-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, plz5BtHcuOeGq7gYhM7b9e1u2uTAXt0hoFQu7a1GPfQhOIMhF8BBuJdGLQvZ+kPG HxVzT+FLvOvo1YduDI72+Q== 0000912057-94-000990.txt : 19940322 0000912057-94-000990.hdr.sgml : 19940322 ACCESSION NUMBER: 0000912057-94-000990 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WELLS FARGO & CO CENTRAL INDEX KEY: 0000105598 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 132553920 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-06214 FILM NUMBER: 94517099 BUSINESS ADDRESS: STREET 1: 420 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94163 BUSINESS PHONE: 4154771000 MAIL ADDRESS: STREET 1: 343 SANSOME ST 3RD FL STREET 2: WELLS FARGO BANK CITY: SAN FRANCISCO STATE: CA ZIP: 94163 10-K 1 FORM 10-K 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 fiscal year ended December 31, 1993 Commission file number 1-6214 ------------------------- WELLS FARGO & COMPANY (Exact name of Registrant as specified in its charter) Delaware No. 13-2553920 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 420 Montgomery Street, San Francisco, California 94163 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 477-1000 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 New York Stock Exchange Series A and B 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 there are delinquent filers pursuant to Item 405 of Regulation S-K that, to the best of the registrant's knowledge, will be 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 ----- ----- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of February 18, 1994, the latest practicable date, 55,827,132 shares of common stock were outstanding. The aggregate market value (based on the closing price on the New York Stock Exchange Composite Transaction Reporting System on February 18, 1994) of common stock of Wells Fargo & Company held by nonaffiliates was approximately $7,450 million. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1993 Annual Report to Shareholders - Incorporated into Parts I, II and IV. Portions of the Proxy Statement dated March 15, 1994 for the 1994 Annual Meeting of Shareholders - Incorporated into Part III. FORM 10-K CROSS-REFERENCE INDEX
Page ------------------------------------------ FORM Annual Proxy 10-K Report (1) Statement (2) ---- ------ --------- PART I Item 1. Business Description of Business 2-10 11-71 Statistical Disclosure: Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential 11-12 13-16 -- Investment Portfolio 13 19-21, 46, 49-50 -- Loan Portfolio 13-15 21-31, 47, 51-52 -- Summary of Loan Loss Experience 16-18 31-33, 47, 52 -- Deposits 18 14-15 -- Return on Equity and Assets -- 11-12 -- Short-Term Borrowings 19 -- -- Item 2. Properties 19 -- -- Item 3. Legal Proceedings -- 67 -- Item 4. Submission of Matters to a Vote of Security- Holders (in fourth quarter 1993) (3) -- -- -- Executive Officers of the Registrant 20 -- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters -- 41, 48 -- Item 6. Selected Financial Data -- 13 -- Item 7. Management's Discussion and Analysis of Finan- cial Condition and Results of Operations -- 11-41 -- Item 8. Financial Statements and Supplementary Data -- 42-71 -- 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 20 -- 5-8 Item 11. Executive Compensation -- -- 3-4,9-13 Item 12. Security Ownership of Certain Beneficial Owners and Management -- -- 4-5 Item 13. Certain Relationships and Related Transactions -- -- 16-17 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 21-23 42-71 -- SIGNATURES 24 -- -- - ---------------------------------------------------------------------------------------------------------------- (1) 1993 Annual Report to Shareholders, portions of which are incorporated by reference into this Form 10-K. (2) Proxy Statement dated March 15, 1994 for the 1994 Annual Meeting of Shareholders, portions of which are incorporated by reference into this Form 10-K. (3) None.
1 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 at December 31, 1993, it was the 12th largest bank holding company in the United States. Its principal subsidiary is Wells Fargo Bank, N.A. (Bank), the seventh 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, the Company completed the purchase of 92 Southern California branches from Great American Bank (GA), a Federal Savings Bank, in the first phase of a two-phase purchase of the California branch network of GA. The second phase of the GA acquisition was completed in 1991 and included GA's remaining 38 California branches. The Company acquired assets with a GA book value of $5.8 billion in this two-phase purchase. 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. 2 The following table shows selected information for the Bank:
- ------------------------------------------------------------------------------------- December 31, ---------------------------------------------- (in billions) 1993 1992 1991 1990 1989 - ------------------------------------------------------------------------------------- Investment securities $12.7 $ 9.0 $ 3.6 $ 1.3 $ 1.5 Loans $32.4 $36.0 $43.0 $47.3 $39.2 Assets $50.7 $50.7 $51.6 $53.7 $45.3 Deposits $42.4 $43.1 $44.5 $42.7 $36.5 Staff (full-time equivalent) 19,600 21,300 21,000 21,600 19,200 Branches (domestic, all California) 624 626 612 574 455 - -------------------------------------------------------------------------------------
RETAIL BANKING Retail Banking includes Branch Banking, Consumer Checking, 7/24 Banking, Credit Card/Consumer Loans, Mortgage Banking and Auto Finance. BRANCH BANKING. Branch banking activities constitute the largest portion of the Bank's business. The Bank through its branch network provides a broad range of consumer banking services in California, including savings and time deposits, checking accounts, credit card services, consumer loans, home mortgage loans, small business loans, mutual funds and safe deposit facilities. The operating hours of the branches are generally 9 a.m. to 6 p.m. on weekdays and 9 a.m. to 2 p.m. on Saturdays. CONSUMER CHECKING. Consumer Checking offers a variety of checking account plans and related transaction services for consumers. Approximately 30% of all consumer checking accounts receive electronic deposits, approximately 65% have overdraft protection (either through a linked savings account or credit card) and over 84% have their checking accounts linked to an automated teller machine card. At December 31, 1993, the Bank had 2.7 million consumer checking accounts and 1.4 million savings accounts linked to checking accounts for overdraft protection. Balances were $4 billion on interest-bearing checking accounts, $3 billion on noninterest-bearing checking accounts and $2.8 billion on savings accounts linked to checking for overdraft protection at the end of 1993. 7/24 BANKING. 7/24 Banking provides banking services 24 hours a day, seven days a week through Customer Service Centers (telephone banking) and Wells Fargo Express-R- automated teller machines (ATMs). At December 31, 1993, there were over 1,800 Wells Fargo Express ATMs statewide, processing approximately 15 million transactions per month. In addition, the Bank is a member of the STAR SYSTEM-R- and PLUS-R- shared ATM networks that have over 100,000 ATMs throughout the U.S. and in foreign countries, including over 15,000 ATMs in the Western states. These systems provide the Bank's customers the ability to withdraw cash at any STAR SYSTEM or PLUS ATM. The Bank's Express ATMs also accept STAR SYSTEM, PLUS, CIRRUS-R-, Visa-R- and MasterCard-R- network cards and American Express-R- cards. 3 The Bank is also a member of the INTERLINK-R- network (a membership corporation and subsidiary of Visa). INTERLINK, which provides point-of-sale electronic funds transfer services, is the largest debit card network in the nation. The Bank issues point-of-sale cards with INTERLINK access to its demand deposit account customers. The Bank's merchant processing area is also a member of Explore-R-, a point-of-sale network related to the STAR SYSTEM. Explore is one of the largest regional electronic funds transfer networks in the West with more than 700 member institutions. The Bank is one of the largest providers of on-line debit services in the nation (i.e., electronic funds transfer processing at participating supermarkets and retailers in California). CREDIT CARD/CONSUMER LOANS. The Credit Card/Consumer Loans Division provides unsecured revolving lines of credit to approximately 2 million Visa and MasterCard accountholders. At December 31, 1993, Credit Card outstandings totaled $2.6 billion. During 1993, there were 52.4 million transactions generating $4.2 billion in purchases and advances on Visa and MasterCard accounts. The Division also provides other consumer loan products, predominantly unsecured lines of credit. At December 31, 1993, the Division's consumer loans (excluding credit card loans) totaled $1.1 billion. MORTGAGE BANKING. Mortgage Banking provides real estate mortgage loan products that are secured by a first mortgage or junior lien on 1-4 family residential properties. Mortgage Banking products include home equity lines of credit, fixed-rate mortgage loans, adjustable-rate mortgage loans and fixed-initial-rate mortgage (FIRM-R-) loans, which carry fixed-rates during an initial period of the loan term and carry adjustable rates thereafter. Some of the first mortgage loans originated by Mortgage Banking are sold through secondary markets (Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC)), while the remainder are retained in the Bank's loan portfolio. At December 31, 1993, Mortgage Banking's loan portfolio consisted of $7.0 billion of real estate 1-4 family first mortgage loans and $3.4 billion of real estate 1-4 family junior lien mortgage loans. Mortgage Banking also services mortgage loans owned by third parties, which totaled approximately $4.4 billion at December 31, 1993. AUTO FINANCE. Auto Finance provides indirect financing for the purchase or lease of automobiles through dealerships, as well as direct automobile loans through the branches. At December 31, 1993, the Auto Finance loan portfolio, which was substantially comprised of auto lease financing and monthly payment loans, totaled $1.7 billion. WHOLESALE BANKING Wholesale Banking includes Commercial Banking, Real Estate and Capital Markets. COMMERCIAL BANKING. The Commercial Banking Group consists of four divisions. The first, the Commercial Banking Division, generally services those firms with annual sales volume from $5 million to $250 million that are headquartered and doing business in California, as well as high-net-worth individuals with commercial financing needs. The Division concentrates on providing credit and non-credit services to the manufacturing, distribution, retail and agribusiness industries. The Division provides revolving lines of credit, term loans, project 4 financing, trade facilities, deposit, cash management and other business services through commercial banking regional offices located in key market areas throughout California. At December 31, 1993, the Division's loan portfolio totaled $5.9 billion. The Corporate Banking Division generally services those corporations with annual sales over $250 million that are headquartered and doing business in California, and corporations with annual sales of over $100 million that are headquartered and doing business outside of California. The Division provides commercial loans, demand deposit accounts, remittance and exchange, and cash management. Operations are conducted from the Division's San Francisco office and its loan production office in Dallas. At December 31, 1993, the Division's loan portfolio totaled $1.8 billion. The Wholesale Services Division offers a broad array of operating and cash management products to businesses throughout the United States. The Division's electronic product lines help customers collect and disburse funds efficiently and safely and deliver important cash flow and accounting information to business customers to optimize the use of their funds. Products include Account Reconcilement, Automated Clearinghouse, Wire Transfer, Lockbox and Balance Reporting, in addition to other services widely used by business clients. The International Division is responsible for providing international financial products and advisory services to the Bank's domestic customers. The Division provides trade finance products (such as import and export letters of credit, documentary collections, standby letters of credit and bankers' acceptances), foreign exchange products and advisory services. The Division conducts substantially all of its activities from its offices in San Francisco and the City of Industry, California. In 1989, the Company reached a cooperative agreement with The Hongkong and Shanghai Banking Corporation Ltd. (HSBC), a unit of HSBC Holdings plc. The agreement provides the Company and its domestic customers access to HSBC's network of nearly 3,000 offices outside the U.S. HSBC, which in 1992 acquired Midland Bank plc of the U.K., provides such services as international trade financing, local currency lending and international cash management, as well as trade, credit and country information. REAL ESTATE GROUP. The Real Estate Group provides commercial and residential construction loans to builders and developers, throughout the United States. In addition, the Group provides a variety of real estate products and services, including land acquisition and development loans, secured and unsecured lines of credit, interim financing arrangements on completed buildings, rehabilitation loans, affordable housing loans and letters of credit. The Group's commercial loan portfolio principally consists of lines of credit and short-term loans to developers and selected real estate investment trusts. The Group has loan production offices in six cities in Northern and Southern California and four offices outside of California. At December 31, 1993, the Group's loan portfolio totaled $6.4 billion. CAPITAL MARKETS. The Capital Markets Group provides a wide range of product lines for Wholesale Banking and third party clients. The Group offers loan syndications and asset sales, private placements, real estate pension fund advisory services, mortgage banking, investment property sales, securitization, rate risk management and the origination and distribution of small commercial, industrial and multifamily mortgages. The Capital Markets 5 Group also services mortgage loans owned by third parties, which totaled approximately $1.7 billion at December 31, 1993. WHOLESALE BANKING AND FEE-BASED INCOME STRATEGIES. Over the past several years, the Company has shifted its focus of operations. The effects of this have been to reduce concentrations from historical levels in commercial real estate and large company, corporate lending and to redirect those assets towards consumer mortgage and small/middle market business lending. The Company is currently focusing its Wholesale Banking operation to sell its full array of credit and non-credit products to its existing customer base and to develop new relationships. In addition, potential new products and services that are tailored to customers' current and future needs will be evaluated and introduced in the coming years. Concentration levels in commercial real estate and large company, corporate lending have declined over the last several years as the recession reduced borrower needs and low rates accelerated traditional prepayment patterns. These assets have been redeployed into investment securities, resulting in total earning assets remaining at approximately the same level. The maturities within the securities portfolio have been kept short so that runoff will accommodate loan growth, primarily in 1-4 family first mortgage loans, consumer loans and small business and middle market loans, as the recovery takes hold. While lending opportunities to existing and new commercial real estate and large company, corporate customers are being pursued, loan concentrations are not expected to approach the levels of prior years. This reduction is not anticipated to have a material effect on the Company's overall performance. The Company's other main strategic focus has been in the area of fee-based services. Noninterest income from these sources are likely to continue to increase in the foreseeable future. The major contributors to this growth will be the value added pricing of services provided to customers and identifying new customer needs, especially in the retail area, and the continued growth of trust and investment management businesses, including mutual funds. Other contributors to noninterest income include fees anticipated to be earned by an originations/servicing business. This value added business is expected to increase income without corresponding needs for increased asset balances. BUSINESS AND INVESTMENT GROUP The Business and Investment Group includes Business Banking, Savings and Investments, and Investment Management and Retirement Programs. BUSINESS BANKING. The divisions of Business Banking are focused on providing loans and a variety of other products and services for small businesses in California. At December 31, 1993, Business Banking's loan portfolio totaled $1.7 billion. The Business Services Division provides payroll and tax services used by over 12,000 business customers headquartered in California. 6 The Merchant Card Services Division provides bankcard services to merchants who accept credit and debit cards throughout California and several other states. The Bank provides credit card services for approximately 29,000 merchant locations; in addition, it provides debit card processing for merchants as well as check guarantee services. In November 1993, the Bank formed an alliance for merchant credit card and debit card services with Card Establishment Services, Inc. (CES). Under this agreement, the Bank is responsible for marketing and sales, initial merchant credit analysis and customer service; CES provides technology and processing operations. The Business Deposit Division offers a wide range of deposit- related products, including checking, savings, market rate and time deposit accounts and investment-related products for small businesses. At December 31, 1993, the Division had deposits of approximately $6.4 billion, consisting of 445,000 accounts, of which 320,000 were checking accounts. The Business Benefits Division offers Simplified Employee Pension (SEP) plans and KEOGH retirement plans to small businesses. At December 31, 1993, the Division was administering approximately $460 million in SEP and KEOGH assets, including $190 million invested in Stagecoach Funds, for more than 25,000 small business customers. SAVINGS AND INVESTMENTS. The Savings and Investments Group (SIG) provides consumer products, such as mutual funds, individual retirement accounts (IRA) and savings accounts, as well as services, such as personal computer banking and brokerage services. The Bank's mutual fund products, which have been a growing area, are comprised of three families of mutual funds: Overland Express, Stagecoach Funds and WellsFunds. In November 1990, the Bank introduced the Overland Express family of funds, which are sold through brokers around the country. At December 31, 1993, the Overland Express family of 13 funds had $3.9 billion of assets under management. In 1992, the Bank increased its focus on selling financial products in the branches by establishing a Personal Financial Officer (PFO) Program and by introducing a new family of mutual funds, the Stagecoach Funds, which are sold by the PFOs through the branch network. By December 31, 1993, the Bank had approximately 210 PFOs and the Stagecoach family of 12 funds had grown to $3.8 billion of assets under management. In mid-1993, the Bank introduced a third family of mutual funds, the WellsFunds, which are offered to selected groups of investors, such as participants in certain employee benefit plans, certain IRA investors and certain corporations, partnerships and other business entities. The WellsFunds family of 7 funds had assets under management of $530 million at December 31, 1993. At December 31, 1993, SIG was administering IRA accounts for approximately 275,000 customers. IRA assets totaled $4.1 billion at December 31, 1993, including $1.2 billion invested in Stagecoach Funds. The Division's personal computer banking service, Wells Fargo ON- LINE, provides access to account balances and transaction information and allows customers to transfer money among their Wells Fargo accounts. ON-LINE users may also pay bills electronically. 7 By the end of 1993, customers were executing over 540,000 transactions per month through the ON-LINE service. INVESTMENT MANAGEMENT AND RETIREMENT PROGRAMS. Investment Management and Retirement Programs (IMRP) provide personal trust, investment management and custody services principally to taxable (i.e., non-ERISA) clients. IMRP also provides trustee and investment services for defined benefit and defined contribution plans, which include plans qualifying under Section 401(K) of the Internal Revenue Code. At December 31, 1993, IMRP managed or maintained approximately $42 billion in personal trust, employee benefit trust and agency assets. IMRP also provides to high net worth individuals, banking and credit services consisting primarily of commercial loans and real estate 1-4 family first mortgage loans, which totaled $503 million at December 31, 1993. WELLS FARGO NIKKO INVESTMENT ADVISORS The Company operates a joint venture, Wells Fargo Nikko Investment Advisors (WFNIA), with Nikko Securities Co., Ltd. of Tokyo. At December 31, 1993, WFNIA managed or was advisor for approximately $155 billion of investment funds for pension plans, endowments, institutions and foundations, making it the nation's largest manager of index and other quantitatively structured or process-driven funds. In 1992, three companies were formed to facilitate WFNIA's global expansion into Europe, Canada and Japan: WFNIA Limited, WFNIA (Canada) Limited and WFNIA (Japan) Limited, respectively. These companies are owned by WFNIA International, a California general partnership owned by Wells Fargo & Company and The Nikko Securities Co., Ltd. The international subsidiaries are providing marketing and client services for WFNIA and advisory services for certain European, Japanese and Canadian clients. In 1993, three additional companies were formed to further WFNIA's global expansion into Australia and Europe: WFNIA Australia Holdings PTY Limited, WFNIA Australia Limited and WFNIA Guernsey Limited. 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 8 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, now the second largest bank holding company in the United States. 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). Within banking products, the Company is presently the second largest holder of customer bank 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. 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 9 of credit to its affiliates. For more information regarding restrictions on loans by the Bank to its affiliates, see Note 2 to the Financial Statements in the 1993 Annual Report to Shareholders. 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. 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 described in Note 2 to the Financial Statements in the 1993 Annual Report to Shareholders. 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, has increased the types of accounts that can be offered and has increased the cost of FDIC insurance of deposits. Generally, the effect of these changes has been to increase the Bank's cost of its traditionally important sources of consumer deposits. In addition, 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. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) was enacted on December 19, 1991. FDICIA contains numerous provisions, including a risk-based FDIC premium assessment system, new reporting requirements, termination of the "too big to fail" doctrine (except in special cases) and revised regulatory standards for real estate lending and capital adequacy. For further information, see the Noninterest Expense and Capital Adequacy/Ratios sections of the Financial Review in the 1993 Annual Report to Shareholders. 10
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) - DOMESTIC AND FOREIGN OPERATIONS (1) - ---------------------------------------------------------------------------------------------------------------------------------- 1993 1992 1991 -------------------------- ------------------------- -------------------------- INTEREST Interest Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ Average Yields/ income/ (in millions) BALANCE RATES EXPENSE balance rates expense balance rates expense - ---------------------------------------------------------------------------------------------------------------------------------- DOMESTIC OPERATIONS Earning assets: Investment securities: 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 Obligations of states and political subdivisions 22 7.36 2 32 7.15 2 50 7.31 4 Private collateralized mortgage obligations 864 4.16 36 -- -- -- -- -- -- Other securities 76 5.85 4 46 6.31 4 143 8.79 13 ------- ------ ------- ------ ------- ------ Total investment securities at cost 11,219 5.96 668 5,837 6.94 406 2,055 7.51 154 At lower of cost or market -- -- -- 108 8.73 9 -- -- -- ------- ------ ------- ------ ------- ------ Total investment securities 11,219 5.96 668 5,945 7.15 415 2,055 7.51 154 Federal funds sold and securities purchased under resale agreements 734 3.17 23 919 3.62 33 303 5.42 16 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 ------- ------ ------- ------ ------- ------ Total loans (2)(3) 34,297 8.94 3,068 40,405 9.16 3,701 46,729 10.31 4,819 Other -- -- -- 1 -- -- 17 8.43 1 ------- ------ ------- ------ ------- ------ Total domestic earning assets $46,250 8.13 3,759 $47,270 8.77 4,149 $49,104 10.17 4,990 ======= ------ ======= ------ ======= ------ Funding sources: Interest-bearing liabilities: Deposits: Interest-bearing checking $ 4,626 1.18 55 $ 4,597 1.77 81 $ 4,379 3.72 163 Savings deposits 2,741 2.19 60 3,250 2.81 91 3,398 4.88 166 Market rate savings 16,592 2.28 378 15,284 2.89 442 12,699 5.04 640 Savings certificates 7,948 4.37 347 10,763 4.94 532 13,758 6.57 905 Certificates of deposit 219 7.99 18 316 8.41 27 570 8.12 46 Other time deposits 112 5.62 6 128 5.32 7 149 7.89 12 ------- ------ ------- ------ ------- ------ Total interest-bearing deposits 32,238 2.68 864 34,338 3.44 1,180 34,953 5.53 1,932 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 Funds transferred from (to) foreign operations (91) (3.04) (3) 10 7.89 1 393 7.38 29 ------- ------ ------- ------ ------- ------ Total interest-bearing liabilities 37,537 2.93 1,102 39,946 3.63 1,450 43,194 5.66 2,448 Portion of noninterest-bearing funding sources 8,713 -- -- 7,324 -- -- 5,910 -- -- ------- ------ ------- ------ ------- ------ Total domestic funding sources $46,250 2.38 1,102 $47,270 3.07 1,450 $49,104 4.99 2,448 ======= ------ ======= ------ ======= ------ Domestic net interest margin and net interest income on a taxable-equivalent basis 5.75% $2,657 5.70 % $2,699 5.19 % $2,542 ===== ====== ===== ====== ===== ====== FOREIGN OPERATIONS (4) Earning assets: Investment securities $ 91 5.12% $ 5 $ 32 4.95 % $ 1 $ -- -- % $ -- Loans (3) 7 -- -- 1 -- -- 7 23.86 2 ------- ------ ------- ------ ------- ------ Total foreign earning assets $ 98 5.04 5 $ 33 4.97 1 $ 7 23.86 2 ======= ------ ======= ------ ======= ------ Funding sources: Deposits in foreign offices $ 7 -- -- $ 43 7.89 3 $ 400 7.62 31 Funds transferred from (to) domestic operations 91 3.04 3 (10) (7.89) (1) (393) (7.38) (29) ------- ------ ------- ------ ------- ------ Total foreign funding sources $ 98 3.04 3 $ 33 7.89 2 $ 7 23.86 2 ======= ------ ======= ------ ======= ------ Foreign net interest margin and net interest income (expense) on a taxable-equivalent basis 2.00% $ 2 (2.92)% $ (1) -- % $ -- ===== ====== ===== ====== ==== ====== Domestic and foreign earning assets, net interest margin and net interest income on a taxable-equivalent basis $46,348 5.74% $2,659 $47,303 5.70 % $2,698 $49,111 5.18 % $2,542 ======= ===== ====== ======= ===== ====== ======= ==== ====== - ----------------------------------------------------------------------------------------------------------------------------------- (1) The average prime rate of the Bank was 6.00%, 6.25% and 8.47% for the years ended 1993, 1992 and 1991, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 3.29%, 3.83% and 5.99% for the same years, respectively. (2) Interest income included loan fees, net of deferred costs, of approximately $41 million, $57 million and $63 million in 1993, 1992 and 1991, respectively. Substantially all of the loan fees related to domestic operations. (3) Nonaccrual loans and related income are included in their respective loan categories. (4) For Securities and Exchange Commission purposes, foreign operations are transactions with customers who are domiciled outside of the United States.
11 ANALYSIS OF CHANGES IN NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS 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, segregated between domestic and foreign operations. 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.
- --------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, --------------------------------------------------------- 1993 OVER 1992 1992 over 1991 -------------------------- -------------------------- (in millions) VOLUME RATE TOTAL Volume Rate Total - --------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in interest income: Investment securities: At cost: Domestic: U.S. Treasury securities $ 37 $ (13) $ 24 $ 55 $ (5) $ 50 Securities of U.S. government agencies and corporations 248 (46) 202 219 (6) 213 Obligations of states and political subdivisions -- -- -- (2) -- (2) Private collateralized mortgage obligations 24 12 36 -- -- -- Other securities -- -- -- (6) (3) (9) Foreign 4 -- 4 1 -- 1 At lower of cost or market (5) (4) (9) 9 -- 9 Federal funds sold and securities purchased under resale agreements (6) (4) (10) 24 (7) 17 Loans: Domestic: Commercial (232) 77 (155) (291) (136) (427) Real estate 1-4 family first mortgage (73) (96) (169) (166) (79) (245) Other real estate mortgage (96) (1) (97) (13) (147) (160) Real estate construction (46) 1 (45) (36) (33) (69) Consumer: Real estate 1-4 family junior lien mortgage (50) (50) (100) (52) (94) (146) Credit card (28) (9) (37) 2 (9) (7) Other revolving credit and monthly payment (18) (8) (26) (25) (28) (53) Lease financing 2 (6) (4) -- (11) (11) Foreign -- -- -- (1) (1) (2) Other -- -- -- -- (1) (1) ------ ------ ------ ------ ------ ------ Total decrease in interest income (239) (147) (386) (282) (560) (842) ------ ------ ------ ------ ------ ------ Increase (decrease) in interest expense: Deposits: Domestic: Interest-bearing checking 1 (27) (26) 8 (90) (82) Savings deposits (13) (18) (31) (7) (68) (75) Market rate savings 35 (99) (64) 112 (310) (198) Savings certificates (129) (56) (185) (174) (199) (373) Certificates of deposit (8) (1) (9) (21) 2 (19) Other time deposits (1) -- (1) (2) (3) (5) Foreign (1) (2) (3) (29) 1 (28) Federal funds purchased and securities sold under repurchase agreements (8) (4) (12) (74) (55) (129) Commercial paper and other short-term borrowings (1) (2) (3) (45) (24) (69) Senior debt -- (23) (23) 33 (33) -- Subordinated debt 5 5 10 2 (22) (20) Funds transferred from foreign operations (4) -- (4) (30) 2 (28) Funds transferred to domestic operations 4 -- 4 30 (2) 28 ------ ------ ------ ------ ------ ------ Total decrease in interest expense (120) (227) (347) (197) (801) (998) ------ ------ ------ ------ ------ ------ Increase (decrease) in net interest income on a taxable-equivalent basis $ (119) $ 80 $ (39) $ (85) $ 241 $ 156 ====== ====== ====== ====== ====== ====== Domestic operations $ (120) $ 78 $ (42) $ (84) $ 241 $ 157 ====== ====== ====== ====== ====== ====== Foreign operations $ 1 $ 2 $ 3 $ (1) $ -- $ (1) ====== ====== ====== ====== ====== ====== - --------------------------------------------------------------------------------------------------------------------------------- Unless otherwise indicated, each of the above interest-earning assets and interest-bearing liabilities is primarily related to domestic operations.
12 INVESTMENT SECURITIES At December 31, 1993, 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. These securities had a cost basis and fair value of $903 million and $901 million, respectively, and were distributed among 41 series of mortgage pass-through certificates; each series was collateralized by separate trusts. The largest series had both a cost basis and fair value of approximately $48 million. ANALYSIS OF LOAN PORTFOLIO At December 31, 1993, the Company did not have loan concentrations that exceeded 10% of total loans, except as shown below.
- -------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1993 -------------------------------------------------------- OVER ONE YEAR THROUGH FIVE YEARS OVER FIVE YEARS ------------------ ----------------- FLOATING FLOATING OR OR December 31, ONE YEAR FIXED ADJUSTABLE FIXED ADJUSTABLE ------------------------------------- (in millions) OR LESS RATE RATE RATE RATE TOTAL 1992 1991 1990 1989 - -------------------------------------------------------------------------------------------------------------------------------- Selected loan maturities (1): Commercial $3,912 $ 397 $ 2,093 $ 46 $ 464 $ 6,912 $ 8,214 $11,270 $14,639 $14,490 Real estate 1-4 family first mortgage (2) 250 843 149 4,957 1,259 7,458 6,836 8,612 9,865 7,628 Other real estate mortgage (3) 2,677 2,418 1,760 596 835 8,286 10,128 10,751 10,505 6,019 Real estate construction (3) 911 72 63 40 24 1,110 1,600 2,055 2,669 4,088 Foreign 16 -- 2 -- -- 18 5 2 9 50 ------ ------ ------- ------ ------ ------- ------- ------- ------- ------- Total selected loan maturities $7,766 $3,730 $ 4,067 $5,639 $2,582 23,784 26,783 32,690 37,687 32,275 ====== ====== ======= ====== ====== ------- ------- ------- ------- ------- Other loan categories: Real estate 1-4 family junior lien mortgage 3,583 4,157 5,053 5,178 3,946 Credit card 2,600 2,807 2,900 2,788 2,504 Other revolving credit and monthly payment 1,920 1,979 2,286 2,163 1,949 ------- ------- ------- ------- ------- Total consumer 8,103 8,943 10,239 10,129 8,399 Lease financing 1,212 1,177 1,170 1,161 1,053 ------- ------- ------- ------- ------- Total loans $33,099 $36,903 $44,099 $48,977 $41,727 ======= ======= ======= ======= ======= - -------------------------------------------------------------------------------------------------------------------------------- (1) Based on remaining contractual principal maturities. (2) Includes approximately $137 million of fixed-initial-rate mortgage (FIRM) loans in the over 1 year through 5 year fixed rate category and $2.2 billion of 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. (3) During the fourth quarter of 1990, loans were reclassified from the real estate construction loan category to the other real estate mortgage loan category so that the real estate construction loan category consists solely of properties where construction is not complete. Prior period balances have not been reclassified as complete information is not available.
13 UNDERWRITING POLICIES AND PRACTICES It is the policy of the Company to grant credit for lawful and productive purposes 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 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, 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, fed funds 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 its 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; it can denote any information which serves to inform the Company about the financial health of its credit customers. A credit analysis includes, at a minimum, an evaluation of the customer's financial strength and probability of repayment. Due consideration is given to the negative factors which may affect a borrower's ability to repay as scheduled. 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 establish criteria for sources of repayment, financial strength and enhancements such as guarantees. With the exception of loans secured by cash and marketable securities, the primary source of repayment will be recurring cash flow of the borrower or cash flow from the real estate project being financed. Such 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; and minimum liquidity and maximum financial leverage requirements and policies for identification of and lending to highly leveraged borrowers and for products which employ credit scoring criteria and methodology. 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. 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 for maximum terms ranging from 2 to 15 years for certain 14 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 nonprofit as well as for-profit developers. Real estate 1-4 family loans (including equity lines) are generally made with maximum LTVs of 50% to 95% depending on the amount and term of the loan, debt service coverage and whether or not the property is owner-occupied; private mortgage insurance is required on loans with LTVs greater than 80%. Generally, commercial loan categories include unsecured loans and lines of credit with minimum debt service coverage of 1.30 or higher depending on the specific credit analysis and with maximum terms of 1 to 7 years; loans and lines of credit secured by accounts receivable, inventories, equipment, marketable securities and cash or equivalent most often have minimum debt service requirements ranging from 1.30 to 1.50, maximum terms of 1 to 7 years and advance rates based on an analysis of the collateral pledged. 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. 15 CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, ------------------------------------------------------ (in millions) 1993 1992 1991 1990 1989 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, beginning of year $2,067 $1,646 $ 885 $738 $752 Allowance related to acquisitions (dispositions) -- -- (2) 33 (11) Provision for loan losses 550 1,215 1,335 310 362 Loan charge-offs: Commercial (110) (238) (402) (75) (116) Real estate 1-4 family first mortgage (25) (17) (11) (5) -- Other real estate mortgage (1) (197) (290) (88) (25) (16) Real estate construction (1) (68) (93) (29) (19) (17) Consumer: Real estate 1-4 family junior lien mortgage (28) (28) (7) (6) (3) Credit card (177) (189) (161) (107) (85) Other revolving credit and monthly payment (41) (41) (42) (26) (20) ------ ------ ------ ---- ---- Total consumer (246) (258) (210) (139) (108) Lease financing (18) (19) (19) (17) (12) ------ ------ ------ ---- ---- Total domestic loan charge-offs (664) (915) (759) (280) (269) Foreign -- -- -- -- (118) ------ ------ ------ ---- ---- Total loan charge-offs (664) (915) (759) (280) (387) ------ ------ ------ ---- ---- Loan recoveries: Commercial 71 59 98 40 41 Real estate 1-4 family first mortgage 2 2 -- -- -- Other real estate mortgage (1) 47 9 2 7 4 Real estate construction (1) 4 3 3 1 13 Consumer: Real estate 1-4 family junior lien mortgage 3 1 -- -- 1 Credit card 21 21 19 17 16 Other revolving credit and monthly payment 12 12 11 12 13 ------ ------ ------ ---- ---- Total consumer 36 34 30 29 30 Lease financing 9 9 5 5 5 ------ ------ ------ ---- ---- Total domestic loan recoveries 169 116 138 82 93 Foreign -- 1 49 30 27 ------ ------ ------ ---- ---- Total loan recoveries 169 117 187 112 120 ------ ------ ------ ---- ---- Total net loan charge-offs (495) (798) (572) (168) (267) Recoveries (losses) on the sale or swap of developing country loans -- 4 -- (28) (98) ------ ------ ------ ---- ---- Balance, end of year $2,122 $2,067 $1,646 $885 $738 ====== ====== ====== ==== ==== Domestic net loan charge-offs as a percentage of average domestic loans 1.44% 1.97% 1.33% .45% .45% ====== ====== ====== ==== ==== Total net loan charge-offs as a percentage of average total loans 1.44% 1.97% 1.22% .38% .67% ====== ====== ====== ==== ==== Allowance as a percentage of total loans 6.41% 5.60% 3.73% 1.81% 1.77% ====== ====== ====== ==== ==== - ---------------------------------------------------------------------------------------------------------------------------------- (1) During the fourth quarter of 1990, loans were reclassified from the real estate construction loan category to the other real estate mortgage loan category so that the real estate construction loan category consists solely of properties where construction is not complete. Prior period balances have not been reclassified as complete information is not available.
16
Changes in the allowance for loan losses allocated to foreign loans were as follows: - ----------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, ------------------------------------------------- (in millions) 1993 1992 1991 1990 1989 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, beginning of year $ -- $ -- $ 6 $ -- $ 6 Provision for loan losses (1) -- (5) (55) 4 183 Gross charge-offs (2) -- -- -- -- (118) Recoveries -- 1 49 30 27 ----- ----- ----- ----- ----- Net loan recoveries (charge-offs) -- 1 49 30 (91) Recoveries (losses) on the sale or swap of developing country loans -- 4 -- (28) (98) ----- ----- ----- ----- ----- Balance, end of year $ -- $ -- $ -- $ 6 $ -- ===== ===== ===== ===== ===== - ----------------------------------------------------------------------------------------------------------------------------------- (1) The 1992 amount represents effects of recoveries from prior years' charge-offs and from losses on loan sales; the 1991 amount represents a reversal of the unused portion of the allowance for loan losses. (2) In 1989, the Company charged off its remaining medium- and long-term loans to developing countries of $107 million.
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 178% and 97% at December 31, 1993 and 1992, 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. (For example, at December 31, 1993 and 1992, the percentages of nonaccrual loan balances that were current as to payment of principal and interest were 50% and 55%, respectively, and the ratios of book to contractual balance were 66% and 79%, respectively.) 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 1993 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 (particularly in Southern California) and other subjective factors. Although management has allocated the allowance to specific loan categories, the adequacy of the allowance must be considered in its entirety. 17 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------------------------------------------------------------------------------------------------- December 31, ---------------------------------------------------------------------------------------------- 1993 1992 1991 1990 1989 - ---------------------------------------------------------------------------------------------------------------------------------- (in millions) Commercial $ 152 $ 373 $ 417 $177 $104 Real estate 1-4 family first mortgage 39 37 33 32 12 Other real estate mortgage (1) 357 589 350 63 24 Real estate construction (1) 92 181 121 36 34 Consumer: Credit card (2) 96 107 239 193 158 Other consumer 87 58 51 32 43 ------ ------ ------ ---- ---- Total consumer 183 165 290 225 201 Lease financing 19 17 15 13 14 Foreign -- -- -- 6 -- Unallocated component of the allowance (3) 1,280 705 420 333 349 ------ ------ ------ ---- ---- Total $2,122 $2,067 $1,646 $885 $738 ====== ====== ====== ==== ====
December 31, --------------------------------------------------------------------------------------------------- 1993 1992 1991 1990 1989 ---------------- ---------------- ---------------- ---------------- --------------- 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 ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- Commercial 2.20% 21% 4.54% 22% 3.70% 25% 1.21% 31% .72% 35% Real estate 1-4 family first mortgage .52 23 .54 19 .38 20 .32 20 .16 18 Other real estate mortgage (1) 4.31 25 5.82 27 3.26 24 .60 21 .40 14 Real estate construction (1) 8.29 3 11.31 4 5.89 5 1.35 5 .83 10 Consumer: Credit card (2) 3.69 8 3.81 8 8.24 7 6.92 6 6.31 6 Other consumer 1.58 16 .95 17 .69 16 .44 15 .73 14 --- --- --- --- --- Total consumer 2.26 24 1.85 25 2.83 23 2.22 21 2.39 20 Lease financing 1.57 4 1.44 3 1.28 3 1.12 2 1.33 3 Foreign -- -- -- -- -- -- 66.67 -- -- -- --- --- --- --- --- Total 6.41% 100% 5.60% 100% 3.73% 100% 1.81% 100% 1.77% 100% ==== === ===== === ==== === ===== === ==== === - ---------------------------------------------------------------------------------------------------------------------------------- (1) During the fourth quarter of 1990, loans were reclassified from the real estate construction loan category to the other real estate mortgage loan category so that the real estate construction loan category consists solely of properties where construction is not complete. Prior period balances have not been reclassified as complete information is not available. (2) In 1992, the calculation method for the allocation of the allowance for loan losses for credit card loans was changed in order to better conform to industry practice, whereby the allocation now approximates 7 months (formerly, 18 to 21 months) of projected losses. Based on the revised method, the estimated allocation for credit card loans would have been reduced (and, correspondingly, the unallocated portion of the allowance would have been increased) by about $140 million, $130 million and $110 million at December 31, 1991, 1990 and 1989, respectively. (3) 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, 1993, the contractual principal maturities of 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): $714 million maturing in 3 months or less; $221 million over 3 through 6 months; $168 million over 6 through 12 months and $508 million over 12 months. 18 SHORT-TERM BORROWINGS
Outstanding amounts of selected short-term borrowings were as follows: - ------------------------------------------------------------------------------ Year ended December 31, -------------------------------- (in millions) 1993 1992 1991 - ------------------------------------------------------------------------------ FEDERAL FUNDS PURCHASED Average amount outstanding $ 574 $ 722 $2,608 Daily average rate 2.78% 3.12% 5.53% Highest month-end balance $ 567 $1,462 $5,445 Year-end balance $ 453 $ 562 $ 349 Weighted average rate on outstandings at year end 2.56% 2.03% 2.42% SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Average amount outstanding $ 477 $ 577 $ 484 Daily average rate 2.79% 3.21% 5.36% Highest month-end balance $ 911 $ 892 $ 769 Year-end balance $ 626 $ 749 $ 602 Weighted average rate on outstandings at year end 2.75% 2.75% 3.83% COMMERCIAL PAPER Average amount outstanding $ 161 $ 211 $ 989 Daily average rate 2.75% 3.31% 6.15% Highest month-end balance $ 211 $ 226 $2,285 Year-end balance $ 136 $ 165 $ 217 Weighted average rate on outstandings at year end 2.70% 2.73% 4.13%
- ------------------------------------------------------------------------------ Federal funds purchased and securities sold under repurchase agreements generally mature in less than 30 days. Commercial paper obligations have original maturities not exceeding 115 days. PROPERTIES The Company owns and leases various properties primarily in the downtown financial district of San Francisco and other locations throughout California. The Company owns its 12-story headquarters building in downtown 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 2,500,000 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, 1993, the Bank operated 624 domestic branch offices, of which 321 were in Northern California and 303 in Southern California. The Company owns the land and buildings occupied by 242 of the branch offices and leases 382 branch offices. The leases are generally for terms not exceeding 30 years. 19 EXECUTIVE OFFICERS OF THE REGISTRANT
Date from Name Office held which held Age - ------------------- ------------------------ -------------- --- Carl E. Reichardt Chairman and Chief January 1983 62 Executive Officer Paul Hazen President and Chief July 1984 52 Operating Officer William F. Aldinger III Vice Chairman July 1992 46 Michael J. Gillfillan Vice Chairman January 1992 45 Charles M. Johnson Vice Chairman January 1992 52 Clyde W. Ostler Vice Chairman January 1990 47 William F. Zuendt Vice Chairman October 1986 47 Rodney L. Jacobs Vice Chairman and Chief January 1990 53 Financial Officer Stuart V.M. Campbell Executive Vice President April 1991 40 and General Auditor Patricia R. Callahan Executive Vice President March 1993 40 and Personnel Director Elizabeth A. Evans Executive Vice President September 1993 38 and Director of Corporate Planning and Asset Strategy Frank A. Moeslein Executive Vice President April 1991 50 and Controller Michael M. Patriarca Executive Vice President March 1992 43 and Risk Control Officer Guy Rounsaville, Jr. Executive Vice President, March 1985 50 Chief Counsel and Secretary
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, with the following exceptions: Stuart V. M. Campbell has been with the Company since June 1990; prior to that, he was a partner with KPMG Peat Marwick. Michael M. Patriarca joined the Company in March 1992; prior to that, he was Western Regional Director of the Office of Thrift Supervision and, preceding that, served with the Office of the Comptroller of the Currency. There is no family relationship among the above officers. All executive officers serve at the pleasure of the Board of Directors. 20 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 42 through 71 of the 1993 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 3(a) Restated Certificate of Incorporation (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 A (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 Adjustable Rate Cumulative Preferred Stock, Series B (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 9% Preferred Stock, Series C, incorporated by reference to Exhibit 3 of Form 8-K filed October 24, 1991 (e) 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 (f) By-Laws 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. 21 EXHIBIT NUMBER DESCRIPTION (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, incorporated by reference to Exhibit 10(a) of Form 10-K for the year ended December 31, 1990* (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* (f) 1990 Equity Incentive Plan, incorporated by reference to Exhibit 10(f) of Form 10-K for the year ended December 31, 1990* (g) 1982 Equity Incentive Plan, as amended through November 15, 1988. (h) Executive Incentive Pay Plan, incorporated by reference to Exhibit 10(h) of Form 10-K for the year ended December 31, 1990* (i) Executive Loan Plan, incorporated by reference to Exhibit 10(g) of Form 10-K for the year ended December 31,1990* (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 * Compensatory Plan or Arrangement. 22 EXHIBIT NUMBER DESCRIPTION 11 Computation of Earnings Per Common Share 12 Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges, including interest on deposits, were 1.90, 1.33, 1.02, 1.43 and 1.36 for the years ended December 31, 1993, 1992, 1991, 1990 and 1989, respectively. The ratios of earnings to fixed charges, excluding interest on deposits, were - 4.53, 2.56, 1.10, 2.42 and 2.05 for the years ended December 31, 1993, 1992, 1991, 1990 and 1989, respectively. 13 1993 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. 22 Subsidiaries of the Registrant -- Wells Fargo & Company's only significant subsidiary, as defined, is Wells Fargo Bank, N.A., a national banking association organized under the laws of the United States. 23 Consent of Independent Accountants (b) The Company filed the following reports on Form 8-K during the fourth quarter of 1993 and through the date hereof in 1994: (1) October 20, 1993 under Item 5, containing the Press Release that announced the Company's financial results for the quarter and nine months ended September 30, 1993 (2) October 21, 1993 under Item 5, containing the Press Release that announced the increase in the Company's common stock dividend (3) January 20, 1994 under Item 5, containing the Press Releases that announced the Company's financial results for the quarter and year ended December 31, 1993 and the increase in the Company's common stock dividend STATUS OF PRIOR DOCUMENTS The Wells Fargo & Company Annual Report on Form 10-K for the year ended December 31, 1993, 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. 23 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 15, 1994. 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 15, 1994: CARL E. REICHARDT Chairman and Chief PAUL HAZEN Director - ----------------------- Executive Officer (Principal ----------------------- (Carl E. Reichardt) Executive Officer) (Paul Hazen) ROBERT K. JAEDICKE Director ----------------------- RODNEY L. JACOBS Vice Chairman and Chief (Robert K. Jaedicke) - ----------------------- Financial Officer (Principal (Rodney L. Jacobs) Financial Officer) PAUL A. MILLER Director ------------------------ (Paul A. Miller) FRANK A. MOESLEIN Executive Vice President - ----------------------- and Controller (Principal ELLEN M. NEWMAN Director (Frank A. Moeslein) Accounting Officer) ------------------------ (Ellen M. Newman) H. JESSE ARNELLE Director DONALD B. RICE Director - ----------------------- ------------------------ (H. Jesse Arnelle) (Donald B. Rice) WILLIAM R. BREUNER Director CHANG-LIN TIEN Director - ----------------------- ------------------------ (William R. Breuner) (Chang-Lin Tien) WILLIAM S. DAVILA Director JOHN A. YOUNG Director - ----------------------- ------------------------ (William S. Davila) (John A. Young) RAYBURN S. DEZEMBER Director - ----------------------- (Rayburn S. Dezember)
24 EX-3.A 2 EXHIBIT 3A Exhibit 3(a) RESTATED CERTIFICATE OF INCORPORATION OF WELLS FARGO & COMPANY The undersigned, Paul Hazen and Guy Rounsaville, Jr., certify that they are the President and the Secretary, respectively, of Wells Fargo & Company, a corporation organized and existing under the laws of the State of Delaware, and do hereby further certify as follows: 1. The name of the corporation is Wells Fargo & Company. The name under which it was originally incorporated was Wells Fargo Company. 2. The original certificate of incorporation of the corporation was filed in the Office of the Secretary of State of Delaware on March 2, 1966. 3. This Restated Certificate of Incorporation was duly adopted by the written consent of the sole stockholder of the corporation in accordance with Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware. 4. The text of the certificate of incorporation of the corporation as amended hereby is restated to read in its entirety, as follows: ARTICLE I The name of the corporation is Wells Fargo & Company. ARTICLE II The address of its registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV A. The corporation is authorized to issue two classes of stock to be designated respectively "Preferred Stock" and "Common Stock." The total number of shares that the corporation is authorized to issue is 175,000,000 with a par value of $5.00 per share. The number of shares of Preferred Stock which the corporation is authorized to issue is 25,000,000 shares. The number of shares of Common Stock which the corporation is authorized to issue is 150,000,000 shares. B. The shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors is authorized to determine or alter the powers, preferences and rights, and the qualifications, limitations or restrictions to be granted to or imposed upon the Preferred Stock or any series thereof with respect to any wholly unissued class or series of Preferred Stock, and to fix the number of shares constituting any such series and the designation thereof, or any of them. Within the limits and restrictions, if any, stated in any resolution of the Board of Directors originally fixing the number of shares constituting any series, the Board of Directors is authorized to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of such series. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. ARTICLE V A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. Any repeal or modification of this Article by the stockholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. ARTICLE VI In furtherance and not in limitation of the powers conferred by statute, the board of directors is expressly authorized to adopt, amend or repeal the bylaws of the corporation. IN WITNESS WHEREOF, Wells Fargo & Company has caused this Restated Certificate of Incorporation to be executed by its officers thereunto duly authorized as of this third day of March 1987. WELLS FARGO & COMPANY By: /s/ PAUL HAZEN ---------------------------------- Paul Hazen President Attest: /s/ GUY ROUNSAVILLE, JR. - -------------------------------------- Guy Rounsaville, Jr. Secretary EX-3.B 3 EXHIBIT 3B Exhibit 3(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 A OF WELLS FARGO & COMPANY WE, THE UNDERSIGNED, Paul Hazen and Guy Rounsaville, Jr., the President and the Secretary, respectively, of Wells Fargo & Company, a Delaware corporation (the "Corporation"), DO HEREBY CERTIFY that the following resolution was duly adopted by the Board of Directors of the Corporation by unanimous written consent dated as of March 5, 1987: RESOLVED that, pursuant to authority conferred upon the Board of Directors by the Restated Certificate of Incorporation of the Corporation, the Board of Directors hereby authorizes the issuance of a series of Preferred Stock of the Corporation to consist of 3,000,000 shares, the voting powers, designation, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, in addition to those set forth in the Restated Certificate of Incorporation, are hereby fixed as follows: 1. DESIGNATION. 3,000,000 shares of the Preferred Stock of the Corporation are hereby constituted as a series of Preferred Stock with a par value of $5.00 per share, designated as Adjustable Rate Cumulative Preferred Stock, Series A (hereinafter called "Series A Preferred Stock"). The number of shares of Series A Preferred Stock may not be increased but may be decreased by a resolution duly adopted by the Financing Committee of the Board of Directors, but not below the number of shares of Series A Preferred Stock then outstanding. 2. DIVIDENDS. (a) The holders of shares of Series A Preferred Stock shall be entitled to receive cash dividends, when and as declared by the Board of Directors out of funds legally available for the purpose, from the date of original issuance to and including June 30, 1983, and for each dividend period commencing on January 1, April 1, July 1 and October 1 in each year after June 30, 1983, and ending on and including the day next preceding the first day of the next dividend period (such period ending June 30, 1983, and each of such other periods herein referred to as a "Dividend Period") at a rate as follows: (i) for the Dividend Periods from the date of original issuance of the Series A Preferred Stock to and including March 31, 1984 (the "Fixed Dividend Periods"), the rate shall be 10% per annum applied against $50.00 per share and (ii) for each Dividend Period commencing after March 31, 1984 (the "Adjustable Dividend Periods") at a rate per annum applied against $50.00 per share equal to the Applicable Rate (as defined in Section 3) in respect of such Adjustable Dividend Period. The amount of dividend per share payable for the portion of the Fixed Dividend Periods from the date of original issuance of the Series A Preferred Stock to and including June 30, 1983, and for any Dividend Period less than a full Dividend Period shall be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed in the period for which payable. The amount of dividend per share payable for each full Dividend Period commencing after June 30, 1983 shall be computed by dividing the annual dividend rate for each Dividend Period by four and applying such resulting rate against $50.00 per share. Dividends shall be payable when and as declared by the Board of Directors, out of funds legally available therefor, on March 31, June 30, September 30 and December 31 of each year, commencing June 30, 1983, to holders of record on such respective dates not exceeding 30 days preceding the payment date thereof as may be determined by the Board of Directors in advance of such payment date. Dividends on account of arrears for any past Dividend Periods may be declared and paid at any time, without reference to any regular dividend payment date, to holders of record on such date not exceeding 30 days preceding the payment date thereof as may be fixed by the Board of Directors. No dividends shall be declared on any other series or class or classes of preferred stock ranking on a parity (as that term is defined in Section 8(d)) with the Series A Preferred Stock as to dividends in respect of any dividend period unless there shall likewise be or have been declared on all shares of Series A Preferred Stock at the time outstanding like dividends for all Dividend Periods coinciding with or ending before such dividend period, ratably in proportion to the respective dividend rates fixed for all such other series or class or classes of preferred stock and the Series A Preferred Stock. Dividends shall be cumulative and will accrue on each share of Series A Preferred Stock from the date of original issuance thereof. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments which may be in arrears. -2- (b) If dividends at the rate per share set out in Section 2(a) for any Dividend Period shall not have been declared and paid or set apart for payment on all outstanding shares of Series A Preferred Stock for such Dividend Period and all preceding Dividend Periods from and after the date of issue thereof, then, until the aggregate deficiency shall be declared and fully paid or set apart for payment, the Corporation shall not (i) declare or pay or set apart for payment any dividends or make any other distribution on the Common Stock, $5.00 par value, of the Corporation ("Common Stock") or any other capital stock of the Corporation ranking junior to the Series A Preferred Stock with respect to the payment of dividends or distribution of assets on liquidation, dissolution or winding up of the Corporation (which for all purposes of this resolution shall mean any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary) (the Common Stock and such other stock being herein referred to as "Junior Stock"), other than dividends or distributions paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Junior Stock, or (ii) make any payment on account of the purchase, redemption or other retirement of any Junior Stock. 3. APPLICABLE RATE. Except as provided below in this paragraph, the "Applicable Rate" for any Adjustable Dividend Period shall be (a) 2.75% less than (b) the highest of the Treasury Bill Rate, the Ten Year Constant Maturity Rate or the Twenty Year Constant Maturity Rate (each as hereinafter defined) for the Adjustable Dividend Period. If the Corporation determines in good faith that for any reason one or more of such rates cannot be determined for any Adjustable Dividend Period, then the Applicable Rate for such Dividend Period shall be 2.75% less than the higher of whichever of such rates can be so determined. If the Corporation determines in good faith that none of such rates can be determined for any Adjustable Dividend Period, then the Applicable Rate in effect for the preceding Dividend Period shall be continued for such Dividend Period. Anything herein to the contrary notwithstanding, the Applicable Rate for any Adjustable Dividend Period shall in no event be less than 6% per annum or greater than 12% per annum. Except as provided below in this paragraph, the "Treasury Bill Rate" for each Adjustable Dividend Period shall be the arithmetic average of the two weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period as provided below) for three-month U.S. Treasury bills, published by the Federal Reserve Board during the Calendar Period immediately prior to the ten calendar days immediately preceding the March 31, -3- June 30, September 30 and December 31, as the case may be, prior to the Adjustable Dividend Period for which the dividend rate on the Series A Preferred Stock is being determined. If the Federal Reserve Board does not publish such a weekly per annum market discount rate during such Calendar Period, then the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the two weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period as provided below) for three-month U.S. Treasury bills, published during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. If a per annum market discount rate for three-month U.S. Treasury bills shall not be published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Treasury Bill Rate for such Adjustable Dividend Period shall be the arithmetic average of the two weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period as provided below) for all the U.S. Treasury bills then having maturities of not less than 80 nor more than 100 days, finally published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board shall not publish such rates, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. If the Corporation determines in good faith that for any reason no such U.S. Treasury bill rates are published as provided above during such Calendar Period, then the Treasury Bill Rate for such Adjustable Dividend Period shall be the arithmetic average of the per annum market discount rates based upon the closing bids during such Calendar Period for each of the issues of marketable non-interest bearing U.S. Treasury securities with a maturity of not less than 80 nor more than 100 days from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the Corporation by at least three recognized U.S. Government securities dealers selected by the Corporation. If the Corporation determines in good faith that for any reason the Corporation cannot determine the Treasury Bill Rate for any Adjustable Dividend Period as provided above in this paragraph, the Treasury Bill Rate for such Adjustable Dividend Period shall be the arithmetic average of the per annum market discount rates based upon the closing bids during such Calendar Period for each of the issues of marketable, interest-bearing U.S. Treasury securities with a maturity of not less than 80 nor more than 100 days from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the -4- Corporation by at least three recognized U.S. Government securities dealers selected by the Corporation. Except as provided below in this paragraph, the "Ten Year Constant Maturity rate" for each Adjustable Dividend Period shall be the arithmetic average of the two weekly per annum Ten Year Average Yields (or the one weekly per annum Ten Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period as provided below), published by the Federal Reserve Board during the Calendar Period immediately prior to the ten calendar days immediately preceding the March 31, June 30, September 30 and December 31, as the case may be, prior to the Adjustable Dividend Period for which the dividend rate on the Series A Preferred Stock is being determined. If the Federal Reserve Board does not publish such a weekly per annum Ten Year Average Yield during such Calendar Period, then the Ten Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two weekly per annum Ten Year Average Yields (or the one weekly per annum Ten Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period as provided below), published during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. If a per annum Ten Year Average Yield shall not be published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Ten Year Constant Maturity Rate for such Adjustable Dividend Period shall be the arithmetic average of the two weekly per annum average yields to maturity (or the one weekly average yield to maturity, if only one such yield shall be published during the relevant Calendar Period as provided below) for all of the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) then having maturities of not less than eight nor more than twelve years, finally published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board shall not publish such yields, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. If the Corporation determines in good faith that for any reason the Corporation cannot determine the Ten Year Constant Maturity Rate for any Adjustable Dividend Period as provided above in this paragraph, then the Ten Year Constant Maturity Rate for such Adjustable Dividend Period shall be the arithmetic average of the per annum average yields to maturity based upon the closing bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than eight nor more than twelve years from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally -5- available) to the Corporation by at least three recognized U.S. Government securities dealers selected by the Corporation. Except as provided below in this paragraph, the "Twenty Year Constant Maturity Rate" for each Adjustable Dividend Period shall be the arithmetic average of the two weekly per annum Twenty Year Average Yields (or the one weekly per annum Twenty Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period as provided below), published by the Federal Reserve Board during the Calendar Period immediately prior to the ten calendar days immediately preceding the March 31, June 30, September 30 and December 31, as the case may be, prior to the Adjustable Dividend Period for which the dividend rate on the Series A Preferred Stock is being determined. If the Federal Reserve Board does not publish such a weekly per annum Twenty Year Average Yield during such Calendar Period, then the Twenty Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two weekly per annum Twenty Year Average Yields (or the one weekly per annum Twenty Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period as provided below), published during such Calendar Period by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. If a per annum Twenty Year Average Yield shall not be published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Twenty Year Constant Maturity Rate for such Adjustable Dividend Period shall be the arithmetic average of the two weekly per annum average yields to maturity (or the one weekly average yield to maturity, if only one such yield shall be published during the relevant Calendar Period as provided below) for all of the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) then having maturities of not less than eighteen nor more than twenty-two years, finally published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board shall not publish such yields, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. If the Corporation determines in good faith that for any reason the Corporation cannot determine the Twenty Year Constant Maturity Rate for any Adjustable Dividend Period as provided above in this paragraph, then the Twenty Year Constant Maturity Rate for such Adjustable Dividend Period shall be the arithmetic average of the per annum average yields to maturity based upon the closing bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than eighteen nor more than twenty-two years from the date of -6- each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the Corporation by at least three recognized U.S. Government securities dealers selected by the Corporation. The Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate shall each be rounded to the nearest five hundredths of a percentage point. The Applicable Rate with respect to each Adjustable Dividend Period will be calculated as promptly as practicable by the Corporation according to the appropriate method described herein. The Corporation will cause each Applicable Rate to be published in a newspaper of general circulation in New York City prior to the commencement of the new Adjustable Dividend Period to which it applies and will cause notice of such Applicable Rate to be included with the dividend payment checks next mailed to the holders of the Series A Preferred Stock. For purposes of this Section, the term (i) "Calendar Period" shall mean 14 calendar days; (ii) "Special Securities" shall mean securities which can, at the option of the holder, be surrendered at face value in payment of any Federal estate tax or which provide tax benefits to the holder and are priced to reflect such tax benefits or which were originally issued at a deep or substantial discount; (iii) The weekly per annum market discount rate for three month U.S. Treasury bills shall be the secondary market rate; (iv) "Ten Year Average Yield" shall mean the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of ten years); and (v) "Twenty Year Average Yield" shall mean the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of twenty years). 4. LIQUIDATION PREFERENCE. (a) In the event of any liquidation, dissolution or winding up of the Corporation, before any payment or distribution of the assets of the Corporation shall be made to or set apart for the holders of any Junior Stock, the -7- holders of the shares of Series A Preferred Stock shall be entitled to receive $50.00 per share plus an amount equal to all dividends (whether or not earned or declared) accrued and unpaid thereon to the date of final distribution to such holders; but such holders shall not be entitled to any further payment. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of the shares of the Series A Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any other preferred stock ranking, as to liquidation, dissolution or winding up, on a parity with the Series A Preferred Stock, then such assets, or the proceeds thereof, shall be distributed among the holders of Series A Preferred Stock and any such other preferred stock ratably in accordance with the respective amounts which would be payable on such shares of Series A Preferred Stock and any such other preferred stock if all amounts payable thereon were paid in full. For the purposes of this Section 4, a consolidation or merger of the Corporation with or into one or more corporations shall not be deemed to be a liquidation, dissolution or winding up. (b) Subject to the rights of the holders of shares of any series or class or classes of stock ranking on a parity with or prior to the Series A Preferred Stock upon liquidation, dissolution or winding up, upon any liquidation, dissolution or winding up of the Corporation, after payment shall have been made in full to the Series A Preferred Stock as provided in this Section 4, but not prior thereto, any Junior Stock shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the Series A Preferred Stock shall not be entitled to share therein. 5. REDEMPTION. (a) The Corporation may not redeem the Series A Preferred Stock prior to April 1, 1988. The Series A Preferred Stock shall be redeemable, at the option of the Corporation, in whole or in part, on or after April 1, 1988 through March 31, 1993 at a redemption price of $51.50 per share plus accrued and unpaid dividends thereon to the date fixed for redemption. Thereafter the Series A Preferred Stock shall be redeemable, at the option of the Corporation, in whole or in part, at a redemption price of $50.00 per share plus accrued and unpaid dividends thereon to the date fixed for redemption. (b) In the event the Corporation shall redeem shares of Series A Preferred Stock pursuant to Section 5(a), notice of such redemption shall be given by first class mail, postage prepaid, mailed not less than 30 nor more than 60 -8- days prior to the redemption date, to each holder of record of the shares to be redeemed, at such holder's address as the same appears on the stock register of the Corporation. Each such notice shall state: (1) the redemption date; (2) the number of shares of Series A Preferred Stock to be redeemed and, if less .than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (3) the redemption price and the manner in which such redemption price is to be paid and delivered; (4) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (5) that dividends on the shares to be redeemed will cease to accrue on such redemption date. Notice having been mailed as aforesaid, from and after the redemption date (unless default shall be made by the Corporation in providing funds for the payment of the redemption price), dividends on the shares of Series A Preferred Stock so called for redemption shall cease to accrue, and said shares shall no longer be deemed to be outstanding, and all rights of the holders thereof as shareholders of the Corporation (except the right to receive from the Corporation the redemption price) shall cease. The Corporation's obligation to provide funds in accordance with the preceding sentence shall be deemed fulfilled if, on or before the redemption date, the Corporation shall deposit with a bank or trust company (which may be an affiliate of the Corporation), having an office or agency in the City and County of San Francisco, State of California, having a capital and surplus of at least $50,000,000, or with any other such bank or trust company located in the continental United States as may be designated from time to time by the Corporation, funds necessary for such redemption, in trust, with irrevocable instructions that such funds be applied to the redemption of the shares of Series A Preferred Stock so called for redemption. Any interest accrued on such funds shall be paid to the Corporation from time to time. Any funds so deposited and unclaimed at the end of six years from such redemption date shall be repaid or released to the Corporation, after which the holder or holders of such shares of Series A Preferred Stock so called for redemption shall look only to the Corporation for payment of the redemption price. (c) Upon surrender in accordance with said notice of the certificates for any shares redeemed pursuant to Section 5(a) (properly endorsed or assigned for transfer, if the Board of Directors of the Corporation shall so require and the notice shall so state), such shares shall be redeemed by the Corporation at the redemption price. If less than all the outstanding shares of Series A Preferred Stock are to be redeemed, shares to be redeemed shall be selected by the Corporation from outstanding shares of Series A Preferred Stock not previously called for redemption by lot or pro rata (as nearly as may be) or by -9- any other method determined by the Board of Directors of the Corporation in its sole discretion to be equitable. (d) In no event shall the Corporation redeem less than all the outstanding shares of Series A Preferred Stock pursuant to Section 5(a) unless full cumulative dividends shall have been paid or declared and set apart for payment upon all outstanding shares of Series A Preferred Stock for all past Dividend Periods. 6. SHARES TO BE RETIRED. All shares of Series A Preferred Stock redeemed or purchased by the Corporation shall be retired and cancelled and shall be restored to the status of authorized but unissued shares of Preferred Stock, without designation as to series, and may thereafter be issued, but not as shares of Series A Preferred Stock. 7. CONVERSION OR EXCHANGE. The holders of shares of Series A Preferred Stock shall not have any rights herein to convert such shares into or exchange such shares for shares of any other class or classes or any other series of any class or classes of capital stock (or any other security) of the Corporation. 8. VOTING. (a) Except as hereinafter in this Section 8 expressly provided for and as otherwise from time to time required by the laws of the State of Delaware, the Series A Preferred Stock shall have no voting rights. Whenever, at any time or times, dividends payable on the Series A Preferred Stock shall be in arrears in an amount equal to at least six full quarterly dividends on the Series A Preferred Stock at the time outstanding, whether or not consecutive, the holders of the outstanding Series A Preferred Stock shall have the exclusive right, voting separately as a class with holders of shares of any one or more other series of preferred stock ranking on a parity with the Series A Preferred Stock either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable, to elect two (2) of the authorized number of members of the Board of Directors of the Corporation at the Corporation's next annual meeting of shareholders and at each subsequent annual meeting of shareholders. At elections for such directors, each holder of Series A Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other series of preferred stock ranking on such a parity and having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). The right of the -10- holders of Series A Preferred Stock, voting separately as a class, to elect (either alone or together with the holders of shares of any one or more other series of preferred stock ranking on such a parity and having like voting rights) members of the Board of Directors of the Corporation as aforesaid shall continue until such time as all dividends accumulated on the Series A Preferred Stock shall have been fully paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of the Series A Preferred Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the Series A Preferred Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause, and any vacancy thereby created may be filled, only by the affirmative vote of the holders of Series A Preferred Stock voting separately as a class (either alone or together with the holders of shares of any one or more other series of preferred stock ranking on such a parity and having like voting rights). If the office of any director elected by the holders of Series A Preferred Stock voting as a class becomes vacant for any reason other than removal from office as aforesaid, the remaining director may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. (b) So long as any shares of Series A Preferred Stock remain outstanding, the consent of the holders of at least two-thirds of the shares of Series A Preferred Stock outstanding at the time (voting separately as a class together with all other series of preferred stock ranking on a parity with the Series A Preferred Stock either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable) given in person or by proxy, either in writing or at any special or annual meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) the authorization, creation or issuance of a new class or series of shares having rights, preferences or privileges prior (as that term is defined in Section 8(d) to the shares of the Series A Preferred Stock, or any increase in the number of authorized shares of any class or series having rights, preferences or privileges prior to the shares of Series A Preferred Stock; or -11- (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Restated Certificate of Incorporation of the Corporation or of this resolution which would materially and adversely affect any right, preference, privilege or voting power of the Series A Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized common stock or authorized preferred stock or the creation and issuance of other series of common stock or preferred stock, in each case ranking on a parity with or junior to the Series A Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Series A Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. (d) Any class or classes of stock of the Corporation shall be deemed to rank: (i) prior to the Series A Preferred Stock as to dividends or as to distribution of assets upon liquidation, dissolution or winding up if the holders of such class shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Series A Preferred Stock; and (ii) on a parity with the Series A Preferred Stock as to dividends or as to distribution of assets upon liquidation, dissolution or winding up, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share thereof are different from those of the Series A Preferred Stock, if the holders of such class of stock and of the Series A Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority one over the other. -12- IN WITNESS WHEREOF, Wells Fargo & Company has caused this Certificate to be executed by its officers thereunto duly authorized as of this fifth day of March 1987. WELLS FARGO & COMPANY By: /s/ PAUL HAZEN ------------------------ Paul Hazen President Attest: /s/ GUY ROUNSAVILLE, JR. - ------------------------------- Guy Rounsaville, Jr. Secretary -13- EX-3.C 4 EXHIBIT 3C Exhibit 3(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 ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK, SERIES B OF WELLS FARGO & COMPANY WE, THE UNDERSIGNED, Paul Hazen and Guy Rounsaville, Jr., the President and the Secretary, respectively, of Wells Fargo & Company, a Delaware corporation (the "Corporation"), DO HEREBY CERTIFY that the following resolution was duly adopted by the Board of Directors of the Corporation by unanimous written consent dated as of March 5, 1987: RESOLVED that, pursuant to authority conferred upon the Board of Directors by the Restated Certificate of Incorporation of the Corporation, the Board of Directors hereby authorizes the issuance of a series of Preferred Stock of the Corporation to consist of 1,500,000 shares, the voting powers, designation, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, in addition to those set forth in the Restated Certificate of Incorporation, are hereby fixed as follows: 1. DESIGNATION. 1,500,000 shares of the Preferred Stock of the Corporation are hereby constituted as a series of Preferred Stock with a par value of $5.00 per share, designated as Adjustable Rate Cumulative Preferred Stock, Series B (hereinafter called "Series B Preferred Stock"). The number of shares of Series B Preferred Stock may not be increased but may be decreased by a resolution duly adopted by the Financing Committee of the Board of Directors, but not below the number of shares of Series B Preferred Stock then outstanding. 2. DIVIDENDS. (a) The holders of shares of Series B Preferred Stock shall be entitled to receive cash dividends, when and as declared by the Board of Directors out of funds legally available for the purpose, from the date of original issuance to and including May 15, 1986, and for each dividend period commencing on February 16, May 16, August 16 and November 16 in each year after May 15, 1986, and ending on and including the day next preceding the first day of the next dividend period (such period ending May 15, 1986, and each of such other periods herein referred to as a "Dividend Period") at a rate as follows: (i) for the Dividend Period from the date of original issuance of the Series B Preferred Stock to and including May 15, 1986 (the "Fixed Dividend Period"), the rate shall be 6.08% per annum applied against $50.00 per share and (ii) for each Dividend Period commencing after May 15, 1986 (the "Adjustable Dividend Periods") at a rate per annum applied against $50.00 per share equal to the Applicable Rate (as defined in Section 3) in respect of such Adjustable Dividend Period. The amount of dividend per share payable for the Fixed Dividend Period and for any portion of a Dividend Period less than a full Dividend Period shall be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed in the period for which payable. The amount of dividend per share payable for each full Dividend Period commencing after May 15, 1986 shall be computed by dividing the annual dividend rate for each Dividend Period by four and applying such resulting rate against $50.00 per share. Dividends shall be payable when and as declared by the Board of Directors, out of funds legally available therefor, on February 15, May 15, August 15 and November 15 of each year, commencing May 15, 1986, to holders of record on such respective dates not exceeding 30 days preceding the payment date thereof as may be determined by the Board of Directors in advance of such payment date. Dividends on account of arrears for any past Dividend Periods may be declared and paid at any time, without reference to any regular dividend payment date, to holders of record on such date not exceeding 30 days preceding the payment date thereof as may be fixed by the Board of Directors. No dividends shall be declared on any other series or class or classes of preferred stock ranking on a parity (as that term is defined in Section 8(d)) with the Series B Preferred Stock as to dividends in respect of any dividend period unless there shall likewise be or have been declared on all shares of Series B Preferred Stock at the time outstanding like dividends for all Dividend Periods coinciding with or ending before such dividend period, ratably in proportion to the respective dividend rates fixed for all such other series or class or classes of preferred stock and the Series B Preferred Stock. Dividends shall be cumulative and will accrue on each share of Series B Preferred Stock from the date of original issuance thereof. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments which may be in arrears. (b) If dividends at the rate per share set out in Section 2(a) for any Dividend Period shall not have been declared and paid or set apart for payment on all -2- outstanding shares of Series B Preferred Stock for such Dividend Period and all preceding Dividend Periods from and after the date of issue thereof, then, until the aggregate deficiency shall be declared and fully paid or set apart for payment, the Corporation shall not (i) declare or pay or set apart for payment any dividends or make any other distribution on the Common Stock, $5.00 par value, of the Corporation ("Common Stock") or any other capital stock of the Corporation ranking junior to the Series B Preferred Stock with respect to the payment of dividends or distribution of assets on liquidation, dissolution or winding up of the Corporation (which for all purposes of this resolution shall mean any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary) (the Common Stock and such other stock being herein referred to as "Junior Stock"), other than dividends or distributions paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Junior Stock, or (ii) make any payment on account of the purchase, redemption or other retirement of any Junior Stock. 3. APPLICABLE RATE. Except as provided below in this paragraph, the Applicable Rate" for any Adjustable Dividend Period shall be (a) 76% of (b) the highest of the Treasury Bill Rate, the Ten Year Constant Maturity Rate or the Twenty Year Constant Maturity Rate (each as hereinafter defined) for the Adjustable Dividend Period. If the Corporation determines in good faith that for any reason one or more of such rates cannot be determined for any Adjustable Dividend Period, then the Applicable Rate for such Dividend Period shall be 76% of the higher of whichever of such rates can be so determined. If the Corporation determines in good faith that none of such rates can be determined for any Adjustable Dividend Period, then the Applicable Rate in effect for the preceding Dividend Period shall be continued for such Dividend Period. Anything herein to the contrary notwithstanding, the Applicable Rate for any Adjustable Dividend Period shall in no event be less than 5.50% per annum or greater than 10.50% per annum. Except as provided below in this paragraph, the "Treasury Bill Rate" for each Adjustable Dividend Period shall be the arithmetic average of the two weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period as provided below) for three-month U.S. Treasury bills, published by the Federal Reserve Board during the Calendar Period immediately prior to the ten calendar days immediately preceding the February 15, May 15, August 15 and November 15, as the case may be, -3- prior to the Adjustable Dividend Period for which the dividend rate on the Series B Preferred Stock is being determined. If the Federal Reserve Board does not publish such a weekly per annum market discount rate during such Calendar Period, then the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the two weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period as provided below) for three-month U.S. Treasury bills, published during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. If a per annum market discount rate for three-month U.S. Treasury bills shall not be published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Treasury Bill Rate for such Adjustable Dividend Period shall be the arithmetic average of the two weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period as provided below) for all the U.S. Treasury bills then having maturities of not less than 80 nor more than 100 days, finally published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board shall not publish such rates, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. If the Corporation determines in good faith that for any reason no such U.S. Treasury bill rates are published as provided above during such Calendar Period, then the Treasury Bill Rate for such Adjustable Dividend Period shall be the arithmetic average of the per annum market discount rates based upon the closing bids during such Calendar Period for each of the issues of marketable non-interest bearing U.S. Treasury securities with a maturity of not less than 80 nor more than 100 days from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the Corporation by at least three recognized U.S. Government securities dealers selected by the Corporation. If the Corporation determines in good faith that for any reason the Corporation cannot determine the Treasury Bill Rate for any Adjustable Dividend Period as provided above in this paragraph, the Treasury Bill Rate for such Adjustable Dividend Period shall be the arithmetic average of the per annum market discount rates based upon the closing bids during such Calendar Period for each of the issues of marketable, interest-bearing U.S. Treasury securities with a maturity of not less than 80 nor more than 100 -4- days from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the Corporation by at least three recognized U.S. Government securities dealers selected by the Corporation. Except as provided below in this paragraph, the "Ten Year Constant Maturity Rate" for each Adjustable Dividend Period shall be the arithmetic average of the two weekly per annum Ten Year Average Yields (or the one weekly per annum Ten Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period as provided below), published by the Federal Reserve Board during the Calendar Period immediately prior to the ten calendar days immediately preceding the February 15, May 15, August 15 and November 15, as the case may be, prior to the Adjustable Dividend Period for which the dividend rate on the Series B Preferred Stock is being determined. If the Federal Reserve Board does not publish such a weekly per annum Ten Year Average Yield during such Calendar Period, then the Ten Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two weekly per annum Ten Year Average Yields (or the one weekly per annum Ten Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period as provided below), published during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. If a per annum Ten Year Average Yield shall not be published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Ten Year Constant Maturity Rate for such Adjustable Dividend Period shall be the arithmetic average of the two weekly per annum average yields to maturity (or the one weekly average yield to maturity, if only one such yield shall be published during the relevant Calendar Period as provided below) for all of the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) then having maturities of not less than eight nor more than twelve years, finally published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board shall not publish such yields, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. If the Corporation determines in good faith that for any reason the Corporation cannot determine the Ten Year Constant Maturity Rate for any Adjustable Dividend Period as provided above in this paragraph, then the Ten Year Constant Maturity Rate for such Adjustable Dividend Period shall be the arithmetic -5- average of the per annum average yields to maturity based upon the closing bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than eight nor more than twelve years from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the Corporation by at least three recognized U.S. Government securities dealers selected by the Corporation. Except as provided below in this paragraph, the "Twenty Year Constant Maturity Rate" for each Adjustable Dividend Period shall be the arithmetic average of the two weekly per annum Twenty Year Average Yields (or the one weekly per annum Twenty Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period as provided below), published by the Federal Reserve Board during the Calendar Period immediately prior to the ten calendar days immediately preceding the February 15, May 15, August 15 and November 15, as the case may be, prior to the Adjustable Dividend Period for which the dividend rate on the Series B Preferred Stock is being determined. If the Federal Reserve Board does not publish such a weekly per annum Twenty Year Average Yield during such Calendar Period, then the Twenty Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two weekly per annum Twenty Year Average Yields (or the one weekly per annum Twenty Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period as provided below), published during such Calendar Period by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. If a per annum Twenty Year Average Yield shall not be published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Twenty Year Constant Maturity Rate for such Adjustable Dividend Period shall be the arithmetic average of the two weekly per annum average yields to maturity (or the one weekly average yield to maturity, if only one such yield shall be published during the relevant Calendar Period as provided below) for all of the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) then having maturities of not less than eighteen nor more than twenty-two years, finally published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board shall not publish such yields, by any Federal Reserve Bank or -6- by any U.S. Government department or agency selected by the Corporation. If the Corporation determines in good faith that for any reason the Corporation cannot determine the Twenty Year Constant Maturity Rate for any Adjustable Dividend Period as provided above in this paragraph, then the Twenty Year Constant Maturity Rate for such Adjustable Dividend Period shall be the arithmetic average of the per annum average yields to maturity based upon the closing bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than eighteen nor more than twenty-two years from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the Corporation by at least three recognized U.S. Government securities dealers selected by the Corporation. The Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate shall each be rounded to the nearest five hundredths of a percentage point. The Applicable Rate with respect to each Adjustable Dividend Period will be calculated as promptly as practicable by the Corporation according to the appropriate method described herein. The Corporation will cause each Applicable Rate to be published in a newspaper of general circulation in New York City prior to the commencement of the new Adjustable Dividend Period to which it applies and will cause notice of such Applicable Rate to be included with the dividend payment checks next mailed to the holders of the Series B Preferred Stock. For purposes of this Section, the term (i) "Calendar Period" shall mean 14 calendar days; (ii) "Special Securities" shall mean securities which can, at the option of the holder, be surrendered at face value in payment of any Federal estate tax or which provide tax benefits to the holder and are priced to reflect such tax benefits or which were originally issued at a deep or substantial discount; (iii) The weekly per annum market discount rate for three month U.S. Treasury bills shall be the secondary market rate; -7- (iv) "Ten Year Average Yield" shall mean the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of ten years); and (v) "Twenty Year Average Yield" shall mean the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of twenty years). 4. LIQUIDATION PREFERENCE. (a) In the event of any liquidation, dissolution or winding up of the Corporation, before any payment or distribution of the assets of the Corporation shall be made to or set apart for the holders of any Junior Stock, the holders of the shares of Series B Preferred Stock shall be entitled to receive $50.00 per share plus an amount equal to all dividends (whether or not earned or declared) accrued and unpaid thereon to the date of final distribution to such holders; but such holders shall not be entitled to any further payment. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of the shares of the Series B Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any other preferred stock ranking, as to liquidation, dissolution or winding up, on a parity with the Series B Preferred Stock, then such assets, or the proceeds thereof, shall be distributed among the holders of Series B Preferred Stock and any such other preferred stock ratably in accordance with the respective amounts which would be payable on such shares of Series B Preferred Stock and any such other preferred stock if all amounts payable thereon were paid in full. For the purposes of this Section 4, a consolidation or merger of the Corporation with or into one or more corporations shall not be deemed to be a liquidation, dissolution or winding up. (b) Subject to the rights of the holders of shares of any series or class or classes of stock ranking on a parity with or prior to the Series B Preferred Stock upon liquidation, dissolution or winding up, upon any liquidation, dissolution or winding up of the Corporation, after payment shall have been made in full to the Series B Preferred Stock as provided in this Section 4, but not prior thereto, any Junior Stock shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the Series B Preferred Stock shall not be entitled to share therein. -8- 5. REDEMPTION. (a) The Corporation may not redeem the Series B Preferred Stock prior to May 15, 1991. The Series B Preferred Stock shall be redeemable, at the option of the Corporation, in whole or in part, on or after May 15, 1991 through May 14, 1996 at a redemption price of $51.50 per share plus accrued and unpaid dividends thereon to the date fixed for redemption. Thereafter the Series B Preferred Stock shall be redeemable, at the option of the Corporation, in whole or in part, at a redemption price of $50.00 per share plus accrued and unpaid dividends thereon to the date fixed for redemption. (b) In the event the Corporation shall redeem shares of Series B Preferred Stock pursuant to Section 5(a), notice of such redemption shall be given by first class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed, at such holder's address as the same appears on the stock register of the Corporation. Each such notice shall state: (1) the redemption date; (2) the number of shares of Series B Preferred Stock to be redeemed and, if less than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (3) the redemption price and the manner in which such redemption price is to be paid and delivered; (4) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (5) that dividends on the shares to be redeemed will cease to accrue on such redemption date. Notice having been mailed as aforesaid, from and after the redemption date (unless default shall be made by the Corporation in providing funds for the payment of the redemption price), dividends on the shares of Series B Preferred Stock so called for redemption shall cease to accrue, and said shares shall no longer be deemed to be outstanding, and all rights of the holders thereof as shareholders of the Corporation (except the right to receive from the Corporation the redemption price) shall cease. The Corporation's obligation to provide funds in accordance with the preceding sentence shall be deemed fulfilled if, on or before the redemption date, the Corporation shall deposit with a bank or trust company (which may be an affiliate of the Corporation), having an office or agency in the City and County of San Francisco, State of California, having a capital and surplus of at least $50,000,000, or with any other such bank or trust company located in the continental United States as may be designated from time to time by the Corporation, funds necessary for such redemption, in trust, with irrevocable instructions that such funds be applied to the redemption of the shares of Series B Preferred Stock so called for redemption. Any interest accrued on such funds shall be paid to the Corporation from time to time. Any -9- funds so deposited and unclaimed at the end of six years from such redemption date shall be repaid or released to the Corporation, after which the holder or holders of such shares of Series B Preferred Stock so called for redemption shall look only to the Corporation for payment of the redemption price. (c) Upon surrender in accordance with said notice of the certificates for any shares redeemed pursuant to Section 5(a) (properly endorsed or assigned for transfer, if the Board of Directors of the Corporation shall so require and the notice shall so state), such shares shall be redeemed by the Corporation at the redemption price. If less than all the outstanding shares of Series B Preferred Stock are to be redeemed, shares to be redeemed shall be selected by the Corporation from outstanding shares of Series B Preferred Stock not previously called for redemption by lot or pro rata (as nearly as may be) or by any other method determined by the Board of Directors of the Corporation in its sole discretion to be equitable. (d) In no event shall the Corporation redeem less than all the outstanding shares of Series B Preferred Stock pursuant to Section 5(a) unless full cumulative dividends shall have been paid or declared and set apart for payment upon all outstanding shares of Series B Preferred Stock for all past Dividend Periods. 6. SHARES TO BE RETIRED. All shares of Series B Preferred Stock redeemed or purchased by the Corporation shall be retired and cancelled and shall be restored to the status of authorized but unissued shares of Preferred Stock, without designation as to series, and may thereafter be issued, but not as shares of Series B Preferred Stock. 7. CONVERSION OR EXCHANGE. The holders of shares of Series B Preferred Stock shall not have any rights herein to convert such shares into or exchange such shares for shares of any other class or classes or any other series of any class or classes of capital stock (or any other security) of the Corporation. 8. VOTING. (a) Except as hereinafter in this Section 8 expressly provided for and as otherwise from time to time required by the laws of the State of Delaware, the Series B Preferred Stock shall have no voting rights. . Whenever, at any time or times, dividends payable on the Series B Preferred Stock shall be in arrears in an amount equal to at least six full quarterly dividends on the Series B Preferred Stock at the -10- time outstanding, whether or not consecutive, the holders of the outstanding Series B Preferred Stock shall have the exclusive right, voting separately as a class with holders of shares of any one or more other series of preferred stock ranking on a parity with the Series B Preferred Stock either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable, to elect two (2) of the authorized number of members of the Board of Directors of the Corporation at the Corporation's next annual meeting of shareholders and at each subsequent annual meeting of shareholders. At elections for such directors, each holder of Series B Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other series of preferred stock ranking on such a parity and having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). The right of the holders of Series B Preferred Stock, voting separately as a class, to elect (either alone or together with the holders of shares of any one or more other series of preferred stock ranking on such a parity and having like voting rights) members of the Board of Directors of the Corporation as aforesaid shall continue until such time as all dividends accumulated on the Series B Preferred Stock shall have been fully paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of the Series B Preferred Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the Series B Preferred Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause, and any vacancy thereby created may be filled, only by the affirmative vote of the holders of Series B Preferred Stock voting separately as a class (either alone or together with the holders of shares of any one or more other series of preferred stock ranking on such a parity and having like voting rights). If the office of any director elected by the holders of Series B Preferred Stock voting as a class becomes vacant for any reason other than removal from office as aforesaid, the remaining director may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. (b) So long as any shares of Series B Preferred Stock remain outstanding, the consent of the holders of at least two-thirds of the shares of Series B Preferred Stock outstanding at the time (voting separately as a class together with all other series of preferred stock ranking on a parity with the Series B Preferred Stock either as to -11- dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable) given in person or by proxy, either in writing or at any special or annual meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) the authorization, creation or issuance of a new class or series of shares having rights, preferences or privileges prior (as that term is defined in Section 8(d) to the shares of the Series B Preferred Stock, or any increase in the number of authorized shares of any class or series having rights, preferences or privileges prior to the shares of Series B Preferred Stock; or (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Restated Certificate of Incorporation of the Corporation or of this resolution which would materially and adversely affect any right, preference, privilege or voting power of the Series B Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized common stock or authorized preferred stock or the creation and issuance of other series of common stock or preferred stock, in each case ranking on a parity with or junior to the Series B Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Series B Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. (d) Any class or classes of stock of the Corporation shall be deemed to rank: (i) prior to the Series B Preferred Stock as to dividends or as to distribution of assets upon liquidation, dissolution or winding up if the holders of such class shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Series B Preferred Stock; and -12- (ii) on a parity with the Series B Preferred Stock as to dividends or as to distribution of assets upon liquidation, dissolution or winding up, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share thereof are different from those of the Series B Preferred Stock, if the holders of such class of stock and of the Series B Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority one over the other. IN WITNESS WHEREOF, Wells Fargo & Company has caused this Certificate to be executed by its officers thereunto duly authorized as of this fifth day of March 1987. WELLS FARGO & COMPANY By: /S/ PAUL HAZEN ----------------------------- Paul Hazen President Attest: /S/ GUY ROUNSAVILLE, JR. - -------------------------------------- Guy Rounsaville, Jr. Secretary -13- EX-3.F 5 EXHIBIT 3F Exhibit 3(F) BY-LAWS OF WELLS FARGO & COMPANY, A DELAWARE CORPORATION (AS AMENDED MAY 18, 1993) ______________ 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. 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 - 1 - 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 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 - 2 - 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 immediately following the adjournment 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 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 - 3 - 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 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. - 4 - 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 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 - 5 - superintendance 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 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 - 6 - 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 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 immediately following the adjournment of the annual meeting of stockholders next following his election and until his 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 - 7 - 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. SECTION 15. ADVISORY DIRECTORS. There shall be not more than 10 Advisory Directors, who shall be elected by the Board of Directors at its organizational meeting. An Advisory Director shall serve until the organizational meeting of the Board of Directors immediately following the adjournment of the annual meeting of stockholders next following his election. 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 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 - 8 - 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. 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 - 9 - 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 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 - 10 - 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 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 - 11 - 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 of 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 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 - 12 - 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. 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 - 13 - 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 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 - 14 - 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 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, finds 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 - 15 - if such action, suit or proceeding was authorized by the Board of Directors. SECTION 13. STATUTORY AND OTHER INFORMATION. Notwithstanding any other provision of this Article, the 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, by action of the Board of Directors, provide indemnification and advancement of expenses to agents of the corporation to the extent deemed appropriate, not to exceed the scope and effect provided under this Article to directors, officers and employees. 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 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 - 16 - 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 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 - 17 - 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. - 18 - EX-10.E 6 EXHIBIT 10E WELLS FARGO & COMPANY DIRECTORS' RETIREMENT PLAN I. PURPOSE OF THE PLAN The purpose of this Plan is to improve the ability of Wells Fargo & Company (the "Company") to attract, retain and motivate capable individuals who will serve as Directors and who will contribute to the success of the Company, to recognize the value of Directors' past, present and future service to the Company, and to compensate Directors for their availability after retirement as a resource to the Company. II. EFFECTIVE DATE: January 1, 1988. III. ADMINISTRATION OF THE PLAN The Plan will be administered by the Company's Board of Directors ("Board") or its delegate, which will have sole authority to interpret and construe the provisions of the Plan and to adopt rules and regulations for administering the Plan. Decisions of the Board or its delegate will be final and binding on all parties who have an interest in the Plan. IV. ELIGIBILITY Any member of the Company's Board of Directors who is not a full-time employee of the Company or one of its subsidiaries ("Outside Director") and who has served in such capacity for at least five years will be eligible to participate in this Plan. V. RETIREMENT BENEFITS A Director who is a participant in the Plan will be entitled to an annual retirement benefit equal to the annual retainer in effect for Outside Directors at the time he or she retires from the Board (not including any additional retainer paid for holding the position of member or chairman of a Board committee), payable for the lesser of ten years or the number of full years of service as an Outside Director. Payment will commence on any date following retirement elected by the participant, but not earlier than the date the participant attains age 65. If a participant is an Outside Director on January 1, 1988, the election must be filed by March 31, 1988. If a participant first becomes an Outside Director after January 1, 1988, the election must be filed within 90 days of the date he or she becomes an Outside Director. If no election is filed, payment will commence on the later of the date the participant retires or the date the participant attains age 65. VI. SURVIVOR BENEFITS In the event of the death of a participant prior to retirement, the participant's designated beneficiary will receive an annual benefit equal to the annual benefit to which the participant would have been entitled if the participant had retired on the date of his or her death, payable for the lesser of ten years or the number of full years of service as an Outside Director. Payment of the survivor benefit will commence the month following the Director's death. However, a Director may elect for benefits to commence on any date following his or her death. If participant is an Outside Director on January 1, 1988, any such election must be filed by March 31, 1988. If a participant first becomes an Outside Director after January 1, 1988, the election must be filed within 90 days of the date he or she becomes an Outside Director. VII. GENERAL PROVISIONS (A) The obligation to pay retirement or survivor benefits will at all times be an unfunded and unsecured obligation of the Company. The Company will not establish any trust, escrow arrangement or other fiduciary relationship for the purpose of segregating funds for the payment of such retirement or survivor benefits, nor will the Company be under any obligation to invest any portion of its general assets in mutual funds, stocks, bonds, securities or other similar investments in order to accumulate funds for the satisfaction of its obligations under the Plan. The participant and his beneficiary must look solely and exclusively to the general assets of the Company for the payment of the participant's benefits. (B) The Board may at any time amend, suspend or terminate the Plan; provided, however, that such action may not adversely affect rights previously vested and non-forfeitable under the Plan. (C) A participant will have no right to alienate, pledge or encumber his interest in his or her benefits, nor will such benefits be subject in any way to the claims of a participant's creditors or to attachment, execution or other process of law. (D) In the event of a participant's death following retirement, the balance of his or her retirement benefits, if any, will be paid to the participant's designated beneficiary or, in the absence of such designation, in accordance with the participant's will or the laws of descent and distribution. In the event of a beneficiary's death, the balance of his or her benefits, if any, will be paid in accordance with the beneficiary's will or the laws of descent and distribution. A participant may from time to time revoke his or her beneficiary designation and file a new beneficiary designation with the Board. All beneficiary designations must be on the form prescribed by the Board or its delegate. EX-10 7 EXHIBIT 10G WELLS FARGO & COMPANY EQUITY INCENTIVE PLAN I. PURPOSES OF THE PLAN This 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 of the Board of Directors of the Corporation (the "Committee"). The Committee shall consist of at least three members, none of whom while serving as such shall be, or during the one-year period prior to such service shall have been, eligible to participate in the Plan or any other stock option, stock appreciation, stock bonus or other stock plan of the Corporation or any of its subsidiaries. The Committee shall have full authority to administer the Plan, including authority to interpret and construe any provision of the Plan and to adopt such rules and regulations for administering the Plan as it may deem necessary. Decisions of the Committee shall be final and binding on all persons who have an interest in the Plan. III. ELIGIBILITY FOR AWARDS The persons who shall be eligible to receive awards under the Plan shall be 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. IV. STOCK SUBJECT TO THE PLAN (a) CLASS. The stock which is to be made the subject of awards granted under the Plan shall be the Corporations's authorized but unissued Common Stock, par value $5 per share ("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 1,750,000 shares (subject to adjustment under Section IV(d)). No limitation shall exist on the aggregate amount of cash payments the Corporation C-3 may make in connection with share rights pursuant to Section VII(b) or the surrender of options pursuant to Article VI(c). (2) If any outstanding option under the Plan expires or is terminated for any reason or is surrendered 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 a stock option granted under the Plan. (3) If (i) any outstanding share rights under the Plan terminate for any reason prior to the issuance of the total number of shares subject to the share rights, or (ii) any outstanding share rights are 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 rights shall not be charged against the limitation of Section IV(b)(1) and may again be made the subject of subsequent share rights 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 350,000 shares (subject to adjustment under Section IV(d)). For purposes of this Article IV(c) 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 share right, reduce the number of shares which can be issued thereunder, the share right shall be deemed to be granted for such reduced number of shares. (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, change in corporate structure or otherwise), then appropriate adjustments shall be made to the maximum number of shares subject to the 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 Article VI or a share right meeting the specifications of Article VII or a combination thereof, as the Committee shall determine. C-4 VI. STOCK OPTIONS Stock options granted under the Plan may be either incentive stock options qualifying under Section 422A of the Internal Revenue Code of 1954, as amended ("Incentive Options"), 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. (2) Any option granted under the Plan 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) The option price shall be payable in cash or by personal check (or, if authorized by the Committee in accordance with Section VIII, a promissory note payable in installments in cash or by personal check), provided that, if and to the extent determined by the Committee and set forth in the instrument evidencing the option, all or a portion of the option price may be payable in shares of Common Stock. Shares of Common Stock delivered to the Corporation as payment of all or a portion of the option price shall be valued at their fair market value on the date of exercise of the option. (c) APPRECIATION DISTRIBUTION. (1) Any instrument evidencing an option granted under the Plan may provide that the option-holder is entitled, by notice of the Corporation at any time while the option is C-5 exercisable, 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 option 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 instrument evidencing an option may contain such further restrictions on the right of surrender as the Committee shall determine and, if the option is not intended to be an Incentive Option, may provide that the option may be surrendered, in whole or in part and under such specified circumstances as the Committee shall determine, at a time or times when the option is not exercisable; provided that in no event shall the option be surrendered during the first six months of the option term, except in the event of the optionee's death or disability. (2) If the option is surrendered in whole or in part, the appreciation distribution to which the option-holder is entitled shall be made in the form of Common Stock and cash in accordance with the percentages of each designated by the option-holder on his surrender-notification form, subject to the provisions of Section VI(c)(3); provided, however, that at least 50% of the distribution must be made in whole shares of Common Stock. For purposes of computing the number of shares to be distributed, the Common Stock shall be valued as of the date the option is surrendered. (3) If (i) the option-holder is at the time of the option surrender considered an officer or director of the Corporation for purposes of Section 16(b) of the Securities Exchange Act of 1934, or was such an officer or director at any time during the six-month period immediately preceding the option surrender and made any purchase or sale of Common Stock during such six-month period, and (ii) the option is being surrendered in part for cash, then the following additional terms and conditions shall apply to the surrender of the option: (A) The option can only be surrendered during the so-called "window period" commencing on the third and ending on the twelfth business day following the day on which the Corporation's quarterly or annual summaries of income and earnings are released to the public; and (B) The Committee, which shall have sole discretion in the matter, shall determine the percentages of Common Stock and cash in which the appreciation distribution shall be made; provided, C-6 however, that at least 50% of the distribution must be made in whole shares of Common Stock. (d) TERMINATION OF EMPLOYMENT. (1) If any optionee ceases to be employed by the Corporation or any of its subsidiaries other than by reason of death or termination for gross and willful misconduct, then any outstanding option granted such optionee under the Plan may be exercised, to the extent such option was exercisable on the date of the optionee's cessation of employment, at any time prior to the earlier of (i) the end of the three-month period following the date of his cessation of employment (OR, IF TERMINATION OCCURS BY REASON OF DISABILITY OR RETIREMENT, SUCH LONGER PERIOD, NOT EXCEEDING THREE YEARS, AS THE COMMITTEE DETERMINES) or (ii) the specified expiration date of the option. However, if Section VI(c)(3) would still be applicable to the surrender of any such option after the date of the optionee's cessation of employment, such option shall not cease to be exercisable before the earlier of (i) the end of the window period immediately following the window period within which or immediately prior to which occurs the optionee's cessation of employment or (ii) the specified expiration date of the option. (2) Should the optionee's employment be terminated for gross and willful misconduct during the course of his employment, including (without limitation) the wrongful appropriation of employer funds or the commission of a felony, then any outstanding options granted such optionee under the Plans may be terminated by the Committee as of the date of such misconduct. (e) DEATH OF OPTIONEE. Any option granted the optionee under the Plan and outstanding on the date of his death may be exercised, to the extent such option was exercisable on the date of his death, by the personal representative of the optionee's estate or by the person or persons to whom the option is transferred pursuant to the optionee's will or in accordance with the laws of descent and distribution, at any time prior to the earlier of (i) A SPECIFIED DATE, NOT LATER THAN THE THIRD ANNIVERSARY OF THE OPTIONEE'S DEATH, DETERMINED BY THE COMMITTEE or (ii) the specified expiration date of such option. Upon the occurrence of the earlier event, the option shall then terminate. (f) 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) PRIOR OUTSTANDING OPTION. Under no circumstances may an Incentive Option granted before January 1, 1987 be C-7 exercised while there remains outstanding any other Incentive Option which was granted at an earlier date to the optionee to purchase stock in the Corporation, his employer corporation or any other corporation which is on the date of grant of the later option either a parent or subsidiary corporation of his employer corporation or in a predecessor corporation of any such corporation. Solely for purposes of this Section VI(f)(1), an Incentive Option shall be treated as outstanding until such option is exercised in full or expires by lapse of time. (2) DOLLAR LIMITATIONS. (A) INCENTIVE OPTIONS GRANTED AFTER DECEMBER 31, 1986. 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 granted after December 31, 1986 that would otherwise be Incentive Stock Options are exercisable for the first time by any individual 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, 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. (B) INCENTIVE OPTIONS GRANTED BEFORE JANUARY 1, 1987. The aggregate fair market value (determined as of the respective date or dates of grant) of the Common Stock which may be made the subject of Incentive Options granted to any employee under the Plan (or any other plan of the Corporation or his employer corporation or its parent or subsidiary corporation or a predecessor of any such corporation) in any one calendar year before January 1, 1987 shall not exceed the sum of One Hundred Thousand Dollars ($100,000), plus any unused Carryover from each of the three immediately preceding calendar years after 1980. For purposes of the preceding limitation, the term "Carryover" means, with respect to each calendar year after 1980, one-half (1/2) the amount by which the sum of One Hundred Thousand Dollars ($100,000) exceeds the aggregate fair market value (determined as of the respective date or dates of grant) of the Common Stock for which the optionee is granted Incentive Options under the Plan (or any other option plan of the Corporation, his employer corporation and its parent and subsidiary corporation) in such calendar year. Incentive Options granted during any calendar year shall first be applied against the basic $100,000 C-8 limitation in effect for such calendar year and then applied against any unused Carryovers to such calendar year in the order of the calendar years in which the Carryovers arose. (3) 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 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. (4) PARENT; SUBSIDIARY. For purposes of this Section VI(f) "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. (g) WITHHOLDING ON NONSTATUTORY OPTIONS. (1) 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 a nonstatutory 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 making an irrevocable election that a portion of the total value of the shares of Common Stock subject to the nonstatutory 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. (2) If the optionee is subject to the trading restrictions of Section 16(b) of the Securities Exchange Act of 1934 (the "1934 Act") at the time of exercise of an option, any election under this subparagraph (g) by such C-9 individual shall be made either (i) at least six months prior to the date the amount of withholding tax due with respect to the exercise is calculated (the "Tax Date") or (ii) on or prior to the Tax Date, within a "window period" as defined in Rule 16b-3(e)(3)(iii) under the 1934 Act; and shall apply only to options exercised six months or more after the date of grant (unless the option holder dies or becomes disabled prior to the expiration of such six-month period). Should the Tax Date be deferred for six months following the exercise date, the full amount of shares purchased under the exercised option shall be issued to the officer or director upon exercise, but such individual shall be obligated unconditionally, upon approval of his withholding election, to tender back to the Corporation on the Tax Date the requisite number of shares of Common Stock (plus cash for any fractional amount) needed to satisfy the designated percentage of his minimum Federal and State income and employment tax withholding liability. 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 rights 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 rights 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: (i) The Committee may require that a designated percentage of the total value of the shares of Common Stock subject to the share C-10 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 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 tax withholding rate in effect at the time under federal and applicable state law. (ii) The Committee may provide one or more employees whose share rights are subject to the mandatory cash payment under clause (i) with an election to receive an 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 (i). If any employee to whom an election under this clause (ii) 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 Securities Exchange Act of 1934, 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 following provisions shall be applicable to the exercise of his election under this clause (ii): (A) The election can be exercised only during one of the so-called "window periods," through and including the window period which ends immediately prior to the date the share rights are to become free of all restrictions under the Plan. Each window period shall commence on the third and end on the twelfth business day following the day on which the Corporation's quarterly or annual summaries of income and earnings are released to the public. (B) The Committee shall have absolute discretion to approve or disapprove the election. (c) MODIFICATION OF RIGHTS. The Committee shall have full power and authority to modify or waive any or all of the terms, C-11 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 subparagraph 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 him. X. SHAREHOLDER RIGHTS No person shall have any rights as a shareholder with respect to the shares of Common Stock subject to an option or share right granted under the Plan until he shall have been issued a stock certificate for such shares. XI. 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 C-12 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. XII. EFFECTIVE DATE AND TERM OF PLAN (a) EFFECTIVE DATE. The Plan shall become effective on the date it is adopted by the Board of Directors of the Corporation, 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 outstanding voting stock represented and voting at a duly-held meeting at which a quorum is present, provided the shares voting for approval also constitute at least a majority of the required quorum. 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 of Directors of the Corporation and before the date fixed herein for termination of the Plan. (b) TERM. The Plan shall terminate on the 10th anniversary of the date of the Plan's adoption by the Board of Directors of the Corporation. 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. XIII. AMENDMENT OR DISCONTINUANCE BY BOARD ACTION The Board of Directors of the Corporation 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 no modification of the Plan by the Board of Directors of the Corporation without the approval of the Corporation's shareholders shall (i) change the number of shares of Common Stock which may be issued under the Plan (unless necessary to effect the adjustments required under subparagraph IV(d)), (ii) materially increase the benefits accruing to participants in the Plan, (iii) materially modify the eligibility requirements for awards under the Plan or (iv) render any member C-13 of the Committee eligible to receive awards under the Plan at any time while serving on the Committee. XIV. CONSTRUCTION Whenever used in the Plan, the masculine gender shall include the feminine gender and the singular shall include the plural. C-14 EX-11 8 EXHIBIT 11 EXHIBIT 11 WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE - ------------------------------------------------------------------------------- Year ended December 31, ------------------------- (in millions) 1993 1992 1991 - -------------------------------------------------------------------------------
PRIMARY EARNINGS PER COMMON SHARE Net income $ 612 $ 283 $ 21 Less preferred dividends 50 48 19 ------ ----- ---- Net income for calculating primary earnings per common share $ 562 $ 235 $ 2 ====== ===== ==== Average common shares outstanding 56 53 52 ====== ===== ==== PRIMARY EARNINGS PER COMMON SHARE $10.10 $4.44 $.04 ====== ===== ==== FULLY DILUTED EARNINGS PER COMMON SHARE (1) Net income $ 612 $ 283 $ 21 Less preferred dividends 50 48 19 ------ ----- ---- Net income for calculating fully diluted earnings per common share $ 562 $ 235 $ 2 ====== ===== ==== Average common shares outstanding 56 53 52 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 1 1 ------ ----- ---- Average common shares outstanding as adjusted 57 54 53 ====== ===== ==== FULLY DILUTED EARNINGS PER COMMON SHARE $ 9.88 $4.38 $.04 ====== ===== ==== - ------------------------------------------------------------------------------- (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%.
EX-12 9 EXHIBIT 12 EXHIBIT 12 WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Year ended December 31, ----------------------------------------------------------- (in millions) 1993 1992 1991 1990 1989 - ------------------------------------------------------------------------------------------------------------------- Earnings, including interest on deposits (1): Income before income tax expense $1,038 $ 500 $ 54 $1,196 $1,001 Fixed charges 1,157 1,505 2,504 2,784 2,759 ------ ------ ------ ------ ------ $2,195 $2,005 $2,558 $3,980 $3,760 ====== ====== ====== ====== ====== Fixed charges (1): Interest expense $1,104 $1,454 $2,452 $2,737 $2,712 Estimated interest component of net rental expense 53 51 52 47 47 ------ ------ ------ ------ ------ $1,157 $1,505 $2,504 $2,784 $2,759 ====== ====== ====== ====== ====== Ratio of earnings to fixed charges (2) 1.90 1.33 1.02 1.43 1.36 ====== ====== ====== ====== ====== Earnings, excluding interest on deposits: Income before income tax expense $1,038 $ 500 $ 54 $1,196 $1,001 Fixed charges 294 320 539 839 949 ------ ------ ------ ------ ------ $1,332 $ 820 $ 593 $2,035 $1,950 ====== ====== ====== ====== ====== Fixed charges: Interest expense $1,104 $1,454 $2,452 $2,737 $2,712 Less interest on deposits (863) (1,185) (1,965) (1,945) (1,810) Estimated interest component of net rental expense 53 51 52 47 47 ------ ------ ------ ------ ------ $ 294 $ 320 $ 539 $ 839 $ 949 ====== ====== ====== ====== ====== Ratio of earnings to fixed charges 4.53 2.56 1.10 2.42 2.05 ====== ====== ====== ====== ====== - ------------------------------------------------------------------------------------------------------------------- (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.
EX-13 10 EXHIBIT 13 (ANNUAL REPORT) Financial Review - -------------------- WELLS FARGO & COMPANY AND SUBSIDIARIES -------------------- - -------------------------------------------------------------------------------- ---------------------------------------- ---------------------------------------- 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 1993 was $612 million, compared with $283 million in 1992. Net income per share was $10.10, compared with $4.44 in 1992. Return on average assets (ROA) was 1.20% and return on average common equity (ROE) was 16.74% in 1993, compared with .54% and 7.93%, respectively, in 1992. The increase in earnings in 1993 compared with 1992 was substantially due to a $665 million, or 55%, decrease in the loan loss provision to $550 million. During 1993, net charge-offs were $495 million, or 1.44% of average total loans, compared with $798 million, or 1.97%, during 1992. The allowance for loan losses was $2,122 million, or 6.41% of total loans, at December 31, 1993, compared with $2,067 million, or 5.60%, at December 31, 1992. At December 31, 1993, total nonaccrual and restructured loans were $1,200 million, or 3.6% of total loans, compared with $2,142 million, or 5.8%, at December 31, 1992. Loans new to nonaccrual in 1993 were $821 million, compared with $2,166 million in 1992. At December 31, 1993, an estimated $704 million, or 59%, of nonaccrual loans were less than 90 days past due, compared with an estimated $1,294 million, or 61%, at December 31, 1992. Foreclosed assets were $348 million at December 31, 1993, compared with $510 million at December 31, 1992. Net interest income on a taxable-equivalent basis decreased to $2,659 million in 1993 from $2,698 million a year ago, while the net interest margin increased to 5.74% from 5.70%. Average earning assets declined to $46.3 billion in 1993 from $47.3 billion in 1992. This decrease was substantially due to loan runoff, predominantly offset by purchases of investment securities. Total average loans were $34.3 billion at December 31, 1993, a 15% decrease from $40.4 billion at December 31, 1992. Total average investment securities increased to $11.3 billion in 1993 from $6.0 billion in 1992. The decrease in average total loans reflects loan repayments, weak loan demand and the Company's emphasis in 1993 on reducing the commercial real estate portfolio. Currently, the Company expects its loan portfolio to grow in 1994, particularly real estate 1-4 family first mortgages, consumer loans and small business and middle market loans. Noninterest income increased from $1,059 million in 1992 to $1,093 million in 1993, an increase of 3%. Substantially all of the growth was in service charges on deposit accounts and trust and investment services income. Noninterest expense increased from $2,035 million in 1992 to $2,162 million in 1993, an increase of 6%. The increase in noninterest expense was substantially due to higher expenses for salaries and benefits. The Company's effective tax rate of 41% for 1993 decreased from 43% for 1992. A significant portion of this decrease was due to a net $9 million reduction of income tax expense related to the impact of the Omnibus Budget Reconciliation Act of 1993. In 1993, economic conditions continued to strengthen in many parts of the country. However, the California economy, the Company's primary market, remained sluggish along a broad group of industries and job losses con- [Graph] [Graph] 11
TABLE 1 RATIOS AND PER COMMON SHARE DATA - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Year ended December 31, ------------------------------------- 1993 1992 1991 PROFITABILITY RATIOS Net income to average total assets (ROA) 1.20% .54% .04% Net income applicable to common stock to average common stockholders' equity (ROE) 16.74 7.93 .07 Net income to average stockholders' equity 15.32 7.92 .63 CAPITAL RATIOS At year end: Common stockholders' equity to assets 7.00% 6.03% 5.24% Stockholders' equity to assets 8.22 7.25 6.11 Risk-based capital (1) Tier 1 capital (core capital) 10.48 8.22 5.78 Total capital 15.12 13.15 10.19 Leverage (1) 7.39 6.36 5.00 Average balances: Common stockholders' equity to assets 6.57 5.65 5.58 Stockholders' equity to assets 7.82 6.81 6.09 PER COMMON SHARE DATA Dividend payout (2) 22% 34% -% Book value $65.87 $57.44 $53.99 Market prices (3): High $133 $ 86 3/8 $ 97 3/4 Low 75 1/2 59 48 1/4 Year end 129 3/8 76 3/8 58 - ------------------------------------------------------------------------------ (1) See the Capital Adequacy/Ratios section for additional information. (2) Dividends declared per common share as a percentage of net income per common share. (3) Based on daily closing prices reported on the New York Stock Exchange Composite Transaction Reporting System.
tinued. Still, there are some signs of stability, mainly as a result of widespread financial restructuring. Corporations and consumers have reduced and/or refinanced their debt, much of it at lower interest rates. Southern California has been particularly burdened by severe cutbacks in the defense and aerospace industries and by the excess in commercial real estate, especially office buildings. The ripple effect from these and other forces spread to a large number of closely related industries, especially retailing, business services and financial activities. The region has also suffered from natural disasters, especially the earthquake in January 1994. Since mid-1990, Southern California is estimated to have lost 525,000 jobs, or 80% of the total jobs lost in the whole state. Higher unemployment has led to greater consumer delinquencies, personal bankruptcies and larger credit card charge-offs than in Northern California. Also, as a result of these difficulties in the Southern California economy, many of the Company's commercial real estate borrowers in the region have experienced falling collateral values due to the substantial oversupply of properties and the resultant reduced rental and occupancy rates. At December 31, 1993, an estimated $3,356 million, or 36%, of the Company's other real estate mortgage and real estate construction loans were in Southern California and an estimated $386 million, or 12%, of that amount was on nonaccrual. The ability of certain real estate developers to support their projects has been impaired. It may take years to absorb the surplus office capacity in the Southern California markets where the Company has $870 million of commercial office building loans. It is difficult to predict when current economic conditions will show significant improvement, but many corporations and households are continuing to restructure and refinance, thus creating favorable conditions for a potential improvement in the economy. Northern California has been affected by the recession but to a lesser extent than Southern California. One of Northern California's advantages is its higher concentration of service-oriented companies and its somewhat broader economic base. At December 31, 1993, an estimated $2,764 million, or 29%, of the Company's other real estate mortgage and real estate construction loans were in Northern California and an estimated $65 million, or 2%, of that amount was on nonaccrual. Although Northern California has had difficulties in commercial real estate similar to Southern California, these difficulties have been much less severe than in Southern California. In all likelihood, this region has better prospects of coming out of the recession earlier than Southern California. At December 31, 1993, the ratio of common equity to total assets was 7.00%, compared with 6.03% at December 31, 1992. The Company's total risk-based capital (RBC) ratio at December 31, 1993 was 15.12% and its Tier 1 RBC ratio was 10.48%, exceeding the minimum guidelines of 8.00% and 4.00%, respectively. The ratios at December 31, 1992 were 13.15% and 8.22%, respectively. The leverage ratios were 7.39% and 6.36% at December 31, 1993 and 1992, respectively. A discussion of RBC and leverage ratio guidelines is in the Capital Adequacy/Ratios section. In October 1993, the Board of Directors approved an increase in the common stock quarterly dividend from $.50 per share to $.75 per share. The quarterly dividend was increased again in January 1994 to $1.00 per share. 12
TABLE 2 SIX-YEAR SUMMARY OF SELECTED FINANCIAL DATA - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- (in millions) 1993 1992 1991 1990 1989 1988 % Change Five-year 1993/ compound 1992 growth rate INCOME STATEMENT Net interest income $ 2,657 $ 2,691 $ 2,520 $ 2,314 $ 2,159 $ 1,972 (1)% 6 % Provision for loan losses 550 1,215 1,335 310 362 300 (55) 13 Noninterest income 1,093 1,059 889 909 779 682 3 10 Noninterest expense 2,162 2,035 2,020 1,717 1,575 1,519 6 7 Net income 612 283 21 712 601 513 116 4 Per common share Net income $ 10.10 $ 4.44 $ .04 $ 13.39 $ 11.02 $ 9.20 127 2 Dividends declared 2.25 1.50 3.50 3.90 3.30 2.45 50 (2) BALANCE SHEET (at year end) Investment securities $13,058 $ 9,338 $ 3,833 $ 1,387 $ 1,738 $ 3,970 40 % 27 % Loans 33,099 36,903 44,099 48,977 41,727 37,670 (10) (3) Allowance for loan losses 2,122 2,067 1,646 885 738 752 3 23 Assets 52,513 52,537 53,547 56,199 48,737 46,617 - 2 Core deposits 41,291 41,879 42,941 41,840 35,607 33,042 (1) 5 Senior debt 2,256 2,159 2,537 529 695 923 4 20 Subordinated debt 1,965 1,881 1,683 1,888 1,846 1,994 4 - Stockholders' equity 4,315 3,809 3,271 3,360 2,861 2,580 13 11 - ---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------- ---------------------------------------- Earnings Performance ---------------------------------------- ---------------------------------------- The Bank generated net income of $632 million and $337 million in 1993 and 1992, respectively. This income was partially offset by net losses of the Parent (excluding its equity in earnings of subsidiaries) and its nonbank subsidiaries totaling $20 million and $54 million in 1993 and 1992, respectively. 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 $2,659 million in 1993, compared with $2,698 million in 1992. 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 1993, the net interest margin was 5.74%, compared with 5.70% [Graph] 13
TABLE 3 AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS)(1) - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- (in millions) 1993 1992 ------------------------------------ ------------------------------------ AVERAGE YIELDS/ INTEREST Average Yields/ Interest BALANCE RATES INCOME/ balance rates income/ EXPENSE expense EARNING ASSETS Investment securities (2): At cost: U.S. Treasury securities $ 2,283 5.03% $ 115 $ 1,562 5.80% $ 91 Securities of U.S. government agencies and corporations 7,974 6.41 511 4,197 7.38 309 Obligations of states and political subdivisions 22 7.36 2 32 7.15 2 Private collateralized mortgage obligations 864 4.16 36 - - - Other securities 167 5.45 9 78 5.76 5 ------- ------ ------- ------ Total investment securities at cost 11,310 5.95 673 5,869 6.93 407 At lower of cost or market - - - 108 8.73 9 ------- ------ ------- ------ Total investment securities 11,310 5.95 673 5,977 6.97 416 Federal funds sold and securities purchased under resale agreements 734 3.17 23 919 3.62 33 Loans: Commercial 7,154 9.36 670 9,702 8.50 825 Real estate 1-4 family first mortgage 6,787 7.92 538 7,628 9.27 707 Other real estate mortgage (3) 9,467 8.20 776 10,634 8.21 873 Real estate construction (3) 1,303 8.50 111 1,837 8.47 156 Consumer: Real estate 1-4 family junior lien mortgage 3,916 6.97 273 4,585 8.14 373 Credit card 2,587 15.62 404 2,771 15.93 441 Other revolving credit and monthly payment 1,893 9.45 179 2,083 9.85 205 ------- ------ ------- ------ Total consumer 8,396 10.19 856 9,439 10.81 1,019 Lease financing 1,190 9.83 117 1,165 10.36 121 Foreign 7 - - 1 - - ------- ------ ------- ------ Total loans (4) 34,304 8.94 3,068 40,406 9.16 3,701 Other - - - 1 - - ------- ------ ------- ------ Total earning assets $46,348 8.12 3,764 $47,303 8.77 4,150 ======= ------ ======= ------ FUNDING SOURCES Interest-bearing liabilities: Deposits: Interest-bearing checking $ 4,626 1.18 55 $ 4,597 1.77 81 Savings deposits 2,741 2.19 60 3,250 2.81 91 Market rate savings 16,592 2.28 378 15,284 2.89 442 Savings certificates 7,948 4.37 347 10,763 4.94 532 Certificates of deposit 219 7.99 18 316 8.41 27 Other time deposits 112 5.62 6 128 532 7 Deposits in foreign offices 7 - - 43 7.89 3 ------- ------ ------- ------ Total interest-bearing deposits 32,245 2.68 864 34,381 3.44 1,183 Federal funds purchased and securities sold under repurchase agreements 1,051 2.79 29 1,299 3.16 41 Commercial paper and other short-term borrowings 207 2.90 6 252 3.54 9 Senior debt 2,174 4.75 103 2,175 5.77 126 Subordinated debt 1,958 5.23 103 1,872 4.99 93 ------- ------ ------- ------ Total interest-bearing liabilities 37,635 2.93 1,105 39,979 3.63 1,452 Portion of noninterest-bearing funding sources 8,713 - - 7,324 - - ------- ------ ------- ------ Total funding sources $46,348 2.38 1,105 $47,303 3.07 1,452 ======= ------ ======= ------ NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (5) 5.74% $2,659 5.70% $2,698 ===== ====== ===== ====== NONINTEREST-EARNING ASSETS Cash and due from banks $ 2,456 $ 2,536 Other 2,306 2,658 ------- ------- Total noninterest-earning assets $ 4,762 $ 5,194 ======= ======= NONINTEREST-BEARING FUNDING SOURCES Deposits $ 8,482 $ 7,885 Other liabilities 997 1,060 Preferred stockholders' equity 639 608 Common stockholders' equity 3,357 2,965 Noninterest-bearing funding sources used to fund earning assets (8,713) (7,324) ------- ------- Net noninterest-bearing funding sources $ 4,762 $ 5,194 ======= ======= TOTAL ASSETS $51,110 $52,497 ======= ======= - ----------------------------------------------------------------------------------------------------------------------------------- (1) The average prime rate of the Bank was 6.00%, 6.25%, 8.47%, 10.01% and 10.87% for 1993, 1992, 1991, 1990 and 1989, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 3.29%, 3.83%, 5.99%, 8.28% and 9.29% for the same years, respectively. (2) There was no average balance or related interest income earned on investment securities carried at fair value since FAS 115 was adopted on December 31, 1993. (3) During the fourth quarter of 1990, loans were reclassified from the real estate construction loan category to the other real estate mortgage loan category so that the real estate construction loan category consists solely of properties where construction is not complete. Prior period balances have not been reclassified as complete information is not available.
14
- ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- 1991 1990 1989 - -------------------------------- -------------------------------- -------------------------------- Average Yields/ Interest Average Yields/ Interest Average Yields/ lnterest balance rates income/ balance rates income/ balance rates income/ expense expense expense $ 631 6.59% $ 41 $ 338 6.82% $ 23 $ 709 7.43% $ 53 1,231 7.85 96 998 8.95 89 2,253 8.81 198 50 7.31 4 68 7.76 5 70 7.51 5 - - - - - - - - - 143 8.79 13 238 9.92 24 315 10.63 34 ------- ------ ------- ------ ------- ------ 2,055 7.51 154 1,642 8.60 141 3,347 8.67 290 - - - - - - - - - ------- ------ ------- ------ ------- ------ 2,055 7.51 154 1,642 8.60 141 3,347 8.67 290 303 5.42 16 45 8.61 4 31 9.33 3 12,974 9.64 1,252 14,382 10.92 1,570 14,154 11.66 1,650 9,367 10.16 952 8,268 10.47 866 5,953 10.51 626 10,773 9.58 1,033 7,022 10.62 746 5,714 11.06 632 2,232 10.10 225 4,271 10.83 463 4,385 11.70 513 5,135 10.10 519 4,321 11.50 497 3,701 12.19 451 2,758 16.25 448 2,566 16.24 416 2,040 16.66 339 2,323 11.11 258 2,072 11.95 248 1,895 12.41 235 ------- ------ ------- ------ ------- ------ 10,216 11.99 1,225 8,959 12.96 1,161 7,636 13.44 1,025 1,167 11.34 132 1,129 10.63 120 1,339 9.55 128 7 23.86 2 30 8.41 3 245 8.61 21 ------- ------ ------- ------ ------- ------ 46,736 10.31 4,821 44,061 11.19 4,929 39,426 11.66 4,595 17 8.43 1 5 - - 49 7.70 4 ------- ----- ------- ------ ------- ------ $49,111 10.17 4,992 $45,753 11.09 5,074 $42,853 11.42 4,892 ======= ------ ======= ------ ======= ------ $ 4,379 3.72 163 $ 3,835 3.93 151 $ 3,593 3.92 141 3,398 4.88 166 3,508 5.01 176 4,064 4.97 202 12,699 5.04 640 9,788 6.32 619 8,155 6.67 544 13,758 6.57 905 11,905 7.74 921 10,161 7.91 804 570 8.12 46 418 8.72 36 436 8.99 39 149 7.89 12 177 8.23 15 159 8.76 14 400 7.76 31 261 8.84 23 654 9.02 59 ------- ------ ------- ------ ------- ------ 35,353 5.55 1,963 29,892 6.49 1,941 27,222 6.62 1,803 3,092 5.50 170 4,522 7.95 359 4,147 9.19 381 1,243 6.29 78 2,871 7.90 227 2,892 9.13 264 1,681 7.53 126 587 9.02 53 815 9.11 74 1,832 6.15 113 1,864 8.23 153 1,943 9.36 182 ------- ------ ------- ------ ------- ------ 43,201 5.67 2,450 39,736 6.88 2,733 37,019 7.31 2,704 5,910 - - 6,017 - - 5,834 - - ------- ------ ------- ------ ------- ------ $49,111 4.99 2,450 $45,753 5.97 2,733 $42,853 6.31 2,704 ======= ------ ======= ------ ======= ------ 5.18% $2,542 5.12% $2,341 5.11% $2,188 ===== ====== ===== ====== ===== ====== $ 2,604 $ 2,616 $ 2,623 3,307 2,740 2,287 ------- ------- ------- $ 5,911 $ 5,356 $ 4,910 ======= ======= ======= $ 7,289 $ 7,183 $ 6,877 1,180 1,053 1,120 279 405 405 3,073 2,732 2,342 (5,910) (6,017) (5,834) ------- ------- ------- $ 5,911 $ 5,356 $ 4,910 ======= ======= ======= $55,022 $51,109 $47,763 ======= ======= ======= - ---------------------------------------------------------------------------------------------------------------- (4) Nonaccrual loans and related income are included in their respective loan categories. (5) 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 1993 and 34% for the other years presented.
15 in 1992. This increase was substantially due to lower rates paid on interest-bearing checking and savings accounts, wider spreads between Prime- and LIBOR-based loans and their funding sources and recoveries on loans where interest had been previously applied to principal. These improvements were partially offset by a change in the mix of earning assets from higher-yielding loans to lower-yielding investment securities and lower income from derivative contracts used to hedge mismatches in the rate maturity of loans and their funding sources. Individual components of net interest income and net interest margin are presented in Table 3. Hedging income from derivative contracts decreased $32 million in 1993, resulting in a 7 basis point decline in the net interest margin due to the maturity of contracts. The maturity of certain hedging contracts is expected to result in lower hedging income in 1994 of about $95 million, or about a 20 basis point decline in the net interest margin, assuming interest rates remain stable. The interest rate derivative contracts that are maturing, primarily purchased interest rate floor contracts and interest rate swaps in which the Company receives a fixed rate, were entered into during a higher interest rate environment and have benefited from the subsequent decline in rates. These maturing contracts may be replaced by new derivative contracts based on the Company's ongoing assessment of its overall interest rate sensitivity position. However, any new replacement contracts are not expected to result in the same hedging income as the maturing contracts due to the lower rate environment. The decrease in earning assets was substantially due to a $6.1 billion decrease in average loans, primarily in commercial loans and other real estate mortgage loans, partially offset by a $5.3 billion increase in average invest- ment securities, predominantly mortgage-backed securities. For further discussion of significant changes in earning assets and funding sources, see the Balance Sheet Analysis section. Net interest income and the net interest margin are expected to decline in 1994 due to the change in mix of assets and the resulting lower yields on investment securities as well as a decline in hedging income. However, this decline may be partially offset by the payoff of loans where interest had been previously applied to principal. Noninterest Income - -------------------------------------------------------------------------------- ------------------ Table 4 shows the major components of noninterest income. TABLE 4 NONINTEREST INCOME
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (in millions) Year ended December 31, % Change ------------------------ ------------ 1993 1992 1991 1993/ 1992/ 1992 1991 Service charges on deposit accounts $423 $394 $337 7 % 17 % Fees and commissions: Debit and credit card merchant fees 80 87 89 (8) (2) Credit card membership and other credit card fees 68 72 73 (6) (1) Charges and fees on loans 48 49 47 (2) 4 Mutual fund and annuity sales fees 43 29 4 48 625 Shared ATM network fees 38 32 23 19 39 All other 99 94 107 5 (12) ------ ------ ---- Total fees and commissions 376 363 343 4 6 Trust and investment services income: Asset management and custody fees 125 124 118 1 5 Mutual fund management fees 37 19 3 95 533 All other 28 22 17 27 29 ------ ------ ---- Total trust and investment services income 190 165 138 15 20 Investment securities gains (losses): At cost - - (6) - (100) At lower of cost or market - 45 - (100) - ------ ------ ---- Total investment securities gains (losses) - 45 (6) (100) - Income from equity investments accounted for by the: Cost method 42 17 18 147 (6) Equity method 24 24 23 - 4 Check printing charges 38 36 28 6 29 Gains on sales of loans 12 20 23 (40) (13) Losses from dispositions of operations (28) (8) (3) 250 167 Real estate investment losses (6) (19) (4) (68) 375 All other 22 22 (8) - - ------ ------ ---- Total $1,093 $1,059 $889 3 % 19 % ====== ====== ==== ==== ==== - --------------------------------------------------------------------------------
16 The growth in service charges on deposit accounts in 1993 compared with 1992 was primarily due to increased service charges on individual and business checking accounts. The increase in total fees and commissions in 1993 compared with 1992 predominantly resulted from sales fees on mutual funds and annuities as well as increased shared ATM network income. The decrease in debit and credit card merchant fees was due to a decline in sales volume and an alliance that the Company entered into in November 1993. The agreement with Card Establishment Services Inc. (CES) formed an alliance for merchant credit card and debit card processing services. Under this agreement, the Company will be responsible for marketing and sales, initial merchant credit analysis and customer service; CES will provide technology and processing operations. The Company retains an interest in the net revenues from processing the transactions which 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. Consequently, approximately $30 million of merchant fees recorded in 1993 will not be reported as such in 1994. The impact of this agreement was not material to 1993 earnings. Shared ATM network income increased to $38 million from $32 million in 1992, primarily due to a fee increase implemented in mid-1992 and a 7% increase in the volume of transactions processed through the ATM network. The increase in "all other" fees and commissions was predominantly due to a decrease in amortization expense for purchased mortgage servicing rights of $16 million for 1993, compared with $22 million in 1992. At December 31, 1993, the remaining balance of purchased mortgage servicing rights was $15 million. In 1993, the Company continued its emphasis on marketing mutual fund products through the Personal Financial Officer (PFO) Program by selling Stagecoach Funds throughout the branches. Sales of Stagecoach Funds, which were introduced in 1992, contributed to fees and commissions income through sales fee revenues and also contributed to trust and investment services income through investment management fees. The increase in trust and investment services income in 1993 compared with 1992 was mostly due to greater mutual fund investment management fees, reflecting growth in the funds' net assets. The Overland Express family of 13 funds, which had $3.9 billion of assets under management at December 31, 1993, compared with $4.1 billion at December 31, 1992, is sold through brokers around the country. The decline in the assets under management from 1992 was substantially in the Variable Rate Government Fund, the largest Overland Fund, reflecting the existence of other competing adjustable rate mortgage funds and slower growth in this segment of the mutual fund market than in 1992. The Stagecoach family of 12 funds had $3.8 billion of assets under management at December 31, 1993, compared with $2.2 billion at December 31,1992. In mid-1993, the Company introduced a new family of mutual funds, the WellsFunds, which are offered to selected groups of investors, such as participants in certain employee benefit plans, certain IRA investors and certain corporations, partnerships and other business entities. The WellsFunds family of 7 funds had assets under management of $530 million at December 31, 1993. In addition to managing Overland Express Funds, Stagecoach Funds and WellsFunds, the Company also managed or maintained personal trust, employee benefit trust and agency assets of approximately $45 billion at December 31, 1993, compared with approximately $37 billion at December 31, 1992. Mutual fund management fees are expected to continue to increase in 1994. In 1992, the Company realized gains of $45 million from the sale of all of its 30-year mortgage-backed securities. These securities were previously designated as held for sale and carried at the lower of cost or market. The increase in income from cost method equity investments in 1993 was substantially due to $23 million in net gains on sales of and distributions from investments in highly leveraged transactions. The increase in losses from disposition of operations was due to a $36 million accrual made in the third quarter of 1993 primarily related to the disposition of owned and leased premises expected to result from reduced space requirements; for example, downsizing some full service branches into supermarket locations and into other smaller, mid-sized branches. Real estate investment (contingent interest loans accounted for as investments) losses in 1992 were substantially due to a $17 million write-down on land for development in Southern California. "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. "All other" noninterest income in 1992 included $14 million of interest income due to the settlement of Internal Revenue Service audits related to the appropriate years for claiming certain deductions and credits applicable to the 1978 through 1986 tax years. Noninterest income is expected to increase in 1994, reflecting a currently anticipated income growth of more than 10% from fee-based products, such as mutual funds and deposit-related services, due to the Company's focus on cross-selling. 17 Noninterest Expense - -------------------------------------------------------------------------------- ------------------- Table 5 shows the major components of noninterest expense. TABLE 5 NONINTEREST EXPENSE
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (in millions) Year ended December 31, % Change -------------------------- ------------ 1993 1992 1991 1993/ 1992/ 1992 1991 Salaries $ 784 $ 714 $ 680 10 % 5 % Employee benefits 222 184 165 21 12 Net occupancy 224 222 218 1 2 Equipment 148 141 143 5 (1) Federal deposit insurance 114 106 98 8 8 Certain identifiable intangibles 77 71 69 8 3 Contract services 61 48 40 27 20 Foreclosed assets 60 93 105 (35) (11) Advertising and promotion 59 47 57 26 (18) Operating losses 52 45 81 16 (44) Telecommunications 44 44 42 - 5 Postage 43 42 40 2 5 Outside professional services 42 45 46 (7) (2) Goodwill 37 37 35 - 6 Check printing 34 33 34 3 (3) Stationery and supplies 31 31 34 - (9) Travel and entertainment 28 24 25 17 (4) Escrow and collection agency fees 24 26 23 (8) 13 Security 19 18 18 6 - Outside data processing 16 18 20 (11) (10) All other 43 46 47 (7) (2) ------ ------ ------ Total $2,162 $2,035 $2,020 6 % 1 % ====== ====== ====== === === - --------------------------------------------------------------------------------
The Company's full-time equivalent (FTE) staff, including hourly employees, averaged approximately 20,800 in 1993 and approximately 21,100 in 1992; it was 19,700 and 21,300 at December 31, 1993 and 1992, respectively. Despite the decline in FTE, salaries expense increased in 1993 compared with 1992 predominantly due to increases in incentive bonus payments (including the Company-wide employee appreciation program announced in December 1993), merit pay increases and severance accruals primarily related to the reorganization of the Retail Banking group. Employee benefits expense increased in 1993 primarily due to the adoption on January 1, 1993 of Statement of Financial Accounting Standards No. 106 (FAS 106), Employers' Accounting for Postretirement Benefits Other Than Pensions and the adoption in the third quarter of 1993 of Statement of Financial Accounting Standards No. 112 (FAS 112), Employers' Accounting for Postemployment Benefits. The adoption of FAS 106 resulted in an incremental expense in 1993 of approximately $11 million. The adoption of FAS 112 resulted in an accrual of $12 million. (See further discussion of FAS 106 and 112 in Note 9 to the Financial Statements.) The increase in federal deposit insurance expense in 1993 compared with 1992 was mostly due to an increase in the federal deposit insurance rate. Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), the FDIC adopted on January 1, 1993 a risk-based assessment system under which the assessment rate for an insured depository institution varies according to the level of risk incurred in its activities. The FDIC bases an institution's assessment risk classification partly upon whether the institution is "well capitalized," "adequately capitalized" or "less than adequately capitalized." In addition, each insured depository institution is assigned to one of three subgroups. Institutions in Subgroup A are financially sound institutions with only a few minor weaknesses; institutions in Subgroup B demonstrate weaknesses which, if not corrected, could result in significant deterioration and increased risk of loss to the FDIC; and institutions in Subgroup C are those for which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken. Based on the semi-annual assessment risk evaluation performed by the FDIC, the Bank is assigned an annualized assessment rate between .230% and .310%. This rate is subject to change on January 1 and July 1 each year. Based on this risk-based assessment rate system, the Bank expects federal deposit insurance expense to decrease in 1994. A significant portion of the increase in contract services expense for 1993 compared with 1992 was due to services related to computer programming for system upgrades throughout the Company. Table 6 shows the major components of foreclosed assets expense. TABLE 6 FORECLOSED ASSETS EXPENSE
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (in millions) Year ended December 31, ------------------------ 1993 1992 1991 Operating expenses $ 67 $ 80 $ 70 Operating revenues (40) (47) (53) Net losses from write-downs/sales 33 60 88 ---- ---- ---- Total $ 60 $ 93 $105 ==== ==== ==== - --------------------------------------------------------------------------------
18 The 35% decrease in foreclosed assets expense in 1993 compared with 1992 was primarily due to a decline in write-downs of office buildings and land and increased gains on sales. Write-downs in 1993 were primarily appraisal driven, related to office buildings and land in Southern California and out-of-state markets. In 1993, the Company continued its efforts to sell foreclosed assets, as evidenced by an increase in sales of foreclosed assets from approximately $294 million in 1992 to approximately $328 million in 1993. The Company intends to continue to emphasize disposing of its foreclosed assets. The increase in advertising and promotion expense compared with 1992 was primarily due to the marketing efforts associated with the introduction of the California Advantage credit card during 1993. The increase in operating losses in 1993 compared with 1992 was primarily due to a loss arising from the Company's role as an agent in a loan participation and losses from litigation. The Company currently expects total noninterest expense in 1994 to be lower than 1993 primarily due to expected decreases in personnel-related expense and FDIC expense. Income Taxes - -------------------------------------------------------------------------------- ------------ The Company's effective income tax rate was 41 % for 1993 and 43% for 1992. The decrease in the effective tax rate for 1993 compared with 1992 was primarily due to reductions of income tax expense of a net $9 million related to the impact of the Omnibus Budget Reconciliation Act of 1993 ("Act") and $4 million related to the revaluation of the state deferred tax asset due to a California tax rate increase. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (FAS 109), Accounting for Income Taxes. FAS 109 changed the method of computing income taxes for financial statement purposes by adopting the liability (or balance sheet) method under which 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. 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 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 now in effect 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. A further discussion of FAS 109 is in Note 10 to the Financial Statements. In 1994, the effective tax rate is currently expected to be about 44%. ---------------------------------------- ---------------------------------------- Balance Sheet Analysis ---------------------------------------- ---------------------------------------- A comparison between the year-end 1993 and 1992 balance sheets is presented below. The Bank's assets of $50.7 billion at December 31, 1993 and 1992 represented substantially all of the Company's consolidated assets at year-end 1993 and 1992. Investment Securities - -------------------------------------------------------------------------------- --------------------- The Company adopted Statement of Financial Accounting Standards No. 115 (FAS 115), Accounting for Certain Investments in Debt and Equity Securities, on December 31, 1993. This Statement addresses the accounting and reporting for certain investments in debt and marketable equity securities. FAS 115 classifies securities into three categories: held-to-maturity, trading and available-for-sale. Debt securities that a company has the positive intent and ability to hold to maturity are considered held-to-maturity securities and reported at cost. Debt and marketable equity securities, if any, that are bought and held principally for the purpose of selling them in the near term are considered trading securities and reported at fair value, with unrealized gains and losses included in earnings. Debt and marketable equity securities not considered either held-to-maturity securities or trading securities are considered available-for-sale securities and reported at fair value, with unrealized gains and losses, after applicable taxes, reported as a separate component of stockholders' equity. 19 Total investment securities averaged $11.3 billion in 1993, an 89% increase from $6.0 billion in 1992. Total investment securities were $13.1 billion at December 31, 1993, a 40% increase from $9.3 billion at December 31, 1992. The investment securities portfolio at December 31, 1993 was comprised of $9.9 billion securities at cost and $3.2 billion securities at fair value. There were no trading securities at December 31, 1993. The Company's classification of securities at fair value was influenced by accounting and regulatory requirements related to certain mortgage-backed securities. The increase in the investment securities portfolio was due to the cash provided by loan repayments which was used to purchase securities in light of continued weak loan demand and the Company's emphasis on reducing commercial real estate concentrations. Most of the increases in the portfolio were in mortgage-backed securities. Additional purchases of investment securities are likely to continue, although not at 1993 levels, until loan demand recovers. Table 7 provides expected remaining maturities and yields (taxable-equivalent basis) of debt securities within the investment portfolio. The yield to maturity, or expected running rate, of the held-to-maturity and available-for-sale securities at December 31, 1993 was approximately 5.76% and 5.68%, respectively. Expected remaining maturities will differ from remaining contractual maturities because borrowers may have the right to prepay certain obligations with or without penalties. For asset/liability management purposes, it is more appropriate to monitor investment security maturities and yields using prepayment assumptions since this better reflects what the Company can expect to occur. (Note 3 to the Financial Statements shows the remaining contractual principal maturities and yields of debt securities.)
TABLE 7 INVESTMENT SECURITIES EXPECTED REMAINING MATURITIES AND YIELDS - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- (in millions) December 31, 1993 ------------------------------------------------------------------------------------------------------ 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.) HELD-TO-MATURITY SECURITIES: U.S. Treasury securities $2,365 4.85% 1-2 $1,209 5.21% $1,156 4.48% $ - -% $ - -% Securities of U.S. government agencies and corporations 6,570 6.23 3-0 1,886 6.09 3,721 6.03 769 6.77 194 7.29 Obligations of states and political subdivisions 18 6.49 4-6 3 6.42 11 6.53 2 6.44 2 6.39 Securities issued by foreign governments 90 5.17 1-11 21 4.48 69 5.38 - - - - Private collateralized mortgage obligations 815 4.68 2-2 314 3.46 480 5.44 21 5.52 - - Corporate debt securities 29 6.14 2-1 11 6.36 18 6.01 - - - - ------- ------ ------ ------ ---- Total cost $ 9,887 5.76% 2-6 $3,444 5.53% $5,455 5.64% $ 792 6.74% $196 7.28% ======= ===== ====== ===== ====== ===== ====== ===== ==== ==== ESTIMATED FAIR VALUE $ 9,978 $3,476 $5,492 $ 809 $201 ======= ====== ====== ====== ==== AVAILABLE-FOR-SALE SECURITIES (1): Securities of U.S. government agencies and corporations $ 1,747 6.00% 2-9 $ 357 7.13% $1,293 5.67% $ 97 6.30% $ - -% Private collateralized mortgage obligations 1,340 5.15 2-7 548 4.25 606 5.69 186 6.02 - - Corporate debt securities 31 11.00 7-0 - - - - 31 11.00 - - ------- ------ ------ ------ ---- Total cost $ 3,118 5.68% 2-9 $ 905 5.39% $1,899 5.68% $ 314 6.60% $ - -% ======= ===== ====== ===== ====== ===== ====== ===== ===== ==== ESTIMATED FAIR VALUE $ 3,131 $ 910 $1,893 $ 328 $ - ======= ====== ====== ====== ==== TOTAL COST OF DEBT SECURITIES $13,005 5.74% 2-7 $4,349 5.50% $7,354 5.65% $1,106 6.70% $196 7.28% ======= ===== === ====== ===== ====== ===== ====== ===== ==== ==== - ------------------------------------------------------------------------------------------------------------------------------------ (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.
20 At December 31, 1993, the held-to-maturity securities at cost portfolio had an estimated unrealized net gain of $91 million (which reflected estimated unrealized gross losses of $23 million), or.9% of the cost of the portfolio. At December 31, 1992, the investment securities at cost portfolio had an estimated unrealized net gain of $90 million (which reflected estimated unrealized gross losses of $43 million), or 1.0% of the cost of the portfolio. At December 31, 1993, the available-for-sale securities at fair value portfolio had unrealized net gains of $21 million, net of tax, reported as a separate component of stockholders' equity. This was comprised of unrealized gross pretax gains of $35 million and unrealized gross pretax losses of $22 million on debt securities and unrealized gross pretax gains of $24 million and unrealized gross pretax losses of $1 million on marketable equity securities. During 1992, the Company classified all 30-year mortgage-backed securities as held for sale and carried them at the lower of cost or market. These securities had a total cost basis of $809 million and were sold for a $45 million gain during 1992. (Note 3 to the Financial Statements shows the cost and fair value of investment securities carried at cost and at fair value.) Loan Portfolio - -------------------------------------------------------------------------------- --------------- A comparative schedule of average loan balances is presented in Table 3; year-end balances are presented in Note 4 to the Financial Statements. Loans averaged $34.3 billion in 1993, a decrease of 15% from 1992. Most of the 26% decrease in average commercial loans was due to loan repayments combined with a slowdown in commercial lending. The 11% decrease in average real estate 1-4 family first mortgage loans was substantially due to loan repayments, which were partially a result of refinancings. The majority of the 11% decrease in average consumer loans was mostly due to a decrease in real estate 1-4 family junior lien mortgage loans, reflecting the trend toward consumer refinancing in response to declining interest rates in 1993. The Company expects growth during 1994 in total outstanding loans. Substantially all of this growth will be from 1-4 family first mortgage loans, consumer loans and small business and middle market loans. Total loans at December 31, 1993 were $33.1 billion, a decrease of 10% compared with year-end 1992, predominandy due to declines of 18% in other real estate mortgage loans and 16% in commercial loans. The Company's commercial real estate loan portfolio was $9.9 billion at December 31, 1993, compared with $12.5 billion at December 31, 1992, a 21 % decrease. This decrease was due [Graph] to reduced lending, payments received, charge-offs and transfers to foreclosed assets. Net charge-offs for commercial real estate loans were $232 million, $406 million and $202 million in 1993, 1992 and 1991, respectively. During 1994, it is anticipated that the commercial real estate loan portfolio will have lower runoff than experienced in 1993. Included in the commercial portfolio were agricultural loans of $643 million and $660 million at December 31, 1993 and 1992, respectively. Agricultural loans consist of loans to finance agricultural production and other loans to farmers. Agricultural loans that are primarily secured by real estate are included in other real estate mortgage loans; such loans were $225 million and $261 million at December 31, 1993 and 1992, respectively. Table 8 presents comparative period-end commercial real estate loans.
TABLE 8 COMMERCIAL REAL ESTATE LOANS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (in millions) December 31, % Change ---------------------------- ------------- 1993 1992 1991 1993/ 1992/ 1992 1991 Commercial loans to real estate developers (1) $ 505 $ 731 $ 1,137 (31)% (36)% Other real estate mortgage 8,286 10,128 10,751 (18) (6) Real estate construction 1,110 1,600 2,055 (31) (22) ------ ------- ------- Total $9,901 $12,459 $13,943 (21)% (11)% ====== ======= ======= === === - -------------------------------------------------------------------------------- (1) Included in commercial loans.
21 Over the years, the Company has prospered as an active commercial real estate lender. However, as a result of the current recession and overbuilt real estate markets, the Company's earnings during the past three years have been significantly affected by its relatively high levels of commercial real estate loans. The Company's real estate borrowers with properties located in Southern California have been particularly affected. At December 31, 1993, $3,356 million, or 36%, of the Company's combined other real estate mortgage and real estate construction loans were in Southern California and $386 million, or 12%, of that amount were on nonaccrual. The Company has responded to the recession and the commercial real estate slump by strengthening its lending practices and working to limit the degree of the portfolio concentration in any product type or location, or to any individual borrower. The U.S. (particularly California) is still suffering from an oversupply of commercial real estate which could last for a number of years. However, there are signs that some liquidity is returning to the real estate markets, mostly in shopping centers and apartments. An increasing number of developers are successfully financing acquisition or development programs through the capital markets and some banks are showing interest in financing certain product types. In the fourth quarter of 1993, $76 million of nonaccrual loans and an additional $349 million of accruing commercial real estate loans were repaid through the formation of third party real estate investment trusts (REITs). The Company expects REIT activity to continue in 1994, although at lower levels than in the fourth quarter of 1993. Table 9 summarizes the other real estate mortgage loans by state and property type. Most of the other real estate mortgage loans are secured by properties located in California, representing 78% of the portfolio at December 31, 1993, compared with 76% at December 31, 1992. No other state comprised more than 2% of the portfolio at December 31, 1993. The largest property type was office buildings, representing 28% of the portfolio at December 31, 1993 and 1992. Table 10 summarizes other real estate mortgage loans in California by region (North, South and Central) and property type. The Company's Southern California real estate loans are mostly located in Los Angeles and Orange counties; its Northern California loans are predominantly located in the San Francisco Bay Area; and its Central California real estate loans are mostly in Sacramento. Table 11 summarizes the real estate construction loans by state and project type. The Company's real estate construction loans were predominantly in California, representing 82% of the portfolio at December 31, 1993 and 1992. No other state comprised more than 6% of the portfolio at December 31, 1993. The largest project type was 1-4 family land, representing 43% of the portfolio at December 31, 1993, compared with 32% at December 31, 1992. Table 12 summarizes real estate construction loans in California by region (South, North and Central) and project type. 22
TABLE 9 REAL ESTATE MORTGAGE LOANS BY STATE AND TYPE (EXCLUDING 1-4 FAMILY FIRST MORTGAGE LOANS) - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ (in millions) --------------------------------------------------------------- New California Hampshire Arizona Minnesota ------------------- --------- ---------------- --------- Total Non- Total Total Non- Total loans accrual loans (2) loans accrual loans (2) Office buildings $1,989 $166 $ - $21 $ - $47 Industrial 1,201 48 - 7 - 29 Shopping centers 610 68 144 32 - - Apartments 919 31 - 33 3 - Hotels/motels 326 24 - 31 - - Retail buildings (other than shopping centers) 428 29 - 1 - 3 Institutional 323 18 - 1 1 1 Land 182 28 - 3 - - Agricultural 224 24 - 1 - - 1-4 family (1): Structures 50 - - 1 - - Land 43 - - - - - Other 176 9 - 9 - 10 ------ ---- ---- ---- -- --- Total by state $6,471 $445 $144 $140 $4 $90 ====== ==== ==== ==== == === % of total loans 78% 2% 2% 1% ====== ==== ==== === Nonaccruals as a % of total by state 7% 3% ==== == - ------------------------------------------------------------------------------------------ - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- December 31, 1993 - ---------------------------------------------------------------------------------------------------------------- Total % of Non- Non- Texas Other states (3) by type total accrual accruals ---------------- ---------------- loans loans as a % Total Non- Total Non- by type of total loans accrual loans accrual by type Office buildings $29 $10 $ 233 $ 5 $2,319 28% $181 8% Industrial 7 - 47 3 1,291 16 51 4 Shopping centers 35 15 461 23 1,282 15 106 8 Apartments 2 - 97 - 1,051 13 34 3 Hotels/motels 11 - 133 40 501 6 64 13 Retail buildings (other than shopping centers) - - 11 - 443 5 29 7 Institutional - - 8 - 333 4 19 6 Land - - 66 21 251 3 49 20 Agricultural - - - - 225 3 24 11 1-4 family (1): Structures - - - - 51 1 - - Land - - - - 43 - - - Other - - 301(4) 12 496 6 21 4 --- --- ------ ---- ------ ---- ---- Total by state $84 $25 $1,357 $104(5) $8,286 100% $578 7% === === ====== ==== ====== === ==== == % of total loans 1% 16% 100% === ====== ====== Nonaccruals as a % of total by state 30% 8% === ====== - ---------------------------------------------------------------------------------------------------------------- (1) Represents loans to real estate developers secured by 1-4 family residential developments. (2) There were no loans on nonaccrual status at December 31, 1993. (3) Consists of 27 states; no state had loans in excess of $74 million at December 31, 1993. (4) Includes loans secured by collateral pools of approximately $177 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). (5) Includes $17 million and $14 million in Ohio and Washington, D.C., respectively. Total loans in these two states were $44 million and $74 million, respectively.
TABLE 10 CALIFORNIA REAL ESTATE MORTGAGE LOANS BY REGION AND TYPE (EXCLUDING 1-4 FAMILY FIRST MORTGAGE LOANS) - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- (in millions) December 31, 1993 ------------------------------------------------------------------------------------------------------ Southern Northern Central Total % of Nonaccrual Nonaccruals California California California California total loans as a % ----------------- ------------------ --------------- by type California by type of total Total Non- Total Non- Total Non- loans by type loans accrual loans accrual loans accrual Office buildings $ 854 $123 $ 884 $19 $ 251 $24 $1,989 31% $166 8% Industrial 543 30 394 9 264 9 1,201 19 48 4 Shopping centers 306 33 171 23 133 12 610 9 68 11 Apartments 541 26 337 4 41 1 919 14 31 3 Hotels/motels 121 21 149 2 56 1 326 5 24 7 Retail buildings (other than shopping centers) 170 25 176 - 82 4 428 7 29 7 Institutional 141 8 130 4 52 6 323 5 18 6 Land 126 26 37 1 19 1 182 3 28 15 Agricultural 41 3 29 - 154 21 224 3 24 11 1-4 family (1): Structures 26 - 24 - - - 50 1 - - Land 33 - 10 - - - 43 - - - Other 89 5 67 3 20 1 176 3 9 5 ------ ---- ------ --- ------ --- ------ --- ---- Total by region $2,991 $300 $2,408 $65 $1,072 $80 $6,471 100% $445 7% ====== ==== ====== === ====== === ====== === ==== == % of total California loans 46% 37% 17% 100% ====== ====== ====== ====== Nonaccruals as a % of total by region 10% 3% 7% ==== === === - ----------------------------------------------------------------------------------------------------------------------------------- (1) Represents loans to real estate developers secured by 1-4 family residential developments.
23
TABLE 11 REAL ESTATE CONSTRUCTION LOANS BY STATE AND TYPE - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- (in millions) December 31, 1993 ----------------------------------------------------------------------------------------------- California Nevada Virginia Other states (2) Total % Of Non- Non- -------------- --------- -------------- ---------------- by type total accrual accruals Total Non- Total Total Non- Total Non- loans loans as a % loans accrual loans (1) loans accrual loans accrual by type of total by type 1-4 family: Land $391 $129 $55 $ - $ - $29 $ - $ 475 43% $129 27% Structures 195 20 1 - - - - 196 18 20 10 Land (excluding 1-4 family) 115 15 7 48 48 31 15 201 18 78 39 Shopping centers 89 1 - - - 21 - 110 10 1 1 Office buildings 49 1 - - - - - 49 4 1 2 Apartments 39 4 - 2 2 - - 41 4 6 16 Industrial 15 - 2 - - - - 17 2 - - Retail buildings (other than shopping centers) 5 - - 1 - - - 6 1 - - Agricultural 5 - - - - - - 5 - - - Institutional 5 - - - - - - 5 - - - Hotels/motels 3 - - - - - - 3 - - - Other 2 - - - - - - 2 - - - ---- ---- --- --- --- --- --- ------ --- ---- Total by state $913 $170 $65 $51 $50 $81 $15 $1,110 100% $235 21 % ==== ==== === === === === === ====== === ==== === % of total loans 82% 6% 5% 7% 100% ==== === === === ====== Nonaccruals as a % of total by state 19% 97% 20% ==== === === - ---------------------------------------------------------------------------------------------------------------------------------- (1) There were no loans on nonaccrual status at December 31, 1993. (2) Consists of nine states; no state had loans in excess of $26 million at December 31, 1993.
TABLE 12 CALIFORNIA REAL ESTATE CONSTRUCTION LOANS BY REGION AND TYPE - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- (in millions) December 31, 1993 ------------------------------------------------------------------------------------------------ Southern Northern Central Total % of Nonaccrual Nonaccruals California California California California total loans as a % --------------- -------------- ---------------- by type California by type of total Total Non- Total Total Non- loans by type loans accrual loans (1) loans accrual 1-4 family: Land $147 $52 $121 $123 $77 $391 42% $129 33% Structures 124 14 56 15 6 195 21 20 10 Land (excluding 1-4 family) 42 15 53 20 - 115 13 15 13 Shopping centers 13 - 58 18 1 89 10 1 1 Office buildings 16 1 31 2 - 49 5 1 2 Apartments 10 4 23 6 - 39 4 4 10 Industrial 11 - 1 3 - 15 2 - - Retail buildings (other than shopping centers) - - 3 2 - 5 1 - - Agricultural - - 3 2 - 5 1 - - Institutional - - 4 1 - 5 1 - - Hotels/motels - - 3 - - 3 - - - Other 2 - - - - 2 - - - ---- --- ---- ---- --- ---- --- ---- Total by region $365 $86 $356 $192 $84 $913 100% $170 19% ==== === ==== ==== === ==== === ==== == % of total California loans 40% 39% 21% 100% ==== ==== ==== ==== Nonaccruals as a % of total by region 23% 44% === === - ---------------------------------------------------------------------------------------------------------------------------------- (1) There were no loans on nonaccrual at December 31, 1993.
24 HIGHLY LEVERAGED TRANSACTIONS The Company's loan portfolio includes loans made to companies involved in highly leveraged transactions (HLTs). HLT outstandings are presented on a comparative basis in Table 13.
TABLE 13 HIGHLY LEVERAGED TRANSACTIONS - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- (in millions) December 31, 1993 1992 ------------------ Senior loans (including working capital loans) (1): Loans in connection with: Buyouts $292 $ 668 Acquisitions 177 268 Recapitalizations 35 122 ---- ------ Total (2) $504 $1,058 ==== ====== Number of transactions 38 48 Largest single loan $ 52 $ 88 Average loan outstanding 13 22 Loans in largest single industry 102 209 Average loans per industry 27 48 Nonaccrual loans 53 152 Number of transactions 4 10 Net charge-offs (recoveries) $ (9) $ 58 Senior unfunded commitments 380 444 Subordinated loans (1) $ 9 $ 31 Nonaccrual loans - 22 Nonmarketable equity investments (included in other assets): 247 236 Largest single investment 25 9 Write-downs 7 2 Gains on sales and distributions 23 10 - ---------------------------------------------------------------------------- (1) There were no HLT loans on restructured status, no loans 90 days or more past due and still accruing and no foreclosed assets resulting from HLT loans at December 31, 1993 and 1992. There were no net charge-offs on subordinated loans in 1993 and 1992. (2) Includes California asset-based, secured lending of $55 million and $129 million at December 31,1993 and 1992, respectively. California asset-based, secured lending consists of middle-market companies whose loans are collat- eralized by receivables, inventories, plant and equipment in conformity with the Company's borrowing requirements.
Nonaccrual and Restructured Loans and Other Assets - -------------------------------------------------------------------------------- --------------------------------- Table 14 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. (Notes 1 and 5 to the Financial Statements describe the Company's accounting policies relating to nonaccrual and restructured loans and foreclosed assets, respectively.) Table 15 summarizes the approximate changes during 1993 and 1992 in nonaccrual loans by loan category. Table 16 summarizes the quarterly trend, for the last eight quarters, of the approximate changes in nonaccrual loans. The general decline of nonaccrual loans over the last five quarters, with nonaccruals peaking in September 1992, largely resulted from loan payments and loans returned to accrual, together with a reduction in new loans placed on nonaccrual. This trend is expected to continue in 1994. The placement of commercial and real estate loans on nonaccrual, as well as transfers to foreclosed assets, are likely to continue to occur, although at a declining rate, until, and for a period after, the current economic environment improves and the substantial oversupply of properties is reduced with resulting increases in occupancy and rental rates. It may take years to absorb the surplus office capacity in certain geographic markets (particularly in Southern California) where the Company has commercial real estate outstandings. 25
TABLE 14 NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- (in millions) December 31, ------------------------------------------------------------------ 1993 1992 1991 1990 1989 Nonaccrual loans: Commercial (1)(2) $ 252 $ 560 $ 871 $ 603 $ 390 Real estate 1-4 family first mortgage 99 96 73 24 13 Other real estate mortgage (3)(4) 578 1,207 778 284 171 Real estate construction (3) 235 235 226 82 171 Consumer: Real estate 1-4 family junior lien mortgage 27 29 23 14 11 Other revolving credit and monthly payment 3 7 6 - 3 Lease financing - - - - 1 ------ ------ ------ ------ ------ Total nonaccrual loans 1,194 2,134 1,977 1,007 760 Restructured loans 6 8 4 6 4 ------ ------ ------ ------ ------ Nonaccrual and restructured loans 1,200 2,142 1,981 1,013 764 As a percentage of total loans 3.6% 5.8% 4.5% 2.1% 1.8% Foreclosed assets (5)(6) 348 510 404 416 390 Real estate investments (7) 15 40 20 - - ------ ------ ------ ------ ------ Total nonaccrual and restructured loans and other assets $1,563 $2,692 $2,405 $1,429 $1,154 ====== ====== ====== ====== ====== - ---------------------------------------------------------------------------------------------------------------------------------- (1) Includes loans to real estate developers of $91 million, $86 million, $199 million, $12 million and $16 million at December 31,1993, 1992, 1991, 1990 and 1989, respectively. (2) Includes agricultural loans of $9 million, $18 million, $13 million, $18 million and $56 million at December 31,1993, 1992, 1991, 1990 and 1989, respectively. (3) During the fourth quarter of 1990, loans were reclassified from the real estate construction loan category to the other real estate mortgage loan category so that the real estate construction loan category consists solely of properties where construction is not complete. Prior period balances have not been reclassified as complete information is not available. However, if 1989 balances were reclassified, the Company estimates that other real estate mortgage nonaccruals would have been approximately $255 million at December 31, 1989 and that real estate construction nonaccruals would have been approximately $85 million. (4) Includes agricultural loans secured by real estate of $24 million, $28 million, $13 million, $21 million and $27 million at December 31, 1993, 1992, 1991, 1990 and 1989, respectively. (5) Includes agricultural properties of $26 million, $55 million, $66 million, $67 million and $86 million at December 31, 1993, 1992, 1991, 1990 and 1989, respectively. (6) 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. (7) Represents the amount of real estate investments (contingent interest loans accounted for as investments) that would be classified as nonaccrual if such assets were loans. Real estate investments totaled $34 million, $93 million and $124 million at December 31, 1993, 1992 and 1991, respectively.
[Graph] 26
TABLE 15 CHANGES IN NONACCRUAL LOANS BY LOAN CATEGORY ================================================================================================================================= (in millions) Commercial Real estate Other real Real estate Consumer Total 1-4 family estate construction first mortgage mortgage YEAR ENDED DECEMBER 31, 1993 BALANCE, BEGINNING OF YEAR $ 560 $ 96 $ 1,207 $ 235 $ 36 $ 2,134 New loans placed on nonaccrual (1) 278 47 326 156 14 821 Charge-offs (97) (1) (167) (54) (6) (325) Payments: Principal (293) (20) (269) (77) (14) (673) Interest applied to principal (42) (1) (67) (14) - (124) Transfers to foreclosed assets (2) (20) (166) (53) - (241) Transfers from foreclosed assets (2) 7 - 48 44 - 99 Loans returned to accrual (3) (66) (2) (383) (6) (1) (458) Loans sold (22) - (11) - - (33) Other additions (deductions) (4) (71) - 60 4 1 (6) ----- ------ ------- ------ ------ ------- BALANCE, END OF YEAR $ 252 $ 99 $ 578 $ 235 $ 30 $ 1,194 ===== ====== ======= ====== ====== ======= YEAR ENDED DECEMBER 31, 1992 Balance, beginning of year $ 871 $ 73 $ 778 $ 226 $ 29 $ 1,977 New loons placed on nonaccrual (5) 534 70 1,280 251 31 2,166 Charge-offs (213) (6) (218) (49) (7) (493) Payments: Principal (249) (14) (174) (73) (15) (525) Interest applied to principal (54) - (57) (11) - (122) Transfers to foreclosed assets (23) (7) (371) (79) (2) (482) Loans returned to accrual (6) (309) (7) (55) (4) - (375) Other additions (deductions) (7) 3 (13) 24 (26) - (12) ----- ----- ------- ------ ------ ------- Balance, end of year $ 560 $ 96 $ 1,207 $ 235 $ 36 $ 2,134 ===== ====== ======= ====== ====== ======= - ---------------------------------------------------------------------------------------------------------------------------------- (1) Additions to commercial loans include $68 million for loans to financial companies and $50 million for HLT loans. Additions to other real estate mortgage loans include $113 million for commercial buildings and $62 million for commercial land. Additions to real estate construction loans include $127 million for single family land. (2) Reclassification 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. (3) Other real estate mortgage loans returned to accrual were the result of loans restructured at market interest rates and the improvement of the credit quality of loans. (4) Includes transfers of restructured loans from commercial to other real estate mortgage loans of approximately $52 million. (5) Additions to commercial loans include approximately $123 million for HLT loans, $54 million for California hotel operating companies, $64 million for manufacturing companies and $47 million for real estate developers, predominantly in California. Additions to other real estate mortgage loans include approximately $363 million for commercial buildings and $273 million for shopping centers. (6) Most commercial loans returned to accrual were a result of the Company's ongoing effort to collateralize unsecured loans to real estate developers and in borrowers' improved credit quality. (7) Includes transfers of completed properties from real estate construction to other real estate mortgage loans of approximately $43 million.
TABLE 16 QUARTERLY TREND OF CHANGES IN NONACCRUAL LOANS ============================================================================================================================== (in millions) Quarter ended - ------------------------------------------------------------------------------------------------------------------------------ December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31, 1993 1993 1993 1993 1992 1992 1992 1992 BALANCE, BEGINNING OF QUARTER $1,696 $1,898 $1,966 $2,134 $2,399 $2,326 $2,051 $1,977 New loans placed on nonaccrual 113 195 264 249 328 649 756 433 Charge-offs (55) (90) (71) (109) (127) (171) (115) (80) Payments (309) (188) (144) (156) (225) (166) (124) (132) Transfers to foreclosed assets (64) (32) (104) (41) (114) (89) (189) (90) Transfers from foreclosed assets (1) - - 99 - - - - - Loans returned to accrual (188) (81) (107) (82) (120) (146) (50) (59) Loans sold - (2) (5) (26) - - - - Other additions (deductions) 1 (4) - (3) (7) (4) (3) 2 ------ ------ ------ ------ ------ ------ ------ ------ BALANCE, END OF QUARTER $1,194 $1,696 $1,898 $1,966 $2,134 $2,399 $2,326 $2,051 ====== ====== ====== ====== ====== ====== ====== ====== - ------------------------------------------------------------------------------------------------------------------------------ (1) Reclassification 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.
27 ================================================================================ Foreclosed assets at December 31, 1993 decreased to $348 million from $510 million at December 31, 1992 primarily due to a $196 million decrease in additions and a transfer of $99 million from foreclosed assets to nonaccrual loans due to a clarification of criteria used in determining when a loan is in-substance foreclosed. The majority of foreclosed asset sales of $328 million consisted of 1-4 family properties and office buildings. Approximately 71 % of foreclosed assets at December 31, 1993 have been in the portfolio less than one year, with land and agricultural properties representing most of the amount greater than one year old. Table 17 summarizes the approximate changes during 1993 and 1992 in foreclosed assets. Table 18 summarizes the quarterly trend in foreclosed assets for the past eight quarters. Table 19 summarizes foreclosed assets at December 31, 1993 by state and type and Table 20 summarizes California foreclosed assets at December 31, 1993 by region and type.
TABLE 17 CHANGES IN FORECLOSED ASSETS ==================================================================================================================================== (in millions) Beginning Additions Sales Charge-offs (1) Write-downs Transfers to Other Ending balance nonaccrual balance loans (2) YEAR ENDED DECEMBER 31, 1993 Land (excluding 1-4 family) $122 $105 $ (18) $(12) $(13) $(34) $(31) $119 1-4 family 111 128 (109) (16) (18) (41) 14 69 Office buildings 119 51 (96) (6) (10) (5) (2) 51 Industrial buildings 44 24 (26) (2) (7) - (6) 27 Shopping centers 12 56 (27) (2) (2) (7) (3) 27 Agricultural 54 7 (21) (1) (5) (5) (3) 26 Apartments 23 20 (22) (4) (4) - 2 15 Hotels/motels 10 9 (7) (6) - - - 6 Other 15 5 (2) - (2) (7) (1) 8 ---- ---- ----- ---- ---- ---- ---- ---- Total $510 $405 $(328) $(49) $(61) $(99) $(30) $348 ==== ==== ===== ==== ==== ==== ==== ==== YEAR ENDED DECEMBER 31, 1992 Land (excluding 1-4 family) $ 98 $ 72 $ (18) $ (8) $(22) $ - $ - $122 1-4 family 48 157 (56) (24) (9) - (5) 111 Office buildings 118 134 (84) (35) (19) - 5 119 Industrial buildings 32 59 (22) (20) (5) - - 44 Shopping centers 12 45 (16) (26) (3) - - 12 Agricultural 65 24 (25) - (10) - - 54 Apartments 3 83 (51) (9) (3) - - 23 Hotels/motels 26 16 (21) (1) (5) - (5) 10 Other 2 11 (1) (3) - - 6 15 ---- ---- ----- ----- ---- ----- --- ----- Total $404 $601 $(294) $(126) $(76) $ - $ 1 $510 ==== ==== ===== ===== ==== ===== === ==== - ----------------------------------------------------------------------------------------------------------------------------------- (1) Commencing October 1992, charge-offs to the allowance for loan losses may only occur up to 90 days (previously, 120 days) after foreclosed assets have been transferred from loans. (2) Reclassification 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.
28 ================================================================================
TABLE 18 QUARTERLY TREND OF CHANGES IN FORECLOSED ASSETS ================================================================================================================================= (in millions) Quarter ended --------------------------------------------------------------------------------------------------- December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31, 1993 1993 1993 1993 1992 1992 1992 1992 BALANCE, BEGINNING OF QUARTER $357 $391 $ 510 $510 $535 $555 $434 $404 Additions 100 65 150 90 145 117 206 133 Sales (89) (76) (117) (46) (125) (58) (46) (65) Charge-offs (10) (8) (23) (8) (20) (52) (28) (26) Write-downs (7) (10) (18) (26) (22) (25) (15) (14) Transfers to nonaccrual loans (1) - - (99) - - - - - Other additions (deductions) (3) (5) (12) (10) (3) (2) 4 2 ---- ---- ----- ---- ---- ---- ---- ---- BALANCE, END OF QUARTER $348 $357 $ 391 $510 $510 $535 $555 $434 ==== ==== ===== ==== ==== ==== ==== ==== - --------------------------------------------------------------------------------------------------------------------------------- (1) Reclassification 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.
TABLE 19 FORECLOSED ASSETS BY STATE AND TYPE ======================================================================================================================= (in millions) December 31, 1993 ---------------------------------------------------------------------------------------- California Washington, Arizona Texas Other Total % of total D.C. states (1) by type foreclosed assets Land (excluding 1-4 family) $ 66 $12 $15 $ 6 $20 $119 34% 1-4 Family 61 - 3 1 4 69 19 Office buildings 50 - - - 1 51 15 Industrial buildings 27 - - - - 27 8 Shopping centers 11 8 - 8 - 27 8 Agricultural 26 - - - - 26 8 Apartments 13 - - 2 - 15 4 Hotels/motels 3 - - - 3 6 2 Other 6 - - - 2 8 2 ---- --- --- --- --- ---- ---- Total by state $263 $20 $18 $17 $30 $348 100% ==== === === === === ==== ==== % of total foreclosed assets 76% 6% 5% 5% 8% 100% ==== === === === === ==== - ---------------------------------------------------------------------------------------------------------------------- (1) Consists of 13 states; foreclosed assets in each of these states was less than $11 million at December 31, 1993.
TABLE 20 CALIFORNIA FORECLOSED ASSETS BY REGION AND TYPE - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- (in millions) December 31, 1993 ---------------------------------------------------------------------- Southern Northern Central Total % of total California California California California California by type foreclosed assets Land (excluding 1-4 family) $ 53 $ 7 $ 6 $ 66 26% 1-4 family 46 8 7 61 23 Office buildings 34 10 6 50 19 Industrial buildings 17 9 1 27 10 Shopping centers 7 4 - 11 4 Agricultural 1 5 20 26 10 Apartments 13 - - 13 5 Hotels/motels 3 - - 3 1 Other 3 3 - 6 2 ---- --- --- ---- --- Total by region $177 $46 $40 $263 100% ==== === === ==== === % of total California foreclosed assets 66% 18% 16% 100% ==== === === ==== - ---------------------------------------------------------------------------------------------------------------------
29 ================================================================================ NONACCRUAL LOANS BY PERFORMANCE CATEGORY Table 21 presents the amount of nonaccrual loans that were contractually past due and those that were contractually current at December 31, 1993 and 1992. Both book and contractual balances are presented in the table, the difference reflecting charge-offs and interest applied to principal. At December 31, 1993, an estimated $704 million, or 59%, of nonaccrual loans were less than 90 days past due, including an estimated $595 million, or 50%, that were current (less than 30 days past due) as to payment of principal and interest. This compares with an estimated $1,294 million, or 61%, of nonaccrual loans that were less than 90 days past due at December 31, 1992, including an estimated $1,170 million, or 55%, that were current. The ratio of book to contractual principal balance was 66% at December 31, 1993, compared with 79% at December 31, 1992. For all loans on nonaccrual during 1993 and 1992 (including loans no longer on nonaccrual at December 31, 1993 and 1992), cash interest payments of $137 million and $143 million were received while the loans were on nonaccrual status in 1993 and 1992, respectively. Of the $137 million received in 1993, $19 million was recognized as interest income and $118 million was applied to principal. Of the $143 million received in 1992, $23 million was recognized as interest income and $120 million was applied to principal. The average nonaccrual book principal loan balances (net of charge-offs and interest applied to principal) were $1,800 million and $2,232 million during 1993 and 1992, respectively.
TABLE 21 NONACCRUAL LOANS BY PERFORMANCE CATEGORY (ESTIMATED)(1) - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- (in millions) December 31, ------------------------------------------------------------------------------------------------------ 1993 1992 --------------------------------------------------- ------------------------------------------------- BOOK CUMULATIVE CUMULATIVE CONTRACTUAL Book Cumulative Cumulative Contractual PRINCIPAL CHARGE-OFFS CASH INTEREST PRINCIPAL principal charge-offs cash interest principal BALANCE (7) APPLIED TO BALANCE balance (7) applied to balance PRINCIPAL principal (7) (7) Contractually past due (2): Payments not made (3): 90 days or more past due $ 161 $ 22 $ - $ 183 $ 283 $ 15 $ - $ 298 Less than 90 days past due 23 - - 23 29 2 - 31 ----- ----- ---- ----- ----- ---- ---- ---- 184 22 - 206 312 17 - 329 ----- ----- ---- ----- ----- ---- ---- ---- Payments made (4): 90 days or more past due 329 171 41 541 557 148 53 758 Less than 90 days past due 86 29 16 131 95 69 8 172 ----- ----- ---- ----- ----- ---- ---- ---- 415 200 57 672 652 217 61 930 ----- ----- ---- ----- ----- ---- ---- ---- Total past due 599 222 57 878 964 234 61 1,259 Contractually current (5) 595 214 120 929 1,170 150 129 1,449 ----- ----- ---- ----- ----- ---- ---- ----- Total nonaccrual loans (6) $1,194 $436 $177 $1,807 $2,134 $384 $190 $2,708 ====== ==== ==== ====== ====== ==== ==== ====== - ---------------------------------------------------------------------------------------------------------------------------------- (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) Contractually 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 $314 million and $453 million of these loans had some payments made on them during the fourth quarter of 1993 and 1992, respectively. (5) Contractually current is defined as a loan for which principal and interest are being paid in accordance with the terms of the loan. Approximately $113 million and $328 million of loans, both current and past due, were placed on nonaccrual in the fourth quarter of 1993 and 1992, respectively, of which approximately $15 million and $120 million were contractually current at December 31, 1993 and 1992, respectively. All of the contractually current loans were placed on nonaccrual due to uncertainty of receiving full timely collection of interest or principal. (6) Interest payments received in the fourth quarter of 1993 on year-end 1993 nonaccruals totaled $23 million, of which $1 million was recognized as interest income and $22 million was applied to principal. Interest payments received in the fourth quarter of 1992 on year-end 1992 nonaccruals totaled $35 million, all of which was applied to principal. Such interest payments include only those received subsequent to a borrower being placed on nonaccrual. Therefore, these amounts do not include interest received before these loans were placed on nonaccrual. There were no interest payments received that were recorded as recoveries on partially charged-off loans because payments on such loans were applied as a reduction of loan principal or recognized as interest income. (7) Cumulative amounts recorded since inception of the loan.
30 ================================================================================ LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING Table 22 shows loans contractually past due 90 days or more as to interest or principal, but not included in the nonaccrual or restructured categories. All loans in this category are both well-secured and in the process of collection or are consumer loans or real estate 1-4 family first mortgage loans that are exempt under regulatory rules from being classified as nonaccrual. TABLE 22 LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
================================================================================ (in millions) December 31, ------------------------------------------------- 1993 1992 1991 1990 1989 Commercial $ 4 $ 4 $ 26 $21 $ 46 Real estate 1-4 family first mortgage (1) 19 29 38 19 - Other real estate mortgage (1)(2) 14 22 28 46 29 Real estate construction (2) 8 11 3 10 2 Consumer: Real estate 1-4 family junior lien mortgage 6 9 13 12 16 Credit card 43 55 50 42 25 Other revolving credit and monthly payment 1 2 3 8 7 --- ---- ---- ---- ---- Total consumer 50 66 66 62 48 Lease financing - 1 1 1 2 --- ---- ---- ---- ---- Total $95 $133 $162 $159 $127 === ==== ==== ==== ==== - -------------------------------------------------------------------------------- (1) In years prior to 1990, real estate 1-4 family first mortgage loans were included in the other real estate mortgage loan category. Balances for 1989 have not been reclassified as complete information is not available. (2) During the fourth quarter of 1990, loans were reclassified from the real estate construction loan category to the other real estate mortgage loan category so that the real estate construction loan category consists solely of properties where construction is not complete. Prior period balances have not been reclassified as complete information is not available.
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, 1993, the allowance for loan losses was $2,122 million, or 6.41% of total loans, compared with $2,067 million, or 5.60%, at December 31, 1992. The provision for loan losses declined to $550 million from $1,215 million in 1992, due to the continued improvement of the Company's loan portfolio. Net charge-offs in 1993 were $495 million, or 1.44% of average total loans, compared with $798 million, or 1.97%, in 1992. Loan loss recoveries were $169 million in 1993, an increase of $52 million, or 44%, over 1992. Table 23 summarizes net charge-offs by loan category. TABLE 23 NET CHARGE-OFFS BY LOAN CATEGORY
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (in millions) Year ended December 31, ---------------------------------------------- 1993 1992 ---------------------- --------------------- AMOUNT % OF Amount % of AVERAGE average LOANS loans Commercial $ 39 .54% $179 1.83 % Real estate 1-4 family first mortgage 23 .34 15 .19 Other real estate mortgage 150 1.58 281 2.64 Real estate construction 64 4.85 90 4.91 Consumer: Real estate 1-4 family junior lien mortgage 25 .62 27 .57 Credit card 156 6.06 168 6.06 Other revolving credit and monthly payment 29 1.60 29 1.42 --- ---- Total consumer 210 2.52 224 2.37 Lease financing 9 .82 10 .89 Foreign recoveries - - (1) (1.18) --- ---- Total net loan charge-offs $495 1.44% $798 1.97 % === ==== ==== ==== - ------------------------------------------------------------------------------
The majority of net charge-offs in 1993 was in credit card loans and other real estate mortgage loans. The high level of credit card charge-offs was mostly due to bankruptcies and the current economic environment (particularly in Southern California). The other real estate mortgage loan net charge-offs largely reflected appraisals received during the year that were below the book value of these real estate-secured loans. The majority of other real estate mortgage loan net charge-offs was related to land and office buildings. Despite the high level in relation to other 31 ================================================================================ loan categories, other real estate mortgage loan net charge-offs were $131 million, or 47%, lower than 1992, partially as a result of an increase in recoveries from $9 million in 1992 to $47 million in 1993. The large decrease in commercial loan net charge-offs was primarily due to a $128 million, or 54%, decline in gross charge-offs resulting from loans in the manufacturing industry. Although net charge-offs in 1993 were higher than historical norms, they were 38% lower than 1992 and are expected to continue to decline. 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 predetermined period of time that is based on loan category. 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 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, which 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. 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 con- tinuously 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 $2,122 million adequate to cover losses inherent in loans, loan commitments and standby letters of credit at December 31, 1993. 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 condi- tions and the Company's ongoing examination process and that of its regulators, will not require significant increases in the allowance for loan losses. In May 1993, the FASB issued Statement of Financial Accounting Standards No. 114 (FAS 114), Accounting by Creditors for Impairment of a Loan. This Statement addresses the accounting treatment of certain impaired loans and amends FASB Statements No. 5 and 15; however, it does not address the overall adequacy of the allowance for loan losses. The Statement is effective January 1, 1995, and can only be applied prospectively. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Once a loan is determined to be impaired, FAS 114 requires that the impairment be measured based on the present value of the expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, the impairment may be measured by using the loan's observable market price or the fair value of the collateral if the loan is collateral dependent (i.e., repayment is expected to be provided solely by the underlying collateral). The choice of a measurement method may be made on a loan-by-loan basis. 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 to be recognized by creating a valuation allowance with a corresponding charge to the provision for loan losses or by adjusting an existing valuation allowance for the impaired loan with a corresponding charge or credit to the provision for loan losses. (Alternatively, the loan may be written down by the amount of the impairment.) 32 ================================================================================ The change in estimated present value of the expected future cash flows is to be reported in future periods either entirely as an adjustment to the provision for loan losses or by separately increasing interest income for the amount of the present value change attributable to the passage of time. For impaired loans which are measured by using an observable market price or the fair value of collateral, the change, if any, in market price or fair value is to be reported in future periods as an adjustment of the valuation allowance and, correspondingly, the provision for loan losses. The FASB is currently proposing to eliminate the above requirement related to the accounting for the change in estimated present value. Instead, it will propose expanded disclosures, which have yet to be determined. The Company does not currently intend to implement the Statement before its effective date. A preliminary assessment of the complex analysis required to determine the impact on the Company's allowance for loan losses has been completed. Based on the information available at December 31, 1993 and the Company's current interpretations of FAS 114, the allowance will not increase as a result of adopting this Statement. Other Assets - -------------------------------------------------------------------------------- ------------ The components of other assets are shown in Note 5 to the Financial Statements. Other assets were $2.4 billion at December 31, 1993, a 10% decrease from $2.7 billion at December 31, 1992. The $269 million decrease was primarily due to a decline in the foreclosed assets balance, which was $348 million at December 31, 1993, compared with $510 million at December 31, 1992. The decrease in other assets also included a $59 million decrease in real estate investments (contingent interest loans accounted for as investments), which totaled $34 million at December 31, 1993, compared with $93 million at December 31, 1992. At December 31, 1993 and 1992, certain identifiable intangible assets of $373 million and $401 million, respectively, were included in other assets and are generally amortized using an accelerated method. As required by FAS 109 (see Income Taxes section), the adjustment on January 1, 1993 of the remaining balances for acquired assets and liabilities from their net-of-tax amounts to their pretax amounts caused the net deferred tax asset balance of $804 million to decrease by $79 million and the certain identifiable intangible asset balance of $401 million to increase by $67 million. The remaining $12 million net increase caused immaterial adjustments to several other asset and liability categories. Deposits - -------------------------------------------------------------------------------- -------- Comparative detail of average deposit balances is presented in Table 3. Average core deposits decreased 3% and average total deposits decreased 4% in 1993 compared with 1992. Average core deposits funded 79% and 80% of the Company's average total assets in 1993 and 1992, respectively. Year-end deposit balances are presented in Table 24. Core deposits and total deposits decreased 1% at December 31, 1993 compared with 1992. Substantially all of these decreases resulted from a $1.9 billion decrease in savings certificates, primarily offset by growth in market rate savings of $1.2 billion. This shift reflects efforts by customers to increase liquidity while seeking alternatives with higher yields. TABLE 24 DEPOSITS - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(in millions) December 31, ----------------------- 1993 1992 Noninterest-bearing $ 9,719 $ 9,190 Interest-bearing checking 4,789 4,845 Savings 2,544 2,948 Market rate savings 17,084 15,874 Savings certificates 7,155 9,022 ------ ------- Core deposits 41,291 41,879 Other 353 365 ------- ------ Total deposits $41,644 $42,244 ======= ======= - ------------------------------------------------------------------------
[Graph] 33 ================================================================================ Certain Fair Value Information - -------------------------------------------------------------------------------- ------------------------------ Effective December 31, 1992, the Company adopted Statement of Financial Accounting Standards No. 107 (FAS 107), Disclosures About Fair Value of Financial Instruments. 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 estimated fair value over the carrying value of the Company's financial instruments at December 31, 1993 compared with December 31, 1992. The increase was substantially due to improved credit quality and a lower interest rate environment than the previous year. 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. Management believes that the Company's current capital position, which exceeds current minimum guidelines established by industry regulators, is adequate to support its various businesses. Federal banking agencies have proposed regulations that would revise the existing risk-based capital standards in order to account for interest rate risk. The proposal would require banks to measure and monitor their interest rate risk and maintain adequate capital for that risk. The Company believes that this modification, if adopted, would not have an impact on its capital position since it does not have excessive interest rate risk. 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, after applicable taxes, on available-for-sale investment securities carried at fair value, as currently required by the federal regulatory agencies); Tier 2 capital includes preferred stock not qualifying as Tier 1 capital, mandatory convertible debt, subordinated debt, certain unsecured senior debt and the allowance for loan losses, subject to limitation 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 25. Under the guidelines, one of four risk weights is applied to the different balance sheet assets, primarily based on the relative credit risk of the counterparty (for example, qualifying 1-4 family first mortgage loans are risk-weighted at 50%). Off-balance sheet items, such as loan commitments and interest rate derivatives, are also applied a risk weight after calculating balance sheet equivalent amounts. One of four credit conversion factors are assigned to loan commitments based on the likelihood of the off-balance sheet item becoming an asset. (For example, certain loan commitments are converted at 50% and then risk-weighted at 100%.) Interest rate derivatives are converted to balance sheet equivalents based on notional values, replacement costs and remaining contractual terms. The credit conversion factors and risk weights are 0%, 20%, 50% and 100%. (Refer to Note 13 to the Financial Statements for further discussion of off-balance sheet items.) The Company's total RBC ratio at December 31, 1993 was 15.12% and its Tier 1 RBC ratio was 10.48%, exceeding the minimum guidelines of 8.00% and 4.00%, respectively. The ratios at December 31, 1992 were 13.15% and 8.22%, respectively. 34 ================================================================================ The increase in the Company's Tier 1 RBC ratio at December 31, 1993 compared with 1992 was primarily due to an increase in Tier 1 capital. Contributing to the increase in Tier 1 capital during 1993 was the accumulation of $437 million in retained earnings. Tier 1 capital also increased due to the issuance of $53 million of common stock, of which $20 million was issued under the dividend reinvestment plan (DRIP) and $33 million was issued under employee benefit plans. The Company's Tier 1 and total RBC ratios also benefitted due to a shift from higher risk-weighted assets (mostly loans) to lower risk-weighted assets (primarily investment securities). As currently required by the federal regulatory agencies, the risk-based capital and leverage ratios do not include unrealized net gains ($21 million, net of tax) on available-for-sale investment securities carried at fair value resulting from the adoption of FAS 115. The Tier 1, total capital and leverage ratios at December 31, 1993 would have been higher by 5, 5 and 4 basis points, respectively, had the unrealized net gains been included. In December 1993, $437 million of subordinated debt was called for redemption in February 1994. This debt was excluded from Tier 2 capital at year end, resulting in a negative impact of 31 basis points on the December 31, 1993 total capital ratio. In February 1994, the Company called $150 million in preferred stock, Series A. This call would have reduced the Company's Tier 1, total capital and leverage ratios by 41, 41, and 29 basis points, respectively, had the call been made by December 31, 1993. The Company's risk-weighted assets are calculated as shown in Table 25. Risk-weighted balance sheet assets were $16.4 billion and $13.4 billion less than total assets on the consolidated balance sheet of $52.5 billion at December 31, 1993 and 1992, respectively, as a result of weighting certain types of assets at less than 100%; such assets, for both December 31, 1993 and 1992, 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%), private collateralized mortgage obligations backed by 1-4 family first mortgage loans (50%) and cash and due from banks (O% to 20%). The $3.0 billion decrease in risk-weighted balance sheet assets in 1993 compared with 1992 was primarily due to a decrease in loans (primarily commercial and other real estate mortgage loans) and a corresponding increase in investment securities, which are lower risk-weighted assets. [GRAPH] TABLE 25 RISK-BASED CAPITAL RATIOS - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(in billions) December 31, --------------------- 1993 1992 Tier 1: Common stockholders' equity $ 3.7 $ 3.2 Preferred stock .6 .6 Less goodwill and other deductions (1) (.5) (.5) ----- ----- Total Tier 1 capital 3.8 3.3 ----- ----- Tier 2: Mandatory convertible debt (2) .1 .1 Subordinated debt and unsecured senior debt (3) 1.1 1.4 Allowance for loan losses allowable in Tier 2 .4 .5 ----- ----- Total Tier 2 capital 1.6 2.0 ----- ----- Total risk-based capital $ 5.4 $ 5.3 ===== ===== Risk-weighted balance sheet assets $36.1 $39.1 Risk-weighted off-balance sheet items: Commitments to make or purchase loans 1.3 1.8 Standby letters of credit .6 .8 Other .2 .3 ----- ----- Total risk-weighted off-balance sheet items 2.1 2.9 ----- ----- Goodwill and other deductions (1) (.5) (.5) Allowance for loan losses not included in Tier 2 (1.7) (1.5) ----- ----- Total risk-weighted assets $36.0 $40.0 ===== ===== Risk-based capital ratios: Tier 1 capital (4.00% minimum requirement) 10.48% 8.22% Total capital (8.00% minimum requirement) 15.12% 13.15% - ---------------------------------------------------------------------------- (1) Other deductions includes the unrealized net gain ($21 million, net of tax) on available-for-sale investment securities carried at fair value resulting from the adoption of FAS 115, as currently required by federal regulatory agencies. (2) Net of note fund and designated stockholders' equity. (3) Discounted based on remaining maturity. In December 1993, $437 million of subordinated debt was called for redemption in February 1994. This debt was excluded from Tier 2 capital at year-end, resulting in a negative impact of 31 basis points on the December 31, 1993 total capital ratio.
35 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 7.39% and 6.36% at December 31, 1993 and 1992, respectively. The increase in the leverage ratio at December 31, 1993 compared with December 31, 1992 was mostly due to an increase in 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 under- capitalized and critically undercapitalized. Under the regulations, a "well capitalized" institution must have a Tier 1 RBC ratio of at least 6%, a combined Tier 1 and Tier 2 RBC ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a capital directive order. An "adequately capitalized" institution must have a Tier 1 RBC ratio of at least 4%, a combined Tier 1 and Tier 2 RBC ratio of at least 8% and a leverage ratio of at least 4%, or 3% in some cases. Under the regulations, the regulators can reduce the capital status of an institution to the next lower tier if the institution is determined to be in an unsafe or unsound condition or if it receives, and has not corrected, a less than satisfactory examination rating for any of the following: asset quality, management, earnings or liquidity. The Bank had a Tier 1 RBC ratio of 10.36%, a combined Tier 1 and Tier 2 ratio of 13.99% and a leverage ratio of 7.30% at December 31, 1993, compared with 7.23%, 11.03% and 5.58% at December 31, 1992, respectively. 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. Management chooses asset/liability strategies to achieve an appropriate trade-off between average spreads and spreads variability. Funding positions are kept within predetermined limits designed to ensure that risk-taking is not excessive and that liquidity is properly managed. The Company's prime-based loans are funded by market rate savings; the majority of the Company's LIBOR-based loan portfolio is funded by savings certificates. The Company hedges primarily to reduce mismatches in the rate maturity of loans and their funding sources through the use of certain off-balance sheet financial contracts including swaps, futures and options. The off-balance sheet contracts provide more stable and more profitable 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 market rate savings to better match the rate maturity of prime-based loans. For a further discussion of off-balance sheet commitments, refer to Note 13 to the Financial Statements. 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 26 shows the Company's interest rate sensitivity based on expected interest rate repricings in specific time frames for the balance sheet (including noninterest-earning assets, noninterest-bearing liabilities and stockholders' equity) as of December 31, 1993. Off-balance sheet contracts are shown as a separate line item in the table. Interest rate sensitivity measures the interval of time before interest-earning assets and interest-bearing liabilities respond to changes in market rates of interest. Generally, an asset sensitivity gap indicates that there would be a net positive impact on the net interest margin of the Company over the next year in a rising interest rate environment since the Company's assets would reprice to higher market interest rates before its liabilities would. A net negative impact would result from a decreasing interest rate environment. In managing its exposure to interest rate fluctuations, the Company attempts to restrict its exposure to a 30 basis point change in the quarterly net 36 TABLE 26 INTEREST RATE SENSITIVITY
- ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- (in millions) December 31, 1993 -------------------------------------------------------------------------------- Prime 0-3 >3-6 >6-12 >1-5 >5 Non- Total loans and months months months years years market funding source ASSETS Investment securities (1) $ - $ 553 $ 711 $ 3,085 $ 7,354 $ 1,315 $ 40 $13,058 Federal funds sold and securities purchased under resale agreements - 1,668 - - - - - 1,668 Loans: Commercial 4,015 1,747 316 125 222 66 421 6,912 Real estate 1-4 family first mortgage 115 1,565 1,223 913 2,519 1,024 99 7,458 Other real estate mortgage 2,572 2,171 591 537 1,478 359 578 8,286 Real estate construction 732 112 1 12 18 - 235 1,110 Consumer 729 4,071 226 303 628 93 2,053 8,103 Lease financing - 85 94 175 850 8 - 1,212 Foreign - 18 - - - - - 18 ------- ------- ------- ------- ------- ------- ------- ------- Total loans (2) 8,163 9,769 2,451 2,065 5,715 1,550 3,386 33,099 ------- ------- ------- ------- ------- ------- ------- ------- Other earning assets (3) - - - - - - 52 52 ------- ------- ------- ------- ------- ------- ------- ------- Total earning assets 8,163 11,990 3,162 5,150 13,069 2,865 3,478 47,877 Noninterest-earning assets - - - - - - 4,636 4,636 ------- ------- ------- ------- ------- ------- ------- ------- Total assets 8,163 11,990 3,162 5,150 13,069 2,865 8,114 52,513 ------- ------- ------- ------- ------- ------- ------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Interest-bearing checking $ - $ - $ - $ - $ - $ - $ 4,789 $ 4,789 Savings deposits - - - - - - 2,544 2,544 Market rate savings 8,163 5,905 1,005 2,011 - - - 17,084 Savings certificates - 2,128 1,357 1,069 2,437 150 14 7,155 Other time deposits - 65 13 31 191 13 2 315 Deposits in foreign offices - 38 - - - - - 38 ------- ------- ------- ------- ------- ------- -------- ------- Total interest-bearing deposits 8,163 8,136 2,375 3,111 2,628 163 7,349 31,925 Federal funds purchased and securities sold under repurchase agreements - 1,079 - - - - - 1,079 Commercial paper and other short-term borrowings - 188 - - - - - 188 Senior debt - 1,527 26 318 343 42 - 2,256 Subordinated debt (4) - 1,895 - - - - 70 1,965 ------- ------- ------- ------- ------- ------- -------- ------- Total interest-bearing liabilities 8,163 12,825 2,401 3,429 2,971 205 7,419 37,413 Noninterest-bearing liabilities - - - - - - 10,785 10,785 Stockholders' equity (5) - - - - - - 4,315 4,315 ------- ------- ------- ------- ------- ------- -------- ------- Total liabilities and stockholders' equity 8,163 12,825 2,401 3,429 2,971 205 22,519 52,513 ------- ------- ------- ------- ------- ------- -------- ------- Gap before interest rate financial contracts - (835) 761 1,721 10,098 2,660 (14,405) - Interest rate swaps - (652) 193 214 245 - - - ------- ------- ------- ------- ------- ------- -------- ------- Gap adjusted for interest rate financial contracts $ - $(1,487) $ 954 $ 1,935 $10,343 $ 2,660 $(14,405) $ - ======= ======= ======= ======= ======= ======= ======== ======= Cumulative gap $ - $(1,487) $ (533) $ 1,402 $11,745 $14,405 $ - ======= ======= ======= ======= ======= ======= ======== Adjustments: Exclude noninterest-earning assets, noninterest- bearing liabilities and stockholders' equity - - - - - - 10,464 Move interest-bearing checking and savings deposits from nonmarket to shortest maturity - (7,333) - - - - 7,333 ------- ------- ------- ------- ------- ------- -------- Adjusted cumulative gap $ - $(8,820) $(7,866) $(5,931) $ 4,412 $ 7,072 $ 10,464 ======= ======= ======= ======= ======= ======= ======== - ---------------------------------------------------------------------------------------------------------------------------------- (1) The nonmarket column consists of marketable equity securities. (2) The nonmarket column consists of nonaccrual loans of $1,194 million, fixed-rate credit card loans of $2,062 million (including $39 million in commercial credit card loans) and overdrafts of $130 million. (3) The nonmarket column consists of Federal Reserve Bank stock. (4) The nonmarket column substantially consists of foreign currency transaction adjustments to subordinated notes issued in German marks and British pounds. (5) The nonmarket column includes $225 million of adjustable rate preferred stock, which is not expected to reprice in the near term due to the current interest rate environment and the minimum dividend rate embedded in these preferred stock issues.
37 interest margin, based on pre-specified rate scenarios and excluding unusual items, such as interest recoveries on loans where interest had been previously applied to principal. This limit is subject to periodic review by the Asset/ Liability Management Committee. The under-one-year net asset position was $1,402 million at December 31, 1993 (2.7% of total assets), compared with the under-one-year net liability position of $983 million at December 31, 1992 (1.9% of total assets). The shift to a net asset position in 1993 from a net liability position in 1992 was predominantly due to a shortening in the expected maturity of mortgage-backed investment securities and 1-4 family first mortgage loans and a decrease in savings certificates. This decline was substantially offset by an increase in market rate savings and the under-one-year balances of senior and subordinated debt and decreases in commercial loans and real estate mortgage loans (excluding 1-4 family first mortgage loans). 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. For instruments with indeterminate contractual maturities and rates that exhibit little or no change as market interest rates vary, the Company uses the "nonmarket" category. For instance, the revolving credit feature of fixed-rate credit card loans differentiates these loans from fixed-rate loans with specified contractual maturities; these fixed-rate credit card loans have therefore been placed in the nonmarket category (floating-rate credit card loans are included in the "prime loans" category). The maturities of certain 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 projected prepayment patterns using current interest rates and prepayment experience over the last three months rather than on contractual maturity. 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 accounts, noninterest-bearing deposits, other noninterest-bearing liabilities, common stockholders' equity and fixed-rate perpetual preferred stock. The two adjustments to the cumulative gap amount shown on Table 26 provide comparability with those bank holding companies that present interest rate sensitivity information in this manner. However, management does not believe that these adjustments necessarily 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 interest rate financial contracts are reported. The second adjustment line moves interest-bearing checking and savings deposits from 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 $5.9 billion and $8.6 billion at December 31, 1993 and 1992, respectively. Since interest rate changes do not affect all categories of assets and liabilities equally or simultaneously, a cumulative gap analysis alone cannot be used to evaluate the Company's interest rate sensitivity position. To supplement traditional gap analysis, the Company uses simulation modeling to estimate the potential effects of changing interest rates. This process allows the Company to fully explore the complex relationships within the gap over time and various interest rate environments. 38 Liquidity Management - ------------------------------------------------------------------------------- -------------------- 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 87% and 86% of its average total assets in 1993 and 1992, respectively. A majority of the remaining funding of average total assets was provided by senior and subordinated debt. Senior and subordinated debt averaged $4.1 billion and $4.0 billion in 1993 and 1992, respectively. The Company has entered into interest rate swap contracts to exchange fixed-rate interest payments for floating-rate interest payments for most of the fixed-rate senior debt issued. Refer to the Consolidated Statement of Cash Flows for further information. The weighted average expected remaining maturity of the investment securities portfolio is 2 years and 7 months, based on amortized cost at December 31, 1993. Of the $13.0 billion debt securities at December 31, 1993, $4.3 billion, or 33%, is expected to mature or be prepaid in 1994 and an additional $3.2 billion, or 25%, is expected to mature or be prepaid in 1995. The Company has purchased shorter-term debt securities to maintain asset liquidity and to fund potential 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, 1993. Of these loans, $7.8 billion matures in one year or less, $7.8 billion matures in over one year through five years and $8.2 billion matures in over five years. Of the $16.0 billion that matures in over one year, $6.6 billion has floating or adjustable rates and $9.4 billion has fixed rates. Of the $9.4 billion of fixed-rate loans, approximately $2.4 billion represents fixed initial-rate mortgage (FIRM) loans. FIRM loans carry fixed rates during the first 3 through 10 years of the loan term and carry adjustable rates thereafter. The estimated net income impact of fixed-rate mortgage loans maturing beyond one year that carry rates below market on December 31, 1993 is not material. The Company believes that liquidity is further provided by its ability to raise funds in a variety of domestic and international money and capital markets. A shelf registration statement filed with the Securities and Exchange Commission became effective in January 1994. The shelf registration allows the issuance of up to $1.5 billion of senior or subordinated debt or preferred stock. (Refer to Note 6 to the Financial Statements for a schedule of outstanding senior and subordinated debt as of December 31, 1993 and 1992.) Dividends payable by a national bank to its parent without the express approval of the 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, based on regulatory accounting principles, less dividends declared during the period. Based on this definition, the Bank can declare dividends of approximately $880 million of its retained net profits at December 31, 1993 plus retained net profits up to the date of any such dividend declaration. There were no dividends declared by the Bank to the Parent in 1993. As such, the Parent Company was funded mostly by the issuance of senior and subordinated debt in 1993. In January 1994, the Bank's Board of Directors declared a quarterly dividend of $78 million. (Note 12 to the Financial Statements shows the Parent Company's financial statements.) To accommodate future growth and current business needs, the Company has a capital expenditure program. Capital expenditures for 1994 are estimated at $150 million for additional automation equipment for branches and offices, 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. 39 -------------------------------------- -------------------------------------- - -------------------------Comparison of 1992 Versus 1991------------------------ -------------------------------------- -------------------------------------- Net income in 1992 was $283 million, compared with $21 million in 1991. Net income per share was $4.44, compared with $.04 in 1991. Return on average assets (ROA) was .54% and return on average common equity (ROE) was 7.93% in 1992, compared with .04% and .07% respectively, in 1991. During the fourth quarter of 1991, the Company reduced its quarterly dividend from $1.00 to $.50 per share in order to improve capital ratios. The increase in earnings in 1992 compared with 1991 reflected a $170 million increase in noninterest income. In addition, net interest income on a taxable-equivalent basis rose 6% to $2,698 million in 1992 and the net interest margin increased 52 basis points to 5.70%. The 1992 earnings also reflected a $120 million decrease in the provision for loan losses. Noninterest income was $1,059 million in 1992, compared with $889 million in 1991. Service charges on deposit accounts increased 17% to $394 million, primarily due to fee increases made in late 1991. The increase in service charges also reflected an increase in the number of checking accounts, which averaged 2.9 million in 1992, compared with 2.8 million in 1991. Fees and commissions increased 6% to $363 million predominantly resulting from sales fees on mutual funds and annuities as well as increased shared ATM network income. Sales fee revenues on mutual funds and other financial products increased from $4 million in 1991 to $29 million in 1992 due to the introduction of the PFO program in the branches. Shared ATM network income increased to $32 million from $23 million in 1991, primarily due to a fee increase implemented in mid-1992 as well as an 18% increase in the volume of transactions processed through the ATM network. Trust and investment services income increased 20% to $165 million, primarily due to greater mutual fund investment management fees, reflecting growth in the funds' net assets. These fees amounted to $19 million in 1992, compared with $3 million in 1991. In 1992, the Company realized gains of $45 million from the sale of all of its 30-year mortgage-backed securities. Noninterest expense totaled $2,035 million in 1992, relatively unchanged compared with $2,020 million in 1991. The 6% increase in net interest income on a taxable-equivalent basis was due to a 10% increase in the net interest margin, partially offset by a 4% decrease in average earning assets. The increase in the net interest margin was substantially due to lower rates paid on interest-bearing checking and savings accounts, wider spreads between Prime- and LIBOR-based loans and their funding sources, and income from derivative contracts used to hedge mismatches in the rate maturity of loans and their funding sources. The decrease of $1.8 billion in average earning assets to $47.3 billion was substantially due to a $6.3 billion decrease in average loans, mostly in commercial loans and real estate 1-4 family first mortgage loans, partially offset by a $3.9 billion increase in average investment securities. Total loans were $36.9 billion at December 31, 1992, a 16% decrease from December 31, 1991. This decrease reflected loan repayments, weak loan demand and continued emphasis on reducing the Company's HLT and commercial real estate loan portfolios. However, small business lending saw growth despite recent slow business activity. In addition, the Company continued to focus on building other fee-based businesses, particularly mutual fund products and deposit accounts. The provision for loan losses in 1992 was $1,215 million, compared with $1,335 million in 1991. Net charge-offs in 1992 were $798 million, or 1.97% of average total loans, compared with $572 million, or 1.22%, in 1991. Loan loss recoveries were $117 million in 1992, compared with $187 million in 1991. The allowance for loan losses was 5.60% of total loans at December 31, 1992, compared with 3.73% at December 31, 1991. The high provision for loan losses and the increase in net loan charge-offs reflected the effects of continuing economic conditions in California (particularly in Southern California) on the loan portfolio as well as the Company's ongoing examination process and that of its regulators. Total nonaccrual and restructured loans were $2,142 million, or 5.8% of total loans, at December 31, 1992, compared with $1,981 million, or 4.5% of total loans, at December 31, 1991. At December 31, 1992, an estimated $1,294 million, or 61%, of nonaccrual loans were less than 90 days past due, compared with an estimated $1,277 million, or 65%, at December 31, 1991. Foreclosed assets were $510 million at December 31, 1992, compared with $404 million at December 31, 1991. The average volume of core deposits in 1992 was $41.8 billion, 1% higher than 1991. Core deposits funded 80% of the Company's average total assets in 1992, compared with 75% in 1991. 40 ------------------------------ ------------------------------ - -----------------------------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 hold- ers of record of the Company's common stock was 27,013 as of January 31, 1994. Common dividends declared per share totaled $2.25 in 1993, $1.50 in 1992 and $3.50 in 1991. The common stock quarterly dividend was reduced in the fourth quarter of 1991 from $1.00 to $.50 per share. Beginning with the fourth quarter of 1992, the Company changed its dividend declaration schedule. Quarterly dividends are now considered at the Board of Directors meeting the month follow- ing quarter end. Accordingly, no dividend was declared (recorded) in the fourth quarter of 1992. The dividend was increased in the fourth quarter of 1993 from $0.50 to $0.75 per share and increased again in the first quarter of 1994 to $1.00 per share. 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. The Company may repurchase common stock from time to time pursuant to authorizations from the Board of Directors that allow shares to be repurchased in relation to the number of shares issued or expected to be issued under various benefit plans and the Company's dividend reinvestment plan, and that allow shares to be repurchased for other corporate purposes. 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 12.2% and 11.6% of the Company's common stock at December 31, 1993 and 1992, respectively. [GRAPH] [GRAPH] 41 Consolidated Statement of Income - --------------------WELLS FARGO & COMPANY AND SUBSIDIARIES--------------------- - -------------------------------------------------------------------------------
(in millions) Year ended December 31, --------------------------------- 1993 1992 1991 INTEREST INCOME Loans $3,066 $3,697 $4,803 Investment securities 672 415 152 Federal funds sold and securities purchased under resale agreements 23 33 16 Other - - 1 ------ ------ ------ Total interest income 3,761 4,145 4,972 ------ ------ ------ INTEREST EXPENSE Deposits 863 1,185 1,965 Federal funds purchased and securities sold under repurchase agreements 29 41 170 Commercial paper and other short-term borrowings 6 9 78 Senior and subordinated debt 206 219 239 ------ ------ ------ Total interest expense 1,104 1,454 2,452 ------ ------ ------ NET INTEREST INCOME 2,657 2,691 2,520 Provision for loan losses 550 1,215 1,335 ------ ------ ------ Net interest income after provision for loan losses 2,107 1,476 1,185 ------ ------ ------ NONINTEREST INCOME Service charges on deposit accounts 423 394 337 Fees and commissions 376 363 343 Trust and investment services income 190 165 138 Investment securities gains (losses) - 45 (6) Other 104 92 77 ------ ------ ------ Total noninterest income 1,093 1,059 889 ------ ------ ------ NONINTEREST EXPENSE Salaries 784 714 680 Employee benefits 222 184 165 Net occupancy 224 222 218 Equipment 148 141 143 Federal deposit insurance 114 106 98 Other 670 668 716 ------ ------ ------ Total noninterest expense 2,162 2,035 2,020 ------ ------ ------ INCOME BEFORE INCOME TAX EXPENSE 1,038 500 54 Income tax expense 426 217 33 ------ ------ ------ NET INCOME $ 612 $ 283 $ 21 ====== ====== ====== NET INCOME APPLICABLE TO COMMON STOCK $ 562 $ 235 $ 2 ====== ====== ====== PER COMMON SHARE Net income $10.10 $ 4.44 $ .04 ====== ====== ====== Dividends declared $ 2.25 $ 1.50 $ 3.50 ====== ====== ====== Average common shares outstanding 56 53 52 ====== ====== ======
The accompanying notes are an integral part of these statements. 42 Consolidated Balance Sheet - ---------------------WELLS FARGO & COMPANY AND SUBSIDIARIES-------------------- - -------------------------------------------------------------------------------
(in millions) December 31, ---------------------- 1993 1992 ASSETS Cash and due from banks $ 2,644 $ 2,690 Investment securities: At cost (estimated fair value $9,978 and $9,428) 9,887 9,338 At fair value 3,171 - ------- ------- Total investment securities 13,058 9,338 Federal funds sold and securities purchased under resale agreements 1,668 1,183 Loans 33,099 36,903 Allowance for loan losses 2,122 2,067 ------- ------- Net loans 30,977 34,836 ------- ------- Due from customers on acceptances 70 97 Accrued interest receivable 297 301 Premises and equipment, net 898 876 Goodwill 477 523 Other assets 2,424 2,693 ------- ------- Total assets $52,513 $52,537 ======= ======= LIABILITIES Noninterest-bearing deposits $ 9,719 $ 9,190 Interest-bearing deposits 31,925 33,054 ------- ------- Total deposits 41,644 42,244 Federal funds purchased and securities sold under repurchase agreements 1,079 1,311 Commercial paper and other short-term borrowings 188 202 Acceptances outstanding 70 97 Accrued interest payable 63 88 Other liabilities 933 746 Senior debt 2,256 2,159 Subordinated debt 1,965 1,881 ------- ------- Total liabilities 48,198 48,728 ------- ------- STOCKHOLDERS' EQUITY Preferred stock 639 639 Common stock-$5 par value, authorized 150,000,000 shares; issued and outstanding 55,812,592 shares and 55,191,173 shares 279 276 Additional paid-in capital 551 506 Retained earnings 2,829 2,392 Cumulative foreign currency translation adjustments (4) (4) Investment securities valuation allowance 21 - ------- ------- Total stockholders' equity 4,315 3,809 ------- ------- Total liabilities and stockholders' equity $52,513 $52,537 ======= =======
The accompanying notes are an integral part of these statements. 43 Consolidated Statement of Changes in Stockholders' Equity - ---------------------WELLS FARGO & COMPANY AND SUBSIDIARIES-------------------- - -------------------------------------------------------------------------------
(in millions) Preferred Common Additional Retained Foreign Investment Total stock stock paid-in earnings currency securities stock- capital translation valuation holders' adjustments allowance equity BALANCE DECEMBER 31,1990 $ 405 $ 257 $ 287 $2,415 $(4) $ - $3,360 ----- ----- ----- ------ --- ----- ------ Net income-1991 21 21 Preferred stock issued, net of issuance costs 238 (7) 231 Common stock issued under employee benefit and dividend reinvestment plans 3 38 41 Preferred stock redeemed (180) (180) Common stock repurchased (2) (2) Preferred stock dividends (19) (19) Common stock dividends (181) (181) ----- ----- ----- ------ --- ----- ------ Net change 58 3 29 (179) - - (89) ----- ----- ----- ------ --- ----- ------ BALANCE DECEMBER 31,1991 463 260 316 2,236 (4) - 3,271 ----- ----- ----- ------ --- ----- ------ Net income-1992 283 283 Preferred stock issued, net of issuance costs 176 (7) 169 Common stock issued under employee benefit and dividend reinvestment plans 16 197 213 Preferred stock dividends (48) (48) Common stock dividends (79) (79) ----- ----- ----- ------ --- ----- ------ Net change 176 16 190 156 - - 538 ----- ----- ----- ------ --- ----- ------ 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, at December 31, 1993 21 21 ----- ----- ----- ------ --- ----- ------ Net change - 3 45 437 - 21 506 ----- ----- ----- ------ --- ----- ------ BALANCE DECEMBER 31,1993 $639 $279 $551 $2,829 $(4) $21 $4,315 ===== ===== ===== ====== ===== ===== ======
The accompanying notes are an integral part of these statements. 44 Consolidated Statement of Cash Flows - ---------------------WELLS FARGO & COMPANY AND SUBSIDIARIES-------------------- - -------------------------------------------------------------------------------
(in millions) Year ended December 31, ----------------------------------------- 1993 1992 1991 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 612 $ 283 $ 21 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 550 1,215 1,335 Depreciation and amortization 266 268 246 Deferred income tax benefit (145) (188) (318) Net decrease in net deferred loan fees (2) (7) (45) Net decrease in accrued interest receivable 4 25 90 Net increase (decrease) in accrued interest payable (25) (58) 55 Other, net 273 126 84 ------- ------- ------- Net cash provided by operating activities 1,533 1,664 1,468 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment securities: At cost: Proceeds from sales - - 70 Proceeds from prepayments and maturities 2,492 1,605 760 Purchases (6,168) (7,919) (3,282) At lower of cost or market: Proceeds from sales - 809 - Net decrease in loans resulting from collections and originations 2,754 3,991 3,005 Proceeds from sales (including participations) of loans 264 1,936 1,341 Purchases (including participations) of loans (36) (31) (178) Cash and cash equivalents from acquisitions, net of cash paid - - 1,615 Proceeds from sales of foreclosed assets 353 311 108 Net (increase) decrease in federal funds sold and securities purchased under resale agreements (485) (1,174) 1 Other, net (59) (109) (114) ------- ------- -------- Net cash provided (used) by investing activities (885) (581) 3,326 ------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in deposits (600) (1,475) (734) Net increase (decrease) in short-term borrowings (246) 296 (5,506) Proceeds from issuance of senior debt 980 508 2,043 Proceeds from issuance of subordinated debt 399 350 - Repayment of senior debt (884) (882) (33) Repayment of subordinated debt (300) (116) (200) Proceeds from issuance of preferred stock - 169 231 Proceeds from issuance of common stock 53 213 41 Redemption of preferred stock - - (180) Repurchase of common stock (5) - (2) Payment of cash dividends (175) (153) (227) Other, net 84 (61) 22 ------- ------- ------- Net cash used by financing activities (694) (1,151) (4,545) ------- ------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM BANKS) (46) (68) 249 Cash and cash equivalents at beginning of year 2,690 2,758 2,509 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,644 $ 2,690 $ 2,758 ======= ======= ======= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,129 $ 1,512 $ 2,393 ======= ======= ======= Income taxes $ 481 $ 370 $ 350 Noncash investing activities: Transfers from investment securities at cost to investment securities at lower of cost or market $ - $ 809 $ - ======= ======= ======= Transfers from investment securities at cost to investment securities at fair value $ 3,077 $ - $ - ======= ======= ======= Transfers from foreclosed assets to nonaccrual loans $ 99 $ - $ - ======= ======= ======= Transfers from loans to foreclosed assets $ 404 $ 600 $ 225 ======= ======= ======= In connection with acquisition (Great American Bank-Phase 2): Fair value of assets acquired $ - $ - $ 1,785 ======= ======= ======= Fair value of liabilities assumed $ - $ - $ 1,785 ======= ======= =======
The accompanying notes are an integral part of these statements. 45 Notes to Financial Statements - -------------------- WELLS FARGO & COMPANY AND SUBSIDIARIES -------------------- - -------------------------------------------------------------------------------- NOTE 1 ---------------------------------------------------- ---------------------------------------------------- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ---------------------------------------------------- ---------------------------------------------------- The accounting and reporting policies of Wells Fargo & Company and Subsidiaries (Company) conform with generally accepted accounting principles and prevailing practices within the banking industry. 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 Wells Fargo & Company (Parent), Wells Fargo Bank, N.A. (Bank) and the 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; 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 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. SECURITIES AT FAIR VALUE Upon the adoption of Statement of Financial Accounting Standards No. 115 (FAS 115), Accounting for Certain Investments in Debt and Equity Securities, on December 31, 1993, 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. 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 LOWER OF COST OR MARKET Prior to December 31, 1993, securities that were not held on a long-term basis or until maturity were classified as securities carried at the lower of cost or market. 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. 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 scope of FAS 115 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. 46 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, 2-10 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 20-35 years. 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 and related direct loan origination costs, if any, are deferred and recognized as a component of the gain or loss on sale recorded in noninterest income. NONACCRUAL LOANS Loans, other than consumer loans for which no portion of the principal has been charged off, 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. Consumer loans not secured by real estate are only placed on nonaccrual status when a portion of the principal has been charged off. 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. 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 loan, unless the effective yield is equivalent to that of a new loan. If the borrower's ability to meet the revised payment schedule is uncertain, the loan is 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. 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 14 years at December 31, 1993. Identifiable intangible assets that are included in other assets are generally amortized using an accelerated method over 5 to 15 years. Approximately 48% of the December 31, 1993 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. 47 Effective January 1, 1993, deferred income tax assets and liabilities are determined in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which uses 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. FAS 109 supersedes Accounting Principles Board Opinion No. 11 (APB 11), Accounting for Income Taxes, which was used prior to 1993 to determine the deferred tax assets and liabilities. Under APB 11, the net deferred tax asset or liability was an accumulation of annual adjustments based on the tax effects of the book and tax income statement differences and was not adjusted for subsequent changes in the tax rates and laws. Interest Rate Derivative Contracts - -------------------------------------------------------------------------------- ---------------------------------- The Company enters into interest rate derivative contracts, such as futures, swaps, caps and floors, 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. 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. NOTE 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. The average required reserve balance was approximately $1.2 billion in both 1993 and 1992. 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 Bank's capital stock and surplus at December 31, 1993 was $6 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, based on regulatory accounting principles, less dividends declared during the period. Based on this definition, the Bank can declare dividends of approximately $880 million of its retained net profits at December 31, 1993 plus retained net profits up to the date of any such dividend declaration. There were no dividends declared by the Bank to the Parent in 1993. In January 1994, the Bank's Board of Directors declared a quarterly dividend of $78 million. 48 NOTE 3 -------------------------------------------------- -------------------------------------------------- INVESTMENT SECURITIES -------------------------------------------------- -------------------------------------------------- The Company adopted Statement of Financial Accounting Standards No. 115 (FAS 115), Accounting for Certain Investments in Debt and Equity Securities, on December 31, 1993. FAS 115 addresses the accounting and reporting for certain investments in debt and marketable equity securities. FAS 115 establishes three classifications of securities, each of which receives different accounting treatment. Held-to-maturity investment securities are reported at cost. Available-for-sale investment securities are reported at fair value, with unrealized gains and losses, after applicable taxes, reported as a separate component of stockholders' equity. Trading securities are reported at fair value, with unrealized gains and losses included in earnings. The esti- mated 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. The Company had no trading securities in 1993, 1992 or 1991. The following table provides the major components Of investment securities at cost and at fair value:
- ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------- (in millions) December 31, --------------------------------------------------- 1993 --------------------------------------------------- COST ESTIMATED ESTIMATED ESTIMATED UNREALIZED UNREALIZED FAIR GROSS GAINS GROSS LOSSES VALUE HELD-TO-MATURITY SECURITIES AT COST: U.S. Treasury securities $2,365 $ 18 $ - $2,383 Securities of U.S. government agencies and corporations (1) 6,570 91 17 6,644 Obligations of states and political subdivisions 18 - - 18 Securities issued by foreign governments 90 1 - 91 Private collateralized mortgage obligations 815 4 6 813 Corporate debt securities 29 - - 29 ------ ---- --- ------ Total debt securities 9,887 114 23 9,978 Corporate and Federal Reserve Bank stock (2) - - - - ------ ---- --- ------ Total $9,887 $114 $23 $9,978 ====== ===== ==== ====== AVAILABLE-FOR-SALE SECURITIES AT FAIR VALUE: Securities of U.S. government agencies and corporations (1) $1,747 $ 13 $11 $1,749 Private collateralized mortgage obligations 1,340 5 11 1,334 Corporate debt securities 31 17 - 48 ------ ---- --- ------ Total debt securities 3,118 35 22 3,131 Marketable equity securities 17 24 1 40 ------ ---- --- ------ Total $3,135 $ 59 $23 $3,171 ====== ==== === ====== - ------------------------------------------------------------------------------------- December 31, --------------------------------------------------------------------------------- 1992 1991 ----------------------------------------------------- ----------------------- Cost Estimated Estimated Estimated Cost Estimated unrealized unrealized fair fair gross gains gross losses value value HELD-TO-MATURITY SECURITIES AT COST: U.S. Treasury securities $1,964 $ 24 $ 5 $1,983 $1,107 $1,139 Securities of U.S. government agencies and corporations (1) 7,206 109 37 7,278 2,643 2,765 Obligations of states and political subdivisions 24 - - 24 41 40 Securities issued by foreign governments 93 - 1 92 - - Private collateralized mortgage obligations - - - - - - Corporate debt securities 1 - - 1 3 3 ------ ---- --- ------ ------ ------ Total debt securities 9,288 133 43 9,378 3,794 3,947 Corporate and Federal Reserve Bank stock (2) 50 - - 50 39 39 ------ ---- --- ------ ------ ------ Total $9,338 $133 $43 $9,428 $3,833 $3,986 ====== ==== === ====== ====== ====== - ------------------------------------------------------------------------------------------------------------------- (1) All securities of U.S. government agencies and corporations are mortgage-backed securities. (2) Federal Reserve Bank stock was reclassified at December 31, 1993 to other assets due to the implementation of FAS 115.
49 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 maturity 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.)
- ---------------------------------------------------------------- - ---------------------------------------------------------------- (in millions) December 31, 1993 - ---------------------------------------------------------------- Total Weighted Weighted amount average average yield remaining maturity (in yrs.-mos.) HELD-TO-MATURITY SECURITIES: U.S. Treasury securities $ 2,365 4.85% 1-2 Securities of U.S. government agencies and corporations 6,570 6.23 5-10 Obligations of states and political subdivisions 18 6.49 4-6 Securities issued by foreign governments 90 5.17 1-11 Private collateralized mortgage obligations 815 4.68 7-8 Corporate debt securities 29 6.14 2-0 ------- Total cost $ 9,887 5.76% 4-10 ======= ===== ESTIMATED FAIR VALUE $ 9,978 ======= AVAILABLE-FOR-SALE SECURITIES (1): Securities of U.S. government agencies and corporations $ 1,747 6.00% 10-1 Private collateralized mortgage obligations 1,340 5.15 10-10 Corporate debt securities 31 11.00 7-0 ------- Total cost $ 3,118 5.68% 10-4 ======= ===== ESTIMATED FAIR VALUE $ 3,131 ======= TOTAL COST OF DEBT SECURITIES $13,005 5.74% 6-2 ======= ===== === - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- (in millions) December 31, 1993 ------------------------------------------------------------------------------------------------ Remaining contractual principal maturity ------------------------------------------------------------------------------------------------ Within one year After one year After five years After ten years through five years through ten years ------------------ ------------------ ------------------ ------------------ Amount Yield Amount Yield Amount Yield Amount Yield HELD-TO-MATURITY SECURITIES: U.S. Treasury securities $1,209 5.21% $1,156 4.48% $ - -% $ - -% Securities of U.S. government agencies and corporations 673 5.99 2,523 5.95 2,203 6.30 1,171 6.85 Obligations of states and political subdivisions 3 6.42 11 6.53 2 6.44 2 6.39 Securities issued by foreign governments 21 4.48 69 5.38 - - - - Private collateralized mortgage obligations 38 4.60 225 4.59 335 4.87 217 4.49 Corporate debt securities 9 5.84 18 6.15 2 7.27 - - ------ ------ ------ ------ Total cost $1,953 5.46% $4,002 5.44% $2,542 6.11% $1,390 6.48% ====== ===== ====== ===== ====== ===== ====== ===== ESTIMATED FAIR VALUE $1,970 $4,027 $2,567 $1,414 ====== ====== ====== ====== AVAILABLE-FOR-SALE SECURITIES (1): Securities of U.S. government agencies and corporations $ 56 7.00% $ 122 6.77% $ 426 5.97% $1,143 5.89% Private collateralized mortgage obligations 51 5.48 78 4.19 425 5.08 786 5.27 Corporate debt securities - - - - 31 11.00 - - ------ ------ ------ ------ Total cost $ 107 6.28% $ 200 5.76% $ 882 5.72% $1,929 5.64% ====== ===== ====== ===== ====== ===== ====== ===== ESTIMATED FAIR VALUE $ 107 $ 201 $ 898 $1,925 ====== ====== ====== ====== TOTAL COST OF DEBT SECURITIES $2,060 5.51% $4,202 5.46% $3,424 6.01% $3,319 5.99% ====== ===== ====== ===== ====== ===== ====== ===== - -------------------------------------------------------------------------------------------------------------------------------- (1) The weighted average yield is computed using the amortized cost of available-for-sale investment securities carried at fair value.
Dividend income of $3 million, $2 million and $6 million in 1993, 1992 and 1991, 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 $2,197 million, $1,880 million and $1,520 million at December 31, 1993, 1992 and 1991, respectively. Proceeds from the sales of debt securities in the securities at cost portfolio totaled $284 thousand in 1993, resulting in a $10 thousand gain. Proceeds from the sales of debt securities totaled $34 million in 1991. Gross gains of $1 million and gross losses of $6 million were realized on these sales. There were no sales from the securities at cost portfolio in 1992. In 1992, 30-year mortgage-backed securities were reclassified from securities at cost to securities held for sale and carried at the lower of cost or market. Proceeds from the subsequent sales of these securities totaled $828 million. Gross gains of $45 million were realized on the sales. 50 NOTE 4 -------------------------------------------------- -------------------------------------------------- LOANS AND ALLOWANCE FOR LOAN LOSSES -------------------------------------------------- -------------------------------------------------- A summary of the major categories of the loan portfolio at the end of the last two years is shown in the table below. The Company also has commitments to extend credit related to these loan categories. Commitments to extend credit under credit card lines were $6.0 billion and $5.3 billion at December 31, 1993 and 1992, respectively. Other commitments to extend credit were $10.0 billion and $11.6 billion at December 31, 1993 and 1992, respectively, of which a significant portion related to commercial loans. Of the commitments to extend credit, those secured by real estate (primarily real estate 1-4 family junior lien mortgage loans) were $3.9 billion and $3.6 billion at December 31, 1993 and 1992, respectively. At December 31, 1993 and 1992, the commercial loan category and related commitments did not have an industry concentration that exceeded 10% of total loans and commitments. Tables 9 through 12 in the Loan Portfolio section of the Financial Review summarize real estate mortgage (excluding 1-4 family mortgage loans) and real estate construction loans by state and project type. Substantially all of the Company's real estate 1-4 family first mortgage and consumer loans are with customers located in California.
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (in millions) December 31, --------------------- 1993 1992 Commercial (1) $ 6,912 $ 8,214 Real estate 1-4 family first mortgage 7,458 6,836 Other real estate mortgage 8,286 10,128 Real estate construction 1,110 1,600 Consumer: Real estate 1-4 family junior lien mortgage 3,583 4,157 Credit card 2,600 2,807 Other revolving credit and monthly payment 1,920 1,979 ------- ------- Total consumer 8,103 8,943 Lease financing 1,212 1,177 Foreign 18 5 ------- ------- Total loans (net of unearned income, including net deferred loan fees, of $336 and $314) $33,099 $36,903 ======= ======= - -------------------------------------------------------------------------------- (1) Includes loans to real estate developers of $505 million and $731 million at December 31, 1993 and 1992, respectively.
The Company determines the amount of collateral needed, if any, based on management's credit evaluation of the customer. 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 commitments as for loans. See Note 13 for a further discussion of commitments to extend credit. Loans held for sale are included in their respective loan categories and recorded at lower of cost or market. At December 31, 1993 and 1992, loans held for sale were $125 million and $178 million. Certain directors, executive officers and a principal shareholder of the Company; certain entities to which they are related; and certain of their relatives are loan customers of the Company. Such loans, which were made in the ordinary course of business, were $19 million and $20 million at December 31, 1993 and 1992, respectively; none were on nonaccrual status, restructured, or 90 days past due and still accruing or charged off during 1993. In 1993, additional loans of $4 million were made and payments of $5 million were received. In May 1993, the FASB issued Statement of Financial Accounting Standards No. 114 (FAS 114), Accounting by Creditors for Impairment of a Loan. This Statement addresses the accounting treatment of certain impaired loans and amends FASB Statements No. 5 and 15. The Statement is effective January 1, 1995. A further discussion of FAS 114 is in the Allowance for Loan Losses section of the Financial Review. 51 Changes in the allowance for loan losses were as follows:
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (in millions) Year ended December 31, ------------------------------------ 1993 1992 1991 Balance, beginning of year $2,067 $1,646 $ 885 Allowance related to dispositions - - (2) Provision for loan losses 550 1,215 1,335 Loan charge-offs: Commercial (1) (110) (238) (402) Real estate 1-4 family first mortgage (25) (17) (11) Other real estate mortgage (197) (290) (88) Real estate construction (68) (93) (29) Consumer: Real estate 1-4 family junior lien mortgage (28) (28) (7) Credit card (177) (189) (161) Other revolving credit and monthly payment (41) (41) (42) ------ ------ ------ Total consumer (246) (258) (210) Lease financing (18) (19) (19) ------ ------ ------ Total loan charge-offs (664) (915) (759) ------ ------ ------ Loan recoveries: Commercial (2) 71 59 98 Real estate 1-4 family first mortgage 2 2 - Other real estate mortgage 47 9 2 Real estate construction 4 3 3 Consumer: Real estate 1-4 family junior lien mortgage 3 1 - Credit card 21 21 19 Other revolving credit and monthly payment 12 12 11 ------ ------ ------ Total consumer 36 34 30 Lease financing 9 9 5 Foreign - 1 49 ------ ------ ------ Total loan recoveries 169 117 187 ------ ------ ------ Total net loan charge-offs (495) (798) (572) Recoveries on the sale of developing country loans - 4 - ------ ------ ------ Balance, end of year $2,122 $2,067 $1,646 ====== ====== ====== Total net loan charge-offs as a percentage of average total loans 1.44% 1.97% 1.22% ====== ====== ====== Allowance as a percentage of total loans 6.41% 5.60% 3.73% ====== ====== ====== - -------------------------------------------------------------------------------- (1) Includes charge-offs of loans to real estate developers of $21 million, $41 million and $93 million in 1993, 1992 and 1991, respectively. (2) Includes recoveries from real estate developers of $3 million, $6 million and $3 million in 1993, 1992 and 1991, respectively.
Nonaccrual and restructured loans were $1,200 million and $2,142 million at December 31, 1993 and 1992, respectively. Related commitments to lend additional funds were approximately $143 million and $125 million at December 31, 1993 and 1992, respectively. Nonaccrual loans with a remaining recorded investment totaling $117 million and $9 million were restructured at market interest rates and returned to fully performing accrual status during 1993 and 1992, respectively. If interest due on the book balances of all nonaccrual and restructured loans (including loans no longer nonaccrual or restructured at year end) had been accrued under their original terms, it is estimated that income before income tax expense would have been greater by the amounts shown in the table below:
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (in millions) Year ended December 31, ---------------------------------- 1993 1992 1991 Estimated interest that would have been recorded under original terms $140 $189 $137 Gross interest recorded 19 23 29 ---- ---- ---- Reduction in interest income $121 $166 $108 ==== ==== ==== - --------------------------------------------------------------------------------
52 NOTE 5 -------------------------------------------------- -------------------------------------------------- PREMISES, EQUIPMENT AND OTHER ASSETS -------------------------------------------------- -------------------------------------------------- The following table presents comparative data for premises and equipment:
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (in millions) December 31, --------------------- 1993 1992 Land $ 148 $ 138 Buildings 546 473 Furniture and equipment 571 554 Leasehold improvements 251 250 Premises leased under capital leases 71 76 ------ ------ Total 1,587 1,491 Less accumulated depreciation and amortization 689 615 ------ ------ Net book value $ 898 $ 876 ====== ====== - -------------------------------------------------------------------------------
Depreciation and amortization expense was $140 million, $136 million and $129 million for the years ended December 31, 1993, 1992 and 1991, respectively. The components of other assets at December 31, 1993 and 1992 were as follows:
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (in millions) December 31, --------------------- 1993 1992 Net deferred tax asset (1) $ 884 $ 804 Nonmarketable equity investments (2) 396 352 Certain identifiable intangible assets 373 401 Foreclosed assets 348 510 Other 423 626 ------ ------ Total other assets $2,424 $2,693 ====== ====== - ------------------------------------------------------------------------------- (1) See Note 10 to the Financial Statements. (2) Includes Federal Reserve Bank stock of $52 million at December 31, 1993.
Income from nonmarketable equity investments was $42 million, $17 million and $18 million for the years ended December 31, 1993, 1992 and 1991, respectively. This amount excludes income from Federal Reserve Bank stock as this was reclassified to nonmarketable equity investments on December 31, 1993. The largest identifiable intangible asset was core deposit intangibles of $257 million and $262 million at December 31, 1993 and 1992, respectively. Amortization expense for core deposit intangibles was $61 million, $57 million and $56 million for the years ended December 31, 1993, 1992 and 1991, 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 disposi- tion gains and losses, was $60 million, $93 million and $105 million in 1993, 1992 and 1991, respectively. 53 NOTE 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:
- ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- (in millions) December 31, Maturity Interest --------------------- date rate 1993 1992 SENIOR Parent: Notes (1) 1993 8.35% $ - $ 125 Notes (1) 1993 8% - 100 Notes (1) 1994 8.5% 100 100 Notes (1) 1994 7 5/8% 175 175 Floating Rate Notes 1994 Various 150 150 Floating Rate Medium-Term Notes 1993-95 Various 1,258 543 Notes (1) 1996 8.2% 200 200 Medium-Term Notes (1) 1993-96 4.7-9.1% 254 488 Other notes (2) 1993-2002 Various - 105 Debentures (2)(3) 2002 8.6% - 54 Notes payable by subsidiaries 59 58 Obligations of subsidiaries under capital leases (Note 13) 60 61 ------ ------ Total senior debt 2,256 2,159 ------ ------ SUBORDINATED Parent: Floating Rate Notes (U.K. pounds sterling denominated L60 face amount) (4)(5)(6) 1994 Various 89 91 Floating Rate Notes (2) 1994 Various - 100 German Mark Floating Rate Notes (DM 300 face amount) (4)(7) 1995 Various 173 185 Notes (2) 1996 8.75% - 100 Floating Rate Notes (5)(8)(9) 1996 Various 100 100 Floating Rate Capital Notes (5)(9)(10) 1996 Various 150 150 Floating Rate Notes (4)(5)(9) 1997 Various 187 187 Floating Rate Notes ($100 face amount) (5)(11) 1997 Various 101 102 Floating Rate Notes (4)(5)(12) 1997 Various 100 100 Floating Rate Capital Notes (2)(10) 1997 Various - 100 Floating Rate Capital Notes (4)(5)(10) 1998 Various 200 200 Floating Rate Notes (4)(5) 2000 Various 118 118 Notes 2002 8.75% 199 199 Notes 2002 8 3/8% 149 149 Notes 2003 6 7/8% 150 - Notes 2003 6 1/8% 249 - ------ ------ Total subordinated debt 1,965 1,881 ------ ------ Total senior and subordinated debt $4,221 $4,040 ====== ====== - ---------------------------------------------------------------------------------------------------------------------------------- (1) The Company has entered into interest rate swap agreements whereby the Company receives fixed-rate interest payments approximately equal to interest on the Notes and makes interest payments based on a floating rate. (2) These notes and debentures were called in 1993 prior to maturity. (3) Assumed from Crocker National Corporation. (4) May be redeemed in whole, at par, at any time in the event withholding taxes are imposed by the United States. (5) Redeemable in whole or in part, at par. (6) The Company has entered into a swap agreement whereby the Company receives pounds sterling sufficient to cover floating-rate interest and principal on the Notes and makes payments in U.S. dollars covering principal and interest. The transaction amount at the date of issue and swap was $74 million. The differences of $15 million and $17 million at December 31, 1993 and 1992, respectively, were due to the foreign currency transaction adjustment. (7) These Notes are subject to a maximum interest rate of 8%. The Company has sold this interest rate cap under an agreement whereby it receives fixed payments in German marks and makes payments based on the amount by which a floating rate exceeds 8%. The Company has also entered into a swap agreement whereby the Company receives German marks approximately equal to principal and interest on the Notes and makes payments in U.S. dollars. The transaction amount at the date of issue and swap was $118 million. The differences of $55 million and $67 million at December 31, 1993 and 1992, respectively, were due to the foreign currency transaction adjustment. (8) Equity Commitment Notes. (9) These Notes have been called for redemption in February 1994, prior to maturity. (10) Mandatory Equity Notes. (11) Subject to a maximum interest rate of 13% due to the purchase of an interest rate cap. (12) Subject to a maximum interest rate of 13%.
54 The principal payments, including sinking fund payments, on senior and subordinated debt are due as follows:
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (in millions) Parent Company 1994 $1,412 $1,416 1995 879 883 1996 475 489 1997 200 204 1998 200 204 Thereafter 868 956 ------ ------ Total $4,034 $4,152 ====== ====== - -------------------------------------------------------------------------------
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 notes (8) and (10) 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 Equity Commitment Notes, which totaled $100 million at December 31, 1993, require the Company to deposit proceeds from the issuance of capital securities into a note fund. As of December 31, 1993, $100 million had been deposited in the note fund. The Equity Commitment Notes have been called for redemption in February 1994, prior to maturity. In 1993, $100 million of Mandatory Equity Notes, due in 1997, were called prior to maturity. The terms of the Mandatory Equity Notes, which totaled $350 million at December 31, 1993, 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. The terms of the Mandatory Equity Notes, due in 1996, which equaled $150 million at December 31, 1993, provide that the Company may redeem Notes, if called prior to maturity, from proceeds from the issuance of capital securities deposited into a voluntary note fund. As of December 31, 1993, $150 million had been deposited into a voluntary note fund and all Mandatory Equity Notes, due in 1996, were called for redemption in February 1994. As of December 31, 1993, $72 million of stockholders' equity had been designated for the retirement or redemption of $200 million of Mandatory Equity Notes, due in 1998, not currently subject to redemption prior to maturity. 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, 1993. 55 NOTE 7 -------------------------------------------------- -------------------------------------------------- PREFERRED STOCK -------------------------------------------------- -------------------------------------------------- At December 31, 1993 and 1992, 25,000,000 shares of preferred stock were authorized and 5,327,500 shares were issued and outstanding. 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):
- ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- At December 31, 1993 and 1992 Dividend rate Dividends declared ----------------------------- -------------------- (in millions) Shares Carrying Minimum Maximum ----------------------------- issued and amount Year ended December 31, outstanding (in millions) ----------------------------- 1993 1992 1991 Adjustable Rate Cumulative, Series A 3,000,000 $150 6.0% 12.0% $ 9 $ 9 $ 9 (Liquidation preference $50) Adjustable Rate Cumulative, Series B 1,500,000 75 5.5 10.5 4 5 5 (Liquidation preference $50) 9% Cumulative, Series C 477,500 238 - - 21 21 4 (Liquidation preference $500) 8 7/8% Cumulative, Series D 350,000 176 - - 16 13 - (Liquidation preference $500) Market Auction Preferred Stock (1) - - - - - - 1 --------- ---- --- --- --- Total 5,327,500 $639 $50 $48 $19 ========= ==== === === === -------------------------------------------------------------------------------------------------------------------- (1) In January 1991, the Company redeemed all $180 million of its Market Auction Preferred Stock.
ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK, SERIES A These shares are redeemable at the option of the Company at a price of $50 per share plus accrued and unpaid dividends. Dividends are cumulative and payable on the last day of each calendar quarter. For each quarterly period, the dividend rate is 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 6.0% during 1993 and 1992 and 6.1% during 1991. 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 5.6%, 6.2% and 6.6% during 1993, 1992 and 1991, respectively. 9% 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% 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. 56 NOTE 8 -------------------------------------------------- -------------------------------------------------- COMMON STOCK AND EMPLOYEE STOCK PLANS -------------------------------------------------- -------------------------------------------------- Common Stock - -------------------------------------------------------------------------------- ------------ The following table summarizes common stock authorized, reserved, issued and outstanding as of December 31, 1993:
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Number of shares Tax Advantage and Retirement Plan 2,718,228 Equity Incentive Plans 3,275,509 Dividend Reinvestment and Common Stock Purchase Plan 4,279,297 Employee Stock Purchase Plan 718,348 Director Option Plans 169,099 Stock Bonus Plan 15,570 ----------- Total shares reserved 11,176,051 Shares not reserved 83,011,357 Shares issued and outstanding 55,812,592 ----------- 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. Director Option Plans - -------------------------------------------------------------------------------- --------------------- 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 may be exercised until the tenth anniversary of the date of receipt; options become exercisable after one year at an exercise price of $1 per share. At December 31, 1993, 3,220 options were outstanding and 2,820 options were exercisable under the plan. During 1993, 429 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. 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 calendar year. At December 31, 1993, 20,938 options were outstanding and 15,844 options were exercisable under the plan. During 1993, 1,650 options were exercised. As the exercise price of the option is equal to the quoted market price of the stock at the time of grant, no compensation expense is recorded for the 1990 DOP. Employee Stock Plans - -------------------------------------------------------------------------------- -------------------- EQUITY INCENTIVE PLANS The 1990 Equity Incentive Plan (1990 EIP) is the successor to the 1982 Equity Incentive Plan (1982 EIP). The 1990 EIP is similar to the 1982 EIP in all material respects, except that the 1990 EIP sets a higher limit on total yearly grants and provides greater flexibility to the committee that administers the Plan. The 1990 EIP provides for the granting to key employees of incentive stock options as defined under current tax laws, nonqualified stock options and restricted share rights. The options may be exercised until the tenth anniversary of the grant date; they generally become fully exercisable over three years from the grant date at the quoted market price at time of grant. Upon termination of employment, the option period is reduced or the options are canceled. The total number of shares of common stock issuable under the 1990 EIP is 2,500,000 in the aggregate and 800,000 in any one calendar year. No additional awards or grants will be issued under the 1982 EIP. As the exercise price is equal to the quoted market price of the stock at the time of grant, no compensation expense is recorded for the stock options under the 1990 and 1982 EIPs. 57 Transactions involving options of the EIPs are summarized as follows:
- --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Number of shares --------------------------------------------------------------- 1990 EIP 1982 EIP ---------------------------- --------------------------- 1993 1992 1993 1992 Options outstanding, beginning of year 960,000 383,000 955,690 1,196,104 Granted 400,400 623,500 - - Canceled (54,840) (36,505) (6,670) (16,680) Exercised (79,862) (9,929) (156,080) (218,738) Share/tax withholding (2,338) (66) (8,900) (4,996) --------- --------- -------- --------- Options outstanding, end of year 1,223,360 960,000 784,040 955,690 ========= ========= ======== ========= Options exercisable, end of year 340,245 117,110 784,040 854,820 Shares available for grant, end of year 755,147 1,172,875 - - Price range of options: Outstanding $68.75-110.75 $68.75-79.38 $29.56-71.00 $29.56-71.00 Exercised $68.75- 78.63 $ 72.50 $29.56-71.00 $ 9.44-71.00 - ---------------------------------------------------------------------------------------------------------
Loans may be made, at the discretion of the Company, to assist the participants of the EIPs in the acquisition of shares under options. The total of such loans were $7 million and $6 million at December 31, 1993 and 1992, respectively. The holders of restricted share rights that were granted prior to 1991 under the 1990 and 1982 EIPs 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 under the 1990 EIP 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, 1993, the 1990 EIP and the 1982 EIP had 406,853 and 106,109 restricted share rights outstanding to 920 and 450 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 1990 and 1982 EIPs was $7 million, $7 million and $8 million in 1993, 1992 and 1991, 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 fair market value at the end of the option period (12 months after the grant date for the current period). For the current option period ending July 31, 1994, the Board approved a closing option price of 85% of fair 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 ----------------------- 1993 1992 Options outstanding, beginning of year 206,185 187,113 Granted 173,270 216,040 Canceled (103,240) (62,029) Exercised (at $69.05 in 1993 and $58.56 in 1992) (115,739) (134,939) -------- -------- Options outstanding, end of year 160,476 206,185 ======== ======== Options available for grant, end of year 557,872 627,902 ======== ======== - --------------------------------------------------------------------------------
For information on employee stock ownership through the Tax Advantage and Retirement Plan, see Note 9. 58 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 thousand of dividends per quarter may be used to purchase shares at a 3% discount. Dividends in excess of $6 thousand per quarter and between $150 and $2 thousand 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 1993 and 1992, 222,679 and 2,553,270 shares, respectively, were issued under the plan. NOTE 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 of 4% 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 3% 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. In addition, the Company makes supplemental retirement contributions of 2% of employee-covered compensation. All salaried employees with at least one year of service are eligible to receive these Company contributions, which are immediately vested. 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 who elect to contribute under the plan. The Company's con- tributions are immediately vested and 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, 1993, 1992 and 1991 were $53 million, $50 million and $46 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). Effective January 1, 1993, the health care and life insurance benefits for retirees changed. The amount of subsidized health care coverage for retired employees is now based upon Medicare eligibility as of January 1, 1993. The amount of subsidized health care coverage for active employees is based upon their eligibility to retire as of January 1, 1993 and their years of service at the time of retirement. For those active employees with an adjusted service date after September 30, 1992, there are no medical or dental benefits upon retirement. Additionally, those employees who retire after January 1, 1993 are no longer eligible for the nominal Company-paid life insurance benefit. Effective January 1, 1994, newly hired employees 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 $49 million, $47 million and $46 million in 1993, 1992 and 1991, 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, $3 million and $1 million in 1993, 1992 and 1991, respectively. At December 31, 1993, the Company had approximately 20,700 active eligible employees and 6,100 retirees. 59 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. 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 (initial APBO) 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 1993:
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (in millions) Amount Interest cost on APBO $11.2 Amortization of initial APBO 7.2 Service cost (benefits attributed to service during the period) 1.0 ----- Total $19.4 ===== - --------------------------------------------------------------------------------
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, 1993.
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (in millions) Amount Accumulated postretirement benefit obligation (1): Retirees $ 99.9 Fully eligible active employees 21.4 Other active employees 15.7 ------ 137.0 Plan assets at fair value - ------ Accumulated postretirement benefit obligation in excess of plan assets 137.0 Unrecognized net gain from past experience different from that assumed and from changes in assumptions 10.4 Unrecognized transition obligation (135.0) ------ Accrued postretirement benefit cost (included in other liabilities) $ 12.4 ====== - -------------------------------------------------------------------------------- (1) Based on a discount rate of 6.45%.
The incremental 1993 pretax expense related to adopting FAS 106 for postretirement health care benefits was $11 million. 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. An average 9% annual increase in the per capita cost of covered health care benefits was assumed for 1994. The rate was assumed to decrease gradually to 5.5% in 2001 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care trend by 1 percentage point in each year would increase the APBO as of December 31, 1993 by $7.6 million and the aggregate of the interest cost and service cost components of the net periodic cost for 1993 by $.6 million. The Company also provides postretirement life insurance to certain existing retirees. The APBO and expenses related to these benefits were not material. Effective July 1, 1993, the Company also adopted Statement of Financial Accounting Standards No. 112 (FAS 112), Employers' Accounting for Postemployment Benefits. This Statement requires employers to recognize the obligation to provide benefits to former or inactive employees after employment but before retirement. The adoption of FAS 112 resulted in an accrual of $12 million. Other Expenses - -------------------------------------------------------------------------------- -------------- Contract services expense was $61 million, $48 million and $40 million for the years ended December 31, 1993, 1992 and 1991, respectively. Advertising and promotion expense was $59 million, $47 million and $57 million for the years ended December 31, 1993, 1992 and 1991, respectively. 60 NOTE 10 -------------------------------------------------- -------------------------------------------------- INCOME TAXES -------------------------------------------------- -------------------------------------------------- Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (FAS 109), Accounting for Income Taxes. FAS 109 changed the method of computing income taxes for financial statement purposes from the deferred method of accounting for income taxes of Accounting Principles Board Opinion No. 11 (APB 11) to the liability (or balance sheet) method. Under the liability method, the net deferred tax asset or liability is determined based upon the effects of the differences between the book and tax bases of the vari- ous balance sheet assets and liabilities. Under FAS 109, deferred tax assets or liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. Computation of the net deferred tax asset or liability gives current recognition to changes in tax rates and laws. The effect of applying FAS 109 was a one-time adjustment that decreased income tax expense for the year by approximately $1 million. As a result of applying FAS 109 in 1993, income before income tax expense was decreased $5 million due to the effects of adjustments for prior purchase business combinations. Total income taxes for the year ended December 31, 1993 were recorded as follows:
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (in millions) Year ended December 31, 1993 Income taxes applicable to income before income tax expense $426 Goodwill for tax benefits related to acquired assets (8) ---- Subtotal 418 Stockholders' equity for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes (8) Stockholders' equity for tax effect of unrealized net gain on investment securities 15 ---- Total income taxes $425 ==== - --------------------------------------------------------------------------------
The following is a summary of the components of income tax expense (benefit) applicable to income before income taxes: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (in millions) Year ended December 31, ------------------------- 1993 1992 1991 Current: Federal $ 450 $ 290 $ 255 State and local 121 91 96 ----- ----- ----- 571 381 351 ----- ----- ----- Deferred: Federal (129) (135) (230) State and local (16) (29) (88) ----- ----- ----- (145) (164) (318) ----- ----- ----- Total $ 426 $ 217 $ 33 ===== ===== ===== - -------------------------------------------------------------------------------
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 1992 are primarily as a result of adjustments to conform to tax returns as filed. The Company's income tax expense for 1993, 1992 and 1991 included less than $1 million, $18 million and $3 million, respectively, related to investment securities transactions. The Company had net deferred tax assets of $884 million, $804 million and $640 million at December 31, 1993, 1992 and 1991, respectively. The tax effect of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December 31, 1993 are presented below:
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (in millions) Year ended December 31, 1993 Deferred Tax Assets Allowance for loan losses $ 879 Net tax-deferred expenses 223 Foreclosed assets 68 State tax expense 32 Investments 6 Other 5 ------ 1,213 Valuation allowance (2) ------ Total deferred tax assets, less valuation allowance 1,211 ------ Deferred Tax Liabilities Leasing 254 Certain identifiable intangibles 47 Depreciation 26 ------ Total deferred tax liabilities 327 ------ Net Deferred Tax Asset $ 884 ====== - --------------------------------------------------------------------------------
61 The Company's $884 million net deferred tax asset at December 31, 1993 includes a valuation allowance of $2 million representing the net deferred tax effect of a $27 million California capital loss carryforward, which is only available to offset future California capital gains, if any, through 1996. The January 1, 1993 valuation allowance of $5 million was reduced by $3 million due to the current utilization of a portion of the California capital loss carryforward. Substantially all of the Company's net deferred tax asset of $884 million at December 31, 1993 related to net expenses (the largest of which was the provision for loan losses), which have been reflected in the financial statements, but which will reduce future taxable income. At December 31, 1993, the Company did not have any net operating loss carryforwards. The Company estimates that approximately $774 million of the $884 million net deferred tax asset at December 31, 1993 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 $110 million relates to approximately $1.6 billion of net deductions that are expected to reduce future California taxable income (California tax law does not permit recovery of previously paid taxes). The Company's California taxable income has averaged approximately $1 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 significant components of deferred income tax (benefits) for the year ended December 31, 1993 were as follows:
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (in millions) Year ended December 31,1993 Deferred tax benefit (exclusive of the other components below) $(120) Adjustments to deferred tax assets and liabilities for enacted changes in rates and laws (22) Decrease in valuation allowance (3) ----- Total $(145) ===== - --------------------------------------------------------------------------------
Under APB 11, the components of the deferred income tax (benefits) for the years ended December 31, 1992 and 1991 were as follows:
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (in millions) Year ended December 31, ---------------------- 1992 1991 Lower loan loss deduction for tax return purposes $(180) $(335) Lower income for tax return purposes resulting from the net change in deferred income and expenses 20 22 Lower depreciation for tax return purposes (13) (7) Higher state tax deduction for tax return purposes 13 41 Lower (higher) lease financing income for tax return purposes (7) 11 Lower (higher) income on financial contracts for tax return purposes 7 (7) Higher income from investments for tax return purposes (4) (14) Higher (lower) loss from foreclosed assets for tax return purposes 9 (40) Other (9) 11 ----- ----- Total $(164) $(318) ===== ===== - --------------------------------------------------------------------------------
The Company has not recognized a deferred tax liability of $45 million on $124 million of undistributed earnings of a foreign subsidiary and an affiliate because such earnings are indefinitely reinvested in those companies and are not taxable under current law. A tax liability would be recognized if the Company recovered those undistributed earnings in a taxable manner, such as through the receipt of dividends or sales of the entities, or if the tax law changed. 62 The following is a reconciliation of the statutory federal income tax expense and rate to the effective income tax expense and rate:
- ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- (in millions) Year ended December 31, ------------------------------------------------------------------ 1993 1992 1991 ------------------ ------------------ ------------------ Amount % Amount % Amount % Statutory federal income tax expense and rate $363 35.0 % $170 34.0 % $18 34.0 % Change in tax rate resulting from: State and local taxes on income, net of federal income tax benefit 75 7.2 39 7.8 4 7.6 Adjustment to deferred tax assets and liabilities for enacted changes in tax rates and laws (22) (2.1) - - - - Amortization of certain intangibles not deductible for tax return purposes 18 1.7 14 2.9 14 25.1 Income and expense related to acquired assets and liabilities accounted for net of tax - - 5 1.0 4 8.4 Tax-exempt interest and dividend income (5) (.5) (4) (.9) (9) (17.3) Other (3) (.3) (7) (1.4) 2 3.5 ---- ---- ---- ---- --- ----- Effective income tax expense and rate $426 41.0 % $217 43.4 % $33 61.3 % ==== ==== ==== ==== === ===== - -----------------------------------------------------------------------------------------------------------------------------
NOTE 11 -------------------------------------------------- -------------------------------------------------- FOREIGN ACTIVITIES -------------------------------------------------- -------------------------------------------------- Selected financial data by geographic area at December 31, 1993, 1992 and 1991 and for the years then ended was as follows:
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (in millions) Total Income Net Assets revenue before income at year end income tax expense Latin America 1993 $ 2 $ 1 $ 1 $ 16 (including 1992 1 1 1 4 Mexico) 1991 - 23 14 - - -------------------------------------------------------------------------------- Other 1993 10 7 4 121 1992 8 8 5 128 1991 8 2 1 35 - -------------------------------------------------------------------------------- Total foreign (1) 1993 12 8 5 137 1992 9 9 6 132 1991 8 25 15 35 - -------------------------------------------------------------------------------- Domestic 1993 4,842 1,030 607 52,376 1992 5,195 491 277 52,405 1991 5,853 29 6 53,512 - -------------------------------------------------------------------------------- Total foreign 1993 $4,854 $1,038 $612 $52,513 and domestic 1992 5,204 500 283 52,537 1991 5,861 54 21 53,547 - -------------------------------------------------------------------------------- (1) The 1991 income before income tax expense reflects a $55 million reversal of the unused portion of the allowance for loan losses allocated to foreign loans.
Foreign activities were insignificant to the Company's results of operations in 1993 and 1992. In 1991, the reversal of the unused portion of the allowance for loan losses attributed to foreign loans contributed significantly to the Company's unusually low consolidated results of operations. Changes in the allowance for loan losses allocated to foreign loans were as follows:
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (in millions) Year ended December 31, --------------------------------- 1993 1992 1991 Balance, beginning of year $- $ - $ 6 Provision for loan losses - (5) (55) Recoveries - 1 49 Recoveries on the sale of developing country loans - 4 - -- --- ---- Balance, at end of year $- $ - $ - == === ==== - --------------------------------------------------------------------------------
63 NOTE 12 -------------------------------------------------- -------------------------------------------------- PARENT COMPANY -------------------------------------------------- -------------------------------------------------- Condensed financial information of Wells Fargo & Company (Parent) is presented below. For information regarding the Parent's long-term debt and commitments and contingent liabilities, see Notes 6 and 13, respectively.
CONDENSED STATEMENT OF INCOME - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (in millions) Year ended December 31, ------------------------- 1993 1992 1991 INCOME Dividends from subsidiaries: Wells Fargo Bank $ - $117 $ 313 Nonbank subsidiaries 3 1 5 Interest income from: Wells Fargo Bank 97 109 139 Nonbank subsidiaries 22 32 62 Other 56 60 65 Noninterest income 45 9 10 ---- ---- ----- Total income 223 328 594 ---- ---- ----- EXPENSE Interest on: Commercial paper and other short-term borrowings 5 8 62 Senior and subordinated debt 195 207 227 Provision for loan losses 9 39 11 Noninterest expense 39 42 43 ---- ---- ----- Total expense 248 296 343 ---- ---- ----- Income (loss) before income tax benefit and undistributed income of subsidiaries (25) 32 251 Income tax (expense) benefit (5) 36 30 Equity in undistributed income (loss) of subsidiaries (1): Wells Fargo Bank 632 220 (225) Nonbank subsidiaries 10 (5) (35) ---- ---- ----- NET INCOME $612 $283 $ 21 ==== ==== ===== - -------------------------------------------------------------------------------- (1) The 1991 amount represents dividends distributed by Wells Fargo Bank in excess of its 1991 net income of $88 million. The amount for the nonbank subsidiaries represents a 1991 net loss of $30 million and dividends of $5 million.
CONDENSED BALANCE SHEET - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (in millions) December 31, ------------------------- 1993 1992 ASSETS Cash and due from Wells Fargo Bank (includes interest-earning deposits of $723 and $800) $ 733 $ 818 Investment securities: At cost (estimated fair value $341 million and $361 million) 337 352 At fair value 50 - ----- ----- Total investment securities 387 352 Securities purchased under resale agreements 250 - Loans 359 455 Allowance for loan losses 60 60 ------ ------ Net loans 299 395 ------ ------ Loans and advances to subsidiaries: Wells Fargo Bank 1,682 1,682 Nonbank subsidiaries 303 406 Investment in subsidiaries: Wells Fargo Bank 4,479 3,733 Nonbank subsidiaries 95 88 Other assets 552 645 ------ ------ Total assets $8,780 $8,119 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper and other short-term borrowings $ 138 $ 168 Other liabilities 225 221 Senior debt 2,137 2,040 Subordinated debt 1,965 1,881 ------ ------ Total liabilities 4,465 4,310 Stockholders' equity 4,315 3,809 ------ ------ Total liabilities and stockholders' equity $8,780 $8,119 ====== ====== - --------------------------------------------------------------------------------
64
CONDENSED STATEMENT OF CASH FLOWS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (in millions) Year ended December 31, ------------------------------ 1993 1992 1991 Cash flows from operating activities: Net income $ 612 $ 283 $ 21 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 9 39 11 Deferred income tax expense (benefit) 30 (15) (7) Equity in undistributed (income) loss of subsidiaries (642) (215) 260 Other, net (32) 2 9 ----- ----- ------ Net cash provided by operating activities (23) 94 294 ----- ----- ------ Cash flows from investing activities: Investment securities: At cost: Proceeds from sales - - 70 Proceeds from prepayments and maturities 13 2 276 Purchases (25) (127) (491) Net decrease in loans 87 32 93 Net decrease in loans and advances to subsidiaries 103 257 360 Investment in subsidiaries (111) (299) (61) Net (increase) in securities purchased under resale agreements (250) - - Other, net 92 66 93 ----- ----- ------ Net cash provided (used) by investing activities (91) (69) 340 ----- ----- ------ Cash flows from financing activities: Net decrease in short-term borrowings (30) (58) (1,534) Proceeds from issuance of senior debt 980 508 2,031 Proceeds from issuance of subordinated debt 399 350 - Repayment of senior debt (884) (882) (33) Repayment of subordinated debt (300) (116) (200) Net decrease in indebtedness to subsidiaries - - (2) Proceeds from issuance of preferred stock - 169 231 Proceeds from issuance of common stock 53 213 41 Redemption of preferred stock - - (180) Repurchase of common stock (5) - (2) Payments of cash dividends (175) (153) (227) Other, net (9) (26) 28 ----- ----- ------ Net cash provided by financing activities 29 5 153 ----- ----- ------ Net change in cash and cash equivalents (due from Wells Fargo Bank) (85) 30 787 Cash and cash equivalents at beginning of year 818 788 1 ----- ----- ------ Cash and cash equivalents at end of year $ 733 $818 $ 788 ===== ===== ====== Noncash investing activities: Transfers from investment securities at cost to investment securities at fair value $ 25 - - ===== ===== ====== - --------------------------------------------------------------------------------
NOTE 13 ---------------------------------------- ---------------------------------------- COMMITMENTS AND CONTINGENT LIABILITIES ---------------------------------------- ---------------------------------------- In the normal course of business, the Company makes commitments and assumes contingent liabilities for various purposes, such as meeting the financing needs of its customers and reducing its own exposure to fluctuations in interest rates. Financial Instruments with Off-Balance Sheet Risk - -------------------------------------------------------------------------------- ---------------------------- Off-balance sheet commitments, which are properly not reflected in the financial statements, involve various types and degrees of risk to the Company, including credit, interest rate and liquidity risk, and are summarized below:
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (in millions) December 31, ---------------------- 1993 1992 Commitments to extend credit under credit card lines (1) $ 6,000 $ 5,300 Other commitments to extend credit (1) 10,000 11,600 Standby letters of credit (1) 900 1,000 Commercial and similar letters of credit (1) 100 100 Commitments related to nonmarketable equity investments (1) 100 100 Interest rate futures contracts (2) 4,900 5,000 Interest rate forward contracts (2) 100 100 Interest rate floor contracts purchased (3) 3,700 4,400 Interest rate cap contracts purchased (3) 1,500 1,500 Interest rate cap contracts written (2) 1,200 1,100 Interest rate swap contracts (3)(4) 2,100 3,400 Cross currency swap contracts (3)(5) 200 200 Foreign exchange contracts (3)(6) 300 300 When-issued securities (3) 500 300 - -------------------------------------------------------------------------------- (1) Financial instruments for which contract amounts represent credit risk. (2) Financial instruments for which credit risk is DE MIMMIS. (3) Financial instruments for which the credit risk is substantially less than the notional or contract amounts. The Company anticipates performance by substantially all of the counterparties for these financial contracts. (4) The Parent's share of the notional principal amount of interest rate swaps outstanding was $100 million and $400 million at December 31, 1993 and 1992, respectively. (5) Replacement cost for those contracts in a gain position was $67 million and $85 million at December 31, 1993 and 1992, respectively. These are off-balance sheet commitments of the Parent. (6) Replacement cost for those contracts in a gain position was $5 million and $10 million at December 31, 1993 and 1992, respectively.
COMMITMENTS 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 expiration dates and generally require a fee. 65 The Company uses the same credit policies in making commitments to extend credit as it does in making loans. The extension of a commitment gives rise to credit risk when it is drawn upon. 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 on the preceding page 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. 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 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, 1993 and 1992, standby letters of credit included approximately $100 million and $200 million, respectively, of participations purchased and were net of approximately $100 million and $100 million, respectively, of participations sold. Approximately 60% of the Company's year-end 1993 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 which back financial instruments (financial guarantees). 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. At December 31, 1993, the Company had issued or purchased participations in financial guarantees of approximately $500 million. Currently, as well as historically, losses on standby letters of credit have been immaterial. INTEREST RATE DERIVATIVE CONTRACTS The Company enters into a variety of financial contracts, which include interest rate futures contracts, interest rate floors and caps, and interest rate swap agreements. 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 contracts are used primarily to hedge mismatches in interest rate maturities and, therefore, serve to reduce rather than increase the Company's exposure to movements in interest rates. The Company controls the credit risk of its financial contracts (except futures contracts and interest rate cap contracts written, which do not have credit risk) through credit approvals, limits and monitoring procedures. Currently, as well as historically, losses associated with counterparty nonperformance on interest rate derivative contracts have been immaterial. Interest rate futures contracts are contracts in which the buyer agrees to purchase and the seller agrees to make delivery of a specific money market instrument at a predetermined date for a specific price. Gains and losses 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 deferred gains related to interest rate futures contracts were $4 million at December 31, 1993. This amount will be fully amortized by December 31, 1994. There were no deferred interest rate losses on related futures contracts in 1993. 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 applied to a notional principal amount. The Company also offers these contracts to its customers and will either hedge the contracts with other capital market instruments or use the contracts for asset/liability management. For such instruments written by the Company, market risks arise from movements in interest rates. For those contracts in a gain position, the replacement cost in the event of nonperformance by counterparties for purchased interest rate floors and caps was approximately $141 million and $249 million at December 31, 1993 and 1992, respectively. Interest rate swap contracts are entered into primarily as an asset/liability management strategy to reduce interest rate risk. Similar to interest rate floors and caps, the Company also offers swap contracts to its customers. Inter- est rate swap contracts are exchanges of interest payments, such as fixed-rate payments for floating-rate payments, 66 based on a notional principal amount. 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. For those contracts in a gain position, the replacement cost in the event of nonperformance by counterparties for the Company's interest rate swaps was approximately $86 million and $155 million at December 31, 1993 and 1992, respectively. Lease Commitments - -------------------------------------------------------------------------------- ----------------- The Company is obligated under a number of noncancelable operating leases for premises (including vacant premises) and equipment with terms ranging from 1-25 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, 1993:
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (in millions) Operating leases Capital leases Year ended December 31, 1994 $128 $ 11 1995 121 11 1996 108 10 1997 92 9 1998 79 9 Thereafter 419 99 ---- ---- Total minimum lease payments $947 149 ==== Executory costs (5) Amounts representing interest (84) ---- Present value of net minimum lease payments $ 60 ==== - --------------------------------------------------------------------------------
Total future minimum payments to be received under noncancelable operating subleases at December 31, 1993 were approximately $264 million; these payments are not reflected in the above table. Rental expense, net of rental income, for all operating leases was $99 million, $100 million and $103 million for the years ended December 31, 1993, 1992 and 1991, respectively. 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. Losses resulting from litigation are included in operating losses, which is a component of noninterest expense. Total operating losses were $52 million, $45 million and $81 million for the years ended December 31, 1993, 1992 and 1991, respectively. NOTE 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 footnotes in this Annual Report. 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, expected losses 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. 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. 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. 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. 67 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- The following table presents a summary of the Company's financial instruments, as defined by FAS 107:
- ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- (in millions) Carrying Estimated Carrying Estimated amount fair value amount fair value DECEMBER 31, 1993 - ---------------------------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS FINANCIAL LIABILITIES Cash and due from banks $ 2,644 $ 2,644 Deposits (3) $41,642 $41,863 Investment securities: Federal funds purchased and securities At cost 9,887 9,978 sold under repurchase agreements 1,079 1,079 At fair value 3,171 3,171 Commercial paper and other ------- ------- short-term borrowings 188 188 Total investment securities 13,058 13,149 Acceptances outstanding 70 70 Federal funds sold and securities purchased Senior debt (4) 2,196 2,244 under resale agreements 1,668 1,668 Subordinated debt (5) 1,965 2,008 Loans (1): Commercial 6,912 6,829 OFF-BALANCE SHEET Real estate 1-4 family first mortgage 7,458 7,534 FINANCIAL INSTRUMENTS Other real estate mortgage 8,286 8,127 Interest rate futures contracts $ (4) $ - Real estate construction 1,110 1,046 Interest rate forward contracts - - Consumer 8,103 7,973 Interest rate floor contracts purchased 11 136 Lease financing (2) 1,060 1,073 Interest rate cap contracts purchased 13 5 Foreign 18 17 Interest rate cap contracts written (8) (3) ------- ------- Interest rate swap contracts - 82 32,947 32,599 Cross currency swap contracts (5) 67 67 Less: Allowance for loan losses (1) 2,122 - Foreign exchange contracts 1 1 Net deferred fees on off-balance sheet instruments 14 - ------- ------- Net loans 30,811 32,599 Due from customers on acceptances 70 70 Nonmarketable equity investments 396 562 Other financial assets 73 73 DECEMBER 31,1992 - ---------------------------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS FINANCIAL LIABILITIES Cash and due from banks $ 2,690 $ 2,690 Deposits (6) $42,196 $42,499 Investment securities 9,338 9,428 Federal funds purchased and securities Federal funds sold and securities purchased sold under repurchase agreements 1,311 1,311 under resale agreements 1,183 1,183 Commercial paper and other Loans (net of allowance) (1)(6)(7) 34,709 35,162 short-term borrowings 202 202 Due from customers on acceptances 97 97 Acceptances outstanding 97 97 Nonmarketable equity investments 352 469 Senior debt (6)(7) 2,098 2,172 Other financial assets 223 220 Subordinated debt (7) 1,881 1,807 - ---------------------------------------------------------------------------------------------------------------------------------- (1) At December 31, 1993, the Company used variable discount rates which incorporate relative credit quality to reflect the credit risk on the fair value calculation. At December 31, 1992, the allowance for loan losses represented a reasonable estimate of the credit risk component of the fair value of loans. (2) The carrying amount and fair value exclude equipment leases of $152 million. (3) The carrying amount excludes deferred gains on off-balance sheet financial instruments of $2 million. (4) The carrying amount and fair value exclude obligations under capital leases of $60 million. (5) The Company has entered into cross currency swap agreements to hedge floating rate subordinated debt issued in German marks and British pounds. (6) The carrying amounts and fair values exclude nonfinancial instruments that equal $127 million for loans, $48 million for deposits and $61 million for senior debt. (7) The fair value of loans and senior debt includes amounts for fair values of off-balance sheet interest rate contracts that qualify as accounting hedges.
68 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 cost and fair value at December 31, 1993 and 1992 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. At December 31, 1993, the Company used variable discount rates which incorporate relative credit quality to reflect the credit risk on the fair value calculation. In initially applying FAS 107 at December 31, 1992, the Company utilized its allowance for loan losses to estimate the credit risk component of fair value. This approach was deemed appropriate in light of depressed economic conditions and the credit quality of the Company's loan portfolio, particularly the high level of nonaccrual loans that needed separate credit evaluation. In 1993, economic conditions improved, some liquidity returned to the real estate market and the Company's nonaccrual loans declined. Consequently, in 1993, the Company incorporated credit spreads in its discounted cash flow approach in calculating fair value. The improved conditions and lower interest rate environment have resulted in an increase of fair value at December 31, 1993 compared with December 31, 1992. 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 applied to this portfolio are between 5.5% and 9.5% at December 31, 1993 and 6.0% and 8.0% at December 31, 1992. Most of the discount rates for commercial loans, other real estate mortgage loans and real estate construction loans are between 8.2% and 9.5%, 5.5% and 9.3%, and 6.0% and 8.0% at December 31, 1993, 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 the Company's current pricing for loans of similar size, type, remaining maturity and repricing characteristics. Most of the discount rates applied to this portfolio are between 5.7% and 7.3% at December 31, 1993 and 5.2% and 9.0% at December 31, 1992. 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. 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 8.5% and 9.5% at December 31, 1993 and 9.5% and 10.5% at December 31, 1992. 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. Most of the discount rates applied to this portfolio are between 8.0% and 9.3% at December 31, 1993 and 9.7% and 10.0% at December 31, 1992. NONMARKETABLE EQUITY INVESTMENTS The Company's nonmarketable equity investments, including securities, are carried at cost and have a book value of $396 million and $352 million and an estimated fair value of $562 million and $469 million at December 31, 1993 and 1992, 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 savings deposits and market rate savings, is equal to the amount payable on demand at the measurement date. Although FASB'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 69 the previous table is their carrying value at December 31, 1993 and 1992. The fair value of certificates of deposit and 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. Off-Balance Sheet Financial Instruments - -------------------------------------------------------------------------------- --------------------- Commitments and standby letters of credit, not included in the previous table, have contractual values of $15,995 million and $890 million at December 31, 1993 and $16,870 million and $1,030 million at December 31, 1992. These instruments generate ongoing fees at the Company's current pricing levels. Derivative contracts are fair valued based on the replacement cost (mark-to-market value) of the contracts. 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 in this footnote is based on market quotes and fair value calculations as of December 31, 1993 and 1992. These amounts have not been updated since year end; therefore, the valuations may have changed significantly since that point in time. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1993 and 1992 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, 1993. 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, 1993 and 1992, and the results of their operations and cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick KPMG Peat Marwick Certified Public Accountants San Francisco, California January 18, 1994 70 Quarterly Financial Data - -------------------- WELLS FARGO & COMPANY AND SUBSIDIARIES -------------------- - --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF INCOME-QUARTERLY - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- (in millions) 1993 1992 QUARTER ENDED Quarter ended -------------------------------------- -------------------------------------- MARCH 31 JUNE 30 SEPT. 30 DEC. 31 March 31 June 30 Sept. 30 Dec. 31 INTEREST INCOME $ 970 $ 936 $ 925 $ 930 $1,091 $1,050 $1,013 $ 992 INTEREST EXPENSE 292 278 270 264 412 381 345 316 ----- ----- ----- ----- ------ ------ ------ ----- NET INTEREST INCOME 678 658 655 666 679 669 668 676 Provision for loan losses 210 140 120 80 215 300 400 300 ----- ----- ----- ----- ------ ------ ------ ----- Net interest income after provision for loan losses 468 518 535 586 464 369 268 376 ----- ----- ----- ----- ------ ------ ------ ----- NONINTEREST INCOME Service charges on deposit accounts 100 105 106 112 95 97 101 102 Fees and commissions 88 99 98 91 84 92 91 95 Trust and investment services income 46 48 48 48 39 41 42 44 Investment securities gains - - - - - - 45 - Other 25 23 12 44 27 41 6 17 ----- ----- ----- ----- ------ ------ ------ ----- Total noninterest income 259 275 264 295 245 271 285 258 ----- ----- ----- ----- ------ ------ ------ ----- NONINTEREST EXPENSE Salaries 183 198 193 210 173 177 182 184 Employee benefits 55 54 63 50 48 46 46 43 Net occupancy 53 57 56 58 57 55 55 56 Equipment 34 34 36 44 34 35 34 37 Federal deposit insurance 32 26 28 28 27 26 26 26 Other 182 162 159 167 156 167 165 181 ----- ----- ----- ----- ------ ------ ------ ----- Total noninterest expense 539 531 535 557 495 506 508 527 ----- ----- ----- ----- ------ ------ ------ ----- INCOME BEFORE INCOME TAX EXPENSE 188 262 264 324 214 134 45 107 Income tax expense 80 113 99 134 95 52 21 49 ----- ----- ----- ----- ------ ------ ------ ----- NET INCOME $ 108 $ 149 $ 165 $ 190 $ 119 $ 82 $ 24 $ 58 ===== ===== ===== ===== ====== ====== ====== ===== NET INCOME APPLICABLE TO COMMON STOCK $ 95 $ 137 $ 152 $ 178 $ 109 $ 70 $ 11 $ 45 ===== ===== ===== ===== ====== ====== ====== ===== PER COMMON SHARE Net income $1.72 $2.46 $2.74 $3.18 $ 2.09 $ 1.33 $ .21 $ .83 ===== ===== ===== ===== ====== ====== ====== ===== Dividends declared (1) $ .50 $ .50 $ .50 $ .75 $ .50 $ .50 $ .50 $ - ===== ===== ===== ===== ====== ====== ====== ===== Average common shares outstanding 55 56 56 56 52 52 53 54 ===== ===== ===== ===== ====== ====== ====== ===== - ----------------------------------------------------------------------------------------------------------------------------- (1) Beginning with the fourth quarter of 1992, the Company changed its dividend declaration schedule. Quarterly dividends are now considered at the Board of Directors' meeting the month following quarter end. Accordingly, no dividend was declared (recorded) in the fourth quarter of 1992. In January 1994, the Board of Directors declared a first quarter dividend of $1.00 per common share.
71 EX-23 11 EXHIBIT 23 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 December 31, 1993 Annual Report on Form 10-K and in the Prospectuses constituting part of the following Registration Statements of Wells Fargo & Company of our report dated January 18, 1994 relating to the consolidated balance sheet of Wells Fargo & Company and Subsidiaries as of December 31, 1993 and 1992, 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, 1993.
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 2-88534, 33-47434 S-3 Dividend Reinvestment and Common Stock Purchase and Share Custody Plan 33-45066 S-3 Shelf registration of convertible preferred stock 33-53514, 33-51227 S-3 Shelf registrations of senior or subordinated debt securities or preferred stock 33-42273, 33-39045 S-3 Shelf registrations of senior or subordinated debt securities KPMG PEAT MARWICK
San Francisco, California March 15, 1994 EX-13 12 APP TO EXH 13 WELLS FARGO & COMPANY APPENDIX TO EXHIBIT 13 PAGE DESCRIPTION NUMBER - ----------- ------ 1. Line graph of Return on Average Total Assets (ROA) for 1993, 1992, 1991, 1990 and 1989 (shown in %). 1993- 1.20 1992- 0.54 1991- 0.04 1990- 1.39 1989- 1.26 11 2. Line graph of Return on Common Stockholders' Equity (ROE) for 1993, 1992, 1991, 1990 and 1989 (shown in %). 1993- 16.74 1992- 7.93 1991- 0.07 1990- 25.07 1989- 24.49 11 3. Line graph of Net Interest Margin for 1993, 1992 and 1991, (shown in %). Also presented is the yield on total earning assets and the rate on total Funding sources for 1993, 1992 and 1991. See information presented in Table 3-AVERAGE BALANCES YIELDS AND RATES PAID on pages 14 and 15. 13 4. Bar graph of the Loan Mix at Year End shown as a percentage of total loans at December 31, 1993, 1992 and 1991.
1993 1992 1991 Commercial 21% 22% 25% Real estate 1-4 family first mortgage 23% 19% 20% Other real estate mortgage 25% 28% 24% Real estate construction 3% 4% 5% Consumer 24% 24% 23% Lease Financing 4% 3% 3% 21 ---- ---- ---- Total 100% 100% 100%
5. Line graphs of Nonaccrual Loans and New Loans Placed on Nonaccrual for the past eight quarters (shown in billions). See information presented in Table 16-QUARTERLY TREND OF CHANGES IN NONACCRUAL LOANS on page 27. 26 6. Bar graph of Core Deposits At Year End at December 31, 1993, 1992 and 1991 (shown in billions).
1993 1992 1991 Noninterest-bearing $9.7 $9.2 $8.2 Interest-bearing checking 4.8 4.8 4.7 Savings 2.5 2.9 3.5 Market rate savings 17.1 16.0 14.2 Saving certificates 7.2 9.0 12.3 ---- ---- ---- Total Core Deposits $41.3 $41.9 $42.9 33
7. Line graph of Risk-Based Capital Ratios at Year End at December 31, 1993, 1992 and 1991. See the information presented in Table 1 - RATIOS AND PER COMMON SHARE DATA on page 12. 35 8. Bar graph of the Price Range of Common Stock on an annual basis for 1993, 1992 and 1991 (shown in dollars). See information presented in Table 1-RATIOS AND PER COMMON SHARE DATA on page 12. 41 9. Bar graph of the Price Range of Common Stock on a quarterly basis for the past eight quarters (shown in dollars).
HIGH LOW AT QTR END 1993 ---- 1Q $109 1/2 $75 1/2 $108 5/8 2Q 120 95 3/4 110 1/4 3Q 127 3/8 107 1/4 126 3/8 4Q 133 105 7/8 129 3/8 1992 ---- 1Q 72 3/4 59 70 2Q 86 3/8 64 1/8 74 5/8 3Q 75 1/2 66 1/8 68 1/4 4Q 79 61 5/8 76 3/8 41
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