<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the year ended December 31, 1995 Commission file number 1-6214
-------------------
WELLS FARGO & COMPANY
(Exact name of registrant as specified in its charter)
Delaware No. 13-2553920
(State of incorporation) (I.R.S. Employer
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ----------------------
Common Stock, par value $5 New York Stock Exchange
Pacific Stock Exchange
Adjustable Rate Cumulative Preferred Stock, Series B New York Stock Exchange
9% Preferred Stock, Series C New York Stock Exchange
8 7/8% Preferred Stock, Series D New York Stock Exchange
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is contained herein, or will be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes X No
----- -----
As of February 16, 1996 (the latest practicable date), 46,994,234 shares of
common stock were outstanding. On the same date, the aggregate market value of
common stock held by nonaffiliates was approximately $11,704 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1995 Annual Report to Shareholders - Incorporated into Parts I,
II and IV.
Portions of the Proxy Statement for the 1996 Annual Meeting of Shareholders -
Incorporated into Part III.
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FORM 10-K CROSS-REFERENCE INDEX
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Page
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FORM Annual Proxy
10-K Report (1) Statement (2)
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<S> <C> <C> <C>
PART I
Item 1. Business
Description of Business 2-5 4-67 --
Statistical Disclosure:
Distribution of Assets, Liabilities and
Stockholders' Equity; Interest Rates
and Interest Differential 6 10-13 --
Investment Portfolio 7 15-16, 39-40, 43-44 --
Loan Portfolio 7-10 17-23, 40-41, 44-46 --
Summary of Loan Loss Experience 11-13 23-24, 41, 45-46 --
Deposits 13 12-13, 24-25 --
Return on Equity and Assets -- 4-5 --
Short-Term Borrowings 14 -- --
Item 2. Properties 14 -- --
Item 3. Legal Proceedings -- 59 --
Item 4. Submission of Matters to a Vote of Security-
Holders (in fourth quarter 1995) (3) -- -- --
Executive Officers of the Registrant 15 -- --
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters -- 34, 42 --
Item 6. Selected Financial Data -- 6 --
Item 7. Management's Discussion and Analysis of Finan-
cial Condition and Results of Operations -- 4-34 --
Item 8. Financial Statements and Supplementary Data -- 35-67 --
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure (3) -- -- --
PART III
Item 10. Directors and Executive Officers of the
Registrant 15 -- 7-11
Item 11. Executive Compensation -- -- 3-4, 12-17
Item 12. Security Ownership of Certain Beneficial
Owners and Management -- -- 5-6
Item 13. Certain Relationships and Related Transactions -- -- 20-22
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 16-18 35-67 --
SIGNATURES 19 -- --
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</TABLE>
(1) The 1995 Annual Report to Shareholders, portions of which are incorporated
by reference into this Form 10-K.
(2) The Proxy Statement dated March 13, 1996 for the 1996 Annual Meeting of
Shareholders, portions of which are incorporated by reference into this
Form 10-K.
(3) None.
1
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DESCRIPTION OF BUSINESS
GENERAL
Wells Fargo & Company (Parent) is a bank holding company registered
under the Bank Holding Company Act of 1956, as amended. Based on assets as of
December 31, 1995, it was the 17th largest bank holding company in the United
States. Its principal subsidiary is Wells Fargo Bank, N.A. (Bank), the ninth
largest bank in the U.S. Wells Fargo & Company and its subsidiaries are
hereinafter referred to as the Company.
THE BANK
HISTORY AND GROWTH
The Bank is the successor to the banking portion of the business
founded by Henry Wells and William G. Fargo in 1852. That business later
operated the westernmost leg of the Pony Express and ran stagecoach lines in the
western part of the United States. The California banking business was separated
from the express business in 1905 and was merged in 1960 with American Trust
Company, another of the oldest banks in the Western United States. The Bank
became Wells Fargo Bank, N.A., a national banking association, in 1968. Its head
office is located in San Francisco, California.
In 1986, the Company acquired from Midland Bank plc all the common
stock of Crocker National Corporation, a bank holding company whose principal
subsidiary was Crocker National Bank, the 17th largest bank in the U.S. at the
time. In 1988, the Company acquired Barclays Bank of California with assets of
$1.3 billion.
In 1990 and 1991, the Company completed the two-phase purchase of the
130-branch California network of Great American Bank (GA), a Federal Savings
Bank. The Company acquired assets with a GA book value of $5.8 billion.
Also during 1990, the Company completed the acquisition of four
California banking companies with combined assets of $1.9 billion: Valley
National Bank of Glendale, Central Pacific Corporation of Bakersfield, the
Torrey Pines Group of Solana Beach and Citizens Holdings and its two banking
subsidiaries in Orange County.
In January 1996, the Company announced it had entered into a
definitive agreement with First Interstate Bancorp (First Interstate) to merge
the two companies. At December 31, 1995, First Interstate had assets of $58.1
billion and was the 15th largest bank holding company in the nation. The merger
is expected to close on April 1, 1996, subject to shareholder approval. The
newly formed company will be operated under the Wells Fargo & Company name. The
merger is discussed in the 1995 Annual Report to Shareholders.
For further information, see the Line of Business Results section of
the 1995 Annual Report to Shareholders.
2
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The following table shows selected information for the Bank:
<TABLE>
<CAPTION>
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December 31,
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(in billions) 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment securities $ 8.5 $11.2 $12.7 $ 9.0 $ 3.6
Loans $34.6 $35.7 $32.4 $36.0 $43.0
Assets $48.6 $51.9 $50.7 $50.7 $51.6
Deposits $39.0 $42.4 $42.4 $43.1 $44.5
Staff (full-time equivalent) 18,426 19,522 19,644 21,276 20,954
Retail outlets (domestic, all California) 974 634 624 626 612
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</TABLE>
OTHER BANK SUBSIDIARIES
In June 1995, the Company formed Wells Fargo Bank (Arizona), N.A., a
new national bank subsidiary, to operate the Company's credit card business.
The Company also has a majority ownership interest in the Wells Fargo HSBC
Trade Bank, N.A. established in October 1995 that provides trade financing,
letters of credit and collection services.
NONBANK SUBSIDIARIES
The Company has wholly-owned subsidiaries that provide various
banking-related services. In the aggregate, these subsidiaries are not material
to the Company's assets or net income.
COMPETITION
The Company competes for deposits, loans and other banking services in
its principal geographic market in California, as well as in selected national
markets as opportunities arise. The banking business is highly competitive and
has become increasingly so in recent years; the industry continues to
consolidate and strong, unregulated competitors have entered core banking
markets with focused products targeted at highly profitable customer segments.
These unregulated competitors, such as investment companies, specialized lenders
and multinational financial services companies, compete across geographic
boundaries and provide customers increasing access to meaningful alternatives to
banking services in nearly all significant products. These competitive trends
are likely to continue.
Within the banking industry, ongoing consolidation has increased
pressure on the Company from its most significant competitor in California, Bank
of America, the second largest bank holding company in the United States based
on assets as of December 31, 1995. Moreover, federal and state legislation
adopted in recent years has increased competition by allowing banking
organizations from other parts of the country to enter the Company's core
geographic market (see "Supervision and Regulation" for further discussion of
such legislation and the competitive environment in which the Company operates).
3
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Among commercial banks, the Bank is presently the second largest
holder of customer deposits in California. There is no meaningful measure of
overall market share within the broadly defined financial services industry.
MONETARY POLICY
The earnings of the Company are affected not only by general economic
conditions, but also by the policies of various governmental regulatory
authorities in the U.S. and abroad. In particular, the Federal Reserve System
exerts a substantial influence on interest rates and credit conditions,
primarily through open market operations in U.S. Government securities, varying
the discount rate on member bank borrowings and setting reserve requirements
against deposits. Federal Reserve monetary policies have had a significant
effect on the operating results of financial institutions in the past and are
expected to continue to do so in the future.
SUPERVISION AND REGULATION
Under the Bank Holding Company Act, the Company is required to file
reports of its operations with the Board of Governors of the Federal Reserve
System and is subject to examination by it. Further, the Act restricts the
activities in which the Company may engage and the nature of any company in
which the Parent may own more than 5% of the voting shares. Generally,
permissible activities are limited to banking, the business of managing and
controlling banks, and activities so closely related to banking as determined by
the Board of Governors to be proper incidents thereto.
Under the Act, the acquisition of substantially all of the assets of
any domestic bank or savings association or the ownership or control of more
than 5% of its voting shares by a bank holding company is subject to prior
approval by the Board of Governors. In no case, however, may the Board approve
the acquisition by the Parent of the voting shares of, or substantially all
assets of, any bank located outside of California unless such acquisition is
specifically authorized by the laws of the state in which the bank to be
acquired is located or the Federal Deposit Insurance Corporation (FDIC) arranges
the acquisition under its authority to aid financially troubled banks. Federal
legislation enacted in 1994 will remove many of the remaining barriers to
interstate expansion and acquisition. Bank holding companies which are
adequately capitalized and adequately managed are now permitted to make
interstate acquisitions of banks without regard to state law restrictions.
Effective June 1, 1997, or earlier if authorized by state legislation, the
merger of commonly owned banks in different states will also be permitted,
except in states which have passed legislation to prohibit such mergers. The new
statute will also permit banks to establish branches outside their home state in
states which pass legislation to permit such interstate branching.
The Bank is subject to certain restrictions under the Federal Reserve
Act, including restrictions on the terms of transactions between the Bank and
its affiliates and on any extension of credit to its affiliates. Dividends
payable by the Bank to the Parent without the express approval of the Office of
the Comptroller of the Currency are limited by a formula. For more information
regarding restrictions on loans and dividends by the Bank to its affiliates, see
Note 2 to the Financial Statements in the 1995 Annual Report to Shareholders.
4
<PAGE>
There are various requirements and restrictions in the laws of the
U.S. and California affecting the Bank and its operations, including
restrictions on the amount of its loans and the nature and amount of its
investments, its activities as an underwriter of securities, its opening of
branches and its acquisition of other banks or savings associations. The Bank,
as a national bank, is subject to regulation and examination by the Office of
the Comptroller of the Currency, the Board of Governors of the Federal Reserve
System and the FDIC.
Major regulatory changes affecting the Bank, banking and the financial
services industry in general have occurred in the last several years and can be
expected to occur increasingly in the future. Federal banking legislation since
1980 has deregulated interest rate ceilings on deposits at banks and thrift
institutions and has increased the types of accounts that can be offered.
Generally, federal banking legislation has narrowed the functional distinctions
among financial institutions. The consumer and commercial banking powers of
thrift institutions have expanded, and state-chartered banks are authorized to
engage in all activities which are permissible for national banks and in certain
cases may, with approval of the FDIC, engage in activities, such as insurance
underwriting, which are not authorized for national banks.
Non-depository institutions can be expected to increase the extent to
which they act as financial intermediaries, particularly in the area of consumer
credit services. Large institutional users and sources of credit may also
increase the extent to which they interact directly, meeting business credit
needs outside the banking system. Furthermore, the geographic constraints on
portions of the financial services industry can be expected to continue to
erode.
These changes create significant opportunities for the Company, as
well as the financial services industry, to compete in financial markets on a
less-regulated basis. They also suggest that the Company and, particularly, the
Bank will face new and major competitors in geographic and product markets in
which their operations historically have been protected by banking laws and
regulations.
5
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ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table allocates the changes in net interest income on a
taxable-equivalent basis to changes in either average balances or average rates
for both interest-earning assets and interest-bearing liabilities. Because of
the numerous simultaneous volume and rate changes during any period, it is not
possible to precisely allocate such changes between volume and rate. For this
table, changes that are not solely due to either volume or rate are allocated
to these categories in proportion to the percentage changes in average volume
and average rate.
<TABLE>
<CAPTION>
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Year ended December 31,
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1995 OVER 1994 1994 over 1993
------------------------------ ------------------------------
(in millions) VOLUME RATE TOTAL Volume Rate Total
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<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income:
Federal funds sold and securities
purchased under resale agreements $ (6) $ 3 $ (3) $ (18) $ 2 $ (16)
Investment securities:
At fair value:
U.S. Treasury Securities 19 (1) 18 13 -- 13
Securities of U.S. government agencies
and corporations (8) (4) (12) 93 -- 93
Private collateralized mortgage obligations (10) 1 (9) 80 -- 80
Other securities 1 4 5 6 -- 6
At cost:
U.S. Treasury securities (54) 2 (52) 4 (6) (2)
Securities of U.S. government agencies
and corporations (89) 1 (88) (127) (27) (154)
Private collateralized mortgage obligations (7) 2 (5) 19 16 35
Other securities 1 1 2 (3) -- (3)
Mortgage loans held for sale 76 -- 76 -- -- --
Loans:
Commercial 149 52 201 (6) (12) (18)
Real estate 1-4 family first mortgage (190) 41 (149) 122 (79) 43
Other real estate mortgage (2) 67 65 (119) 43 (76)
Real estate construction 16 9 25 (30) 10 (20)
Consumer:
Real estate 1-4 family junior lien mortgage (3) 29 26 (39) 28 (11)
Credit card 131 5 136 18 (6) 12
Other revolving credit and monthly payment 39 24 63 12 3 15
Lease financing 21 1 22 7 (8) (1)
Foreign -- -- -- 2 -- 2
Other -- -- -- 3 -- 3
----- ---- ----- ----- ---- -----
Total increase (decrease) in interest income 84 237 321 37 (36) 1
----- ---- ----- ----- ---- -----
Increase (decrease) in interest expense:
Deposits:
Interest-bearing checking (7) 1 (6) -- (10) (10)
Market rate and other savings (84) 47 (37) (9) 13 4
Savings certificates 49 74 123 (39) (7) (46)
Other time deposits 6 (4) 2 (2) -- (2)
Deposits in foreign offices 48 13 61 44 -- 44
Federal funds purchased and securities
sold under repurchase agreements 63 37 100 45 25 70
Commercial paper and other short-term borrowings 17 5 22 1 3 4
Senior debt (18) 23 5 (12) 11 (1)
Subordinated debt (3) 9 6 (26) 13 (13)
----- ---- ----- ----- ---- -----
Total increase (decrease) in interest expense 71 205 276 2 48 50
----- ---- ----- ----- ---- -----
Increase (decrease) in net interest income
on a taxable-equivalent basis $ 13 $ 32 $ 45 $ 35 $(84) $ (49)
----- ---- ----- ----- ---- -----
----- ---- ----- ----- ---- -----
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</TABLE>
6
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INVESTMENT SECURITIES
At December 31, 1995, there were no investment securities issued by a
single issuer (excluding the U.S. government and its agencies and corporations)
that exceeded 10% of stockholders' equity, except for private collateralized
mortgage obligations issued by The Prudential Home Mortgage Securities Company,
Inc. The securities issued by The Prudential Home Mortgage Securities Company,
Inc. had a cost basis and fair value of $801 million and were distributed among
36 series of mortgage pass-through certificates; each series was collateralized
by separate trusts. The largest series had a cost basis and fair value of $51
million.
LOAN PORTFOLIO
The following table presents the remaining contractual principal
maturities of selected loan categories at December 31, 1995 and a summary of the
major categories of loans outstanding at the end of the last five years. At
December 31, 1995, the Company did not have loan concentrations that exceeded
10% of total loans, except as shown below.
<TABLE>
<CAPTION>
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DECEMBER 31, 1995
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OVER ONE YEAR
THROUGH FIVE YEARS OVER FIVE YEARS
------------------ -------------------
FLOATING FLOATING
OR OR
ONE YEAR FIXED ADJUSTABLE FIXED ADJUSTABLE December 31,
OR LESS RATE RATE RATE RATE ----------------------------------
(in millions) TOTAL 1994 1993 1992 1991
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Selected loan maturities:
Commercial $5,365 $ 330 $3,270 $ 79 $ 706 $ 9,750 $ 8,162 $ 6,912 $ 8,214 $11,270
Real estate 1-4 family first
mortgage (1) 27 60 34 2,887 1,440 4,448 9,050 7,458 6,836 8,612
Other real estate mortgage 1,846 888 3,286 1,145 1,098 8,263 8,079 8,286 10,128 10,751
Real estate construction 749 75 483 5 54 1,366 1,013 1,110 1,600 2,055
Foreign 31 -- -- -- -- 31 27 18 5 2
------ ------ ------ ------ ------ ------- ------ ------- ------- -------
Total selected loan
maturities $8,018 $1,353 $7,073 $4,116 $3,298 23,858 26,331 23,784 26,783 32,690
------ ------ ------ ------ ------ ------- ------ ------- ------- -------
------ ------ ------ ------ ------ ------- ------ ------- ------- -------
Other loan categories:
Real estate 1-4 family
junior lien mortgage 3,358 3,332 3,583 4,157 5,053
Credit card 4,001 3,125 2,600 2,807 2,900
Other revolving credit and
monthly payment 2,576 2,229 1,920 1,979 2,286
------- ------ ------- ------- -------
Total consumer 9,935 8,686 8,103 8,943 10,239
Lease financing 1,789 1,330 1,212 1,177 1,170
------- ------ ------- ------- -------
Total loans $35,582 $36,347 $33,099 $36,903 $44,099
------- ------ ------- ------- -------
------- ------ ------- ------- -------
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</TABLE>
(1) Includes approximately $2 billion of fixed-initial-rate mortgage (FIRM)
loans in the over 5 year fixed rate category. FIRM loans carry fixed rates
during the first 3, 5, 7 or 10 years (based on the period selected by the
borrower) of the loan term and carry adjustable rates thereafter.
7
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UNDERWRITING POLICIES AND PRACTICES
It is the policy of the Company to grant credit in accordance with the
principles of sound risk management and the Company's business strategy. The
Company obtains and analyzes sufficient information to ensure that the purpose
of a credit extension is lawful and productive and that the borrower is able to
repay as scheduled. Credit is structured in a manner consistent with such
supporting analysis and is monitored to detect changes in quality. The Company's
credit policies establish the fundamental credit principles which guide the
Company in granting loans, leases, lines of credit, standby and commercial
letters of credit, acceptances and commitments ("direct credit") to customers on
an unsecured, partially secured or fully secured basis. The credit product line
for both businesses and individuals includes standardized products as well as
customized, individual accommodations. In addition, the Company provides
products and services which could become direct credit exposure unless such
products are offered on a "cash only" basis. These include: automated clearing
house services, controlled disbursement, wire services, foreign exchange
services, interest rate protection products, Federal fund lines to banks, cash
letters and deposit accounts which create exposure by allowing use of funds
advanced/uncollected funds ("operating credit"). Standardized documentation and
underwriting and a study of the requirements of the secondary market are an
explicit consideration in credit product development.
The Company requires some degree of background check into character
and credit history of all its credit customers. Extensions of credit must be
supported by current financial information on the borrower (and guarantor) which
is appropriate to the size and type of credit being offered; such information
can denote any material which serves to inform the Company about the financial
health of its credit customers. An accompanying credit analysis includes, at a
minimum, an evaluation of the customer's financial strength and probability of
repayment, with due consideration given to the negative factors which may affect
the borrower's ability to meet repayment schedules. Collateral is valued in
accordance with Company appraisal standards and, where applicable, appraisal
regulations issued under FIRREA and other applicable law. For commercial real
estate transactions, the recommending officer reviews and evaluates the key
assumptions supporting the appraised value.
In addition to a broad range of laws and regulations and the
Company's credit policies, the Company has established minimum underwriting
standards which delineate criteria for sources of repayment, financial
strength and enhancements such as guarantees. The primary source of repayment
will be recurring cash flow of the borrower or cash flow from the real estate
project being financed. Underwriting standards include: minimum financial
condition and cash flow hurdles for unsecured credit; maximum loan to
collateral value ratios for secured products; minimum cash flow coverage of
debt service, or debt to income ratios, for term products; minimum liquidity
and maximum financial leverage requirements when lending to highly leveraged
borrowers; and, for certain products, a description of any credit scoring
criteria and methodology employed. Prudent credit practice will permit credit
extensions which are an exception to the minimum underwriting standards;
procedures for approval of exceptions are included in Company policy; and
certain exceptions are reported to the Board of Directors.
8
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Generally, the Company's minimum underwriting standards for commercial
real estate include various maximum loan-to-value ("LTV") ratios ranging from
50% to 80% depending on the type of collateral and the size and purpose of the
loan; minimum debt service (stabilized net income divided by debt service cost)
ranging from 1.10 to 1.30 depending on the type of property financed; and
maximum terms ranging from 2 to 15 years for certain commercial property loans
depending on the same loan/collateral characteristics. For example, a typical
owner-occupied commercial real estate loan would most often have a maximum LTV
of 80%, debt service coverage of 1.25 and a term of 4 to 15 years. For community
reinvestment projects, the Company applies special underwriting criteria to its
financing of construction of affordable multi-family housing in California built
by non-profit as well as for-profit developers.
Recently, the Company has devoted a limited portion of its
commercial real estate portfolio to higher-risk loans, for which a
commensurate return is expected. Such transactions include purchases of
performing or distressed real estate loans at a discount, acquisition of
rated and unrated tranches of commercial mortgage obligations, loan
acquisition financing, mezzanine financing and origination of single assets
for securitization. Many of the higher-yielding of these transactions may
contain non-recourse provisions. In general, this business is more
"opportunistic" in nature, as opposed to representing a highly defined
lending program. As such, higher LTVs (up to 90% or 95%) will be underwritten
on occasion, particularly in the case of junior and senior participating debt.
Generally, commercial loan categories include unsecured loans and
lines of credit with minimum debt service coverage (earnings before interest,
taxes, depreciation and amortization divided by debt service cost) of 1.50 or
higher depending on the specific credit analysis. Common forms of collateral
pledged to secure commercial credit accommodations include accounts receivable,
inventories, equipment, agricultural crops or livestock, marketable securities
and cash or cash equivalent. Most transactions have minimum debt service
requirements of 1.50, maximum terms of 1 to 7 years and/or LTVs in the range of
65% to 85%, based on an analysis of the collateral pledged. The newly created
Wells Fargo HSBC Trade Bank, which provides trade financing, letters of credit,
foreign exchange services and collection services, generally uses the same
underwriting guidelines as the Company has established for its commercial
lending functions.
The Company also allocates a small percentage of its commercial loan
portfolio to the origination of asset-based loans secured by "hard assets"
(accounts receivable, inventory, equipment and/or real estate). In contrast to
traditional commercial lending, asset-based borrowers generally do not have the
ability to repay their debts through cash flow; therefore, such loans are fully
secured and tailored to the growth and turnover of the borrower's
self-liquidating asset base. Maximum LTVs are generally in the range of 65% to
85%, with specialized collateral monitoring and control procedures in place to
mitigate risk exposure.
The Company has devoted a focused product group to providing a full
range of credit products to small businesses, generally those with three
years of business operations, with annual sales of up to $10 million and in
which the owner of the business is also the
9
<PAGE>
principal financial decision maker. Credit products include lines of credit,
loans, leases and credit cards, granted on an unsecured, partially secured or
fully secured basis depending on the product type or the applicant's financial
strength. The group utilizes automated credit decision methods, in conjunction
with more traditional credit analysis in some cases, to approve or decline
requests for credit. An evaluation of the soundness and desirability of
collateral, if any, is also required before an extension of credit will be made.
Loan-to-value, debt service coverage and maximum loan term underwriting
guidelines employed are, in general, similar to those described earlier for
commercial and commercial real estate loan products.
The Company is an active participant in the national auto finance
market, underwriting primarily indirect leases and direct (branch-originated)
loans, by employing a business strategy which emanated from a seasoned
California practice. Most applicants for these credit products are assigned a
credit score which is indicative of their relative probability of repayment. The
credit scoring models are validated as to their predictive power on a periodic
basis. The lending group bases its credit decisions on judgmental criteria
including, but not limited to, this credit score. However, all credit decisions
made contrary to an established cut-off score must be supported and documented
by a credit officer with the appropriate approval authority.
In a similar fashion, the Company offers credit cards and consumer
loans and lines of credit on a national basis, although the majority of the
portfolio is domiciled in California. The credit review process includes initial
screens to ensure that applicants meet minimum age and income level requirements
for the product requested. Fraud screens are also completed. Credit bureau
reports are used to calculate the debt-to-income ratios and credit scores on
which an evaluation of creditworthiness is based. If accepted by the credit
score, applicants with major derogatory bureau information, minimal credit
references or high debt ratios are reviewed by an analyst for possible
overrides, with income verification and/or collateral verification required for
certain products and loan amounts.
Town Square Mortgage, a joint venture between the Company and Norwest
Mortgage, Inc., began operations in October 1995 to fund residential mortgages
for the Company's customers, with the Company servicing a portion of these
loans. The loans are underwritten by Norwest Mortgage, Inc. The Company
continues to provide second mortgage loans and lines of credit secured by first
and second deeds of trust directly to its customers. The Company relies on cash
flow as the primary source of repayment for these equity products. The nature of
the credit review which is conducted depends on the product, but typically
consists of an evaluation of the applicant's debt ratios and credit history,
either judgmentally or using a credit score, along with a review of the
collateral. Maximum combined LTVs will range from 50% to 100% depending on the
amount and term of the loan.
The above underwriting practices are general standards that are
subject to change; the actual terms and conditions of a specific credit
transaction are dependent on an analysis of the specific transaction.
10
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CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Year ended December 31,
----------------------------------------------
(in millions) 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $2,082 $2,122 $2,067 $1,646 $ 885
Allowance related to acquisitions (dispositions) -- -- -- -- (2)
Provision for loan losses -- 200 550 1,215 1,335
Loan charge-offs:
Commercial (55) (54) (110) (238) (402)
Real estate 1-4 family first mortgage (13) (18) (25) (17) (11)
Other real estate mortgage (52) (66) (197) (290) (88)
Real estate construction (10) (19) (68) (93) (29)
Consumer:
Real estate 1-4 family junior lien mortgage (16) (24) (28) (28) (7)
Credit card (208) (138) (177) (189) (161)
Other revolving credit and monthly payment (53) (36) (41) (41) (42)
------ ------ ------ ------ ------
Total consumer (277) (198) (246) (258) (210)
Lease financing (15) (14) (18) (19) (19)
------ ------ ------ ------ ------
Total loan charge-offs (422) (369) (664) (915) (759)
------ ------ ------ ------ ------
Loan recoveries:
Commercial 38 37 71 59 98
Real estate 1-4 family first mortgage 3 6 2 2 --
Other real estate mortgage 53 22 47 9 2
Real estate construction 1 15 4 3 3
Consumer:
Real estate 1-4 family junior lien mortgage 3 4 3 1 --
Credit card 13 18 21 21 19
Other revolving credit and monthly payment 12 11 12 12 11
------ ------ ------ ------ ------
Total consumer 28 33 36 34 30
Lease financing 11 16 9 9 5
Foreign -- -- -- 1 49
------ ------ ------ ------ ------
Total loan recoveries 134 129 169 117 187
------ ------ ------ ------ ------
Total net loan charge-offs (288) (240) (495) (798) (572)
Recoveries on the sale or swap of developing
country loans -- -- -- 4 --
------ ------ ------ ------ ------
Balance, end of year $1,794 $2,082 $2,122 $2,067 $1,646
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total net loan charge-offs as a percentage of
average total loans .83% .70% 1.44% 1.97% 1.22%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Allowance as a percentage of total loans 5.04% 5.73% 6.41% 5.60% 3.73%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
- --------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
The Securities and Exchange Commission requires the Company to present
the ratio of the allowance for loan losses to total nonaccrual loans. This ratio
was 333% and 367% at December 31, 1995 and 1994, respectively. This ratio may
fluctuate significantly from period to period due to such factors as the
prospects of borrowers and the value and marketability of collateral as well as,
for the nonaccrual portfolio taken as a whole, wide variances from period to
period in terms of delinquency and relationship of book to contractual principal
balance. Classification of a loan as nonaccrual does not necessarily indicate
that the principal of a loan is uncollectible in whole or in part. Consequently,
the ratio of the allowance for loan losses to nonaccrual loans, taken alone and
without taking into account numerous additional factors, is not a reliable
indicator of the adequacy of the allowance for loan losses. Indicators of the
credit quality of the Company's loan portfolio and the method of determining the
allowance for loan losses are discussed in the 1995 Annual Report to
Shareholders.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The table on the following page provides a breakdown of the allowance
for loan losses by loan category. The allocated component of the allowance
reflects inherent losses resulting from the analysis of individual loans and is
developed through specific credit allocations for individual loans and
historical loss experience for each loan category and degree of criticism within
each category. The total of these allocations is then supplemented by the
unallocated component of the allowance for loan losses, which includes
adjustments to the historical loss experience for the various loan categories
to reflect any current conditions that could affect loss recognition. The
unallocated component includes management's judgmental determination of the
amounts necessary for concentrations, economic uncertainties and other
subjective factors; correspondingly, the relationship of the unallocated
component to the total allowance for loan losses may fluctuate significantly
from period to period. Although management has allocated the allowance to
specific loan categories, the adequacy of the allowance must be considered in
its entirety.
12
<PAGE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
(in millions) 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 148 $ 109 $ 152 $ 373 $ 417
Real estate 1-4 family
first mortgage 46 41 39 37 33
Other real estate mortgage 165 212 357 589 350
Real estate construction 49 45 92 181 121
Consumer:
Credit card (1) 332 87 96 107 239
Other consumer 87 70 87 58 51
------ ------ ------ ------ ------
Total consumer 419 157 183 165 290
Lease financing 28 21 19 17 15
------ ------ ------ ------ ------
Total allocated 855 585 842 1,362 1,226
Unallocated component of
the allowance (2) 939 1,497 1,280 705 420
------ ------ ------ ------ ------
Total $1,794 $2,082 $2,122 $2,067 $1,646
------ ------ ------ ------ ------
------ ------ ------ ------ ------
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------------- ----------------- ----------------- ----------------- -----------------
ALLOC. LOAN Alloc. Loan Alloc. Loan Alloc. Loan Alloc. Loan
ALLOW. CATGRY allow. catgry allow. catgry allow. catgry allow. catgry
AS % AS % as % as % as % as % as % as % as % as %
OF LOAN OF TOTAL of loan of total of loan of total of loan of total of loan of total
CATGRY LOANS catgry loans catgry loans catgry loans catgry loans
------- -------- ------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial 1.52% 27% 1.34% 22% 2.20% 21% 4.54% 22% 3.70% 25%
Real estate 1-4 family
first mortgage 1.03 13 .45 25 .52 23 .54 19 .38 20
Other real estate mortgage 2.00 23 2.62 22 4.31 25 5.82 27 3.26 24
Real estate construction 3.59 4 4.44 3 8.29 3 11.31 4 5.89 5
Consumer:
Credit card (1) 8.30 11 2.78 9 3.69 8 3.81 8 8.24 7
Other consumer 1.47 17 1.26 15 1.58 16 .95 17 .69 16
--- --- --- --- ---
Total consumer 4.22 28 1.81 24 2.26 24 1.85 25 2.83 23
Lease financing 1.57 5 1.58 4 1.57 4 1.44 3 1.28 3
--- --- --- --- ---
Total 5.04% 100% 5.73% 100% 6.41% 100% 5.60% 100% 3.73% 100%
---- --- ---- --- ---- --- ---- --- ---- ---
---- --- ---- --- ---- --- ---- --- ---- ---
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In 1995, the calculation method for the allocation of the allowance for
loan losses for credit card loans was changed, whereby the allocation now
approximates 12 months of projected losses, compared with 7 months in 1992
to 1994 and 18 months in 1991.
(2) This amount and any unabsorbed portion of the allocated allowance are also
available for any of the above listed loan categories.
DEPOSITS
At December 31, 1995, the contractual principal maturities of
domestic time certificates of deposit and other time deposits issued in
amounts of $100,000 or more were as follows (based on time remaining until
maturity): $771 million maturing in 3 months or less; $541 million over 3
through 6 months; $517 million over 6 through 12 months and $270 million
over 12 months.
Time certificates of deposit and other time deposits issued by
foreign offices in amounts of $100,000 or more represent substantially all
of the foreign deposit liabilities of $876 million at December 31, 1995.
13
<PAGE>
SHORT-TERM BORROWINGS
The following table shows selected information for those short-term
borrowings that exceed 30% of stockholders' equity:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Year ended December 31,
------------------------------------
(in millions) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FEDERAL FUNDS PURCHASED AND
SECURITIES SOLD UNDER
REPURCHASE AGREEMENTS (1)
Average amount outstanding $3,401 $2,223 $1,051
Daily average rate 5.84% 4.45% 2.79%
Highest month-end balance $5,468 $3,887 $1,378
Year-end balance $2,781 $3,022 $1,079
Weighted average rate on
outstandings at year end 5.43% 5.24% 2.67%
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) These borrowings generally mature in less than 30 days.
PROPERTIES
The Company owns and leases various properties, primarily in the
financial district of San Francisco and other locations throughout California.
The Company owns its 12-story headquarters building in San Francisco
and a four-story administrative building and a five-story data processing
center, both in El Monte, California. The Company is also a joint venture
partner in a 54-story office building in downtown Los Angeles, of which
approximately 200,000 square feet is occupied by administrative staff and 60,000
square feet is sublet. In addition, the Company leases approximately 2,100,000
square feet of office space for data processing support and various
administrative departments in four major buildings in San Francisco, two other
major locations in the San Francisco Bay Area and four major locations in
Southern California.
At December 31, 1995, the Bank operated 974 retail outlets (including
345 banking centers and 94 supermarket branches), of which 451 were in Northern
California and 523 in Southern California. The Company owns the land and
buildings occupied by 237 of the outlets and leases 737 outlets (including 337
banking centers). The leases are generally for terms not exceeding 30 years.
14
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Date from
Name Office held which held Age
- -------------------- ----------------------- ------------ ---
Paul Hazen Chairman of the Board and January 1995 54
Chief Executive Officer
William F. Zuendt President and Chief January 1995 49
Operating Officer
Michael J. Gillfillan Vice Chairman and
Chief Credit Officer January 1992 47
Rodney L. Jacobs Vice Chairman and Chief January 1990 55
Financial Officer
Charles M. Johnson Vice Chairman January 1992 54
Clyde W. Ostler Vice Chairman January 1990 49
Leslie L. Altick Executive Vice President and July 1995 45
Director of Investor Relations
Patricia R. Callahan Executive Vice President March 1993 42
and Personnel Director
Ross J. Kari Executive Vice President January 1995 37
and General Auditor
Frank A. Moeslein Executive Vice President May 1990 52
and Controller
Guy Rounsaville, Jr. Executive Vice President, March 1985 52
Chief Counsel and
Secretary
Eric D. Shand Executive Vice President and July 1995 43
Chief Loan Examiner
The principal occupation of each of the executive officers during the
past five years has been in the position reported above or in other positions as
an officer with the Company, except for Eric D. Shand, who has been with the
Company since 1993; prior to that, he was San Francisco Regional Director of the
Office of Thrift Supervision.
There is no family relationship among the above officers. All
executive officers serve at the pleasure of the Board of Directors.
15
<PAGE>
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits:
(1) The consolidated financial statements and related notes, the
independent auditors' report thereon and supplementary data that
appear on pages 35 through 67 of the 1995 Annual Report to
Shareholders are incorporated herein by reference.
(2) Financial Statement Schedules:
All schedules are omitted, because the conditions requiring their
filing do not exist.
(3) Exhibits:
Exhibit
number Description
------ -----------
2 Agreement and Plan of Merger, dated as of January 23, 1996,
by and between Wells Fargo & Company and First Interstate
Bancorp, as amended as of February 23, 1996, excluding all
annexes and schedules, incorporated by reference to Appendix
A to the Joint Proxy Statement of Wells Fargo & Company and
First Interstate Bancorp and the Prospectus of Wells Fargo &
Company dated February 27, 1996. The omitted annexes and
schedules will be furnished supplementally to the Securities
and Exchange Commission upon request.
3(a) Restated Certificate of Incorporation, incorporated by
reference to Exhibit 3(a) of Form 10-K filed March 21, 1994
(b) Certificate of the Voting Powers, Designation, Preferences
and Relative, Participating, Optional or Other Special
Rights, and the Qualifications, Limitations or Restrictions
Thereof, Which Have Not Been Set Forth in the Certificate of
Incorporation or in any Amendment Thereto, of the Adjustable
Rate Cumulative Preferred Stock, Series B, incorporated by
reference to Exhibit 3(c) of Form 10-K filed March 21, 1994
(c) Certificate of the Voting Powers, Designation, Preferences
and Relative, Participating, Optional or Other Special
Rights, and the Qualifications, Limitations or Restrictions
Thereof, Which Have Not Been Set Forth in the Certificate of
Incorporation or in any Amendment Thereto, of the 9%
Preferred Stock, Series C, incorporated by reference to
Exhibit 3 of Form 8-K filed October 24, 1991
(d) Certificate of the Voting Powers, Designation, Preferences
and Relative, Participating, Optional or Other Special
Rights, and the Qualifications, Limitations or Restrictions
Thereof, Which Have Not Been Set Forth in the Certificate of
Incorporation or in any Amendment Thereto, of the 8 7/8%
Preferred Stock, Series D, incorporated by reference to
Exhibit 3 of Form 8-K filed March 5, 1992
(e) By-Laws
16
<PAGE>
Exhibit
number Description
------ -----------
4(a) The Company hereby agrees to furnish upon request to the
Commission a copy of each instrument defining the rights of
holders of senior and subordinated debt of the Company.
(b) Deposit Agreement dated as of October 24, 1991 among Wells
Fargo & Company, Marine Midland Bank, N.A. as Depositary and
the holders from time to time of the Depositary Shares
representing one-twentieth of a share of 9% Preferred Stock,
Series C, incorporated by reference to Exhibit 4(a) of Form
8-K filed October 24, 1991
(c) Specimen of certificate for the 9% Preferred Stock, Series C,
incorporated by reference to Exhibit 4(b) of Form 8-K filed
October 24, 1991
(d) Specimen of Depositary Receipt for the Depositary Shares,
each representing a one-twentieth interest in a share of the
9% Preferred Stock, Series C, incorporated by reference to
Exhibit 4(c) of Form 8-K filed October 24, 1991
(e) Deposit Agreement dated as of March 5, 1992 among Wells Fargo
& Company, Marine Midland Bank, N.A. as Depositary and the
holders from time to time of the Depositary Shares
representing one-twentieth of a share of 8 7/8% Preferred
Stock, Series D, incorporated by reference to Exhibit 4(a) of
Form 8-K filed March 5, 1992
(f) Specimen of certificate for the 8 7/8% Preferred Stock,
Series D, incorporated by reference to Exhibit 4(b) of Form
8-K filed March 5, 1992
(g) Specimen of Depositary Receipt for the Depositary Shares,
each representing a one-twentieth interest in a share of the
8 7/8% Preferred Stock, Series D, incorporated by reference
to Exhibit 4(c) of Form 8-K filed March 5, 1992
10(a) Benefits Restoration Program
(b) Deferral Plan for Directors, as amended through November 19,
1991, incorporated by reference to Exhibit 10(b) of Form 10-K
for the year ended December 31, 1991
(c) 1990 Director Option Plan, as amended through November 19,
1991, incorporated by reference to Exhibit 10(c) of Form 10-K
for the year ended December 31, 1991
(d) 1987 Director Option Plan, as amended through November 19,
1991, incorporated by reference to Exhibit 10(d) of Form 10-K
for the year ended December 31, 1991
(e) Director Retirement Plan, incorporated by reference to
Exhibit 10(e) of Form 10-K for the year ended December 31,
1993
(f) 1990 Equity Incentive Plan
(g) 1982 Equity Incentive Plan, as amended through November 15,
1988, incorporated by reference to Exhibit 10(g) of Form 10-K
for the year ended December 31, 1993
(h) Executive Incentive Pay Plan
(i) Executive Loan Plan, incorporated by reference to Exhibit
10(i) of Form 10-K for the year ended December 31, 1994
(j) Passivity Agreement dated July 31, 1991 between the Company
and Berkshire Hathaway Inc., including the form of proxy
granted in connection therewith, incorporated by reference to
Exhibit 19 of Form 10-Q for the quarter ended June 30, 1991
(k) Long-Term Incentive Plan, incorporated by reference to
Exhibit A of the Proxy Statement filed March 14, 1994
17
<PAGE>
Exhibit
number Description
------ -----------
(l) Senior Executive Performance Plan, incorporated by reference
to Exhibit B of the Proxy Statement filed March 14, 1994
11 Computation of Earnings Per Common Share
12(a) Computation of Ratios of Earnings to Fixed Charges -- the
ratios of earnings to fixed charges, including interest on
deposits, were 2.19, 2.20, 1.90, 1.33 and 1.02 for the years
ended December 31, 1995, 1994, 1993, 1992 and 1991,
respectively. The ratios of earnings to fixed charges,
excluding interest on deposits, were 4.56, 5.04, 4.53, 2.56
and 1.10 for the years ended December 31, 1995, 1994, 1993,
1992 and 1991, respectively.
12(b) Computation of Ratios of Earnings to Fixed Charges and
Preferred Dividends -- the ratios of earnings to fixed
charges and preferred dividends, including interest on
deposits, were 2.09, 2.07, 1.77, 1.26 and 1.00 for the years
ended December 31, 1995, 1994, 1993, 1992 and 1991,
respectively. The ratios of earnings to fixed charges and
preferred dividends, excluding interest on deposits, were
3.99, 4.18, 3.51, 2.02 and 1.01 for the years ended December
31, 1995, 1994, 1993, 1992 and 1991, respectively.
13 1995 Annual Report to Shareholders -- only those sections of
the Annual Report to Shareholders referenced in the index on
page 1 are incorporated in the Form 10-K.
21 Subsidiaries of the Registrant -- Wells Fargo & Company's
only significant subsidiary, as defined, is Wells Fargo Bank,
N.A.
23 Consent of Independent Accountants
27 Financial Data Schedule
(b) The Company filed the following reports on Form 8-K during the fourth
quarter of 1995 and through the date hereof in 1996:
(1) October 17, 1995 under Item 5, containing the Press Release that
announced the Company's financial results for the quarter and nine
months ended September 30, 1995
(2) October 19, 1995 under Item 5, containing the Press Release that
announced the Company's proposed merger with First Interstate Bancorp
(3) October 24, 1995 under Item 5, containing the October 23 Press Release
that announced the Company's intention to file a Hart-Scott-Rodino Act
notification with the appropriate regulatory authorities in order to
be in a position to purchase shares of First Interstate Bancorp
(4) January 16, 1996 under Item 5, containing the Press Releases that
announced the Company's financial results for the quarter and year
ended December 31, 1995 and the increase in the Company's common stock
dividend
18
<PAGE>
(5) January 24, 1996 under Item 5, containing the January 24 Press Release
that announced that the Company and First Interstate Bancorp have
reached a definitive agreement to merge the two companies
(6) January 31, 1996 under Item 5, containing the Agreement and Plan of
Merger with First Interstate Bancorp, pursuant to which First
Interstate will merge with and into the Company
(7) February 29, 1996, under Item 5, containing the February 28 Press
Release that announced that the joint proxy statement of the Company
and First Interstate Bancorp had been declared effective by the
Securities and Exchange Commission and that the Company has reached
agreement with the Department of Justice and the Office of the
Attorney General for California regarding divestitures
STATUS OF PRIOR DOCUMENTS
The Wells Fargo & Company Annual Report on Form 10-K for the year
ended December 31, 1995, at the time of filing with the Securities and Exchange
Commission, shall modify and supersede all prior documents filed pursuant to
Sections 13, 14 and 15(d) of the Securities Exchange Act of 1934 for purposes of
any offers or sales of any securities after the date of such filing pursuant to
any Registration Statement or Prospectus filed pursuant to the Securities Act of
1933 which incorporates by reference such Annual Report on Form 10-K.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 March 19, 1996.
WELLS FARGO & COMPANY
By: FRANK A. MOESLEIN
-----------------------------------------
Frank A. Moeslein
(Executive Vice President and Controller)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 19, 1996:
<TABLE>
<S> <C> <C> <C>
PAUL HAZEN Chairman of the Board ROBERT K. JAEDICKE Director
- ----------------------- and Chief Executive -----------------------
(Paul Hazen) Officer (Principal (Robert K. Jaedicke)
Executive Officer)
ELLEN M. NEWMAN Director
-----------------------
(Ellen M. Newman)
RODNEY L. JACOBS Vice Chairman and Chief PHILIP J. QUIGLEY Director
- ----------------------- Financial Officer -----------------------
(Rodney L. Jacobs) (Principal Financial (Philip J. Quigley)
Officer)
CARL E. REICHARDT
----------------------- Director
(Carl E. Reichardt)
FRANK A. MOESLEIN Executive Vice President Director
- ----------------------- and Controller -----------------------
(Frank A. Moeslein) (Principal Accounting (Donald B. Rice)
Officer)
SUSAN G. SWENSON
----------------------- Director
(Susan G. Swenson)
H. JESSE ARNELLE Director CHANG-LIN TIEN Director
- ----------------------- -----------------------
(H. Jesse Arnelle) (Chang-Lin Tien)
WILLIAM R. BREUNER Director JOHN A. YOUNG Director
- ----------------------- -----------------------
(William R. Breuner) (John A. Young)
WILLIAM S. DAVILA Director WILLIAM F. ZUENDT Director
- ----------------------- -----------------------
(William S. Davila) (William F. Zuendt)
RAYBURN S. DEZEMBER Director
- -----------------------
(Rayburn S. Dezember)
</TABLE>
20
<PAGE>
By-Laws
of
WELLS FARGO & COMPANY
(a Delaware corporation),
As amended April 18, 1995
______________
ARTICLE I
MEETINGS OF STOCKHOLDERS
SECTION 1. Annual Meetings. The annual meeting of
stockholders of Wells Fargo & Company (the "corporation") shall
be held on the third Tuesday of April in each year at such time
of day as may be fixed by the Board of Directors, at the
principal office of the corporation, if not a bank holiday, and
if a bank holiday then on the next succeeding business day at the
same hour and place, or at such other time, date or place, within
or without the State of Delaware, as may be determined by the
Board of Directors. At such meeting, Directors shall be elected,
reports of the affairs of the corporation may be considered, and
any other proper business may be transacted.
SECTION 2. Special Meetings. Special meetings of the
stockholders, unless otherwise regulated by statute, for any
purpose or purposes whatsoever, may be called at any time by the
Board of Directors, the Chairman of the Board, the President, the
Chief Executive Officer (if other than the Chairman of the Board
or the President), or one or more stockholders holding not less
than 10 percent of the voting power of the corporation. Such
meetings may be held at any place within or without the State of
Delaware designated by the Board of Directors of the corporation.
<PAGE>
SECTION 3. Notice of Meetings. Notice of all meetings
of the stockholders, both annual and special, shall be given by
the Secretary in writing to stockholders entitled to vote. A
notice may be given either personally or by mail or other means
of written communication, charges prepaid, addressed to any
stockholder at his address appearing on the books of the
corporation or at the address given by such stockholder to the
corporation for the purpose of notice. Notice of any meeting of
stockholders shall be sent to each stockholder entitled thereto
not less than 10 nor more than 60 days prior to such meeting.
Such notice shall state the place, date and hour of the meeting
and shall also state (i) in the case of a special meeting, the
general nature of the business to be transacted and that no other
business may be transacted, (ii) in the case of an annual
meeting, those matters which the Board of Directors intends at
the time of the mailing of the notice to present for stockholder
action and that any other proper matter may be presented for
stockholder action to the meeting, and (iii) in the case of any
meeting at which Directors are to be elected, the names of the
nominees which the management intends at the time of the mailing
of the notice to present for election.
SECTION 4. Quorum. Except as otherwise provided by
law, the presence of the holders of a majority of the stock
issued and outstanding present in person or represented by proxy
and entitled to vote is requisite and shall constitute a quorum
for the transaction of business at all meetings of the
stockholders, and the vote of a majority of such stock present
and voting at a duly held meeting at which there is a quorum
present shall decide any question brought before such meeting.
SECTION 5. Voting. Unless otherwise provided in the
Certificate of Incorporation, every stockholder shall be entitled
to one vote for every share of stock standing in his name on the
books of the corporation, and may vote either in person or by
proxy.
ARTICLE II
DIRECTORS
SECTION 1. Number, Term. The property, business and
affairs of the corporation shall be managed and all corporate
power shall be exercised by or under the direction of the Board
<PAGE>
of Directors as from time to time constituted. The number of
Directors of this corporation shall be not less than 10 nor more
than 20, the exact number within the limits so specified to be
fixed from time to time by a By-Law adopted by the stockholders
or by the Board of Directors. Until some other number is so
fixed, the number of Directors shall be 14. The term of office
of each Director shall be from the time of his election until the
annual meeting next succeeding his election and until his
successor shall have been duly elected, or until his death,
resignation or lawful removal pursuant to the provisions of the
General Corporation Law of Delaware.
SECTION 2. Powers. In addition to the powers expressly
conferred by these By-Laws, the Board of Directors may exercise
all corporate powers and do such lawful acts and things as are
not by statute or by the Certificate of Incorporation or by these
By-Laws required to be exercised or approved by the stockholders.
SECTION 3. Compensation. Directors and Advisory
Directors (as provided in Section 12 of this Article) as such may
receive such compensation, if any, as the Board of Directors by
resolution may direct, including salary or a fixed sum plus
expenses, if any, for attendance at meetings of the Board of
Directors or of its committees.
SECTION 4. Organizational Meeting. An organizational
meeting of the Board of Directors shall be held each year on the
day of the annual meeting of stockholders of the corporation for
the purpose of electing officers, the members of the Formal
Committees provided in Section 11 of this Article and the
Advisory Directors provided in Section 12 of this Article, and
for the transaction of any other business. Said organizational
meeting shall be held without any notice other than this By-Law.
SECTION 5. Place of Meetings. The Board of Directors
shall hold its meetings at the main office of the corporation or
at such other place as may from time to time be designated by the
Board of Directors or by the chief executive officer.
SECTION 6. Regular Meetings. Regular meetings of the
Board of Directors will be held on the third Tuesday of each
month (except for the months of August and December) at the later
of the following times: (i) 10:30 a.m. or (ii) immediately
following the adjournment of any regular meeting of the Board of
Directors of Wells Fargo Bank, National Association, held on the
same day. If the day of any regular meeting shall fall upon a
bank holiday, the meeting shall be held at the same hour on the
<PAGE>
first day following which is not a bank holiday. No call or
notice of a regular meeting need be given unless the meeting is
to be held at a place other than the main office of the
corporation.
SECTION 7. Special Meetings. Special meetings shall be
held when called by the chief executive officer or at the written
request of four Directors.
SECTION 8. Quorum; Adjourned Meetings. A majority of
the authorized number of Directors shall constitute a quorum for
the transaction of business. A majority of the Directors
present, whether or not a quorum, may adjourn any meeting to
another time and place, provided that, if the meeting is
adjourned for more than 30 days, notice of the adjournment shall
be given in accordance with these By-Laws.
SECTION 9. Notice, Waivers of Notice. Notice of
special meetings and notice of regular meetings held at a place
other than the head office of the corporation shall be given to
each Director, and notice of the adjournment of a meeting
adjourned for more than 30 days shall be given prior to the
adjourned meeting to all Directors not present at the time of the
adjournment. No such notice need specify the purpose of the
meeting. Such notice shall be given four days prior to the
meeting if given by mail or on the day preceding the day of the
meeting if delivered personally or by telephone, facsimile, telex
or telegram. Such notice shall be addressed or delivered to each
Director at such Director's address as shown upon the records of
the corporation or as may have been given to the corporation by
the Director for the purposes of notice. Notice need not be
given to any Director who signs a waiver of notice (whether
before or after the meeting) or who attends the meeting without
protesting the lack of notice prior to its commencement. All
such waivers shall be filed with and made a part of the minutes
of the meeting.
SECTION 10. Telephonic Meetings. A meeting of the
Board of Directors or of any Committee thereof may be held
through the use of conference telephone or similar communications
equipment, so long as all members participating in such meeting
can hear one another. Participation in such a meeting shall
constitute presence at such meeting.
SECTION 11. Written Consents. Any action required or
permitted to be taken by the Board of Directors may be taken
without a meeting, if all members of the Board of Directors shall
<PAGE>
individually or collectively consent in writing to such action.
Such written consent or consents shall be filed with the minutes
of the proceedings of the Board of Directors. Such action by
written consent shall have the same force and effect as the
unanimous vote of the Directors.
SECTION 12. Resignations. Any Director may resign his
position as such at any time by giving written notice to the
Chairman of the Board, the President, the Secretary or the Board
of Directors. Such resignation shall take effect as of the time
such notice is given or as of any later time specified therein
and the acceptance thereof shall not be necessary to make it
effective.
SECTION 13. Vacancies. Vacancies in the membership of
the Board of Directors shall be deemed to exist (i) in case of
the death, resignation or removal of any Director, (ii) if the
authorized number of Directors is increased, or (iii) if the
stockholders fail, at a meeting of stockholders at which
Directors are elected, to elect the full authorized number of
Directors to be elected at that meeting. Vacancies in the
membership of the Board of Directors may be filled by a majority
of the remaining Directors, though less than a quorum, or by a
sole remaining Director, and each Director so elected shall hold
office until his successor is elected at an annual or a special
meeting of the stockholders. The stockholders may elect a
Director at any time to fill any vacancy not filled by the
Directors.
SECTION 14. Committees of the Board of Directors. By
resolution adopted by a majority of the authorized number of
Directors, the Board of Directors may designate one or more
Committees to act as or on behalf of the Board of Directors.
Each such Committee shall consist of one or more Directors
designated by the Board of Directors to serve on such Committee
at the pleasure of the Board of Directors. The Board of
Directors may designate one or more Directors as alternate
members of any Committee, which alternate members may replace any
absent member at any meeting of such Committee. In the absence
or disqualification of a member of a Committee, the member or
members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to
act at the meeting in the place of any such absent or
disqualified member. Any Committee, to the extent provided in
the resolution of the Board of Directors, these By-Laws or the
Certificate of Incorporation, may have all the authority of the
<PAGE>
Board of Directors, except with respect to: (i) amending the
Certificate of Incorporation (except that a Committee may, to the
extent authorized in the resolution or resolutions providing for
the issuance of shares of stock adopted by the Board of Directors
as provided in Section 151(a) of the General Corporation Law of
Delaware, fix any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution
of assets of the corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of
stock of the corporation or fix the number of shares of any
series of stock or authorize the increase or decrease of the
shares of any series), (ii) adopting an agreement of merger or
consolidation under Section 251 or 252 of the General Corporation
Law of Delaware, (iii) recommending to the stockholders the sale,
lease or exchange of all or substantially all of the
corporation's property and assets, (iv) recommending to the
stockholders a dissolution of the corporation or a revocation of
a dissolution, or (v) amending these By-Laws.
Included among the Committees shall be the following:
(a) Executive Committee. There shall be an Executive
Committee consisting of its ex officio member and such additional
Directors, in no event less than seven, as the Board of Directors
may from time to time deem appropriate, elected by the Board of
Directors at its organizational meeting or otherwise. Subject to
such limitations as may from time to time be imposed by the Board
of Directors or as are imposed by these By-Laws, the Executive
Committee shall have the fullest authority to act for and on
behalf of the corporation, and it shall have all of the powers of
the Board of Directors which, under the law, it is possible for a
Board of Directors to delegate to such a committee, including the
supervision of the general management, direction and
superintendence of the business and affairs of the corporation
and the power to declare a dividend, to authorize the issuance of
stock or to adopt a certificate of ownership and merger pursuant
to Section 253 of the General Corporation Law of Delaware.
(b) Committee on Examinations and Audits. There shall
be a Committee on Examinations and Audits consisting of not less
than three Directors who are not officers of the corporation and
who shall be elected by the Board of Directors at its
organizational meeting or otherwise. It shall be the duty of
this Committee (i) to make, or cause to be made, in accordance
with the procedures from time to time approved by the Board of
Directors, internal examinations and audits of the affairs of the
<PAGE>
corporation and the affairs of any subsidiary which by resolution
of its board of directors has authorized the Committee on
Examinations and Audits to act hereunder, (ii) to make
recommendations to the Board of Directors of the corporation and
of each such subsidiary with respect to the selection of and
scope of work for the independent auditors for the corporation
and for each subsidiary, (iii) to review, or cause to be reviewed
in accordance with procedures from time to time approved by the
Board of Directors, all reports of internal examinations and
audits, all audit-related reports made by the independent
auditors for the corporation and each such subsidiary and all
reports of examination of the corporation and of any subsidiary
made by regulatory authorities, (iv) from time to time, to review
and discuss with the management, and independently with the
General Auditor, the Risk Control Officer and the independent
auditors, the accounting and reporting principles, policies and
practices employed by the corporation and its subsidiaries and
the adequacy of their accounting, financial, operating and
administrative controls, including the review and approval of any
policy statements relating thereto, and (v) to perform such other
duties as the Board of Directors may from time to time assign to
it. The Committee on Examinations and Audits shall submit
reports of its findings, conclusions and recommendations, if any,
to the Board of Directors.
(c) Management Development and Compensation Committee.
There shall be a Management Development and Compensation
Committee consisting of not less than six directors, who shall be
elected by the Board of Directors at its organizational meeting
or otherwise and none of whom shall be eligible to participate in
either the Wells Fargo & Company Stock Appreciation Rights Plan,
the Wells Fargo & Company Stock Option Plan the Wells Fargo &
Company Employee Stock Purchase Plan or any similar employee
stock plan (or shall have been so eligible within the year next
preceding the date of becoming a member of the Management
Development and Compensation Committee). It shall be the duty of
the Management Development and Compensation Committee, and it
shall have authority, (i) to advise the Chief Executive Officer
concerning the corporation's salary policies, (ii) to administer
such compensation programs as from time to time are delegated to
it by the Board of Directors, (iii) to accept or reject the
recommendations of the Chief Executive Officer with respect to
all salaries in excess of such dollar amount or of officers of
such grade or grades as the Board of Directors may from time to
time by resolution determine to be appropriate and (iv) upon the
request of any subsidiary which by resolution of its board of
directors has authorized the Management Development and
<PAGE>
Compensation Committee to act hereunder, to advise its chief
executive officer concerning such subsidiary's salary policies
and compensation programs.
(d) Nominating Committee. There shall be a Nominating
Committee consisting of not less than three Directors, who shall
be elected by the Board of Directors at its organizational
meeting or otherwise. It shall be the duty of the Nominating
Committee, annually and in the event of vacancies on the Board of
Directors, to nominate candidates for election to the Board of
Directors.
The Chairman of the Board, or in the absence of the
Chairman of the Board, the acting chief executive officer, if a
Director, shall be an ex officio member of all the Committees
except the Committee on Examinations and Audits, the Management
and Development and Compensation Committee, the Nominating
Committee and such other Committees which by resolution the Board
of Directors expressly limit membership to non-officer Directors.
Each Committee member shall serve until the
organizational meeting of the Board of Directors held on the day
of the annual meeting of stockholders in the year next following
his or her election and until his or her successor shall have
been elected, but any such member may be removed at any time by
the Board of Directors. Vacancies in any of said committees,
however created, shall be filled by the Board of Directors. A
majority of the members of any such committee shall be necessary
to constitute a quorum and sufficient for the transaction of
business, and any act of a majority present at a meeting of any
such committee at which there is a quorum present shall be the
act of such committee. Subject to these By-Laws and the
authority of the Board of Directors, each committee shall have
the power to determine the form of its organization. The
provisions of these By-Laws governing the calling, notice and
place of special meetings of the Board of Directors shall apply
to all meetings of any Committee unless such committee fixes a
time and place for regular meetings, in which case notice for
such meeting shall be unnecessary. The provisions of these
By-Laws regarding actions taken by the Board of Directors,
however called or noticed, shall apply to all meetings of any
Committee. Each committee shall cause to be kept a full and
complete record of its proceedings, which shall be available for
inspection by any Director. There shall be presented at each
meeting of the Board of Directors a summary of the minutes of all
proceedings of each committee since the preceding meeting of the
Board of Directors.
<PAGE>
SECTION 15. Advisory Directors. There may be not more
than 10 Advisory Directors, who may be elected by the Board of
Directors at its organizational meeting. An Advisory Director
shall serve until the next following organizational meeting of
the Board of Directors. Any Advisory Director may be removed at
any time by the Board of Directors. Vacancies may, but need not
be, filled by the Board of Directors. Advisory Directors may
attend meetings of the Board of Directors and, if appointed
thereto as an advisor by the Board of Directors, meetings of
Formal Committees with the privilege of participating in all
discussions but without the right to vote.
SECTION 16. Directors Emeriti. There shall be not more
than ten (10) Directors Emeriti who shall be elected by the Board
of Directors at its organizational meeting. A Director Emeritus
shall serve until the next following organizational meeting of
the Board of Directors. No person may be elected a Director
Emeritus unless at some time prior thereto such person has been a
Director of the corporation. Any Director Emeritus may be
removed at any time by the Board of Directors. Vacancies,
however created, may, but need not, be filled by the Board of
Directors. Directors Emeriti may attend meetings of the Board of
Directors and, if appointed thereto as an advisor by the Board of
Directors, meetings of Committees with the privilege of
participating in all discussions but without the right to vote.
ARTICLE III
OFFICERS
SECTION 1. Election of Executive Officers. The
corporation shall have (i) a Chairman of the Board, (ii) a
President, (iii) a Secretary and (iv) a Chief Financial Officer.
The Corporation also may have a Vice Chairman of the Board, one
or more Vice Chairmen, one or more Executive Vice Presidents, one
or more Senior Vice Presidents, one or more Vice Presidents, a
Controller, a Treasurer, one or more Assistant Vice Presidents,
one or more Assistant Treasurers, one or more Assistant
Secretaries, a General Auditor, a Risk Control Officer, and such
other officers as the Board of Directors, or the Chief Executive
Officer or any officer or committee whom he may authorize to
<PAGE>
perform this duty, may from time to time deem necessary or
expedient for the proper conduct of business by the corporation.
The Chairman of the Board, the Vice Chairman of the Board, if
any, and the President shall be elected from among the members of
the Board of Directors. The following offices shall be filled
only pursuant to election by the Board of Directors: Chairman of
the Board, Vice Chairman of the Board, President, Vice Chairman,
Executive Vice President, Senior Vice President, Secretary,
Controller, Treasurer, General Auditor and Risk Control Officer.
Other officers may be appointed by the Chief Executive Officer or
by any officer or committee whom he may authorize to perform this
duty. All officers shall hold office at will, at the pleasure of
the Board of Directors, the Chief Executive Officer, the officer
or committee having the authority to appoint such officers, and
the officer or committee authorized by the Chief Executive
Officer to remove such officers, and may be removed at any time,
with or without notice and with or without cause. No
authorization by the Chief Executive Officer to perform such duty
of appointment or removal shall be effective unless done in
writing and signed by the Chief Executive Officer. Two or more
offices may be held by the same person.
SECTION 2. Chairman of the Board. The Chairman of the
Board shall, when present, preside at all meetings of the
stockholders and of the Board of Directors and shall be the Chief
Executive Officer of the corporation. As Chief Executive
Officer, he shall (i) exercise, and be responsible to the Board
of Directors for, the general supervision of the property,
affairs and business of the corporation, (ii) report at each
meeting of the Board of Directors upon all matters within his
knowledge which the interests of the corporation may require to
be brought to its notice, (iii) prescribe, or to the extent he
may deem appropriate designate an officer or committee to
prescribe, the duties, authority and signing power of all other
officers and employees of the corporation and (iv) exercise,
subject to these By-Laws, such other powers and perform such
other duties as may from time to time be prescribed by the Board
of Directors.
SECTION 3. Vice Chairman of the Board. The Vice
Chairman of the Board shall, subject to these By-Laws, exercise
such powers and perform such duties as may from time to time be
prescribed by the Board of Directors. In the absence of the
Chairman of the Board and the President, the Vice Chairman of the
Board shall preside over the meetings of the stockholders and the
Board of Directors.
<PAGE>
SECTION 4. President. The President shall, subject to
these By-Laws, be the chief operating officer of the corporation
and shall exercise such other powers and perform such other
duties as may from time to time be prescribed by the Board of
Directors. In the absence of the Chairman of the Board, the
President shall preside over the meetings of the stockholders and
the Board of Directors.
SECTION 5. Absence or Disability of Chief Executive
Officer. In the absence or disability of the Chairman of the
Board, the President shall act as Chief Executive Officer. In
the absence or the disability of both the Chairman of the Board
and the President, the Vice Chairman of the Board shall act as
Chief Executive Officer. In the absence of the Chairman of the
Board, the President and the Vice Chairman of the Board, the
officer designated by the Board of Directors, or if there be no
such designation the officer designated by the Chairman of the
Board, shall act as Chief Executive Officer. The Chairman of the
Board shall at all times have on file with the Secretary his
written designation of the officer from time to time so
designated by him to act as Chief Executive Officer in his
absence or disability and in the absence or disability of the
President and the Vice Chairman of the Board.
SECTION 6. Executive Vice Presidents; Senior Vice
Presidents; Vice Presidents. The Executive Vice Presidents, the
Senior Vice Presidents and the Vice Presidents shall have all
such powers and duties as may be prescribed by the Board of
Directors or by the Chief Executive Officer.
SECTION 7. Secretary. The Secretary shall keep a full
and accurate record of all meetings of the stockholders and of
the Board of Directors, and shall have the custody of all books
and papers belonging to the corporation which are located in its
principal office. He shall give, or cause to be given, notice of
all meetings of the stockholders and of the Board of Directors,
and all other notices required by law or by these By-Laws. He
shall be the custodian of the corporate seal or seals. In
general, he shall perform all duties ordinarily incident to the
office of a secretary of a corporation, and such other duties as
from time to time may be assigned to him by the Board of
Directors or the Chief Executive Officer.
SECTION 8. Chief Financial Officer. The Chief
Financial Officer shall have charge of and be responsible for all
funds, securities, receipts and disbursements of the corporation,
and shall deposit, or cause to be deposited, in the name of the
<PAGE>
corporation all moneys or other valuable effects in such banks,
trust companies, or other depositories as shall from time to time
be selected by the Board of Directors. He shall render to the
Chief Executive Officer and the Board of Directors, whenever
requested, an account of the financial condition of the
corporation. In general, he shall perform all duties ordinarily
incident to the office of a chief financial officer of a
corporation, and such other duties as may be assigned to him by
the Board of Directors or the Chief Executive Officer.
SECTION 9. General Auditor. The General Auditor shall
be responsible to the Board of Directors for evaluating the
ongoing operation, and the adequacy, effectiveness and
efficiency, of the system of control within the corporation and
of each subsidiary which has authorized the Committee on
Examinations and Audits to act under Section 14(b) of Article II
of these By-Laws. He shall make, or cause to be made, such
internal audits and reports of the corporation and each such
subsidiary as may be required by the Board of Directors or by the
Committee on Examinations and Audits. He shall coordinate the
auditing work performed for the corporation and its subsidiaries
by public accounting firms and, in connection therewith, he shall
determine whether the internal auditing functions being performed
within the subsidiaries are adequate. He shall also perform such
other duties as the Chief Executive Officer may prescribe, and
shall report to the Chief Executive Officer on all matters
concerning the safety of the operations of the corporation and of
any subsidiary which he deems advisable or which the Chief
Executive Officer may request. Additionally, the General Auditor
shall have the duty of reporting independently of all officers of
the corporation to the Committee on Examinations and Audits at
least quarterly on all matters concerning the safety of the
operations of the corporation and its subsidiaries which should
be brought in such manner through such committee to the attention
of the Board of Directors. Should the General Auditor deem any
matter to be of especial immediate importance, he shall report
thereon forthwith through the Committee on Examinations and
Audits to the Board of Directors.
SECTION 10. Risk Control Officer. The Risk Control
Officer shall report to the Board of Directors through its
Committee on Examinations and Audits. The Risk Control Officer
shall be responsible for directing a number of control related
activities principally affecting the Company's credit function
and shall have such other duties and responsibilities as shall be
prescribed from time to time by the chief executive officer and
the Committee on Examinations and Audits. Should the Risk
<PAGE>
Control Officer deem any matter to be of special importance, the
Risk Control Officer shall report thereon forthwith through the
Committee to the Board of Directors.
ARTICLE IV
INDEMNIFICATION
SECTION 1. Action, etc. Other Than by or in the Right
of the Corporation. The corporation shall indemnify any person
who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding or
investigation, whether civil, criminal or administrative, and
whether external or internal to the corporation (other than a
judicial action or suit brought by or in the right of the
corporation), by reason of the fact that he or she is or was an
Agent (as hereinafter defined) against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by the Agent in connection with
such action, suit or proceeding, or any appeal therein, if the
Agent acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such conduct was
unlawful. The termination of any action, suit or proceeding --
whether by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent -- shall not, of
itself, create a presumption that the Agent did not act in good
faith and in a manner which he or she reasonably believed to be
in or not opposed to the best interests of the corporation and,
with respect to any criminal action or proceeding, that the Agent
had reasonable cause to believe that his or her conduct was
unlawful. For purposes of this Article, an "Agent" shall be any
director, officer or employee of the corporation, or any person
who, being or having been such a director, officer or employee,
is or was serving at the request of the corporation as a
director, officer, employee, trustee or agent of another
corporation, partnership, joint venture, trust or other
enterprise.
SECTION 2. Action, etc. by or in the Right of the
Corporation. The corporation shall indemnify any person who was
or is a party or is threatened to be made a party to any
threatened, pending or completed judicial action or suit brought
<PAGE>
by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that such person is or was an
Agent (as defined above) against expenses (including attorneys'
fees) and amounts paid in settlement actually and reasonably
incurred by such person in connection with the defense,
settlement or appeal of such action or suit if he or she acted in
good faith and in a manner he or she reasonably believed to be in
or not opposed to the best interests of the corporation, except
that no indemnification shall be made in respect of any claim,
issue or matter as to which such person shall have been adjudged
to be liable to the corporation unless and only to the extent the
Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to
indemnify for such expenses which the Court of Chancery or such
other court shall deem proper.
SECTION 3. Determination of Right of Indemnification or
Contribution. Unless otherwise ordered by a court, any
indemnification under Section 1 or 2, and any contribution under
Section 6, of this Article shall be made by the corporation to an
Agent unless a determination is reasonably and promptly made,
either (i) by the Board of Directors acting by a majority vote of
a quorum consisting of Directors who were not party to such
action, suit or proceeding, or (ii) if such a quorum is not
obtainable, or if obtainable and such quorum so directs, by
independent legal counsel in a written opinion, or (iii) by the
stockholders, that such Agent acted in bad faith and in a manner
that such Agent did not believe to be in or not opposed to the
best interests of the corporation or, with respect to any
criminal proceeding, that such Agent believed or had reasonable
cause to believe that his or her conduct was unlawful.
SECTION 4. Advances of Expenses. Except as limited by
Section 5 of this Article, costs, charges and expenses (including
attorneys' fees) incurred by an Agent in defense of any action,
suit, proceeding or investigation of the nature referred to in
Section 1 or 2 of this Article or any appeal therefrom shall be
paid by the corporation in advance of the final disposition of
such matter; provided, however, that if the General Corporation
Law of Delaware then so requires, such payment shall be made only
if the Agent shall undertake to reimburse the corporation for
such payment in the event that it is ultimately determined, as
provided herein, that such person is not entitled to
indemnification.
<PAGE>
SECTION 5. Right of Agent to Indemnification or Advance
Upon Application; Procedure Upon Application. Any
indemnification under Section 1 or 2, or advance under Section 4,
of this Article shall be made promptly and in any event within 90
days, upon the written request of the Agent, unless with respect
to an application under said Sections 1 or 2 an adverse
determination is reasonably and promptly made pursuant to Section
3 of this Article or unless with respect to an application under
said Section 4 an adverse determination is made pursuant to said
Section 4. The right to indemnification or advances as granted
by this Article shall be enforceable by the Agent in any court of
competent jurisdiction if the Board of Directors or independent
legal counsel improperly denies the claim, in whole or in part,
or if no disposition of such claim is made within 90 days. It
shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in defending any
action, suit or proceeding in advance of its final disposition
where any required undertaking has been tendered to the
corporation) that the Agent has not met the standards of conduct
which would require the corporation to indemnify or advance the
amount claimed, but the burden of proving such defense shall be
on the corporation. Neither the failure of the corporation
(including the Board of Directors, independent legal counsel and
the stockholders) to have made a determination prior to the
commencement of such action that indemnification of the Agent is
proper in the circumstances because he or she has met the
applicable standard of conduct, nor an actual determination by
the corporation (including the Board of Directors, independent
legal counsel and the stockholders) that the Agent had not met
such applicable standard of conduct, shall be a defense to the
action or create a presumption that the Agent had not met the
applicable standard of conduct. The Agent's costs and expenses
incurred in connection with successfully establishing his or her
right to indemnification, in whole or in part, in any such
proceeding shall also be indemnified by the corporation.
SECTION 6. Contribution. In the event that the
indemnification provided for in this Article is held by a court
of competent jurisdiction to be unavailable to an Agent in whole
or in part, then in respect of any threatened, pending or
completed action, suit or proceeding in which the corporation is
jointly liable with the Agent (or would be if joined in such
action, suit or proceeding), to the extent permitted by the
General Corporation Law of Delaware the corporation shall
contribute to the amount of expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred and paid or payable by the Agent in such
<PAGE>
proportion as is appropriate to reflect (i) the relative benefits
received by the corporation on the one hand and the Agent on the
other from the transaction from which such action, suit or
proceeding arose and (ii) the relative fault of the corporation
on the one hand and of the Agent on the other in connection with
the events which resulted in such expenses, judgments, fines or
settlement amounts, as well as any other relevant equitable
considerations. The relative fault of the corporation on the one
hand and of the Agent on the other shall be determined by
reference to, among other things, the parties' relative intent,
knowledge, access to information and opportunity to correct or
prevent the circumstances resulting in such expenses, judgments,
fines or settlement amounts.
SECTION 7. Other Rights and Remedies. Indemnification
under this Article shall be provided regardless of when the
events alleged to underlie any action, suit or proceeding may
have occurred, shall continue as to a person who has ceased to be
an Agent and shall inure to the benefit of the heirs, executors
and administrators of such a person. All rights to
indemnification and advancement of expenses under this Article
shall be deemed to be provided by a contract between the
corporation and the Agent who serves as such at any time while
these By-Laws and other relevant provisions of the General
Corporation Law of Delaware and other applicable law, if any, are
in effect. Any repeal or modification thereof shall not affect
any rights or obligations then existing.
SECTION 8. Insurance. Upon resolution passed by the
Board of Directors, the corporation may purchase and maintain
insurance on behalf of any person who is or was an Agent against
any liability asserted against such person and incurred by him or
her in any such capacity, or arising out of his or her status as
such, regardless of whether the corporation would have the power
to indemnify such person against such liability under the
provisions of this Article. The corporation may create a trust
fund, grant a security interest or use other means, including
without limitation a letter of credit, to ensure the payment of
such sums as may become necessary to effect indemnification as
provided herein.
SECTION 9. Constituent Corporations. For the purposes
of this Article, references to "the corporation" include all
constituent corporations (including any constituent of a
constituent) absorbed in a consolidation or merger as well as the
resulting or surviving corporation, so that any person who is or
was a director, officer or employee of such a constituent
<PAGE>
corporation or who, being or having been such a director, officer
or employee, is or was serving at the request of such constituent
corporation as a director, officer, employee or trustee of
another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions
of this Article with respect to the resulting or surviving
corporation as such person would if he or she had served the
resulting or surviving corporation in the same capacity.
SECTION 10. Other Enterprises, Fines, and Serving at
Corporation's Request. For purposes of this Article, references
to "other enterprise" in Sections 1 and 9 shall include employee
benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit
plan; and references to "serving at the request of the
corporation" shall include any service by an Agent as director,
officer, employee, trustee or agent of the corporation which
imposes duties on, or involves services by, such Agent with
respect to any employee benefit plan, its participants, or
beneficiaries. A person who acted in good faith and in a manner
he or she reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall
be deemed to have acted in a manner "not opposed to the best
interest of the corporation" for purposes of this Article.
SECTION 11. Savings Clause. If this Article or any
portion hereof shall be invalidated on any ground by any court of
competent jurisdiction, then the corporation shall nevertheless
indemnify each Agent as to expenses (including attorneys' fees,
judgments, fines and amounts paid in settlement with respect to
any action, suit, appeal, proceeding or investigation, whether
civil, criminal or administrative, and whether internal or
external, including a grand jury proceeding and an action or suit
brought by or in the right of the corporation, to the full extent
permitted by the applicable portion of this Article that shall
not have been invalidated, or by any other applicable law.
SECTION 12. Actions Initiated by Agent. Anything to
the contrary in this Article notwithstanding, the corporation
shall indemnify any Agent in connection with an action, suit or
proceeding initiated by such Agent (other than actions, suits, or
proceedings commenced pursuant to Section 5 of this Article) only
if such action, suit or proceeding was authorized by the Board of
Directors.
SECTION 13. Statutory and Other Indemnification.
Notwithstanding any other provision of this Article, the
<PAGE>
corporation shall indemnify any Agent and advance expenses
incurred by such Agent in any action, suit or proceeding of the
nature referred to in Section 1 or 2 of this Article to the
fullest extent permitted by the General Corporation Law of
Delaware, as the same may be amended from time to time, except
that no amount shall be paid pursuant to this Article in the
event of an adverse determination pursuant to Section 3 of this
Article or in respect of remuneration to the extent that it shall
be determined to have been paid in violation of law or in respect
of amounts owing under Section 16(b) of the Securities Exchange
Act of 1934. The rights to indemnification and advancement of
expenses provided by any provision of this Article, including
without limitation those rights conferred by the preceding
sentence, shall not be deemed exclusive of, and shall not affect,
any other rights to which an Agent seeking indemnification or
advancement of expenses may be entitled under any provision of
any law, certificate of incorporation, by-law, agreement or by
any vote of stockholders or disinterested directors or otherwise,
both as to action in his or her official capacity and as to
action in another capacity while serving as an Agent. The
corporation may also provide indemnification and advancement of
expenses to other persons or entities to the extent deemed
appropriate.
ARTICLE V
MISCELLANEOUS
SECTION 1. Fiscal Year. The fiscal year of the
corporation shall be the calendar year.
SECTION 2. Stock Certificates. Each stockholder shall
be entitled to a certificate representing the number of shares of
the stock of the corporation owned by such stockholder and the
class or series of such shares. Each certificate shall be signed
in the name of the corporation by (i) the Chairman of the Board,
the Vice Chairman of the Board, the President, an Executive Vice
President, a Senior Vice President, or a Vice President, and (ii)
the Treasurer, an Assistant Treasurer, the Secretary, or an
<PAGE>
Assistant Secretary. Any of the signatures on the certificate
may be facsimile. Prior to due presentment for registration of
transfer in the stock transfer book of the corporation, the
registered owner for any share of stock of the corporation shall
be treated as the person exclusively entitled to vote, to receive
notice, and to exercise all other rights and receive all other
entitlements of a stockholder with respect to such share, except
as may be provided otherwise by law.
SECTION 3. Execution of Written Instruments. All
written instruments shall be binding upon the corporation if
signed on its behalf by (i) any two of the following officers:
the Chairman of the Board, the President, the Vice Chairman of
the Board, the Vice Chairmen or the Executive Vice Presidents; or
(ii) any one of the foregoing officers signing jointly with any
Senior Vice President. Whenever any other officer or person
shall be authorized to execute any agreement, document or
instrument by resolution of the Board of Directors, or by the
Chief Executive Officer, or by any two of the officers identified
in the immediately preceding sentence, such execution by such
other officer or person shall be equally binding upon the
corporation.
SECTION 4. Subsidiary. As used in these By-Laws the
term "subsidiary" or "subsidiaries" means any corporation 25
percent or more of whose voting shares is directly or indirectly
owned or controlled by the corporation, or any other affiliate of
the corporation designated in writing as a subsidiary of the
corporation by the Chief Executive Officer of the corporation.
All such written designations shall be filed with the Secretary
of the corporation.
SECTION 5. Amendments. These By-Laws may be altered,
amended or repealed by a vote of the stockholders entitled to
exercise a majority of the voting power of the corporation, by
written consent of such stockholders or by the Board of
Directors.
SECTION 6. Annual Report. The Board of Directors shall
cause an annual report to be sent to the stockholders not later
than 120 days after the close of the fiscal year and at least 15
days prior to the annual meeting of stockholders to be held
during the ensuing fiscal year.
SECTION 7. Construction. Unless the context clearly
requires it, nothing in these By-Laws shall be construed as a
limitation on any powers or rights of the corporation, its
<PAGE>
Directors or its officers provided by the General Corporation Law
of Delaware. Unless the context otherwise requires, the General
Corporation Law of Delaware shall govern the construction of
these By-Laws.
SECTION 8. Loans to Officers. The corporation may lend
money to, or guarantee any obligation of, or otherwise assist any
officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director
of the corporation or its subsidiary, whenever, in the judgment
of the Board of Directors or any committee thereof, such loan,
guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with
or without interest, and may be unsecured, or secured in such
manner as the Board of Directors or such committee shall approve,
including, without limitation, a pledge of shares of stock of the
corporation. This Section shall not be deemed to deny, limit or
restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
SECTION 9. Notices; Waivers. Whenever, under any
provision of the General Corporation Law of Delaware, the
Certificate of Incorporation or these By-Laws, notice is required
to be given to any director or stockholder, such provision shall
not be construed to mean personal notice, but such notice may be
given in writing, by mail, addressed to such Director or
stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall
be deemed to be given at the time when the same shall be
deposited in the United States mail. Notice to directors may
also be given by facsimile, telex or telegram. A waiver in
writing of any such required notice, signed by the person or
persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
<PAGE>
WELLS FARGO & COMPANY
BENEFIT RESTORATION
PROGRAM
Effective January 1, 1991
<PAGE>
WELLS FARGO & COMPANY
BENEFIT RESTORATION PROGRAM
TABLE OF CONTENTS
ARTICLE I Definitions. . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II Excess Defined Benefit Plan . . . . . . . . . . . . . 3
ARTICLE III Excess Defined Contribution Plan . . . . . . . . . . . 3
ARTICLE IV Executive Supplemental Benefits Plan . . . . . . . . . 4
ARTICLE V Accounts . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE VI Distribution of Benefits . . . . . . . . . . . . . . . 6
ARTICLE VII Unfunded Nature of the Plan . . . . . . . . . . . . . 7
ARTICLE VIII Administration of the Program. . . . . . . . . . . . . 7
ARTICLE IX Amendments and Termination . . . . . . . . . . . . . . 8
ARTICLE X Miscellaneous. . . . . . . . . . . . . . . . . . . . . 8
SCHEDULE A . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
i
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THE WELLS FARGO & COMPANY
BENEFIT RESTORATION PROGRAM
The Wells Fargo & Company Benefit Restoration Program supersedes the
Wells Fargo & Company Supplemental Benefits Plan, Executive Supplemental
Benefits Plan and Supplemental Savings Plan effective January 1, 1991. All
accrued benefits and account balances under such prior plans shall be
transferred to and governed by the provisions of this Program effective January
1, 1991 and no person shall have any rights under any such prior plan on and
after that date. The Program shall consist of three plans: the Excess Defined
Benefit Plan, the Excess Defined Contribution Plan and the Executive
Supplemental Benefits Plan, each of which shall constitute a separate plan for
purposes of the Employee Retirement Income Security Act of 1974, as amended.
ARTICLE I
DEFINITIONS
Wherever used herein the following terms have the meanings indicated:
1.1 "ACCOUNTS" means one or more accounts established under Article
V.
1.2 "BENEFICIARY" means the person or persons effectively designated
by a Participant to receive benefits under the Company's Predecessor Retirement
Plan or Qualified Defined Contribution Plans.
1.3 "BOARD OF DIRECTORS" means the Board of Directors of Wells Fargo
& Company.
1.4 "CODE" means the Internal Revenue Code of 1986, as amended from
time to time.
1.5 "COMMITTEE" means the committee established pursuant to Article
VIII, as constituted from time to time.
1.6 "COMPANY" means Wells Fargo & Company and any successor to all
or a major portion of the assets or business of Wells Fargo & Company.
1.7 "EMPLOYEE" means an employee of a Participating Company.
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1.8 "ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time.
1.9 "EXCESS DEFINED BENEFIT SUPPLEMENT" has the meaning set forth in
Article II.
1.10 "EXCESS DEFINED CONTRIBUTION SUPPLEMENT" has the meaning set
forth in Section 3.2.
1.11 "EXECUTIVE SUPPLEMENT" has the meaning set forth in Section 4.2.
1.12 "MATCHING CONTRIBUTION" means a Participating Company matching
contribution (within the meaning of Section 401(m) of the Code) to a Qualified
Defined Contribution Plan.
1.13 "PARTICIPANT" means each individual who participates in a Plan
in accordance with the terms of such Plan.
1.14 "PARTICIPATING COMPANY" means the Company or any subsidiary or
affiliated company which is listed on Schedule A to this Plan, as revised from
time to time by the Committee or its delegate.
1.15 "PLAN" means the Wells Fargo & Company Excess Defined Benefit
Plan, Excess Defined Contribution Plan and Executive Supplemental Benefits Plan
as set forth in this document and in any subsequent amendments.
1.16 "PREDECESSOR RETIREMENT PLAN" means the Wells Fargo & Company
Retirement Plan as in effect for calendar years commencing prior to January 1,
1985.
1.17 "PRE-TAX CONTRIBUTION" means an elective deferral contribution
by a Participating Company under a 401(k) feature of a Qualified Defined
Contribution Plan.
1.18 "PROGRAM" means the Wells Fargo & Company Benefit Restoration
Program as set forth in this document and subsequent amendments.
1.19 "QUALIFIED DEFINED CONTRIBUTION PLANS" means those defined
contribution plans maintained by the Company that are intended to qualify under
Section 401 of the Code.
2
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ARTICLE II
EXCESS DEFINED BENEFIT PLAN
Each Employee or Beneficiary whose benefits under the Predecessor
Retirement Plan were reduced under the provisions included in such plan to
comply with the dollar limitations (but not the percentage of compensation
limitations) of Section 415(b) and (e) of the Code shall be a Participant under
the Excess Defined Benefit Plan. Each Participant shall be credited with an
"Excess Defined Benefit Supplement" equal to such reduction, payable at the same
time and in the same manner as the benefit payable to such Participant under the
annuities issued upon termination of the Predecessor Retirement Plan.
ARTICLE III
EXCESS DEFINED CONTRIBUTION PLAN
3.1 PARTICIPATION. An Employee shall automatically become a
Participant in the Excess Defined Contribution Plan for any calendar year that
the Employee is eligible to receive "transition" retirement contributions under
the Company's Qualified Defined Contribution Plans and his or her Participating
Company contributions under the Qualified Defined Contribution Plans for that
year are reduced solely by reason of the provisions included in such plans to
comply with the 25 per cent of compensation limitation of Section 415 of the
Code. Every other Employee shall be a Participant in the Excess Defined
Contribution Plan for a calendar year only if the Participant receives prior
notice from the Committee that he or she is eligible for that year. An Employee
shall be eligible for a calendar year if the Committee determines, at such time
prior to the beginning of such year as it specifies and based on the information
then available to it, that the Employee's Participating Company contributions
under the Qualified Defined Contribution Plans for such year could be reduced by
reason of the provisions included in such plans to comply with the limitations
of Section 415 of the Code.
3.2 EXCESS DEFINED CONTRIBUTION SUPPLEMENT. Each Participant whose
Participating Company contributions to the Company's Qualified Defined
Contribution Plans are reduced under the Section 415 provisions of such plans
shall, subject to the provisions of Section 3.3, be credited with an "Excess
Defined Contribution Supplement" equal to the amount of such reduction. Such
supplement shall be credited to the Participant's Accounts in accordance with
Article V at the time that the related Participating Company contributions are
made to the Qualified Defined Contribution Plans.
3.3 LIMITATIONS ON EXCESS DEFINED CONTRIBUTION SUPPLEMENT
(a) PRE-TAX ELECTION. At such time before the first day of each
calendar year and based on the information then available to it, the Committee
shall determine and notify those Participants whose maximum Pre-Tax
Contributions to the Qualified Retirement Plans for that year could be reduced
by reason of the provisions included in such plans to comply with the
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<PAGE>
limitations of Section 415 of the Code. Each such Participant shall be given an
irrevocable election (i) to select one single percentage of compensation to be
used in calculating all of the Pre-Tax Contributions made on his or her behalf
for the upcoming calendar year and (ii) to reduce his or her salary or wages for
such calendar year in an amount equal to the portion of the Pre-Tax Contribution
which could not be contributed to the Qualified Defined Contribution Plans under
the Section 415 provisions of such plans. If a Participant is not so notified
or does not so elect, his or her Excess Defined Contribution Supplement for such
year shall not include any amount attributable to either Pre-Tax Contributions
that are reduced under the Section 415 provisions of the Qualified Defined
Contribution Plans or any Matching Contributions that would have been made with
respect to such Pre-Tax Contributions had they been made.
(b) 25 PERCENT LIMITATION. A Participant shall not receive an
"Excess Defined Contribution Supplement" for a calendar year if the
Participant's Participating Company contributions to the Qualified Defined
Contribution Plans for that year exceed the Section 415 limitations of such
plans solely due to the 25 percent of compensation limitation provisions
thereof, unless the Employee is eligible to receive "transition" retirement
contributions under the Company's Qualified Defined Contribution Plans for that
year.
(c) OTHER STATUTORY LIMITATIONS. In no event shall a Participant's
Excess Defined Contribution Supplement include an amount attributable to (i) any
Pre-tax Contribution to the extent that such contribution would exceed the
limitations of Section 401(a) (17) or (30), (k) or (m) of the Code (or any
successor provision) if made to TAP or (ii) any Matching Contribution that would
either be attributable to any such excess Pre-Tax Contribution or would exceed
the limitation of Section 401(k) or (m) of the Code if made.
ARTICLE IV
EXECUTIVE SUPPLEMENTAL BENEFITS PLAN
4.1 PARTICIPATION. An Employee shall become a Participant in the
Executive Supplemental Benefits Plan on the first day of the first calendar year
for which the Participant receives prior notice from the Committee that he or
she is eligible. An Employee shall be eligible for a calendar year if the
Committee determines, at such time prior to the beginning of such year as it
specifies and based on the information then available to it, that the Employee's
Participating Company contributions under the Qualified Defined Contributions
Plans for such year either (i) could be reduced by reason of the provisions
included in such plans to comply with the limitations of Section 401(a) (17) of
the Code (relating to an indexed $200,000 compensation limit) or Section 401(a)
(30) of the Code (relating to an indexed $7,000 limit on 401(k) elective
deferrals) or (ii) would be so reduced were the limitations of Section 415 of
the Code not imposed under such plans. An Employee shall not become a
Participant for a calendar year unless he or she was notified of eligibility by
the Committee prior to the beginning of such year, even if his or her
Participating Company Contributions for such year are reduced.
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<PAGE>
4.2 EXECUTIVE SUPPLEMENT. Each Participant whose Participating
Company contributions to the Company's Qualified Defined Contribution Plans is
reduced under the Section 401(a)(17) or Section 401(a) (30) provisions of such
plans shall, subject to the provisions of Section 4.3 and the provisions
included in the Qualified Defined Contribution Plans comply with Code Section
401(k) or (m) (which are incorporated by reference in the Excess Defined
Contribution Plan), be credited with an "Executive Supplement" equal to the
amount of such reduction. Such supplement shall be credited to the
Participant's Accounts in accordance with Article V at the time that the related
Participating Company contributions are made to the Qualified Defined
Contribution Plans.
4.3 PRE-TAX ELECTION REQUIREMENT. At such time before the first day
of each calendar year as the Committee shall specify, each Participant shall be
given an irrevocable election (i) to select one single percentage of
compensation to be used in calculating all of the Pre-Tax Contributions made on
his or her behalf for the upcoming calendar year and (ii) to reduce his or her
salary or wages for such calendar year in an amount equal to the portion of the
Pre-Tax Contribution which could not be contributed to the Qualified Defined
Contribution Plans under the Section 401(a) (17) or Section 401(a) (30)
provisions of such plans. If a Participant does not so elect, his or her
Executive Supplement for such year shall not include any amount attributable to
either Pre-Tax Contributions that are reduced under the Section 40l(a) (17) and
401(a) (30) provisions of the Qualified Defined Contribution Plans or any
matching contributions that would have been made with respect to such Pre-Tax
Contributions had they been made.
ARTICLE V
ACCOUNTS
5.1 (a) PARTICIPANT ACCOUNTS. The Committee shall establish an
Account for each Participant to which shall be credited the following:
(i) the Excess Defined Contribution Supplements and the Executive
Supplements of such Participant, and
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(ii) interest on the balance of the phantom account calculated
quarterly at an annual rate equal to the sum of (i) the average annual rate for
3-year Treasury Notes for the immediately preceding calendar year and (ii) 2 per
cent, with contributions made during a quarter being credited with interest for
the portion of the quarter that the contribution is credited to a Participant's
phantom account, according to the following table:
Semi-Monthly Pay Period
During Quarter for Which the Portion of Quarter for
Contribution is Credited Which Interest Is Credited
---------------------------- --------------------------
lst 5/6
2nd 4/6
3rd 3/6
4th 2/6
5th 1/6
6th none
An Account shall be debited for any distributions made therefrom. Accounts
under the Program shall be merely bookkeeping entries to assist the Committee in
determining the amount of benefits payable to a Participant under the Program.
5.2 SUBACCOUNTING. The Committee shall maintain separate subaccounts
for each Plan under the Program or shall maintain records sufficient to create
such subaccounts. The Committee may, but need not, maintain separate
subaccounts under the program for some or all of the different types of employer
contributions to the Company's Qualified Defined Contribution Plans that are
supplemented under the Program.
ARTICLE VI
DISTRIBUTION OF BENEFITS
6.1 TERMINATION OF EMPLOYMENT. The balance of a Participant's
Accounts shall generally be distributed to the Participant in a single lump sum
as soon as practicable after the Participant terminates employment for any
reason other than death. However, a Participant may elect at such time prior to
becoming a Participant in the Program to have his or her Accounts paid in ten
(10) annual installment payments beginning in January following termination of
Employment, unless the balance of such Accounts is less than or equal to three
thousand five hundred dollars ($3,500). The amount of each installment will be
equal to the entire remaining balance payable to the Participant as of the
beginning of the calendar year of payment divided by the number of remaining
installments to be paid.
6.2 DEATH. In the event that a participant dies before distribution
of the entire balance of his or her Accounts, the remaining balance of the
Participant's Accounts will be
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<PAGE>
distributed as soon as practicable after death to the Participant's
Beneficiaries in such percentages as the Beneficiaries are or were entitled to
the Participant's benefits under the Company's Qualified Defined Contribution
Plans.
6.3 TRANSFER TO NON-PARTICIPATING COMPANY. If a Participant ceases
to be an employee of a Participating Company, but becomes an employee of a
company that participates in the Company's Qualified Defined Contribution Plans
(but is not a Participating Company in this Plan), the Participant shall accrue
no further benefits under this Plan and his or her Accounts shall be immediately
distributed, unless assumed by his or her successor employer.
ARTICLE VII
UNFUNDED NATURE OF THE PROGRAM
The Program shall be unfunded. The funds used for payment of benefits
under the Program and of the expenses incurred in the administration thereof
shall, until such actual payment, continue to be a part of the general funds of
each Participating Company and no person other than the Participating Company
shall, by virtue of the Program, have any interest in any such funds. Nothing
contained herein shall be deemed to create a trust of any kind or create any
fiduciary relationship. To the extent that any person acquires a right to
receive payments from a Participating Company under a Plan, such right shall be
no greater than the right of any unsecured general creditor of the Participating
Company. Benefits under this Program shall not be alienated, hypothecated or
otherwise encumbered, and such benefits shall not in any way be subject to claim
by creditors or liable to attachment, execution or other process of law.
ARTICLE VIII
ADMINISTRATION OF THE PROGRAM
8.1 COMMITTEE. The Program shall be administered by a Benefits
Restoration Program Committee ("Committee"), the membership of which will be
selected from time to time by the Chief Executive Officer of the Company. The
Committee shall have the exclusive authority and responsibility for all matters
in connection with the operation and administration of the Plan. The
Committee's powers and duties shall include, but shall not be limited to, the
following: (a) responsibility for the compilation and maintenance of all records
necessary in connection with the Program; (b) authorizing the payment of all
benefits and expense of the Program as they become payable under the Program;
(c) authority to engage such legal, accounting and other professional services
as it may deem proper; (d) discretionary authority to interpret the Program; and
(e) discretionary authority to determine eligibility for benefits under the
Program and to resolve all issues of fact and law in connection with such
determination. Decisions by the Committee shall be final and binding upon all
parties.
8.2 ALLOCATION OF RESPONSIBILITIES. The Committee, from time to
time, may allocate to one or more of its members or to any other person or
persons or organizations any of
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<PAGE>
its rights, powers, and duties with respect to the operation and administration
of the Program. Any such allocation shall be reviewed from time to time by the
Committee; shall, unless the Committee specifies otherwise, carry such
discretionary authority as the Committee possesses regarding the matter; and
shall be terminable upon such notice as the Committee, in its sole discretion,
deems reasonable and prudent under the circumstances.
8.3 COMPENSATION AND EXPENSES. The members of the Committee shall
serve without compensation, but all benefits payable under the Program and all
expenses properly incurred in the administration of the Program, including all
expenses properly incurred by the Committee in exercising its duties under the
Program, shall be borne by the Company.
ARTICLE IX
AMENDMENTS AND TERMINATION
The Board of Directors reserves the power at any time, with or without
notice, to terminate this Program or any Plan that forms a part of this Program
and delegates to the Committee the power to otherwise amend any portion of this
Program other than this Article IX; provided, however, that no such action shall
reduce the amount accrued by any Participant or Beneficiary under the Program
prior to the date of amendment or termination.
ARTICLE X
MISCELLANEOUS
10.1 HEADINGS. The headings and subheadings of this instrument are
inserted for convenience of reference only and are not to be considered in the
construction of this Program.
10.2 NATURE OF PLANS. The Excess Defined Benefit Plan and the Excess
Defined Contribution Plan are intended to qualify for exemption from ERISA as
unfunded excess benefit plans under Sections 3(36) and 4(b) (5) of ERISA. The
Executive Supplemental Benefits Plan is intended to qualify as an unfunded plan
maintained primarily for the purpose of providing deferred compensation for a
select group of management or highly compensated employees for purposes of Title
I of ERISA. Each Plan shall be interpreted accordingly.
10.3 CONSTRUCTION. The instrument creating the Program shall be
construed, administered, and governed in all respects in accordance with the
laws of the State of California to the extent not preempted by ERISA. If any
provision of this Program shall be held by a court of competent jurisdiction to
be invalid or unenforceable, the remaining provisions shall continue to be fully
effective.
10.4 NO EMPLOYMENT RIGHTS. Participation in this Program does not
provide any employment rights or otherwise affect or modify the employment
relationship with the
8
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Company or a Participating Company. Employment with a Participating Company has
no specified term or length and each Participating Company reserves the right to
discharge an employee with or without cause, notwithstanding any effect that
such discharge would have upon the employee's interest in this Program.
10.5 PAYMENT AND RELEASE. Any payment to a Participant or Beneficiary
or the legal representative of either, in accordance with the terms of this
Program shall to the extent thereof be in full satisfaction of all claims such
person may have against a Participating Company hereunder, which may require
such payee, as a condition to such payment, to execute a receipt and release
therefor in such form as shall be determined by the Company.
IN WITNESS WHEREOF, Wells Fargo & Company has caused its authorized
officers to execute this instrument in its name and on its behalf.
WELLS FARGO & COMPANY
By
- ------------------------- ----------------------
date
By
- ------------------------- ----------------------
date
9
<PAGE>
SCHEDULE A
The following companies are "Participating Companies" in the Wells Fargo &
Company Benefit Restoration Program:
Wells Fargo & Company
Wells Fargo Ag Credit
Wells Fargo Bank, N.A.
Wells Fargo Corporate Services, Inc.
Wells Fargo Credit Corporation
Wells Fargo Insurance Services
Wells Fargo Realty Advisors
Wells Fargo Realty Finance Corporation
Wells Fargo Securities, Inc.
Wells Fargo Securities Clearance Corporation
10
<PAGE>
Exhibit 10(f)
WELLS FARGO & COMPANY
1990 EQUITY INCENTIVE PLAN
I. PURPOSES OF THE PLAN
This 1990 Equity Incentive Plan (the "Plan") is intended to promote the
interests of Wells Fargo & Company (the "Corporation") and its subsidiaries by
providing a method whereby employees of the Corporation and its subsidiaries who
are largely responsible for the management, growth and success of the business
may be offered incentives and rewards which will encourage them to continue in
the employ of the Corporation or its subsidiaries.
II. ADMINISTRATION OF THE PLAN
The Plan shall be administered by a committee or committees appointed by,
and consisting of one or more members of, the Board of Directors of the
Corporation (the "Board"). The Board may delegate the responsibility for
administration of the Plan with respect to designated classes of optionees to
different committees, subject to such limitations as the Board deems
appropriate. The composition of any committee responsible for administration of
the Plan with respect to optionees who are subject to trading restrictions of
Section 16(b) of the Securities Exchange Act of 1934 (the "1934 Act") with
respect to securities of the Corporation shall comply with the applicable
requirements of Rule 16b-3 of the Securities and Exchange Commission. Members
of a committee shall serve for such term as the Board may determine and shall be
subject to removal by the Board at any time. Any committee appointed by the
Board shall have full authority to administer the Plan within the scope of its
delegated responsibilities, including authority to interpret and construe any
relevant provision of the Plan and to adopt such rules and regulations as it may
deem necessary. Decisions of a committee made within the discretion delegated
to it by the Board shall be final and binding on all persons who have an
interest in the Plan. With respect to any matter, the term "Committee" shall
hereinafter refer to such committee as shall have been delegated authority with
respect to such matter.
III. ELIGIBILITY FOR AWARDS
Awards may be granted under the Plan to such key employees of the
Corporation and its subsidiaries (including officers, whether or not they are
directors) as the Committee shall from time to time select.
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IV. STOCK SUBJECT TO THE PLAN
(a) CLASS. The stock which is the subject of awards granted under the
Plan shall be the Corporation's authorized but unissued common stock ("Common
Stock"). In connection with the issuance of shares of Common Stock under the
Plan, the Corporation may repurchase shares in the open market or otherwise.
(b) AGGREGATE AMOUNT
(1) The total number of shares issuable under the Plan shall not
exceed 2,500,000 shares (subject to adjustment under Section IV(d)). No
limitation shall exist on the aggregate amount of cash payments the Corporation
may make in connection with share rights pursuant to Section VII(b) or the
surrender of options pursuant to Section VI(c).
(2) If any outstanding option under the Plan expires or is terminated
for any reason or is surrendered for cash pursuant to Section VI(c), then the
Common Stock allocable to the unexercised or surrendered portion of such option
shall not be charged against the limitation of Section IV(b)(1) and may again
become the subject of subsequent awards granted under the Plan.
(3) If (i) any outstanding share right under the Plan terminates for
any reason prior to the issuance of the total number of shares subject to such
share right, or (ii) any outstanding share right is paid in the form of cash in
lieu of the issuance of Common Stock under the Plan, then the number of unissued
shares of Common Stock under such share right shall not be charged against the
limitation of Section IV(b)(1) and may again be made the subject of subsequent
awards granted under the Plan.
(c) ANNUAL LIMITATIONS ON GRANTS. The maximum number of shares for which
options or share rights may be granted in any one calendar year shall not exceed
800,000 (subject to adjustment under Section IV(d)). For purposes of this
Section IV(c) an option or a share right shall be deemed to be granted for the
maximum number of shares which could be issued thereunder; provided that, upon
and following the occurrence, if any, of circumstances which, under the terms of
the option or share right, reduce the number of shares which can be issued
thereunder, (i) if such reduction occurs in the year of grant, the option or
share right shall be deemed to be granted for such reduced number of shares and
(ii) if such reduction occurs after the year of grant, the maximum number of
shares for which options or share rights may be granted in such subsequent year
shall be increased by the amount of such reduction.
(d) ADJUSTMENTS. In the event any change is made to the Common Stock
subject to the Plan or subject to any outstanding award granted under the Plan
(whether by reason of merger, consolidation, reorganization, recapitalization,
stock dividend, stock split, combination of shares, exchange of shares, or other
change in corporate or capital structure of the Corporation), then, unless such
change results in the termination of all outstanding options, the Committee
shall make appropriate adjustments to the maximum number of shares subject to
the
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Plan, the maximum number of shares for which options or share rights may be
granted in any one calendar year, the number of shares and price per share of
stock subject to outstanding options, and the number of shares subject to share
rights.
V. FORM AND GRANT OF AWARDS
The Committee shall have the authority to grant to eligible employees one
or more awards under the Plan. An award shall be in the form of a stock option
meeting the specifications of Section VI or a share right meeting the
specifications of Section VII or a combination thereof, as the Committee shall
determine.
VI. STOCK OPTIONS
Stock options granted under the Plan may be either incentive stock options
("Incentive Options") qualifying under Section 422A of the Internal Revenue Code
of 1986, as amended ("Internal Revenue Code"), or nonstatutory options, and
shall be appropriately designated. The options shall be evidenced by
instruments in such form as the Committee may from time to time approve. Such
instruments shall conform to the following terms and conditions:
(a) OPTION PRICE. The option price per share shall be the fair market
value of a share of Common Stock on the day the option is granted.
(b) NUMBER OF SHARES, TERM AND EXERCISE
(1) Each option granted under the Plan shall be exercisable on such
date or dates, during such period and for such number of shares as shall be
determined by the Committee and set forth in the instrument evidencing such
option. No option granted under the Plan, however, shall become exercisable
during the first six months of the option term, except in the event of the
optionee's death or disability; nor shall any option have an expiration date
which is more than 10 years after the date of the option grant. Each option
shall contain such other terms, conditions and restrictions, which may vary from
grant to grant and may be modified by the Committee after the date of grant, as
the Committee shall determine.
(2) After any option granted under the Plan becomes exercisable, it
may be exercised by notice to the Corporation at any time prior to the
termination of such option. Except as authorized by the Committee in accordance
with Section VIII, the option price for the number of shares of Common Stock for
which the option is exercised shall become immediately due and payable upon
exercise.
3
<PAGE>
(3) The option price shall be payable in full in cash; provided,
however, that the Committee may, either at the time the option is granted or at
the time it is exercised and subject to such limitations as it may determine,
authorize payment of all or a portion of the option price in cash and/or one or
a combination of the following alternative forms:
(i) a promissory note authorized pursuant to Section VIII;
or
(ii) full payment in shares of Common Stock valued as of
the exercise date; or
(iii) by delivering a properly executed exercise notice
together with irrevocable instructions to a broker to
promptly deliver to the Corporation the amount of sale
or loan proceeds to pay the option price.
(c) APPRECIATION DISTRIBUTION
(1) An option may provide that the optionee is entitled to surrender
the option, in whole or in part to the extent it is then exercisable, for an
appreciation distribution by the Corporation in an amount equal to the
difference between the fair market value, on the date of the surrender, of the
Common Stock subject to the surrendered option (or the surrendered portion
thereof) and the aggregate option price for such Common Stock. An option may
contain such further restrictions on the right of surrender as the Committee
shall determine, including such limitations as shall be necessary to comply with
Rule 16b-3 of the Securities and Exchange Commission.
(2) If the option is surrendered in whole or in part, the
appreciation distribution to which the optionee is entitled shall be made in the
form of Common Stock and cash in accordance with the percentages of each
designated by the optionee on his or her surrender-notification form; provided,
however, that the Committee may specify a minimum percentage of the distribution
that must be made in whole shares of Common Stock.
(d) TERMINATION OF EMPLOYMENT
The Committee shall determine and shall set forth in each option whether
the option shall continue to be exercisable, and the terms and conditions of
such exercise, if an optionee ceases to be employed by the Corporation or any of
its subsidiaries.
(e) INCENTIVE OPTIONS. Options granted under the Plan which are intended
to be Incentive Options shall be subject to the following additional terms and
conditions:
(1) DOLLAR LIMITATION. To the extent that the aggregate fair market
value (determined as of the respective date or dates of grant) of shares with
respect to which options that would otherwise be Incentive Options are
exercisable for the first time by any individual
4
<PAGE>
during any calendar year under the Plan (or any other plan of the Corporation, a
parent or subsidiary corporation or predecessor thereof) exceeds the sum of
$100,000 (or such greater amount as may be permitted under the Internal Revenue
Code), whether by reason of acceleration or otherwise, such options shall be
treated as "nonstatutory" options. Such options shall be taken into account in
the order in which they were granted.
(2) 10% SHAREHOLDER. If any employee to whom an Incentive Option is
to be granted pursuant to the provisions of the Plan is on the date of grant the
owner of stock (determined with application of the ownership attribution rules
of Section 425(d) of the Internal Revenue Code) possessing more than 10% of the
total combined voting power of all classes of stock of his or her employer
corporation or of its parent or subsidiary corporation, then the following
special provisions shall be applicable to the option granted to such individual:
(i) The option price per share of the Common Stock subject
to such Incentive Option shall not be less than 110% of the fair
market value of one share of Common Stock on the date of grant; and
(ii) The Option shall not have a term in excess of five (5)
years from the date of grant.
(3) PARENT; SUBSIDIARY. For purposes of this Section VI(e) "parent
and subsidiary corporation" and "parent or subsidiary corporation" shall have
the meaning attributed to those terms under Section 422A(b) of the Internal
Revenue Code.
(f) WITHHOLDING
(1) The Corporation's obligation to (i) deliver stock certificates
upon the exercise of any option or (ii) pay cash or deliver stock certificates
upon the surrender of any option shall be subject to the optionee's satisfaction
of all applicable federal, state and local income and employment tax withholding
requirements.
(2) In the event that an optionee is required to pay to the
Corporation an amount with respect to income and employment tax withholding
obligations in connection with exercise of an option, the Committee may, in its
discretion and subject to such rules as it may adopt, permit the optionee to
satisfy the obligation, in whole or in part, by delivering shares of Common
Stock already held by the optionee or by making an irrevocable election that a
portion of the total value of the shares of Common Stock subject to the option
be paid in the form of cash in lieu of the issuance of Common Stock and that
such cash payment be applied to the satisfaction of the withholding obligations.
The amount to be withheld shall not exceed the statutory minimum federal and
state income and employment tax liability arising from the option exercise
transaction.
5
<PAGE>
(3) If the optionee is subject to the trading restrictions of Section
16(b) of the 1934 Act at the time of exercise of an option, any election under
this Section VI(f) by such individual shall be made only in accordance with the
applicable requirements of Rule 16b-3(e) of the Securities and Exchange
Commission.
(g) MODIFICATION OF OPTIONS. The Committee shall have full power and
authority to modify or waive any or all of the terms, conditions or restrictions
applicable to any outstanding option, to the extent not inconsistent with the
Plan; provided, however, that no such modification or waiver shall, without the
consent of the option holder, adversely affect the holder's rights thereunder.
VII. RESTRICTED SHARE RIGHTS
(a) NATURE OF RIGHTS. Share rights granted under the Plan shall provide
an employee with the restricted right to receive shares of Common Stock under
the Plan. The right to receive shares (together with cash dividend equivalents
if so determined by the Committee) pursuant to any share rights shall be subject
to such terms, conditions and restrictions (whether based on performance
standards or periods of service or otherwise) as the Committee shall determine.
However, in no event shall any share right entitle the holder to receive shares
under the Plan free of all restrictions on transfer at any time prior to the
expiration of two (2) years of service after the grant date of such share right
except, if the Committee shall so determine, in the case of death, disability or
retirement. The Committee shall have the absolute discretion to determine
whether any consideration (other than the services of the employee) is to be
received by the Corporation or its subsidiaries as a condition precedent to the
issuance of shares pursuant to share rights. The terms, conditions and
restrictions to which share rights are subject may vary from grant to grant.
(b) FORM; CASH PAYMENTS. All share rights granted under the Plan shall be
evidenced by instruments in such form as the Committee may from time to time
approve. The Committee shall have the absolute discretion to incorporate into
one or more of such instruments provisions for the payment of share rights
partly in shares of Common Stock and partly in cash in accordance with the
following terms and conditions:
(1) The Committee may require that a designated percentage of the
total value of the shares of Common Stock subject to the share rights held
by one or more employees be paid in the form of cash in lieu of the
issuance of Common Stock and that such cash payment be applied to the
satisfaction of the federal and state income and employment tax withholding
obligations that arise at the time the share rights become free of all
restrictions under the Plan. The designated percentage shall be equal to
the income and employment tax withholding rate in effect at the time under
federal and applicable state law.
(2) The Committee may provide one or more employees whose share
rights are subject to the mandatory cash payment under clause (1) with an
election to receive an
6
<PAGE>
additional percentage of the total value of the Common Stock subject to
their share rights in the form of a cash payment in lieu of the issuance
of Common Stock. The additional percentage shall not exceed the
difference between 50% and the designated percentage under clause (1). If
any employee to whom an election under this clause (2) is granted is, at
the time such election is to be exercised, considered an officer or
director of the Corporation for purposes of Section 16(b) of the 1934 Act,
or was such an officer or director at any time during the six-month period
immediately preceding the date of the election and made any purchase or
sale of Common Stock during such six-month period, then the exercise of
his or her election under this clause (2) shall be made only in accordance
with the applicable requirements of Rule 16b-3(e) of the Securities and
Exchange Commission.
(c) MODIFICATION OF RIGHTS. The Committee shall have full power and
authority to modify or waive any or all of the terms, conditions or restrictions
applicable to any outstanding share rights; provided, however, that (i) no such
modification or waiver shall, without the consent of the holder of the share
rights, adversely affect the holder's rights thereunder and (ii) no such
modification or waiver shall reduce the service requirement specified in Section
VII(a) to less than two (2) years, except in the event of the holder's death,
disability or retirement.
VIII. LOANS, LOAN GUARANTEES AND INSTALLMENT PAYMENTS
In order to assist an employee (including an employee who is an officer or
director of the Corporation) in the acquisition of shares of Common Stock
pursuant to an award granted under the Plan, the Committee may authorize, at
either the time of the grant of an award or the time of the acquisition of
Common Stock pursuant to the award, (i) the extension of a loan to the employee
by the Corporation, (ii) the payment by the employee of the purchase price, if
any, of the Common Stock in installments, or (iii) the guarantee by the
Corporation of a loan obtained by the employee from a third party. The terms of
any loans, guarantees or installment payments, including the interest rate and
terms of repayment, will be subject to the discretion of the Committee. Loans,
installment payments and guarantees may be granted without security, the maximum
credit available being the purchase price, if any, of the Common Stock acquired
plus the maximum federal and state income and employment tax liability which may
be incurred in connection with the acquisition.
IX. ASSIGNABILITY
No option or share right granted under the Plan shall be assignable or
transferable by the optionee other than by will or by the laws of descent and
distribution, and during the lifetime of the optionee options granted under the
Plan shall be exercisable only by the optionee.
7
<PAGE>
X. VALUATION OF COMMON STOCK
For all valuation purposes under the Plan, the fair market value of a
share of Common Stock shall be its closing price, as quoted on the New York
Stock Exchange Composite Tape, on the day immediately prior to the date in
question. If there is no quotation available for such day, then the closing
price on the next preceding day for which there does exist such a quotation
shall be determinative of fair market value. If, however, the Committee
determines that, as a result of circumstances existing on any date, the use of
such price is not a reasonable method of determining fair market value on that
date, the Committee may use such other method as, in its judgment, is
reasonable.
XI. EFFECTIVE DATE AND TERM OF PLAN
(a) EFFECTIVE DATE. The Plan shall become effective on the date it
is adopted by the Board, but no shares of Common Stock shall be issued under the
Plan and no options granted under the Plan shall be exercisable before the Plan
is approved by the holders of at least a majority of the Corporation's voting
stock represented and voting at a duly-held meeting at which a quorum is
present. If such shareholder approval is not obtained, then any options or
share rights previously granted under the Plan shall terminate and no further
options or share rights shall be granted. Subject to such limitation, the
Committee may grant options and share rights under the Plan at any time after
the adoption of the Plan by the Board and before the date fixed herein for
termination of the Plan.
(b) TERM. The Plan shall terminate on the tenth anniversary of the
date of the Plan's adoption by the Board. Any option or share right outstanding
under the Plan at the time of its termination shall continue to have full force
and effect in accordance with the provisions set forth in the instruments
evidencing such option or share right.
XII. AMENDMENT OR DISCONTINUANCE BY BOARD ACTION
The Board may amend, suspend or discontinue the Plan in whole or in part at
any time; provided, however, that, except to the extent necessary to qualify as
Incentive Options any or all options granted under the Plan which are intended
to so qualify, such action shall not adversely affect rights and obligations
with respect to options or share rights at the time outstanding under the Plan;
and provided, further, that the Board shall not, without the approval of the
Corporation's shareholders (i) change the number of shares of Common Stock which
may be issued under the Plan (unless necessary to effect the adjustments
required under Section IV(d)), (ii) modify the eligibility requirements for
awards under the Plan or (iii) make any other change with respect to which the
Board determines that shareholder approval is required by applicable law or
regulatory standards.
8
<PAGE>
XIII. NO EMPLOYMENT OBLIGATION
Nothing contained in the Plan (or in any option or share right granted
pursuant to the Plan) shall confer upon any employee any right to continue in
the employ of the Corporation or any affiliate or constitute any contract or
agreement of employment or interfere in any way with the right of the
Corporation or an affiliate to reduce such employee's compensation from the rate
in existence at the time of the granting of an option or share right or to
terminate such employee's employment at any time, with or without cause, but
nothing contained herein or in any option or share right shall affect any
contractual rights of an employee pursuant to a written employment agreement.
XIV. USE OF PROCEEDS
The cash proceeds received by the Corporation from the issuance of shares
pursuant to options or share rights under the Plan shall be used for general
corporate purposes.
XV. REGULATORY APPROVALS
The implementation of the Plan, the granting of any option or share right
under the Plan, and the issuance of Common Stock upon the exercise of any such
option or lapse of restrictions on any such share right shall be subject to the
Corporation's procurement of all approvals and permits required by regulatory
authorities having jurisdiction over the Plan, the options or share rights
granted under it or the Common Stock issued pursuant to it.
XVI. GOVERNING LAW
To the extent not otherwise governed by federal law, the Plan and its
implementation shall be governed by and construed in accordance with the laws of
the State of California.
9
<PAGE>
Exhibit 10(h)
WELLS FARGO & COMPANY
EXECUTIVE INCENTIVE PAY PLAN
Wells Fargo & Company (Company) adopted the Executive Incentive Pay Plan
(EIPP) effective January 1, 1981. Effective January 1, 1982, the EIPP was split
into two plans - the EIPP covering Executive Vice Presidents and above and the
Management Incentive Pay Plan (MIPP) covering other key employees. Effective
January 1, 1992, the MIPP was terminated and Senior Vice Presidents became
covered under the EIPP. Effective January 1, 1992, the EIPP reads as follows:
1. PURPOSE
The purposes of the EIPP are to:
(A) Promote the interests of the Company.
(B) Provide incentives and rewards to key executives, as a group and
individually, who are largely responsible for the management, growth and
profitability of the Company.
2. ELIGIBILITY AND PARTICIPATION
(A) The executives eligible for the EIPP are all Senior Vice Presidents and
above.
Amended 1/1/92
<PAGE>
(B) No executive shall remain eligible for participation in any calendar
year if he/she terminates employment prior to the end of such calendar year for
any reason other than normal retirement, death, disability or, with the
Personnel Director's approval, involuntary termination without cause.
Amended 1/1/92
<PAGE>
(C) Eligible executives shall be approved for participation by the Chief
Executive Officer or the President of the Company. Participants are approved
for each annual plan year and will not be eligible for an award for any year
unless explicitly approved for such year. With approval by the Chief Executive
Officer or President, participants may participate for part of a plan year on a
pro-rata basis.
(D) No participant shall receive an award from the EIPP if he/she
participates in any other Company sponsored incentive, sales or bonus plan
unless such participation is approved by the Chief Executive Officer or
President of the Company.
3. DETERMINATION OF THE EIPP POOL
The total amount of bonuses available for payout (EIPP Pool) shall be
determined by the Management Development and Compensation Committee (Committee)
of the Board of Directors.
4. DETERMINATION OF PARTICIPANTS' SHARE OF THE EIPP POOL
(A) The Committee shall have the sole discretion to determine the share of
the EIPP Pool available to the Chief Executive Officer and the President.
Amended 1/1/92
<PAGE>
(B) Upon the recommendation of the Chief Executive Officer, the Committee
shall determine the share of the EIPP Pool for each other participant.
(C) Share awards shall not be determined until after the end of each plan
year. No commitment to share awards shall be made prior to such determination
unless approved by the Committee.
Amended 1/1/92
<PAGE>
(D) Final payouts are subject to the approval of the Committee and shall
occur as soon as practical after the close of the Company's financial books for
the year.
5. DEFERRAL ELECTION
(A) Each participant in the EIPP may defer part or all of the bonus awarded
to him/her with respect to any calendar year by executing the EIPP Deferral
Election Forms and delivering them to the Executive Compensation Department no
later than the date specified in the notification to the participant of his/her
participation for such year, which date shall be
(i) a date prior to December 31 of the calendar year preceding the year in
which the participant may earn a bonus or
(ii) a date within 30 days following the date of such notification.
(B) A participant may elect to defer either a specific dollar amount or a
percentage of his/her bonus. If the dollar amount to be deferred exceeds the
bonus actually awarded, 100% of the bonus will be deferred. Any election to
defer a percentage less than 100% of the bonus must be made in multiples of 25%
of the bonus.
Amended 1/1/92
<PAGE>
The election, once made, shall be irrevocable with respect to the year for which
it is made.
(C) The deferred bonus will be credited to a special book account
maintained for each participant and will accrue interest each year, commencing
as of March 1 of the year following the
Amended 1/1/92
<PAGE>
calendar year in which the bonus is earned. The rate each year will be equal to
the average annual rate for 3-year Treasury Notes for the immediately preceding
calendar year. Distribution of the deferred bonus plus accrued interest will be
made at such time or times and in such manner as the participant shall specify
at the time he/she files the EIPP Deferral Election Forms, subject, however, to
such restrictions and limitations as the Committee may from time to time impose.
6. DEFERRED AMOUNTS
The obligation to pay the deferred bonus plus interest shall at all times
be an unfunded and unsecured obligation of the Company. The participant and
his/her beneficiary(ies) shall look exclusively to the general assets of the
Company for payment. The participant shall have no right to assign, pledge or
encumber his/her interest in the amount credited to the deferred bonus account.
The participant may, however, designate one or more beneficiaries to receive the
account balance in the event of his/her death.
7. AMENDMENT/TERMINATION
Amended 1/1/92
<PAGE>
The Company hereby reserves the right to amend the EIPP at any time and in
any respect or to discontinue and terminate the EIPP in whole or in part at any
time. Amendment or termination may be effective with respect to any amount
which has not yet been paid out, except amounts which would have been paid out
prior to amendment or termination if no deferral election had been made.
Amended 1/1/92
<PAGE>
No provision of the EIPP shall be deemed to constitute a commitment of the
Company to pay, or to confer any contractual or other rights upon a participant
to receive a bonus award for any one or more calendar years or to confer upon
any participant any right to continue in the employ of the Company or to
constitute any contract or agreement of employment or to interfere in any way
with the right of the Company to terminate a participant's employment at any
time, with or without cause, but nothing contained herein shall affect any
contractual right of a participant pursuant to a written employment agreement.
Amended 1/1/92
<PAGE>
- ------------------------------------ ---------------
Carl E. Reichardt Date
Chairman and Chief Executive Officer
Amended 1/1/92
<PAGE>
EXHIBIT 11
WELLS FARGO & COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Year ended December 31,
------------------------------------
(in millions) 1995 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRIMARY EARNINGS PER COMMON SHARE
Net income $1,032 $ 841 $ 612
Less preferred dividends 42 43 50
------ ------ ------
Net income for calculating primary
earnings per common share $ 990 $ 798 $ 562
------ ------ ------
------ ------ ------
Average common shares outstanding 48.6 53.9 55.6
------ ------ ------
------ ------ ------
PRIMARY EARNINGS PER COMMON SHARE $20.37 $14.78 $10.10
------ ------ ------
------ ------ ------
FULLY DILUTED EARNINGS PER COMMON SHARE (1)
Net income $1,032 $ 841 $ 612
Less preferred dividends 42 43 50
------ ------ ------
Net income for calculating fully
diluted earnings per common share $ 990 $ 798 $ 562
------ ------ ------
------ ------ ------
Average common shares outstanding 48.6 53.9 55.6
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 1.2 1.4 1.2
------ ------ ------
Average common shares outstanding, as adjusted 49.8 55.3 56.8
------ ------ ------
------ ------ ------
FULLY DILUTED EARNINGS PER COMMON SHARE $19.90 $14.42 $ 9.88
------ ------ ------
------ ------ ------
- -----------------------------------------------------------------------------------------------
</TABLE>
(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%.
<PAGE>
EXHIBIT 12(A)
WELLS FARGO & COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
------------------------------------------------------------------
(in millions) 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS, INCLUDING INTEREST ON DEPOSITS (1):
Income before income tax expense $1,777 $1,454 $1,038 $ 500 $ 54
Fixed charges 1,496 1,214 1,157 1,505 2,504
------ ------ ------ ------- -------
$3,273 $2,668 $2,195 $ 2,005 $ 2,558
------ ------ ------ ------- -------
------ ------ ------ ------- -------
Fixed charges (1):
Interest expense $1,431 $1,155 $1,104 $ 1,454 $ 2,452
Estimated interest component of net rental expense 65 59 53 51 52
------ ------ ------ ------- -------
$1,496 $1,214 $1,157 $ 1,505 $ 2,504
------ ------ ------ ------- -------
------ ------ ------ ------- -------
Ratio of earnings to fixed charges (2) 2.19 2.20 1.90 1.33 1.02
EARNINGS, EXCLUDING INTEREST ON DEPOSITS:
Income before income tax expense $1,777 $1,454 $1,038 $ 500 $ 54
Fixed charges 499 360 294 320 539
------ ------ ------ ------- -------
$2,276 $1,814 $1,332 $ 820 $ 593
------ ------ ------ ------- -------
------ ------ ------ ------- -------
Fixed charges:
Interest expense $1,431 $1,155 $1,104 $ 1,454 $ 2,452
Less interest on deposits (997) (854) (863) (1,185) (1,965)
Estimated interest component of net rental expense 65 59 53 51 52
------ ------ ------ ------- -------
$ 499 $ 360 $ 294 $ 320 $ 539
------ ------ ------ ------- -------
------ ------ ------ ------- -------
Ratio of earnings to fixed charges (2) 4.56 5.04 4.53 2.56 1.10
------ ------ ------ ------- -------
------ ------ ------ ------- -------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
<PAGE>
EXHIBIT 12(B)
WELLS FARGO & COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
---------------------------------------------------------
(in millions) 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS, INCLUDING INTEREST ON DEPOSITS (1):
Income before income tax expense $1,777 $1,454 $1,038 $ 500 $ 54
Fixed charges 1,496 1,214 1,157 1,505 2,504
------ ------ ------ ------- -------
$3,273 $2,668 $2,195 $ 2,005 $ 2,558
------ ------ ------ ------- -------
------ ------ ------ ------- -------
Preferred dividend requirement $ 42 $ 43 $50 $ 48 $ 19
Ratio of income before income tax expense to net income 1.72 1.73 1.70 1.77 2.57
------ ------ ------ ------- -------
Preferred dividends (2) $ 72 $ 74 $85 $ 85 $ 49
------ ------ ------ ------- -------
Fixed charges (1):
Interest expense 1,431 1,155 1,104 1,454 2,452
Estimated interest component of net rental expense 65 59 53 51 52
------ ------ ------ ------- -------
1,496 1,214 1,157 1,505 2,504
------ ------ ------ ------- -------
Fixed charges and preferred dividends $1,568 $1,288 $1,242 $ 1,590 $ 2,553
------ ------ ------ ------- -------
------ ------ ------ ------- -------
Ratio of earnings to fixed charges and preferred dividends (3) 2.09 2.07 1.77 1.26 1.00
------ ------ ------ ------- -------
------ ------ ------ ------- -------
EARNINGS, EXCLUDING INTEREST ON DEPOSITS:
Income before income tax expense $1,777 $1,454 $1,038 $ 500 $ 54
Fixed charges 499 360 294 320 539
------ ------ ------ ------- -------
$2,276 $1,814 $1,332 $ 820 $ 593
------ ------ ------ ------- -------
------ ------ ------ ------- -------
Preferred dividends (2) $ 72 $ 74 $ 85 $ 85 $ 49
------ ------ ------ ------- -------
Fixed charges:
Interest expense 1,431 1,155 1,104 1,454 2,452
Less interest on deposits (997) (854) (863) (1,185) (1,965)
Estimated interest component of net rental expense 65 59 53 51 52
------ ------ ------ ------- -------
499 360 294 320 539
------ ------ ------ ------- -------
Fixed charges and preferred dividends $ 571 $ 434 $ 379 $ 405 $ 588
------ ------ ------ ------- -------
------ ------ ------ ------- -------
Ratio of earnings to fixed charges and preferred dividends (3) 3.99 4.18 3.51 2.02 1.01
------ ------ ------ ------- -------
------ ------ ------ ------- -------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) As defined in Item 503(d) of Regulation S-K.
(2) The preferred dividends were increased to amounts representing the pretax
earnings that would be required to cover such dividend requirements.
(3) 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 was 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 was 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.
<PAGE>
WELLS FARGO & COMPANY AND SUBSIDIARIES
FINANCIAL REVIEW
OVERVIEW
- --------------------------------------------------------------------------------
Wells Fargo & Company (Parent) is a bank holding company whose principal
subsidiary is Wells Fargo Bank, N.A. (Bank). In this Annual Report, Wells Fargo
& Company and its subsidiaries are referred to as the Company.
Net income in 1995 was $1,032 million, compared with $841 million in 1994,
an increase of 23%. Net income per share was $20.37, compared with $14.78 in
1994, an increase of 38%. The percentage increase in per share earnings was
greater than the percentage increase in net income due to the Company's stock
repurchase program.
[RETURN ON AVERAGE TOTAL ASSETS (ROA)(GRAPH) (%)] SEE APPENDIX
[RETURN ON COMMON STOCKHOLDERS' EQUITY (ROE)(GRAPH) (%)] SEE APPENDIX
The increase in earnings from a year ago reflected a $163 million ($94
million after tax) gain resulting from the sale of the Company's joint venture
interest in Wells Fargo Nikko Investment Advisors (WFNIA) and a zero loan loss
provision, compared with $200 million in 1994.
Return on average assets (ROA) was 2.03% and return on average common equity
(ROE) was 29.70% in 1995, compared with 1.62% and 22.41%, respectively, in 1994.
Net interest income on a taxable-equivalent basis was $2,655 million in
1995, compared with $2,610 million a year ago. The Company's net interest margin
was 5.80% for 1995, compared with 5.55% in 1994. The increase in the margin was
attributable to an increase in the spread between loans and deposits and a
change in the mix of average earning assets, as higher-yielding loans, such as
credit card and small business, replaced lower-yielding securities and single
family loans.
Noninterest income increased from $1,200 million in 1994 to $1,324 million
in 1995, an increase of 10%. The growth reflected an overall increase in revenue
from the Company's core products and services and the gain resulting from the
sale of WFNIA, partially offset by accruals related to the disposition of
operations associated with scheduled branch closures.
Noninterest expense increased from $2,156 million in 1994 to $2,201 million
in 1995. A major portion of the increase in noninterest expense was due to
higher salary levels as well as higher contract services related to new product
development and marketing initiatives. This increase was primarily offset by a
reduction in federal deposit insurance expense.
There was no provision for loan losses in 1995, compared with $200 million
in 1994. During 1995, net charge-offs were $288 million, or .83% of average
total loans, compared with $240 million, or .70%, during 1994. The allowance for
loan losses was $1,794 million, or 5.04% of total loans, at December 31, 1995,
compared with $2,082 million, or 5.73%, at December 31, 1994.
At December 31, 1995, total nonaccrual and restructured loans were
$552 million, or 1.6% of total loans, compared with $582 million, or 1.6%, at
December 31, 1994. At December 31, 1995, an estimated $265 million, or 49%, of
nonaccrual loans were either current or less than 90 days past due, compared
with an estimated $246 million, or 43%, at December 31, 1994. Foreclosed assets
were $186 million at December 31, 1995, compared with $272 million at
December 31, 1994.
4
<PAGE>
At December 31, 1995, the ratio of common stockholders' equity to total
assets was 7.09%, compared with 6.41% at December 31, 1994. The Company's total
risk-based capital (RBC) ratio at December 31, 1995 was 12.46% and its Tier 1
RBC ratio was 8.81%, exceeding the minimum regulatory guidelines of 8% and 4%,
respectively, for bank holding companies and the "well capitalized" guidelines
for banks of 10% and 6%, respectively. The Company's ratios at December 31, 1994
were 13.16% and 9.09%, respectively. The Company's leverage ratios were 7.46%
and 6.89% at December 31, 1995 and 1994, respectively, exceeding the minimum
regulatory guideline of 3% for bank holding companies and the "well capitalized"
guideline for banks of 5%. A discussion of RBC and leverage ratio guidelines is
in the Capital Adequacy/Ratios section.
In the first quarter of 1995, the Board of Directors approved an increase in
the common stock quarterly dividend from $1.00 to $1.15 per share. The quarterly
dividend was increased again in January 1996 to $1.30 per share.
The Company repurchased a total of 5.0 million shares of common stock during
1995. The Company has bought in the past, and will continue to buy, shares to
offset stock issued or expected to be issued under the Company's employee
benefit and dividend reinvestment plans. In addition to these shares, the Board
of Directors authorized in April 1995 the repurchase of up to 4.96 million
shares of the Company's outstanding common stock. This action reflected the
Company's strong capital position and has allowed the Company to effectively
manage its overall capital position in the best interest of its shareholders.
Share repurchases ceased after the October 1995 announcement of the proposed
merger with First Interstate Bancorp. Repurchases are expected to resume in late
first quarter or early second quarter of 1996.
California continues to make progress in its recovery from its recent severe
recession. Many industries grew at a satisfactory rate although construction and
defense continued to struggle. Last year's recovery was helped by lower interest
rates. Confidence improved in many households and small businesses, but
competition for jobs and sales remained stiff and higher profits were more
difficult to come by. The year 1995 marked the state's third year of growth in
this business cycle.
TABLE 1 RATIOS AND PER COMMON SHARE DATA
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Year ended December 31,
------------------------------
1995 1994 1993
<S> <C> <C> <C>
PROFITABILITY RATIOS
Net income to average total assets (ROA) 2.03% 1.62% 1.20%
Net income applicable to common stock
to average common stockholders'
equity (ROE) 29.70 22.41 16.74
Net income to average
stockholders' equity 26.99 20.61 15.32
EFFICIENCY RATIO (1) 55.3% 56.6% 57.7%
CAPITAL RATIOS
At year end:
Common stockholders' equity to assets 7.09% 6.41% 7.00%
Stockholders' equity to assets 8.06 7.33 8.22
Risk-based capital (2)
Tier 1 capital 8.81 9.09 10.48
Total capital 12.46 13.16 15.12
Leverage (2) 7.46 6.89 7.39
Average balances:
Common stockholders' equity to assets 6.57 6.86 6.57
Stockholders' equity to assets 7.53 7.87 7.82
PER COMMON SHARE DATA
Dividend payout (3) 23% 27% 22%
Book value $75.93 $66.77 $65.87
Market prices (4):
High $229 $160 3/8 $133
Low 143 3/8 127 5/8 75 1/2
Year end 216 145 129 3/8
- ------------------------------------------------------------------------------
</TABLE>
(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.
(3) Dividends declared per common share as a percentage of net income per common
share.
(4) Based on daily closing prices reported on the New York Stock Exchange
Composite Transaction Reporting System.
In the fourth quarter of 1995, the Company adopted Financial Accounting
Standard Nos. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of (FAS 121), and 122, Accounting for Mortgage
Servicing Rights (FAS 122). These adoptions did not have a material impact on
the financial statements. For a further discussion of FAS 121 and 122, refer to
Note 5 of the Financial Statements.
5
<PAGE>
TABLE 2 SIX-YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
(in millions) 1995 1994 1993 1992 1991 1990 % CHANGE FIVE-YEAR
1995/ COMPOUND
1994 GROWTH RATE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
Net interest income $ 2,654 $ 2,610 $ 2,657 $ 2,691 $ 2,520 $ 2,314 2 % 3 %
Provision for loan losses - 200 550 1,215 1,335 310 (100) (100)
Noninterest income 1,324 1,200 1,093 1,059 889 909 10 8
Noninterest expense 2,201 2,156 2,162 2,035 2,020 1,717 2 5
Net income 1,032 841 612 283 21 712 23 8
PER COMMON SHARE
Net income $ 20.37 $ 14.78 $ 10.10 $ 4.44 $ .04 $ 13.39 38 9
Dividends declared 4.60 4.00 2.25 1.50 3.50 3.90 15 3
BALANCE SHEET
(at year end)
Investment securities $ 8,920 $11,608 $13,058 $ 9,338 $ 3,833 $ 1,387 (23)% 45 %
Loans 35,582 36,347 33,099 36,903 44,099 48,977 (2) (6)
Allowance for loan losses 1,794 2,082 2,122 2,067 1,646 885 (14) 15
Assets 50,316 53,374 52,513 52,537 53,547 56,199 (6) (2)
Core deposits 37,858 38,508 41,291 41,879 42,941 41,840 (2) (2)
Senior/Subordinated debt 3,049 2,853 4,221 4,040 4,220 2,417 7 5
Stockholders' equity 4,055 3,911 4,315 3,809 3,271 3,360 4 4
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MERGER WITH FIRST INTERSTATE BANCORP
- --------------------------------------------------------------------------------
On January 24, 1996, the Company announced it had entered into a definitive
agreement with First Interstate Bancorp (First Interstate) to merge the two
companies. At December 31, 1995, First Interstate had assets of $58.1 billion
and was the 15th largest bank holding company in the nation. First Interstate
had 405 offices in California and a total of approximately 1,150 offices in 13
western states. The Company had 974 banking locations throughout California at
December 31, 1995. The newly formed company will be operated under the Wells
Fargo & Company name. Under the terms of the merger agreement, the Company will
operate from headquarters in San Francisco and Los Angeles, with a senior
executive presence in both. The combined Board of Directors will consist of the
existing members of the Company's Board and seven directors from First
Interstate's Board.
Under terms of the merger agreement, First Interstate shareholders will
receive a tax-free exchange of two-thirds of a share of the Company's common
stock for each share of First Interstate common stock. Based on the Company's
closing price on Friday, January 19 (the last trading day before First
Interstate's Board of Directors agreed to the two-thirds exchange ratio), the
base purchase price is approximately $11 billion. The merger will be accounted
for as a purchase transaction. Accordingly, the results of operations of First
Interstate will be included with that of the Company for periods subsequent to
the consummation of the merger. The merger is currently expected to close on or
about April 1, 1996, subject to regulatory and shareholder approvals. As part of
the regulatory approval process, the combined company will be required to divest
61 branches in various markets in California having aggregate deposits of about
$2.5 billion and loans of about $1.3 billion. Shareholders of both companies
will vote upon the proposed merger at special meetings to be held on March 28.
The Company expects to achieve annual cost savings of approximately
$800 million within 18 months of the consummation of the merger. These savings
are expected to result from the significant overlap that exists between the
Company's operations and those of First Interstate in California, the proximity
of the Company's operations in California and those of First Interstate's in
neighboring states, the greater level of efficiency with which the Com-
6
<PAGE>
pany runs its franchise when compared to First Interstate and, finally,
economies of scale. However, the Company estimates a potential annual revenue
loss of $100 million as a result of combining the two companies. This loss is
expected to occur principally in commercial lending, retail and trust. Revenue
decreases in these areas are expected to result from anticipated loan runoffs,
deposit attrition and account attrition. Potential revenue losses were estimated
based on expected results one year after consummation of the merger.
It is anticipated that the Company will incur merger-related costs of about
$700 million related to premises, severance and other costs. Of this amount,
approximately $400 million of costs relate to First Interstate's premises,
employees and operations and will affect the final amount of goodwill as of the
consummation of the merger. The remaining amount of approximately $300 million
of costs relate to the Company's premises, employees and operations as well as
all costs relating to systems conversions and other indirect, integration costs
and will be expensed, either upon consummation of the merger or as incurred.
With respect to timing, it is assumed that the integration would be completed
and that such costs would be incurred not later than 18 months after the closing
of the merger.
For pro forma information, see Note 15 to the Financial Statements.
The following discussions included in the Line of Business Results, Earnings
Performance and Balance Sheet Analysis sections of this report do not reflect
the expected impact of the Company's merger with First Interstate.
LINE OF BUSINESS RESULTS
- --------------------------------------------------------------------------------
The Company has identified seven distinct lines of business for the purposes of
management reporting, as shown in Table 3.
The line of business results show the financial performance of the major
business units. Line of business results are determined based on the Company's
management accounting process, which assigns balance sheet and income statement
items to each responsible business unit. This process is dynamic and somewhat
subjective. Unlike financial accounting, there is no comprehensive,
authoritative body of guidance for management accounting equivalent to generally
accepted accounting principles. The management accounting process measures the
performance of the business lines based on the management structure of the
Company and is not necessarily comparable with similar information for any other
financial institution. Changes in management structure and/or the allocation
process may result in changes in allocations, transfers and assignments. In that
case, results for prior periods would be restated to allow comparability from
one year to the next.
Internal expense allocations are independently negotiated between business
units and, where possible, service and price is measured against comparable
services available in the external marketplace.
The following describes the major business units.
THE RETAIL DISTRIBUTION GROUP sells and services a complete line of retail
financial products for consumers and small businesses. It encompasses a network
of traditional branches, supermarket branches and banking centers, the 24-hour
Telephone Banking Centers, the ATM network and Wells Fargo's On-Line Financial
Services, the Company's personal computer banking services. In addition, Retail
Distribution includes the consumer checking business, which primarily uses the
branches as a source of new customers.
As part of the ongoing effort to provide higher-convenience, lower-cost
service to customers, the Company continued to open supermarket branches and
banking centers in California in 1995. The supermarket banking centers
(modularly designed kiosks equipped with an ATM, a customer service telephone
and staffed by a banking manager) are capable of providing substantially all
consumer services. The number of ATM locations continued to increase in 1995,
reaching a total of 2,385 at December 31, 1995.
The Retail Distribution Group's net income for 1995 decreased $43 million,
or 73%. Net interest income increased by $39 million substantially due to wider
spreads on core deposits. A significant portion of this increase was offset
by lower balances. Noninterest income reflected losses of $91 million and $14
million in 1995 and 1994, respectively, related to the disposition of operations
associated with scheduled branch closures. (See Noninterest Income section for
further information.) A significant portion of these losses was offset by higher
charges to product groups from increased sales through branches and alternative
distribution channels, higher ATM shared network fees and increased point-of-
sale interchange income. Noninterest expense increased substantially due to
higher expenditures on alternative distribution channels, including supermarket
branches and banking centers, partly offset by the allocation of a refund
received from the FDIC.
7
<PAGE>
TABLE 3 LINE OF BUSINESS RESULTS (ESTIMATED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Retail
(income/expense in millions, Distribution Business Investment Real Estate
average balances in billions) Group Banking Group Group Group
-------------- -------------- -------------- --------------
1995 1994 1995 1994 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income (1) $452 $ 413 $368 $292 $ 457 $ 383 $242 $214
Provision for loan losses (2) 1 1 35 27 1 1 28 28
Noninterest income (3) 565 612 144 129 464 302 28 24
Noninterest expense (3) 979 912 284 272 440 436 78 66
---- ----- ---- ---- ----- ----- ---- ----
Income before income
tax expense (benefit) 37 112 193 122 480 248 164 144
Income tax expense (benefit) (4) 21 53 85 55 209 110 69 61
---- ----- ---- ---- ----- ----- ---- ----
Net income (loss) $ 16 $ 59 $108 $ 67 $ 271 $ 138 $ 95 $ 83
---- ----- ---- ---- ----- ----- ---- ----
---- ----- ---- ---- ----- ----- ---- ----
Average loans $ - $ - $2.4 $1.8 $ 0.5 $ 0.5 $6.3 $6.2
Average assets 1.2 1.2 3.6 3.0 1.0 1.0 6.7 6.6
Average core deposits 9.5 10.2 6.4 7.1 17.9 19.5 0.1 0.1
Return on equity (5)(6) 5% 20% 32% 22% 61% 30% 15% 13%
Risk-adjusted efficiency ratio (6)(7) 103% 95% 73% 83% 57% 76% 83% 88%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net interest income is the difference between actual interest earned on
assets (and interest paid on liabilities) owned by a group and a funding
charge (and credit) based on the Company's cost of funds. Groups are charged
a cost to fund any assets (e.g., loans) and are paid a funding credit for
any funds provided (e.g., deposits). The interest spread is the difference
between the interest rate earned on an asset or paid on a liability and the
Company's cost of funds rate.
(2) The provision allocated to the line groups is based on management's current
assessment of the normalized net charge-off ratio for each line of business.
In any particular year, the actual net charge-offs can be higher or lower
than the normalized provision allocated to the lines of business. The
difference between the normalized provision and the Company provision is
included in Other.
(3) Retail Distribution Group's charges to the product groups are shown as
noninterest income to the branches and noninterest expense to the product
groups. They amounted to $206 million and $178 million for 1995 and 1994,
respectively. These charges are eliminated in the Other category in arriving
at the Consolidated Company totals for noninterest income and expense.
THE BUSINESS BANKING GROUP provides a full range of financial services to small
businesses, including credit, deposits, investments, payroll services,
retirement programs, and credit and debit card services. Business Banking
customers include small businesses with annual sales up to $10 million in which
the owner of the business is also the principal financial decision maker.
The Business Banking Group's net income for 1995 increased $41 million, or
61%. Net interest income increased substantially due to wider spreads on core
deposits and higher loan balances. Noninterest income increased largely due to
higher sweep account balances and activity, and increased fees from mass market
products. Noninterest expense increased primarily due to higher expenses
associated with increased mass market lending volumes.
THE INVESTMENT GROUP is responsible for the sales and management of savings and
investment products, investment management, fiduciary and brokerage services.
This includes the Stagecoach and Overland Express families of funds as well as
personal trust, employee benefit trust and agency assets. It also includes
product management for market rate accounts, savings deposits, Individual
Retirement Accounts (IRAs) and time deposits.
The Investment Group's net income for 1995 increased $133 million, or 96%.
The Group benefited from the sale of its joint venture interest in WFNIA and the
Investment Group's MasterWorks division to Barclays PLC of the U.K. The sale was
completed in December 1995. The Company recognized an after-tax gain of $94
million. The combined net income contribution from the operations of WFNIA and
MasterWorks was less than $12 million for 1995 and 1994. Net interest income
increased due to wider spreads on core deposits, of which a major portion was
offset by a decline in deposit balances.
THE REAL ESTATE GROUP provides a complete line of services supporting the
commercial real estate market. Products and services include construction loans
for commercial and residential development, land acquisition and development
loans, secured and unsecured lines of credit, interim financing arrangements for
completed structures, rehabilitation loans, affordable housing loans and letters
of credit. Secondary market services are provided through the Real Estate
Capital Markets Group. Its business includes purchasing distressed loans at a
discount, mezzanine financing, acquisition financing, origination of permanent
loans for securitization, syndications, commercial real estate loan servicing
and real estate pension fund advisory services.
The Real Estate Group's net income for 1995 increased $12 million, or 14%
over 1994. Net interest income increased due to the recoveries on loans where
interest had been previously applied to principal and due to the payoff of loans
purchased at a discount. Noninterest income
8
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(income/expense in millions, Wholesale Consumer Mortgage Consolidated
(average balances in billions) Products Group Lending Business (8) Other Company
-------------- -------------- -------------- -------------- --------------
1995 1994 1995 1994 1995 1994 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income (1) $ 424 $365 $ 640 $547 $ 64 $ 95 $ 7 $ 301 $2,654 $2,610
Provision for loan losses (2) 42 37 227 177 6 10 (340) (81) - 200
Noninterest income (3) 157 136 192 144 (48) 6 (178) (153) 1,324 1,200
Noninterest expense (3) 198 184 282 256 43 80 (103) (50) 2,201 2,156
----- ---- ----- ---- ---- ---- ----- ----- ------ ------
Income before income
tax expense (benefit) 341 280 323 258 (33) 11 272 279 1,777 1,454
Income tax expense (benefit) (4) 145 120 137 110 (14) 5 93 99 745 613
----- ---- ----- ---- ---- ---- ----- ----- ------ ------
Net income (loss) $ 196 $160 $ 186 $148 $(19) $ 06 $ 179 $ 180 $1,032 $ 841
----- ---- ----- ---- ---- ---- ----- ----- ------ ------
----- ---- ----- ---- ---- ---- ----- ----- ------ ------
Average loans $ 9.2 $8.2 $10.8 $9.3 $5.0 $7.6 $ 0.3 $ 0.4 $ 34.5 $ 34.0
Average assets 10.2 9.0 11.0 9.4 6.2 7.7 10.9 13.9 50.8 51.8
Average core deposits 2.4 2.4 0.1 - 0.2 0.1 - 0.2 36.6 39.6
Return on equity (5)(6) 25% 23% 27% 25% -% -% -% -% 30% 22%
Risk-adjusted efficiency ratio (6)(7) 64% 68% 68% 71% -% -% -% -% -% -%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) Businesses are taxed at the Company's marginal (statutory) tax rate,
adjusted for any nondeductible expenses. Any differences between the
marginal and effective tax rate are in Other.
(5) Equity is allocated to the lines of business based on an assessment of the
inherent risk associated with each business so that the returns on allocated
equity are on a risk-adjusted basis and comparable across business lines.
(6) Ratios for the Mortgage Business are not meaningful.
(7) The risk-adjusted efficiency ratio is defined as noninterest expense plus
the cost of capital divided by revenues (net interest income and noninterest
income) less normalized loan losses.
(8) The Company exited the 1-4 family first mortgage loan origination business
in October 1995.
increased substantially due to gains on the sale of loans. Noninterest expense
increased substantially due to lower foreclosed asset gains on sales and the
expansion of the Real Estate Capital Markets Group in 1995.
THE WHOLESALE PRODUCTS GROUP serves businesses headquartered in California with
annual sales of $5 million to $250 million and maintains relationships with
major corporations throughout the United States. The group is responsible for
soliciting and maintaining credit and noncredit relationships with businesses by
offering a variety of products and services, including traditional commercial
loans and lines, letters of credit, international trade facilities, foreign
exchange services and cash management. This group includes the majority
ownership interest in the Wells Fargo HSBC Trade Bank established in October
1995 that provides trade financing, letters of credit and collection services.
The Wholesale Products Group's net income for 1995 increased $36 million, or
23%, from 1994. Net interest income increased substantially due to the increase
in average loan balances and wider spreads on core deposits. Noninterest income
reflected growth in cash management products and fees and commissions. The
increase in noninterest expense was related to the growth in cash management,
ongoing product development and infrastructure enhancement.
CONSUMER LENDING offers a full array of consumer loan products, including an
average of $3.5 billion in credit card loans, $2.0 billion in auto financing and
leases, and $5.3 billion in home equity lines and loans, lines of credit and
installment loans.
Consumer Lending's net income for 1995 increased $38 million, or 26%. The
increase in net interest income was largely due to higher credit card balances.
Noninterest income increased primarily due to higher credit card fee income.
Noninterest expense increased primarily due to the cost of servicing a higher
number of open accounts.
MORTGAGE BUSINESS (formerly, Mortgage Lending) decided at year-end 1994 to cease
the origination of 1-4 family first mortgage loans due to concerns regarding the
long-run economics of the first mortgage origination business. In April 1995,
the Company agreed in principle to form an alliance with Norwest Mortgage, Inc.
Under the terms of the resulting agreement, the new joint venture, Towne Square
Mortgage, will fund residential mortgages for the Company's customers and the
Company will service a portion of these loans. Norwest Mortgage, Inc. provides
underwriting for these loans. The joint venture began operations in October 1995
and is being accounted for as an equity method investment. Accordingly, pretax
income from the alliance is reported as income from equity investments accounted
for by the equity method as part of noninterest income.
9
<PAGE>
In the first quarter of 1995, as a result of reevaluating its
asset/liability management strategies in light of Mortgage Business' decision to
cease the origination of first mortgages, the Company decided to sell certain
types of products within the real estate 1-4 family first mortgage portfolio.
Accordingly, approximately $4 billion of first mortgages were reclassified on
March 31, 1995 to a held-for-sale category and an $83 million write-down to the
lower of cost or estimated market was recorded as a loss on sale of loans in
noninterest income. These loans were subsequently sold in 1995 at prices greater
than originally estimated, resulting in a $19 million gain upon sale.
THE OTHER category includes the Company's investment securities portfolio, the
difference between the normalized provision for the line groups and the Company
provision for loan losses, the net impact of transfer pricing loan and deposit
balances, the cost of external debt, the elimination of intergroup noninterest
income and expense, and any residual effects of unallocated systems and other
support groups. It also includes the impact of asset/liability strategies the
Company has put in place to manage the sensitivity of net interest spreads.
Net income for the Other category was basically flat in 1995. The decrease
in net interest income was due to higher funding costs, lower investment
securities and lower hedging income. The decrease was substantially offset by a
higher loan loss provision credit. The Other category also reflected a reduction
in tax expense related to the settlement with the Internal Revenue Service in
1995 of certain audit issues pertaining to auto leases.
EARNINGS PERFORMANCE
- --------------------------------------------------------------------------------
The Bank generated net income of $1,105 million and $863 million in 1995 and
1994, respectively. The Parent (excluding its equity in earnings of
subsidiaries) and its other bank and nonbank subsidiaries had net losses of
$73 million and $22 million in 1995 and 1994, respectively.
[NET INTEREST MARGIN (GRAPH)(%)] SEE APPENDIX
NET INTEREST INCOME
................................................................................
Net interest income is the difference between interest income (which includes
yield-related loan fees) and interest expense. Net interest income on a taxable-
equivalent basis was $2,655 million in 1995, compared with $2,610 million in
1994.
Net interest income on a taxable-equivalent basis expressed as a percentage
of average total earning assets is referred to as the net interest margin, which
represents the average net effective yield on earning assets. For 1995, the net
interest margin was 5.80%, compared with 5.55% in 1994.
Table 5 presents the individual components of net interest income and net
interest margin.
The increase in the margin in 1995 compared with 1994 was primarily
attributable to an increase in the spread between loans and deposits, as loan
yields climbed and deposit rates were slow to react. Additionally, the increase
in the margin reflected a change in the mix of average earning assets, as
higher-yielding loans, such as credit card and small business, replaced lower-
yielding securities and single-family loans. These increases were primarily
offset by a reduction in hedging income.
The reduction in hedging income resulted primarily from the maturing
interest rate floor and swap hedges. Interest income included hedging income of
$4 million in 1995, compared with $124 million in 1994. Interest expense
included hedging income of $15 million in 1995, compared
10
<PAGE>
with $5 million in 1994. The decrease of $110 million in 1995 in hedging income
from derivative contracts reduced the margin by 23 basis points.
Net interest income and the net interest margin are expected to increase in
1996, assuming both loan growth and investment securities runoff continues and
there is no significant change in deposit rates.
NONINTEREST INCOME
................................................................................
Table 4 shows the major components of noninterest income.
TABLE 4 NONINTEREST INCOME
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
(in millions) Year ended December 31, % Change
------------------------ -------------
1995 1994 1993 1995/ 1994/
1994 1993
<S> <C> <C> <C> <C> <C>
Service charges on
deposit accounts $ 478 $ 473 $ 423 1 % 12 %
Fees and commissions:
Credit card membership
and other credit card fees 95 64 68 48 (6)
Debit and credit card
merchant fees 65 55 80 18 (31)
Charges and fees on loans 52 42 48 24 (13)
Shared ATM network fees 51 43 38 19 13
Mutual fund and
annuity sales fees 33 64 43 (48) 49
All other 137 119 99 15 20
------ ------ ------
Total fees and
commissions 433 387 376 12 3
Trust and investment
services income:
Asset management
and custody fees 129 124 125 4 (1)
Mutual fund
management fees 71 46 37 54 24
All other 41 33 28 24 18
------ ------ ------
Total trust and investment
services income 241 203 190 19 7
Investment securities
gains (losses) (17) 8 - - -
Sale of joint
venture interest 163 - - - -
Income from equity
investments accounted
for by the:
Cost method 58 31 42 87 (26)
Equity method 39 31 24 26 29
Check printing charges 39 40 38 (3) 5
Losses from dispositions
of operations (89) (5) (28) - (82)
Gains (losses) on sales
of loans (40) 4 12 - (67)
Losses on dispositions
of premises and
equipment (31) (12) (19) 158 (37)
All other 50 40 35 25 14
------ ------ ------
Total $1,324 $1,200 $1,093 10 % 10 %
------ ------ ------ --- ---
------ ------ ------ --- ---
- -----------------------------------------------------------------------------
</TABLE>
The overall increase in noninterest income reflected a broad-based increase
in revenue from the Company's core products and services, which is expected to
continue in 1996.
The increase in credit card membership and other credit card fees in 1995
compared with 1994 was predominantly due to late fees and other transaction fees
incurred by customers.
In 1995, the decrease in mutual fund and annuity sales fees substantially
reflected a lower sales volume of commission-based fixed-rate annuities.
"All other" fees and commissions include mortgage loan servicing fees and
the related amortization expense for purchased mortgage servicing rights.
Mortgage loan servicing fees totaled $55 million and $17 million in 1995 and
1994, respectively. The related amortization expense was $39 million and $8
million in 1995 and 1994, respectively. The balance of purchased mortgage
servicing rights was $152 million and $96 million at December 31, 1995 and 1994,
respectively. The purchased mortgage loan servicing portfolio totaled $19
billion at December 31, 1995, compared with $7 billion at December 31, 1994.
The increase in trust and investment services income in 1995 compared with
1994 was primarily due to greater mutual fund investment management fees,
reflecting the overall growth in the fund families' net assets. The Company
managed 15 of the Stagecoach family of funds consisting of $7.0 billion of
assets at December 31, 1995, compared with 24 funds consisting of $6.4 billion
at December 31, 1994. Prior to December 31, 1995, the Stagecoach family
consisted of both retail and institutional funds. The retail funds are primarily
distributed through the branch network. The institutional funds were offered
primarily to selected groups of investors and certain corporations, partnerships
and other business entities. As a result of the sale of the Company's joint
venture in WFNIA and the sale of the MasterWorks division, $.5 billion of the
retail funds and all the institutional funds were no longer under the Company's
management at December 31, 1995. These funds totaled $1.8 billion and $1.0
billion at December 31, 1995 and 1994, respectively. The Overland Express family
of 12 funds, which is sold nationwide through brokers, had $3.7 billion of
assets under management at December 31, 1995, compared with $3.4 billion at
December 31, 1994. In addition to managing Overland Express Funds and the funds
in the Stagecoach family, the Company also managed or maintained personal trust,
employee benefit trust and agency assets of approximately $51 billion at
December 31, 1995, compared with $47 billion at December 31, 1994.
The investment securities losses in 1995 largely resulted from the sale of
debt securities from the available-for-sale portfolio. The investment securities
gains in 1994 reflected the sale of both corporate debt and marketable equity
securities from the available-for-sale portfolio.
11
<PAGE>
TABLE 5 AVERAGE BALANCES, YIELDS AND RATES PAID
(TAXABLE-EQUIVALENT BASIS) (1)(2)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
(in millions) 1995 1994
--------------------------- ---------------------------
AVERAGE YIELDS/ INTEREST Average Yields/ Interest
BALANCE RATES INCOME/ balance rates income/
EXPENSE expense
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Federal funds sold and securities purchased
under resale agreements $ 69 5.94% $ 4 $ 189 3.51% $ 7
Investment securities:
At fair value (3):
U.S. Treasury securities 499 6.34 31 190 6.66 13
Securities of U.S. government agencies
and corporations 1,426 5.55 81 1,547 5.82 93
Private collateralized mortgage obligations 1,095 6.24 71 1,240 6.14 80
Other securities 81 19.69 11 76 14.13 6
------- ------ ------- ------
Total investment securities at fair value 3,101 6.17 194 3,053 6.12 192
At cost:
U.S. Treasury securities 1,246 4.88 61 2,376 4.77 113
Securities of U.S. government agencies
and corporations 4,428 6.07 269 5,902 6.05 357
Private collateralized mortgage obligations 1,124 5.87 66 1,242 5.74 71
Other securities 145 6.90 10 133 5.75 8
------- ------ ------- ------
Total investment securities at cost 6,943 5.84 406 9,653 5.69 549
At lower of cost or market - - - - - -
------- ------ ------- ------
Total investment securities 10,044 5.94 600 12,706 5.79 741
Mortgage loans held for sale (3) 1,002 7.48 76 - - -
Loans:
Commercial 8,635 9.88 853 7,092 9.19 652
Real estate 1-4 family first mortgage 5,867 7.36 432 8,484 6.85 581
Other real estate mortgage 8,046 9.50 765 8,071 8.68 700
Real estate construction 1,146 10.16 116 977 9.29 91
Consumer:
Real estate 1-4 family junior lien mortgage 3,349 8.61 288 3,387 7.75 262
Credit card 3,547 15.59 552 2,703 15.39 416
Other revolving credit and monthly payment 2,397 10.68 257 2,023 9.60 194
------- ------ ------- ------
Total consumer 9,293 11.81 1,097 8,113 10.75 872
Lease financing 1,498 9.22 138 1,271 9.16 116
Foreign 23 7.54 2 31 5.06 2
------- ------ ------- ------
Total loans (4)(5) 34,508 9.86 3,403 34,039 8.85 3,014
Other 62 5.47 3 54 5.89 3
------- ------ ------- ------
Total earning assets $45,685 8.93 4,086 $46,988 8.00 3,765
------- ------ ------- ------
------- -------
FUNDING SOURCES
Interest-bearing liabilities:
Deposits:
Interest-bearing checking $ 3,907 1.00 39 $ 4,622 .98 45
Market rate and other savings 15,552 2.61 405 18,921 2.34 442
Savings certificates 8,080 5.25 424 7,030 4.28 301
Other time deposits 385 6.14 24 304 7.35 22
Deposits in foreign offices 1,771 5.91 105 925 4.75 44
------- ------ ------- ------
Total interest-bearing deposits 29,695 3.36 997 31,802 2.69 854
Federal funds purchased and securities sold
under repurchase agreements 3,401 5.84 199 2,223 4.45 99
Commercial paper and other short-term borrowings 544 5.82 32 224 4.25 10
Senior debt 1,618 6.67 107 1,930 5.29 102
Subordinated debt 1,459 6.55 96 1,510 5.94 90
------- ------ ------- ------
Total interest-bearing liabilities 36,717 3.90 1,431 37,689 3.06 1,155
Portion of noninterest-bearing funding sources 8,968 - - 9,299 - -
------- ------ ------- ------
Total funding sources $45,685 3.13 1,431 $46,988 2.45 1,155
------- ------ ------- ------
------- -------
NET INTEREST MARGIN AND NET INTEREST INCOME
ON A TAXABLE-EQUIVALENT BASIS (6) 5.80% $2,655 5.55% $2,610
----- ------ ----- ------
----- ------ ----- ------
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 2,681 $ 2,618
Other 2,401 2,243
------- -------
Total noninterest-earning assets $ 5,082 $ 4,861
------- -------
------- -------
NONINTEREST-BEARING FUNDING SOURCES
Deposits $ 9,085 $ 9,019
Other liabilities 1,142 1,062
Preferred stockholders' equity 489 521
Common stockholders' equity 3,334 3,558
Noninterest-bearing funding sources
used to fund earning assets (8,968) (9,299)
------- -------
Net noninterest-bearing funding sources $ 5,082 $ 4,861
------- -------
------- -------
TOTAL ASSETS $50,767 $51,849
------- -------
------- -------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The average prime rate of the Bank was 8.83%, 7.14%, 6.00%, 6.25% and 8.47%
for 1995, 1994, 1993, 1992 and 1991, respectively. The average three-month
London Interbank Offered Rate (LIBOR) was 6.04%, 4.75%, 3.29%, 3.83% and
5.99% for the same years, respectively.
(2) Interest rates and amounts include the effects of hedge and risk management
activities associated with the respective asset and liabilities categories.
(3) Yields are based on amortized cost balances. The average amortized cost
balances for investment securities at fair value totaled $3,144 million and
$3,131 million in 1995 and 1994, respectively. The average amortized cost
balance for mortgage loans held for sale totaled $1,012 million in 1995.
12
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(in millions) 1993 1992 1991
-------------------------- -------------------------- --------------------------
Average Yields/ Interest Average Yields/ Interest Average Yields/ Interest
balance rates income/ balance rates income/ balance rates income/
expense expense expense
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Federal funds sold and securities purchased
under resale agreements $ 734 3.17% $ 23 $ 919 3.62% $ 33 $ 303 5.42% $ 16
Investment securities:
At fair value (3):
U.S. Treasury securities - - - - - - - - -
Securities of U.S. government agencies
and corporations - - - - - - - - -
Private collateralized mortgage
obligations - - - - - - - - -
Other securities - - - - - - - - -
------- ------ ------- ------ ------- ------
Total investment securities at fair value - - - - - - - - -
At cost:
U.S. Treasury securities 2,283 5.03 115 1,562 5.80 91 631 6.59 41
Securities of U.S. government agencies
and corporations 7,974 6.41 511 4,197 7.38 309 1,231 7.85 96
Private collateralized mortgage obligations 864 4.16 36 - - - - - -
Other securities 189 5.67 11 110 6.16 7 193 8.41 17
------- ------ ------- ------ ------- ------
Total investment securities at cost 11,310 5.95 673 5,869 6.93 407 2,055 7.51 154
At lower of cost or market - - - 108 8.73 9 - - -
------- ------ ------- ------ ------- ------
Total investment securities 11,310 5.95 673 5,977 6.97 416 2,055 7.51 154
Mortgage loans held for sale (3) - - - - - - - - -
Loans:
Commercial 7,154 9.36 670 9,702 8.50 825 12,974 9.64 1,252
Real estate 1-4 family first mortgage 6,787 7.92 538 7,628 9.27 707 9,367 10.16 952
Other real estate mortgage 9,467 8.20 776 10,634 8.21 873 10,773 9.58 1,033
Real estate construction 1,303 8.50 111 1,837 8.47 156 2,232 10.10 225
Consumer:
Real estate 1-4 family junior lien mortgage 3,916 6.97 273 4,585 8.14 373 5,135 10.10 519
Credit card 2,587 15.62 404 2,771 15.93 441 2,758 16.25 448
Other revolving credit and monthly payment 1,893 9.45 179 2,083 9.85 205 2,323 11.11 258
------- ------ ------- ------ ------- ------
Total consumer 8,396 10.19 856 9,439 10.81 1,019 10,216 11.99 1,225
Lease financing 1,190 9.83 117 1,165 10.36 121 1,167 11.34 132
Foreign 7 - - 1 - - 7 23.86 2
------- ------ ------- ------ ------- ------
Total loans (4)(5) 34,304 8.94 3,068 40,406 9.16 3,701 46,736 10.31 4,821
Other - - - 1 - - 17 8.43 1
------- ------ ------- ------ ------- ------
Total earning assets $46,348 8.12 3,764 $47,303 8.77 4,150 $49,111 10.17 4,992
------- ------ ------- ------ ------- ------
------- ------- -------
FUNDING SOURCES
Interest-bearing liabilities:
Deposits:
Interest-bearing checking $ 4,626 1.18 55 $ 4,597 1.77 81 $ 4,379 3.72 163
Market rate and other savings 19,333 2.26 438 18,534 2.88 533 16,097 5.01 806
Savings certificates 7,948 4.37 347 10,763 4.94 532 13,758 6.57 905
Other time deposits 331 7.19 24 444 7.52 34 719 8.07 58
Deposits in foreign offices 7 - - 43 7.89 3 400 7.76 31
------- ------ ------- ------ ------- ------
Total interest-bearing deposits 32,245 2.68 864 34,381 3.44 1,183 35,353 5.55 1,963
Federal funds purchased and securities sold
under repurchase agreements 1,051 2.79 29 1,299 3.16 41 3,092 5.50 170
Commercial paper and other short-term
borrowings 207 2.90 6 252 3.54 9 1,243 6.29 78
Senior debt 2,174 4.75 103 2,175 5.77 126 1,681 7.53 126
Subordinated debt 1,958 5.23 103 1,872 4.99 93 1,832 6.15 113
------- ------ ------- ------ ------- ------
Total interest-bearing liabilities 37,635 2.93 1,105 39,979 3.63 1,452 43,201 5.67 2,450
Portion of noninterest-bearing funding sources 8,713 - - 7,324 - - 5,910 - -
------- ------ ------- ------ ------- ------
Total funding sources $46,348 2.38 1,105 $47,303 3.07 1,452 $49,111 4.99 2,450
------- ------ ------- ------ ------- ------
------- ------- -------
NET INTEREST MARGIN AND NET INTEREST INCOME
ON A TAXABLE-EQUIVALENT BASIS (6) 5.74% $2,659 5.70% $2,698 5.18% $2,542
----- ------ ----- ------ ----- ------
----- ------ ----- ------ ----- ------
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 2,456 $ 2,536 $ 2,604
Other 2,306 2,658 3,307
------- ------- -------
Total noninterest-earning assets $ 4,762 $ 5,194 $ 5,911
------- ------- -------
------- ------- -------
NONINTEREST-BEARING FUNDING SOURCES
Deposits $ 8,482 $ 7,885 $ 7,289
Other liabilities 997 1,060 1,180
Preferred stockholders' equity 639 608 279
Common stockholders' equity 3,357 2,965 3,073
Noninterest-bearing funding sources
used to fund earning assets (8,713) (7,324) (5,910)
------- ------- -------
Net noninterest-bearing funding
sources $ 4,762 $ 5,194 $ 5,911
------- ------- -------
------- ------- -------
TOTAL ASSETS $51,110 $52,497 $55,022
------- ------- -------
------- ------- -------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) Interest income includes loan fees, net of deferred costs, of approximately
$41 million, $40 million, $41 million, $57 million and $63 million in 1995,
1994, 1993, 1992 and 1991, respectively.
(5) Nonaccrual loans and related income are included in their respective loan
categories.
(6) Includes taxable-equivalent adjustments that primarily relate to income on
certain loans and securities that is exempt from federal and applicable
state income taxes. The federal statutory tax rate was 35% for 1995, 1994
and 1993 and 34% for 1992 and 1991.
13
<PAGE>
The Company sold its joint venture interest in WFNIA as well as its
MasterWorks division to Barclays PLC of the U.K., resulting in a $163 million
pre-tax gain. The sale was completed in December 1995. The Company's joint
venture interest in WFNIA was accounted for as an equity investment under the
equity method. The income from the equity investment in WFNIA, included in
noninterest income, totaled $27 million and $21 million in 1995 and 1994,
respectively. Noninterest income from the MasterWorks division, included in "all
other" trust and investment services income, totaled $26 million and $20 million
in 1995 and 1994, respectively. (See Line of Business Results - Investment Group
section for further information.)
Income from cost method equity investments in both 1995 and 1994 reflected
net gains on the sales of and distribution from nonmarketable equity
investments.
In 1995, losses from dispositions of operations included a $70 million
fourth quarter accrual related to the disposition of premises ($64 million) and,
to a lesser extent, severance ($5 million) and miscellaneous expenses ($1
million) associated with the scheduled closures of 120 traditional retail branch
locations as the Company expands its alternative distribution channels by
continuing to open both supermarket branches and banking centers. These closures
were expected to be completed by year-end 1996; however, due to the proposed
merger with First Interstate, the completion of the closures may be delayed
until early 1997. In addition to the $70 million accrual, there was also a $13
million liability at December 31, 1995, representing a third quarter 1995
accrual for the closure of 21 branches scheduled for March 1996. Additional
accruals may be made in 1996 for branch closures or relocations as the Company
continues to open more supermarket branches and banking centers. The opening of
the supermarket locations is part of the Company's ongoing effort to provide
higher-convenience, lower-cost service to its customers. The Company expects by
year-end 1996 to have about 200 supermarket branches and 500 banking centers in
California (excluding the impact of the merger with First Interstate).
In 1994, losses from dispositions of operations included fourth quarter
accruals for the disposition of premises and, to a lesser extent, severance of
$14 million associated with scheduled branch closures and $10 million associated
with ceasing the direct origination of 1-4 family first mortgage loans by the
Company's mortgage lending unit. Partially offsetting these accruals was an $8
million payment received in the first quarter of 1994 that was contingent upon
performance in relation to the alliance formed with Card Establishment Services
(CES). Additional payments from the CES agreement are also contingent upon
future performance.
Gains and losses on sales of loans for 1995 included a first quarter $83
million write-down to the lower of cost or estimated market resulting from the
reclassification of certain types of products within the real estate 1-4 family
first mortgage loan portfolio to mortgage loans held for sale. (See Line of
Business Results - Mortgage Business section for further information.) During
the second half of 1995, as all mortgage loans held for sale were sold and
because such sales were at prices greater than originally estimated, the Company
recorded a $19 million gain on sale.
NONINTEREST EXPENSE
................................................................................
Table 6 shows the major components of noninterest expense.
Table 6 NONINTEREST EXPENSE
<TABLE>
<CAPTION>
(in millions) Year ended December 31, % Change
------------------------ -----------
1995 1994 1993 1995/ 1994/
1994 1993
<S> <C> <C> <C> <C> <C>
Salaries $ 713 $ 671 $ 684 6 % (2)%
Incentive compensation 126 155 109 (19) 42
Employee benefits 187 201 213 (7) (6)
Net occupancy 211 215 224 (2) (4)
Equipment 193 174 148 11 18
Contract services 149 101 61 48 66
Advertising and promotion 73 65 59 12 10
Telecommunications 58 49 44 18 11
Certain identifiable
intangibles 54 62 77 (13) (19)
Federal deposit insurance 52 101 114 (49) (11)
Postage 52 44 43 18 2
Operating losses 45 62 52 (27) 19
Outside professional services 45 33 42 36 (21)
Stationery and supplies 37 30 31 23 (3)
Travel and entertainment 36 30 28 20 7
Goodwill 35 36 37 (3) (3)
Check printing 25 29 34 (14) (15)
Security 21 20 19 5 5
Escrow and collection
agency fees 15 19 24 (21) (21)
Outside data processing 11 10 16 10 (38)
All other 63 49 103 29 (52)
------ ------ ------
Total $2,201 $2,156 $2,162 2 % - %
------ ------ ------ ---- ----
------ ------ ------ ---- ----
</TABLE>
The increase in salaries expense in 1995 compared with 1994 was primarily
attributable to increased temporary help expense and higher salary levels. The
Company's full-time equivalent staff, including hourly employees, averaged
19,520 in 1995, compared with 19,558 in 1994.
The decrease in incentive compensation from 1994 to 1995 was predominately
due to a differing mix of product sales, reflecting a shift away from
commissioned retail products, such as fixed-rate annuities. Additionally, the
decrease reflected a decline in incentive compensation related to Mortgage
Business' decision at year-end 1994 to cease the origination of first mortgages.
14
<PAGE>
Increases in equipment expense in 1995 compared with 1994 were related to a
higher level of spending on software and technology for product development and
increased depreciation expense on equipment related to business initiatives and
system upgrades.
The increase in contract services in 1995 compared with 1994 was largely due
to new product development and marketing initiatives.
In August 1995, the FDIC significantly reduced the deposit insurance premiums
paid by most banks. Under the revised rate structure, the best-rated
institutions insured by the Bank Insurance Fund (BIF) paid four cents per $100
of domestic deposits, down from the previous rate of 23 cents per $100. The
revised assessment rates were retroactive to June 1, 1995, the first day of the
month after the BIF was recapitalized. In the third quarter of 1995, the Company
received a $23 million refund for the overpayment of assessments made for the
period June 1 through September 30, 1995. In November 1995, the FDIC further
reduced the rate by four cents per $100 of domestic deposits, effective January
1, 1996. Under the most recent rate structure, the best-rated institutions
insured by the BIF pay the statutory annual minimum assessment of $2,000.
The Company expects total noninterest expense to be up slightly in 1996
compared with 1995.
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (FAS 123), Accounting for
Stock-Based Compensation. This Statement establishes a new fair value based
accounting method for stock-based compensation plans and encourages (but does
not require) employers to adopt the new method in place of the provisions of
Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued
to Employees. Companies may continue to apply the accounting provisions of APB
25 in determining net income; however, they must apply the disclosure
requirements of FAS 123. The recognition provisions and disclosure requirements
of FAS 123 are effective January 1, 1996, but may be applied in 1995. The
Company has decided it will not adopt the recognition provisions of FAS 123 but
will adopt the disclosure requirements in 1996.
BALANCE SHEET ANALYSIS
- --------------------------------------------------------------------------------
A comparison between the year-end 1995 and 1994 balance sheets is presented
below. The Bank's assets of $48.6 billion and $51.9 billion at December 31, 1995
and 1994, respectively, represented substantially all of
the Company's consolidated assets at those dates.
INVESTMENT SECURITIES
................................................................................
Total investment securities averaged $10.0 billion in 1995, a 21% decrease from
$12.7 billion in 1994. Investment securities totaled $8.9 billion at December
31, 1995, down 23% from $11.6 billion at December 31, 1994. The decrease was
largely due to the maturity of investment securities. Investment securities are
expected to continue to decrease in the future as the cash received from their
maturities is used to fund loan growth.
In November 1995, the FASB permitted a one-time opportunity for companies to
reassess by December 31, 1995 their classification of securities under FAS 115,
Accounting for Certain Investments in Debt and Equity Securities. As a result,
on November 30, the Company reclassified all of its held-to-maturity securities
at cost portfolio of $6.5 billion to the available-for-sale securities at fair
value portfolio in order to provide increased liquidity flexibility to meet
anticipated loan growth. A related unrealized net after-tax loss of $6 million
was recorded in stockholders' equity.
Table 7 provides expected remaining maturities and yields (taxable-equivalent
basis) of debt securities within the investment portfolio. The weighted average
expected remaining maturity of the debt securities portfolio was
2 years and 1 month at December 31, 1995, compared with 2 years and 10 months at
December 31, 1994. In addition to not replacing maturing securities that are
used to fund loan growth, the decrease in the expected remaining maturity
reflects a lower interest rate environment, in which a higher level of
prepayments is likely to occur. Expected remaining maturities will differ from
remaining contractual maturities because borrowers may have the right to prepay
certain obligations with or without penalties. It is more appropriate to monitor
investment security maturities and yields using prepayment assumptions since
this better reflects what the Company expects to occur. (Note 3 to the Financial
Statements shows the remaining contractual principal maturities and yields of
debt securities.)
15
<PAGE>
TABLE 7 INVESTMENT SECURITIES
EXPECTED REMAINING MATURITIES AND YIELDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in millions) December 31, 1995
------------------------------------------------------------------------------------------------------------
Total Weighted Weighted Within one year After one year After five years After ten years
amount average average through five years through ten years
yield expected ---------------- ------------------ ----------------- ----------------
remaining Amount Yield Amount Yield Amount Yield Amount Yield
maturity (in
yrs.-mos.)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
SECURITIES (1):
U.S. Treasury securities $1,347 5.51% 1-4 $ 549 5.18% $ 798 5.74% $ - -% $ - -%
Securities of U.S.
government agencies
and corporations 5,218 6.03 2-2 1,551 5.76 3,172 5.99 425 7.11 70 7.44
Private collateralized
mortgage obligations 2,121 6.26 2-3 456 5.96 1,474 6.18 181 6.53 10 24.47
Other 169 8.58 2-5 51 5.99 116 9.75 - - 2 6.37
------- ------- ------- ---- --
TOTAL COST OF
DEBT SECURITIES $8,855 6.06% 2-1 $2,607 5.68% $5,560 6.08% $606 6.94% $82 9.49%
------- ---- --- ------- ------- ---- ---- ---- --- -----
------- ---- --- ------- ------- ---- ---- ---- --- -----
ESTIMATED FAIR VALUE $8,883 $2,604 $5,580 $613 $86
------- ------- ------- ---- ---
------- ------- ------- ---- ---
</TABLE>
- --------------------------------------------------------------------------------
(1) The weighted average yield is computed using the amortized cost of
available-for-sale investment securities carried at fair value. See Note 3 to
the Financial Statements for fair value of available-for-sale securities by type
of security.
The available-for-sale portfolio includes both debt and marketable equity
securities. At December 31, 1995, the available-for-sale securities portfolio
had an unrealized net gain of $47 million, comprised of unrealized gross gains
of $88 million and unrealized gross losses of $41 million. At December 31, 1994,
the available-for-sale securities portfolio had an unrealized net loss of $189
million, comprised of unrealized gross losses of $221 million and unrealized
gross gains of $32 million. The unrealized net gain or loss on available-for-
sale securities is reported on an after-tax basis as a valuation allowance that
is a separate component of stockholders' equity. At December 31, 1995, the
valuation allowance amounted to an unrealized net gain of $26 million, compared
with an unrealized net loss of $110 million at December 31, 1994.
At December 31, 1994, the held-to-maturity securities portfolio had an
estimated unrealized loss of $434 million (estimated unrealized gross gains were
zero), or 5.0% of the cost of the portfolio.
The unrealized net gain in the available-for-sale portfolio at December 31,
1995 was primarily due to investments in mortgage-backed securities. This
unrealized net gain reflected interest rates that were lower than those at the
time the investments were purchased. The Company may decide to sell certain of
the available-for-sale securities to manage the level of earning assets (for
example, to offset loan growth that may exceed expected maturities and
prepayments of securities). (See Note 3 to the Financial Statements for
investment securities at fair value and at cost by security type.)
At December 31, 1995, mortgage-backed securities included in Securities of
U.S. government agencies and corporations primarily consisted of pass-through
securities and collateralized mortgage obligations (CMOs) and substantially all
were issued or backed by federal agencies. These securities, along with the
Private CMOs, represented $7,345 million, or 82% of the Company's investment
securities portfolio at December 31, 1995. The CMO securities held by the
Company (including the private issues) are primarily shorter-maturity class
bonds that were structured to have more predictable cash flows by being less
sensitive to prepayments during periods of changing interest rates. As an
indication of interest rate risk, the Company has estimated the impact of a 200
basis point increase in interest rates on the value of the mortgage-backed
securities and the corresponding expected remaining maturities. Based on this
rate scenario, mortgage-backed securities would decrease in fair value from
$7,345 million to $7,014 million and the expected remaining maturity of these
securities would increase from 2 years and 3 months to 2 years and 9 months.
16
<PAGE>
LOAN PORTFOLIO
................................................................................
A comparative schedule of average loan balances is presented in Table 5; year-
end balances are presented in Note 4 to the Financial Statements.
Loans averaged $34.5 billion in 1995, compared with $34.0 billion in 1994.
Total loans at December 31, 1995 were $35.6 billion, compared with $36.3 billion
at year-end 1994. The decrease resulted from the sale of $4.4 billion of real
estate 1-4 family first mortgages in 1995, mostly offset by increases in other
loan portfolios. The most significant increases for both average and year-end
loans were in the commercial and credit card portfolios. The Company's total
unfunded loan commitments grew 16% to $24.2 billion at December 31, 1995, from
$20.9 billion at December 31, 1994.
Commercial loans grew 20% to $9.8 billion at year-end 1995, from $8.2 billion
at December 31, 1994. This increase reflected growth in middle market and small
business loans, resulting from ongoing marketing efforts, and is expected to
continue in 1996. Total unfunded commercial loan commitments grew from $6.6
billion at December 31, 1994 to $8.4 billion at December 31, 1995. Included in
the commercial loan portfolio are agricultural loans of $1,029 million and $822
million at December 31, 1995 and 1994, respectively. Agricultural loans consist
of loans to finance agricultural production and other loans to farmers.
The increase in the credit card loan portfolio during 1995 was due to new
accounts resulting from nationwide direct mail campaigns, originations in retail
outlets and increased loan balances from the Company's existing cardholders.
Table 8 presents comparative period-end commercial real estate loans.
TABLE 8 COMMERCIAL REAL ESTATE LOANS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in millions) December 31, % Change
--------------------------- -------------
1995 1994 1993 1995/ 1994/
1994 1993
<S> <C> <C> <C> <C> <C>
Commercial loans to real
estate developers (1) $ 700 $ 525 $ 505 33 % 4 %
Other real estate
mortgage (2) 8,263 8,079 8,286 2 (2)
Real estate construction 1,366 1,013 1,110 35 (9)
------- ------ ------
Total $10,329 $9,617 $9,901 7 % (3)%
------- ------ ------ --- ---
------- ------ ------ --- ---
Nonaccrual loans $ 371 $ 416 $ 904 (11)% (54)%
------- ------ ------ --- ---
------- ------ ------ --- ---
Nonaccrual loans as a
% of total 3.6% 4.3% 9.1%
------- ------ ------
------- ------ ------
</TABLE>
- --------------------------------------------------------------------------------
(1) Included in commercial loans.
(2) Agricultural loans that are primarily secured by real estate are included in
other real estate mortgage loans; such loans were $250 million, $256 million
and $225 million at December 31, 1995, 1994 and 1993, respectively.
[LOAN MIX AT YEAR END (GRAPH)(%)] SEE APPENDIX
Table 9 summarizes other real estate mortgage loans by property type and by
region (South, North and Central) in California. The Company's Southern
California real estate loans are primarily located in Los Angeles and Orange
counties; its Northern California loans are predominantly located in the San
Francisco Bay Area; and a significant portion of its Central California real
estate loans is in Sacramento.
Table 10 summarizes real estate construction loans by project type and by
region (South, North and Central)
in California.
17
<PAGE>
TABLE 9 REAL ESTATE MORTGAGE LOANS BY TYPE AND REGION
(EXCLUDING 1-4 FAMILY FIRST MORTGAGE LOANS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(in millions) December 31, 1995
--------------------------------------------------------------------------------------------------------------
Southern Northern Central Total Non-
California California California California Other states(2) All states accruals-
-------------- -------------- -------------- -------------- --------------- -------------- as a %
Total Non- Total Non- Total Non- Total Non- Total Non- Total Non- of total
loans accrual loans accrual loans accrual loans accrual loans accrual loans accrual by type
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Office buildings $ 918 $110 $ 862 $10 $ 283 $16 $2,063 $136 $ 395 $13 $2,458 $149 6%
Industrial 624 14 452 7 238 1 1,314 22 116 - 1,430 22 2
Apartments 390 20 247 - 63 3 700 23 328 1 1,028 24 2
Shopping centers 211 14 199 6 116 6 526 26 445 5 971 31 3
Hotels/motels 95 20 134 - 49 - 278 20 295 - 573 20 3
Retail buildings
(other than
shopping centers) 177 14 156 1 88 4 421 19 145 1 566 20 4
Institutional 186 20 131 1 48 - 365 21 5 - 370 21 6
Land 114 10 36 1 43 2 193 13 78 - 271 13 5
Agricultural 40 - 31 1 174 - 245 1 4 - 249 1 -
1-4 family (1):
Land 1 - - - - - 1 - - - 1 - -
Structures 4 - - - - - 4 - - - 4 - -
Other 46 - 41 - 11 - 98 - 244(3) 6 342 6 2
------ ---- ------ --- ------ --- ------ ---- ------ --- ------ ----
Total $2,806 $222 $2,289 $27 $1,113 $32 $6,208 $281 $2,055 $26 $8,263 $307 4%
------ ---- ------ --- ------ --- ------ ---- ------ --- ------ ---- -
------ ---- ------ --- ------ --- ------ ---- ------ --- ------ ---- -
% of total
California loans 45% 37% 18% 100%
------ ------ ------ ------
------ ------ ------ ------
Nonaccruals as
a % of total
by region 8% 1% 3%
--- --- ---
--- --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents loans to real estate developers secured by 1-4 family residential
developments.
(2) Consists of 36 states; no state had loans in excess of $225 million at
December 31, 1995.
(3) Includes loans secured by collateral pools of approximately $95 million
(where the pool is a mixture of various real estate property types located
in various states, non-real estate-related assets and other guarantees).
TABLE 10 REAL ESTATE CONSTRUCTION LOANS BY TYPE AND REGION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(in millions) December 31, 1995
-------------------------------------------------------------------------------------------------------------
Southern Northern Central Total Non-
California California California California Other states(2) All states accruals-
-------------- ---------- -------------- -------------- --------------- -------------- as a %
Total Non- Total Total Non- Total Non- Total Non- Total Non- of total
loans accrual loans(1) loans accrual loans accrual loans accrual loans accrual by type
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1-4 family:
Land $103 $ 3 $140 $134 $2 $377 $ 5 $ 94 $ - $ 471 $ 5 1%
Structures 83 14 54 15 2 152 16 40 - 192 16 8
Shopping centers 19 - 3 5 - 27 - 183 - 210 - -
Land (excluding
1-4 family) 21 - 36 10 - 67 - 100 25 167 25 15
Apartments 18 - 31 - - 49 - 43 - 92 - -
Industrial 10 - 21 21 - 52 - 6 - 58 - -
Office buildings 4 - 21 2 - 27 - 17 - 44 - -
Hotels/motels - - 24 2 - 26 - 15 - 41 - -
Retail buildings
(other than
shopping centers) 14 - 14 7 - 35 - 1 - 36 - -
Institutional 5 - 12 2 - 19 - 3 - 22 - -
Agricultural - - 2 1 - 3 - - - 3 - -
Other 3 - - 1 - 4 - 26 - 30 - -
---- --- ---- ---- -- ---- --- ---- --- ------ ---
Total $280 $17 $358 $200 $4 $838 $21 $528 $25 $1,366 $46 3%
---- --- ---- ---- -- ---- --- ---- --- ------ --- --
---- --- ---- ---- -- ---- --- ---- --- ------ --- --
% of total
California loans 33% 43% 24% 100%
---- ---- ---- ----
---- ---- ---- ----
Nonaccruals as
a % of total
by region 6% 2%
--- --
--- --
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) There were no loans on nonaccrual at December 31, 1995.
(2) Consists of 26 states; no state had loans in excess of $80 million at
December 31, 1995.
18
<PAGE>
NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS
................................................................................
Table 11 presents comparative data for nonaccrual and restructured loans and
other assets. Management's classification of a loan as nonaccrual or
restructured does not necessarily indicate that the principal of the loan is
uncollectible in whole or in part. Table 11 excludes loans that are
contractually past due 90 days or more as to interest or principal, but are both
well-secured and in the process of collection or are real estate 1-4 family
first mortgage loans or consumer loans that are exempt under regulatory rules
from being classified as nonaccrual. This information is presented in Table 17.
Notwithstanding, real estate 1-4 family loans (first and junior liens) are
placed on nonaccrual within 150 days of becoming past due and are shown in the
table below. (Notes 1 and 5 to the Financial Statements describe the Company's
accounting policies relating to nonaccrual and restructured loans and foreclosed
assets, respectively.)
[NONACCRUAL LOANS ($ BILLIONS)(GRAPH)] SEE APPENDIX
[NEW LOANS PLACED ON NONACCRUAL ($ BILLIONS)(GRAPH)] SEE APPENDIX
Table 11 NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(in millions) December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial (1)(2) $112 $ 88 $ 252 $ 560 $ 871
Real estate 1-4 family first mortgage 64 81 99 96 73
Other real estate mortgage (3) 307 328 578 1,207 778
Real estate construction 46 58 235 235 226
Consumer:
Real estate 1-4 family junior lien mortgage 8 11 27 29 23
Other revolving credit and monthly payment 1 1 3 7 6
---- ---- ------ ------ ------
Total nonaccrual loans (4) 538 567 1,194 2,134 1,977
Restructured loans (5) 14 15 6 8 4
---- ---- ------ ------ ------
Nonaccrual and restructured loans (6) 552 582 1,200 2,142 1,981
As a percentage of total loans 1.6% 1.6% 3.6% 5.8% 4.5%
Foreclosed assets (7)(8) 186 272 348 510 404
Real estate investments (9) 12 17 15 40 20
---- ---- ------ ------ ------
Total nonaccrual and restructured loans and other assets $750 $871 $1,563 $2,692 $2,405
---- ---- ------ ------ ------
---- ---- ------ ------ ------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes loans to real estate developers of $18 million, $30 million,
$91 million, $86 million and $199 million at December 31, 1995, 1994, 1993,
1992 and 1991, respectively.
(2) Includes agricultural loans of $6 million, $1 million, $9 million,
$18 million and $13 million at December 31, 1995, 1994, 1993, 1992 and 1991,
respectively.
(3) Includes agricultural loans secured by real estate of $1 million,
$3 million, $24 million, $28 million and $13 million at December 31, 1995,
1994, 1993, 1992 and 1991, respectively.
(4) Of the total nonaccrual loans at December 31, 1995, $408 million were
considered impaired under FAS 114 (Accounting by Creditors for Impairment of
a Loan).
(5) In addition to originated loans that were subsequently restructured, there
were loans of $50 million at December 31, 1995 that were purchased at a
steep discount whose contractual terms were modified after acquisition. The
modified terms did not affect the book balance nor the yields expected at
the date of purchase. Of the total $14 million of restructured loans and $50
million of purchased loans at December 31, 1995, $50 million were considered
impaired under FAS 114.
(6) Related commitments to lend additional funds were approximately $45 million
at December 31, 1995.
(7) Includes agricultural properties of $22 million, $23 million, $26 million,
$55 million and $66 million at December 31, 1995, 1994, 1993, 1992 and 1991,
respectively.
(8) Excludes in-substance foreclosures (ISFs) of $99 million reclassified to
nonaccrual loans at June 30, 1993 due to clarification of criteria used in
determining when a loan is in-substance foreclosed. Complete information is
not available for prior periods; however, any ISFs that would be
reclassified in prior periods would not be materially higher than
$99 million.
(9) Represents the amount of real estate investments (contingent interest loans
accounted for as investments) that would be classified as nonaccrual if such
assets were loans. Real estate investments totaled $95 million, $54 million,
$34 million, $93 million and $124 million at December 31, 1995, 1994, 1993,
1992 and 1991, respectively.
19
<PAGE>
Table 12 summarizes the approximate changes during 1995 and 1994 in
nonaccrual loans by loan category. Table 13 summarizes the quarterly trend, for
the last eight quarters, of the approximate changes in nonaccrual loans. The
overall credit quality of the loan portfolio has improved since 1992. The
Company anticipates normal influxes of nonaccrual loans as it further increases
its lending activity as well as resolutions of loans in the nonaccrual
portfolio. The
Table 12 CHANGES IN NONACCRUAL LOANS BY LOAN CATEGORY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(in millions) Commercial Real estate Other Real estate Consumer Total
1-4 family real estate construction
first mortgage mortgage
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
BALANCE, BEGINNING OF YEAR $ 88 $ 81 $ 328 $ 58 $ 12 $ 567
New loans placed on nonaccrual (1)(2) 149 104 224 25 12 514
Loans purchased - - 14 - - 14
Loans sold - - (13) - - (13)
Charge-offs (39) (1) (49) (10) (1) (100)
Payments:
Principal (71) (23) (77) (22) (9) (202)
Interest applied to principal (11) - (28) (4) - (43)
Transfers to foreclosed assets - (56) (46) - (4) (106)
Loans returned to accrual (3) (4) (41) (46) - (4) (95)
Other additions (deductions) - - - (1) 3 2
---- ---- ----- ----- ---- ------
BALANCE, END OF YEAR $112 $ 64 $ 307 $ 46 $ 9 $ 538
---- ---- ----- ----- ---- ------
---- ---- ----- ----- ---- ------
YEAR ENDED DECEMBER 31, 1994
Balance, beginning of year $252 $ 99 $ 578 $ 235 $ 30 $1,194
New loans placed on nonaccrual 71 46 160 57 6 340
Loans purchased - 2 25 7 - 34
Loans sold - (3) - - - (3)
Charge-offs (42) (3) (63) (15) (2) (125)
Payments:
Principal (82) (35) (92) (67) (15) (291)
Interest applied to principal (20) - (26) (6) (1) (53)
Transfers to foreclosed assets (6) (15) (53) (18) (4) (96)
Loans returned to accrual (3) (84) (11) (209) (131) (1) (436)
Other additions (deductions) (1) 1 8 (4) (1) 3
---- ---- ----- ----- ---- ------
Balance, end of year $ 88 $ 81 $ 328 $ 58 $ 12 $ 567
---- ---- ----- ----- ---- ------
---- ---- ----- ----- ---- ------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) No commercial loan placed on nonaccrual status during 1995 exceeded
$26 million. A significant portion of these loans are located in Central and
Southern California.
(2) No other real estate mortgage loan placed on nonaccrual status in 1995
exceeded $30 million. The majority of these loans are located in Southern
California.
(3) Other real estate mortgage loans returned to accrual were the result of
loans restructured at market interest rates and the improvement in the
credit quality of loans.
TABLE 13 QUARTERLY TREND OF CHANGES IN NONACCRUAL LOANS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(in millions) Quarter ended
---------------------------------------------------------------------------------------------------------
DECEMBER 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
1995 1995 1995 1995 1994 1994 1994 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, BEGINNING OF
QUARTER $586 $631 $566 $567 $637 $712 $ 895 $1,194
New loans placed on
nonaccrual 106 108 173 127 71 93 124 52
Loans purchased - - 1 13 25 - 9 -
Loans sold - (13) - - - - - (3)
Charge-offs (27) (27) (18) (28) (25) (38) (27) (35)
Payments (71) (70) (49) (55) (61) (71) (91) (121)
Transfers to
foreclosed assets (22) (29) (19) (36) (18) (14) (27) (37)
Loans returned to
accrual (34) (14) (23) (24) (62) (45) (172) (157)
Other additions - - - 2 - - 1 2
---- ---- ---- ---- ---- ---- ----- ------
BALANCE, END OF QUARTER $538 $586 $631 $566 $567 $637 $ 712 $ 895
---- ---- ---- ---- ---- ---- ----- ------
---- ---- ---- ---- ---- ---- ----- ------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
performance of any individual loan can be impacted by external factors, such as
the interest rate environment or factors particular to a borrower such as
actions taken by a borrower's management. In addition, from time to time, the
Company purchases loans from other financial institutions that may be classified
as nonaccrual based on its policies.
Table 14 presents the amount of nonaccrual loans that were contractually past
due and those that were contractually current at December 31, 1995 and 1994.
Both book and contractual balances are presented in the table, the difference
reflecting charge-offs and interest applied to principal. The ratio of book to
contractual principal balance was 63% at December 31, 1995, compared with 65% at
December 31, 1994.
At December 31, 1995, an estimated $265 million, or 49%, of nonaccrual loans
were either current or less than 90 days past due as to payment of principal and
interest. This compares with an estimated $246 million, or 43%,
at December 31, 1994.
For all loans on nonaccrual during 1995 and 1994 (including loans no longer
on nonaccrual at December 31, 1995 and 1994), cash interest payments of
$58 million and $74 million were received while the loans were on nonaccrual
status in 1995 and 1994, respectively. Of the $58 million received in 1995, $21
million was recognized as interest income and $37 million was applied to
principal. Of the $74 million received in 1994, $24 million was recognized as
interest income and $50 million was applied to principal. The average nonaccrual
book principal loan balances (net of charge-offs and interest applied to
principal) were $581 million and $799 million during 1995 and 1994,
respectively.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114 (FAS 114), Accounting by Creditors for Impairment
of a Loan, as amended by FAS 118 (collectively referred to as FAS 114). The
adoption of FAS 114 has not affected the Company's policy for placing loans on
nonaccrual status. The Company generally identifies loans to be evaluated for
impairment when such loans are on nonaccrual or have been restructured. However,
not all nonaccrual loans are impaired. Generally, a loan is placed on nonaccrual
status upon becoming 90 days past due as to interest or principal (unless both
well-secured and in the process of collection), when the full timely collection
of interest or principal becomes uncertain or when a portion of the principal
balance has been
Table 14 NONACCRUAL LOANS BY PERFORMANCE CATEGORY (ESTIMATED)(1)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(in millions) December 31,
---------------------------------------------------------------------
1995
---------------------------------------------------------------------
BOOK CUMULATIVE CUMULATIVE CONTRACTUAL
PRINCIPAL CHARGE-OFFS(6) CASH INTEREST PRINCIPAL
BALANCE APPLIED TO BALANCE
PRINCIPAL(6)
<S> <C> <C> <C> <C>
Contractually past due (2):
Payments not made (3):
90 days or more past due $ 86 $ 1 $ - $ 87
Less than 90 days past due 2 - - 2
---- ---- ---- ----
88 1 - 89
Payments made (4):
90 days or more past due 187 130 48 365
Less than 90 days past due 94 25 27 146
---- ---- ---- ----
281 155 75 511
---- ---- ---- ----
Total past due 369 156 75 600
Contractually current (5) 169 54 35 258
---- ---- ---- ----
Total nonaccrual loans $538 $210 $110 $858
---- ---- ---- ----
---- ---- ---- ----
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(in millions) December 31,
---------------------------------------------------------------------
1994
---------------------------------------------------------------------
Book Cumulative Cumulative Contractual
principal charge-offs(6) cash interest principal
balance applied to balance
principal(6)
<S> <C> <C> <C> <C>
Contractually past due (2):
Payments not made (3):
90 days or more past due $111 $ 3 $ - $114
Less than 90 days past due 2 - - 2
---- ---- ---- ----
113 3 - 116
---- ---- ---- ----
Payments made (4):
90 days or more past due 210 75 28 313
Less than 90 days past due 60 4 12 76
---- ---- ---- ----
270 79 40 389
---- ---- ---- ----
Total past due 383 82 40 505
Contractually current (5) 184 115 62 361
---- ---- ---- ----
Total nonaccrual loans $567 $197 $102 $866
---- ---- ---- ----
---- ---- ---- ----
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 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.
(2) Past due is defined as a borrower whose loan principal or interest payment
is 30 days or more past due.
(3) Borrower has made no payment since being placed on nonaccrual.
(4) Borrower has made some payments since being placed on nonaccrual.
Approximately $175 million and $168 million of these loans had some payments
made on them during the fourth quarter of 1995 and 1994, respectively.
(5) 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.
(6) Cumulative amounts recorded since inception of the loan.
21
<PAGE>
charged off. Real estate 1-4 family loans (both first liens and junior liens)
are placed on nonaccrual status within 150 days of becoming past due as to
interest or principal, regardless of security. In contrast, under FAS 114, loans
are considered impaired when it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Certain nonaccrual loans may not be impaired because they are
included in large groups of smaller-balance homogeneous loans that by definition
are excluded from FAS 114 (unless they have been restructured). Similarly, not
all impaired loans are necessarily placed on nonaccrual status. That is,
restructured loans performing under restructured terms beyond a specified
performance period are classified as accruing but may still be deemed impaired
under FAS 114. For a further discussion of FAS 114, refer to Note 4 to the
Financial Statements.
If interest due on the book balances of all nonaccrual and restructured loans
(including loans no longer on nonaccrual or restructured at year end) had been
accrued under their original terms, $57 million of interest would have been
recorded in 1995, compared with $23 million actually recorded. In addition, the
interest that would have been recorded under the original terms for the $50
million of loans purchased at a steep discount (see Table 11, footnote 5) for
the period after the contractual terms were modified in late 1995 through year
end was $650 thousand, compared with $326 thousand actually recorded.
Table 15 summarizes the quarterly trend in foreclosed assets for the past
eight quarters. Table 16 summarizes foreclosed assets by type and by region
(South, North and Central) in California at December 31, 1995. Foreclosed assets
at December 31, 1995 decreased to $186 million from $272 million at December 31,
1994. Approximately 76% of foreclosed assets at December 31, 1995 have been in
the portfolio three years or less, with land and agricultural properties
representing substantially all of the amount greater than three years old.
TABLE 15 QUARTERLY TREND OF CHANGES IN FORECLOSED ASSETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
(in millions) Quarter ended
-----------------------------------------------------------------------
DECEMBER 31, September 30, June 30, March 31,
1995 1995 1995 1995
<S> <C> <C> <C> <C>
BALANCE, BEGINNING OF QUARTER $214 $224 $273 $272
Additions 24 30 19 42
Sales (49) (32) (62) (29)
Charge-offs (2) (3) (2) (2)
Write-downs (1) (5) (1) (3)
Other deductions - - (3) (7)
---- ---- ---- ----
BALANCE, END OF QUARTER $186 $214 $224 $273
---- ---- ---- ----
---- ---- ---- ----
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
(in millions)
-----------------------------------------------------------------------
December 31, September 30, June 30, March 31,
1994 1994 1994 1994
<S> <C> <C> <C> <C>
BALANCE, BEGINNING OF QUARTER $306 $344 $354 $348
Additions 19 30 63 62
Sales (37) (64) (63) (42)
Charge-offs (11) (1) (3) (8)
Write-downs (2) (2) (3) (6)
Other deductions (3) (1) (4) -
---- ---- ---- ----
BALANCE, END OF QUARTER $272 $306 $344 $354
---- ---- ---- ----
---- ---- ---- ----
- ---------------------------------------------------------------------------------------------------------
</TABLE>
TABLE 16 FORECLOSED ASSETS BY TYPE AND REGION
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(in millions) December 31, 1995
-------------------------------------------------------------------------------------
Southern Northern Central Total Other All
California California California California states (1) states
<S> <C> <C> <C> <C> <C> <C>
Land (excluding 1-4 family) $ 48 $ 6 $ 4 $ 58 $10 $ 68
1-4 family 34 4 2 40 1 41
Shopping centers 17 - - 17 8 25
Agricultural - 5 17 22 - 22
Industrial buildings 9 2 - 11 - 11
Office buildings 5 1 - 6 - 6
Apartments 3 - - 3 - 3
Hotels/motels - - - - 3 3
Other 3 3 - 6 1 7
---- --- --- ---- --- ----
Total $119 $21 $23 $163 $23 $186
---- --- --- ---- --- ----
---- --- --- ---- --- ----
% of total California foreclosed assets 73% 13% 14% 100%
---- --- --- ----
---- --- --- ----
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Consists of eight states; no state had foreclosed assets in excess of
$7 million at December 31, 1995.
22
<PAGE>
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
Table 17 shows loans contractually past due 90 days or more as to interest or
principal, but not included in the nonaccrual or restructured categories. All
loans in this category are both well-secured and in the process of collection or
are real estate 1-4 family first mortgage loans or consumer loans that are
exempt under regulatory rules from being classified as nonaccrual because they
are automatically charged off after being past due for a prescribed period
(generally, 180 days). Notwithstanding, real estate 1-4 family loans (first
liens and junior liens) are placed on nonaccrual within 150 days of becoming
past due and are excluded from Table 17.
TABLE 17 LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(in millions) December 31,
------------------------------------------------------
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Commercial $ 12 $ 6 $ 4 $ 4 $ 26
Real estate
1-4 family
first mortgage 8 18 19 29 38
Other real estate
mortgage 24 47 14 22 28
Real estate
construction - - 8 11 3
Consumer:
Real estate
1-4 family junior
lien mortgage 4 4 6 9 13
Credit card 95 42 43 55 50
Other revolving
credit and
monthly
payment 1 1 1 2 3
---- ---- --- ---- ----
Total consumer 100 47 50 66 66
Lease financing - - - 1 1
---- ---- --- ---- ----
Total $144 $118 $95 $133 $162
---- ---- --- ---- ----
---- ---- --- ---- ----
- -------------------------------------------------------------------------------
</TABLE>
ALLOWANCE FOR LOAN LOSSES
................................................................................
An analysis of the changes in the allowance for loan losses, including charge-
offs and recoveries by loan category, is presented in Note 4 to the Financial
Statements. At December 31, 1995, the allowance for loan losses was $1,794
million, or 5.04% of total loans, compared with $2,082 million, or 5.73%, at
December 31, 1994. The provision for loan losses was zero in 1995, down from
$200 million in 1994. During 1991 and 1992, the Company had a significantly
higher provision for loan losses than in the past resulting from a nationwide
(particularly California) recession as well as the Company's examination process
and that of its regulators. In light of the economic environment and in response
to the regulatory environment in which it operates, the Company took steps to
strengthen credit processes, including limiting the degree of the portfolio
concentration in any product type or location, or to any individual borrower.
Additionally, it revised or adopted policies and procedures to address a number
of issues, including deterioration of asset quality and the effectiveness of the
management structure in the Company's credit-related areas. As both the economic
environment and the credit quality of the Company's loan portfolio improved, the
Company began reducing its provision in 1993 and 1994. In 1995, as California
continued to make progress in its economic recovery and as the Company
considered the allowance for loan losses adequate in relation to its existing
loan portfolio, no provision was made. However, as loan growth continues, the
Company anticipates that it will commence making a provision in the latter half
of 1996. Net charge-offs in 1995 were $288 million, or .83% of average total
loans, compared with $240 million, or .70%, in 1994. Loan loss recoveries were
$134 million in 1995, compared with $129 million in 1994. Table 18 summarizes
net charge-offs by loan category.
The largest category of net charge-offs in 1995 was credit card loans,
comprising more than 50% of the total net charge-offs. During 1994 and the first
half of 1995, the Company grew its credit card loan portfolio through nationwide
direct mail campaigns as well as through retail outlets. The objective of the
direct mail campaigns was higher-yielding loans to higher-risk cardholders.
Hence, a high level of charge-offs was expected. As these loans continue to
mature, charge-offs are expected to continue at a level higher than experienced
in the past. The Company continuously evaluates and monitors its selection
criteria for direct mail campaigns and other account acquisition methods to
accomplish the desired risk/customer mix within the credit card portfolio.
Any loan that is past due as to principal or interest and that is not both
well-secured and in the process of collection is generally charged off (to
the extent that it exceeds the fair value of any related collateral) after a
23
<PAGE>
Table 18 NET CHARGE-OFFS BY LOAN CATEGORY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(in millions) Year ended December 31,
---------------------------------------------------------------------------------
1995 1994 1993
--------------------- --------------------- ---------------------
AMOUNT % OF AMOUNT % OF Amount % of
AVERAGE AVERAGE average
LOANS LOANS loans
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 17 .19 % $ 17 .23 % $ 39 .54%
Real estate 1-4 family first mortgage 10 .17 12 .14 23 .34
Other real estate mortgage (1) (.02) 44 .55 150 1.58
Real estate construction 9 .80 4 .34 64 4.85
Consumer:
Real estate 1-4 family junior lien mortgage 13 .40 20 .59 25 .62
Credit card 195 5.46 120 4.45 156 6.06
Other revolving credit and monthly payment 41 1.73 25 1.26 29 1.60
---- ---- ----
Total consumer 249 2.67 165 2.04 210 2.52
Lease financing 4 .31 (2) (.15) 9 .82
---- ---- ----
Total net loan charge-offs $288 .83 % $240 .70 % $495 1.44%
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
predetermined period of time that is based on loan category. For example, credit
card loans generally are charged off within 180 days of becoming past due.
Additionally, loans are charged off when classified as a loss by either internal
loan examiners or regulatory examiners.
The Company has an established process to determine the adequacy of the
allowance for loan losses that assesses the risk and losses inherent in its
portfolio. This process provides an allowance consisting of two components,
allocated and unallocated. The allocated component reflects inherent losses
resulting from the analysis of individual loans. It is developed through
specific credit allocations for individual loans (including impaired loans
subject to FAS 114), historical loss experience for each loan category and
degree of criticism within each category. The total of these allocations is then
supplemented by the unallocated component of the allowance. This includes
adjustments to the historical loss experience for the various loan categories to
reflect any current conditions that could affect losses inherent in the
portfolio. The unallocated component includes management's judgmental
determination of the amounts necessary for concentrations, economic
uncertainties and other subjective factors; correspondingly, the relationship of
the unallocated component to the total allowance for loan losses may fluctuate
significantly from period to period. Although management has allocated the
allowance to specific loan categories, the adequacy of the allowance must be
considered in its entirety.
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's) economic conditions,
loan portfolio composition, prior loan loss experience and the Company's ongoing
examination process and that of its regulators. The Company has an internal risk
analysis and review staff that reports to the Board of Directors and
continuously reviews loan quality. Such reviews also assist management in
establishing the level of the allowance. Similar to a number of other large
national banks, the Bank has been for several years and continues to be examined
by its primary regulator, the Office of the Comptroller of the Currency (OCC),
and has OCC examiners in residence. These examinations occur throughout the year
and target various activities of the Bank, including specific segments of the
loan portfolio (for example, commercial real estate and shared national
credits). In addition to the Bank being examined by the OCC, the Parent and its
nonbank subsidiaries are examined by the Federal Reserve.
The Company considers the allowance for loan losses of $1,794 million adequate
to cover losses inherent in loans, commitments to extend credit and standby
letters of credit at December 31, 1995.
DEPOSITS
................................................................................
Comparative detail of average deposit balances is presented in Table 5. Average
core deposits decreased 7% in 1995 compared with 1994. Average core deposits
funded 72% and 76% of the Company's average total assets in 1995 and 1994,
respectively.
Year-end deposit balances are presented in Table 19.
24
<PAGE>
TABLE 19 DEPOSITS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(in millions) December 31, %
---------------------- Change
1995 1994
<S> <C> <C> <C>
Noninterest-bearing $10,391 $10,145 2 %
Interest-bearing checking (1) 887 4,518 (80)
Market rate and
other savings (1) 17,944 16,713 7
Savings certificates 8,636 7,132 21
------- -------
Core deposits 37,858 38,508 (2)
Other time deposits 248 284 (13)
Deposits in foreign offices (2) 876 3,540 (75)
------- -------
Total deposits $38,982 $42,332 (8)%
------- ------- ---
------- ------- ---
- ------------------------------------------------------------------------------
</TABLE>
(1) Due to the limited transaction activity of existing NOW (negotiable order of
withdrawal) account customers, $3.4 billion of interest-bearing checking
deposits at December 31, 1995 were reclassified to market rate and other
savings deposits.
(2) Short-term (under 90 days) interest-bearing deposits used to fund short-term
borrowing needs.
CERTAIN FAIR VALUE INFORMATION
................................................................................
FAS 107 requires that the Company disclose estimated fair values for certain
financial instruments. Quoted market prices, when available, are used to reflect
fair values. If market quotes are not available, which is the case for most of
the Company's financial instruments, management has provided its best estimate
of the calculation of the fair values using discounted cash flows. Fair value
amounts differ from book balances because fair values attempt to capture the
effect of current market conditions (for example, interest rates) on the
Company's financial instruments.
There was an increase in the excess (premium) of the fair value over the
carrying value of the Company's financial instruments at December 31, 1995
compared with December 31, 1994. The Company's FAS 107 disclosures are presented
in Note 14 to the Financial Statements.
CAPITAL ADEQUACY/RATIOS
................................................................................
The Company uses a variety of measures to evaluate capital adequacy. Management
reviews the various capital measures monthly and takes appropriate action to
ensure that they are within established internal and external guidelines. The
Company's current capital position exceeds current guidelines established by
industry regulators.
[CORE DEPOSITS AT YEAR END ($ BILLIONS)(GRAPH)] SEE APPENDIX
RISK-BASED CAPITAL RATIOS
The Federal Reserve Board (FRB) and the OCC issue risk-based capital (RBC)
guidelines for bank holding companies and national banks, respectively. The FRB
is the primary regulator for the Parent and the OCC is the primary regulator for
the Bank. RBC guidelines establish a risk-adjusted ratio relating capital to
different categories of assets and off-balance sheet exposures.
There are two categories of capital under the guidelines. Tier 1 capital
includes common stockholders' equity and qualifying preferred stock, less
goodwill and certain other deductions (including the unrealized net gains and
losses, after applicable taxes, on available-for-sale investment securities
carried at fair value); Tier 2 capital includes preferred stock not qualifying
as Tier 1 capital, mandatory convertible debt, subordinated debt, certain
unsecured senior debt issued by the Parent and the allowance for loan losses,
subject to limitations by the guidelines. Tier 2 capital is limited to the
amount of Tier 1 capital (i.e., at least half of the total capital must be in
the form of Tier 1 capital). The Company's Tier 1 and Tier 2 capital components
are shown in Table 20.
Under the guidelines, one of four risk weights (0%, 20%, 50% and 100%) is
applied to the different balance sheet assets, primarily based on the relative
credit risk of the counterparty. For example, claims guaranteed by the U.S.
government or its agencies are risk-weighted at 0%. Off-balance sheet items,
such as loan commitments and derivative financial instruments, are also applied
a risk weight after calculating balance sheet equivalent amounts. One of four
credit conversion factors (0%, 20%, 50% and 100%) are assigned to loan
commitments based on the likelihood of the off-balance sheet item becoming an
asset. For example,
25
<PAGE>
certain loan commitments are converted at 50% and then risk-weighted at 100%.
Derivative financial instruments are converted to balance sheet equivalents
based on notional values, replacement costs and remaining contractual terms.
(Refer to Notes 4 and 13 to the Financial Statements for further discussion of
off-balance sheet items.)
The Company's total RBC ratio at December 31, 1995 was 12.46% and its Tier 1
RBC ratio was 8.81%, exceeding the minimum guidelines of 8% and 4%,
respectively. The ratios at December 31, 1994 were 13.16% and 9.09%,
respectively. The decrease in the Company's total and Tier 1 RBC ratios at
December 31, 1995 compared with 1994 resulted primarily from the replacement of
lower risk-weighted investment securities and 1-4 family loans with higher risk-
weighted loans, such as credit card and small business, as the cash received
from the runoff of investment securities and the sale of 1-4 family loans was
used to fund loan growth.
The Company's risk-weighted assets are calculated as shown in Table 20. Risk-
weighted balance sheet assets were $11.1 billion and $15.1 billion less than
total assets on the consolidated balance sheet of $50.3 billion and $53.4
billion at December 31, 1995 and 1994, respectively, as a result of weighting
certain types of assets at less than 100%; such assets, for both December 31,
1995 and 1994, substantially consisted of claims on or guarantees by the U.S.
government or its agencies (risk-weighted at 0% to 20%), 1-4 family first
mortgage loans (50%), cash and due from banks (0% to 20%) and private
collateralized mortgage obligations backed by 1-4 family first mortgage loans
(50%). The $.9 billion increase in risk-weighted balance sheet assets in 1995
compared with 1994 was substantially due to an increase in loans in the 100%
risk weight category (mostly commercial and consumer) and a corresponding
decrease in 1-4 family first mortgage loans, which are lower risk-weighted
assets.
LEVERAGE RATIO
To supplement the RBC guidelines, the FRB established
a leverage ratio guideline. The leverage ratio consists of Tier 1 capital
divided by quarterly average total assets, excluding goodwill and certain other
items. The minimum leverage ratio guideline is 3% for banking organizations that
do not anticipate significant growth and that have well-diversified risk,
excellent asset quality, high liquidity, good earnings and, in general, are
considered top-rated, strong banking organizations. Other banking organizations
are expected to have ratios of at least 4% to 5%, depending upon their
particular condition and growth plans. Higher leverage ratios could be required
by the particular circumstances or risk profile of a given banking organization.
The Company's leverage ratios were 7.46% and 6.89% at December 31, 1995 and
1994, respectively. The increase in the leverage ratio at December 31, 1995
compared with December 31, 1994 was primarily due to a decrease in quarterly
average total assets.
TABLE 20 RISK-BASED CAPITAL AND LEVERAGE RATIOS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(in billions) December 31,
--------------------
1995 1994
<S> <C> <C>
Tier 1:
Common stockholders' equity $ 3.6 $ 3.4
Preferred stock .5 .5
Less goodwill and other deductions (1) (.5) (.3)
----- -----
Total Tier 1 capital 3.6 3.6
----- -----
Tier 2:
Mandatory convertible debt - .1
Subordinated debt and unsecured senior debt 1.0 1.0
Allowance for loan losses allowable in Tier 2 .5 .5
----- -----
Total Tier 2 capital 1.5 1.6
----- -----
Total risk-based capital $ 5.1 $ 5.2
----- -----
----- -----
Risk-weighted balance sheet assets $39.2 $38.3
Risk-weighted off-balance sheet items:
Commitments to make or purchase loans 2.7 1.9
Standby letters of credit .7 .6
Other .4 .3
----- -----
Total risk-weighted off-balance sheet items 3.8 2.8
----- -----
Goodwill and other deductions (1) (.5) (.3)
Allowance for loan losses not included in Tier 2 (1.3) (1.6)
----- -----
Total risk-weighted assets $41.2 $39.2
----- -----
----- -----
Risk-based capital ratios:
Tier 1 capital (4% minimum requirement) 8.81% 9.09%
Total capital (8% minimum requirement) 12.46 13.16
Leverage ratio (3% minimum requirement) (2) 7.46% 6.89%
- -------------------------------------------------------------------------------
</TABLE>
(1) Other deductions include the unrealized net gain (loss) on available-for-
sale investment securities carried at fair value.
(2) Tier 1 capital divided by quarterly average total assets (excluding goodwill
and other items which were deducted to arrive at Tier 1 capital).
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 (FDICIA)
In addition to adopting a risk-based assessment system, FDICIA required that the
federal regulatory agencies adopt regulations defining five capital tiers:
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Under the regulations, a
"well capitalized" institution must have a Tier 1 RBC ratio of at least 6%,
a total capital ratio of at least 10% and a leverage ratio of at least 5%
and not be subject to a capital directive order. The Bank had a Tier 1 RBC ratio
of 10.12%, a total capital ratio of 13.23% and a leverage ratio of 7.89% at
December 31, 1995, compared with 9.56%, 12.64% and 7.21% at December 31, 1994,
respectively.
26
<PAGE>
ASSET/LIABILITY MANAGEMENT
................................................................................
The principal objectives of asset/liability management are to manage the
sensitivity of net interest spreads to potential changes in interest rates and
to enhance profitability in ways that promise sufficient reward for understood
and controlled risk. Funding positions are kept within predetermined limits
designed to ensure that risk-taking is not excessive and that liquidity is
properly managed.
Interest rate risk occurs when assets and liabilities reprice at different
times as interest rates change. For example, if fixed-rate assets are funded
with floating-rate debt, the spread between asset and liability rates will
decline or turn negative if rates increase. The Company refers to this type of
risk as "term structure risk." There is, however, another source of interest
rate risk, which results from changing spreads between loan and deposit rates.
These changing spreads are not highly correlated to changes in the level of
interest rates and are driven by other market conditions. The Company calls this
type of risk "basis risk"; it is the Company's main source of interest rate risk
and is significantly more difficult to quantify and manage than term structure
risk.
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. Table 21 shows in summary form the Company's interest rate
sensitivity based on expected interest rate repricings in specific time frames
for the balance sheet and swaps as of December 31, 1995. A more detailed swap
maturity schedule is included in Table 24. Table 22 presents an expanded,
detailed report of the Company's interest rate sensitivity by major asset and
liability categories, together with an adjusted cumulative gap measure.
In categorizing assets and liabilities according to expected repricing time
frames, management makes certain judgments and approximations. For example, a
new three-year loan with a rate that is adjusted every 30 days would be included
in the "0-3 months" category rather than the "over 1-5 years" category. There
are also balance sheet categories that have a fixed rate and an unspecified
maturity, or a rate that is administered but changes slowly or not at all as
market rates change. An example of this type of account is interest-bearing
checking, which has balances available on demand and pays a rate that changes
infrequently. The balances are relatively stable from quarter to quarter, but
could decline because of disintermediation if rates increased substantially.
Another example is the revolving credit feature of fixed-rate credit card loans,
which differentiates these loans from loans with specified contractual
maturities. Given the unusual rate maturity characteristics of these balance
sheet items, they are placed in a "nonmarket category." This category is
generally viewed as being relatively stable in terms of interest rate
variability and the net nonmarket liabilities are viewed as funding fixed-rate
assets with maturities greater than one year. Nonmarket assets include
noninterest-earning assets, fixed-rate credit card loans, nonaccrual loans and
equity securities. Nonmarket liabilities and stockholders' equity include
savings deposits, interest-bearing checking, noninterest-bearing deposits, other
noninterest-bearing liabilities, common stockholders' equity and fixed-rate
perpetual preferred stock.
Some asset/liability managers allocate these nonmarket assets and liabilities
to the various maturity categories. The Company believes that these allocations
are mostly arbitrary and tend to provide a false sense that the gap structure is
accurately defined. For this reason, they remain in the nonmarket category, in
order to maintain the Company's focus on their unusual rate maturity
characteristics.
Mortgage-backed investment securities and fixed-rate loans in the real estate
1-4 family first mortgage, other real estate mortgage and consumer loan
categories are based on expected maturities rather than on contractual
maturities. Expected maturities are estimated based on dealer prepayment
projections to the extent that such projections are available. For certain types
of adjustable-rate mortgages and
TABLE 21 SUMMARY OF INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(in millions) December 31, 1995
--------------------------------------------------------------------------------------
Prime- MRA 0-3 >3-6 >6-12 >1-5 >5 Non- Total
based savings months months months years years market
loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets $9,558 $ - $13,358 $ 2,833 $2,991 $10,947 $ 2,500 $ 8,129 $50,316
Liabilities and stockholders' equity - 9,601 9,527 2,463 2,191 1,737 925 23,872 50,316
------ ------- ------- ------- ------ ------- ------- -------- -------
Gap before interest rate swaps $9,558 $(9,601) $ 3,831 $ 370 $ 800 $ 9,210 $ 1,575 $(15,743) $ -
Interest rate swaps (72) - (5,917) 157 480 5,290 62 - -
------ ------- ------- ------- ------ ------- ------- -------- -------
Gap adjusted for interest rate swaps $9,486 $(9,601) $(2,086) $ 527 $1,280 $14,500 $ 1,637 $(15,743) $ -
------ ------- ------- ------- ------ ------- ------- -------- -------
------ ------- ------- ------- ------ ------- ------- -------- -------
Cumulative gap $ - $ (115) $(2,201) $(1,674) $ (394) $14,106 $15,743 $ -
------ ------- ------- ------- ------ ------- ------- --------
------ ------- ------- ------- ------ ------- ------- --------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
consumer loans where dealer prepayment projections are not available, the
Company uses its historical experience. The gap structure also does not allocate
Prime-based loans and market rate account (MRA) savings deposits, included in
market rate and other savings, to specific maturity categories. Statistical
evidence indicates that both Prime-based loans and MRA savings deposits have
relatively short maturities, with that of MRA savings deposits being somewhat
longer. Keeping them in distinct categories (as with nonmarket) helps maintain
focus on these rates, since most of the Company's short-term net interest income
variability depends on their relative movements.
The Company uses interest rate derivative financial instruments as an
asset/liability management tool to hedge mismatches in interest rate maturities.
They are used to reduce the Company's exposure to interest rate fluctuations and
provide more stable spreads between loan yields and the rates on their funding
sources. For example, the Company uses interest rate futures to shorten the rate
maturity of MRA savings deposits to better match the maturity of Prime-based
loans.
The under-one-year net liability position at December 31, 1995 was $394
million (0.8% of total assets), compared with the under-one-year net liability
position of $520 million at December 31, 1994 (1.0% of total assets). This
measure of term structure risk would indicate a nearly balanced interest rate
risk position. A significant under-one-year net liability position (greater than
4% of total assets) would indicate that the Company's net interest income is
exposed to rising short-term interest rates, while a similar size net asset
position would mean an exposure to declining short-term interest rates. The
average under-one-year net liability positions during 1995 and 1994 were $555
million and $538 million, respectively.
The two adjustments to the cumulative gap amount shown on Table 22 provide
comparability with those bank holding companies that present interest rate
sensitivity information in this manner. However, management does not believe
that these adjustments depict its interest rate risk. The first adjustment line
excludes noninterest-earning assets, noninterest-bearing liabilities and
stockholders' equity from the cumulative gap calculation so that only earning
assets, interest-bearing liabilities and all interest rate swap contracts used
to hedge such assets and liabilities are reported. The second adjustment line
moves interest-bearing checking and market rate and other savings deposits in
the nonmarket liability category to the shortest rate maturity category. This
second adjustment reflects the availability of these deposits for immediate
withdrawal. The resulting adjusted under-one-year cumulative gap (net liability
position) was $8.7 billion and $10.1 billion at December 31, 1995 and 1994,
respectively.
In addition, the Company performs earnings at risk analysis and net interest
income simulations based on multiple interest rate scenarios and projected on-
and off-balance sheet changes to estimate the potential effects of changing
interest rates. The Company uses four standard scenarios - rates unchanged,
expected rates, high rates and low rates in analyzing interest rate sensitivity
for policy measurement. The expected rates scenario is based on the Company's
projected future interest rates, while the high rates and low rates scenarios
cover 90% probable upward and downward rate movements based on the Company's own
interest rate models. Earnings at risk may be estimated by multiplying the
short-term gap positions by possible changes in interest rates. The potential
adverse impact on earnings over the next 12 months is compared to an interest
rate risk limit with a sublimit for the term structure risk. The current
interest rate risk limit allows up to 30 basis points of sensitivity in the
average net interest margin over the next year. The term structure risk sublimit
is currently $50 million of annual net interest income based on the earnings at
risk analysis. Subject to these limits, the Company may maintain a particular
gap position to achieve a more desirable risk/return tradeoff. Earnings at risk
analysis and net interest income simulations allow the Company to fully explore
the complex relationships within the gap over time and for various rate
environments. The results during the year showed that the Company's interest
rate sensitivity was well within the policy limit. The net interest income
simulation at December 31, 1995 showed a sensitivity of 8 basis points between
the net interest margins for the high and the expected rate scenarios over the
next year.
To get a complete picture of its current interest rate risk position, the
Company must look at both term structure risk and basis risk. The two most
significant components of basis risk are the Prime/MRA spread and the rate paid
on savings and interest-bearing checking accounts. During the 1987-1993 interest
rate cycle, the Prime/MRA spread varied from a low of approximately 275 basis
points in 1987 to a high of approximately 525 basis points when rates peaked in
1989. The increase in the Prime/MRA spread as well as lagged movements in other
deposit rates caused spreads to increase to historic high levels. At the peak of
the rate cycle in 1989 and during the first quarter of 1991, interest rate
floors and swaps were purchased to hedge against margin compression. Most of
these contracts matured by the end of 1995.
28
<PAGE>
TABLE 22 INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(in millions) December 31, 1995
--------------------------------------------------------------------------------------
Prime- MRA 0-3 >3-6 >6-12 >1-5 >5 Non- Total
based savings months months months years years market
loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and securities
purchased under resale agreements $ - $ - $ 177 $ - $ - $ - $ - $ - $ 177
Investment securities (1) - - 517 819 1,268 5,523 756 37 8,920
Loans:
Commercial 4,931 - 3,536 498 118 268 29 370 9,750
Real estate 1-4 family first mortgage 49 - 1,030 393 520 1,853 539 64 4,448
Other real estate mortgage 1,968 - 3,248 650 500 1,123 468 306 8,263
Real estate construction 761 - 474 58 - 20 7 46 1,366
Consumer 1,849 - 4,174 205 251 583 136 2,737 9,935
Lease financing - - 149 142 255 1,165 78 - 1,789
Foreign - - 2 28 - - - 1 31
------ ------- -------- ------- ------- ------- ------- -------- -------
Total loans (2) 9,558 - 12,613 1,974 1,644 5,012 1,257 3,524 35,582
------ ------- -------- ------- ------- ------- ------- -------- -------
Other earning assets (3) - - 10 - - - - 61 71
------ ------- -------- ------- ------- ------- ------- -------- -------
Total earning assets 9,558 - 13,317 2,793 2,912 10,535 2,013 3,622 44,750
Noninterest-earning assets - - 41 40 79 412 487 4,507 5,566
------ ------- -------- ------- ------- ------- ------- -------- -------
Total assets $9,558 $ - $ 13,358 $ 2,833 $ 2,991 $10,947 $ 2,500 $ 8,129 $50,316
------ ------- -------- ------- ------- ------- ------- -------- -------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Interest-bearing checking $ - $ - $ - $ - $ - $ - $ - $ 887 $ 887
Market rate and other savings - 9,601 971 - - - - 7,372 17,944
Savings certificates - - 2,595 2,446 1,750 1,695 100 50 8,636
Other time deposits - - 36 15 188 9 - - 248
Deposits in foreign offices - - 876 - - - - - 876
------ ------- -------- ------- ------- ------- ------- -------- -------
Total interest-bearing deposits - 9,601 4,478 2,461 1,938 1,704 100 8,309 28,591
Short-term borrowings - - 2,976 - - - - - 2,976
Senior debt - - 1,479 1 251 14 38 - 1,783
Subordinated debt - - 518 - - - 748 - 1,266
------ ------- -------- ------- ------- ------- ------- -------- -------
Total interest-bearing liabilities - 9,601 9,451 2,462 2,189 1,718 886 8,309 34,616
Noninterest-bearing liabilities - - 1 1 2 19 39 11,583 11,645
Stockholders' equity - - 75 - - - - 3,980 4,055
------ ------- -------- ------- ------- ------- ------- -------- -------
Total liabilities and
stockholders' equity $ - $ 9,601 $ 9,527 $ 2,463 $ 2,191 $ 1,737 $ 925 $ 23,872 $50,316
------ ------- -------- ------- ------- ------- ------- -------- -------
Gap before interest rate swaps $9,558 $(9,601) $ 3,831 $ 370 $ 800 $ 9,210 $ 1,575 $(15,743) $ -
Interest rate swaps:
Receive fixed (72) - (5,917) 157 480 5,290 62 - -
------ ------- -------- ------- ------- ------- ------- -------- -------
Gap adjusted for interest rate swaps $9,486 $(9,601) $ (2,086) $ 527 $ 1,280 $14,500 $ 1,637 $(15,743) $ -
------ ------- ------- ------- ------ ------- ------- -------- -------
------ ------- ------- ------- ------ ------- ------- -------- -------
Cumulative gap $ - $ (115) $ (2,201) $(1,674) $ (394) $14,106 $15,743 $ -
------ ------- ------- ------- ------ ------- ------- --------
------ ------- ------- ------- ------ ------- ------- --------
Adjustments:
Exclude noninterest-earning assets,
noninterest-bearing liabilities and
stockholders' equity - - 36 (39) (76) (394) (447) 11,054
Move interest-bearing checking
and market rate and other
savings from nonmarket to
shortest maturity - - (8,259) - - - - 8,259
------ ------- -------- ------- ------- ------- ------- --------
Adjusted cumulative gap $9,486 $ (115) $(10,424) $(9,936) $(8,732) $ 5,374 $ 6,564 $ 10,134
------ ------- ------- ------- ------ ------- ------- --------
------ ------- ------- ------- ------ ------- ------- --------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The nonmarket column consists of marketable equity securities.
(2) The nonmarket column consists of nonaccrual loans of $538 million,
fixed-rate credit card loans of $2,788 million (including $63 million in
commercial credit card loans) and overdrafts of $210 million.
(3) The nonmarket column consists of Federal Reserve Bank stock.
29
<PAGE>
As interest rates began to rise in early 1994 and continued through mid-1995,
the spread between loans and deposits began to rise again as the Prime rate
climbed 300 basis points and deposit rates were slow to react. During 1994 and
1995, the increasing loan/deposit spread roughly offset the decline in hedging
income due to the maturity of the interest rate floor and swap hedges put in
place in 1989 and 1991.
As the Company looks toward managing interest rate risk in 1996, it is
confronted with several risk scenarios. If interest rates rise, net interest
income may actually increase if deposit rates lag increases in market rates. The
Company could, however, experience significant pressure on net interest income
if there is a substantial movement in deposit rates relative to market rates.
This basis risk potentially could be hedged with interest rate caps, but the
Company believes they are not cost-effective in relation to the risk they would
mitigate.
A declining interest rate environment might result in a decrease in loan
rates, while deposit rates remain relatively stable, since they have not
increased much in 1994 and 1995. This rate scenario could also create
significant risk to net interest income. The Company has partially hedged
against this risk by again purchasing interest rate floor contracts in 1995 and
1994. Based on its current and projected balance sheet, the Company does not
expect that a change in interest rates would affect its liquidity position.
DERIVATIVE FINANCIAL INSTRUMENTS
................................................................................
The Company uses interest rate derivative financial instruments as an
asset/liability management tool to hedge the Company's exposure to interest rate
fluctuations. The Company also offers contracts to its customers, but hedges
such contracts by purchasing other financial contracts or uses the contracts for
asset/liability management.
Table 23 reconciles the beginning and ending notional or contractual amounts
for derivative financial instruments for 1995 and shows the expected remaining
maturity at year-end 1995. Table 24 summarizes the notional amount, expected
maturities and weighted average interest rates associated with amounts to be
received or paid on interest rate swap agreements, together with an indication
of the asset/liability hedged. For a further discussion of derivative financial
instruments, refer to Note 13 of the Financial Statements.
TABLE 23 DERIVATIVE ACTIVITIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(notional or contractual amounts in millions) Year ended December 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Beginning Additions Expirations Terminations(2) Ending Weighted
balance balance average
expected
remaining
maturity (in
yrs.-mos.)
<S> <C> <C> <C> <C> <C> <C>
Interest rate contracts:
Futures contracts $ 5,009 $21,862 $20,337(1) $1,139 $ 5,395 0-3
Forward contracts 8 439 30(1) 417 - -
Futures options purchased - 456 393 63 - -
Floors written - 105 - - 105 1-8
Caps written 1,039 657 467 59 1,170 1-11
Floors purchased 14,355 2,807 1,520 15 15,627 2-11
Caps purchased 1,260 819 497 52 1,530 1-11
Swap contracts 3,279 5,508 915 40 7,832(3) 2-10
Foreign exchange contracts:
Forwards and spot contracts 615 21,283 20,964 - 934 0-2
Option contracts purchased 319 223 513 - 29 0-6
Option contracts written 318 192 487 - 23 0-6
Cross currency swaps 118 - 118 - - -
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) To facilitate the settlement process, the Company enters into offsetting
contracts 2 to 45 days prior to their maturity date. Concurrent with the
closing of these positions, the Company generally enters into new interest
rate futures and forward contracts with a later expiration date since the
Company's use of these contracts predominantly relates to ongoing hedging
programs.
(2) Terminations occur if a customer that purchased a contract decides to cancel
it before the maturity date. If the customer contract was hedged, the
Company terminates the interest rate derivative instrument used to hedge the
customer's contract upon cancellation. The impact of terminations on income
before income taxes for 1995 was a loss of less than $.5 million.
(3) See Table 24 for further details of maturities and average rates received or
paid.
30
<PAGE>
TABLE 24 INTEREST RATE SWAP MATURITIES AND AVERAGE RATES (1)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(notional amounts in millions) 1996 1997 1998 1999 Thereafter Total
<S> <C> <C> <C> <C> <C> <C>
Receive-fixed rate (hedges loans)
Notional amount $ 548 $423 $1,905 $1,920 $1,070 $5,866
Weighted average rate received 4.6% 5.0% 5.9% 7.0% 7.3% 6.3%
Weighted average rate paid 6.0 6.1 5.9 6.0 6.0 6.0
Receive-fixed rate (hedges senior debt)
Notional amount $ 224 $ - $ - $ - $ - $ 224
Weighted average rate received 7.4% -% -% -% -% 7.4%
Weighted average rate paid 6.0 - - - - 6.0
Receive-fixed rate (hedges purchased
mortgage servicing rights)
Notional amount $ - $ - $ 200 $ - $ - $ 200
Weighted average rate received -% -% 5.9% -% -% 5.9%
Weighted average rate paid - - 6.0 - - 6.0
Receive-fixed rate, forward starting
swaps (hedges loans) (2)
Notional amount $ - $ 2 $ 3 $ 3 $ 16 $ 24
Other swaps (3)
Notional amount $ 284 $541 $ 152 $ 66 $ 475 $1,518
Weighted average rate received 5.9% 5.4% 5.9% 5.9% 5.9% 5.7%
Weighted average rate paid 5.9 5.4 5.9 5.8 5.8 5.7
Total notional amount $1,056 $966 $2,260 $1,989 $1,561 $7,832
------ ---- ------ ------ ------ ------
------ ---- ------ ------ ------ ------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Variable interest rates are presented on the basis of rates in effect at
December 31, 1995. These rates may change substantially in the future due to
open market factors.
(2) These forward swaps, which will hedge loans, start in January 1996 for
$21 million, in October 1996 for $2 million and in October 2000 for
$1 million.
(3) Represents customer accommodation swaps not used for asset/liability
management purposes. The notional amount reflects customer accommodations as
well as the swaps used to hedge the customer accommodations.
LIQUIDITY MANANGEMENT
................................................................................
Liquidity refers to the Company's ability to maintain a cash flow adequate to
fund operations and meet obligations and other commitments on a timely and cost-
effective basis.
In recent years, core deposits have provided the Company with a sizable
source of relatively stable and low-cost funds. The Company's average core
deposits and stockholders' equity funded 80% and 84% of its average total assets
in 1995 and 1994, respectively.
The remaining funding of average total assets was substantially provided by
senior and subordinated debt, deposits in foreign offices and short-term
borrowings (comprised of federal funds purchased and securities sold under
repurchase agreements, commercial paper and other short-term borrowings). Senior
and subordinated debt averaged $3.1 billion and $3.4 billion in 1995 and 1994,
respectively. Short-term borrowings averaged $3.9 billion and $2.4 billion in
1995 and 1994, respectively.
The weighted average expected remaining maturity of the debt securities
within the investment securities portfolio was 2 years and 1 month at December
31, 1995. Of the $8.9 billion debt securities that were available for sale at
December 31, 1995, $2.6 billion, or 29%, is expected to mature or be prepaid in
1996 and an additional $2.5 billion, or 28%, is expected to mature or be prepaid
in 1997. The Company purchased shorter-term debt securities to maintain asset
liquidity and to fund loan growth.
Other sources of liquidity include maturity extensions of short-term
borrowings and sale or runoff of assets. Commercial and real estate loans
totaled $23.8 billion at December 31, 1995. Of these loans, $8.0 billion matures
in one year or less, $8.4 billion matures in over one year through five years
and $7.4 billion matures in over five years. Of the $15.8 billion that matures
in over one year, $10.4 billion has floating or adjustable rates and $5.4
billion has fixed rates. Of the $5.4 billion of fixed-rate loans, approximately
$2.4 billion represents fixed initial-rate mortgage (FIRM) loans. FIRM loans
carry fixed rates for a minimum of 3 years to a maximum of 10 years of the loan
term and carry adjustable rates thereafter. Additionally, in 1995, sources of
liquidity included the proceeds from the
31
<PAGE>
sale of $4.4 billion in real estate 1-4 family first mortgage loans. (Refer to
the Consolidated Statement of Cash Flows for further information on the
Company's cash flows from its operating, investing and financing activities.)
Liquidity for the Parent Company and its subsidiaries is generated through
its ability to raise funds in a variety of domestic and international money and
capital markets, and through dividends from subsidiaries and lines of credit. In
1995, the Bank filed a shelf registration with the Office of the Comptroller of
the Currency that allows for the issuance of up to $3.0 billion of bank notes.
At December 31, 1995, the total amount remained unissued. Additionally during
1995, the Company filed a shelf registration with the Securities and Exchange
Commission that allows the issuance of up to $2.3 billion of senior or
subordinated debt or preferred stock. The proceeds from the sale of any
securities will be used for general corporate purposes. At December 31, 1995,
$2.1 billion of securities remained unissued under this shelf registration.
(Refer to Note 6 to the Financial Statements for a schedule of outstanding
senior and subordinated debt.)
In 1995, substantially all of the Parent's source of funding was due to
dividends paid by the Bank totaling $1,131 million. The dividends received
helped to fund the Company's stock repurchase program. The Company expects the
Parent to continue to receive dividends from the Bank in 1996. (See Notes 2 and
11 to the Financial Statements for the Bank's dividend restriction and the
Parent Company's financial statements, respectively.)
To accommodate future growth and current business needs, the Company has a
capital expenditure program. Capital expenditures for 1996 are estimated at
about $200 million for equipment for supermarket branches, relocation and
remodeling of Company facilities and routine replacement of furniture and
equipment. The Company will fund these expenditures from various sources,
including retained earnings of the Company and borrowings of various maturities.
COMPARISON OF 1994 VERSUS 1993
- --------------------------------------------------------------------------------
Net income in 1994 was $841 million, compared with $612 million in 1993. Net
income per share was $14.78 in 1994, compared with $10.10 in 1993. Return on
average assets (ROA) was 1.62% and return on average common equity (ROE) was
22.41% in 1994, compared with 1.20% and 16.74% respectively, in 1993.
The increase in earnings from 1993 to 1994 was largely 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 stock repurchase
program.
Net interest income on a taxable-equivalent basis was $2,610 million in 1994,
compared with $2,659 million in 1993. The Company's net interest margin was
5.55% for 1994, down from 5.74% in 1993. This decrease was substantially due to
lower hedging income, largely offset by an increase in the rate spread between
loans and deposits.
Noninterest income was $1,200 million in 1994, compared with $1,093 in 1993.
Service charges on deposits increased from $423 million in 1993 to $473 million
in 1994, an increase of 12%. The growth in service charges on deposit accounts
was predominantly due to increased service fees for overdrafts as well as
increased cash management-related fee income earned on wholesale accounts. Fees
and commissions increased 3% to $387 million predominantly resulting from sales
fees on mutual funds and annuities as well as an increase in "all other" fees.
The increase in mutual fund and annuity sales fees was due to a $40 million
growth in annuity sales fees from $17 million in 1993 to $57 million in 1994,
primarily offset by a $19 million decrease in mutual fund sales fees from $26
million in 1993 to $7 million in 1994. The increase in "all other" fees and
commissions was primarily due to a decrease in amortization expense for
purchased mortgage servicing rights and increased
32
<PAGE>
loan servicing fees. A significant portion of the increase in fees and
commissions was offset by a decrease in debit and credit card merchant fees
substantially due to an alliance with Card Establishment Services (CES) that the
Company entered into in November 1993 for merchant credit card and debit card
processing services. 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.
Trust and investment services income increased 7% to $203 million primarily
due to greater mutual fund investment management fees, reflecting the overall
growth in the fund families' net assets. These fees amounted to $46 million in
1994, compared with $37 million in 1993. The investment securities gains in 1994
reflected the sale of both corporate debt and marketable equity securities from
the available-for-sale portfolio. In 1994, losses from the disposition of
operations included fourth quarter accruals for the disposition of premises and,
to a lesser extent, severance of $14 million associated with scheduled branch
closures and $10 million associated with ceasing the direct origination of 1-4
family first mortgage loans by the Company's mortgage lending unit. In 1993,
losses from disposition of operations included a $36 million accrual related to
the disposition of owned and leased premises resulting from reduced space
requirements.
"All other" noninterest income in 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 expense totaled $2,156 million in 1994, compared with $2,162
million in 1993. Salaries expense decreased 2% to $671 million due to a decline
in the Company's full-time equivalent staff. Incentive compensation increased
42% to $155 million substantially due to various sales programs, of which a
significant portion related to annuities and mutual funds. Increases in
equipment expense and contract services from $209 million in 1993 to
$275 million in 1994 were primarily related to system upgrades throughout the
Company and the development of new products and services. The 100% decrease in
foreclosed assets expense, included in "all other", in 1994 compared with 1993
was largely due to a decline in write-downs from $60 million in 1993 to $13
million in 1994 and increased gains on sales.
Total loans were $36.3 billion at December 31, 1994, a 10% increase from
December 31, 1993. A significant portion of this increase was due to increases
in the real estate 1-4 family first mortgage portfolio.
The provision for loan losses in 1994 was $200 million, compared with
$550 million in 1993. Net charge-offs in 1994 were $240 million, or .70% of
average total loans, compared with $495 million, or 1.44%, in 1993. Loan loss
recoveries were $129 million in 1994, compared with $169 million in 1993. The
allowance for loan losses was 5.73% of total loans at December 31, 1994,
compared with 6.41% at December 31, 1993. The decline in the provision for loan
losses reflected the continued improvement in the Company's loan portfolio.
Total nonaccrual and restructured loans were $582 million, or 1.6% of total
loans, at December 31, 1994, compared with $1,200 million, or 3.6% of total
loans, at December 31, 1993. At December 31, 1994, an estimated $246 million,
or 43%, of nonaccrual loans were less than 90 days past due, compared with
an estimated $704 million, or 59%, at December 31, 1993. Foreclosed assets
were $272 million at December 31, 1994, compared with $348 million at
December 31, 1993.
The average volume of core deposits in 1994 was $39.6 billion, 2% lower than
in 1993. Average core deposits funded 76% of the Company's average total assets
in 1994, compared with 79% in 1993.
The Company adopted FAS 109, Accounting for Income Taxes, on January 1, 1993.
Under this method, the computation of the net deferred tax asset or liability
gives current recognition to changes in tax rates and laws. As a result, when
the Omnibus Budget Reconciliation Act was signed into law in August of 1993,
raising the corporate tax rate from 34% to 35%, effective January 1, 1993, an
adjustment was made that increased the Company's deferred tax asset and,
correspondingly, decreased income tax expense by approximately $18 million.
Because the deferred tax asset was originally recorded at a lower tax rate, the
higher tax rate in effect at that time increased the value of the asset. The
decreased income tax expense was partially offset by a $9 million increase to
reflect the application of the higher tax rate to 1993 earnings.
33
<PAGE>
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Common stock of the Company is traded on the New York Stock Exchange, the
Pacific Stock Exchange, the London Stock Exchange and the Frankfurt Stock
Exchange. The high, low and end-of-period annual and quarterly closing prices of
the Company's stock as reported on the New York Stock Exchange Composite
Transaction Reporting System are presented in the graphs. The number of holders
of record of the Company's common stock was 27,742 as of January 31, 1996.
[PRICE RANGE OF COMMON STOCK - ANNUAL (GRAPH)($)] SEE APPENDIX
[PRICE RANGE OF COMMON STOCK - QUARTERLY (GRAPH)($)] SEE APPENDIX
Common dividends declared per share totaled $4.60 in 1995, $4.00 in 1994 and
$2.25 in 1993. The dividend was increased in the first quarter of 1994 from
$0.75 per share to $1.00 per share, increased to $1.15 per share in January 1995
and increased again to $1.30 in January 1996. Quarterly dividends are considered
at the Board of Directors meeting the month following quarter end. Dividends
declared are payable the second month after quarter end. The Company, with the
approval of the Board of Directors, intends to continue its present policy of
paying quarterly cash dividends to stockholders. The level of future dividends
will be determined by the Board of Directors in light of the earnings and
financial condition of the Company.
In 1991, the FRB approved an application by Berkshire Hathaway, Inc.
(Berkshire) to purchase additional shares of the Company's common stock in the
open market, up to a total of 22%. Berkshire entered into a passivity agreement
with the Company, in which it agrees not to exercise any control over the
Company's management or policies. Accordingly, Berkshire granted its proxy to
the Company to vote Berkshire's shares in accordance with the recommendations of
the Board of Directors of the Company. Berkshire owned 14.5% and 13.3% of the
Company's common stock at December 31, 1995 and 1994, respectively.
34
<PAGE>
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
(in millions) Year ended December 31,
------------------------------------
1995 1994 1993
<S> <C> <C> <C>
INTEREST INCOME
Federal funds sold and securities purchased under resale agreements $ 4 $ 7 $ 23
Investment securities 599 740 672
Mortgage loans held for sale 76 - -
Loans 3,403 3,015 3,066
Other 3 3 -
------ ------ ------
Total interest income 4,085 3,765 3,761
------ ------ ------
INTEREST EXPENSE
Deposits 997 854 863
Federal funds purchased and securities sold under repurchase agreements 199 99 29
Commercial paper and other short-term borrowings 32 10 6
Senior and subordinated debt 203 192 206
------ ------ ------
Total interest expense 1,431 1,155 1,104
------ ------ ------
NET INTEREST INCOME 2,654 2,610 2,657
Provision for loan losses - 200 550
------ ------ ------
Net interest income after provision for loan losses 2,654 2,410 2,107
------ ------ ------
NONINTEREST INCOME
Service charges on deposit accounts 478 473 423
Fees and commissions 433 387 376
Trust and investment services income 241 203 190
Investment securities gains (losses) (17) 8 -
Sale of joint venture interest 163 - -
Other 26 129 104
------ ------ ------
Total noninterest income 1,324 1,200 1,093
------ ------ ------
NONINTEREST EXPENSE
Salaries 713 671 684
Incentive compensation 126 155 109
Employee benefits 187 201 213
Net occupancy 211 215 224
Equipment 193 174 148
Federal deposit insurance 52 101 114
Other 719 639 670
------ ------ ------
Total noninterest expense 2,201 2,156 2,162
------ ------ ------
INCOME BEFORE INCOME TAX EXPENSE 1,777 1,454 1,038
Income tax expense 745 613 426
------ ------ ------
NET INCOME $1,032 $ 841 $ 612
------ ------ ------
------ ------ ------
NET INCOME APPLICABLE TO COMMON STOCK $ 990 $ 798 $ 562
------ ------ ------
------ ------ ------
PER COMMON SHARE
Net income $20.37 $14.78 $10.10
------ ------ ------
------ ------ ------
Dividends declared $ 4.60 $ 4.00 $ 2.25
------ ------ ------
------ ------ ------
Average common shares outstanding 48.6 53.9 55.6
------ ------ ------
------ ------ ------
</TABLE>
The accompanying notes are an integral part of these statements.
35
<PAGE>
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(in millions) December 31,
----------------------
1995 1994
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,375 $ 2,974
Federal funds sold and securities purchased under resale agreements 177 260
Investment securities:
At fair value 8,920 2,989
At cost (estimated fair value $8,185) - 8,619
------- -------
Total investment securities 8,920 11,608
Loans 35,582 36,347
Allowance for loan losses 1,794 2,082
------- -------
Net loans 33,788 34,265
------- -------
Due from customers on acceptances 98 77
Accrued interest receivable 308 328
Premises and equipment, net 862 886
Goodwill 382 416
Other assets 2,406 2,560
------- -------
Total assets $50,316 $53,374
------- -------
------- -------
LIABILITIES
Noninterest-bearing deposits $10,391 $10,145
Interest-bearing deposits 28,591 32,187
------- -------
Total deposits 38,982 42,332
Federal funds purchased and securities sold under repurchase agreements 2,781 3,022
Commercial paper and other short-term borrowings 195 189
Acceptances outstanding 98 77
Accrued interest payable 85 60
Other liabilities 1,071 930
Senior debt 1,783 1,393
Subordinated debt 1,266 1,460
------- -------
Total liabilities 46,261 49,463
------- -------
STOCKHOLDERS' EQUITY
Preferred stock 489 489
Common stock-$5 par value, authorized 150,000,000 shares;
issued and outstanding 46,973,319 shares and 51,251,648 shares 235 256
Additional paid-in capital 1,135 871
Retained earnings 2,174 2,409
Cumulative foreign currency translation adjustments (4) (4)
Investment securities valuation allowance 26 (110)
------- -------
Total stockholders' equity 4,055 3,911
------- -------
Total liabilities and stockholders' equity $50,316 $53,374
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
36
<PAGE>
WELLS FARGO & COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in millions) Preferred Common Additional Retained Foreign Investment Total
stock stock paid-in earnings currency securities stock-
capital translation valuation holders'
adjustments allowance equity
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1992 $ 639 $276 $ 506 $ 2,392 $(4) $ - $3,809
------ ----- ------- -------- --- ------ -------
Net income-1993 612 612
Common stock issued under
employee benefit and
dividend reinvestment plans 3 50 53
Common stock repurchased (5) (5)
Preferred stock dividends (50) (50)
Common stock dividends (125) (125)
Cumulative unrealized net
gains, after applicable
taxes 21 21
------ ----- ------- -------- --- ------ -------
Net change - 3 45 437 - 21 506
------ ----- ------- -------- --- ------ -------
BALANCE DECEMBER 31, 1993 639 279 551 2,829 (4) 21 4,315
------ ----- ------- -------- --- ------ -------
Net income-1994 841 841
Common stock issued under
employee benefit and
dividend reinvestment plans 3 54 57
Preferred stock redeemed (150) (150)
Common stock repurchased (26) (734) (760)
Preferred stock dividends (43) (43)
Common stock dividends (218) (218)
Change in unrealized net
gains, after applicable
taxes (131) (131)
Transfer 1,000 (1,000) -
------ ----- ------- -------- --- ------ -------
Net change (150) (23) 320 (420) - (131) (404)
------ ----- ------- -------- --- ------ -------
BALANCE DECEMBER 31, 1994 489 256 871 2,409 (4) (110) 3,911
------ ----- ------- -------- --- ------ -------
Net income-1995 1,032 1,032
Common stock issued under
employee benefit and
dividend reinvestment plans 4 86 90
Common stock repurchased (25) (822) (847)
Preferred stock dividends (42) (42)
Common stock dividends (225) (225)
Change in unrealized net
losses, after applicable
taxes 136 136
Transfer 1,000 (1,000) -
------ ----- ------- -------- --- ------ -------
Net change - (21) 264 (235) - 136 144
------ ----- ------- -------- --- ------ -------
BALANCE DECEMBER 31, 1995 $ 489 $235 $1,135 $ 2,174 $(4) $ 26 $4,055
------ ----- ------- -------- --- ------ -------
------ ----- ------- -------- --- ------ -------
</TABLE>
The accompanying notes are an integral part of these statements.
37
<PAGE>
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(in millions) Year ended December 31,
-------------------------------------
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,032 $ 841 $ 612
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses - 200 550
Depreciation and amortization 272 246 266
Losses on disposition of operations 89 5 28
Gain on sale of joint venture interest (163) - -
Deferred income tax expense (benefit) 17 (32) (145)
Increase (decrease) in net deferred loan fees (6) (8) 2
Net (increase) decrease in accrued interest receivable 20 (31) 4
Writedown on mortgage loans held for sale 64 - -
Net increase (decrease) in accrued interest payable 25 (3) (25)
Net (increase) decrease in loans originated for sale (535) - 21
Other, net (139) (74) 220
------- ------- -------
Net cash provided by operating activities 676 1,144 1,533
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities:
At fair value:
Proceeds from sales 673 18 -
Proceeds from prepayments and maturities 229 670 -
Purchases (77) (724) -
At cost:
Proceeds from prepayments and maturities 2,191 3,866 2,492
Purchases (104) (2,598) (6,168)
Proceeds from sales of mortgage loans held for sale 4,273 - -
Net (increase) decrease in loans resulting from originations and collections (3,700) (3,338) 2,699
Proceeds from sales (including participations) of loans 770 134 264
Purchases (including participations) of loans (233) (375) (36)
Proceeds from sales of foreclosed assets 202 240 353
Net (increase) decrease in federal funds sold and securities purchased
under resale agreements 83 1,408 (485)
Other, net (172) (264) (4)
------- ------- -------
Net cash provided (used) by investing activities 4,135 (963) (885)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (3,350) 688 (600)
Net increase (decrease) in short-term borrowings (235) 1,944 (246)
Proceeds from issuance of senior debt 1,230 248 980
Repayment of senior debt (811) (1,101) (884)
Proceeds from issuance of subordinated debt - - 399
Repayment of subordinated debt (210) (526) (300)
Proceeds from issuance of common stock 90 57 53
Redemption of preferred stock - (150) -
Repurchase of common stock (847) (760) (5)
Payment of cash dividends on preferred stock (42) (34) (50)
Payment of cash dividends on common stock (225) (218) (125)
Other, net (10) 1 84
------- ------- -------
Net cash provided (used) by financing activities (4,410) 149 (694)
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM BANKS) 401 330 (46)
Cash and cash equivalents at beginning of year 2,974 2,644 2,690
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,375 $ 2,974 $ 2,644
------- ------- -------
------- ------- -------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,406 $ 1,158 $ 1,129
------- ------- -------
------- ------- -------
Income taxes $ 618 $ 680 $ 481
------- ------- -------
------- ------- -------
Noncash investing activities:
Transfers from investment securities at cost to investment securities at fair value $ 6,532 $ - $ 3,077
------- ------- -------
------- ------- -------
Transfers from foreclosed assets to nonaccrual loans $ - $ - $ 99
------- ------- -------
------- ------- -------
Transfers from loans to foreclosed assets $ 115 $ 174 $ 404
------- ------- -------
------- ------- -------
Transfers from loans to mortgage loans held for sale $ 4,440 $ - $ -
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
38
<PAGE>
WELLS FARGO & COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Wells Fargo & Company (Parent) is a bank holding company whose principal
subsidiary is Wells Fargo Bank, N.A. (Bank). The Bank provides a broad range of
financial products and services through electronic and traditional channels.
Besides servicing millions of California retail customers, the Bank provides a
full range of banking and financial services to commercial, corporate, real
estate and small business customers across the nation. The Company also has
other bank and nonbank subsidiaries that provide various banking related
services.
The accounting and reporting policies of Wells Fargo & Company and
Subsidiaries (Company) conform with generally accepted accounting principles
(GAAP) and prevailing practices within the banking industry. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and income and expenses
during the reporting period. Actual results could differ from those estimates.
Certain amounts in the financial statements for prior years have been
reclassified to conform with the current financial statement presentation. The
following is a description of the significant accounting policies of the
Company.
CONSOLIDATION
................................................................................
The consolidated financial statements of the Company include the accounts of the
Parent, the Bank and other bank and nonbank subsidiaries of the Parent.
Significant majority-owned subsidiaries are consolidated on a line-by-line
basis. Significant intercompany accounts and transactions are eliminated in
consolidation. Other subsidiaries and affiliates in which there is at least
20% ownership are generally accounted for by the equity method; those in
which there is less than 20% ownership are generally carried at cost.
Subsidiaries and affiliates that are accounted for by either the equity or
cost method are included in other assets.
SECURITIES
................................................................................
Securities are accounted for according to their purpose and holding period.
INVESTMENT SECURITIES
Securities generally acquired to meet long-term investment objectives, including
yield and liquidity management purposes, are classified as investment
securities. Realized gains and losses are recorded in noninterest income using
the identified certificate method.
SECURITIES AT FAIR VALUE Debt securities that may not be held until maturity
and marketable equity securities are considered available for sale and, as such,
are classified as securities carried at fair value, with unrealized gains and
losses, after applicable taxes, reported in a separate component of
stockholders' equity. The estimated fair value of investments is determined
based on current quotations, where available. Where current quotations are not
available, the estimated fair value is determined based primarily on the present
value of future cash flows, adjusted for the quality rating of the securities,
prepayment assumptions and other factors. Declines in the value of debt
securities and marketable equity securities that are considered other than
temporary are recorded in noninterest income as a loss on investment securities.
SECURITIES AT COST Debt securities acquired with the positive intent and ability
to hold to maturity are classified as securities carried at historical cost,
adjusted for amortization of premium and accretion of discount, where
appropriate. For certain debt securities (for example, Government National
Mortgage Association securities), the Company anticipates prepayments of
principal in the calculation of the effective yield. If it is probable that
the carrying value of any debt security will not be realized due to other-than-
temporary impairment, the estimated loss is recorded in noninterest income as a
loss on investment securities. If a decision is made to dispose of securities at
cost or should the Company become unable to hold securities until maturity, they
would be reclassified to securities at fair value.
39
<PAGE>
TRADING SECURITIES
Securities, if any, acquired for short-term appreciation or other trading
purposes are recorded in a trading portfolio and are carried at fair value, with
unrealized gains and losses recorded in noninterest income. There were no
trading securities in the past three years.
NONMARKETABLE EQUITY SECURITIES
Nonmarketable equity securities are acquired for various purposes, such as
troubled debt restructurings and as a regulatory requirement (for example,
Federal Reserve Bank stock). These securities are accounted for at cost and are
included in other assets as they do not fall within the definition of an
investment security since there are restrictions on their sale or liquidation.
The asset value is reduced when declines in value are considered to be other
than temporary and the estimated loss is recorded in noninterest income
as a loss from equity investments.
LOANS
................................................................................
Loans are reported at the principal amount outstanding, net of unearned income.
Unearned income, which includes deferred fees net of deferred direct incremental
loan origination costs, is amortized to interest income generally over the
contractual life of the loan using an interest method or the straight-line
method if it is not materially different.
Loans identified as held for sale are carried at the lower of cost or market
value. Nonrefundable fees, related direct loan origination costs and related
hedging gains or losses, if any, are deferred and recognized as a component of
the gain or loss on sale recorded in noninterest income.
NONACCRUAL LOANS Loans are placed on nonaccrual status upon becoming 90 days
past due as to interest or principal (unless both well-secured and in the
process of collection), when the full timely collection of interest or principal
becomes uncertain or when a portion of the principal balance has been charged
off. Real estate 1-4 family loans (both first liens and junior liens) are placed
on nonaccrual status within 150 days of becoming past due as to interest or
principal, regardless of security. Generally, consumer loans not secured by real
estate are only placed on nonaccrual status when a portion of the principal has
been charged off. Generally, such loans are entirely charged off within 180 days
of becoming past due.
When a loan is placed on nonaccrual status, the accrued and unpaid interest
receivable is reversed and the loan is accounted for on the cash or cost
recovery method thereafter, until qualifying for return to accrual status.
Generally, a loan may be returned to accrual status when all delinquent interest
and principal become current in accordance with the terms of the loan agreement
or when the loan is both well-secured and in the process of collection.
IMPAIRED LOANS Effective January 1, 1995, the Company adopted Statement of
Financial Accounting Standards No. 114 (FAS 114), Accounting by Creditors for
Impairment of a Loan, as amended by FAS 118 (collectively referred to as FAS
114). These Statements address the accounting treatment of certain impaired
loans and amend FASB Statement Nos. 5 and 15. However, these Statements do not
address the overall adequacy of the allowance for loan losses and do not apply
to large groups of smaller-balance homogeneous loans, such as most consumer,
real estate 1-4 family first mortgage and small business loans, unless they have
been involved in a restructuring. These Statements can only be applied
prospectively.
A loan within the scope of FAS 114 is considered impaired when, based on
current information and events, it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the loan
agreement, including scheduled interest payments. For a loan that has been
restructured, the contractual terms of the loan agreement refer to the
contractual terms specified by the original loan agreement, not the contractual
terms specified by the restructuring agreement.
For loans covered by this Statement, the Company makes an assessment for
impairment when and while such loans are on nonaccrual, or the loan has been
restructured. When a loan with unique risk characteristics has been identified
as being impaired, the amount of impairment will be measured by the Company
using discounted cash flows, except when it is determined that the sole
(remaining) source of repayment for the loan is the operation or liquidation of
the underlying collateral. In such cases, the current fair value of the
collateral, reduced by costs to sell, will be used in place of discounted cash
flows. Additionally, some impaired loans with commitments of less than $1
million are aggregated for the purpose of measuring impairment using historical
loss factors as a means of measurement.
If the measurement of the impaired loan is less than the recorded investment
in the loan (including accrued interest, net deferred loan fees or costs and
unamortized premium or discount), an impairment is recognized by creating or
adjusting an existing allocation of the allowance for loan losses. FAS 114 does
not change the timing of charge-offs of loans to reflect the amount ultimately
expected to be collected.
40
<PAGE>
RESTRUCTURED LOANS In cases where a borrower experiences financial difficulties
and the Company makes certain concessionary modifications to contractual terms,
the loan is classified as a restructured (accruing) loan. Subsequent to the
adoption of FAS 114, loans restructured at a rate equal to or greater than that
of a new loan with comparable risk at the time the contract is modified may be
excluded from the impairment assessment and may cease to be considered impaired
loans in the calendar years subsequent to the restructuring if they are not
impaired based on the modified terms.
Generally, a nonaccrual loan that is restructured remains on nonaccrual for a
period of six months to demonstrate that the borrower can meet the restructured
terms. However, performance prior to the restructuring, or significant events
that coincide with the restructuring, are included in assessing whether the
borrower can meet the new terms and may result in the loan being returned to
accrual at the time of restructuring or after a shorter performance period. If
the borrower's ability to meet the revised payment schedule is uncertain, the
loan remains classified as a nonaccrual loan.
ALLOWANCE FOR LOAN LOSSES The Company's determination of the level of the
allowance for loan losses rests upon various judgments and assumptions,
including general economic conditions, loan portfolio composition, prior loan
loss experience, evaluation of credit risk related to certain individual
borrowers and the Company's ongoing examination process and that of its
regulators. The Company considers the allowance for loan losses adequate to
cover losses inherent in loans, loan commitments and standby letters of credit.
PREMISES AND EQUIPMENT
................................................................................
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Capital leases are included in premises and equipment, at the
capitalized amount less accumulated amortization.
Depreciation and amortization are computed primarily using the straight-line
method. Estimated useful lives range up to 40 years for buildings, 2 to 10 years
for furniture and equipment, and up to the lease term for leasehold
improvements. Capitalized leased assets are amortized on a straight-line basis
over the lives of the respective leases, which generally range from 20 to 35
years.
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
................................................................................
Goodwill, representing the excess of purchase price over the fair value of net
assets acquired, results from acquisitions made by the Company. Most of the
Company's goodwill is being amortized using the straight-line method over 20
years. The remaining period of amortization, on a weighted average basis,
approximated 11 years at December 31, 1995.
Identifiable intangible assets that are included in other assets are
generally amortized using an accelerated method over an original life of 5 to 15
years. Approximately 55% of the December 31, 1995 remaining balance will be
amortized in 3 years.
INCOME TAXES
................................................................................
The Company files a consolidated federal income tax return. Consolidated or
combined state tax returns are filed in certain states, including California.
Income taxes are generally allocated to individual subsidiaries as if each had
filed a separate return. Payments are made to the Parent by those subsidiaries
with net tax liabilities on a separate return basis. Subsidiaries with net tax
losses and excess tax credits receive payment for these benefits from the
Parent.
Deferred income tax assets and liabilities are determined using the liability
(or balance sheet) method. Under this method, the net deferred tax asset or
liability is determined based on the tax effects of the differences between the
book and tax bases of the various balance sheet assets and liabilities and gives
current recognition to changes in tax rates and laws.
DERIVATIVE FINANCIAL INSTRUMENTS
................................................................................
INTEREST RATE DERIVATIVES The Company uses interest rate derivative financial
instruments (futures, caps, floors and swaps) primarily to hedge mismatches in
the rate maturity of loans and their funding sources. Gains and losses on
interest rate futures are deferred and amortized as a component of the interest
income or expense reported on the asset or liability hedged. Amounts payable or
receivable for swaps, caps and floors are accrued with the passage of time, the
effect of which is included in the interest income or expense reported on the
asset or liability hedged; fees on these financial contracts are amortized over
their contractual life as a component of the interest reported on the asset or
liability hedged. If a hedged asset or liability settles before maturity of the
interest rate derivative financial instruments used as a hedge, the derivatives
are closed out or settled, and previously unrecognized hedge results and the net
41
<PAGE>
settlement upon close-out or termination are accounted for as part of the gains
and losses on the asset or liability hedged. If interest rate derivative
financial instruments used in an effective hedge are closed out or terminated
before the hedged item, previously unrecognized hedge results and the net
settlement upon close-out or termination are deferred and amortized over the
life of the asset or liability hedged. Cash flows resulting from interest rate
derivative financial instruments that are accounted for as hedges of assets and
liabilities are classified in the same category as the cash flows from the items
being hedged.
Interest rate derivative financial instruments entered into as an
accommodation to customers and interest rate derivative financial instruments
used to offset the interest rate risk of those contracts are carried at fair
value with unrealized gains and losses recorded in noninterest income. Cash
flows resulting from interest rate derivative financial instruments carried at
fair value are classified as operating cash flows.
Credit risk related to interest rate derivative financial instruments is
considered and, if material, provided for separately from the allowance for loan
losses.
FOREIGN EXCHANGE DERIVATIVES The Company enters into foreign exchange derivative
financial instruments (forward and spot contracts and options) primarily as an
accommodation to customers and offsets the related foreign exchange risk with
other foreign exchange derivative financial instruments. All contracts are
carried at fair value with unrealized gains and losses recorded in noninterest
income. Cash flows resulting from foreign exchange derivative financial
instruments are classified as operating cash flows. Credit risk related to
foreign exchange derivative financial instruments is considered and, if
material, provided for separately from the allowance for loan losses.
NET INCOME PER COMMON SHARE
................................................................................
Net income per common share is computed by dividing net income (after deducting
dividends on preferred stock) by the average number of common shares outstanding
during the year. The impact of common stock equivalents, such as stock options,
and other potentially dilutive securities is not material; therefore, they are
not included in the computation.
2 CASH, LOAN AND DIVIDEND RESTRICTIONS
- --------------------------------------------------------------------------------
Federal Reserve Board regulations require reserve balances on deposits to be
maintained by the Bank with the Federal Reserve Bank of San Francisco. The
average required reserve balance was $1.2 billion in 1995 and 1994.
The Bank is subject to certain restrictions under the Federal Reserve Act,
including restrictions on extensions of credit to its affiliates. In particular,
the Bank is prohibited from lending to the Parent and its nonbank subsidiaries
unless the loans are secured by specified collateral. Such secured loans and
other regulated transactions made by the Bank (including its subsidiaries) are
limited in amount as to each of its affiliates, including the Parent, to 10% of
the Bank's capital stock and surplus (as defined, which for this purpose
includes the allowance for loan losses on an after-tax basis) and, in the
aggregate to all of its affiliates, to 20% of the Bank's capital stock and
surplus. The capital stock and surplus at December 31, 1995 was $5 billion.
Dividends payable by the Bank to the Parent without
the express approval of the Office of the Comptroller of the Currency (OCC) are
limited to the Bank's retained net profits for the preceding two calendar years
plus retained net profits up to the date of any dividend declaration in the
current calendar year. Retained net profits are defined by the OCC as net
income, less dividends declared during the period, both of which are based on
regulatory accounting principles. Based on this definition, the Bank declared
dividends in 1995 and 1994 of $184 million in excess of its net income of $2,437
million for those years. Therefore, before it can declare dividends in 1996
without the approval of the OCC, the Bank must have net income of $184 million
plus an amount equal to or greater than the dividends declared in 1996. With the
approval of the OCC, the Bank declared a first quarter 1996 dividend of $310
million. Dividends declared by the Bank in 1995, 1994 and 1993 were $1,620
million (including a $489 million deemed dividend), $1,001 million and none,
respectively.
The Company's other banking subsidiaries are subject to the same restrictions
as the Bank. However, any such restrictions have not had a material impact on
the banking subsidiaries or the Company.
42
<PAGE>
3 INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
The following table provides the major components of investment securities at
fair value and at cost:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(in millions) December 31,
---------------------------------------------------------------------------------------------------------
1995 1994 1993
----------------------------------------- ---------------------------------------- -----------------
COST ESTIMATED ESTIMATED ESTIMATED Cost Estimated Estimated Estimated Cost Estimated
UNREALIZED UNREALIZED FAIR unrealized unrealized fair fair
GROSS GROSS VALUE gross gross value value
GAINS LOSSES gains losses
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
SECURITIES AT
FAIR VALUE:
U.S. Treasury securities $1,347 $13 $ 3 $1,357 $ 372 $ - $ 10 $ 362 $ - $ -
Securities of U.S.
government agencies
and corporations (1) 5,218 35 30 5,223 1,476 - 96 1,380 1,747 1,749
Private collateralized
mortgage obligations (2) 2,121 9 8 2,122 1,290 1 113 1,178 1,340 1,334
Other 169 12 - 181 24 14 - 38 31 48
------ --- --- ------ ------ --- ---- ------ ------ ------
Total debt securities 8,855 69 41 8,883 3,162 15 219 2,958 3,118 3,131
Marketable equity
securities 18 19 - 37 16 17 2 31 17 40
------ --- --- ------ ------ --- ---- ------ ------ ------
Total $8,873 $88 $41 $8,920 $3,178 $32 $221 $2,989 $3,135 $3,171
------ --- --- ------ ------ --- ---- ------ ------ ------
------ --- --- ------ ------ --- ---- ------ ------ ------
HELD-TO-MATURITY
SECURITIES AT COST:
U.S. Treasury securities $ - $ - $ - $ - $1,772 $ - $ 52 $1,720 $2,365 $2,383
Securities of U.S.
government agencies
and corporations (1) - - - - 5,394 - 293 5,101 6,570 6,644
Private collateralized
mortgage obligations (2) - - - - 1,306 - 85 1,221 815 813
Other - - - - 147 - 4 143 137 138
------ --- --- ------ ------ --- ---- ------ ------ ------
Total $ - $ - $ - $ - $8,619 $ - $434 $8,185 $9,887 $9,978
------ --- --- ------ ------ --- ---- ------ ------ ------
------ --- --- ------ ------ --- ---- ------ ------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) All securities of U.S. government agencies and corporations are mortgage-
backed securities.
(2) Substantially all private collateralized mortgage obligations are AAA-rated
bonds collateralized by 1-4 family residential first mortgages.
In November 1995, the Financial Accounting Standards Board (FASB) permitted a
one-time opportunity for companies to reassess by December 31, 1995 their
classification of securities under Statement of Financial Accounting Standards
No. 115 (FAS 115), Accounting for Certain Investments in Debt and Equity
Securities. On November 30, 1995, the Company reclassified all of its held-to-
maturity securities at cost portfolio of $6.5 billion to the available-for-sale
securities at fair value portfolio. A related unrealized net after-tax loss of
$6 million was recorded in stockholders' equity.
Proceeds from the sales of debt securities in the available-for-sale
portfolio totaled $674 million in 1995, resulting in a $13 million loss.
These securities were sold for asset/ liability management purposes.
Additionally, a loss of $4 million was realized resulting from a
write-down of certain equity securities due to other-than-temporary
impairment.
Proceeds from the sales of debt securities in the available-for-sale
portfolio totaled $13 million in 1994, resulting in a $5 million gain. A loss of
$1 million was realized in 1994 resulting from a write-down due to other-than-
temporary impairment in the fair value of certain debt securities. Proceeds from
the sales of marketable equity securities in the available-for-sale portfolio
totaled $5 million in 1994, resulting in a $4 million gain. Proceeds from the
sales of debt securities in the available-for-sale portfolio totaled $284
thousand in 1993, resulting in a $10 thousand gain.
43
<PAGE>
The following table provides the remaining contractual principal maturities
and yields (taxable-equivalent basis) of debt securities within the investment
portfolio. The remaining contractual principal maturities for mortgage-backed
securities were allocated assuming no prepayments. Expected remaining maturities
will differ from contractual maturities because borrowers may have the right to
prepay obligations with or without penalties. (See the Investment Securities
section of the Financial Review for expected remaining maturities and yields.)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
(in millions) December 31, 1995
------------------------------------------------------------------------------------------------------
Total Weighted Weighted Remaining contractual principal maturity
amount average average -----------------------------------------------------------------------
yield remaining Within one year After one year After five years After ten years
maturing (in through five years through ten years
yrs.-mos.) --------------- ------------------ ----------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
SECURITIES (1):
U.S. Treasury securities $1,347 5.51% 1-4 $ 549 5.18% $ 798 5.74% $ - -% $ - -%
Securities of U.S.
government agencies
and corporations 5,218 6.03 5-1 356 5.86 2,617 5.93 1,824 6.07 421 6.66
Private collateralized
mortgage obligations 2,121 6.26 7-4 115 5.93 718 6.10 703 6.25 585 6.53
Other 169 8.58 2-5 50 5.99 115 9.81 2 5.48 2 6.37
------ ------ ------ ------ ------
TOTAL COST OF
DEBT SECURITIES $8,855 6.06% 5-0 $1,070 5.52% $4,248 6.03% $2,529 6.12% $1,008 6.58%
------ ---- --- ------ ---- ------ ---- ------ ---- ------ ----
------ ---- --- ------ ---- ------ ---- ------ ---- ------ ----
ESTIMATED FAIR VALUE $8,883 $1,070 $4,272 $2,529 $1,012
------ ------ ------ ------ ------
------ ------ ------ ------ ------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The weighted average yield is computed using the amortized cost of
available-for-sale investment securities carried at fair value.
Dividend income of none, none and $3 million in 1995, 1994 and 1993,
respectively, is included in interest income on investment securities in the
Consolidated Statement of Income. Substantially all income on investment
securities is taxable.
The cost of investment securities pledged to secure trust and public deposits
and for other purposes as required or permitted by law was $4.8 billion, $3.1
billion and $2.2 billion at December 31, 1995, 1994 and 1993, respectively.
4 LOANS AND ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
A summary of the major categories of loans outstanding and related unfunded
commitments to extend credit is shown in the table on the right. At December 31,
1995 and 1994, the commercial loan category and related commitments did not have
an industry concentration that exceeded 10% of total loans and commitments.
Tables 9 and 10 in the Loan Portfolio section of the Financial Review summarize
real estate mortgage (excluding 1-4 family first mortgage loans) and real estate
construction loans by California region and other states by project type.
Substantially all of the Company's real estate 1-4 family first mortgages and
most of the consumer loans are with customers located in California.
In the course of evaluating the credit risk presented by a customer and the
pricing that will adequately compensate the Company for assuming that risk,
management determines a requisite amount of collateral support. The type of
collateral held varies, but may include accounts receivable, inventory, land,
buildings, equipment, income-producing commercial properties and residential
real estate. The Company has the same collateral policy for loans whether they
are funded immediately or on a delayed basis (commitment).
A commitment to extend credit is a legally binding agreement to lend funds to
a customer and is usually for a specified interest rate and purpose. These
commitments have fixed
44
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(in millions) December 31,
------------------------------------------------------
1995 1994
------------------------ ------------------------
OUTSTANDING COMMITMENTS Outstanding Commitments
TO EXTEND to extend
CREDIT credit
<S> <C> <C> <C> <C>
Commercial (1) $ 9,750 $ 8,368 $ 8,162 $ 6,551
Real estate 1-4 family first mortgage (2) 4,448 723 9,050 651
Other real estate mortgage 8,263 563 8,079 522
Real estate construction 1,366 859 1,013 731
Consumer:
Real estate 1-4 family junior lien mortgage 3,358 3,053 3,332 2,952
Credit card 4,001 8,644 3,125 7,780
Other revolving credit and monthly payment 2,576 2,035 2,229 1,752
------- ------- ------- -------
Total consumer 9,935 13,732 8,686 12,484
Lease financing 1,789 - 1,330 -
Foreign 31 - 27 -
------- ------- ------- -------
Total loans (3) $35,582 $24,245 $36,347 $20,939
------- ------- ------- -------
------- ------- ------- -------
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Outstanding balances include loans to real estate developers of $700 million
and $525 million at December 31, 1995 and 1994, respectively.
(2) Substantially all the commitments to extend credit relate to those equity
lines that are effectively first mortgages.
(3) Outstanding loan balances at December 31, 1995 and 1994 are net of unearned
income, including net deferred loan fees, of $463 million and $361 million,
respectively.
expiration dates and generally require a fee. The extension of a commitment
gives rise to credit risk. The actual liquidity needs or the credit risk that
the Company will experience will be lower than the contractual amount of
commitments to extend credit shown in the table above because a significant
portion of these commitments is expected to expire without being drawn upon.
Certain commitments are subject to a loan agreement containing covenants
regarding the financial performance of the customer that must be met before the
Company is required to fund the commitment. The Company uses the same credit
policies in making commitments to extend credit as it does in making loans.
In addition, the Company manages the potential credit risk in commitments to
extend credit by limiting the total amount of arrangements, both by individual
customer and in the aggregate; by monitoring the size and maturity structure of
these portfolios; and by applying the same credit standards maintained for all
of its credit activities. The credit risk associated with these commitments is
considered in management's determination of the allowance for loan losses.
Standby letters of credit totaled $921 million and $836 million at December
31, 1995 and 1994, respectively. Standby letters of credit are issued on behalf
of customers in connection with contracts between the customers and third
parties. Under a standby letter of credit, the Company assures that the third
party will receive specified funds if a customer fails to meet his contractual
obligation. The liquidity risk to the Company arises from its obligation to make
payment in the event of a customer's contractual default. The credit risk
involved in issuing letters of credit and the Company's management of that
credit risk is the same as for loans and is considered in management's
determination of the allowance for loan losses. At December 31, 1995 and 1994,
standby letters of credit included approximately $159 million and $123 million,
respectively, of participations purchased, net of approximately $90 million and
$81 million, respectively, of participations sold. Approximately 57% of the
Company's year-end 1995 standby letters of credit had maturities of one year or
less and substantially all had maturities of seven years or less.
Included in standby letters of credit are those that back financial
instruments (financial guarantees). The Company had issued or purchased
participations in financial guarantees of approximately $450 million and $427
million at December 31, 1995 and 1994, respectively. The Company also had
commitments for commercial and similar letters of credit
of $209 million and $125 million at December 31, 1995 and 1994, respectively.
Substantially all fees received from the issuance of financial guarantees are
deferred and amortized on a straight-line basis over the term of the guarantee.
Losses on standby letters of credit and other similar letters of credit have
been immaterial.
The Company considers the allowance for loan losses of $1,794 million
adequate to cover losses inherent in loans, loan commitments and standby letters
of credit at December 31, 1995. However, no assurance can be given that the
Company will not, in any particular period, sustain loan losses that are sizable
in relation to the amount reserved, or that subsequent evaluations of the loan
portfolio, in light of the factors then prevailing, including economic
conditions
45
<PAGE>
and the Company's ongoing examination process and that of its regulators, will
not require significant increases in the allowance for loan losses.
Loans held for sale are included in their respective loan categories and
recorded at the lower of cost or market. At December 31, 1995 and 1994, loans
held for sale were $640 million and $324 million, respectively.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
(in millions) Year ended December 31,
--------------------------
1995 1994 1993
<S> <C> <C> <C>
BALANCE, BEGINNING OF YEAR $2,082 $2,122 $2,067
Provision for loan losses - 200 550
Loan charge-offs:
Commercial (1) (55) (54) (110)
Real estate 1-4 family
first mortgage (13) (18) (25)
Other real estate mortgage (52) (66) (197)
Real estate construction (10) (19) (68)
Consumer:
Real estate 1-4 family
junior lien mortgage (16) (24) (28)
Credit card (208) (138) (177)
Other revolving credit and
monthly payment (53) (36) (41)
------ ------ ------
Total consumer (277) (198) (246)
Lease financing (15) (14) (18)
------ ------ ------
Total loan charge-offs (422) (369) (664)
------ ------ ------
Loan recoveries:
Commercial (2) 38 37 71
Real estate 1-4 family
first mortgage 3 6 2
Other real estate mortgage 53 22 47
Real estate construction 1 15 4
Consumer:
Real estate 1-4 family
junior lien mortgage 3 4 3
Credit card 13 18 21
Other revolving credit and
monthly payment 12 11 12
------ ------ ------
Total consumer 28 33 36
Lease financing 11 16 9
------ ------ ------
Total loan recoveries 134 129 169
------ ------ ------
Total net loan
charge-offs (288) (240) (495)
------ ------ ------
BALANCE, END OF YEAR $1,794 $2,082 $2,122
------ ------ ------
------ ------ ------
Total net loan charge-offs as
a percentage of average
total loans .83% .70% 1.44%
------ ------ ------
------ ------ ------
Allowance as a percentage
of total loans 5.04% 5.73% 6.41%
------ ------ ------
------ ------ ------
- -----------------------------------------------------------------
</TABLE>
(1) Includes charge-offs of loans to real estate developers of none, $14 million
and $21 million in 1995, 1994 and 1993, respectively.
(2) Includes recoveries from real estate developers of $3 million, $2 million
and $3 million in 1995, 1994 and 1993, respectively.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114 (FAS 114), Accounting by Creditors for Impairment
of a Loan, as amended by FAS 118 (collectively referred to as FAS 114). FAS 114
addresses the accounting treatment of certain impaired loans and amends FASB
Statement Nos. 5 and 15. However, these statements do not address the overall
adequacy of the allowance for loan losses and do not apply to large groups of
smaller-balance homogeneous loans unless they have been involved in a
restructuring. These statements can only be applied prospectively.
The table below shows the recorded investment in impaired loans by loan
category at December 31, 1995:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
(in millions) December 31, 1995
<S> <C>
Commercial $ 77
Real estate 1-4 family first mortgage 2
Other real estate mortgage (1) 330
Real estate construction 46
Other 3
----
Total (2) $458
----
----
- ---------------------------------------------------------
</TABLE>
(1) Includes $50 million of accruing loans purchased at a steep discount whose
contractual terms were modified after acquisition. The modified terms did
not affect the book balance nor the yields expected at the date of purchase.
(2) Includes $22 million of impaired loans with a related FAS 114 allowance of
$3 million at December 31, 1995.
Of the recorded investment in impaired loans of $458 million at December 31,
1995, the Company measured the impairment on $374 million using the collateral
value method. Generally under this method, a direct charge-off
is taken to reduce the recorded investment to the value of the underlying
collateral. For $66 million of impaired loans, impairment was measured
using the discounted cash flow method. The remaining $18 million of
impaired loans were aggregated for the purpose of measuring impairment using
historical loss factors as the means of measurement.
The average recorded investment in impaired loans during 1995 was $472
million. Total interest income recognized on impaired loans during 1995 was $15
million, substantially all of which was recorded using the cash method.
The Company uses either the cash or cost recovery method to record cash
receipts on impaired loans that are on nonaccrual. Under the cash method,
contractual interest is credited to interest income when received. This method
is used when the ultimate collectibility of the total principal is not in doubt.
Under the cost recovery method, all payments received are applied to principal.
This method is used when the ultimate collectibility of the total principal is
in doubt. Loans on the cost recovery method may be changed to the cash method
when the application of the cash payments has reduced the principal balance to a
level where collection of the remaining recorded investment is no longer in
doubt.
46
<PAGE>
5 PREMISES, EQUIPMENT,
LEASE COMMITMENTS AND OTHER ASSETS
- --------------------------------------------------------------------------------
The following table presents comparative data for premises and equipment:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
(in millions) December 31,
-------------------
1995 1994
<S> <C> <C>
Land $ 96 $ 144
Buildings 520 531
Furniture and equipment 730 608
Leasehold improvements 270 258
Premises leased under capital leases 66 68
------ ------
Total 1,682 1,609
Less accumulated depreciation
and amortization 820 723
------ ------
Net book value $ 862 $ 886
------ ------
------ ------
- ------------------------------------------------------------------
</TABLE>
Depreciation and amortization expense was $154 million, $142 million and $140
million in 1995, 1994 and 1993, respectively. Losses on disposition of premises
and equipment, recorded in noninterest income, were $31 million, $12 million and
$19 million in 1995, 1994 and 1993, respectively. In addition, also recorded in
noninterest income were losses from disposition of operations primarily related
to the disposition of premises associated with scheduled branch closures of $89
million, $5 million and $28 million in 1995, 1994 and 1993, respectively.
The Company is obligated under a number of noncancelable operating leases for
premises (including vacant premises) and equipment with terms up to 25 years,
many of which provide for periodic adjustment of rentals based on changes in
various economic indicators. The following table shows future minimum payments
under noncancelable operating leases and capital leases with terms in excess of
one year as of December 31, 1995:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(in millions) Operating leases Capital leases
<S> <C> <C>
Year ended December 31,
1996 $145 $ 10
1997 134 9
1998 117 9
1999 104 9
2000 82 8
Thereafter 381 72
---- ----
Total minimum lease payments $963 117
----
----
Executory costs (4)
Amounts representing interest (61)
----
Present value of net minimum lease payments $ 52
----
----
- ----------------------------------------------------------------------
</TABLE>
Total future minimum payments to be received under noncancelable operating
subleases at December 31, 1995 were approximately $205 million; these payments
are not reflected in the preceding table.
Rental expense, net of rental income, for all operating leases was $111
million, $97 million and $99 million in 1995, 1994 and 1993, respectively.
The components of other assets at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
(in millions) December 31,
-------------------
1995 1994
<S> <C> <C>
Net deferred tax asset (1) $ 854 $ 971
Nonmarketable equity investments (2) 428 407
Certain identifiable intangible assets 386 388
Foreclosed assets 186 272
Other 552 522
------ ------
Total other assets $2,406 $2,560
------ ------
------ ------
- ------------------------------------------------------------------
</TABLE>
(1) See Note 10 to the Financial Statements.
(2) Commitments related to nonmarketable equity investments totaled
$159 million and $174 million at December 31, 1995 and 1994, respectively.
Income from nonmarketable equity investments accounted for using the cost
method was $58 million, $31 million and $42 million in 1995, 1994 and 1993,
respectively.
The largest identifiable intangible asset was core deposit intangibles of
$166 million and $208 million at December 31, 1995 and 1994, respectively.
Amortization expense for core deposit intangibles was $42 million, $49 million
and $61 million in 1995, 1994 and 1993, respectively. Total amortization expense
for certain identifiable intangible assets recorded in noninterest expense was
$54 million, $62 million and $77 million in 1995, 1994 and 1993, respectively.
Foreclosed assets consist of assets (substantially real estate) acquired in
satisfaction of troubled debt and are carried at the lower of fair value (less
estimated costs to sell) or cost. Foreclosed assets expense, including
disposition gains and losses, was $1 million, none and $60 million in 1995, 1994
and 1993, respectively.
47
<PAGE>
On October 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 122 (FAS 122), Accounting for Mortgage Servicing Rights. This
Statement amends FAS 65, Accounting for Certain Mortgage Banking Activities, to
require that, for mortgage loans originated for sale with servicing rights
retained, the right to service those loans be recognized as a separate asset,
similar to purchased mortgage servicing rights. This Statement also requires
that capitalized mortgage servicing rights be assessed for impairment based on
the fair value of those rights. Mortgage servicing rights purchased during 1995,
1994 and 1993 were $95 million, $89 million and none, respectively. No
originated mortgage servicing rights were capitalized in 1995. Purchased
mortgage servicing rights are amortized in proportion to and over the period of
estimated net servicing income. Amortization expense, recorded in noninterest
income, totaled $39 million, $8 million and $16 million for 1995, 1994 and 1993,
respectively. Purchased mortgage servicing rights included in certain
identifiable intangible assets amounted to $152 million, $96 million
and $15 million at December 31, 1995, 1994 and 1993, respectively.
For purposes of evaluating and measuring impairment for purchased mortgage
servicing rights, the Company stratified these rights based on the type and
interest rate of the underlying loans. Impairment is measured as the amount by
which the purchased mortgage servicing rights for a stratum exceed their fair
value. Fair value of the purchased mortgage servicing rights is determined based
on valuation techniques utilizing discounted cash flows incorporating
assumptions that market participants would use and totaled $153 million at
December 31, 1995. The valuations include the results of hedges used to reduce
the Company's exposure to movements in the fair market value of the purchased
mortgage servicing rights. Impairment, net of hedge results, is recognized
through a valuation allowance for each individual stratum. At December 31, 1995,
the balance of the valuation allowances totaled $352 thousand. Certain mortgage
servicing rights owned by the Company have not been capitalized as they were
acquired by origination prior to the adoption of FAS 122. These rights were not
included in the valuation.
The Company adopted on December 31, 1995 Statement of Financial Accounting
Standards No. 121 (FAS 121), Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of. This Statement requires that long-
lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Additionally, FAS 121 requires that long-lived assets to be disposed of be
reported at the lower of their carrying amount or fair value, less costs to
sell. The impact of adopting FAS 121 was immaterial. Independent of FAS 121, the
Company periodically reviews its space requirements. During the course of 1995,
such reviews resulted in two properties being designated as held for sale.
Regardless of FAS 121, assets designated as held for sale are carried at the
lower of cost or fair value, less costs to sell. Accordingly, the Company
recorded a $21 million write-down in 1995 in noninterest income related to these
properties. These properties had a carrying value of $15 million at December 31,
1995.
48
<PAGE>
6 SENIOR AND SUBORDINATED DEBT
- --------------------------------------------------------------------------------
The following is a summary of senior and subordinated debt (reflecting
unamortized debt discounts and premiums, where applicable) owed by the Parent
and its subsidiaries:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(in millions) Maturity Interest December 31,
date rate ----------------
1995 1994
<S> <C> <C> <C> <C>
SENIOR
Parent: Floating-Rate Medium-Term Notes 1995-99 Various $1,478 $ 958
Notes (1) 1996 8.2% 200 200
Medium-Term Notes (1) 1995-96 4.7-9.1% 25 126
Notes payable by subsidiaries 28 54
Obligations of subsidiaries under capital leases (Note 5) 52 55
------ ------
Total senior debt 1,783 1,393
------ ------
SUBORDINATED
Parent: German Mark Floating-Rate Notes (DM 300 face amount) (2) 1995 Various - 194
Floating-Rate Notes (3)(4) 1997 Various 101 101
Floating-Rate Notes (3)(5)(6) 1997 Various 100 100
Floating-Rate Capital Notes (3)(5)(7) 1998 Various 200 200
Floating-Rate Notes (3)(5) 2000 Various 118 118
Notes 2002 8.75% 199 199
Notes 2002 8.375% 149 149
Notes 2003 6.875% 150 150
Notes 2003 6.125% 249 249
------ ------
Total subordinated debt 1,266 1,460
------ ------
Total senior and subordinated debt $3,049 $2,853
------ ------
------ ------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company entered into interest rate swap agreements for substantially all
of these Notes, whereby the Company receives fixed-rate interest payments
approximately equal to interest on the Notes and makes interest payments
based on an average three-month LIBOR rate.
(2) These Notes were subject to a maximum interest rate of 8%. The Company sold
this interest rate cap under an agreement whereby it received fixed payments
in German marks and made payments based on the amount by which a floating
rate exceeded 8%. The Company also entered into a swap agreement whereby the
Company received German marks approximately equal to principal and interest
on the Notes and made payments in U.S. dollars. The transaction amount at
the date of issue and swap was $118 million. The difference of $76 million
at December 31, 1994 was due to the foreign currency transaction adjustment.
(3) Redeemable in whole or in part, at par.
(4) Subject to a maximum interest rate of 13% due to the purchase of an interest
rate cap.
(5) May be redeemed in whole, at par, at any time in the event withholding taxes
are imposed by the United States.
(6) Subject to a maximum interest rate of 13%.
(7) Mandatory Equity Notes.
At December 31, 1995, the principal payments, including sinking fund payments,
on senior and subordinated debt are due as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------
(in millions) Parent Company
<S> <C> <C>
1996 $1,153 $1,158
1997 701 705
1998 200 205
1999 50 55
2000 118 122
Thereafter 747 804
------ ------
Total $2,969 $3,049
------ ------
------ ------
- --------------------------------------------------------
</TABLE>
49
<PAGE>
The interest rates on floating-rate notes are determined periodically by
formulas based on certain money market rates, subject, on certain notes, to
minimum or maximum interest rates.
The Company's mandatory convertible debt, which is identified by note (7) to
the table on the preceding page, qualifies as Tier 2 capital but is subject to
discounting and note fund restrictions under the risk-based capital rules. The
terms of the $200 million of the Mandatory Equity Notes, due in 1998, require
the Company to sell or exchange with the noteholder the Company's common stock,
perpetual preferred stock or other capital securities at maturity or earlier
redemption of the notes. At December 31, 1995, $180 million of stockholders'
equity had been designated for the retirement or redemption of those notes.
Certain of the agreements under which debt has been issued contain provisions
that may limit the merger or sale of the Bank and the issuance of its capital
stock or convertible securities. The Company was in compliance with the
provisions of the borrowing agreements at December 31, 1995.
7 PREFERRED STOCK
- --------------------------------------------------------------------------------
Of the 25,000,000 shares authorized, there were 2,327,500 shares of preferred
stock issued and outstanding at December 31, 1995 and 1994. All preferred shares
rank senior to common shares both as to dividends and liquidation preference but
have no general voting rights.
The following is a summary of Preferred Stock (Adjustable and Fixed):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Shares issued Carrying amount Adjustable Dividends declared
and outstanding (in millions) dividend rate (in millions)
-------------------- ------------------ ---------------- ------------------------
December 31, December 31, Minimum Maximum Year ended December 31,
-------------------- ------------------ ------------------------
1995 1994 1995 1994 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable-Rate Cumulative, Series A - - $ - $ - 6.0% 12.0% $ - $ 2 $ 9
(Liquidation preference $50) (1)
Adjustable-Rate Cumulative, Series B 1,500,000 1,500,000 75 75 5.5 10.5 5 4 4
(Liquidation preference $50)
9% Cumulative, Series C 477,500 477,500 238 238 - - 21 21 21
(Liquidation preference $500)
8 7/8% Cumulative, Series D 350,000 350,000 176 176 - - 16 16 16
(Liquidation preference $500)
--------- --------- ---- ---- --- --- ---
Total 2,327,500 2,327,500 $489 $489 $42 $43 $50
--------- --------- ---- ---- --- --- ---
--------- --------- ---- ---- --- --- ---
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In March 1994, the Company redeemed all $150 million of its Series A
preferred stock.
ADJUSTABLE-RATE CUMULATIVE
PREFERRED STOCK, SERIES A
In March 1994, the Company redeemed all $150 million of its Series A preferred
stock at a price of $50 per share plus accrued and unpaid dividends. Dividends
were cumulative and payable on the last day of each calendar quarter. For each
quarterly period, the dividend rate was 2.75% less than the highest of the
three-month Treasury bill discount rate, 10-year constant maturity Treasury
security yield or 20-year constant maturity Treasury bond yield, but limited to
a minimum of 6% and a maximum of 12% per year. The average dividend rate was
6.1% (annualized) and 6.0% in 1994 and 1993, respectively.
50
<PAGE>
ADJUSTABLE-RATE CUMULATIVE
PREFERRED STOCK, SERIES B
These shares are redeemable at the option of the Company through May 14, 1996 at
a price of $51.50 per share and, thereafter, at $50 per share plus accrued and
unpaid dividends. Dividends are cumulative and payable quarterly on the 15th of
February, May, August and November. For each quarterly period, the dividend rate
is 76% of the highest of the three-month Treasury bill discount rate, 10-year
constant maturity Treasury security yield or 20-year constant maturity Treasury
bond yield, but limited to a minimum of 5.5% and a maximum of 10.5% per year.
The average dividend rate was 5.8%, 5.7% and 5.6% during 1995, 1994 and 1993,
respectively.
9% CUMULATIVE PREFERRED STOCK, SERIES C
This class of preferred stock has been issued as depositary shares, each
representing one-twentieth of a share of the Series C preferred stock. These
shares are redeemable at the option of the Company on and after October 24, 1996
at a price of $500 per share plus accrued and unpaid dividends. Dividends of
$11.25 per share (9% annualized rate) are cumulative and payable on the last day
of each calendar quarter.
8 7/8% CUMULATIVE PREFERRED STOCK, SERIES D
This class of preferred stock has been issued as depositary shares, each
representing one-twentieth of a share of the Series D preferred stock. These
shares are redeemable at the option of the Company on and after March 5, 1997 at
a price of $500 per share plus accrued and unpaid dividends. Dividends of $11.09
per share (8 7/8% annualized rate) are cumulative and payable on the last day of
each calendar quarter.
8 COMMON STOCK, ADDITIONAL PAID-IN CAPITAL AND STOCK PLANS
- --------------------------------------------------------------------------------
COMMON STOCK
................................................................................
The following table summarizes common stock reserved, issued, outstanding and
authorized as of December 31, 1995:
- ----------------------------------------------------------------------
Number of shares
Tax Advantage and Retirement Plan 2,718,226
Long-Term and Equity Incentive Plans 4,021,043
Dividend Reinvestment and
Common Stock Purchase Plan 4,094,173
Employee Stock Purchase Plan 542,358
Director Option Plans 165,099
Stock Bonus Plan 14,756
-----------
Total shares reserved 11,555,655
Shares issued and outstanding 46,973,319
Shares not reserved 91,471,026
-----------
Total shares authorized 150,000,000
-----------
-----------
- ---------------------------------------------------------------------
Under the terms of mandatory convertible debt, the Company must exchange with
the noteholder, or sell, various capital securities of the Company as described
in Note 6 to the Financial Statements.
ADDITIONAL PAID-IN CAPITAL
................................................................................
Repurchases made in connection with the Company's stock repurchase program
result in a reduction of the Additional Paid-In Capital (APIC) account equal to
the amount paid in repurchasing the stock, less the $5 per share representing
par value that is charged to the Common Stock account. In order to absorb future
repurchases of common stock, the Company transferred $1 billion from Retained
Earnings to APIC in each of the years 1995 and 1994.
DIRECTOR OPTION PLANS
................................................................................
The 1990 Director Option Plan (1990 DOP) provides for annual grants of options
to purchase 500 shares of common stock to each non-employee director elected or
re-elected at the annual meeting of shareholders. Non-employee directors who
join the Board between annual meetings receive options on a prorated basis. The
options may be exercised until the tenth anniversary of the date of grant; they
become exercisable after one year at an exercise price equal to the fair market
value of the stock at the time of grant. The maximum total number of shares of
common stock issuable under the 1990 DOP is 100,000 in the aggregate and 20,000
in any one
51
<PAGE>
calendar year. At December 31, 1995, 28,652 options were outstanding under this
plan, of which 22,526 options were exercisable. During 1995, 2,000 options were
exercised. No compensation expense was recorded for the stock options under the
1990 DOP, as the exercise price was equal to the quoted market price of the
stock at the time of the grant.
The 1987 Director Option Plan (1987 DOP) allows participating directors to
file an irrevocable election to receive stock options in lieu of their retainer
to be earned in any one calendar year. The options become exercisable after one
year and may be exercised until the tenth anniversary of the date of grant.
Options granted prior to 1995 have an exercise price of $1 per share. Commencing
in 1995, options granted have an exercise price equal to 50 percent of the
quoted market price of the stock at the time of grant. At December 31, 1995,
4,919 options were outstanding under this plan, of which 3,781 options were
exercisable. During 1995, no options were exercised. Compensation expense for
the 1987 DOP is measured as the difference between the quoted market price of
the stock at the date of grant less the option exercise price. This expense is
accrued as retainers are earned.
EMPLOYEE STOCK PLANS
................................................................................
LONG-TERM AND EQUITY INCENTIVE PLANS
The Wells Fargo & Company Long-Term Incentive Plan (LTIP) became effective upon
the approval of shareholders in April 1994. The LTIP supersedes the 1990 Equity
Incentive Plan (1990 EIP), which is itself the successor to the original 1982
Equity Incentive Plan (1982 EIP). No additional awards or grants will be issued
under the 1990 or 1982 EIPs.
While similar to the existing 1990 EIP, in that the LTIP includes provisions
for the same kinds of awards that could have been made under the 1990 EIP, the
LTIP varies from the 1990 EIP in certain respects. The following are certain of
the more important differences. The LTIP provides for awards of restricted
shares in addition to the stock options, stock appreciation rights and share
rights that could have been awarded under the 1990 EIP. Stock appreciation
rights awarded under the LTIP need not be in tandem with stock options, as was
the case under the 1990 EIP, but may stand alone. Employee stock options granted
under the LTIP can be granted with exercise prices at or, unlike the 1990 EIP,
above the current value of the common stock and, except for incentive stock
options, can have terms longer than 10 years, the maximum provided in the 1990
EIP. Employee stock options generally become fully exercisable over 3 years from
the grant date. Upon termination of employment, the option period is reduced or
the options are canceled. The LTIP also provides for grants to recipients not
limited to present key employees of the Company. The total number of shares of
common stock issuable under the LTIP is 2,500,000 in the aggregate (excluding
outstanding awards under the 1990 and 1982 EIPs) and 800,000 in any one calendar
year. No compensation expense was recorded for the stock options under the LTIP
(or 1990 and 1982 EIPs), as the exercise price was equal to the quoted market
price of the stock at the time of grant.
Transactions involving options of the LTIP and EIPs are summarized as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Number of shares
-------------------------------------------------------------------------------------------
LTIP 1990 EIP 1982 EIP
------------------------------- ------------------------- ---------------------------
1995 1994 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year 655,180 - 710,935 1,223,360 563,453 784,040
Granted 284,700 284,000 - - - -
Transferred (1) - 400,400 - (400,400) - -
Canceled (8,500) (28,500) (2,330) (28,665) - -
Exercised (66,870) (720) (193,510) (83,360) (278,115) (220,587)
---------- ---------- -------- -------- -------- --------
Options outstanding, end of year 864,510 655,180 515,095 710,935 285,338 563,453
---------- ---------- -------- -------- -------- --------
---------- ---------- -------- -------- -------- --------
Options exercisable, end of year 287,875 371,180 515,095 710,935 285,338 563,453
Shares available for grant,
end of year 1,911,725 2,219,872 - - - -
Price range of options:
Outstanding $107.25-211.38 $107.25-146.75 $68.75-78.63 $68.75-79.38 $33.50-71.00 $33.50-71.00
Exercised $ 110.75 $ 110.75 $68.75-79.38 $68.75-78.63 $33.50-71.00 $29.56-71.00
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In accordance with the terms of the LTIP, the 400,400 options that were
previously granted in 1993 under the 1990 EIP were assumed under the LTIP.
52
<PAGE>
Loans may be made, at the discretion of the Company, to assist the
participants of the LTIP and the EIPs in the acquisition of shares under
options. The total of such interest-bearing loans were $5.8 million and $6.0
million at December 31, 1995 and 1994, respectively.
The holders of restricted share rights that were granted prior to 1991 are
entitled at no cost to 30% of the shares of common stock represented by the
restricted share rights held three years after the restricted share rights were
granted, an additional 30% after four years and the final 40% after five years.
The holders of the restricted share rights granted in 1991 or later are entitled
at no cost to the shares of common stock represented by the restricted share
rights held by each person five years after the restricted share rights were
granted. Upon receipt of the restricted share rights, holders are entitled to
receive quarterly cash payments equal to the cash dividends that would be paid
on the number of common shares equal to the number of restricted share rights.
Except in limited circumstances, restricted share rights are canceled upon
termination of employment. As of December 31, 1995, the LTIP, the 1990 EIP and
the 1982 EIP had 117,918, 306,278 and 20,179 restricted share rights
outstanding, respectively, to 867,740 and 65 employees or their beneficiaries,
respectively. The compensation expense for the restricted share rights equals
the market price at the time of grant and is accrued on a straight-line basis
over the vesting period of three to five years. The amount of expense accrued
for the restricted share rights under the LTIP, 1990 and 1982 EIPs was $8
million, $8 million and $7 million in 1995, 1994 and 1993, respectively.
EMPLOYEE STOCK PURCHASE PLAN
Options to purchase up to 1,100,000 shares of common stock may be granted under
the Employee Stock Purchase Plan (ESPP). Employees of the Company with at least
one year of service, except hourly employees, are eligible to participate.
Certain highly compensated employees may be excluded from participation at the
discretion of the Management Development and Compensation Committee of the Board
of Directors. The plan provides for an option price of the lower of market value
at grant date or 85% to 100% (as determined by the Board of Directors for each
option period) of the market value at the end of the one-year option period. For
the current option period ending July 31, 1996, the Board approved a closing
option price of 85% of the market value. The plan is noncompensatory and results
in no expense to the Company. Transactions involving the ESPP are summarized as
follows:
- ------------------------------------------------------------------------
Number of options
------------------
1995 1994
Options outstanding, beginning of year 143,404 160,476
Granted 143,072 159,515
Canceled (1) (73,359) (83,734)
Exercised (at $153.38 in 1995 and
$114.73 in 1994) (83,137) (92,853)
------- -------
Options outstanding, end of year 129,980 143,404
------- -------
------- -------
Options available for grant, end of year 412,378 482,091
------- -------
------- -------
- ------------------------------------------------------------------------
(1) At the beginning of the option period, participants are granted an
additional 50% of options that are exercised only to the extent that the
closing option price is sufficiently below the market value at grant date
and based on the participant's level of participation. Since the closing
option price was higher in 1995 and 1994, the additional option grants were
canceled. These options represent a majority of the canceled options shown
above.
For information on employee stock ownership through the Tax Advantage and
Retirement Plan, see Note 9.
DIVIDEND REINVESTMENT PLAN
The Dividend Reinvestment and Common Stock Purchase and Share Custody Plan
allows holders of the Company's common stock to purchase additional shares
either by reinvesting all or part of their dividends, or by making optional cash
payments. Currently, up to $6,000 of dividends per quarter may be used to
purchase shares at a 3% discount. Dividends in excess of $6,000 per quarter and
between $150 and $2,000 per month in optional cash payments may be used to
purchase shares at fair market value. Shares may also be held in custody under
the Plan even without the reinvestment of dividends. During 1995 and 1994,
87,868 and 97,256 shares, respectively, were issued under the plan.
In October 1995, the FASB issued FAS 123, Accounting for Stock-Based
Compensation. This Statement establishes a new fair value based method for
stock-based compensation plans which is effective January 1, 1996. A further
discussion of FAS 123 is in the Noninterest Expense section of the Financial
Review.
53
<PAGE>
9 EMPLOYEE BENEFITS AND OTHER EXPENSES
- --------------------------------------------------------------------------------
RETIREMENT PLAN
................................................................................
The Company's retirement plan is known as the Tax Advantage and Retirement Plan
(TAP), a defined contribution plan. As part of TAP, the Company makes basic
retirement contributions to employee retirement accounts. Effective July 1994,
the Company increased its basic retirement contributions from 4% to 6% of the
total of employee base salary plus payments from certain bonus plans (covered
compensation). The Company also makes special transition contributions related
to the termination of a prior defined benefit plan of the Company ranging from
.5% to 5% of covered compensation for certain employees. The plan covers
salaried employees with at least one year of service and contains a vesting
schedule graduated from three to seven years of service.
Prior to July 1994, the Company made supplemental retirement contributions of
2% of employee-covered compensation. All salaried employees with at least one
year of service were eligible to receive these Company contributions, which
vested immediately. Effective July 1994, the supplemental retirement
contributions were discontinued, except for those contributions that are made to
employees hired before January 1, 1992. Those employees will continue to receive
the supplemental 2% contribution and the 4% basic retirement contributions until
fully vested. Upon becoming 100% vested, the basic retirement contribution will
increase to 6% of employee-covered compensation and the supplemental 2%
contributions will end.
Salaried employees who have at least one year of service are eligible to
contribute to TAP up to 10% of their pretax covered compensation through salary
deductions under Section 401(k) of the Internal Revenue Code, although a lower
contribution limit may be applied to certain employees in order to maintain the
qualified status of the plan. The Company makes matching contributions of up to
4% of an employee's covered compensation for those who have at least three years
of service and elect to contribute under the plan. Effective July 1994, the
Company began to partially match contributions by employees with at least one
but less than three years of service. For such employees who elect to contribute
under the plan, the Company matches 50% of each dollar on the first 4% of the
employee's covered compensation. The Company's matching contributions are
immediately vested and, similar to retirement contributions, are tax deductible
by the Company.
Employees direct the investment of their TAP funds and may elect to invest in
the Company's common stock.
Expenses related to TAP for the years ended December 31, 1995, 1994 and 1993
were $57 million, $56 million and $53 million, respectively.
HEALTH CARE AND LIFE INSURANCE
................................................................................
The Company provides health care and life insurance benefits for certain active
and retired employees. The Company reserves its right to terminate these
benefits at any time. The health care benefits for active and retired employees
are self-funded by the Company with the Point-of-Service Managed Care Plan or
provided through health maintenance organizations (HMOs). The amount of
subsidized health care coverage for employees who retired prior to January 1,
1993 is based upon their Medicare eligibility. The amount of subsidized health
care coverage for employees who retire after December 31, 1992 is based upon
their eligibility to retire as of January 1, 1993 and their years of service at
the time of retirement. Active employees with an adjusted service date after
September 30, 1992 are not eligible for subsidized health care coverage upon
retirement. Employees with an adjusted service date after January 1, 1994
are not eligible for Company paid life insurance benefits.
The Company recognized the cost of health care benefits for active eligible
employees by expensing contributions totaling $37 million, $45 million and $49
million in 1995, 1994 and 1993, respectively. Life insurance benefits for active
eligible employees are provided through an insurance company. The Company
recognizes the cost of these benefits by expensing the annual insurance
premiums, which were $2 million in 1995, 1994 and 1993. At December 31, 1995,
the Company had approximately 15,800 active eligible employees and 5,600
retirees participating in these plans.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106 (FAS 106), Employers' Accounting for Postretirement
Benefits Other Than Pensions. This Statement changed the method of accounting
for postretirement benefits other than pensions from a cash to an accrual basis.
54
<PAGE>
Under FAS 106, the determination of the accrued liability requires a
calculation of the accumulated postretirement benefit obligation (APBO). The
APBO represents the actuarial present value of postretirement benefits other
than pensions to be paid out in the future (e.g., health benefits to be paid for
retirees) that have been earned as of the end of the year. The unrecognized APBO
at the time of adoption of FAS 106 (transition obligation) of $142 million for
postretirement health care benefits is being amortized over 20 years.
The following table sets forth the net periodic cost for postretirement
health care benefits for 1995 and 1994:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(in millions) Year ended December 31,
----------------------
1995 1994
<S> <C> <C>
Interest cost on APBO $ 8.5 $ 8.7
Amortization of transition obligation 7.1 7.1
Amortization of net gain (3.5) -
Service cost (benefits attributed to
service during the period) 1.1 1.0
----- -----
Total $13.2 $16.8
----- -----
----- -----
- ----------------------------------------------------------------------
</TABLE>
The following table sets forth the funded status for postretirement health
care benefits and provides an analysis of the accrued postretirement benefit
cost included in the Company's Consolidated Balance Sheet at December 31, 1995
and 1994.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(in millions) December 31,
------------------
1995 1994
<S> <C> <C>
APBO (1):
Retirees $ 64.2 $ 69.7
Eligible active employees 11.9 14.6
Other active employees 18.7 18.5
------ ------
94.8 102.8
Plan assets at fair value - -
------ ------
APBO in excess of plan assets 94.8 102.8
Unrecognized net gain from past experience
different from that assumed and
from changes in assumptions 51.3 44.8
Unrecognized transition obligation (120.8) (127.8)
------ ------
Accrued postretirement benefit cost
(included in other liabilities) $ 25.3 $ 19.8
------- -------
------- -------
- ----------------------------------------------------------------------
</TABLE>
(1) Based on a discount rate of 6.98% and 8.55% in 1995 and 1994, respectively.
For measurement purposes, a health care cost trend rate was used to recognize
the effect of expected changes in future health care costs due to medical
inflation, utilization changes, technological changes, regulatory requirements
and Medicare cost shifting. Average annual increases of 5.5% for HMOs and 8.0%
for all other types of coverage in the per capita cost of covered health care
benefits were assumed for 1996. The rate for other coverage was assumed to
decrease gradually to 5.5% in 2001 and remain at that level thereafter.
Increasing the assumed health care trend by one percentage point in each year
would increase the APBO as of December 31, 1995 by $3.2 million and the
aggregate of the interest cost and service cost components of the
net periodic cost for 1995 by $.1 million.
The $6.5 million increase in the unrecognized net gain in 1995 was due to a
decrease in the number of participants combined with a lower average per capita
cost of health care coverage, which was partially offset by a decrease in the
discount rate and amortization of the net gain.
The Company also provides postretirement life insurance to certain existing
retirees. The APBO and expenses related to these benefits were not material.
OTHER EXPENSES
................................................................................
The following table shows expenses which exceeded 1% of total interest income
and noninterest income and which are not otherwise shown separately in the
financial statements or notes thereto.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(in millions) Year ended December 31,
-----------------------
1995 1994 1993
<S> <C> <C> <C>
Contract services $149 $101 $61
Advertising and promotion 73 65 59
Telecommunications 58 49 44
Operating losses (1) 45 62 52
- ----------------------------------------------------------------------
</TABLE>
(1) Includes losses from litigation, fraud and other matters.
55
<PAGE>
10 INCOME TAXES
- --------------------------------------------------------------------------------
Total income taxes for the years ended December 31, 1995 and 1994 were recorded
as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(in millions) Year ended December 31,
----------------------
1995 1994
<S> <C> <C>
Income taxes applicable to income
before income tax expense $745 $613
Goodwill for tax benefits related
to acquired assets - (25)
---- ----
Subtotal 745 588
Stockholders' equity for compensation
expense for tax purposes in excess of
amounts recognized for financial
reporting purposes (24) (13)
Stockholders' equity for tax effect of the
change in net unrealized gain (loss)
on investment securities 100 (95)
---- ----
Total income taxes $821 $480
---- ----
---- ----
- ----------------------------------------------------------------------
</TABLE>
The following is a summary of the components of income tax expense (benefit)
applicable to income before income taxes:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(in millions) Year ended December 31,
-----------------------
1995 1994 1993
<S> <C> <C> <C>
Current:
Federal $521 $472 $ 445
State and local 207 146 113
---- ---- -----
728 618 558
---- ---- -----
Deferred:
Federal 23 (26) (125)
State and local (6) 21 (7)
---- ---- -----
17 (5) (132)
---- ---- -----
Total $745 $613 $ 426
---- ---- -----
---- ---- -----
- ----------------------------------------------------------------------
</TABLE>
Amounts for the current year are based upon estimates and assumptions as of
the date of this report and could vary significantly from amounts shown on the
tax returns as filed. Accordingly, the variances from the amounts previously
reported for 1994 are primarily as a result of adjustments to conform to tax
returns as filed.
The Company's income tax expense (benefit) related to investment securities
transactions was $(7) million, $3 million and under $1 million for 1995, 1994
and 1993, respectively.
The Company had net deferred tax assets of $854 million, $971 million and
$862 million at December 31, 1995, 1994 and 1993, respectively. The tax effect
of temporary differences that gave rise to significant portions of deferred tax
assets and liabilities at December 31, 1995 and 1994 are presented below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(in millions) Year ended December 31,
----------------------
1995 1994
<S> <C> <C>
DEFERRED TAX ASSETS
Allowance for loan losses $ 711 $ 839
Net tax-deferred expenses 208 181
State tax expense 72 54
Certain identifiable intangibles 66 10
Foreclosed assets 39 51
Depreciation 25 5
Investments - 94
------ ------
1,121 1,234
Valuation allowance - (2)
------ ------
Total deferred tax assets,
less valuation allowance 1,121 1,232
------ ------
DEFERRED TAX LIABILITIES
Leasing 257 248
Investments 6 -
Other 4 13
------ ------
Total deferred tax liabilities 267 261
------ ------
NET DEFERRED TAX ASSET $ 854 $ 971
------ ------
------ ------
- ----------------------------------------------------------------------
</TABLE>
56
<PAGE>
The Company's $854 million and $971 million net deferred tax asset at
December 31, 1995 and 1994, respectively, included a valuation allowance of none
and $2 million, respectively. Substantially all of the Company's net deferred
tax asset of $854 million at December 31, 1995 related to net expenses (the
largest of which was the provision for loan losses) that have been reflected in
the financial statements, but which will reduce future taxable income. At
December 31, 1995, the Company did not have any net operating loss
carryforwards. The Company estimates that approximately $741 million of the $854
million net deferred tax asset at December 31, 1995 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 $113 million relates
to approximately $1.7 billion of net deductions that are expected to reduce
future California taxable income (California tax law does not permit recovery of
previously paid taxes). The Company's California taxable income has averaged
approximately $1.3 billion for each of the last three years. The Company
believes that it is more likely than not that it will have sufficient future
California taxable income to fully utilize these deductions. The amount of the
total deferred tax asset considered realizable, however, could be reduced in the
near term if estimates of future taxable income during the carryforward periods
are reduced.
The following is a reconciliation of the statutory federal income tax expense
and rate to the effective income tax expense and rate:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(in millions) Year ended December 31,
--------------------------------------------------------
1995 1994 1993
--------------- --------------- ----------------
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Statutory federal income tax expense and rate $622 35.0 % $509 35.0 % $363 35.0 %
Change in tax rate resulting from:
State and local taxes on income, net of federal
income tax benefit 132 7.4 110 7.5 75 7.2
Amortization of certain intangibles not
deductible for tax return purposes 14 .8 17 1.2 18 1.7
Adjustment to deferred tax assets and liabilities for
enacted changes in tax rates and laws - - - - (22) (2.1)
Other (23) (1.2) (23) (1.5) (8) (.8)
---- ---- ---- ---- ---- ----
Effective income tax expense and rate $745 42.0 % $613 42.2 % $426 41.0 %
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has not recognized a federal deferred tax liability of $36
million on $102 million of undistributed earnings of a foreign subsidiary
because such earnings are indefinitely reinvested in the subsidiary and are not
taxable under current law. A deferred tax liability would be recognized to the
extent the Company changed its intent to not indefinitely reinvest a portion or
all of such undistributed earnings. In addition, a current tax liability would
be recognized if the Company recovered those undistributed earnings in a taxable
manner, such as through the receipt of dividends or sale of the entity, or if
the tax law changed.
57
<PAGE>
11 PARENT COMPANY
- --------------------------------------------------------------------------------
Condensed financial information of Wells Fargo & Company (Parent) is presented
below. For information regarding the Parent's long-term debt and derivative
financial instruments, see Notes 6 and 13, respectively.
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF INCOME
- ---------------------------------------------------------------------------
(in millions) Year ended December 31,
------------------------------------
1995 1994 1993
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries:
Wells Fargo Bank $1,131 $1,001 $ -
Nonbank subsidiaries - - 3
Interest income from:
Wells Fargo Bank 86 81 97
Other bank subsidiaries 3 - -
Nonbank subsidiaries 12 15 22
Other 53 51 56
Noninterest income 52 38 45
------ ------ ----
Total income 1,337 1,186 223
------ ------ ----
EXPENSE
Interest on:
Commercial paper and
other short-term borrowings 14 8 5
Senior and subordinated debt 194 181 195
Provision for loan losses - - 9
Noninterest expense 35 56 39
------ ------ ----
Total expense 243 245 248
------ ------ ----
Income (loss) before income tax
(expense) benefit and
undistributed income
of subsidiaries 1,094 941 (25)
Income tax (expense) benefit 17 27 (5)
Equity in undistributed income
of subsidiaries:
Wells Fargo Bank (1) (26) (138) 632
Other bank subsidiaries (65) - -
Nonbank subsidiaries 12 11 10
------ ------ ----
NET INCOME $1,032 $ 841 $612
------ ------ ----
------ ------ ----
- ---------------------------------------------------------------------------
</TABLE>
(1) The 1995 and 1994 amounts represent dividends distributed by Wells Fargo
Bank in excess of its 1995 and 1994 net income of $1,105 million and
$863 million, respectively.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
- ---------------------------------------------------------------------------
(in millions) December 31,
----------------------
1995 1994
<S> <C> <C>
ASSETS
Cash and due from Wells Fargo Bank
(includes interest-earning deposits
of $1 million and none) $ 31 $ 25
Investment securities:
At fair value 424 211
At cost (estimated fair value $198 million) - 203
------ ------
Total investment securities 424 414
Loans 263 333
Allowance for loan losses 58 58
------ ------
Net loans 205 275
------ ------
Loans and advances to subsidiaries:
Wells Fargo Bank 1,417 1,258
Other subsidiaries 231 198
Investment in subsidiaries (1):
Wells Fargo Bank 4,322 4,219
Other subsidiaries 316 101
Other assets 508 568
------ ------
Total assets $7,454 $7,058
------ ------
------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and other
short-term borrowings $ 160 $ 133
Other liabilities 270 270
Senior debt 1,703 1,284
Subordinated debt 1,266 1,460
------ ------
Total liabilities 3,399 3,147
Stockholders' equity 4,055 3,911
------ ------
Total liabilities and stockholders' equity $7,454 $7,058
------ ------
------ ------
- ---------------------------------------------------------------------------
</TABLE>
(1) The double leverage ratio, which represents the ratio of the Parent's total
equity investment in subsidiaries to its total stockholders' equity, was
114% and 110% at December 31, 1995 and 1994, respectively.
58
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------------
(in millions) Year ended December 31,
------------------------------------
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,032 $ 841 $ 612
Adjustments to reconcile net income
to net cash provided by
operating activities:
Provision for loan losses - - 9
Deferred income tax expense (benefit) (15) (4) 30
Equity in undistributed (income) loss
of subsidiaries 79 127 (642)
Other, net (52) (24) (32)
------ ------ -----
Net cash provided (used) by
operating activities 1,044 940 (23)
------ ------ -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities:
At fair value:
Proceeds from sales 4 5 -
Proceeds from prepayments
and maturities 2 - -
Purchases (59) (175) -
At cost:
Proceeds from prepayments
and maturities 56 256 13
Purchases - (122) (25)
Net decrease in loans 70 24 87
Net (increase) decrease in loans and
advances to subsidiaries (192) 529 103
Net (increase) decrease in investment
in subsidiaries (266) 5 (111)
Net (increase) decrease in securities
purchased under resale agreements - 250 (250)
Other, net 119 12 92
------ ------ -----
Net cash provided (used) by
investing activities (266) 784 (91)
------ ------ -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in
short-term borrowings 27 (5) (30)
Proceeds from issuance of senior debt 1,230 248 980
Proceeds from issuance of
subordinated debt - - 399
Repayment of senior debt (811) (1,101) (884)
Repayment of subordinated debt (210) (526) (300)
Proceeds from issuance of common stock 90 57 53
Redemption of preferred stock - (150) -
Repurchase of common stock (847) (760) (5)
Payment of cash dividends on
preferred stock (42) (34) (50)
Payment of cash dividends on
common stock (225) (218) (125)
Other, net 16 57 (9)
------ ------ -----
Net cash provided (used) by
financing activities (772) (2,432) 29
------ ------ -----
NET CHANGE IN CASH AND CASH
EQUIVALENTS (DUE FROM
WELLS FARGO BANK) 6 (708) (85)
Cash and cash equivalents at
beginning of year 25 733 818
------ ------ -----
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 31 $ 25 $ 733
------ ------ -----
------ ------ -----
Noncash investing activities:
Transfers from investment securities
at cost to investment securities
at fair value $ 147 $ - $ 25
------ ------ -----
------ ------ -----
</TABLE>
12 LEGAL ACTIONS
- --------------------------------------------------------------------------------
In the normal course of business, the Company is at all times subject to
numerous pending and threatened legal actions, some for which the relief or
damages sought are substantial. After reviewing pending and threatened actions
with counsel, management considers that the outcome of such actions will not
have a material adverse effect on stockholders' equity of the Company; the
Company is not able to predict whether the outcome of such actions may or may
not have a material adverse effect on results of operations in a particular
future period as the timing and amount of any resolution of such actions
and its relationship to the future results of operations are not known.
59
<PAGE>
13 DERIVATIVE FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The Company enters into a variety of financial contracts, which include interest
rate futures and forward contracts, interest rate floors and caps and interest
rate swap agreements. The contract or notional amounts of derivatives do not
represent amounts exchanged by the parties and therefore are not a measure of
exposure through the use of derivatives. The amounts exchanged are determined by
reference to the notional amounts and the other terms of the derivatives. The
contract or notional amounts do not represent exposure to liquidity risk. The
Company is not a dealer but an end-user of these instruments and does not use
them speculatively. The Company also offers contracts to its customers, but
offsets such contracts by purchasing other financial contracts or uses the
contracts for asset/liability management.
The interest rate derivative financial instruments that are used primarily to
hedge mismatches in interest rate maturities serve to reduce rather than
increase the Company's exposure to movements in interest rates. These
instruments are accounted for by the deferral or accrual method only if they are
designated as a hedge and are expected to be and are effective in substantially
reducing interest rate risk arising from assets and liabilities exposing the
Company to interest rate risk at the consolidated or enterprise level.
Furthermore, futures contracts must meet specific correlation tests. If periodic
assessment indicates derivatives no longer provide an effective hedge, the
derivatives are closed out or settled; previously unrecognized hedge results and
the net settlement upon close-out or termination that offset changes in value of
the asset or liability hedged are deferred and amortized over the life of the
asset or liability with excess amounts recognized in noninterest income.
The Company also enters into foreign exchange derivative financial
instruments (forward and spot contracts and options) primarily as an
accommodation to customers and offsets the related foreign exchange risk with
other foreign exchange derivative financial instruments.
The Company is exposed to credit risk in the event of nonperformance by
counterparties to financial instruments. The Company controls the credit risk of
its financial contracts (except futures contracts and interest rate cap
contracts written, for which credit risk is DE MINIMUS) through credit
approvals, limits and monitoring procedures. Credit risk related to derivative
financial instruments is considered and, if material, provided for separately
from the allowance for loan losses. As the Company generally enters into
transactions only with high quality counterparties, losses associated with
counterparty nonperformance on derivative financial instruments have been
immaterial.
The table on the right summarizes the aggregate notional or contractual
amounts, credit risk amount and net fair value for the Company's derivative
financial instruments at December 31, 1995 and 1994.
Interest rate futures contracts are contracts in which
the buyer agrees to purchase and the seller agrees to make delivery of a
specific financial instrument at a predetermined price or yield. Gains and
losses on futures contracts are settled daily based on a notional (underlying)
principal value and do not involve an actual transfer of the specific
instrument. Futures contracts are standardized and are traded on exchanges. The
exchange assumes the risk that a counterparty will not pay and generally
requires margin payments to minimize such risk. Market risks arise from
movements in interest rates and security values. The Company uses 90- to 120-day
futures contracts on Eurodollar deposits and U.S. Treasury Notes mostly to
shorten the rate maturity of market rate savings to better match the rate
maturity of Prime-based loans. Initial margin requirements on futures contracts
are provided by investment securities pledged as collateral. The net deferred
gains related to interest rate futures contracts were $2 million at December 31,
1995, which will be fully amortized in 1996. The net deferred losses related to
interest rate futures contracts were $4 million at December 31, 1994, which were
fully amortized in 1995.
Interest rate floors and caps are interest rate protection instruments that
involve the payment from the seller to the buyer of an interest differential.
This differential represents the difference between current interest rates and
an agreed-upon rate, the strike rate, applied to a notional principal amount. At
December 31, 1995, the Company had $14.8 billion of floors to protect variable-
rate loans from a drop in interest rates. The Company also had $.7 billion of
floors to protect purchased mortgage servicing rights from a drop in interest
rates. By purchasing a floor, the Company will be paid by a counterparty the
difference between a short-term rate (e.g., three-month LIBOR) and the strike
rate, should the short-term rate fall below the strike level of the agreement.
These contracts have a weighted average maturity of 2 years and 11 months. At
December 31, 1995, there were $.4 billion of caps purchased to hedge caps
embedded within loans. The Company generally receives cash quarterly on
purchased floors (when the current interest rate falls below the strike rate)
and purchased caps (when the current interest rate exceeds the strike rate). The
premiums paid for interest rate purchased floor and cap agreements are included
with the assets hedged.
60
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
(in millions) December 31,
--------------------------------------------------------------------------------------
1995 1994
---------------------------------------- ------------------------------------------
NOTIONAL OR CREDIT RISK ESTIMATED Notional or Credit risk Estimated
CONTRACTUAL AMOUNT (5) FAIR VALUE contractual amount (5) fair value
AMOUNT amount
<S> <C> <C> <C> <C> <C> <C>
ASSET/LIABILITY MANAGEMENT HEDGES
Interest rate contracts:
Futures contracts $ 5,372 $ - $ - $ 5,009 $ - $ -
Forward contracts - - - 8 - -
Floors purchased (1) 15,522 206 206 14,355 25 25
Caps purchased (1) 391 1 1 244 6 6
Swap contracts (1)(2) 6,314 185 175 3,103 3 (65)
Foreign exchange contracts:
Cross currency swaps (1)(3) - - - 118 76 76
Forward contracts (1) 25 - - 25 - -
CUSTOMER ACCOMMODATIONS
Interest rate contracts:
Futures contracts 23 - - - - -
Floors written 105 - (1) - - -
Caps written 1,170 - (4) 1,039 - (15)
Floors purchased (1) 105 1 1 - - -
Caps purchased (1) 1,139 4 4 1,016 15 15
Swap contracts (1) 1,518 5 1 176 1 -
Foreign exchange contracts (4):
Forward and spot contracts (1) 909 10 1 590 7 -
Option contracts purchased 29 - - 319 - -
Option contracts written 23 - - 318 - -
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company anticipates performance by substantially all of the
counterparties for these financial instruments.
(2) The Parent's share of the notional principal amount outstanding was $224
million and $88 million at December 31, 1995 and 1994, respectively.
(3) These are off-balance sheet commitments of the Parent. At December 31, 1994,
the Parent had a $118 million cross currency swap to convert debt costs of
variable-rate long-term debt issued in German marks into fixed-rate U.S.
dollar obligations. Interest payments were settled quarterly, whereas the
principal payment was settled at the expiration of the contract in 1995.
(4) The Company has immaterial trading positions in certain of these contracts.
(5) Credit risk amounts reflect the replacement cost for those contracts in a
gain position in the event of nonperformance by counterparties.
Interest rate swap contracts are entered into primarily as an asset/liability
management strategy to reduce interest rate risk. Interest rate swap contracts
are exchanges of interest payments, such as fixed-rate payments for floating-
rate payments, based on a notional principal amount. Payments related to the
Company's swap contracts are made either monthly, quarterly or semi-annually by
one of the parties depending on the specific terms of the related contract. The
primary risk associated with swaps is the exposure to movements in interest
rates and the ability of the counterparties to meet the terms of the contract.
At December 31, 1995, the Company had $6.3 billion of interest rate swaps
outstanding for interest rate risk management purposes. Of this amount, $6.1
billion relates to swaps for which the Company receives payments based on fixed
interest rates and makes payments based on variable rates (i.e., one- or three-
month LIBOR rate) and $.2 billion relates to swaps used to hedge purchased
mortgage servicing rights. Of the $6.1 billion of receive-fixed rate swap
agreements, $5.9 billion was used to convert floating-rate loans into fixed-rate
assets. These contracts have a weighted average maturity of 3 years, a weighted
average receive rate of 6.3% and a weighted average pay rate of 6.0%. The
remaining $.2 billion was used to convert fixed-rate debt into floating-rate
obligations. These contracts have a weighted average maturity of 11 months, a
weighted average receive rate of 7.4% and a weighted average pay rate of 6.0%.
The Company also had $24 million of forward starting swaps in which the Company
will receive payments based on fixed rates and will make payments based on
variable rates. These contracts have a weighted average maturity of 7 years and
9 months.
61
<PAGE>
14 FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Statement of Financial Accounting Standards No. 107 (FAS 107), Disclosures about
Fair Value of Financial Instruments, requires that the Company disclose
estimated fair values for its financial instruments. Fair value estimates,
methods and assumptions set forth below for the Company's financial instruments
are made solely to comply with the requirements of FAS 107 and should be read in
conjunction with the financial statements and notes in this Annual Report. The
carrying amounts in the table are recorded in the Consolidated Balance Sheet
under the indicated captions, except for the derivative financial instruments,
which are recorded in the specific asset or liability balance being hedged or
in other assets if the derivative financial instrument is a customer
accommodation.
Fair values are based on estimates or calculations at
the transaction level using present value techniques in instances where quoted
market prices are not available. Because broadly traded markets do not exist for
most of the Company's financial instruments, the fair value calculations attempt
to incorporate the effect of current market conditions at a specific time. Fair
valuations are management's estimates of the values, and they are often
calculated based on current pricing policy, the economic and competitive
environment, the characteristics of the financial instruments and other such
factors. These calculations are subjective in nature, involve uncertainties and
matters of significant judgment and do not include tax ramifications; therefore,
the results cannot be determined with precision, substantiated by comparison to
independent markets and may not be realized in an actual sale or immediate
settlement of the instruments. There may be inherent weaknesses in any
calculation technique, and changes in the underlying assumptions used, including
discount rates and estimates of future cash flows, could significantly affect
the results. The Company has not included certain material items in its
disclosure, such as the value of the long-term relationships with the Company's
deposit, credit card and trust customers, since these intangibles are not
financial instruments. For all of these reasons, the aggregation of the fair
value calculations presented herein do not represent, and should not be
construed to represent, the underlying value of the Company.
FINANCIAL ASSETS
................................................................................
SHORT-TERM FINANCIAL ASSETS
This category includes cash and due from banks, federal funds sold and
securities purchased under resale agreements and due from customers on
acceptances. The carrying amount is a reasonable estimate of fair value because
of the relatively short period of time between the origination of the instrument
and its expected realization.
INVESTMENT SECURITIES
Investment securities at fair value and cost at December 31, 1995 and 1994 are
set forth in Note 3.
LOANS
The fair valuation calculation process differentiates loans based on their
financial characteristics, such as product classification, loan category,
pricing features and remaining maturity. Prepayment estimates are evaluated by
product and loan rate. Discount rates presented in the paragraphs below have a
wide range due to the Company's mix of fixed- and variable-rate products. The
Company used variable discount rates which incorporate relative credit quality
to reflect the credit risk, where appropriate, on the fair value calculation.
The fair value of commercial loans, other real estate mortgage loans and real
estate construction loans is calculated by discounting contractual cash flows
using discount rates that reflect the Company's current pricing for loans with
similar characteristics and remaining maturity. Most of the discount rates for
commercial loans, other real estate mortgage loans and real estate construction
loans are between 6.3% and 9.5%, 7.0% and 11.3%, and 7.3% and 10.0%,
respectively, at December 31, 1995. Most of the discount rates for the same
portfolios in 1994 were between 7.3% and 10.3%, 7.8% and 12.5%, and 8.0% and
12.5%, respectively.
For real estate 1-4 family first and junior lien mortgages, fair value is
calculated by discounting contractual cash flows, adjusted for prepayment
estimates, using discount rates based on current industry pricing for loans of
similar size, type, remaining maturity and repricing characteristics. Most of
the discount rates applied to this portfolio are between 6.0% and 9.0% at
December 31, 1995 and 7.0% and 10.0% at December 31, 1994.
For credit card loans, the portfolio's yield is equal to the Company's
current pricing and, therefore, the fair value is equal to book value.
62
<PAGE>
The following table presents a summary of the Company's financial
instruments, as defined by FAS 107:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(in millions) December 31,
-----------------------------------------------------
1995 1994
----------------------- -----------------------
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE amount fair value
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks $ 3,375 $ 3,375 $ 2,974 $ 2,974
Federal funds sold and securities purchased
under resale agreements 177 177 260 260
Investment securities:
At fair value 8,920 8,920 2,989 2,989
At cost - - 8,619 8,185
------- ------- ------- -------
Total investment securities 8,920 8,920 11,608 11,174
Loans:
Commercial 9,750 9,785 8,162 8,209
Real estate 1-4 family first mortgage 4,448 4,370 9,050 8,604
Other real estate mortgage 8,263 8,249 8,079 7,933
Real estate construction 1,366 1,367 1,013 1,005
Consumer 9,935 9,460 8,686 8,439
Lease financing (1) 1,789 1,789 1,206 1,185
Foreign 31 31 27 27
------- ------- ------- -------
35,582 35,051 36,223 35,402
Less: Allowance for loan losses 1,794 - 2,082 -
Net deferred fees on loan commitments and
standby letters of credit 27 - 28 -
------- ------- ------- -------
Net loans 33,761 35,051 34,113 35,402
Due from customers on acceptances 98 98 77 77
Nonmarketable equity investments 428 694 407 618
Other financial assets 151 151 97 97
FINANCIAL LIABILITIES
Deposits $38,982 $39,162 $42,332 $42,354
Federal funds purchased and securities sold
under repurchase agreements 2,781 2,781 3,022 3,022
Commercial paper and other short-term borrowings 195 195 189 189
Acceptances outstanding 98 98 77 77
Senior debt (2) 1,731 1,753 1,338 1,337
Subordinated debt (3) 1,266 1,319 1,460 1,399
DERIVATIVE FINANCIAL INSTRUMENTS (4)
Interest rate floor contracts purchased in a
receivable position $ 27 $ 207 $ 27 $ 25
Interest rate floor contracts written in a payable position (1) (1) - -
Interest rate cap contracts purchased in a
receivable position 13 5 12 21
Interest rate cap contracts written in a payable position (11) (4) (9) (15)
Interest rate swap contracts in a receivable position - 190 - 4
Interest rate swap contracts in a payable position - (14) - (69)
Cross currency swap contracts in a receivable position (3) - - 76 76
Foreign exchange contracts in a gain position 11 10 14 7
Foreign exchange contracts in a loss position (9) (9) (14) (7)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The carrying amount and fair value exclude equipment leases of $124 million
at December 31, 1994.
(2) The carrying amount and fair value exclude obligations under capital leases
of $52 million and $55 million at December 31, 1995 and 1994, respectively.
(3) For 1994, the Company had cross currency swap agreements to hedge floating-
rate subordinated debt issued in German marks.
(4) The carrying amounts include unamortized fees paid or received, deferred
gains or losses and gains or losses on derivative financial instruments
receiving mark-to-market treatment.
63
<PAGE>
For other consumer loans, the fair value is calculated by discounting the
contractual cash flows, adjusted for prepayment estimates, based on the current
rates offered by the Company for loans with similar characteristics. Most of the
discount rates applied to this portfolio are between 7.3% and 16.5% at December
31, 1995 and 9.5% and 16.0% at December 31, 1994.
For auto lease financing, the fair value is calculated by discounting the
contractual cash flows at the Company's current pricing for items of similar
remaining term, without including any tax benefits. The discount rate applied to
this portfolio was 8.35% at December 31, 1995 and most were between 9.0% and
10.0% at December 31, 1994.
Commitments, standby letters of credit and commercial and similar letters of
credit not included in the previous table have contractual values of $24,245
million, $921 million and $209 million, respectively, at December 31, 1995, and
$20,939 million, $836 million and $125 million, respectively, at December 31,
1994. These instruments generate ongoing fees at the Company's current pricing
levels. Of the commitments at December 31, 1995, 80% mature within one year and
82% are commitments to extend credit at a floating rate.
NONMARKETABLE EQUITY INVESTMENTS
The Company's nonmarketable equity investments, including securities, are
carried at cost and have a book value of $428 million and $407 million and an
estimated fair value of $694 million and $618 million at December 31, 1995 and
1994, respectively. There are restrictions on the sale and/or liquidation of the
Company's interest, which is generally in the form of limited partnerships; and
the Company has no direct control over the investment decisions of the limited
partnerships. To estimate fair value, a significant portion of the underlying
limited partnerships' investments are valued based on market quotes.
FINANCIAL LIABILITIES
................................................................................
DEPOSIT LIABILITIES
FAS 107 states that the fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, interest-bearing checking and market rate
and other savings, is equal to the amount payable on demand at the measurement
date. Although the Financial Accounting Standards Board's requirement for these
categories is not consistent with the market practice of using prevailing
interest rates to value these amounts, the amount included for these deposits in
the previous table is their carrying value at December 31, 1995 and 1994. The
fair value of other time deposits is calculated based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates currently
offered for like deposits with similar remaining maturities.
SHORT-TERM FINANCIAL LIABILITIES
This category includes federal funds purchased and securities sold under
repurchase agreements, commercial paper and other short-term borrowings. The
carrying amount is a reasonable estimate of fair value because of the relatively
short period of time between the origination of the instrument and its expected
realization.
SENIOR AND SUBORDINATED DEBT
The fair value of the Company's underwritten senior and subordinated debt is
estimated based on the quoted market prices of the instruments. The fair value
of the medium-term note programs, which are part of senior debt, is calculated
based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for new notes with similar remaining
maturities.
DERIVATIVE FINANCIAL INSTRUMENTS
................................................................................
Derivative financial instruments are fair valued based on the estimated amounts
that the Company would receive or pay to terminate the contracts at the
reporting date (i.e., mark-to-market value). Dealer quotes are available for
substantially all of the Company's derivative financial instruments.
LIMITATIONS
................................................................................
These fair value disclosures are made solely to comply with the requirements of
FAS 107. The calculations represent management's best estimates; however, due to
the lack of broad markets and the significant items excluded from this
disclosure, the calculations do not represent the underlying value of the
Company. The information presented is based on fair value calculations and
market quotes as of December 31, 1995 and 1994. These amounts have not been
updated since year end; therefore, the valuations may have changed significantly
since that point in time.
64
<PAGE>
15 MERGER WITH FIRST INTERSTATE BANCORP
- --------------------------------------------------------------------------------
On January 24, 1996, the Company announced it had entered into a definitive
merger agreement (Merger Agreement) with First Interstate Bancorp (First
Interstate). Under terms of the Merger Agreement, First Interstate shareholders
will receive a tax-free exchange of two-thirds of a share of the Company's
common stock for each share of First Interstate common stock. Based on the
Company's closing price on January 19, 1996 (the last trading day before the
First Interstate Board of Directors agreed to the exchange ratio of two-thirds),
the base purchase price is approximately $11 billion. Each outstanding share of
First Interstate preferred stock will be converted into the right to receive one
share of the Company's preferred stock. The merger will be accounted for as a
purchase transaction. Accordingly, the results of operations of First Interstate
will be included with that of the Company for periods subsequent to the date of
the merger. On the basis of assets of $58.1 billion at December 31, 1995, First
Interstate was the 15th largest bank holding company in the United States. The
name of the newly combined company will be Wells Fargo & Company.
Consummation of the merger is subject to various conditions, including
receipt of the required approvals of the Company's and First Interstate's
stockholders, receipt of all requisite regulatory approvals, receipt of an
opinion of counsel as to the tax-free nature of certain aspects of the merger
and listing on the New York Stock Exchange of the Company's common stock and
depositary shares to be issued in the merger. Subject to these conditions, the
merger is currently expected to close on or about April 1, 1996.
There is no assurance as to when or whether the aforementioned approvals will
be obtained and, if obtained, as to what conditions or restrictions might be
imposed. The Merger Agreement may be terminated by either party if the
transaction has not closed by December 31, 1996 and in certain other
circumstances.
The following unaudited pro forma combined financial data shows the pro forma
effects of the proposed merger. The pro forma combined summary of income gives
effect to the combination as if the merger was consummated on January 1, 1995
and the selected pro forma combined balance sheet data gives effect to the
merger as if it was consummated on December 31, 1995. The unaudited pro forma
data are based upon the audited income statements and balance sheets of the
Company and First Interstate for the year ended December 31, 1995, information
available to the Company as of February 27, 1996 and the Securities and Exchange
Commission's rules and regulations. Purchase accounting adjustments were made
based upon preliminary estimates and assumptions to reflect estimated fair
values with respect to First Interstate's assets and liabilities. Such
preliminary estimates and assumptions are subject to change as additional
information is obtained. Purchase adjustments will be made on the basis of
estimates, appraisals and evaluations as of the date of closing and, therefore,
will differ from those reflected in the table.
The pro forma amounts in the table below are presented for informational
purposes and are not necessarily indicative of the financial position or the
results of operations of the combined company that would have actually occurred
had the merger been consummated as of the date or for the period presented. The
pro forma amounts are also not necessarily indicative of the future financial
position or future results of operations of the combined company. In particular,
the Company expects to achieve significant operating cost savings as a result of
the merger. No adjustment has been included in the pro forma amounts for
anticipated operating cost savings.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED
FINANCIAL DATA
- -------------------------------------------------------------------------------
(in millions, except per share data) Year ended December 31, 1995
<S> <C>
SUMMARY OF INCOME
Net interest income $ 5,186
Provision for loan losses -
Noninterest income 2,443
Noninterest expense 4,898
Net income 1,549
PER COMMON SHARE
Net income $ 14.87
Dividends declared 4.60
AVERAGE COMMON SHARES OUTSTANDING 99.1
SELECTED BALANCE SHEET DATA
(AT YEAR END)
Investment securities $ 17,910
Loans 72,360
Assets 116,061
Deposits 89,202
Senior and subordinated debt 4,395
Stockholders' equity 15,402
- -------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
The pro forma net income of $1,549 million consists of 1995 net income of the
Company and First Interstate of $1,032 million and $885 million, respectively,
less pro forma expense adjustments of $368 million. The pro forma expense
adjustments include amortization of $257 million relating to a preliminary
estimate of $6,400 million excess purchase price over fair value of First
Interstate's net assets acquired (goodwill).
It is anticipated that the Company will incur merger-related costs of about
$700 million related to premises, severance and other costs. Of this amount,
approximately $400 million of costs relate to First Interstate's premises,
employees and operations and will affect the final amount of goodwill as of the
consummation of the merger. The remaining amount of approximately $300 million
of costs relate to the Company's premises, employees and operations as well as
all costs relating to systems conversions and other indirect, integration costs
and will be expensed, either upon consummation of the merger or as incurred.
With respect to timing, it is assumed that the integration would be completed
and that such costs would be incurred not later than 18 months after the closing
of the merger.
The foregoing estimate is based on the assumption that the equivalent of
approximately 85% (or 350) of First Interstate's California branches will be
consolidated (by closing or divesting both First Interstate and Wells Fargo
branches) following consummation of the merger. As part of the regulatory
approval process, the combined company will be required to divest 61 branches in
California having aggregate deposits of about $2.5 billion and loans of about
$1.3 billion. The divestitures have not been reflected in the pro forma
financial data since they are not expected to have a material impact on net
income.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
of Wells Fargo & Company:
We have audited the accompanying consolidated balance sheet of Wells Fargo &
Company and Subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wells Fargo &
Company and Subsidiaries as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Certified Public Accountants
San Francisco, California
January 16, 1996, except as to Note 15,
which is as of February 27, 1996
66
<PAGE>
WELLS FARGO & COMPANY AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENT OF INCOME - QUARTERLY
- -----------------------------------------------------------------------------------------------------------------------------
(in millions) 1995 1994
QUARTER ENDED Quarter ended
------------------------------------- -------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31 Dec. 31 Sept. 30 June 30 Mar. 31
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME $1,010 $1,019 $1,031 $1,025 $ 984 $ 954 $ 932 $ 895
INTEREST EXPENSE 343 356 372 360 328 297 277 253
------ ------ ------ ------ ----- ----- ----- -----
NET INTEREST INCOME 667 663 659 665 656 657 655 642
Provision for loan losses - - - - 30 50 60 60
------ ------ ------ ------ ----- ----- ----- -----
Net interest income after
provision for loan losses 667 663 659 665 626 607 595 582
------ ------ ------ ------ ----- ----- ----- -----
NONINTEREST INCOME
Service charges on deposit accounts 121 121 119 118 118 119 119 117
Fees and commissions 116 112 103 101 106 104 92 85
Trust and investment services income 65 63 57 55 51 52 50 50
Investment securities gains (losses) (3) - - (15) - 1 3 4
Sale of joint venture interest 163 - - - - - - -
Other (28) 43 31 (17) 19 31 35 44
------ ------ ------ ------ ----- ----- ----- -----
Total noninterest income 434 339 310 242 294 307 299 300
------ ------ ------ ------ ----- ----- ----- -----
NONINTEREST EXPENSE
Salaries 187 176 177 172 171 172 164 164
Incentive compensation 33 33 33 27 49 44 34 28
Employee benefits 40 46 48 53 48 50 49 54
Net occupancy 52 54 53 53 54 53 53 55
Equipment 54 47 45 47 54 40 41 39
Federal deposit insurance 5 - 24 24 25 25 25 26
Other 192 186 180 161 176 147 160 157
------ ------ ------ ------ ----- ----- ----- -----
Total noninterest expense 563 542 560 537 577 531 526 523
------ ------ ------ ------ ----- ----- ----- -----
INCOME BEFORE INCOME TAX EXPENSE 538 460 409 370 343 383 368 359
Income tax expense 232 199 177 137 128 166 162 157
------ ------ ------ ------ ----- ----- ----- -----
NET INCOME $ 306 $ 261 $ 232 $ 233 $ 215 $ 217 $ 206 $ 202
------ ------ ------ ------ ----- ----- ----- -----
------ ------ ------ ------ ----- ----- ----- -----
NET INCOME APPLICABLE TO
COMMON STOCK $ 295 $ 251 $ 222 $ 223 $ 205 $ 207 $ 195 $ 190
------ ------ ------ ------ ----- ----- ----- -----
------ ------ ------ ------ ----- ----- ----- -----
PER COMMON SHARE
Net income $ 6.29 $ 5.23 $ 4.51 $ 4.41 $3.96 $3.86 $3.57 $3.41
------ ------ ------ ------ ----- ----- ----- -----
------ ------ ------ ------ ----- ----- ----- -----
Dividends declared (1) $ 1.15 $ 1.15 $ 1.15 $ 1.15 $1.00 $1.00 $1.00 $1.00
------ ------ ------ ------ ----- ----- ----- -----
------ ------ ------ ------ ----- ----- ----- -----
Average common shares outstanding 47.0 47.9 49.1 50.5 51.8 53.6 54.8 55.7
------ ------ ------ ------ ----- ----- ----- -----
------ ------ ------ ------ ----- ----- ----- -----
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In January 1996, the Board of Directors declared a first quarter dividend of
$1.30 per common share.
67
<PAGE>
WELLS FARGO & COMPANY
APPENDIX TO
EXHIBIT 13
Description Page number
1. Line graph of Return on Average Total Assets
(ROA) for 1995, 1994, 1993, 1992 and 1991
(shown in %).
1995 2.03
1994 1.62
1993 1.20
1992 0.54
1991 0.04 4
2. Line graph of Return on Common Stockholders' Equity
(ROE) for 1995, 1994, 1993, 1992 and 1991 (shown in %).
1995 29.70
1994 22.41
1993 16.74
1992 7.93
1991 0.07 4
3. Line graph of Net Interest Margin for 1995, 1994 and
1993 (shown in %). Also presented is the yield on
total earning assets and the rate on total funding
sources for the same periods. This information is
also presented in Table 5-AVERAGE BALANCES, YIELDS
AND RATES PAID on pages 12 and 13. 10
4. Bar graph of the Loan Mix at Year End shown as a
percentage of total loans at December 31, 1995, 1994
and 1993.
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Commercial 27 % 22 % 21 %
Real Estate 1-4
family first
mortgage 13 25 23
Other real estate
mortgage 23 22 25
Real estate
construction 4 3 3
Consumer 28 24 24
Lease Financing 5 4 4
---- ---- ----
Total 100 % 100 % 100 % 17
</TABLE>
<PAGE>
5. Line graph of Nonaccrual Loans at December 31, 1995,
1994, 1993, 1992 and 1991 (shown in billions). This
information is also presented in Table 11-NONACCRUAL
AND RESTRUCTURED LOANS AND OTHER ASSETS on page 19. 19
6. Line graph of New Loans Placed on Nonaccrual at December 31,
1995, 1994, 1993, 1992 and 1991 (shown in billions).
1995 0.5
1994 0.3
1993 0.8
1992 2.2
1991 2.2 19
7. Bar graph of Core Deposits at Year End at December 31,
1995, 1994 and 1993 (shown in billions).
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Noninterest-bearing 10.4 10.1 9.7
Interest-bearing
checking .9 4.5 4.8
Market rate and
other savings 17.9 16.7 19.6
Savings certificates 8.6 7.1 7.2
------ ------ ------
Total Core Deposits $37.9 $38.5 $41.3 25
</TABLE>
8. Bar graph on the Price Range of Common Stock
(high, low, closing price) on an annual
basis for 1995, 1994 and 1993 (shown in dollars).
This information is also presented in Table 1-
RATIOS AND PER COMMON SHARE DATA on page 5. 34
9. Bar graph on the Price Range of Common Stock
(high, low, closing price) on a quarterly
basis for 1995 and 1994 (shown in dollars).
<TABLE>
<CAPTION>
HIGH LOW QTR END
<S> <C> <C> <C>
1995
1Q $160 5/8 $143 3/8 $156 3/8
2Q 185 7/8 157 180 1/4
3Q 189 177 3/4 185 5/8
4Q 229 190 216
1994
1Q $147 1/2 $127 5/8 $139 3/8
2Q 159 1/2 136 5/8 150 3/8
3Q 160 3/8 145 1/8 145 1/8
4Q 149 5/8 141 145 34
</TABLE>
<PAGE>
EXHIBIT 23
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Wells Fargo & Company:
We consent to the incorporation by reference in the Registration Statements
noted below on Forms S-3, S-4 and S-8 of Wells Fargo & Company of our report
dated January 16, 1996, except Note 15, which is as of February 27, 1996,
relating to the consolidated balance sheet of Wells Fargo & Company and
Subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1995, which report is
incorporated by reference in the December 31, 1995 Annual Report on Form 10-K of
Wells Fargo & Company.
Registration
Statement Number Form Description
- ---------------- ---- -----------
33-34969 S-8 Employee Stock Purchase Plan
33-7274, 33-40781 S-8 Equity Incentive Plans
33-26052, 33-41731 S-8 Director Option Plans
2-93338 S-8 Tax Advantage Plan and Tax Advantage Plan Sales by
Wells Fargo Bank
33-54441 S-8 Long-Term Incentive Plan
2-88534, 33-47434 S-3 Dividend Reinvestment and Common Stock Purchase
and Share Custody Plan
33-51227 S-3 Shelf registration of senior or subordinated debt
securities, preferred stock, depositary shares or
common stock
33-60573 S-3 Shelf registration of senior or subordinated debt
securities, preferred stock, depositary shares or
common stock
33-64575 S-4 Common stock issuable in connection with First
Interstate Bancorp acquisition
KPMG PEAT MARWICK LLP
San Francisco, California
March 19, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-K DATED MARCH 19, 1996 FOR THE PERIOD ENDED DECEMBER 31, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 3,375
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 177
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,920
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 35,582
<ALLOWANCE> 1,794
<TOTAL-ASSETS> 50,316
<DEPOSITS> 38,982
<SHORT-TERM> 2,976
<LIABILITIES-OTHER> 1,156
<LONG-TERM> 3,049
0
489
<COMMON> 235
<OTHER-SE> 3,331
<TOTAL-LIABILITIES-AND-EQUITY> 50,316
<INTEREST-LOAN> 3,403
<INTEREST-INVEST> 599
<INTEREST-OTHER> 7
<INTEREST-TOTAL> 4,085
<INTEREST-DEPOSIT> 997
<INTEREST-EXPENSE> 1,431
<INTEREST-INCOME-NET> 2,654
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (17)
<EXPENSE-OTHER> 2,201
<INCOME-PRETAX> 1,777
<INCOME-PRE-EXTRAORDINARY> 1,032
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,032
<EPS-PRIMARY> 20.37
<EPS-DILUTED> 19.90
<YIELD-ACTUAL> 6.08
<LOANS-NON> 538
<LOANS-PAST> 144
<LOANS-TROUBLED> 14
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,082
<CHARGE-OFFS> 422
<RECOVERIES> 134
<ALLOWANCE-CLOSE> 1,794
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 939
</TABLE>
