors and certain corporations, partnerships
and other business entities. At September 30, 1994, these funds had $933
million of assets under management, compared with $445 million at
September 30, 1993. The Overland Express family of 16 funds, which had $3.6
billion of assets under management at September 30, 1994, compared with $4.0
billion at September 30, 1993, is sold nationwide through brokers. The decline
in assets under management was mostly in the Variable Rate Government Fund, the
largest Overland Fund, reflecting a shift of investor preferences away from
bond-oriented funds due to the rising interest rate environment. In addition
to managing Overland Express Funds and all the funds in the Stagecoach family,
the Company also managed or maintained personal trust, employee benefit trust
and agency assets of approximately $46 billion at September 30, 1994, compared
with $45 billion at September 30, 1993. Mutual fund management fees are
expected to continue to be higher in 1994 than 1993.
In the third quarter of 1993, income from cost method equity investments
included $9 million in net gains on sales and special distributions from
nonmarketable equity investments.
In the third quarter of 1993, the Company made a $36 million accrual primarily
related to the disposition of owned and leased premises resulting from reduced
space requirements; for example, downsizing some full service branches into
supermarket locations and into other smaller, midsized branches. The remaining
reserve of $5 million at October 31, 1994 relates substantially to branch
closures scheduled to occur by year-end 1994. Additional accruals may be made
in the fourth quarter of 1994 depending on the Company's plans for further
reducing its space requirements for full service branches.
13
<PAGE>
"All Other" noninterest income in the third quarter of 1993 included $18 million
of interest income received as a result of the settlement of California
Franchise Tax Board audits related to the appropriate years for claiming
deductions applicable to the 1976 through 1986 tax returns.
Noninterest income from fee-based products, mutual fund management fees and
deposit-related services is expected to continue to be higher in 1994 than 1993.
<TABLE>
<CAPTION>
NONINTEREST EXPENSE
===============================================================================================================
Quarter Nine months
ended September 30, ended September 30,
------------------ % ------------------ %
(in millions) 1994 1993 Change 1994 1993 Change
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries $213 $193 10 % $ 598 $ 574 4 %
Employee benefits 53 63 (16) 161 172 (6)
Net occupancy 53 56 (5) 161 166 (3)
Equipment 40 36 11 120 104 15
Federal deposit insurance 25 28 (11) 76 86 (12)
Contract services 27 15 80 71 41 73
Certain identifiable intangibles 15 18 (17) 47 60 (22)
Advertising and promotion 11 10 10 44 44 --
Operating losses 16 10 60 41 36 14
Telecommunications 12 11 9 35 33 6
Postage 11 11 -- 33 33 --
Goodwill 9 9 -- 27 28 (4)
Outside professional services 6 10 (40) 25 31 (19)
Check printing 8 8 -- 23 25 (8)
Stationery and supplies 7 8 (13) 22 23 (4)
Travel and entertainment 7 7 -- 22 20 10
Escrow and collection agency fees 5 6 (17) 15 19 (21)
Security 5 5 -- 15 14 7
Outside data processing 2 5 (60) 7 13 (46)
Foreclosed assets (8) 15 -- (2) 50 --
All other 14 11 27 39 33 18
---- ---- ------ ------
Total $531 $535 (1)% $1,580 $1,605 (2)%
==== ==== === ====== ====== ===
===============================================================================================================
</TABLE>
The increase in salaries expense in the third quarter of 1994 was primarily due
to an increase in incentive compensation related to the increase in annuity
sales. The Company's full-time equivalent staff, including hourly employees,
averaged approximately 19,700 in the third quarter of 1994, compared with
approximately 20,700 in the third quarter of 1993.
Employee benefits in the third quarter of 1993 included an $11 million accrual
for the adoption of Statement of Financial Accounting Standards No. 112 for
postemployment benefits.
The increase in contract services expense in the third quarter of 1994 compared
with the same quarter of 1993 was predominantly due to the development of new
products and services and system upgrades throughout the Company.
14
<PAGE>
The table below shows the major components of foreclosed assets expense.
<TABLE>
<CAPTION>
====================================================================================================
Quarter Nine months
ended September 30, ended September 30,
------------------ ------------------
(in millions) 1994 1993 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating expenses $ 11 $ 19 $ 38 $ 47
Operating revenues (8) (11) (23) (32)
Net (gains) losses from write-downs/sales (11) 7 (17) 35
---- ---- ---- ----
Total $ (8) $ 15 $ (2) $ 50
==== ==== ==== ====
====================================================================================================
</TABLE>
The decrease in foreclosed assets expense was largely due to a decrease in
write-downs from $10 million in the third quarter of 1993 to $2 million in the
third quarter of 1994 and increased gains on sales. The Company intends to
continue to emphasize disposing of its foreclosed assets.
Total noninterest expense in 1994 is likely to be lower than 1993 primarily due
to decreases in foreclosed assets expense.
INCOME TAXES
The Company's effective tax rate was 43% for the third quarter of 1994 and 44%
for the first nine months of 1994, compared with 38% and 41% for the same
periods in 1993, respectively. The effective tax rate was lower for the third
quarter of 1993 due to a net $14 million reduction of income tax expense related
to the impact of the Omnibus Budget Reconciliation Act of 1993 and a $3 million
reduction of income tax expense related to the settlement of California
Franchise Tax Board audits of the Company's 1976 through 1986 tax returns.
15
<PAGE>
BALANCE SHEET ANALYSIS
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
===============================================================================================================================
SEPTEMBER 30, December 31, September 30,
1994 1993 1993
------------------ ------------------ --------------------
ESTIMATED Estimated Estimated
FAIR fair fair
(in millions) COST VALUE Cost value Cost value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
HELD-TO-MATURITY SECURITIES
AT COST:
U.S. Treasury securities $1,958 $1,917 $2,365 $2,383 $ 2,367 $ 2,396
Securities of U.S. government
agencies and corporations (1) 5,687 5,493 6,570 6,644 8,569 8,706
Obligations of states and political subdivisions 16 15 18 18 19 19
Securities issued by foreign governments 88 86 90 91 90 92
Private collateralized mortgage obligations (2) 1,343 1,282 815 813 1,665 1,660
Corporate debt securities 28 28 29 29 32 32
------ ------ ------ ------ ------- -------
Total debt securities 9,120 8,821 9,887 9,978 12,742 12,905
Corporate and Federal Reserve Bank stock -- -- -- -- 54 54
------ ------ ------ ------ ------- -------
Total $9,120 $8,821 $9,887 $9,978 $12,796 $12,959
====== ====== ====== ====== ======= =======
AVAILABLE-FOR-SALE SECURITIES
AT FAIR VALUE:
U.S. Treasury securities $ 372 $ 369 $ -- $ -- $ -- $ --
Securities of U.S. government
agencies and corporations (1) 1,536 1,472 1,747 1,749 -- --
Private collateralized mortgage obligations (2) 1,308 1,229 1,340 1,334 -- --
Corporate debt securities 24 38 31 48 -- --
------ ------ ------ ------ ------- -------
Total debt securities 3,240 3,108 3,118 3,131
Marketable equity securities 16 32 17 40 -- --
------ ------ ------ ------ ------- -------
Total $3,256 $3,140 $3,135 $3,171 $ -- $ --
====== ====== ====== ====== ======= =======
===============================================================================================================================
<FN>
(1) All securities of U.S. government agencies and corporations are mortgage-backed securities.
(2) All private collateralized mortgage obligations (CMOs) are AAA rated bonds collateralized by 1-4 family residential first
mortgages.
</TABLE>
Investment securities were $12.3 billion at September 30, 1994, an 8% decrease
from $13.3 billion at June 30, 1994 and a 4% decrease from $12.8 billion at
September 30, 1993. The investment securities portfolio at September 30, 1994
was comprised of $9.1 billion of held-to-maturity securities at cost and $3.1
billion of available-for-sale securities at fair value.
At September 30, 1994, the held-to-maturity securities portfolio had an
estimated unrealized net loss of $299 million (which reflected estimated
unrealized gross gains of $4 million), or 3.3% of the cost of the portfolio. At
December 31, 1993, the held-to-maturity portfolio had an estimated unrealized
net gain of $91 million (which reflected estimated unrealized gross losses of
$23 million), or .9% of the cost of the portfolio.
At September 30, 1994, the available-for-sale securities portfolio had an
unrealized net loss of $116 million, or 3.6 % of the cost of the portfolio,
comprised of unrealized gross losses of $147 million and unrealized gross gains
of $15 million on debt securities and unrealized gross gains of $16 million on
marketable equity securities. 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, 1994, the unrealized net after-tax loss
amounted to $67 million, compared with an unrealized net after-tax gain of $21
million at December 31, 1993.
16
<PAGE>
The unrealized net loss in both the held-to-maturity and available-for-sale
portfolios was predominantly due to investments in mortgage-backed
securities. These unrealized net losses reflected an increasing interest rate
environment. As interest rates rise, the Company expects the unrealized losses
to grow and prepayments to decrease. Although it does not presently intend to
sell the available-for-sale securities, the Company may decide to sell certain
of the securities to maintain approximately the current level of earning assets
(for example, to offset loan growth that may exceed expected maturities and
prepayments of securities), resulting in the realization of losses.
The following table provides the expected remaining maturities and yields
(taxable-equivalent basis) of debt securities within the investment portfolio.
<TABLE>
<CAPTION>
====================================================================================================================
September 30, 1994
--------------------------------------------------------------
Expected remaining principal maturity
--------------------------------------------------------------
Weighted
average
expected
Weighted remaining One year or less
Total average maturity -----------------
(in millions) amount yield (yrs.-mos.) Amount Yield
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HELD-TO-MATURITY SECURITIES:
U.S. Treasury securities $ 1,958 4.59% 1-3 $1,010 4.48%
Securities of U.S. government agencies
and corporations 5,687 6.13 3-8 1,207 5.67
Obligations of states and political
subdivisions 16 6.49 4-5 3 6.52
Securities issued by foreign governments 88 5.17 1-2 36 4.63
Private collateralized mortgage obligations 1,343 6.09 2-8 214 5.75
Corporate debt securities 28 6.36 1-10 7 6.17
------- ------
Total cost $ 9,120 5.78% 3-0 $2,477 5.18%
======= ===== ====== =====
ESTIMATED FAIR VALUE $ 8,821 $2,440
======= ======
AVAILABLE-FOR-SALE SECURITIES (1):
U.S. Treasury securities $ 372 6.62% 3-4 $ -- --%
Securities of U.S. government agencies
and corporations 1,536 5.54 2-10 185 6.66
Private collateralized mortgage obligations 1,308 6.38 4-2 162 5.85
Corporate debt securities 24 22.46 5-11 -- --
------- ------
Total cost $ 3,240 6.13% 3-5 $ 347 6.28%
======= ===== ====== =====
ESTIMATED FAIR VALUE $ 3,108 $ 338
======= ======
TOTAL COST OF DEBT SECURITIES $12,360 5.87% 3-1 $2,824 5.13%
======= ===== ==== ====== =====
====================================================================================================================
<CAPTION>
====================================================================================================================
September 30, 1994
------------------------------------------------------------------
Expected remaining principal maturity
------------------------------------------------------------------
After one year After five years
through five years through ten years After ten years
------------------ ----------------- -----------------
(in millions) Amount Yield Amount Yield Amount Yield
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
HELD-TO-MATURITY SECURITIES:
U.S. Treasury securities $ 948 4.70% $ -- --% $ -- --%
Securities of U.S. government agencies
and corporations 3,391 5.99 856 7.07 233 7.06
Obligations of states and political
subdivisions 11 6.51 -- -- 2 6.37
Securities issued by foreign governments 52 5.55 -- -- -- --
Private collateralized mortgage obligations 1,056 6.15 73 6.10 -- --
Corporate debt securities 21 6.42 -- -- -- --
------ ------ ----
Total cost $5,479 5.80% $ 929 6.99% $235 7.05%
====== ==== ====== ===== ==== =====
ESTIMATED FAIR VALUE $5,269 $ 887 $225
====== ====== ====
AVAILABLE-FOR-SALE SECURITIES (1):
U.S. Treasury securities $ 372 6.62% $ -- --% $ -- --%
Securities of U.S. government agencies
and corporations 1,245 5.37 106 5.52 -- --
Private collateralized mortgage obligations 754 6.37 379 6.39 13 13.66
Corporate debt securities -- -- 24 22.46 -- --
------ ------ ----
Total cost $2,371 5.88% $ 509 6.97% $ 13 13.66%
====== ==== ====== ===== ==== =====
ESTIMATED FAIR VALUE $2,268 $ 489 $ 13
====== ====== ====
TOTAL COST OF DEBT SECURITIES $7,850 5.82% $1,438 6.98% $248 7.40%
====== ==== ====== ===== ==== =====
====================================================================================================================
<FN>
(1) The weighted average yield is computed using the amortized cost of available-for-sale investment securities
carried at fair value.
</TABLE>
The weighted average expected remaining maturity of the debt securities
portfolio was 3 years and 1 month at September 30, 1994, compared with 3 years
at June 30, 1994 and 2 years and 7 months at December 31, 1993. The increase in
the expected remaining maturity reflects a higher interest rate environment, in
which prepayments are likely to slow down. The short-term debt securities
portfolio serves to maintain asset liquidity and to fund loan growth.
17
<PAGE>
<TABLE>
<CAPTION>
LOAN PORTFOLIO
========================================================================================================================
% Change
Sept. 30, 1994 from
---------------------
SEPT. 30, Dec. 31, Sept. 30, Dec. 31, Sept. 30,
(in millions) 1994 1993 1993 1993 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial (1)(2) $ 7,511 $ 6,912 $ 6,982 9 % 8 %
Real estate 1-4 family first mortgage 8,883 7,458 6,913 19 28
Other real estate mortgage (3) 8,040 8,286 9,096 (3) (12)
Real estate construction 950 1,110 1,206 (14) (21)
Consumer:
Real estate 1-4 family junior lien mortgage 3,342 3,583 3,793 (7) (12)
Credit card 2,830 2,600 2,538 9 12
Other revolving credit and monthly payment 2,071 1,920 1,865 8 11
------- ------- -------
Total consumer 8,243 8,103 8,196 2 1
Lease financing 1,300 1,212 1,196 7 9
Foreign 24 18 17 33 41
------- ------- -------
Total loans (net of unearned income,
including net deferred loan fees,
of $348, $336 and $344) $34,951 $33,099 $33,606 6 % 4 %
======= ======= ======= ==== ====
========================================================================================================================
<FN>
(1) Includes loans to real estate developers of $371 million, $505 million and $506 million at September 30, 1994,
December 31, 1993 and September 30, 1993, respectively.
(2) Includes agricultural loans (loans to finance agricultural production and other loans to farmers) of $696 million,
$643 million and $583 million at September 30, 1994, December 31, 1993 and September 30, 1993, respectively.
(3) Includes agricultural loans secured by real estate of $260 million, $225 million and $243 million at September 30,
1994, December 31, 1993 and September 30, 1993, respectively.
</TABLE>
The largest growth in the loan portfolio in the first nine months of 1994 was
from real estate 1-4 family first mortgage loans which grew by 19%. The
majority of the growth was due to the shift in originations from 30-year fixed
rate loans to adjustable rate mortgages, which have generally been held for
portfolio purposes.
The table below presents comparative period-end commercial real estate loans.
<TABLE>
<CAPTION>
=======================================================================================================
% Change
Sept. 30, 1994 from
---------------------
SEPT. 30, Dec. 31, Sept. 30, Dec. 31, Sept. 30,
(in millions) 1994 1993 1993 1993 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial loans to
real estate developers (1) $ 371 $ 505 $ 506 (27)% (27)%
Other real estate mortgage 8,040 8,286 9,096 (3) (12)
Real estate construction 950 1,110 1,206 (14) (21)
------ ------ -------
Total $9,361 $9,901 $10,808 (5)% (13)%
====== ====== ======= ==== ====
=======================================================================================================
<FN>
(1) Included in commercial loans.
</TABLE>
18
<PAGE>
The Company's commercial real estate loan portfolio was $9.4 billion at
September 30, 1994, compared with $9.9 billion at December 31, 1993 and $10.8
billion at September 30, 1993, a 5% and 13% decrease, respectively. These
decreases were primarily due to payments received.
Over the years, the Company has prospered as an active commercial real estate
lender. However, as a result of the recent recession and overbuilt real estate
markets, the Company's earnings during the past three years were significantly
affected by its relatively high levels of commercial real estate loans. The
Company's real estate borrowers with properties located in Southern California
have been particularly affected. There is still an oversupply of certain types
of commercial real estate in the U.S. (particularly California) which could last
for a number of years. However, a substantial amount of liquidity has returned
to the real estate markets, mostly in apartments and shopping centers and, to a
lesser degree, in other property types. Many developers are successfully
financing acquisition or development programs through the capital markets and
many banks are showing interest in financing certain product types. This
liquidity is contributing significantly to the Company's progress in reducing
its nonaccrual loans and foreclosed assets. As a result of this liquidity in
the marketplace and the Company's strengthened lending practices (including
limiting the degree of the portfolio concentration in any product type, location
or to any individual borrower), nonaccrual commercial real estate loans have
declined to 5.1% of the commercial real estate portfolio at September 30, 1994,
down from 11.5% at September 30, 1993 and 12.3% at its peak at December 31,
1992. The Company has begun to see growth in its out-of-state commercial real
estate loan portfolio and expects growth during 1995.
19
<PAGE>
<TABLE>
<CAPTION>
NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS
===========================================================================================================================
SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(in millions) 1994 1994 1994 1993 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial (1)(2) $109 $ 121 $ 165 $ 252 $ 441
Real estate 1-4 family first mortgage 76 88 90 99 96
Other real estate mortgage (3) 334 410 413 578 850
Real estate construction 101 72 202 235 278
Consumer:
Real estate 1-4 family junior lien mortgage 14 19 22 27 25
Other revolving credit and monthly payment 3 2 3 3 6
---- ------ ------ ------ ------
Total nonaccrual loans 637 712 895 1,194 1,696
Restructured loans 4 5 5 6 6
---- ------ ------ ------ ------
Nonaccrual and restructured loans 641 717 900 1,200 1,702
As a percentage of total loans 1.8% 2.1% 2.7% 3.6% 5.1%
Foreclosed assets (4) 306 344 354 348 357
Real estate investments (5) 12 11 11 15 15
---- ------ ------ ------ ------
Total nonaccrual and restructured loans
and other assets $959 $1,072 $1,265 $1,563 $2,074
==== ====== ====== ====== ======
===========================================================================================================================
<FN>
(1) Includes loans to real estate developers of $38 million, $41 million, $47 million, $91 million and $116 million at
September 30, 1994, June 30, 1994, March 31, 1994, December 31, 1993 and September 30, 1993, respectively.
(2) Includes agricultural loans of $1 million, $2 million, $2 million, $9 million and $24 million at September 30, 1994,
June 30, 1994, March 31, 1994, December 31, 1993 and September 30, 1993, respectively.
(3) Includes agricultural loans secured by real estate of $3 million, $3 million, $4 million, $24 million and $24 million
at September 30, 1994, June 30, 1994, March 31, 1994, December 31, 1993 and September 30, 1993, respectively.
(4) Includes agricultural properties of $23 million, $25 million, $25 million, $26 million and $23 million at September 30,
1994, June 30, 1994, March 31, 1994, December 31, 1993 and September 30, 1993, respectively.
(5) Represents the amount of real estate investments (contingent interest loans accounted for as investments) that would be
classified as nonaccrual if such assets were loans. Real estate investments totaled $26 million, $28 million,
$29 million, $34 million and $39 million at September 30, 1994, June 30, 1994, March 31, 1994, December 31, 1993 and
September 30, 1993, respectively.
</TABLE>
Nonaccrual loans at September 30, 1994 declined for the eighth consecutive
quarter following nine quarters of increases. The general decline of nonaccrual
loans over the last eight quarters largely resulted from loan payments and loans
returned to accrual, together with a reduction in new loans placed on
nonaccrual. While the overall credit quality of the loan portfolio continues to
improve, the Company anticipates that the amount of new loans placed on
nonaccrual will fluctuate from quarter to quarter. The placement of commercial
and real estate loans on nonaccrual, as well as transfers to foreclosed assets,
are likely to continue to occur, although not at levels seen in the last three
years, until, and for a period after, the economy fully recovers and the
oversupply of properties is reduced with resulting increases in occupancy and
rental rates. It may take years to absorb the surplus office capacity in
certain geographic markets (particularly in Southern California) where the
Company has commercial real estate outstandings.
20
<PAGE>
The table below summarizes the quarterly trend of the changes in total
nonaccrual loans.
<TABLE>
<CAPTION>
===================================================================================================================
SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(in millions) 1994 1994 1994 1993 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, BEGINNING OF QUARTER $712 $ 895 $1,194 $1,696 $1,898
New loans placed on nonaccrual 93 133 52 113 195
Charge-offs (38) (27) (35) (55) (90)
Payments (71) (91) (121) (309) (188)
Transfers to foreclosed assets (14) (27) (37) (64) (32)
Loans returned to accrual (45) (172) (157) (188) (81)
Loans sold -- -- (3) -- (2)
Other additions (deductions) -- 1 2 1 (4)
---- ----- ------ ------ ------
BALANCE, END OF QUARTER $637 $ 712 $ 895 $1,194 $1,696
==== ===== ====== ====== ======
===================================================================================================================
</TABLE>
The table below summarizes the changes in nonaccrual loans by loan category for
the quarters ended September 30, 1994 and June 30, 1994.
<TABLE>
<CAPTION>
==================================================================================================================================
Real estate
1-4 family Other real
first estate Real estate
(in millions) Commercial mortgage mortgage construction Consumer Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
QUARTER ENDED SEPTEMBER 30, 1994
Balance, beginning of quarter $121 $88 $410 $ 72 $21 $712
New loans placed on nonaccrual 11 6 26 48 2 93
Charge-offs (5) (1) (22) (10) -- (38)
Payments:
Principal (10) (15) (19) (10) (5) (59)
Interest applied to principal (5) -- (6) (1) -- (12)
Transfers to foreclosed assets -- -- (13) (1) -- (14)
Loans returned to accrual (2) (3) (40) -- -- (45)
Other additions (deductions) (1) 1 (2) 3 (1) --
---- --- ---- ---- --- ----
Balance, end of quarter $109 $76 $334 $101 $17 $637
==== === ==== ==== === ====
QUARTER ENDED JUNE 30, 1994
Balance, beginning of quarter $165 $90 $413 $202 $25 $895
New loans placed on nonaccrual (1) 19 9 90 14 1 133
Charge-offs (4) (1) (22) -- -- (27)
Payments:
Principal (21) (9) (19) (26) (4) (79)
Interest applied to principal (5) -- (6) -- (1) (12)
Transfers to foreclosed assets (6) -- (19) (2) -- (27)
Loans returned to accrual (27) (1) (35) (109) -- (172)
Other additions (deductions) -- -- 8 (7) -- 1
---- --- ---- ---- --- ----
Balance, end of quarter $121 $88 $410 $72 $21 $712
==== === ==== === === ====
==================================================================================================================================
<FN>
(1) Additions to other real estate mortgage loans include $28 million for land (excluding 1-4 family land) and $22 million for
office buildings.
</TABLE>
21
<PAGE>
The table below summarizes the quarterly trend of the changes in foreclosed
assets.
<TABLE>
<CAPTION>
===================================================================================================================
SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(in millions) 1994 1994 1994 1993 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, BEGINNING OF QUARTER $344 $354 $348 $357 $391
Additions 30 63 62 100 65
Sales (64) (63) (42) (89) (76)
Charge-offs (1) (3) (8) (10) (8)
Write-downs (2) (3) (6) (7) (10)
Other deductions (1) (4) -- (3) (5)
---- ---- ---- ---- ----
BALANCE, END OF QUARTER $306 $344 $354 $348 $357
==== ==== ==== ==== ====
===================================================================================================================
</TABLE>
Approximately 58% of the foreclosed assets at September 30, 1994 have been in
the Company's portfolio less than one year.
NONACCRUAL LOANS BY PERFORMANCE CATEGORY
At September 30, 1994, an estimated $319 million, or 50%, of nonaccrual loans
were less than 90 days past due, including an estimated $248 million, or 39%,
that were current (less than 30 days past due) as to payment of principal and
interest. This compares with an estimated $336 million, or 47%, of nonaccrual
loans that were less than 90 days past due at June 30, 1994, including an
estimated $242 million, or 34%, that were current.
For all loans on nonaccrual during the third and second quarter of 1994
(including loans no longer on nonaccrual at September 30, 1994 and June 30,
1994), cash interest payments of $16 million and $18 million, respectively, were
received while the loans were on nonaccrual status. Of the $16 million received
in the third quarter, $4 million was recognized as interest income and
$12 million was applied to principal. Of the $18 million received in the second
quarter, $7 million was recognized as interest income and $11 million was
applied to principal. The average nonaccrual book principal loan balances (net
of charge-offs and interest applied to principal) were $662 million and
$830 million for the quarters ended September 30, 1994 and June 30, 1994,
respectively.
The table on the following page presents the estimated amount of nonaccrual
loans that were contractually past due and those that were contractually current
at the end of the third and second quarters of 1994. There can be no assurance
that individual borrowers will continue to perform at the level indicated or
that the performance characteristics will not change significantly. Both book
and contractual principal balances are presented in the table, the difference
reflecting charge-offs and interest applied to principal. The ratio of book to
22
<PAGE>
contractual principal balance was 64% at September 30, 1994, compared with 66%
at June 30, 1994.
<TABLE>
<CAPTION>
====================================================================================================
Cumulative
cash
Book interest Contractual
principal Cumulative applied to principal
(in millions) balance charge-offs(5) principal(5) balance
- ----------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1994
------------------------------------------------------
<S> <C> <C> <C> <C>
Contractually past due (1):
Payments not made (2):
90 days or more past due $113 $ 5 $ -- $ 118
Less than 90 days past due 2 -- -- 2
---- ---- ---- ------
115 5 -- 120
---- ---- ---- ------
Payments made (3):
90 days or more past due 205 79 22 306
Less than 90 days past due 69 38 23 130
---- ---- ---- ------
274 117 45 436
---- ---- ---- ------
Total past due 389 122 45 556
Contractually current (4) 248 131 60 439
---- ---- ---- ------
Total nonaccrual loans $637 $253 $105 $ 995
==== ==== ==== ======
- ----------------------------------------------------------------------------------------------------
June 30, 1994
-------------------------------------------------------
Contractually past due (1):
Payments not made (2):
90 days or more past due $155 $ 4 $ -- $ 159
Less than 90 days past due 14 1 -- 15
---- ---- ----- ------
169 5 -- 174
---- ---- ----- ------
Payments made (3):
90 days or more past due 221 80 27 328
Less than 90 days past due 80 43 20 143
---- ---- ----- -----
301 123 47 471
---- ---- ----- -----
Total past due 470 128 47 645
Contractually current (4) 242 125 61 428
---- ---- ----- -----
Total nonaccrual loans $712 $253 $108 $1,073
==== ==== ==== ======
====================================================================================================
<FN>
(1) Contractually past due is defined as a borrower whose loan principal or interest payment is
30 days or more past due.
(2) Borrower has made no payments since being placed on nonaccrual.
(3) Borrower has made some payments since being placed on nonaccrual. Approximately $215 million
and $239 million of these loans had some payments made on them during the third and second
quarters of 1994, respectively.
(4) Contractually current is defined as a loan for which principal and interest are being paid in
accordance with the terms of the loan. All of the contractually current loans were placed on
nonaccrual due to uncertainty of receiving full timely collection of interest or principal.
(5) Cumulative amounts recorded since inception of the loan.
</TABLE>
23
<PAGE>
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
The following table shows loans contractually past due 90 days or more as to
interest or principal, but not included in the nonaccrual or restructured
categories. All loans in this category are both well-secured and in the process
of collection or are consumer loans or real estate 1-4 family first mortgage
loans that are exempt under regulatory rules from being classified as
nonaccrual.
<TABLE>
<CAPTION>
====================================================================================================================
SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(in millions) 1994 1994 1994 1993 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 7 $ 7 $ 6 $ 4 $ 10
Real estate 1-4 family first mortgage 19 25 19 19 31
Other real estate mortgage 45 53 68 14 28
Real estate construction 1 4 11 8 4
Consumer:
Real estate 1-4 family junior lien mortgage 5 7 6 6 8
Credit card 31 33 40 43 42
Other revolving credit and monthly payment 5 2 1 1 2
---- ---- ---- --- ----
Total consumer 41 42 47 50 52
Lease financing -- -- 1 -- --
---- ---- ---- --- ----
Total $113 $131 $152 $95 $125
==== ==== ==== === ====
====================================================================================================================
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
=============================================================================================================
Quarter ended Nine months ended
---------------------------------- ---------------------
SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
(in millions) 1994 1994 1993 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, BEGINNING OF PERIOD $2,120 $2,121 $2,124 $2,122 $2,067
Provision for loan losses 50 60 120 170 470
Loan charge-offs:
Commercial (1) (9) (5) (22) (39) (81)
Real estate 1-4 family first mortgage (5) (6) (5) (16) (17)
Other real estate mortgage (23) (22) (61) (58) (176)
Real estate construction (9) (1) (16) (14) (55)
Consumer:
Real estate 1-4 family junior lien mortgage (5) (7) (5) (20) (19)
Credit card (32) (35) (43) (107) (137)
Other revolving credit and monthly payment (7) (10) (9) (25) (32)
------ ------ ------ ------ ------
Total consumer (44) (52) (57) (152) (188)
Lease financing (3) (4) (4) (11) (13)
------ ------ ------ ------ ------
Total loan charge-offs (93) (90) (165) (290) (530)
------ ------ ------ ------ ------
Loan recoveries:
Commercial (2) 10 12 11 30 49
Real estate 1-4 family first mortgage 2 1 1 6 2
Other real estate mortgage 7 2 19 19 31
Real estate construction 5 2 1 12 1
Consumer:
Real estate 1-4 family junior lien mortgage 1 1 1 3 2
Credit card 3 7 5 15 15
Other revolving credit and monthly payment 3 2 3 8 9
------ ------ ------ ------ ------
Total consumer 7 10 9 26 26
Lease financing 2 2 3 15 7
------ ------ ------ ------ ------
Total loan recoveries 33 29 44 108 116
------ ------ ------ ------ ------
Total net loan charge-offs (60) (61) (121) (182) (414)
------ ------ ------ ------ ------
BALANCE, END OF PERIOD $2,110 $2,120 $2,123 $2,110 $2,123
====== ====== ====== ====== ======
Total net loan charge-offs as a percentage
of average total loans (annualized) .69% .73% 1.42% .72% 1.59%
====== ====== ====== ====== ======
Allowance as a percentage of total loans 6.04% 6.20% 6.32% 6.04% 6.32%
====== ====== ====== ====== ======
=============================================================================================================
<FN>
(1) Includes charge-offs of loans to real estate developers of none, none and $1 million in the quarters
ended September 30, 1994, June 30, 1994 and September 30, 1993, respectively, and $10 million and
$5 million in the nine months ended September 30, 1994 and 1993, respectively.
(2) Includes recoveries from loans to real estate developers of $2 million, none and $1 million in the
quarters ended September 30, 1994, June 30, 1994 and September 30, 1993, and $2 million and $2 million in
the nine months ended September 30, 1994 and 1993, respectively.
</TABLE>
25
<PAGE>
The table below presents net charge-offs by loan category.
<TABLE>
<CAPTION>
==================================================================================================================
Quarter ended
---------------------------------------------------------------
SEPTEMBER 30, 1994 June 30, 1994 September 30, 1993
------------------ ----------------- ------------------
% OF % of % of
AVERAGE average average
(in millions) AMOUNT LOANS(1) Amount loans(1) Amount loans(1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $(1) (.04)% $(7) (.41)% $ 11 .58%
Real estate 1-4 family first mortgage 3 .12 5 .24 4 .26
Other real estate mortgage 16 .72 20 1.00 42 1.75
Real estate construction 4 1.54 (1) (.57) 15 4.88
Consumer:
Real estate 1-4 family junior lien mortgage 4 .49 6 .71 4 .92
Credit card (2) 29 4.27 28 4.49 38 5.95
Other revolving credit and monthly payment 4 .98 8 1.39 6 .60
--- --- ----
Total consumer 37 1.89 42 2.11 48 2.32
Lease financing 1 .32 2 .68 1 .63
--- --- ----
Total net loan charge-offs $60 .69 % $61 .73 % $121 1.42%
=== ==== === ==== ==== ====
==================================================================================================================
<FN>
(1) Calculated on an annualized basis.
(2) The second quarter of 1994 includes $2 million of recoveries from the sale of previously charged off loans.
</TABLE>
Total net charge-offs for the third quarter of 1994 were .69% of average total
loans on an annualized basis. Net charge-offs were largely due to credit card
loans and other real estate mortgage loans. Credit card net charge-offs were
primarily due to bankruptcies and the current economic environment (particularly
in Southern California). Despite the high level in relation to other loan
types, credit card net charge-offs continued to improve over their peak levels
in mid-1992, primarily due to the economic improvements in California. The other
real estate mortgage net charge-offs were primarily due to loans related to
shopping centers and industrial buildings.
Although net charge-offs during 1991 and 1992 were higher than historical norms,
they steadily declined during 1993 and are expected to remain lower in 1994 than
1993 due to the improvement in the credit quality of the Company's loan
portfolio.
The Company considers the allowance for loan losses of $2,110 million adequate
to cover losses inherent in loans, loan commitments and standby letters of
credit at September 30, 1994. The Company's determination of the level of the
allowance and, correspondingly, the provision for loan losses rests upon various
judgments and assumptions, including general (particularly California) economic
conditions, loan portfolio composition, prior loan loss experience and the
Company's ongoing examination process and that of its regulators. The provision
for loan losses declined to $50 million in the third quarter of 1994 from $120
million in the same period a year ago. The lower provision reflects continued
improvement in credit quality. A further reduction in the provision is
currently expected in the fourth quarter of 1994, assuming continued
improvements in credit quality.
Statement of Financial Accounting Standards No. 114 (FAS 114), Accounting by
Creditors for Impairment of a Loan, addresses the accounting treatment of
certain impaired loans and amends FASB Statements No. 5 and 15; however, it does
not address the overall adequacy of the
26
<PAGE>
allowance for loan losses. The Statement is effective January 1, 1995, and can
only be applied prospectively. In October 1994, the FASB issued FAS 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures. FAS 118 amends FAS 114 and allows creditors to use existing
methods for recognizing interest income on an impaired loan and changes certain
disclosure requirements. FAS 118 is effective concurrent with the effective
date of FAS 114. The Company does not currently intend to implement the
Statements before their effective date. Based on the Company's interpretations,
the allowance will not increase as a result of adopting these Statements.
<TABLE>
<CAPTION>
OTHER ASSETS
=====================================================================================
SEPTEMBER 30, December 31, September 30,
(in millions) 1994 1993 1993
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net deferred tax asset (1) $ 953 $ 884 $ 828
Nonmarketable equity investments 405 396 343
Certain identifiable intangible assets 343 373 391
Foreclosed assets 306 348 357
Other 465 423 512
------ ------ ------
Total other assets $2,472 $2,424 $2,431
====== ====== ======
=====================================================================================
<FN>
(1) Net of a valuation allowance of $2 million, $2 million and $5 million at
September 30, 1994, December 31, 1993 and September 30, 1993, respectively.
</TABLE>
The Company estimates that approximately $831 million of the $953 million net
deferred tax asset at September 30, 1994 could be realized by the recovery of
previously paid federal taxes; however, the Company expects to actually realize
the federal net deferred tax asset by claiming deductions against future taxable
income. The balance of approximately $122 million relates to approximately $1.6
billion of net deductions that are expected to reduce future California taxable
income (California tax law does not permit recovery of previously paid taxes).
The Company believes that it is more likely than not that it will have
sufficient future California taxable income to fully utilize these deductions.
The identifiable intangible assets are generally amortized using an accelerated
method, which is based on estimated useful lives ranging from 5 to 15 years.
Amortization expense was $18 million, $20 million and $22 million for the
quarters ended September 30, 1994, December 31, 1993 and September 30, 1993,
respectively.
27
<PAGE>
<TABLE>
<CAPTION>
DEPOSITS
================================================================================
SEPTEMBER 30, December 31, September 30,
(in millions) 1994 1993 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest-bearing $ 9,447 $ 9,719 $ 9,096
Interest-bearing checking 4,486 4,789 4,496
Savings 2,500 2,544 2,610
Market rate savings 15,643 17,084 16,831
Savings certificates 7,021 7,155 7,499
------- ------- -------
Core deposits 39,097 41,291 40,532
Other 903 353 333
------- ------- -------
Total deposits $40,000 $41,644 $40,865
======= ======= =======
================================================================================
</TABLE>
CAPITAL ADEQUACY/RATIOS
Risk-based capital (RBC) guidelines issued by the Federal Reserve Board (FRB)
establish a risk-adjusted ratio relating capital to different categories of
assets and off-balance sheet exposures. The Company's Tier 1 and Tier 2 capital
components are presented on the following page. The guidelines require a
minimum total RBC ratio of 8%, with at least half of the total capital in the
form of Tier 1 capital. To supplement the RBC guidelines, the FRB established a
minimum leverage ratio guideline of 3% of Tier 1 capital to average total
assets.
The decrease in the Company's RBC and leverage ratios at September 30, 1994
compared with December 31, 1993 resulted primarily from common stock repurchases
of 555,853 shares, 1,124,856 shares and 1,777,598 shares in the first, second
and third quarters of 1994, respectively, and secondarily from the redemption of
$150 million in Series A preferred stock (at its liquidation preference carrying
amount) in the first quarter of 1994.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a "well
capitalized" bank must have a Tier 1 RBC ratio of at least 6%, a combined Tier 1
and Tier 2 ratio of at least 10% and a leverage ratio of at least 5%. At
September 30, 1994, the Bank had a Tier 1 RBC ratio of 10.72%, a combined Tier 1
and Tier 2 ratio of 13.87% and a leverage ratio of 7.76%.
28
<PAGE>
The table below presents the Company's risk-based capital and leverage ratios.
<TABLE>
<CAPTION>
=============================================================================================
SEPTEMBER 30, December 31, September 30,
(in billions) 1994 1993 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tier 1:
Common stockholders' equity $ 3.5 $ 3.7 $ 3.5
Preferred stock .5 .6 .6
Less goodwill and other deductions (1) (.4) (.5) (.5)
------ ------ ------
Total Tier 1 capital 3.6 3.8 3.6
------ ------ ------
Tier 2:
Mandatory convertible debt .1 .1 .1
Subordinated debt and unsecured senior debt 1.0 1.1 1.2
Allowance for loan losses allowable in Tier 2 .5 .4 .5
------ ------ ------
Total Tier 2 capital 1.6 1.6 1.8
------ ------ ------
Total risk-based capital $ 5.2 $ 5.4 $ 5.4
====== ====== ======
Risk-weighted balance sheet assets $ 37.1 $ 36.1 $ 36.7
Risk-weighted off-balance sheet items:
Commitments to make or purchase loans 1.7 1.3 1.3
Standby letters of credit .6 .6 .7
Other .2 .2 .1
------ ------ ------
Total risk-weighted off-balance sheet items 2.5 2.1 2.1
------ ------ ------
Goodwill and other deductions (1) (.4) (.5) (.5)
Allowance for loan losses not included in Tier 2 (1.6) (1.7) (1.6)
------ ------ ------
Total risk-weighted assets $ 37.6 $ 36.0 $ 36.7
====== ====== ======
Risk-based capital ratios:
Tier 1 capital (4% minimum requirement) 9.62% 10.48% 9.91%
Total capital (8% minimum requirement) 13.93 15.12 14.60
Leverage ratio (3% minimum requirement) (2) 7.01% 7.39% 7.21%
=============================================================================================
<FN>
(1) Other deductions include the unrealized net gain (loss) on available-for-sale investment
securities carried at fair value, as currently required by federal regulatory agencies.
(2) Tier 1 capital divided by quarterly average total assets (excluding goodwill and other
items which were deducted to arrive at Tier 1 capital).
</TABLE>
29
<PAGE>
ASSET/LIABILITY MANAGEMENT
As is typical in the banking industry, most of the Company's assets and
liabilities are sensitive to fluctuations in interest rates. Accordingly, an
essential objective of asset/liability management is to control interest rate
risk.
The Company manages portfolio assets by matching them with funding sources that
have similar repricing characteristics. The Company uses various asset/liability
strategies to manage the repricing characteristics of its assets, liabilities
and off-balance sheet financial instruments to ensure that exposure to interest
rate fluctuations is limited within Company guidelines of acceptable levels of
risk-taking. Hedging strategies, including the use of interest rate contracts,
are used to reduce mismatches in interest rate maturities of portfolio assets
and their funding sources.
One way to measure the impact that future changes in interest rates will have on
net interest income is through a cumulative gap measure. The gap represents the
net position of assets and liabilities subject to repricing in specified time
periods. Generally, a liability sensitivity gap indicates that there would be a
net negative impact on the net interest margin of the Company over the next year
in an increasing interest rate environment since the Company's liabilities would
reprice to higher market interest rates before its assets would. A net positive
impact would result from a decreasing interest rate environment. At September
30, 1994, the under-one-year cumulative gap was a $678 million (1.3% of total
assets) net liability position, compared with a $415 million (.8% of total
assets) net liability position at June 30, 1994 and a $1,402 million (2.7% of
total assets) net asset position at December 31, 1993. The increase in the net
liability position at September 30, 1994 compared with June 30, 1994 was
predominately due to an increase in short-term borrowings, as well as a lower
level of investment securities that are expected to mature or prepay within a
year due to the increasing interest rate environment. This was primarily offset
by a decrease in market rate savings and an increase in the under-one-year
balance of the commercial loan portfolio.
Two adjustments to the cumulative gap provide comparability with banks that
present interest rate sensitivity in an alternative manner. However, management
does not believe that these adjustments necessarily depict its interest rate
risk. The first adjustment excludes noninterest earning assets, noninterest-
bearing liabilities and stockholders' equity from the cumulative gap calculation
so only earning assets, interest-bearing liabilities and interest rate financial
contracts are reported. The second adjustment moves interest-bearing checking
and savings deposits from the nonmarket, over-one-year liability category to the
shortest rate maturity category. The second adjustment reflects the
availability of the deposits for immediate withdrawal. The resulting adjusted
under-one-year cumulative gap (net liability position) was $7.7 billion, $7.4
billion and $5.9 billion at September 30, 1994, June 30, 1994 and December 31,
1993, respectively.
Since interest rate changes do not affect all categories of assets and
liabilities equally or simultaneously, a cumulative gap analysis alone is not
adequate to evaluate the Company's interest rate sensitivity position. To
supplement traditional gap analysis, the Company performs simulation modeling to
estimate the potential effects of changing interest rates. The process
30
<PAGE>
allows the Company to fully explore the complex relationships within the gap
over time and various interest rate environments.
In October 1994, the FASB issued Statement of Financial Accounting Standards No.
119 (FAS 119), Disclosure about Derivative Financial Instruments and Fair Value
of Financial Instruments. FAS 119 requires various disclosures regarding
derivative activities commencing with the Company's 1994 Annual Report.
31
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4 The Company hereby agrees to furnish upon request to the
Commission a copy of each instrument defining the rights of
holders of securities of the Company.
11 Computation of Earnings Per Common Share
27 Financial Data Schedule
99 Computation of Ratios of Earnings to Fixed Charges -- the
ratios of earnings to fixed charges, including interest on
deposits, were 2.23 and 1.94 for the quarters ended
September 30, 1994 and 1993, respectively, and 2.28 and 1.81
for the first nine months of 1994 and 1993, respectively.
The ratios of earnings to fixed charges, excluding interest
on deposits, were 5.12 and 4.72 for the quarters ended
September 30, 1994 and 1993, respectively, and 5.53 and 4.26
for the first nine months of 1994 and 1993, respectively.
(b) The Company filed the following reports on Form 8-K during the
third quarter of 1994 and through the date hereof:
(1) July 20, 1994 under Item 5, containing the Press Releases
that announced the Company's financial results for the
quarter ended June 30, 1994, the share repurchase program,
the quarterly common stock dividend and the retirement of
Chairman Carl E. Reichardt on December 31, 1994
(2) October 18, 1994 under Item 5, containing the Press Release
that announced the Company's financial results for the
quarter ended September 30, 1994
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 10, 1994.
WELLS FARGO & COMPANY
By: FRANK A. MOESLEIN
---------------------------------------
Frank A. Moeslein
Executive Vice President and Controller
(Principal Accounting Officer)
32
<PAGE>
EXHIBIT 11
WELLS FARGO & COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
===========================================================================================
Quarter Nine months
ended Sept. 30, ended Sept. 30,
--------------- ----------------
(in millions) 1994 1993 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER COMMON SHARE
Net income $ 217 $ 165 $ 625 $ 422
Less preferred dividends 10 13 33 38
----- ----- ------ -----
Net income for calculating primary
earnings per common share $ 207 $ 152 $ 592 $ 384
===== ===== ====== =====
Average common shares outstanding 53.6 55.7 54.7 55.5
===== ===== ====== =====
PRIMARY EARNINGS PER COMMON SHARE $3.86 $2.74 $10.83 $6.92
===== ===== ====== =====
FULLY DILUTED EARNINGS PER COMMON SHARE (1)
Net income $ 217 $ 165 $ 625 $ 422
Less preferred dividends 10 13 33 38
----- ----- ------ -----
Net income for calculating fully
diluted earnings per common share $ 207 $ 152 $ 592 $ 384
===== ===== ====== =====
Average common shares outstanding 53.6 55.7 54.7 55.5
Add exercise of options, warrants and
share rights, reduced by the number
of shares that could have been
purchased with the proceeds from
such exercise 1.4 1.3 1.4 1.3
----- ----- ------ -----
Average common shares outstanding as adjusted 55.0 57.0 56.1 56.8
===== ===== ====== =====
FULLY DILUTED EARNINGS PER COMMON SHARE $3.76 $2.68 $10.56 $6.77
===== ===== ====== =====
===========================================================================================
<FN>
(1) This presentation is submitted in accordance with Item 601(b)(11) of Regulation S-K.
This presentation is not required by APB Opinion No. 15, because it results in
dilution of less than 3%.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
10-Q dated November 10, 1994 for the period ended September 30, 1994 and
is qualified in its entirety by reference to such financial information.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 2,828
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 36
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,140
<INVESTMENTS-CARRYING> 9,120
<INVESTMENTS-MARKET> 8,821
<LOANS> 34,951
<ALLOWANCE> 2,110
<TOTAL-ASSETS> 52,164
<DEPOSITS> 40,000
<SHORT-TERM> 3,915
<LIABILITIES-OTHER> 954
<LONG-TERM> 3,192
<COMMON> 264
0
489
<OTHER-SE> 3,269
<TOTAL-LIABILITIES-AND-EQUITY> 52,164
<INTEREST-LOAN> 2,206
<INTEREST-INVEST> 567
<INTEREST-OTHER> 8
<INTEREST-TOTAL> 2,781
<INTEREST-DEPOSIT> 624
<INTEREST-EXPENSE> 827
<INTEREST-INCOME-NET> 1,954
<LOAN-LOSSES> 170
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 1,580
<INCOME-PRETAX> 1,110
<INCOME-PRE-EXTRAORDINARY> 625
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 625
<EPS-PRIMARY> 10.83
<EPS-DILUTED> 10.56
<YIELD-ACTUAL> 5.55
<LOANS-NON> 637
<LOANS-PAST> 113
<LOANS-TROUBLED> 4
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,122
<CHARGE-OFFS> 290
<RECOVERIES> 108
<ALLOWANCE-CLOSE> 2,110
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
EXHIBIT 99
WELLS FARGO & COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
===============================================================================================================
Quarter ended Sept. 30, Nine months ended Sept. 30,
---------------------- --------------------------
(in millions) 1994 1993 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EARNINGS, INCLUDING INTEREST ON DEPOSITS (1):
Income before income tax expense $ 383 $ 264 $1,110 $ 714
Fixed charges 311 282 869 878
----- ----- ------ ------
$ 694 $ 546 $1,979 $1,592
===== ===== ====== ======
Fixed charges (1):
Interest expense $ 297 $ 270 $ 827 $ 840
Estimated interest component of net rental expense 14 12 42 38
----- ----- ------ ------
$ 311 $ 282 $ 869 $ 878
===== ===== ====== ======
Ratio of earnings to fixed charges (2) 2.23 1.94 2.28 1.81
===== ===== ====== ======
EARNINGS, EXCLUDING INTEREST ON DEPOSITS:
Income before income tax expense $ 383 $ 264 $1,110 $ 714
Fixed charges 93 71 245 219
----- ----- ------ ------
$ 476 $ 335 $1,355 $ 933
===== ===== ====== ======
Fixed charges:
Interest expense $ 297 $ 270 $ 827 $ 840
Less interest on deposits (218) (211) (624) (659)
Estimated interest component of net rental expense 14 12 42 38
----- ----- ------ ------
$ 93 $ 71 $ 245 $ 219
===== ===== ====== ======
Ratio of earnings to fixed charges 5.12 4.72 5.53 4.26
===== ===== ====== ======
===============================================================================================================
<FN>
(1) As defined in Item 503(d) of Regulation S-K.
(2) These computations are included herein in compliance with Securities and Exchange Commission regulations.
However, management believes that fixed charge ratios are not meaningful measures for the business of the
Company because of two factors. First, even if there were no change in net income, the ratios would
decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase
with a decrease in the proportion of income which is tax-exempt. Second, even if there were no change in
net income, the ratios would decline if interest income and interest expense increase by the same amount due
to an increase in the level of interest rates or, conversely, they would increase if interest income and
interest expense decrease by the same amount due to a decrease in the level of interest rates.
</TABLE>
