-----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, iqGZYNhzdcta3m4Qp3rYY5yudsGGfObDhApl9Y8yPqlO1APaFRNEh3IFGF2hHDXj SiUIrdloq491Z5ugJ1nqyw== 0000912057-94-002604.txt : 19940812 0000912057-94-002604.hdr.sgml : 19940812 ACCESSION NUMBER: 0000912057-94-002604 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940811 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06214 FILM NUMBER: 94543055 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-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1994 Commission file number 1-6214 ------------------------------------------ WELLS FARGO & COMPANY (Exact name of Registrant as specified in its charter) Delaware 13-2553920 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 420 Montgomery Street, San Francisco, California 94163 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 415-477-1000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Shares Outstanding July 31, 1994 ------------------ Common stock, $5 par value 53,915,181
FORM 10-Q TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Financial Statements Page ---- Consolidated Statement of Income . . . . . . . . . . . . . . . 2 Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . 3 Consolidated Statement of Changes in Stockholders' Equity. . . 4 Consolidated Statement of Cash Flows . . . . . . . . . . . . . 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Summary Financial Data . . . . . . . . . . . . . . . . . . . . 6 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Earnings Performance . . . . . . . . . . . . . . . . . . . . . 8 Net Interest Income. . . . . . . . . . . . . . . . . . . . . 8 Noninterest Income . . . . . . . . . . . . . . . . . . . . . 12 Noninterest Expense. . . . . . . . . . . . . . . . . . . . . 14 Balance Sheet Analysis . . . . . . . . . . . . . . . . . . . . 16 Investment Securities. . . . . . . . . . . . . . . . . . . . 16 Loan Portfolio . . . . . . . . . . . . . . . . . . . . . . . 19 Commercial real estate . . . . . . . . . . . . . . . . . . 19 Nonaccrual and Restructured Loans and Other Assets . . . . . 21 Quarterly trend of changes in nonaccrual loans . . . . . . 22 Changes in nonaccrual loans by loan category . . . . . . . 22 Quarterly trend of changes in foreclosed assets. . . . . . 23 Nonaccrual loans by performance category . . . . . . . . . 23 Loans 90 days past due and still accruing. . . . . . . . . 25 Allowance for Loan Losses. . . . . . . . . . . . . . . . . . 26 Other Assets . . . . . . . . . . . . . . . . . . . . . . . . 28 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Capital Adequacy/Ratios. . . . . . . . . . . . . . . . . . . 29 Asset/Liability Management . . . . . . . . . . . . . . . . . 31 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 32 SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 - -------------------------------------------------------------------------------- The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for such periods. Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year. The interim financial information should be read in conjunction with the Company's 1993 Annual Report on Form 10-K. 1 PART I - FINANCIAL INFORMATION ------------------------------ WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
- -------------------------------------------------------------------------------------------------------------- Quarter Six months ended June 30, ended June 30, -------------------- -------------------- (in millions) 1994 1993 1994 1993 - -------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans $ 733 $ 763 $1,438 $1,577 Investment securities 197 168 382 320 Federal funds sold and securities purchased under resale agreements 1 5 5 9 Other 1 -- 2 -- ----- ----- ------ ------ Total interest income 932 936 1,827 1,906 ----- ----- ------ ------ INTEREST EXPENSE Deposits 210 216 406 448 Federal funds purchased and securities sold under repurchase agreements 18 9 26 16 Commercial paper and other short-term borrowings 2 1 3 3 Senior and subordinated debt 47 52 95 103 ----- ----- ------ ------ Total interest expense 277 278 530 570 ----- ----- ------ ------ NET INTEREST INCOME 655 658 1,297 1,336 Provision for loan losses 60 140 120 350 ----- ----- ------ ------ Net interest income after provision for loan losses 595 518 1,177 986 ----- ----- ------ ------ NONINTEREST INCOME Service charges on deposit accounts 119 105 236 205 Fees and commissions 92 99 177 187 Trust and investment services income 50 48 100 94 Investment securities gains 3 -- 7 -- Other 35 23 79 48 ----- ----- ------ ------ Total noninterest income 299 275 599 534 ----- ----- ------ ------ NONINTEREST EXPENSE Salaries 196 198 385 381 Employee benefits 51 54 108 109 Net occupancy 53 57 108 110 Equipment 41 34 80 68 Federal deposit insurance 25 26 51 58 Other 160 162 317 344 ----- ----- ------ ------ Total noninterest expense 526 531 1,049 1,070 ----- ----- ------ ------ INCOME BEFORE INCOME TAX EXPENSE 368 262 727 450 Income tax expense 162 113 319 193 ----- ----- ------ ------ NET INCOME $ 206 $ 149 $ 408 $ 257 ----- ----- ------ ------ ----- ----- ------ ------ NET INCOME APPLICABLE TO COMMON STOCK $ 195 $ 137 $ 385 $ 232 ----- ----- ------ ------ ----- ----- ------ ------ PER COMMON SHARE Net income $3.57 $2.46 $ 6.98 $ 4.18 ----- ----- ------ ------ ----- ----- ------ ------ Dividends declared $1.00 $ .50 $ 2.00 $ 1.00 ----- ----- ------ ------ ----- ----- ------ ------ Average common shares outstanding 55 56 55 55 ----- ----- ------ ------ ----- ----- ------ ------ - --------------------------------------------------------------------------------------------------------------
2 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------------------------------------- JUNE 30, December 31, June 30, (in millions) 1994 1993 1993 - -------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 2,653 $ 2,644 $ 2,535 Investment securities: At cost (estimated fair value $9,996, $9,978 and $11,921) 10,261 9,887 11,700 At fair value 3,067 3,171 -- ------- ------- ------- Total investment securities 13,328 13,058 11,700 Federal funds sold and securities purchased under resale agreements 55 1,668 551 Loans 34,172 33,099 34,353 Allowance for loan losses 2,120 2,122 2,124 ------- ------- ------- Net loans 32,052 30,977 32,229 ------- ------- ------- Due from customers on acceptances 69 70 79 Accrued interest receivable 316 297 310 Premises and equipment, net 886 898 917 Goodwill 459 477 504 Other assets 2,469 2,424 2,504 ------- ------- ------- Total assets $52,287 $52,513 $51,329 ------- ------- ------- ------- ------- ------- LIABILITIES Noninterest-bearing deposits $ 9,475 $ 9,719 $ 9,047 Interest-bearing deposits 31,730 31,925 31,887 ------- ------- ------- Total deposits 41,205 41,644 40,934 Federal funds purchased and securities sold under repurchase agreements 2,331 1,079 1,145 Commercial paper and other short-term borrowings 195 188 153 Acceptances outstanding 69 70 79 Accrued interest payable 68 63 86 Other liabilities 848 933 838 Senior debt 1,990 2,256 2,163 Subordinated debt 1,455 1,965 1,920 ------- ------- ------- Total liabilities 48,161 48,198 47,318 ------- ------- ------- STOCKHOLDERS' EQUITY Preferred stock 489 639 639 Common stock - $5 par value, authorized 150,000,000 shares; issued and outstanding 54,255,187 shares, 55,812,592 shares and 55,544,255 shares 271 279 278 Additional paid-in capital 330 551 530 Retained earnings 3,103 2,829 2,568 Cumulative foreign currency translation adjustments (4) (4) (4) Investment securities valuation allowance (63) 21 -- ------- ------- ------- Total stockholders' equity 4,126 4,315 4,011 ------- ------- ------- Total liabilities and stockholders' equity $52,287 $52,513 $51,329 ------- ------- ------- ------- ------- ------- - --------------------------------------------------------------------------------------------------------------
3 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------ Six months ended June 30, ------------------------- (in millions) 1994 1993 - ------------------------------------------------------------------------------ PREFERRED STOCK Balance, beginning of period $ 639 $ 639 Preferred stock redeemed (150) -- ------ ------ Balance, end of period 489 639 ------ ------ COMMON STOCK Balance, beginning of period 279 276 Common stock issued under employee benefit and dividend reinvestment plans 1 2 Common stock repurchased (9) -- ------ ------ Balance, end of period 271 278 ------ ------ ADDITIONAL PAID-IN CAPITAL Balance, beginning of period 551 506 Common stock issued under employee benefit and dividend reinvestment plans 12 24 Common stock repurchased (233) -- ------ ------ Balance, end of period 330 530 ------ ------ RETAINED EARNINGS Balance, beginning of period 2,829 2,392 Net income 408 257 Preferred stock dividends (23) (25) Common stock dividends (111) (56) ------ ------ Balance, end of period 3,103 2,568 ------ ------ CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENTS Balance, beginning and end of period (4) (4) ------ ------ INVESTMENT SECURITIES VALUATION ALLOWANCE Balance, beginning of period 21 -- Change in unrealized net gain, after applicable taxes (84) -- ------ ------ Balance, end of period (63) -- ------ ------ Total stockholders' equity $4,126 $4,011 ------ ------ ------ ------ - ------------------------------------------------------------------------------
4 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------- Six months ended June 30, ------------------------ (in millions) 1994 1993 - ------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 408 $ 257 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 120 350 Depreciation and amortization 120 139 Deferred income tax provision (benefit) 5 (44) Decrease in net deferred loan fees (2) (3) Net increase in accrued interest receivable (19) (9) Net increase (decrease) in accrued interest payable 5 (2) Other, net (47) 153 ------- ------- Net cash provided by operating activities 590 841 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment securities: At cost: Proceeds from prepayments and maturities 2,066 709 Purchases (2,440) (3,071) At fair value: Proceeds from sales 17 -- Proceeds from prepayments and maturities 494 -- Purchases (545) -- Net (increase) decrease in loans resulting from originations and collections (1,244) 1,958 Proceeds from sales (including participations) of loans 61 192 Purchases (including participations) of loans (154) (18) Proceeds from sales of foreclosed assets 121 165 Net decrease in federal funds sold and securities purchased under resale agreements 1,613 632 Other, net (19) (93) ------- ------- Net cash provided (used) by investing activities (30) 474 ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in deposits (439) (1,310) Net increase (decrease) in short-term borrowings 1,259 (215) Proceeds from issuance of senior debt -- 365 Proceeds from issuance of subordinated debt -- 150 Repayment of senior debt (261) (401) Repayment of subordinated debt (526) (100) Proceeds from issuance of common stock 13 26 Repurchase of common stock (242) -- Redemption of preferred stock (150) -- Payment of cash dividends (134) (81) Other, net (71) 96 ------- ------- Net cash used by financing activities (551) (1,470) ------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM BANKS) 9 (155) Cash and cash equivalents at beginning of period 2,644 2,690 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,653 $ 2,535 ------- ------- ------- ------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 525 $ 572 ------- ------- ------- ------- Income taxes $ 346 $ 217 ------- ------- ------- ------- Noncash investing activities: Transfers from loans to foreclosed assets $ 125 $ 240 ------- ------- ------- ------- Transfers from foreclosed assets to nonaccrual loans $ -- $ 99 ------- ------- ------- ------- - -------------------------------------------------------------------------------
5 FINANCIAL REVIEW
SUMMARY FINANCIAL DATA - ---------------------------------------------------------------------------------------------------------------------------------- % Change Quarter ended June 30, 1994 from Six months ended ------------------------------- ------------------ ------------------ JUNE 30, Mar. 31, June 30, Mar. 31, June 30, JUNE 30, June 30, % (in millions) 1994 1994 1993 1994 1993 1994 1993 Change - ---------------------------------------------------------------------------------------------------------------------------------- FOR THE PERIOD Net income $ 206 $ 202 $ 149 2 % 38 % $ 408 $ 257 59 % Per common share Net income $ 3.57 $ 3.41 $ 2.46 5 45 $ 6.98 $ 4.18 67 Dividends declared 1.00 1.00 .50 -- 100 2.00 1.00 100 Average common shares outstanding 55 56 56 (2) (2) 55 55 -- Profitability ratios (annualized) Net income to average total assets (ROA) 1.59% 1.60% 1.18% (1) 35 1.59% 1.02% 56 Net income applicable to common stock to average common stockholders' equity (ROE) 21.67 21.09 16.73 3 30 21.38 14.46 48 Efficiency ratio (1) 55.2% 55.5% 56.9% (1) (3) 55.3% 57.2% (3) Average loans $ 33,630 $ 32,848 $ 34,582 2 (3) $ 33,242 $ 35,205 (6) Average assets 52,013 51,220 50,866 2 2 51,619 50,913 1 Average core deposits 40,232 40,385 40,203 -- -- 40,309 40,295 -- Net interest margin 5.56% 5.56% 5.71% -- (3) 5.56% 5.81% (4) Average staff (full-time equivalent) 19,500 19,400 21,300 1 (8) 19,500 21,200 (8) AT PERIOD END Investment securities $ 13,328 $ 13,766 $ 11,700 (3) 14 $ 13,328 $ 11,700 14 Loans 34,172 33,452 34,353 2 (1) 34,172 34,353 (1) Allowance for loan losses 2,120 2,121 2,124 -- -- 2,120 2,124 -- Assets 52,287 52,176 51,329 -- 2 52,287 51,329 2 Core deposits 40,249 41,145 40,592 (2) (1) 40,249 40,592 (1) Common stockholders' equity 3,637 3,700 3,372 (2) 8 3,637 3,372 8 Stockholders' equity 4,126 4,189 4,011 (2) 3 4,126 4,011 3 Tier 1 capital (2) 3,711 3,722 3,493 -- 6 3,711 3,493 6 Total capital (Tiers 1 and 2) (2) 5,372 5,397 5,375 -- -- 5,372 5,375 -- Capital ratios Common stockholders' equity to assets 6.96% 7.09% 6.57% (2) 6 6.96% 6.57% 6 Stockholders' equity to assets 7.89 8.03 7.82 (2) 1 7.89 7.82 1 Risk-based capital (2) Tier 1 capital 10.06 10.23 9.31 (2) 8 10.06 9.31 8 Total capital 14.56 14.83 14.33 (2) 2 14.56 14.33 2 Leverage (2) 7.20 7.34 6.94 (2) 4 7.20 6.94 4 Book value per common share $ 67.04 $ 66.87 $ 60.72 -- 10 $ 67.04 $ 60.72 10 COMMON STOCK PRICE High $159-1/2 $147-1/2 $120-0/0 8 33 $159-1/2 $120-0/0 33 Low 136-5/8 127-5/8 95-3/4 7 43 127-5/8 75-1/2 69 Period end 150-3/8 139-3/8 110-1/4 8 36 150-3/8 110-1/4 36 - ---------------------------------------------------------------------------------------------------------------------------------- (1) The efficiency ratio is defined as noninterest expense divided by the total of net interest income and noninterest income. (2) See the Capital Adequacy/Ratios section for additional information.
6 OVERVIEW - -------- Wells Fargo & Company (Parent) is a bank holding company whose principal subsidiary is Wells Fargo Bank N.A. (Bank). In this Form 10-Q, Wells Fargo & Company and its subsidiaries are referred to as the Company. Net income in the second quarter of 1994 was $206 million, or $3.57 per share, compared with $149 million, or $2.46 per share, in the second quarter of 1993. Net income for the first six months of 1994 was $408 million, or $6.98 per share, compared with $257 million, or $4.18 per share, in the first six months of 1993. The increase in earnings in the second quarter of 1994 compared with 1993 was primarily due to an $80 million, or 57%, decrease in the loan loss provision to $60 million. Return on average assets (ROA) was 1.59% in the second quarter and first half of 1994, compared with 1.18% and 1.02% in the same periods of 1993, respectively. Return on average common equity (ROE) was 21.67% and 21.38% in the second quarter and first half of 1994, respectively, compared with 16.73% and 14.46%, in the same periods of 1993, respectively. Net interest income on a taxable-equivalent basis was $656 million in the second quarter of 1994, roughly flat with $658 million a year ago. The Company's net interest margin was 5.56% for the second quarter of 1994, down from 5.71% in the same quarter of 1993. The decrease was substantially due to lower yields on earning assets. Noninterest income increased $24 million, or 9%, to $299 million in the second quarter of 1994, compared with $275 million in the second quarter of 1993. A significant portion of the increase was due to growth in service charges on deposit accounts. Noninterest expense decreased from $531 million in the second quarter of 1993 to $526 million in the second quarter of 1994, a decrease of 1%. A decline in foreclosed assets expense contributed to the drop. The Company's provision for loan losses was $60 million in the second quarter of 1994, compared with $60 million in the first quarter of 1994 and $140 million in the second quarter of 1993. The provision was $120 million in the first half of 1994, compared with $350 million in the first half of 1993. During the second quarter of 1994, net charge-offs totaled $61 million, or .73% of average total loans (annualized). This compared with $61 million, or .74%, during the first quarter of 1994 and $138 million, or 1.60%, during the second quarter of 1993. The allowance for loan losses was 6.20% of total loans at June 30, 1994, compared with 6.34% at March 31, 1994 and 6.18% at June 30, 1993. Total nonaccrual and restructured loans were $717 million, or 2.1% of total loans, at June 30, 1994, compared with $900 million, or 2.7%, at March 31, 1994 and $1,905 million, or 5.5%, at June 30, 1993. Loans new to nonaccrual in the second quarter of 1994 were $133 million, as compared with $52 million in the first quarter of 1994 and $264 million in the second quarter 7 of 1993. At June 30, 1994, an estimated $336 million, or 47%, of nonaccrual loans were less than 90 days past due, compared with an estimated $489 million, or 55%, at March 31, 1994. Foreclosed assets amounted to $344 million at June 30, 1994, $354 million at March 31, 1994 and $391 million at June 30, 1993. Common equity to total assets was 6.96% at June 30, 1994, compared with 7.09% and 6.57% at March 31, 1994 and June 30, 1993, respectively. The Company's total risk-based capital ratio at June 30, 1994 was 14.56% and its Tier 1 risk- based capital ratio was 10.06%, exceeding the minimum guidelines of 8% and 4%, respectively. At March 31, 1994, these risk-based capital ratios were 14.83% and 10.23%, respectively. The decrease in total and Tier 1 risk-based capital ratios between March 31, 1994 and June 30, 1994 resulted primarily from the repurchase of 1,124,856 shares of common stock during the second quarter. The Company has bought in the past, and will continue to buy, shares to offset stock issued or expected to be issued under the Company's employee benefit and dividend reinvestment plans. In addition to these shares, the Board of Directors authorized in July 1994 the repurchase of up to 5.4 million shares of the Company's outstanding common stock, representing 10% of the Company's shares as of June 30, 1994. This action reflects the Company's strong capital position and will allow the Company to effectively manage its overall capital position in the best interest of its shareholders. There is no scheduled date for completion of the program; the Company will purchase shares from time to time, subject to market conditions. Total and Tier 1 risk-based capital ratios at June 30, 1993 were 14.33% and 9.31%, respectively. The leverage ratios were 7.20%, 7.34% and 6.94% at June 30, 1994, March 31, 1994 and June 30, 1993, respectively. A weak recovery appears to have taken hold in the California economy. During the second quarter of 1994, business conditions continued to show moderate and erratic gains. The unemployment rate stabilized at 8.3% in May and June, compared to an average of 9% in the previous four months. A survey of small businesses indicated a continued improvement in the level of confidence, reflecting somewhat more buoyant sales. Home sales, however, declined because of a rise in mortgage interest rates, and the job level fell, with the biggest drop in manufacturing. EARNINGS PERFORMANCE - -------------------- NET INTEREST INCOME Net interest income on a taxable-equivalent basis was $656 million in the second quarter of 1994, compared with $658 million in the second quarter of 1993. Taxable-equivalent net interest income was $1,298 million in the first six months of 1994, compared with $1,337 million in the same period of 1993. Individual components of net interest income and net interest margin are presented in the rate/yield table on pages 10 and 11. The Company's net interest margin was 5.56% for the second quarter of 1994, compared with 5.71% for the second quarter of 1993. The decrease was substantially due to lower yields on earning assets, reflecting lower hedging income, a significant portion of which was offset by a decrease in nonaccrual loans. 8 Hedging income from derivative contracts decreased approximately $40 million, or 35 basis points of the net interest margin, from the second quarter of 1993 and $62 million, or 27 basis points, from the first half of 1993 due to the maturity of contracts. 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 comparatively lower rate environment. Loans averaged $33.6 billion in the second quarter of 1994, a 3% decrease from $34.6 billion in the second quarter of 1993. The two largest decreases occurred in other real estate mortgage loans and 1-4 family junior lien mortgage loans. Most of the decreases indicated in the rate/yield table were due to loan repayments. Loans totaled $34.2 billion at June 30, 1994, up 2% from March 31, 1994 and up 3% from December 31, 1993. This is the second consecutive quarterly increase in loan balances since 1990. The Company expects growth to continue during 1994 in total outstanding loans. Substantially all of this growth will be from 1-4 family first mortgage, consumer, and small business, middle market and other commercial loans. Investment securities averaged $13.4 billion during the second quarter of 1994, a 22% increase from $11.0 billion in the second quarter of 1993. This increase was primarily a result of cash provided by loan repayments; such cash was predominantly invested in private collateralized mortgage obligations and U.S. Treasury securities. Investment securities are expected to decrease as the cash received from their maturities is used to fund loan growth. Average core deposits were $40.2 billion and funded 77% and 79% of the Company's average total assets in the second quarters of 1994 and 1993, respectively. Despite the recent rise in interest rates, the net interest margin and net interest income for the last half of 1994 are expected to remain about the same as the first half of 1994, assuming that there are no significant increases in deposit rates. In the long-term, the net interest margin is expected to decline modestly, assuming deposit rates will gradually increase in response to rising market interest rates. However, net interest income is not currently expected to change significantly. 9
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) - ---------------------------------------------------------------------------------------------------------------------------------- Quarter ended June 30, ------------------------------------------------------------------------ 1994 1993 -------------------------------- ---------------------------------- INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ (in millions) BALANCE RATES EXPENSE balance rates expense - ---------------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Investment securities: At cost: U.S. Treasury securities $ 2,734 4.84% $ 33 $ 2,287 5.13% $ 29 Securities of U.S. government agencies and corporations 6,155 6.02 93 8,041 6.44 129 Obligations of states and political subdivisions 18 -- -- 24 7.11 1 Private collateralized mortgage obligations 1,337 6.14 21 433 5.82 6 Other securities 118 5.50 2 171 5.32 3 ------- ---- ------- ---- Total investment securities at cost 10,362 5.72 149 10,956 6.12 168 At fair value (2): U.S. Treasury securities 97 6.84 2 -- -- -- Securities of U.S. government agencies and corporations 1,594 5.79 24 -- -- -- Private collateralized mortgage obligations 1,230 6.91 22 -- -- -- Other securities 72 13.77 1 -- -- -- ------- ---- ------- ---- Total investment securities at fair value 2,993 6.40 49 -- -- -- ------- ---- ------- ---- Total investment securities 13,355 5.87 198 10,956 6.12 168 Federal funds sold and securities purchased under resale agreements 60 4.03 1 581 3.15 5 Loans: Commercial 6,854 9.26 157 7,314 9.05 165 Real estate 1-4 family first mortgage 8,463 6.76 143 6,585 8.20 135 Other real estate mortgage 8,089 8.52 172 9,653 8.04 193 Real estate construction 910 8.92 20 1,319 8.69 29 Consumer: Real estate 1-4 family junior lien mortgage 3,385 7.59 64 4,012 6.65 67 Credit card 2,614 15.27 100 2,600 15.62 101 Other revolving credit and monthly payment 2,016 9.27 47 1,917 9.20 44 ------- ---- ------- ---- Total consumer 8,015 10.52 211 8,529 9.96 212 Lease financing 1,261 9.21 29 1,182 9.84 29 Foreign 38 4.72 1 -- -- -- ------- ---- ------- ---- Total loans 33,630 8.74 733 34,582 8.84 763 Other 52 6.00 1 1 -- -- ------- ---- ------- ---- Total earning assets $47,097 7.91 933 $46,120 8.13 936 ------- ---- ------- ---- ------- ------- FUNDING SOURCES Interest-bearing liabilities: Deposits: Interest-bearing checking $ 4,679 .98 11 $ 4,596 1.23 15 Savings deposits 2,600 1.99 13 2,797 2.24 16 Market rate savings 16,974 2.34 99 16,366 2.28 91 Savings certificates 7,022 4.18 73 8,118 4.39 89 Certificates of deposit 202 7.58 4 218 8.01 4 Other time deposits 108 6.70 2 113 2.58 1 Deposits in foreign offices 780 4.06 8 10 -- -- ------- ---- ------- ---- Total interest-bearing deposits 32,365 2.60 210 32,218 2.70 216 Federal funds purchased and securities sold under repurchase agreements 1,876 3.86 18 1,141 2.79 9 Commercial paper and other short-term borrowings 176 3.78 2 163 2.68 1 Senior debt 2,034 5.05 26 2,187 4.92 27 Subordinated debt 1,449 5.87 21 1,974 5.11 25 ------- ---- ------- ---- Total interest-bearing liabilities 37,900 2.93 277 37,683 2.96 278 Portion of noninterest-bearing funding sources 9,197 -- -- 8,437 -- -- ------- ---- ------- ---- Total funding sources $47,097 2.35 277 $46,120 2.42 278 ------- ---- ------- ---- ------- ------- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (3) 5.56% $656 5.71% $658 ------ ---- ----- ---- ------ ---- ----- ---- NONINTEREST-EARNING ASSETS Cash and due from banks $ 2,613 $ 2,454 Other 2,303 2,292 ------- ------- Total noninterest-earning assets $ 4,916 $ 4,746 ------- ------- ------- ------- NONINTEREST-BEARING FUNDING SOURCES Deposits $ 8,957 $ 8,326 Other liabilities 1,049 941 Preferred stockholders' equity 489 639 Common stockholders' equity 3,618 3,277 Noninterest-bearing funding sources used to fund earning assets (9,197) (8,437) ------- ------- Net noninterest-bearing funding sources $ 4,916 $ 4,746 ------- ------- ------- ------- TOTAL ASSETS $52,013 $50,866 ------- ------- ------- ------- - ---------------------------------------------------------------------------------------------------------------------------------- (1) The average prime rate of Wells Fargo Bank was 6.90% and 6.00% for the quarters ended June 30, 1994 and 1993, respectively, and 6.46% and 6.00% for the six months ended June 30, 1994 and 1993, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 4.46% and 3.24% for the quarters ended June 30, 1994 and 1993, respectively, and 4.02% and 3.25% for the six months ended June 30, 1994 and 1993, respectively. (2) Yields are based on amortized cost balances. (3) Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal and applicable state income taxes. The federal statutory tax rate was 35% for the quarter and six months ended June 30, 1994 and 34% for the respective periods in 1993.
10
- ---------------------------------------------------------------- Six months ended June 30, - ---------------------------------------------------------------- 1994 1993 - --------------------------- -------------------------------- INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ BALANCE RATES EXPENSE balance rates expense - ---------------------------------------------------------------- $ 2,655 4.86% $ 64 $ 2,221 5.19% $ 57 6,159 6.08 187 7,746 6.49 251 18 7.20 1 24 7.62 1 1,144 5.76 33 218 5.80 6 118 5.48 3 159 5.32 5 ------- ------ ------- ------ 10,094 5.71 288 10,368 6.18 320 49 6.84 2 -- -- -- 1,637 5.91 49 -- -- -- 1,259 6.18 40 -- -- -- 78 13.94 3 -- -- -- ------- ------ ------- ------ 3,023 6.15 94 -- -- -- ------- ------ ------- ------ 13,117 5.82 382 10,368 6.18 320 316 3.24 5 560 3.22 9 6,742 9.09 303 7,502 9.38 349 8,117 6.84 278 6,633 8.36 277 8,124 8.45 341 9,846 7.95 389 984 8.60 42 1,405 8.85 62 3,439 7.43 128 4,057 7.09 144 2,577 15.31 197 2,650 15.71 208 1,978 9.27 91 1,931 9.40 90 ------- ------ ------- ------ 7,994 10.43 416 8,638 10.25 442 1,245 9.29 58 1,180 9.97 59 36 4.54 1 1 -- -- ------- ------ ------- ------ 33,242 8.69 1,439 35,205 9.00 1,578 52 6.00 2 -- -- -- ------- ------ ------- ------ $46,727 7.84 1,828 $46,133 8.30 1,907 ------- ------ ------- ------ ------- ------- $ 4,695 .98 23 $ 4,610 1.34 31 2,583 1.99 26 2,855 2.33 33 17,065 2.28 193 16,202 2.35 188 7,032 4.16 145 8,415 4.41 184 205 7.67 8 228 8.11 9 106 6.63 3 117 4.69 3 420 4.01 8 8 -- -- ------- ------ ------- ------ 32,106 2.55 406 32,435 2.79 448 1,478 3.57 26 1,112 2.80 16 163 3.42 3 192 2.84 3 2,118 4.77 50 2,191 4.97 54 1,563 5.72 45 1,926 5.13 49 ------- ------ ------- ------ 37,428 2.85 530 37,856 3.03 570 9,299 -- -- 8,277 -- -- ------- ------ ------- ------ $46,727 2.28 530 $46,133 2.49 570 ------- ------ ------- ------ ------- ------- 5.56% $1,298 5.81% $1,337 ---- ------ ------ ------ ---- ------ ------ ------ $ 2,585 $ 2,435 2,307 2,345 ------- ------- $ 4,892 $ 4,780 ------- ------- ------- ------- $ 8,934 $ 8,213 1,067 974 554 639 3,636 3,231 (9,299) (8,277) ------- ------- $ 4,892 $ 4,780 ------- ------- ------- ------- $51,619 $50,913 ------- ------- ------- ------- - ----------------------------------------------------------------
11
NONINTEREST INCOME - ------------------------------------------------------------------------------------------------------------------ Quarter Six months ended June 30, ended June 30, -------------- % -------------- % (in millions) 1994 1993 Change 1994 1993 Change - ------------------------------------------------------------------------------------------------------------------ Service charges on deposit accounts $119 $105 13 % $236 $205 15 % Fees and commissions: Credit card membership and other credit card fees 15 18 (17) 31 35 (11) Debit and credit card merchant fees 13 22 (41) 25 41 (39) Charges and fees on loans 11 12 (8) 21 23 (9) Mutual fund and annuity sales fees 12 12 -- 21 23 (9) Shared ATM network fees 11 9 22 20 18 11 All other 30 26 15 59 47 26 ---- ---- ---- ---- Total fees and commissions 92 99 (7) 177 187 (5) Trust and investment services income: Asset management and custody fees 32 32 -- 63 63 -- Mutual fund management fees 11 9 22 22 17 29 All other 7 7 -- 15 14 7 ---- ---- ---- ---- Total trust and investment services income 50 48 4 100 94 6 Investment securities gains 3 -- -- 7 -- -- Income (loss) from equity investments accounted for by the: Cost method 9 (1) -- 17 13 31 Equity method 7 5 40 16 13 23 Check printing charges 10 10 -- 20 19 5 Gains from dispositions of operations -- 1 (100) 10 1 900 Real estate investment gains (losses) 1 -- -- 3 (7) -- Gains on sales of loans 1 3 (67) 2 6 (67) All other 7 5 40 11 3 267 ---- ---- ---- ---- Total $299 $275 9 % $599 $534 12 % ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- - ------------------------------------------------------------------------------------------------------------------
The growth in service charges on deposit accounts in the second quarter of 1994 compared with the second quarter of 1993 was largely due to increased fees for overdrafts and higher business checking charges. The decrease in the total fees and commissions in the second quarter of 1994 compared with the second quarter of 1993 was primarily due to a decline in debit and credit card merchant fees. The decrease in debit and credit card merchant fees was primarily due to an alliance that the Company entered into in November 1993. The agreement with Card Establishment Services (CES) formed an alliance for merchant credit and debit card processing services. Under this agreement, the Company is responsible for marketing and sales, initial merchant credit analysis and customer service; CES provides technology and processing operations. The Company retains an interest in the net revenues from processing the transactions that are now reported as income from equity investments accounted for by the equity method, rather than reported as income from debit and credit card merchant fees. As a result, income from the alliance contributed approximately $2 million to income from equity investments in the second quarter of 1994. 12 A significant portion of the decrease in debit and credit card merchant fees was offset by an increase in "all other" fees and commissions, which includes amortization expense for purchased mortgage servicing rights. This amortization expense totaled $2 million in the second quarter of 1994, compared with $3 million in the same period of 1993. At June 30, 1994, the balance of purchased mortgage servicing rights was $38 million, compared with $18 million at June 30, 1993. The increase in the balance was due to a $25 million purchase of additional servicing rights in March 1994. The increase in trust and investment services income in the second quarter of 1994 compared with the second quarter of 1993 was due to greater mutual fund investment management fees, reflecting the overall growth in the fund families' net assets. The Overland Express family of 16 funds, which had $3.7 billion of assets under management at June 30, 1994, compared with $4.0 billion at June 30, 1993, is sold through brokers around the country. The Stagecoach family of 24 funds had $4.8 billion of assets under management at June 30, 1994, compared with $3.3 billion at June 30, 1993. The Stagecoach family consists of both retail and institutional funds. The retail funds, first introduced in 1992, are primarily distributed through the branch network. These funds had $4.1 billion under management at June 30, 1994, compared with $3.3 billion at June 30, 1993. The institutional funds, first introduced in mid-1993, are offered primarily to selected groups of investors and certain corporations, partnerships and other business entities. At June 30, 1994, these funds had $700 million of assets under management. In addition to managing Overland Express Funds and all the funds in the Stagecoach family, the Company also managed or maintained personal trust, employee benefit trust and agency assets of approximately $45 billion at June 30, 1994, compared with $43 billion at June 30, 1993. Mutual fund management fees are expected to continue to be higher in 1994 than 1993 levels. The investment securities gains for the second quarter of 1994 resulted from the sale of marketable equity securities from the available-for-sale portfolio. Income from cost method equity investments was predominantly due to net gains on the sales of and distributions from investments in nonmarketable equity investments of $8 million in the second quarter of 1994. In the second quarter of 1993, there were $5 million in write-downs of nonmarketable equity investments. Noninterest income is expected to continue to increase as compared with 1993, reflecting growth from fee-based products, such as mutual funds and deposit- related services. 13
NONINTEREST EXPENSE - --------------------------------------------------------------------------------------------------------------------------------- Quarter Six months ended June 30, ended June 30, --------------- % --------------- % (in millions) 1994 1993 Change 1994 1993 Change - --------------------------------------------------------------------------------------------------------------------------------- Salaries $196 $198 (1)% $ 385 $ 381 1 % Employee benefits 51 54 (6) 108 109 (1) Net occupancy 53 57 (7) 108 110 (2) Equipment 41 34 21 80 68 18 Federal deposit insurance 25 26 (4) 51 58 (12) Contract services 25 14 79 44 26 69 Advertising and promotion 18 19 (5) 33 34 (3) Certain identifiable intangibles 16 19 (16) 32 42 (24) Operating losses 11 10 10 25 26 (4) Telecommunications 12 11 9 23 22 5 Postage 11 11 -- 22 22 -- Outside professional services 10 11 (9) 19 21 (10) Goodwill 9 9 -- 18 19 (5) Check printing 7 8 (13) 15 17 (12) Stationery and supplies 8 8 -- 15 15 -- Travel and entertainment 8 7 14 15 13 15 Escrow and collection agency fees 5 6 (17) 10 13 (23) Security 5 4 25 10 9 11 Foreclosed assets -- 9 (100) 6 35 (83) Outside data processing 2 4 (50) 5 8 (38) All other 13 12 8 25 22 14 ---- ---- ----- ------ ------ Total $526 $531 (1)% $1,049 $1,070 (2)% ---- ---- ----- ------ ------ ----- ---- ---- ----- ------ ------ ----- - ---------------------------------------------------------------------------------------------------------------------------------
Salaries expense and employee benefits decreased in the second quarter of 1994 compared with the same period of 1993 primarily due to lower full-time equivalent (FTE) staff. The Company's FTE staff, including hourly employees, averaged approximately 19,500 in the second quarter of 1994, compared with approximately 21,300 in the second quarter of 1993. Equipment expense increased 21% in the second quarter of 1994 compared with the same quarter of 1993 primarily due to increased systems expenditures, particularly new software. The increase in contract services expense in the second quarter of 1994 compared with the same quarter of 1993 was predominantly due to the development of new products and services and system upgrades throughout the Company. 14 The table below shows the major components of foreclosed assets expense.
- ------------------------------------------------------------------------------- Quarter Six months ended June 30, ended June 30, -------------- --------------- (in millions) 1994 1993 1994 1993 - ------------------------------------------------------------------------------- Operating expenses $14 $ 15 $ 27 $ 28 Operating revenues (8) (12) (15) (21) Net (gains) losses from write-downs/sales (6) 6 (6) 28 --- ---- ---- ---- Total $-- $ 9 $ 6 $ 35 --- ---- ---- ---- --- ---- ---- ---- - -------------------------------------------------------------------------------
The decline in foreclosed assets expense compared with the second quarter of 1993 was substantially due to a decrease in write-downs from $18 million in the second quarter of 1993 to $3 million in the second quarter of 1994. The Company intends to continue to emphasize disposing of its foreclosed assets. The Company expects total noninterest expense in 1994 to be lower than 1993 primarily due to expected decreases in foreclosed assets expense, personnel- related expense and FDIC expense. 15
BALANCE SHEET ANALYSIS - ---------------------- INVESTMENT SECURITIES - ---------------------------------------------------------------------------------------------------------------------------------- JUNE 30, December 31, June 30, 1994 1993 1993 ------------------- ------------------ ------------------- ESTIMATED Estimated Estimated FAIR fair fair (in millions) COST VALUE Cost value Cost value - ---------------------------------------------------------------------------------------------------------------------------------- HELD-TO-MATURITY SECURITIES AT COST: U.S. Treasury securities $ 2,684 $2,646 $2,365 $2,383 $ 2,272 $ 2,300 Securities of U.S. government agencies and corporations (1) 6,053 5,886 6,570 6,644 8,120 8,312 Obligations of states and political subdivisions 18 18 18 18 23 23 Securities issued by foreign governments 88 87 90 91 91 92 Private collateralized mortgage obligations (2) 1,388 1,330 815 813 1,117 1,117 Corporate debt securities 30 29 29 29 23 23 ------- ------ ------ ------ ------- ------- Total debt securities 10,261 9,996 9,887 9,978 11,646 11,867 Corporate and Federal Reserve Bank stock -- -- -- -- 54 54 ------- ------ ------ ------ ------- ------- Total $10,261 $9,996 $9,887 $9,978 $11,700 $11,921 ------- ------ ------ ------ ------- ------- ------- ------ ------ ------ ------- ------- AVAILABLE-FOR-SALE SECURITIES AT FAIR VALUE: U.S. Treasury securities $ 197 $ 197 $ -- $ -- $ -- $ -- Securities of U.S. government agencies and corporations (1) 1,611 1,552 1,747 1,749 -- -- Private collateralized mortgage obligations (2) 1,328 1,252 1,340 1,334 -- -- Corporate debt securities 24 37 31 48 -- -- ------- ------ ------ ------ ------- ------- Total debt securities 3,160 3,038 3,118 3,131 Marketable equity securities 16 29 17 40 -- -- ------- ------ ------ ------ ------- ------- Total $ 3,176 $3,067 $3,135 $3,171 $ -- $ -- ------- ------ ------ ------ ------- ------- ------- ------ ------ ------ ------- ------- - ---------------------------------------------------------------------------------------------------------------------------------- (1) All securities of U.S. government agencies and corporations are mortgage-backed securities. (2) All private collateralized mortgage obligations are AAA rated bonds collateralized by 1-4 family residential first mortgages.
Investment securities were $13.3 billion at June 30, 1994, a 3% decrease from $13.8 billion at March 31, 1994 and a 14% increase from $11.7 billion at June 30, 1993. The investment securities portfolio at June 30, 1994 was comprised of $10.3 billion of held-to-maturity at cost securities and $3.1 billion of available-for-sale at fair value securities. (There were no trading securities for any of the periods presented.) The Company's classification of available- for-sale securities was influenced by accounting and regulatory requirements related to certain mortgage-backed securities. The increase from June 30, 1993 was due to the cash provided by loan repayments used to purchase securities. Investment securities are expected to decrease as the cash received from their maturities is used to fund loan growth. 16 At June 30, 1994, the held-to-maturity securities portfolio had an estimated unrealized net loss of $265 million (which reflected estimated unrealized gross gains of $10 million), or 2.6% of the cost of the portfolio. At December 31, 1993, the held-to-maturity portfolio had an estimated unrealized net gain of $91 million (which reflected estimated unrealized gross losses of $23 million), or .9% of the cost of the portfolio. At June 30, 1994, the available-for-sale securities portfolio had an unrealized net loss of $63 million, net of tax, reported as a separate component of stockholders' equity, compared with an unrealized net gain of $21 million at December 31, 1993. The unrealized net pretax loss of $109 million, or 3.4% of the cost of the portfolio, at June 30, 1994 was comprised of unrealized gross pretax losses of $139 million and unrealized gross pretax gains of $17 million on debt securities and unrealized gross pretax losses of $4 million and unrealized gross pretax gains of $17 million on marketable equity securities. The unrealized net loss in both the held-to-maturity and available-for-sale portfolios was predominantly due to investments in mortgage-backed securities. These unrealized net losses reflected an increasing interest rate environment. As interest rates rise, the Company expects the unrealized losses to increase and prepayments to decrease. Although those securities classified as available- for-sale can be sold, the Company currently has no intention of selling these securities and expects to collect the full amount due for both interest and principal. Realized gross gains from the available-for-sale securities portfolio amounted to $3 million in the second quarter of 1994. The realized gross gain resulted from the sale of marketable equity securities. There were no realized losses in the second quarter of 1994. There were $284 thousand of investment securities sold in the second quarter of 1993, resulting in a $10 thousand gain. 17 The following table provides the expected remaining maturities and yields (taxable-equivalent basis) of debt securities within the investment portfolio.
- ---------------------------------------------------------------------------------------------------------------------------------- June 30, 1994 ---------------------------------------------------------------------------------------------- Expected remaining principal maturity ---------------------------------------------------------------------------------------------- Weighted average expected After one year remaining through five After five years Weighted maturity One year or less years through ten years After ten years Total average (yrs.- ---------------- -------------- ----------------- --------------- (in millions) amount yield mos.) Amount Yield Amount Yield Amount Yield Amount Yield - ---------------------------------------------------------------------------------------------------------------------------------- HELD-TO-MATURITY SECURITIES: U.S. Treasury securities $ 2,684 4.76% 1-2 $1,435 4.91% $1,249 4.59% $ -- --% $ -- --% Securities of U.S. government agencies and corporations 6,053 6.07 3-7 1,254 5.60 3,635 5.92 900 7.00 264 7.20 Obligations of states and political subdivisions 18 6.48 4-0 3 6.42 11 6.53 2 6.44 2 6.37 Securities issued by foreign governments 88 5.17 1-5 36 4.63 52 5.54 -- -- -- -- Private collateralized mortgage obligations 1,388 6.10 2-10 202 5.55 1,083 6.19 103 6.26 -- -- Corporate debt securities 30 6.33 2-1 6 6.11 24 6.38 -- -- -- -- ------- ------ ------ ------ ---- Total cost $10,261 5.73% 2-10 $2,936 5.25% $6,054 5.69% $1,005 6.92% $266 7.19% ------- ----- ------ ----- ------ ---- ------ ---- ---- ---- ------- ----- ------ ----- ------ ---- ------ ---- ---- ---- ESTIMATED FAIR VALUE $ 9,996 $2,913 $5,858 $ 969 $256 ------- ------ ------ ------ ---- ------- ------ ------ ------ ---- AVAILABLE-FOR-SALE SECURITIES (1): U.S. Treasury securities $ 197 6.81% 4-4 $ -- --% $ 197 6.81% $ -- --% $ -- --% Securities of U.S. government agencies and corporations 1,611 5.56 2-11 232 6.73 1,253 5.35 126 5.50 -- -- Private collateralized mortgage obligations 1,328 6.28 4-4 121 5.71 766 6.32 431 6.35 10 6.48 Corporate debt securities 24 22.46 6-2 -- -- -- -- 24 22.46 -- -- ------- ------ ------ ------ ---- Total cost $ 3,160 6.07% 3-7 $ 353 6.38% $2,216 5.82% $ 581 6.83% $ 10 6.48% ------- ----- ------ ---- ------ ---- ------ ----- ---- ---- ------- ----- ------ ---- ------ ---- ------ ----- ---- ---- ESTIMATED FAIR VALUE $ 3,038 $ 348 $2,122 $ 558 $ 10 ------- ------ ------ ------ ---- ------- ------ ------ ------ ---- TOTAL COST OF DEBT SECURITIES $13,421 5.81% 3-0 $3,289 5.37% $8,270 5.73% $1,586 6.89% $276 7.17% ------- ----- ------ ------ ---- ------ ---- ------ ----- ---- ---- ------- ----- ------ ------ ---- ------ ---- ------ ----- ---- ---- - ---------------------------------------------------------------------------------------------------------------------------------- (1) The weighted average yield is computed using the amortized cost of available-for-sale investment securities carried at fair value.
The weighted average expected remaining maturity of the debt securities portfolio was 3 years at June 30, 1994, compared with 2 years and 9 months at March 31, 1994 and 2 years and 7 months at December 31, 1993. The increase in the expected remaining maturity reflects a higher interest rate environment, in which prepayments are likely to slow down. The short-term debt securities portfolio serves to maintain asset liquidity and to fund loan growth. 18
LOAN PORTFOLIO - ------------------------------------------------------------------------------------------------------------------- % Change June 30, 1994 from ---------------------- JUNE 30, Dec. 31, June 30, Dec. 31, June 30, (in millions) 1994 1993 1993 1993 1993 - ------------------------------------------------------------------------------------------------------------------- Commercial (1)(2) $ 7,184 $ 6,912 $ 7,323 4 % (2)% Real estate 1-4 family first mortgage 8,681 7,458 6,634 16 31 Other real estate mortgage (3) 7,965 8,286 9,510 (4) (16) Real estate construction 985 1,110 1,290 (11) (24) Consumer: Real estate 1-4 family junior lien mortgage 3,355 3,583 3,946 (6) (15) Credit card 2,706 2,600 2,569 4 5 Other revolving credit and monthly payment 1,998 1,920 1,899 4 5 ------- ------- ------- Total consumer 8,059 8,103 8,414 (1) (4) Lease financing 1,267 1,212 1,181 5 7 Foreign 31 18 1 72 -- ------- ------- ------- Total loans (net of unearned income, including net deferred loan fees, of $337, $336 and $352) $34,172 $33,099 $34,353 3 % (1)% ------- ------- ------- --- ---- ------- ------- ------- --- ---- - ------------------------------------------------------------------------------------------------------------------- (1) Includes loans to real estate developers of $415 million, $505 million and $598 million at June 30, 1994, December 31, 1993 and June 30, 1993, respectively. (2) Includes agricultural loans (loans to finance agricultural production and other loans to farmers) of $673 million, $643 million and $590 million at June 30, 1994, December 31, 1993 and June 30, 1993, respectively. (3) Includes agricultural loans secured by real estate of $236 million, $225 million and $270 million at June 30, 1994, December 31, 1993 and June 30, 1993, respectively.
The real estate 1-4 family first mortgage portfolio grew by 16% in the first six months of 1994. The majority of the growth was due to the shift in originations of 30-year fixed rate loans into adjustable rate mortgage loans, which are generally held for portfolio purposes. The table below presents comparative period-end commercial real estate loans.
- ------------------------------------------------------------------------------------------------------------------- % Change June 30, 1994 from ---------------------- JUNE 30, Dec. 31, June 30, Dec. 31, June 30, (in millions) 1994 1993 1993 1993 1993 - ------------------------------------------------------------------------------------------------------------------- Commercial loans to real estate developers (1) $ 415 $ 505 $ 598 (18)% (31)% Other real estate mortgage 7,965 8,286 9,510 (4) (16) Real estate construction 985 1,110 1,290 (11) (24) ------ ------ ------- Total $9,365 $9,901 $11,398 (5)% (18)% ------ ------ ------- --- --- ------ ------ ------- --- --- - ------------------------------------------------------------------------------------------------------------------- (1) Included in commercial loans.
19 The Company's commercial real estate loan portfolio was $9.4 billion at June 30, 1994, compared with $9.9 billion at December 31, 1993 and $11.4 billion at June 30, 1993, a 5% and 18% decrease, respectively. These decreases were primarily due to reduced lending and payments received. Over the years, the Company has prospered as an active commercial real estate lender. However, as a result of the recession and overbuilt real estate markets, the Company's earnings during the past three years were significantly affected by its relatively high levels of commercial real estate loans. The Company's real estate borrowers with properties located in Southern California have been particularly affected. 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 certain types of commercial real estate which could last for a number of years. However, a substantial amount of liquidity has returned to the real estate markets, mostly in apartments and shopping centers and, to a lesser degree, in other property types. Many developers are successfully financing acquisition or development programs through the capital markets and some banks are showing interest in financing certain product types. This liquidity is contributing significantly to the Company's progress in reducing its nonaccrual loans and foreclosed assets. 20
NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS - ------------------------------------------------------------------------------------------------------------------- JUNE 30, March 31, Dec. 31, Sept. 30, June 30, (in millions) 1994 1994 1993 1993 1993 - ------------------------------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial (1)(2) $ 121 $ 165 $ 252 $ 441 $ 486 Real estate 1-4 family first mortgage 88 90 99 96 95 Other real estate mortgage (3) 410 413 578 850 1,035 Real estate construction 72 202 235 278 241 Consumer: Real estate 1-4 family junior lien mortgage 19 22 27 25 28 Other revolving credit and monthly payment 2 3 3 6 13 ------ ------ ------ ------ ------ Total nonaccrual loans 712 895 1,194 1,696 1,898 Restructured loans 5 5 6 6 7 ------ ------ ------ ------ ------ Nonaccrual and restructured loans 717 900 1,200 1,702 1,905 As a percentage of total loans 2.1% 2.7% 3.6% 5.1% 5.5% Foreclosed assets (4) 344 354 348 357 391 Real estate investments (5) 11 11 15 15 23 ------ ------ ------ ------ ------ Total nonaccrual and restructured loans and other assets $1,072 $1,265 $1,563 $2,074 $2,319 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ - ------------------------------------------------------------------------------------------------------------------- (1) Includes loans to real estate developers of $41 million, $47 million, $91 million, $116 million and $115 million at June 30, 1994, March 31, 1994, December 31, 1993, September 30, 1993 and June 30, 1993, respectively. (2) Includes agricultural loans of $2 million, $2 million, $9 million, $24 million and $35 million at June 30, 1994, March 31, 1994, December 31, 1993, September 30, 1993 and June 30, 1993, respectively. (3) Includes agricultural loans secured by real estate of $3 million, $4 million, $24 million, $24 million and $26 million at June 30, 1994, March 31, 1994, December 31, 1993, September 30, 1993 and June 30, 1993, respectively. (4) Includes agricultural properties of $25 million, $25 million, $26 million, $23 million and $31 million at June 30, 1994, March 31, 1994, December 31, 1993, September 30, 1993 and June 30, 1993, respectively. (5) Represents the amount of real estate investments (contingent interest loans accounted for as investments) that would be classified as nonaccrual if such assets were loans. Real estate investments totaled $28 million, $29 million, $34 million, $39 million and $51 million at June 30, 1994, March 31, 1994, December 31, 1993, September 30, 1993 and June 30, 1993, respectively.
Nonaccrual loans at June 30, 1994 declined for the seventh consecutive quarter following nine quarters of increases. This decline is expected to continue throughout 1994. The general decline of nonaccrual loans over the last seven quarters largely resulted from loan payments and loans returned to accrual, together with a reduction in new loans placed on nonaccrual. New loans placed on nonaccrual in the second quarter of 1994 increased for the first time since the second quarter of 1993. While the overall credit quality of the loan portfolio continues to improve, the Company anticipates that the amount of new loans placed on nonaccrual will fluctuate from quarter to quarter. The placement of commercial and real estate loans on nonaccrual, as well as transfers to foreclosed assets, are likely to continue to occur, although not at levels seen in the last three years, until, and for a period after, the current economic environment improves and the oversupply of properties is reduced with resulting increases in occupancy and rental rates. It may take years to absorb the surplus office capacity in certain geographic markets (particularly in Southern California) where the Company has commercial real estate outstandings. 21 The table below summarizes the quarterly trend of the changes in total nonaccrual loans.
- ------------------------------------------------------------------------------------------------------------------- June 30, March 31, Dec. 31, Sept. 30, June 30, (in millions) 1994 1994 1993 1993 1993 - ------------------------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF QUARTER $895 $1,194 $1,696 $1,898 $1,966 New loans placed on nonaccrual 133 52 113 195 264 Charge-offs (27) (35) (55) (90) (71) Payments (91) (121) (309) (188) (144) Transfers to foreclosed assets (27) (37) (64) (32) (104) Transfers from foreclosed assets (1) -- -- -- -- 99 Loans returned to accrual (172) (157) (188) (81) (107) Loans sold -- (3) -- (2) (5) Other additions (deductions) 1 2 1 (4) -- ---- ------ ------ ------ ------ BALANCE, END OF QUARTER $712 $ 895 $1,194 $1,696 $1,898 ---- ------ ------ ------ ------ ---- ------ ------ ------ ------ - ------------------------------------------------------------------------------------------------------------------- (1) Reclassification due to clarification of criteria used in determining when a loan is in-substance foreclosed.
The table below summarizes the changes in nonaccrual loans by loan category for the quarters ended June 30, 1994 and March 31, 1994.
- ------------------------------------------------------------------------------------------------------------------- Real estate 1-4 family Other real first estate Real estate (in millions) Commercial mortgage mortgage construction Consumer Total - ------------------------------------------------------------------------------------------------------------------- QUARTER ENDED JUNE 30, 1994 Balance, beginning of quarter $165 $90 $ 413 $202 $25 $ 895 New loans placed on nonaccrual (1) 19 9 90 14 1 133 Charge-offs (4) (1) (22) -- -- (27) Payments: Principal (21) (9) (19) (26) (4) (79) Interest applied to principal (5) -- (6) -- (1) (12) Transfers to foreclosed assets (6) -- (19) (2) -- (27) Loans returned to accrual (27) (1) (35) (109) -- (172) Other additions (deductions) -- -- 8 (7) -- 1 ---- --- ----- ---- --- ------ Balance, end of quarter $121 $88 $ 410 $ 72 $21 $ 712 ---- --- ----- ---- --- ------ ---- --- ----- ---- --- ------ QUARTER ENDED MARCH 31, 1994 Balance, beginning of quarter $252 $99 $ 578 $235 $30 $1,194 New loans placed on nonaccrual 15 9 25 2 1 52 Charge-offs (22) -- (12) (1) -- (35) Payments: Principal (32) (6) (45) (18) (3) (104) Interest applied to principal (5) -- (8) (4) -- (17) Transfers to foreclosed assets -- (6) (16) (12) (3) (37) Loans returned to accrual (43) (3) (111) -- -- (157) Loans sold -- (3) -- -- -- (3) Other additions -- -- 2 -- -- 2 ---- --- ----- ---- --- ------ Balance, end of quarter $165 $90 $ 413 $202 $25 $ 895 ---- --- ----- ---- --- ------ ---- --- ----- ---- --- ------ - ------------------------------------------------------------------------------------------------------------------- (1) Additions to other real estate mortgage loans include $28 million for land (excluding 1-4 family land) and $22 million for office buildings.
22 The table below summarizes the quarterly trend of the changes in foreclosed assets.
- ---------------------------------------------------------------------------------------------------- JUNE 30, March 31, Dec. 31, Sept. 30, June 30, (in millions) 1994 1994 1993 1993 1993 - ---------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF QUARTER $354 $348 $357 $391 $510 Additions 63 62 100 65 150 Sales (63) (42) (89) (76) (117) Charge-offs (3) (8) (10) (8) (23) Write-downs (3) (6) (7) (10) (18) Transfers to nonaccrual loans (1) -- -- -- -- (99) Other deductions (4) -- (3) (5) (12) ---- ---- ---- ---- ---- BALANCE, END OF QUARTER $344 $354 $348 $357 $391 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- - ---------------------------------------------------------------------------------------------------- (1) Reclassification due to clarification of criteria used in determining when a loan is in-substance foreclosed. Approximately 52% of the foreclosed assets at June 30, 1994 have been in the Company's portfolio less than one year.
Nonaccrual Loans by Performance Category - ---------------------------------------- At June 30, 1994, an estimated $336 million, or 47%, of nonaccrual loans were less than 90 days past due, including an estimated $242 million, or 34%, that were current (less than 30 days past due) as to payment of principal and interest. This compares with an estimated $489 million, or 55%, of nonaccrual loans that were less than 90 days past due at March 31, 1994, including an estimated $363 million, or 41%, that were current. For all loans on nonaccrual during the second and first quarter of 1994 (including loans no longer on nonaccrual at June 30, 1994 and March 31, 1994), cash interest payments of $18 million and $23 million, respectively, were received while the loans were on nonaccrual status. Of the $18 million received in the second quarter, $7 million was recognized as interest income and $11 million was applied to principal. Of the $23 million received in the first quarter, $6 million was recognized as interest income and $17 million was applied to principal. The average nonaccrual book principal loan balances (net of charge-offs and interest applied to principal) were $830 million and $1,094 million for the quarters ended June 30, 1994 and March 31, 1994, respectively. The table on the following page presents the estimated amount of nonaccrual loans that were contractually past due and those that were contractually current at the end of the second and first quarters of 1994. There can be no assurance that individual borrowers will continue to perform at the level indicated or that the performance characteristics will not change significantly. Both book and contractual principal balances are presented in the table, the difference reflecting 23 charge-offs and interest applied to principal. The ratio of book to contractual principal balance was 66% at June 30, 1994, compared with 68% at March 31, 1994.
- -------------------------------------------------------------------------------------------------------------- Cumulative cash Book interest Contractual principal Cumulative applied to principal (in millions) balance charge-offs(5) principal(5) balance - -------------------------------------------------------------------------------------------------------------- JUNE 30, 1994 ------------------------------------------------------ Contractually past due (1): Payments not made (2): 90 days or more past due $ 155 $ 4 $ -- $ 159 Less than 90 days past due 14 1 -- 15 ----- ----- ------ ------ 169 5 -- 174 ----- ----- ------ ------ Payments made (3): 90 days or more past due 221 80 27 328 Less than 90 days past due 80 43 20 143 ----- ----- ------ ------ 301 123 47 471 ----- ----- ------ ------ Total past due 470 128 47 645 Contractually current (4) 242 125 61 428 ----- ----- ------ ------ Total nonaccrual loans $ 712 $ 253 $ 108 $1,073 ----- ----- ------ ------ ----- ----- ------ ------ March 31, 1994 ---------------------------------------------------- Contractually past due (1): Payments not made (2): 90 days or more past due $ 136 $ 4 $ -- $ 140 Less than 90 days past due 4 6 -- 10 ----- ----- ------ ------ 140 10 -- 150 ----- ----- ------ ------ Payments made (3): 90 days or more past due 270 127 38 435 Less than 90 days past due 122 61 36 219 ----- ----- ------ ------ 392 188 74 654 ----- ----- ------ ------ Total past due 532 198 74 804 Contractually current (4) 363 102 55 520 ----- ----- ------ ------ Total nonaccrual loans $ 895 $ 300 $ 129 $1,324 ----- ----- ------ ------ ----- ----- ------ ------ - -------------------------------------------------------------------------------------------------------------- (1) Contractually past due is defined as a borrower whose loan principal or interest payment is 30 days or more past due. (2) Borrower has made no payments since being placed on nonaccrual. (3) Borrower has made some payments since being placed on nonaccrual. Approximately $239 million and $283 million of these loans had some payments made on them during the second and first quarters of 1994, respectively. (4) Contractually current is defined as a loan for which principal and interest are being paid in accordance with the terms of the loan. All of the contractually current loans were placed on nonaccrual due to uncertainty of receiving full timely collection of interest or principal. (5) Cumulative amounts recorded since inception of the loan.
24 Loans 90 Days or More Past Due and Still Accruing - ------------------------------------------------- The following table shows loans contractually past due 90 days or more as to interest or principal, but not included in the nonaccrual or restructured categories. All loans in this category are both well-secured and in the process of collection or are consumer loans or real estate 1-4 family first mortgage loans that are exempt under regulatory rules from being classified as nonaccrual. The balance at June 30, 1994 does not include $38 million for 1-4 family first mortgage loan customers and $2 million for 1-4 family junior lien mortgage loan customers affected by the January 1994 Northridge earthquake who applied for and received a deferment of payments, ranging from three to six months. These loans are considered current under the new terms of the deferment agreement.
- ------------------------------------------------------------------------------------------------------------------- JUNE 30, March 31, Dec. 31, Sept. 30, June 30, (in millions) 1994 1994 1993 1993 1993 - ------------------------------------------------------------------------------------------------------------------- Commercial $ 7 $ 6 $ 4 $ 10 $ 2 Real estate 1-4 family first mortgage 25 19 19 31 21 Other real estate mortgage 53 68 14 28 53 Real estate construction 4 11 8 4 8 Consumer: Real estate 1-4 family junior lien mortgage 7 6 6 8 9 Credit card 33 40 43 42 46 Other revolving credit and monthly payment 2 1 1 2 2 ---- ---- --- ---- ---- Total consumer 42 47 50 52 57 Lease financing -- 1 -- -- -- ---- ---- --- ---- ---- Total $131 $152 $95 $125 $141 ---- ---- --- ---- ---- ---- ---- --- ---- ---- - -------------------------------------------------------------------------------------------------------------------
25
ALLOWANCE FOR LOAN LOSSES - ------------------------------------------------------------------------------------------------------------------- Quarter ended Six months ended ----------------------------------- ---------------------- JUNE 30, March 31, June 30, JUNE 30, June 30, (in millions) 1994 1994 1993 1994 1993 - ------------------------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF PERIOD $2,121 $2,122 $2,122 $2,122 $2,067 Provision for loan losses 60 60 140 120 350 Loan charge-offs: Commercial (1) (5) (25) (29) (30) (58) Real estate 1-4 family first mortgage (6) (5) (7) (11) (12) Other real estate mortgage (22) (13) (49) (35) (115) Real estate construction (1) (4) (16) (5) (40) Consumer: Real estate 1-4 family junior lien mortgage (7) (8) (6) (15) (14) Credit card (35) (40) (48) (75) (95) Other revolving credit and monthly payment (10) (8) (10) (18) (23) ------ ------ ------ ------ ------ Total consumer (52) (56) (64) (108) (132) Lease financing (4) (4) (5) (8) (10) ------ ------ ------ ------ ------ Total loan charge-offs (90) (107) (170) (197) (367) ------ ------ ------ ------ ------ Loan recoveries: Commercial (2) 12 8 15 20 37 Real estate 1-4 family first mortgage 1 3 1 4 1 Other real estate mortgage 2 10 4 12 12 Real estate construction 2 5 1 7 1 Consumer: Real estate 1-4 family junior lien mortgage 1 1 -- 2 1 Credit card 7 5 6 12 11 Other revolving credit and monthly payment 2 3 3 5 6 ------ ------ ------ ------ ------ Total consumer 10 9 9 19 18 Lease financing 2 11 2 13 5 ------ ------ ------ ------ ------ Total loan recoveries 29 46 32 75 74 ------ ------ ------ ------ ------ Total net loan charge-offs (61) (61) (138) (122) (293) ------ ------ ------ ------ ------ BALANCE, END OF PERIOD $2,120 $2,121 $2,124 $2,120 $2,124 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total net loan charge-offs as a percentage of average total loans (annualized) .73% .74% 1.60% .74% 1.67% ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Allowance as a percentage of total loans 6.20% 6.34% 6.18% 6.20% 6.18% ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ - ------------------------------------------------------------------------------------------------------------------- (1) Includes charge-offs of loans to real estate developers of none, $10 million and none in the quarters ended June 30, 1994, March 31, 1994 and June 30, 1993, respectively, and $10 million and $4 million in the six months ended June 30, 1994 and 1993, respectively. (2) Includes recoveries from loans to real estate developers of none in the quarters ended June 30, 1994, March 31, 1994 and June 30, 1993, and none and $1 million in the six months ended June 30, 1994 and 1993, respectively.
26 The table below presents net charge-offs by loan category.
- ---------------------------------------------------------------------------------------------------------------------------------- Quarter ended ------------------------------------------------------------------ JUNE 30, 1994 March 31, 1994 June 30, 1993 ------------------- ------------------ ------------------- % OF % of % of AVERAGE average average (in millions) AMOUNT LOANS(1) Amount loans(1) Amount loans(1) - ---------------------------------------------------------------------------------------------------------------------------------- Commercial $(7) (.41)% $17 1.01 % $ 14 .78% Real estate 1-4 family first mortgage 5 .24 2 .10 6 .36 Other real estate mortgage 20 1.00 3 .18 45 1.89 Real estate construction (1) (.57) (1) (.31) 15 4.46 Consumer: Real estate 1-4 family junior lien mortgage 6 .71 7 .78 6 .57 Credit card (2) 28 4.49 35 5.39 42 6.49 Other revolving credit and monthly payment 8 1.39 5 1.18 7 1.46 --- --- ---- Total consumer 42 2.11 47 2.35 55 2.57 Lease financing 2 .68 (7) (2.36) 3 .97 --- --- ---- Total net loan charge-offs $61 .73 % $61 .74 % $138 1.60% --- ---- --- ----- ---- ---- --- ---- --- ----- ---- ---- - ---------------------------------------------------------------------------------------------------------------------------------- (1) Calculated on an annualized basis. (2) The second quarter of 1994 includes $2 million of recoveries from the sale of previously charged off loans.
Total net charge-offs for the second quarter of 1994 were .73% of average total loans on an annualized basis. Net charge-offs were largely due to credit card loans and other real estate mortgage loans. Credit card net charge-offs were primarily due to bankruptcies and the current economic environment (particularly in Southern California). The other real estate mortgage net charge-offs were substantially due to loans related to land (excluding 1-4 family land) and shopping centers. Although net charge-offs during 1991 and 1992 were higher than historical norms, they steadily declined during 1993 and are expected to remain lower in 1994 than 1993 due to the improvement in the credit quality of the Company's loan portfolio. The Company considers the allowance for loan losses of $2,120 million adequate to cover losses inherent in loans, loan commitments and standby letters of credit at June 30, 1994. The Company's determination of the level of the allowance and, correspondingly, the provision for loan losses rests upon various judgments and assumptions, including general (particularly California) economic conditions, loan portfolio composition, prior loan loss experience and the Company's ongoing examination process and that of its regulators. Statement of Financial Accounting Standards No. 114 (FAS 114), Accounting by Creditors for Impairment of a Loan, addresses the accounting treatment of certain impaired loans and amends FASB Statements No. 5 and 15; however, it does not address the overall adequacy of the allowance for loan losses. The Statement is effective January 1, 1995, and can only be applied prospectively. The Company does not currently intend to implement the Statement before its effective date. Based on the information available at June 30, 1994 and the Company's current interpretations of FAS 114, the allowance will not increase as a result of adopting this Statement. 27
OTHER ASSETS - -------------------------------------------------------------------------------------------------------------- JUNE 30, December 31, June 30, (in millions) 1994 1993 1993 - -------------------------------------------------------------------------------------------------------------- Net deferred tax asset (1) $ 942 $ 884 $ 806 Nonmarketable equity investments 399 396 348 Certain identifiable intangible assets 361 373 413 Foreclosed assets 344 348 391 Other 423 423 546 ------ ------ ------ Total other assets $2,469 $2,424 $2,504 ------ ------ ------ ------ ------ ------ - -------------------------------------------------------------------------------------------------------------- (1) Net of a valuation allowance of $2 million, $2 million and $5 million at June 30, 1994, December 31, 1993 and June 30, 1993, respectively.
The Company estimates that approximately $819 million of the $942 million net deferred tax asset at June 30, 1994 could be realized by the recovery of previously paid federal taxes; however, the Company expects to actually realize the federal net deferred tax asset by claiming deductions against future taxable income. The balance of approximately $123 million relates to approximately $1.6 billion of net deductions that are expected to reduce future California taxable income (California tax law does not permit recovery of previously paid taxes). The Company believes that it is more likely than not that it will have sufficient future California taxable income to fully utilize these deductions. The identifiable intangible assets are generally amortized using an accelerated method, which is based on estimated useful lives ranging from 5 to 15 years. Amortization expense was $19 million, $20 million and $23 million for the quarters ended June 30, 1994, December 31, 1993 and June 30, 1993, respectively. DEPOSITS
- -------------------------------------------------------------------------------------------------------------- JUNE 30, December 31, June 30, (in millions) 1994 1993 1993 - -------------------------------------------------------------------------------------------------------------- Noninterest-bearing $ 9,475 $ 9,719 $ 9,047 Interest-bearing checking 4,498 4,789 4,474 Savings 2,577 2,544 2,690 Market rate savings 16,663 17,084 16,514 Savings certificates 7,036 7,155 7,867 ------- ------- ------- Core deposits 40,249 41,291 40,592 Other 956 353 342 ------- ------- ------- Total deposits $41,205 $41,644 $40,934 ------- ------- ------- ------- ------- ------- - --------------------------------------------------------------------------------------------------------------
28 CAPITAL ADEQUACY/RATIOS Risk-based capital (RBC) guidelines issued by the Federal Reserve Board (FRB) establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures. The Company's Tier 1 and Tier 2 capital components are presented on the following page. The guidelines require a minimum total RBC ratio of 8%, with at least half of the total capital in the form of Tier 1 capital. To supplement the RBC guidelines, the FRB established a minimum leverage ratio guideline of 3% of Tier 1 capital to average total assets. The decrease in the Company's RBC and leverage ratios at June 30, 1994 compared with December 31, 1993 resulted primarily from the repurchase of 555,853 shares of common stock during the first quarter of 1994 and 1,124,856 shares of common stock in the second quarter of 1994 and secondarily from the redemption of $150 million in Series A preferred stock (at its liquidation preference carrying amount) in the first quarter of 1994. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a "well capitalized" bank must have a Tier 1 RBC ratio of at least 6%, a combined Tier 1 and Tier 2 ratio of at least 10% and a leverage ratio of at least 5%. At June 30, 1994, the Bank had a Tier 1 RBC ratio of 10.81%, a combined Tier 1 and Tier 2 ratio of 14.01% and a leverage ratio of 7.68%. 29 The table below presents the Company's risk-based capital and leverage ratios.
- -------------------------------------------------------------------------------------------------------------- JUNE 30, Dec. 31, June 30, (in billions) 1994 1993 1993 - -------------------------------------------------------------------------------------------------------------- Tier 1: Common stockholders' equity $ 3.6 $ 3.7 $ 3.4 Preferred stock .5 .6 .6 Less goodwill and other deductions (1) (.4) (.5) (.5) ------ ------ ------ Total Tier 1 capital 3.7 3.8 3.5 ------ ------ ------ Tier 2: Mandatory convertible debt .1 .1 .1 Subordinated debt and unsecured senior debt 1.1 1.1 1.3 Allowance for loan losses allowable in Tier 2 .5 .4 .5 ------ ------ ------ Total Tier 2 capital 1.7 1.6 1.9 ------ ------ ------ Total risk-based capital $ 5.4 $ 5.4 $ 5.4 ------ ------ ------ ------ ------ ------ Risk-weighted balance sheet assets $ 36.6 $ 36.1 $ 37.3 Risk-weighted off-balance sheet items: Commitments to make or purchase loans 1.6 1.3 1.4 Standby letters of credit .6 .6 .7 Other .1 .2 .2 ------ ------ ------ Total risk-weighted off-balance sheet items 2.3 2.1 2.3 ------ ------ ------ Goodwill and other deductions (1) (.4) (.5) (.5) Allowance for loan losses not included in Tier 2 (1.6) (1.7) (1.6) ------ ------ ------ Total risk-weighted assets $ 36.9 $ 36.0 $ 37.5 ------ ------ ------ ------ ------ ------ Risk-based capital ratios: Tier 1 capital (4% minimum requirement) 10.06% 10.48% 9.31% Total capital (8% minimum requirement) 14.56 15.12 14.33 Leverage ratio (3% minimum requirement) (2) 7.20% 7.39% 6.94% - -------------------------------------------------------------------------------------------------------------- (1) Other deductions include the unrealized net gain (loss) on available-for-sale investment securities carried at fair value, as currently required by federal regulatory agencies. (2) Tier 1 capital divided by quarterly average total assets (excluding goodwill and other items which were deducted to arrive at Tier 1 capital).
30 ASSET/LIABILITY MANAGEMENT As is typical in the banking industry, most of the Company's assets and liabilities are sensitive to fluctuations in interest rates. Accordingly, an essential objective of asset/liability management is to control interest rate risk. The Company manages portfolio assets by matching them with funding sources that have similar repricing characteristics. The Company uses various asset/liability strategies to manage the repricing characteristics of its assets, liabilities and off-balance sheet financial instruments to ensure that exposure to interest rate fluctuations is limited within Company guidelines of acceptable levels of risk-taking. Hedging strategies, including the use of interest rate contracts, are used to reduce mismatches in interest rate maturities of portfolio assets and their funding sources. One way to measure the impact that future changes in interest rates will have on net interest income is through a cumulative gap measure. The gap represents the net position of assets and liabilities subject to repricing in specified time periods. Generally, a liability sensitivity gap indicates that there would be a net negative impact on the net interest margin of the Company over the next year in an increasing interest rate environment since the Company's liabilities would reprice to higher market interest rates before its assets would. A net positive impact would result from a decreasing interest rate environment. At June 30, 1994, the under-one-year cumulative gap was a $415 million (.8% of total assets) net liability position, compared with a $236 million (.5% of total assets) net liability position at March 31, 1994 and a $1,402 million (2.7% of total assets) net asset position at December 31, 1993. The increase in the net liability position at June 30, 1994 compared with March 31, 1994 was significantly due to an increase in short-term borrowings and deposits in foreign offices, as well as a lower level of investment securities that are expected to mature or prepay within a year due to the increasing interest rate environment. This was primarily offset by a decrease in market rate savings and an increase in the under-one-year balance of the real estate 1-4 family first mortgage portfolio. Two adjustments to the cumulative gap provide comparability with banks that present interest rate sensitivity in an alternative manner. However, management does not believe that these adjustments necessarily depict its interest rate risk. The first adjustment excludes noninterest earning assets, noninterest- bearing liabilities and stockholders' equity from the cumulative gap calculation so only earning assets, interest-bearing liabilities and interest rate financial contracts are reported. The second adjustment moves interest-bearing checking and savings deposits from the nonmarket, over-one-year liability category to the shortest rate maturity category. The second adjustment reflects the availability of the deposits for immediate withdrawal. The resulting adjusted under-one-year cumulative gap (net liability position) was $7.4 billion, $7.5 billion and $5.9 billion at June 30, 1994, March 31, 1994 and December 31, 1993, respectively. Since interest rate changes do not affect all categories of assets and liabilities equally or simultaneously, a cumulative gap analysis alone cannot be used to evaluate the Company's interest rate sensitivity position. To supplement traditional gap analysis, the Company performs simulation modeling to estimate the potential effects of changing interest rates. The process allows the Company to fully explore the complex relationships within the gap over time and various interest rate environments. 31 PART II - OTHER INFORMATION --------------------------- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 4 The Company hereby agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of securities of the Company. 11 Computation of Earnings Per Common Share 99 Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges, including interest on deposits, were 2.26 and 1.90 for the quarters ended June 30, 1994 and 1993, respectively, and 2.30 and 1.76 for the six months ended 1994 and 1993, respectively. The ratios of earnings to fixed charges, excluding interest on deposits, were 5.54 and 4.49 for the quarters ended June 30, 1994 and 1993, respectively, and 5.78 and 4.04 for the first half of 1994 and 1993, respectively. (b) The Company filed the following reports on Form 8-K during the second quarter of 1994 and through the date hereof: (1) April 19, 1994 under Item 5, containing the Press Release that announced the Company's financial results for the quarter ended March 31, 1994 (2) July 20, 1994 under Item 5, containing the Press Releases that announced the Company's financial results for the quarter ended June 30, 1994, the share repurchase program, the quarterly common stock dividend and the retirement of Chairman Carl E. Reichardt on December 31, 1994 SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 11, 1994. WELLS FARGO & COMPANY By:FRANK A. MOESLEIN ------------------------------------ Frank A. Moeslein Executive Vice President and Controller (Principal Accounting Officer) 32 EX-11 2 EXHIBIT 11 EXHIBIT 11 WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE
- -------------------------------------------------------------------------------------------------------------- Quarter Six months ended June 30, ended June 30, -------------------- --------------------- (in millions) 1994 1993 1994 1993 - -------------------------------------------------------------------------------------------------------------- PRIMARY EARNINGS PER COMMON SHARE Net income $ 206 $ 149 $ 408 $ 257 Less preferred dividends 11 12 23 25 ----- ----- ----- ----- Net income for calculating primary earnings per common share $ 195 $ 137 $ 385 $ 232 ----- ----- ----- ----- ----- ----- ----- ----- Average common shares outstanding 55 56 55 55 ----- ----- ----- ----- ----- ----- ----- ----- PRIMARY EARNINGS PER COMMON SHARE $3.57 $2.46 $6.98 $4.18 ----- ----- ----- ----- ----- ----- ----- ----- FULLY DILUTED EARNINGS PER COMMON SHARE (1) Net income $ 206 $ 149 $ 408 $ 257 Less preferred dividends 11 12 23 25 ----- ----- ----- ----- Net income for calculating fully diluted earnings per common share $ 195 $ 137 $ 385 $ 232 ----- ----- ----- ----- ----- ----- ----- ----- Average common shares outstanding 55 56 55 55 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 2 2 ----- ----- ----- ----- Average common shares outstanding as adjusted 56 57 57 57 ----- ----- ----- ----- ----- ----- ----- ----- FULLY DILUTED EARNINGS PER COMMON SHARE $3.48 $2.41 $6.80 $4.09 ----- ----- ----- ----- ----- ----- ----- ----- - -------------------------------------------------------------------------------------------------------------- (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-99 3 EXHIBIT 99 EXHIBIT 99 WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
- -------------------------------------------------------------------------------------------------------------- Quarter ended June 30, Six months ended June 30, --------------------- ------------------------ (in millions) 1994 1993 1994 1993 - -------------------------------------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 368 $ 262 $ 727 $ 450 Fixed charges 291 291 558 596 ----- ----- ------ ------ $ 659 $ 553 $1,285 $1,046 ----- ----- ------ ------ ----- ----- ------ ------ Fixed charges(1): Interest expense $ 277 $ 278 $ 530 $ 570 Estimated interest component of net rental expense 14 $ 13 28 26 ----- ----- ------ ------ $ 291 $ 291 $ 558 $ 596 ----- ----- ------ ------ ----- ----- ------ ------ Ratio of earnings to fixed charges (2) 2.26 1.90 2.30 1.76 ----- ----- ------ ------ ----- ----- ------ ------ EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 368 $ 262 $ 727 $ 450 Fixed charges 81 75 152 148 ----- ----- ------ ------ $ 449 $ 337 $ 879 $ 598 ----- ----- ------ ------ ----- ----- ------ ------ Fixed charges: Interest expense $ 277 $ 278 $ 530 $ 570 Less interest on deposits (210) (216) (406) (448) Estimated interest component of net rental expense 14 13 28 26 ----- ----- ------ ------ $ 81 $ 75 $ 152 $ 148 ----- ----- ------ ------ ----- ----- ------ ------ Ratio of earnings to fixed charges 5.54 4.49 5.78 4.04 ----- ----- ------ ------ ----- ----- ------ ------ - -------------------------------------------------------------------------------------------------------------- (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.
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