-----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, AhCI0sGmL4Ok1GNeVTnvLv+n3UBIxB7wVkhQtLExAgotbTKdIKPYsePdLGUaMHYy ERhooNn3vNR0rP9aUyIibw== 0000912057-94-003791.txt : 19941111 0000912057-94-003791.hdr.sgml : 19941111 ACCESSION NUMBER: 0000912057-94-003791 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941110 SROS: NYSE SROS: PSE 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: 94558678 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 FORM 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 September 30, 1994 Commission file number 1-6214 _____________________________ WELLS FARGO & COMPANY (Exact name of Registrant as specified in its charter) Delaware 13-2553920 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 420 Montgomery Street, San Francisco, California 94163 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 415-477-1000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding October 31, 1994 ------------------ Common stock, $5 par value 52,055,652 FORM 10-Q TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Financial Statements Page ---- Consolidated Statement of Income . . . . . . . . . . . . . . . . . 2 Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . 3 Consolidated Statement of Changes in Stockholders' Equity. . . . . 4 Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Summary Financial Data . . . . . . . . . . . . . . . . . . . . . . 6 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Earnings Performance . . . . . . . . . . . . . . . . . . . . . . . 8 Net Interest Income. . . . . . . . . . . . . . . . . . . . . . . 8 Noninterest Income . . . . . . . . . . . . . . . . . . . . . . . 12 Noninterest Expense. . . . . . . . . . . . . . . . . . . . . . . 14 Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Balance Sheet Analysis . . . . . . . . . . . . . . . . . . . . . . 16 Investment Securities. . . . . . . . . . . . . . . . . . . . . . 16 Loan Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . 18 Commercial real estate . . . . . . . . . . . . . . . . . . . . 18 Nonaccrual and Restructured Loans and Other Assets . . . . . . . 20 Quarterly trend of changes in nonaccrual loans . . . . . . . . 21 Changes in nonaccrual loans by loan category . . . . . . . . . 21 Quarterly trend of changes in foreclosed assets. . . . . . . . 22 Nonaccrual loans by performance category . . . . . . . . . . . 22 Loans 90 days past due and still accruing. . . . . . . . . . . 24 Allowance for Loan Losses. . . . . . . . . . . . . . . . . . . . 25 Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Capital Adequacy/Ratios. . . . . . . . . . . . . . . . . . . . . 28 Asset/Liability Management . . . . . . . . . . . . . . . . . . . 30 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 32 SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 ================================================================================ The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for such periods. Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year. The interim financial information should be read in conjunction with the Company's 1993 Annual Report on Form 10-K. 1 PART I - FINANCIAL INFORMATION WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
======================================================================================================== Quarter Nine months ended September 30, ended September 30, ------------------ ------------------ (in millions) 1994 1993 1994 1993 - -------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans $ 768 $ 745 $2,206 $2,322 Investment securities 185 174 567 494 Federal funds sold and securities purchased under resale agreements 1 6 6 15 Other -- -- 2 -- ----- ----- ------ ------ Total interest income 954 925 2,781 2,831 ----- ----- ------ ------ INTEREST EXPENSE Deposits 218 211 624 659 Federal funds purchased and securities sold under repurchase agreements 28 7 54 23 Commercial paper and other short-term borrowings 2 2 5 5 Senior and subordinated debt 49 50 144 153 ----- ----- ------ ------ Total interest expense 297 270 827 840 ----- ----- ------ ------ NET INTEREST INCOME 657 655 1,954 1,991 Provision for loan losses 50 120 170 470 ----- ----- ------ ------ Net interest income after provision for loan losses 607 535 1,784 1,521 ----- ----- ------ ------ NONINTEREST INCOME Service charges on deposit accounts 119 106 355 311 Fees and commissions 104 98 281 285 Trust and investment services income 52 48 152 142 Investment securities gains 1 -- 8 -- Other 31 12 110 60 ----- ----- ------ ------ Total noninterest income 307 264 906 798 ----- ----- ------ ------ NONINTEREST EXPENSE Salaries 213 193 598 574 Employee benefits 53 63 161 172 Net occupancy 53 56 161 166 Equipment 40 36 120 104 Federal deposit insurance 25 28 76 86 Other 147 159 464 503 ----- ----- ------ ------ Total noninterest expense 531 535 1,580 1,605 ----- ----- ------ ------ INCOME BEFORE INCOME TAX EXPENSE 383 264 1,110 714 Income tax expense 166 99 485 292 ----- ----- ------ ------ NET INCOME $ 217 $ 165 $ 625 $ 422 ===== ===== ====== ====== NET INCOME APPLICABLE TO COMMON STOCK $ 207 $ 152 $ 592 $ 384 ===== ===== ====== ====== PER COMMON SHARE Net income $3.86 $2.74 $10.83 $ 6.92 ===== ===== ====== ====== Dividends declared $1.00 $ .50 $ 3.00 $ 1.50 ===== ===== ====== ====== Average common shares outstanding 53.6 55.7 54.7 55.5 ===== ===== ====== ====== ========================================================================================================
2 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
======================================================================================================== SEPTEMBER 30, December 31, September 30, (in millions) 1994 1993 1993 - -------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 2,828 $ 2,644 $ 2,490 Investment securities: At cost (estimated fair value $8,821, $9,978 and $12,959) 9,120 9,887 12,796 At fair value 3,140 3,171 -- ------- ------- ------- Total investment securities 12,260 13,058 12,796 Federal funds sold and securities purchased under resale agreements 36 1,668 584 Loans 34,951 33,099 33,606 Allowance for loan losses 2,110 2,122 2,123 ------- ------- ------- Net loans 32,841 30,977 31,483 ------- ------- ------- Due from customers on acceptances 81 70 83 Accrued interest receivable 313 297 318 Premises and equipment, net 883 898 908 Goodwill 450 477 486 Other assets 2,472 2,424 2,431 ------- ------- ------- Total assets $52,164 $52,513 $51,579 ======= ======= ======= LIABILITIES Noninterest-bearing deposits $ 9,447 $ 9,719 $ 9,096 Interest-bearing deposits 30,553 31,925 31,769 ------- ------- ------- Total deposits 40,000 41,644 40,865 Federal funds purchased and securities sold under repurchase agreements 3,729 1,079 1,136 Commercial paper and other short-term borrowings 186 188 235 Acceptances outstanding 81 70 83 Accrued interest payable 93 63 100 Other liabilities 861 933 890 Senior debt 1,732 2,256 2,190 Subordinated debt 1,460 1,965 1,928 ------- ------- ------- Total liabilities 48,142 48,198 47,427 ------- ------- ------- STOCKHOLDERS' EQUITY Preferred stock 489 639 639 Common stock - $5 par value, authorized 150,000,000 shares; issued and outstanding 52,790,062 shares, 55,812,592 shares and 55,786,482 shares 264 279 279 Additional paid-in capital 1,084 551 545 Retained earnings 2,256 2,829 2,693 Cumulative foreign currency translation adjustments (4) (4) (4) Investment securities valuation allowance (67) 21 -- ------- ------- ------- Total stockholders' equity 4,022 4,315 4,152 ------- ------- ------- Total liabilities and stockholders' equity $52,164 $52,513 $51,579 ======= ======= ======= ========================================================================================================
3 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
=============================================================================================== Nine months ended September 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 2 3 Common stock repurchased (17) -- ------ ------ Balance, end of period 264 279 ------ ------ ADDITIONAL PAID-IN CAPITAL Balance, beginning of period 551 506 Common stock issued under employee benefit and dividend reinvestment plans 34 41 Common stock repurchased (501) (2) Transfer from retained earnings 1,000 -- ------ ------ Balance, end of period 1,084 545 ------ ------ RETAINED EARNINGS Balance, beginning of period 2,829 2,392 Net income 625 422 Preferred stock dividends (33) (38) Common stock dividends (165) (83) Transfer to additional paid-in capital (1,000) -- ------ ------ Balance, end of period 2,256 2,693 ------ ------ CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENTS Balance, beginning and end of period (4) (4) ------ ------ INVESTMENT SECURITIES VALUATION ALLOWANCE Balance, beginning of period 21 -- Change in unrealized net gain, after applicable taxes (88) -- ------ ------ Balance, end of period (67) -- ------ ------ Total stockholders' equity $4,022 $4,152 ====== ====== ===============================================================================================
4 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
=============================================================================================== Nine months ended September 30, ------------------------------ (in millions) 1994 1993 - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 625 $ 422 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 170 470 Depreciation and amortization 183 205 Deferred income tax benefit (20) (85) Decrease in net deferred loan fees (4) (4) Net increase in accrued interest receivable (16) (17) Net increase in accrued interest payable 30 12 Other, net (66) 187 ------ ------ Net cash provided by operating activities 902 1,190 ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Investment securities: At cost: Proceeds from prepayments and maturities 3,207 1,362 Purchases (2,440) (4,820) At fair value: Proceeds from sales 17 -- Proceeds from prepayments and maturities 593 -- Purchases (723) -- Net (increase) decrease in loans resulting from originations and collections (2,060) 2,470 Proceeds from sales (including participations) of loans 98 239 Purchases (including participations) of loans (243) (20) Proceeds from sales of foreclosed assets 199 256 Net decrease in federal funds sold and securities purchased under resale agreements 1,632 599 Other, net (83) (41) ------ ------ Net cash provided by investing activities 197 45 ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in deposits (1,644) (1,379) Net increase (decrease) in short-term borrowings 2,648 (142) Proceeds from issuance of senior debt -- 565 Proceeds from issuance of subordinated debt -- 150 Repayment of senior debt (517) (522) Repayment of subordinated debt (526) (100) Proceeds from issuance of common stock 36 44 Repurchase of common stock (518) (2) Redemption of preferred stock (150) -- Payment of cash dividends (198) (121) Other, net (46) 72 ------ ------ Net cash used by financing activities (915) (1,435) ------ ------ NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM BANKS) 184 (200) Cash and cash equivalents at beginning of period 2,644 2,690 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,828 $2,490 ====== ====== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 797 $ 828 ====== ====== Income taxes $ 542 $ 335 ====== ====== Noncash investing activities: Transfers from loans to foreclosed assets $ 155 $ 305 ====== ====== Transfers from foreclosed assets to nonaccrual loans $ -- $ 99 ====== ====== ===============================================================================================
5 FINANCIAL REVIEW SUMMARY FINANCIAL DATA
================================================================================================================================== % Change Quarter ended Sept. 30, 1994 from Nine months ended -------------------------------- ------------------- -------------------- SEPT. 30, June 30, Sept. 30, June 30, Sept. 30, SEPT. 30, Sept. 30, % (in millions) 1994 1994 1993 1994 1993 1994 1993 Change - ---------------------------------------------------------------------------------------------------------------------------------- FOR THE PERIOD Net income $ 217 $ 206 $ 165 5 % 32 % $ 625 $ 422 48 % Per common share Net income $ 3.86 $ 3.57 $ 2.74 8 41 $ 10.83 $ 6.92 57 Dividends declared 1.00 1.00 .50 -- 100 3.00 1.50 100 Average common shares outstanding 53.6 54.8 55.7 (2) (4) 54.7 55.5 (1) Profitability ratios (annualized) Net income to average total assets (ROA) 1.65% 1.59% 1.29% 4 28 1.61% 1.11% 45 Net income applicable to common stock to average common stockholders' equity (ROE) 22.99 21.67 17.75 6 30 21.91 15.61 40 Efficiency ratio (1) 55.1% 55.2% 58.2% -- (5) 55.3% 57.5% (4) Average loans $ 34,325 $ 33,630 $ 33,682 2 2 $ 33,607 $ 34,692 (3) Average assets 52,061 52,013 51,009 -- 2 51,768 50,946 2 Average core deposits 39,466 40,232 40,272 (2) (2) 40,025 40,288 (1) Net interest margin 5.53% 5.56% 5.65% (1) (2) 5.55% 5.76% (4) Average staff (full-time equivalent) 19,700 19,500 20,700 1 (5) 19,600 21,000 (7) AT PERIOD END Investment securities $ 12,260 $ 13,328 $ 12,796 (8) (4) $ 12,260 $ 12,796 (4) Loans 34,951 34,172 33,606 2 4 34,951 33,606 4 Allowance for loan losses 2,110 2,120 2,123 -- (1) 2,110 2,123 (1) Assets 52,164 52,287 51,579 -- 1 52,164 51,579 1 Core deposits 39,097 40,249 40,532 (3) (4) 39,097 40,532 (4) Common stockholders' equity 3,533 3,637 3,513 (3) 1 3,533 3,513 1 Stockholders' equity 4,022 4,126 4,152 (3) (3) 4,022 4,152 (3) Tier 1 capital (2) 3,620 3,711 3,639 (2) (1) 3,620 3,639 (1) Total capital (Tiers 1 and 2) (2) 5,244 5,372 5,360 (2) (2) 5,244 5,360 (2) Capital ratios Common stockholders' equity to assets 6.77% 6.96% 6.81% (3) (1) 6.77% 6.81% (1) Stockholders' equity to assets 7.71 7.89 8.05 (2) (4) 7.71 8.05 (4) Risk-based capital (2) Tier 1 capital 9.62 10.06 9.91 (4) (3) 9.62 9.91 (3) Total capital 13.93 14.56 14.60 (4) (5) 13.93 14.60 (5) Leverage (2) 7.01 7.20 7.21 (3) (3) 7.01 7.21 (3) Book value per common share $ 66.93 $ 67.04 $ 62.98 -- 6 $ 66.93 $ 62.98 6 COMMON STOCK PRICE High $160-3/8 $159-1/2 $127-3/8 1 26 $160-3/8 $127-3/8 26 Low 145-1/8 136-5/8 107-1/4 6 35 127-5/8 75-1/2 69 Period end 145-1/8 150-3/8 126-3/8 (3) 15 145-1/8 126-3/8 15 ================================================================================================================================== (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 third quarter of 1994 was $217 million, compared with $165 million in the third quarter of 1993, an increase of 32%. Per share earnings for the third quarter of 1994 were $3.86 per share, compared with $2.74 per share in the third quarter of 1993, an increase of 41%. A significant portion of the increase in earnings from a year ago was due to a lower loan loss provision. The percentage increase in per share earnings was greater than the percentage increase in net income due to the Company's continuing stock repurchase program. Net income for the first nine months of 1994 was $625 million, or $10.83 per share, compared with $422 million, or $6.92 per share, in the first nine months of 1993. Return on average assets (ROA) was 1.65% and 1.61% in the third quarter and first nine months of 1994, compared with 1.29% and 1.11% in the same periods of 1993, respectively. Return on average common equity (ROE) was 22.99% and 21.91% in the third quarter and first nine months of 1994, respectively, compared with 17.75% and 15.61% in the same periods of 1993, respectively. Net interest income on a taxable-equivalent basis was $656 million in the third quarter of 1994 and 1993. The Company's net interest margin was 5.53% for the third quarter of 1994, down from 5.65% in the same quarter of 1993. A major portion of the decrease was due to higher funding costs. Noninterest income in the third quarter of 1994 was $307 million, compared with $264 million in the same quarter of 1993, an increase of 16%. The increase was primarily due to a $36 million accrual related to the disposition of owned and leased premises that reduced noninterest income in the third quarter of 1993. A $13 million increase in service charges on deposit accounts and a $12 million increase in mutual fund and annuity sales fees also contributed to the increase. Noninterest expense in the third quarter of 1994 was $531 million, down 1% from $535 million. A decline in foreclosed assets expense was largely offset by a higher level of incentive compensation. The Company's provision for loan losses was $50 million in the third quarter of 1994, compared with $60 million in the second quarter of 1994 and $120 million in the third quarter of 1993. The provision was $170 million in the first nine months of 1994, compared with $470 million in the first nine months of 1993. During the third quarter of 1994, net charge-offs totaled $60 million, or .69% of average total loans (annualized). This compared with $61 million, or .73%, during the second quarter of 1994 and $121 million, or 1.42%, during the third quarter of 1993. The allowance for loan losses was 6.04% of total loans at September 30, 1994, compared with 6.20% at June 30, 1994 and 6.32% at September 30, 1993. 7 Loan balances increased 4% since the end of the third quarter of 1993, rising to $34,951 million at September 30, 1994. Total nonaccrual and restructured loans were $641 million, or 1.8% of total loans, at September 30, 1994, compared with $717 million, or 2.1%, at June 30, 1994 and $1,702 million, or 5.1%, at September 30, 1993. Loans new to nonaccrual in the third quarter of 1994 were $93 million, compared with $133 million in the second quarter of 1994 and $195 million in the third quarter of 1993. At September 30, 1994, an estimated $319 million, or 50%, of nonaccrual loans were less than 90 days past due, compared with an estimated $336 million, or 47%, at June 30, 1994. Foreclosed assets amounted to $306 million at September 30, 1994, $344 million at June 30, 1994 and $357 million at September 30, 1993. Common equity to total assets was 6.77% at September 30, 1994, compared with 6.96% and 6.81% at June 30, 1994 and September 30, 1993, respectively. The Company's total risk-based capital ratio at September 30, 1994 was 13.93% and its Tier 1 risk-based capital ratio was 9.62%, exceeding the minimum guidelines of 8% and 4%, respectively. At June 30, 1994, these risk-based capital ratios were 14.56% and 10.06%, respectively. The decrease in total and Tier 1 risk- based capital ratios between June 30, 1994 and September 30, 1994 resulted primarily from the repurchase of 1,777,598 shares of common stock during the third quarter. Total and Tier 1 risk-based capital ratios at September 30, 1993 were 14.60% and 9.91%, respectively. The leverage ratios were 7.01%, 7.20% and 7.21% at September 30, 1994, June 30, 1994 and September 30, 1993, respectively. During the third quarter, business conditions in California continued to improve, although the pace was moderate and hesitant. Job gains stabilized, while consumer spending increased moderately. Home sales were still buoyant but below their peak in the first quarter. Building activity rose somewhat in both residential and commercial markets. The general belief is that the economic recovery in California is continuing at a moderate pace. EARNINGS PERFORMANCE NET INTEREST INCOME Net interest income on a taxable-equivalent basis was $656 million in the third quarter of 1994 and 1993. Taxable-equivalent net interest income was $1,954 million in the first nine months of 1994, compared with $1,993 million in the same period of 1993. Individual components of net interest income and net interest margin are presented in the rate/yield table on pages 10 and 11. The Company's net interest margin was 5.53% for the third quarter of 1994, compared with 5.65% for the third quarter of 1993. The decrease was predominantly due to higher funding costs and lower hedging income, primarily offset by higher yields on earning assets. Hedging income from derivative contracts decreased approximately $49 million, or 42 basis points of the net interest margin, from the third quarter of 1993 and $122 million, or 35 basis points, from the nine months ended September 30, 1993, primarily due to the maturity of contracts. The interest rate derivative contracts that are maturing, primarily purchased interest 8 rate floor contracts and interest rate swaps in which the Company receives a fixed rate, were entered into during a higher interest rate environment and have benefited from the subsequent decline in rates. Any new replacement contracts are not expected to result in the same hedging income as the maturing contracts due to the comparatively lower rate environment. Loans averaged $34.3 billion in the third quarter of 1994, a 2% increase from $33.7 billion in the third quarter of 1993. The largest increase occurred in 1- 4 family first mortgage loans. The majority of this increase was due to the shift in originations from 30-year fixed rate loans to adjustable rate mortgages, which have generally been held for portfolio purposes. Loans totaled $35.0 billion at September 30, 1994, up 2% from June 30, 1994 and up 6% from December 31, 1993. This is the third consecutive quarterly increase in loan balances since 1990. The Company expects loan balances at December 31, 1994 to be higher than balances at September 30, 1994. Investment securities averaged $12.8 billion during the third quarter of 1994, an 8% increase from $11.9 billion in the third quarter of 1993. However, investment securities totaled $12.3 billion at September 30, 1994, down 8% from June 30, 1994 and down 6% from December 31, 1993. Investment securities are expected to continue to decrease as the cash received from their maturities is used to fund loan growth. Average core deposits were $39.5 billion and $40.3 billion in the third quarters of 1994 and 1993, respectively, and funded 76% and 79% of the Company's average total assets in the same quarters of 1994 and 1993, respectively. Despite the recent rise in interest rates, the net interest margin and net interest income for the fourth quarter of 1994 are expected to remain about the same as the third quarter of 1994, assuming that there are no significant increases in deposit rates. In the long-term, the net interest margin is expected to decline modestly, assuming that deposit rates will gradually increase in response to rising market interest rates. However, net interest income is not currently expected to change significantly. 9
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) =================================================================================================================================== Quarter ended September 30, ------------------------------------------------------------------- 1994 1993 ------------------------------- ------------------------------- INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ (in millions) BALANCE RATES EXPENSE balance rates expense - ----------------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Investment securities: At cost: U.S. Treasury securities $ 2,382 4.66% $ 28 $ 2,323 4.91% $ 29 Securities of U.S. government agencies and corporations 5,808 6.00 87 8,092 6.31 128 Obligations of states and political subdivisions 16 -- -- 20 -- -- Private collateralized mortgage obligations 1,358 5.74 19 1,265 4.93 16 Other securities 117 5.52 2 173 5.47 2 ------- ---- ------- ---- Total investment securities at cost 9,681 5.63 136 11,873 5.88 175 At fair value (2): U.S. Treasury securities 293 6.65 5 -- -- -- Securities of U.S. government agencies and corporations 1,503 5.78 23 -- -- -- Private collateralized mortgage obligations 1,245 6.00 20 -- -- -- Other securities 67 14.43 1 -- -- -- ------- ---- ------- ---- Total investment securities at fair value 3,108 6.06 49 -- -- -- ------- ---- ------- ---- Total investment securities 12,789 5.74 185 11,873 5.88 175 Federal funds sold and securities purchased under resale agreements 80 4.71 1 804 3.17 6 Loans: Commercial 7,218 9.20 167 6,917 9.10 159 Real estate 1-4 family first mortgage 8,754 6.80 149 6,726 7.67 129 Other real estate mortgage 7,982 8.74 176 9,357 8.24 194 Real estate construction 969 9.88 24 1,234 8.08 25 Consumer: Real estate 1-4 family junior lien mortgage 3,342 7.84 66 3,866 6.91 67 Credit card 2,744 15.46 106 2,543 15.53 98 Other revolving credit and monthly payment 2,010 9.75 49 1,846 9.51 44 ------- ---- ------- ---- Total consumer 8,096 10.90 221 8,255 10.15 209 Lease financing 1,277 9.15 29 1,190 9.81 29 Foreign 29 -- -- 3 -- -- ------- ---- ------- ---- Total loans 34,325 8.89 766 33,682 8.82 745 Other 53 5.94 1 -- -- -- ------- ---- ------- ---- Total earning assets $47,247 8.02 953 $46,359 7.96 926 ======= ---- ======= ---- FUNDING SOURCES Interest-bearing liabilities: Deposits: Interest-bearing checking $ 4,585 .98 11 $ 4,604 1.08 12 Savings deposits 2,553 1.99 13 2,668 2.08 14 Market rate savings 16,314 2.42 99 16,837 2.23 95 Savings certificates 7,000 4.27 75 7,671 4.33 84 Certificates of deposit 206 7.67 4 211 7.83 4 Other time deposits 92 6.56 2 107 6.65 2 Deposits in foreign offices 1,203 4.52 14 8 -- -- ------- ---- ------- ---- Total interest-bearing deposits 31,953 2.71 218 32,106 2.61 211 Federal funds purchased and securities sold under repurchase agreements 2,427 4.50 28 1,052 2.79 7 Commercial paper and other short-term borrowings 210 4.31 2 243 3.00 2 Senior debt 1,912 5.65 27 2,135 4.57 24 Subordinated debt 1,456 6.07 22 1,921 5.26 26 ------- ---- ------- ---- Total interest-bearing liabilities 37,958 3.11 297 37,457 2.86 270 Portion of noninterest-bearing funding sources 9,289 -- -- 8,902 -- -- ------- ---- ------- ---- Total funding sources $47,247 2.49 297 $46,359 2.31 270 ======= ---- ======= ---- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (3) 5.53% $656 5.65% $656 ===== ==== ===== ==== NONINTEREST-EARNING ASSETS Cash and due from banks $ 2,622 $ 2,405 Other 2,192 2,245 ------- ------- Total noninterest-earning assets $ 4,814 $ 4,650 ======= ======= NONINTEREST-BEARING FUNDING SOURCES Deposits $ 9,014 $ 8,492 Other liabilities 1,031 1,004 Preferred stockholders' equity 489 639 Common stockholders' equity 3,569 3,417 Noninterest-bearing funding sources used to fund earning assets (9,289) (8,902) ------- ------- Net noninterest-bearing funding sources $ 4,814 $ 4,650 ======= ======= TOTAL ASSETS $52,061 $51,009 ======= ======= =================================================================================================================================== (1) The average prime rate of Wells Fargo Bank was 7.50% and 6.00% for the quarters ended September 30, 1994 and 1993, respectively, and 6.81% and 6.00% for the nine months ended September 30, 1994 and 1993, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 4.97% and 3.26% for the quarters ended September 30, 1994 and 1993, respectively, and 4.34% and 3.25% for the nine months ended September 30, 1994 and 1993, respectively. (2) Yields are based on amortized cost balances, which totaled $3,203 million and $3,107 million for the quarter and nine months ended September 30, 1994, respectively. (3) Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal and applicable state income taxes. The federal statutory tax rate was 35% for the quarters and nine months ended September 30, 1994 and 1993.
10
=================================================================================================================================== Nine months ended September 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 $ 2,563 4.80% $ 92 $ 2,256 5.09% $ 86 Securities of U.S. government agencies and corporations 6,041 6.05 274 7,861 6.43 379 Obligations of states and political subdivisions 18 7.17 1 23 7.44 1 Private collateralized mortgage obligations 1,216 5.75 52 571 5.12 22 Other securities 117 5.49 5 164 5.37 7 ------- ------ ------- ------ Total investment securities at cost 9,955 5.69 424 10,875 6.07 495 At fair value (2): U.S. Treasury securities 131 6.70 7 -- -- -- Securities of U.S. government agencies and corporations 1,591 5.87 72 -- -- -- Private collateralized mortgage obligations 1,255 6.12 60 -- -- -- Other securities 74 14.10 4 -- -- -- ------- ------ ------- ------ Total investment securities at fair value 3,051 6.12 143 -- -- -- ------- ------ ------- ------ Total investment securities 13,006 5.79 567 10,875 6.07 495 Federal funds sold and securities purchased under resale agreements 237 3.41 6 642 3.20 15 Loans: Commercial 6,902 9.13 472 7,305 9.29 508 Real estate 1-4 family first mortgage 8,332 6.82 426 6,665 8.13 406 Other real estate mortgage 8,076 8.55 517 9,682 8.05 583 Real estate construction 979 9.03 66 1,347 8.61 87 Consumer: Real estate 1-4 family junior lien mortgage 3,406 7.57 193 3,993 7.03 210 Credit card 2,633 15.36 304 2,614 15.65 307 Other revolving credit and monthly payment 1,989 9.43 140 1,902 9.44 134 ------- ------ ------- ------ Total consumer 8,028 10.58 637 8,509 10.22 651 Lease financing 1,256 9.24 87 1,183 9.91 88 Foreign 34 4.78 1 1 -- -- ------- ------ ------- ------ Total loans 33,607 8.76 2,206 34,692 8.94 2,323 Other 52 5.98 2 -- -- -- ------- ------ ------- ------ Total earning assets $46,902 7.90 2,781 $46,209 8.19 2,833 ======= ------ ======= ------ FUNDING SOURCES Interest-bearing liabilities: Deposits: Interest-bearing checking $ 4,658 .98 34 $ 4,608 1.25 43 Savings deposits 2,572 1.99 38 2,792 2.25 47 Market rate savings 16,812 2.33 293 16,416 2.31 283 Savings certificates 7,021 4.19 220 8,164 4.39 268 Certificates of deposit 205 7.67 12 222 8.02 13 Other time deposits 102 6.61 5 114 5.31 5 Deposits in foreign offices 684 4.31 22 8 -- -- ------- ------ ------- ------ Total interest-bearing deposits 32,054 2.60 624 32,324 2.73 659 Federal funds purchased and securities sold under repurchase agreements 1,798 3.99 54 1,092 2.79 23 Commercial paper and other short-term borrowings 179 3.78 5 209 2.90 5 Senior debt 2,048 5.05 77 2,171 4.84 78 Subordinated debt 1,527 5.83 67 1,925 5.17 75 ------- ------ ------- ------ Total interest-bearing liabilities 37,606 2.94 827 37,721 2.98 840 Portion of noninterest-bearing funding sources 9,296 -- -- 8,488 -- -- ------- ------ ------- ------ Total funding sources $46,902 2.35 827 $46,209 2.43 840 ======= ------ ======= ------ NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (3) 5.55% $1,954 5.76% $1,993 ===== ====== ===== ====== NONINTEREST-EARNING ASSETS Cash and due from banks $ 2,598 $ 2,426 Other 2,268 2,311 ------- ------- Total noninterest-earning assets $ 4,866 $ 4,737 ======= ======= NONINTEREST-BEARING FUNDING SOURCES Deposits $ 8,962 $ 8,308 Other liabilities 1,055 984 Preferred stockholders' equity 532 639 Common stockholders' equity 3,613 3,294 Noninterest-bearing funding sources used to fund earning assets (9,296) (8,488) ------- ------- Net noninterest-bearing funding sources $ 4,866 $ 4,737 ======= ======= TOTAL ASSETS $51,768 $50,946 ======= ======= ===================================================================================================================================
11
NONINTEREST INCOME ============================================================================================================================== Quarter Nine months ended September 30, ended September 30, ------------------ % ------------------ % (in millions) 1994 1993 Change 1994 1993 Change - ------------------------------------------------------------------------------------------------------------------------------ Service charges on deposit accounts $119 $106 12 % $355 $311 14 % Fees and commissions: Credit card membership and other credit card fees 16 16 -- 47 51 (8) Mutual fund and annuity sales fees 23 11 109 44 34 29 Debit and credit card merchant fees 15 22 (32) 40 63 (37) Charges and fees on loans 11 13 (15) 32 36 (11) Shared ATM network fees 11 10 10 31 28 11 All other 28 26 8 87 73 19 ---- ---- ---- ---- Total fees and commissions 104 98 6 281 285 (1) Trust and investment services income: Asset management and custody fees 30 31 (3) 93 94 (1) Mutual fund management fees 12 10 20 34 27 26 All other 10 7 43 25 21 19 ---- ---- ---- ---- Total trust and investment services income 52 48 8 152 142 7 Investment securities gains 1 -- -- 8 -- -- Income from equity investments accounted for by the: Equity method 8 7 14 24 20 20 Cost method -- 9 (100) 17 22 (23) Check printing charges 10 9 11 30 28 7 Gains (losses) from dispositions of operations -- (36) (100) 10 (35) -- Real estate investment gains (losses) -- -- -- 3 (7) -- Gains on sales of loans 1 4 (75) 3 10 (70) All other 12 19 (37) 23 22 5 ---- ---- ---- ---- Total $307 $264 16 % $906 $798 14 % ==== ==== ==== ==== ==== ==== ==============================================================================================================================
The growth in service charges on deposit accounts in the third quarter of 1994 compared with the third quarter of 1993 was primarily due to increased fees for overdrafts and higher business checking charges. The increase in the total fees and commissions in the third quarter of 1994 compared with the third quarter of 1993 was predominantly due to growth in mutual fund and annuity sales fees, primarily offset by a decrease in debit and credit card merchant fees. The increase in mutual fund and annuity sales fees was due to a $17 million growth in annuity sales fees from $5 million in the third quarter of 1993 to $22 million in the third quarter of 1994. Sales volume of annuities grew from $109 million in the third quarter of 1993 to $460 million in the third quarter of 1994. The change in the mix of products sold, from bond-oriented mutual funds to fixed-rate annuities, reflected a combination of influences, including a shift in investor preferences due to rising interest rates and the introduction of new non-commission retail products. Sales of mutual funds and annuities contributed to fees and commissions income through sales fees and to trust and investment services income through mutual fund management fees. 12 The decrease in debit and credit card merchant fees was primarily due to an alliance that the Company entered into in November 1993. The agreement with Card Establishment Services (CES) formed an alliance for merchant credit and debit card processing services. Under this agreement, the Company is responsible for marketing and sales, initial merchant credit analysis and customer service; CES provides technology and processing operations. The Company retains an interest in the net revenues from processing the transactions that are now reported as income from equity investments accounted for by the equity method, rather than reported as income from debit and credit card merchant fees. As a result, income from the alliance contributed approximately $2 million and $5 million to income from equity investments in the third quarter and nine months ended September 30, 1994, respectively. "All other" fees and commissions include amortization expense for purchased mortgage servicing rights. This amortization expense totaled $2 million in the third quarter of 1994, compared with $3 million in the same period of 1993. At September 30, 1994, the balance of purchased mortgage servicing rights was $36 million, compared with $15 million at September 30, 1993. The increase in trust and investment services income in the third quarter of 1994 compared with the third quarter of 1993 was significantly due to greater mutual fund investment management fees, reflecting the overall growth in the fund families' net assets. The Stagecoach family of 24 funds had $5.8 billion of assets under management at September 30, 1994, compared with $4.0 billion at September 30, 1993. The Stagecoach family consists of both retail and institutional funds. The retail funds, first introduced in 1992, are primarily distributed through the branch network. These funds had $4.8 billion under management at September 30, 1994, compared with $3.6 billion at September 30, 1993. The institutional funds, first introduced in mid-1993, are offered primarily to selected groups of investors and certain corporations, partnerships and other business entities. At September 30, 1994, these funds had $933 million of assets under management, compared with $445 million at September 30, 1993. The Overland Express family of 16 funds, which had $3.6 billion of assets under management at September 30, 1994, compared with $4.0 billion at September 30, 1993, is sold nationwide through brokers. The decline in assets under management was mostly in the Variable Rate Government Fund, the largest Overland Fund, reflecting a shift of investor preferences away from bond-oriented funds due to the rising interest rate environment. In addition to managing Overland Express Funds and all the funds in the Stagecoach family, the Company also managed or maintained personal trust, employee benefit trust and agency assets of approximately $46 billion at September 30, 1994, compared with $45 billion at September 30, 1993. Mutual fund management fees are expected to continue to be higher in 1994 than 1993. In the third quarter of 1993, income from cost method equity investments included $9 million in net gains on sales and special distributions from nonmarketable equity investments. In the third quarter of 1993, the Company made a $36 million accrual primarily related to the disposition of owned and leased premises resulting from reduced space requirements; for example, downsizing some full service branches into supermarket locations and into other smaller, midsized branches. The remaining reserve of $5 million at October 31, 1994 relates substantially to branch closures scheduled to occur by year-end 1994. Additional accruals may be made in the fourth quarter of 1994 depending on the Company's plans for further reducing its space requirements for full service branches. 13 "All Other" noninterest income in the third quarter of 1993 included $18 million of interest income received as a result of the settlement of California Franchise Tax Board audits related to the appropriate years for claiming deductions applicable to the 1976 through 1986 tax returns. Noninterest income from fee-based products, mutual fund management fees and deposit-related services is expected to continue to be higher in 1994 than 1993.
NONINTEREST EXPENSE =============================================================================================================== Quarter Nine months ended September 30, ended September 30, ------------------ % ------------------ % (in millions) 1994 1993 Change 1994 1993 Change - --------------------------------------------------------------------------------------------------------------- Salaries $213 $193 10 % $ 598 $ 574 4 % Employee benefits 53 63 (16) 161 172 (6) Net occupancy 53 56 (5) 161 166 (3) Equipment 40 36 11 120 104 15 Federal deposit insurance 25 28 (11) 76 86 (12) Contract services 27 15 80 71 41 73 Certain identifiable intangibles 15 18 (17) 47 60 (22) Advertising and promotion 11 10 10 44 44 -- Operating losses 16 10 60 41 36 14 Telecommunications 12 11 9 35 33 6 Postage 11 11 -- 33 33 -- Goodwill 9 9 -- 27 28 (4) Outside professional services 6 10 (40) 25 31 (19) Check printing 8 8 -- 23 25 (8) Stationery and supplies 7 8 (13) 22 23 (4) Travel and entertainment 7 7 -- 22 20 10 Escrow and collection agency fees 5 6 (17) 15 19 (21) Security 5 5 -- 15 14 7 Outside data processing 2 5 (60) 7 13 (46) Foreclosed assets (8) 15 -- (2) 50 -- All other 14 11 27 39 33 18 ---- ---- ------ ------ Total $531 $535 (1)% $1,580 $1,605 (2)% ==== ==== === ====== ====== === ===============================================================================================================
The increase in salaries expense in the third quarter of 1994 was primarily due to an increase in incentive compensation related to the increase in annuity sales. The Company's full-time equivalent staff, including hourly employees, averaged approximately 19,700 in the third quarter of 1994, compared with approximately 20,700 in the third quarter of 1993. Employee benefits in the third quarter of 1993 included an $11 million accrual for the adoption of Statement of Financial Accounting Standards No. 112 for postemployment benefits. The increase in contract services expense in the third quarter of 1994 compared with the same quarter of 1993 was predominantly due to the development of new products and services and system upgrades throughout the Company. 14 The table below shows the major components of foreclosed assets expense.
==================================================================================================== Quarter Nine months ended September 30, ended September 30, ------------------ ------------------ (in millions) 1994 1993 1994 1993 - ---------------------------------------------------------------------------------------------------- Operating expenses $ 11 $ 19 $ 38 $ 47 Operating revenues (8) (11) (23) (32) Net (gains) losses from write-downs/sales (11) 7 (17) 35 ---- ---- ---- ---- Total $ (8) $ 15 $ (2) $ 50 ==== ==== ==== ==== ====================================================================================================
The decrease in foreclosed assets expense was largely due to a decrease in write-downs from $10 million in the third quarter of 1993 to $2 million in the third quarter of 1994 and increased gains on sales. The Company intends to continue to emphasize disposing of its foreclosed assets. Total noninterest expense in 1994 is likely to be lower than 1993 primarily due to decreases in foreclosed assets expense. INCOME TAXES The Company's effective tax rate was 43% for the third quarter of 1994 and 44% for the first nine months of 1994, compared with 38% and 41% for the same periods in 1993, respectively. The effective tax rate was lower for the third quarter of 1993 due to a net $14 million reduction of income tax expense related to the impact of the Omnibus Budget Reconciliation Act of 1993 and a $3 million reduction of income tax expense related to the settlement of California Franchise Tax Board audits of the Company's 1976 through 1986 tax returns. 15 BALANCE SHEET ANALYSIS
INVESTMENT SECURITIES =============================================================================================================================== SEPTEMBER 30, December 31, September 30, 1994 1993 1993 ------------------ ------------------ -------------------- ESTIMATED Estimated Estimated FAIR fair fair (in millions) COST VALUE Cost value Cost value - ------------------------------------------------------------------------------------------------------------------------------- HELD-TO-MATURITY SECURITIES AT COST: U.S. Treasury securities $1,958 $1,917 $2,365 $2,383 $ 2,367 $ 2,396 Securities of U.S. government agencies and corporations (1) 5,687 5,493 6,570 6,644 8,569 8,706 Obligations of states and political subdivisions 16 15 18 18 19 19 Securities issued by foreign governments 88 86 90 91 90 92 Private collateralized mortgage obligations (2) 1,343 1,282 815 813 1,665 1,660 Corporate debt securities 28 28 29 29 32 32 ------ ------ ------ ------ ------- ------- Total debt securities 9,120 8,821 9,887 9,978 12,742 12,905 Corporate and Federal Reserve Bank stock -- -- -- -- 54 54 ------ ------ ------ ------ ------- ------- Total $9,120 $8,821 $9,887 $9,978 $12,796 $12,959 ====== ====== ====== ====== ======= ======= AVAILABLE-FOR-SALE SECURITIES AT FAIR VALUE: U.S. Treasury securities $ 372 $ 369 $ -- $ -- $ -- $ -- Securities of U.S. government agencies and corporations (1) 1,536 1,472 1,747 1,749 -- -- Private collateralized mortgage obligations (2) 1,308 1,229 1,340 1,334 -- -- Corporate debt securities 24 38 31 48 -- -- ------ ------ ------ ------ ------- ------- Total debt securities 3,240 3,108 3,118 3,131 Marketable equity securities 16 32 17 40 -- -- ------ ------ ------ ------ ------- ------- Total $3,256 $3,140 $3,135 $3,171 $ -- $ -- ====== ====== ====== ====== ======= ======= =============================================================================================================================== (1) All securities of U.S. government agencies and corporations are mortgage-backed securities. (2) All private collateralized mortgage obligations (CMOs) are AAA rated bonds collateralized by 1-4 family residential first mortgages.
Investment securities were $12.3 billion at September 30, 1994, an 8% decrease from $13.3 billion at June 30, 1994 and a 4% decrease from $12.8 billion at September 30, 1993. The investment securities portfolio at September 30, 1994 was comprised of $9.1 billion of held-to-maturity securities at cost and $3.1 billion of available-for-sale securities at fair value. At September 30, 1994, the held-to-maturity securities portfolio had an estimated unrealized net loss of $299 million (which reflected estimated unrealized gross gains of $4 million), or 3.3% of the cost of the portfolio. At December 31, 1993, the held-to-maturity portfolio had an estimated unrealized net gain of $91 million (which reflected estimated unrealized gross losses of $23 million), or .9% of the cost of the portfolio. At September 30, 1994, the available-for-sale securities portfolio had an unrealized net loss of $116 million, or 3.6 % of the cost of the portfolio, comprised of unrealized gross losses of $147 million and unrealized gross gains of $15 million on debt securities and unrealized gross gains of $16 million on marketable equity securities. The unrealized net gain or loss on available-for- sale securities is reported on an after-tax basis as a separate component of stockholders' equity. At September 30, 1994, the unrealized net after-tax loss amounted to $67 million, compared with an unrealized net after-tax gain of $21 million at December 31, 1993. 16 The unrealized net loss in both the held-to-maturity and available-for-sale portfolios was predominantly due to investments in mortgage-backed securities. These unrealized net losses reflected an increasing interest rate environment. As interest rates rise, the Company expects the unrealized losses to grow and prepayments to decrease. Although it does not presently intend to sell the available-for-sale securities, the Company may decide to sell certain of the securities to maintain approximately the current level of earning assets (for example, to offset loan growth that may exceed expected maturities and prepayments of securities), resulting in the realization of losses. The following table provides the expected remaining maturities and yields (taxable-equivalent basis) of debt securities within the investment portfolio.
==================================================================================================================== September 30, 1994 -------------------------------------------------------------- Expected remaining principal maturity -------------------------------------------------------------- Weighted average expected Weighted remaining One year or less Total average maturity ----------------- (in millions) amount yield (yrs.-mos.) Amount Yield - -------------------------------------------------------------------------------------------------------------------- HELD-TO-MATURITY SECURITIES: U.S. Treasury securities $ 1,958 4.59% 1-3 $1,010 4.48% Securities of U.S. government agencies and corporations 5,687 6.13 3-8 1,207 5.67 Obligations of states and political subdivisions 16 6.49 4-5 3 6.52 Securities issued by foreign governments 88 5.17 1-2 36 4.63 Private collateralized mortgage obligations 1,343 6.09 2-8 214 5.75 Corporate debt securities 28 6.36 1-10 7 6.17 ------- ------ Total cost $ 9,120 5.78% 3-0 $2,477 5.18% ======= ===== ====== ===== ESTIMATED FAIR VALUE $ 8,821 $2,440 ======= ====== AVAILABLE-FOR-SALE SECURITIES (1): U.S. Treasury securities $ 372 6.62% 3-4 $ -- --% Securities of U.S. government agencies and corporations 1,536 5.54 2-10 185 6.66 Private collateralized mortgage obligations 1,308 6.38 4-2 162 5.85 Corporate debt securities 24 22.46 5-11 -- -- ------- ------ Total cost $ 3,240 6.13% 3-5 $ 347 6.28% ======= ===== ====== ===== ESTIMATED FAIR VALUE $ 3,108 $ 338 ======= ====== TOTAL COST OF DEBT SECURITIES $12,360 5.87% 3-1 $2,824 5.13% ======= ===== ==== ====== ===== ==================================================================================================================== ==================================================================================================================== September 30, 1994 ------------------------------------------------------------------ Expected remaining principal maturity ------------------------------------------------------------------ After one year After five years through five years through ten years After ten years ------------------ ----------------- ----------------- (in millions) Amount Yield Amount Yield Amount Yield - -------------------------------------------------------------------------------------------------------------------- HELD-TO-MATURITY SECURITIES: U.S. Treasury securities $ 948 4.70% $ -- --% $ -- --% Securities of U.S. government agencies and corporations 3,391 5.99 856 7.07 233 7.06 Obligations of states and political subdivisions 11 6.51 -- -- 2 6.37 Securities issued by foreign governments 52 5.55 -- -- -- -- Private collateralized mortgage obligations 1,056 6.15 73 6.10 -- -- Corporate debt securities 21 6.42 -- -- -- -- ------ ------ ---- Total cost $5,479 5.80% $ 929 6.99% $235 7.05% ====== ==== ====== ===== ==== ===== ESTIMATED FAIR VALUE $5,269 $ 887 $225 ====== ====== ==== AVAILABLE-FOR-SALE SECURITIES (1): U.S. Treasury securities $ 372 6.62% $ -- --% $ -- --% Securities of U.S. government agencies and corporations 1,245 5.37 106 5.52 -- -- Private collateralized mortgage obligations 754 6.37 379 6.39 13 13.66 Corporate debt securities -- -- 24 22.46 -- -- ------ ------ ---- Total cost $2,371 5.88% $ 509 6.97% $ 13 13.66% ====== ==== ====== ===== ==== ===== ESTIMATED FAIR VALUE $2,268 $ 489 $ 13 ====== ====== ==== TOTAL COST OF DEBT SECURITIES $7,850 5.82% $1,438 6.98% $248 7.40% ====== ==== ====== ===== ==== ===== ==================================================================================================================== (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 and 1 month at September 30, 1994, compared with 3 years at June 30, 1994 and 2 years and 7 months at December 31, 1993. The increase in the expected remaining maturity reflects a higher interest rate environment, in which prepayments are likely to slow down. The short-term debt securities portfolio serves to maintain asset liquidity and to fund loan growth. 17
LOAN PORTFOLIO ======================================================================================================================== % Change Sept. 30, 1994 from --------------------- SEPT. 30, Dec. 31, Sept. 30, Dec. 31, Sept. 30, (in millions) 1994 1993 1993 1993 1993 - ------------------------------------------------------------------------------------------------------------------------ Commercial (1)(2) $ 7,511 $ 6,912 $ 6,982 9 % 8 % Real estate 1-4 family first mortgage 8,883 7,458 6,913 19 28 Other real estate mortgage (3) 8,040 8,286 9,096 (3) (12) Real estate construction 950 1,110 1,206 (14) (21) Consumer: Real estate 1-4 family junior lien mortgage 3,342 3,583 3,793 (7) (12) Credit card 2,830 2,600 2,538 9 12 Other revolving credit and monthly payment 2,071 1,920 1,865 8 11 ------- ------- ------- Total consumer 8,243 8,103 8,196 2 1 Lease financing 1,300 1,212 1,196 7 9 Foreign 24 18 17 33 41 ------- ------- ------- Total loans (net of unearned income, including net deferred loan fees, of $348, $336 and $344) $34,951 $33,099 $33,606 6 % 4 % ======= ======= ======= ==== ==== ======================================================================================================================== (1) Includes loans to real estate developers of $371 million, $505 million and $506 million at September 30, 1994, December 31, 1993 and September 30, 1993, respectively. (2) Includes agricultural loans (loans to finance agricultural production and other loans to farmers) of $696 million, $643 million and $583 million at September 30, 1994, December 31, 1993 and September 30, 1993, respectively. (3) Includes agricultural loans secured by real estate of $260 million, $225 million and $243 million at September 30, 1994, December 31, 1993 and September 30, 1993, respectively.
The largest growth in the loan portfolio in the first nine months of 1994 was from real estate 1-4 family first mortgage loans which grew by 19%. The majority of the growth was due to the shift in originations from 30-year fixed rate loans to adjustable rate mortgages, which have generally been held for portfolio purposes. The table below presents comparative period-end commercial real estate loans.
======================================================================================================= % Change Sept. 30, 1994 from --------------------- SEPT. 30, Dec. 31, Sept. 30, Dec. 31, Sept. 30, (in millions) 1994 1993 1993 1993 1993 - ------------------------------------------------------------------------------------------------------- Commercial loans to real estate developers (1) $ 371 $ 505 $ 506 (27)% (27)% Other real estate mortgage 8,040 8,286 9,096 (3) (12) Real estate construction 950 1,110 1,206 (14) (21) ------ ------ ------- Total $9,361 $9,901 $10,808 (5)% (13)% ====== ====== ======= ==== ==== ======================================================================================================= (1) Included in commercial loans.
18 The Company's commercial real estate loan portfolio was $9.4 billion at September 30, 1994, compared with $9.9 billion at December 31, 1993 and $10.8 billion at September 30, 1993, a 5% and 13% decrease, respectively. These decreases were primarily due to payments received. Over the years, the Company has prospered as an active commercial real estate lender. However, as a result of the recent recession and overbuilt real estate markets, the Company's earnings during the past three years were significantly affected by its relatively high levels of commercial real estate loans. The Company's real estate borrowers with properties located in Southern California have been particularly affected. There is still an oversupply of certain types of commercial real estate in the U.S. (particularly California) which could last for a number of years. However, a substantial amount of liquidity has returned to the real estate markets, mostly in apartments and shopping centers and, to a lesser degree, in other property types. Many developers are successfully financing acquisition or development programs through the capital markets and many banks are showing interest in financing certain product types. This liquidity is contributing significantly to the Company's progress in reducing its nonaccrual loans and foreclosed assets. As a result of this liquidity in the marketplace and the Company's strengthened lending practices (including limiting the degree of the portfolio concentration in any product type, location or to any individual borrower), nonaccrual commercial real estate loans have declined to 5.1% of the commercial real estate portfolio at September 30, 1994, down from 11.5% at September 30, 1993 and 12.3% at its peak at December 31, 1992. The Company has begun to see growth in its out-of-state commercial real estate loan portfolio and expects growth during 1995. 19
NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS =========================================================================================================================== SEPT. 30, June 30, March 31, Dec. 31, Sept. 30, (in millions) 1994 1994 1994 1993 1993 - -------------------------------------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial (1)(2) $109 $ 121 $ 165 $ 252 $ 441 Real estate 1-4 family first mortgage 76 88 90 99 96 Other real estate mortgage (3) 334 410 413 578 850 Real estate construction 101 72 202 235 278 Consumer: Real estate 1-4 family junior lien mortgage 14 19 22 27 25 Other revolving credit and monthly payment 3 2 3 3 6 ---- ------ ------ ------ ------ Total nonaccrual loans 637 712 895 1,194 1,696 Restructured loans 4 5 5 6 6 ---- ------ ------ ------ ------ Nonaccrual and restructured loans 641 717 900 1,200 1,702 As a percentage of total loans 1.8% 2.1% 2.7% 3.6% 5.1% Foreclosed assets (4) 306 344 354 348 357 Real estate investments (5) 12 11 11 15 15 ---- ------ ------ ------ ------ Total nonaccrual and restructured loans and other assets $959 $1,072 $1,265 $1,563 $2,074 ==== ====== ====== ====== ====== =========================================================================================================================== (1) Includes loans to real estate developers of $38 million, $41 million, $47 million, $91 million and $116 million at September 30, 1994, June 30, 1994, March 31, 1994, December 31, 1993 and September 30, 1993, respectively. (2) Includes agricultural loans of $1 million, $2 million, $2 million, $9 million and $24 million at September 30, 1994, June 30, 1994, March 31, 1994, December 31, 1993 and September 30, 1993, respectively. (3) Includes agricultural loans secured by real estate of $3 million, $3 million, $4 million, $24 million and $24 million at September 30, 1994, June 30, 1994, March 31, 1994, December 31, 1993 and September 30, 1993, respectively. (4) Includes agricultural properties of $23 million, $25 million, $25 million, $26 million and $23 million at September 30, 1994, June 30, 1994, March 31, 1994, December 31, 1993 and September 30, 1993, respectively. (5) Represents the amount of real estate investments (contingent interest loans accounted for as investments) that would be classified as nonaccrual if such assets were loans. Real estate investments totaled $26 million, $28 million, $29 million, $34 million and $39 million at September 30, 1994, June 30, 1994, March 31, 1994, December 31, 1993 and September 30, 1993, respectively.
Nonaccrual loans at September 30, 1994 declined for the eighth consecutive quarter following nine quarters of increases. The general decline of nonaccrual loans over the last eight quarters largely resulted from loan payments and loans returned to accrual, together with a reduction in new loans placed on nonaccrual. While the overall credit quality of the loan portfolio continues to improve, the Company anticipates that the amount of new loans placed on nonaccrual will fluctuate from quarter to quarter. The placement of commercial and real estate loans on nonaccrual, as well as transfers to foreclosed assets, are likely to continue to occur, although not at levels seen in the last three years, until, and for a period after, the economy fully recovers and the oversupply of properties is reduced with resulting increases in occupancy and rental rates. It may take years to absorb the surplus office capacity in certain geographic markets (particularly in Southern California) where the Company has commercial real estate outstandings. 20 The table below summarizes the quarterly trend of the changes in total nonaccrual loans.
=================================================================================================================== SEPT. 30, June 30, March 31, Dec. 31, Sept. 30, (in millions) 1994 1994 1994 1993 1993 - ------------------------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF QUARTER $712 $ 895 $1,194 $1,696 $1,898 New loans placed on nonaccrual 93 133 52 113 195 Charge-offs (38) (27) (35) (55) (90) Payments (71) (91) (121) (309) (188) Transfers to foreclosed assets (14) (27) (37) (64) (32) Loans returned to accrual (45) (172) (157) (188) (81) Loans sold -- -- (3) -- (2) Other additions (deductions) -- 1 2 1 (4) ---- ----- ------ ------ ------ BALANCE, END OF QUARTER $637 $ 712 $ 895 $1,194 $1,696 ==== ===== ====== ====== ====== ===================================================================================================================
The table below summarizes the changes in nonaccrual loans by loan category for the quarters ended September 30, 1994 and June 30, 1994.
================================================================================================================================== Real estate 1-4 family Other real first estate Real estate (in millions) Commercial mortgage mortgage construction Consumer Total - ---------------------------------------------------------------------------------------------------------------------------------- QUARTER ENDED SEPTEMBER 30, 1994 Balance, beginning of quarter $121 $88 $410 $ 72 $21 $712 New loans placed on nonaccrual 11 6 26 48 2 93 Charge-offs (5) (1) (22) (10) -- (38) Payments: Principal (10) (15) (19) (10) (5) (59) Interest applied to principal (5) -- (6) (1) -- (12) Transfers to foreclosed assets -- -- (13) (1) -- (14) Loans returned to accrual (2) (3) (40) -- -- (45) Other additions (deductions) (1) 1 (2) 3 (1) -- ---- --- ---- ---- --- ---- Balance, end of quarter $109 $76 $334 $101 $17 $637 ==== === ==== ==== === ==== QUARTER ENDED JUNE 30, 1994 Balance, beginning of quarter $165 $90 $413 $202 $25 $895 New loans placed on nonaccrual (1) 19 9 90 14 1 133 Charge-offs (4) (1) (22) -- -- (27) Payments: Principal (21) (9) (19) (26) (4) (79) Interest applied to principal (5) -- (6) -- (1) (12) Transfers to foreclosed assets (6) -- (19) (2) -- (27) Loans returned to accrual (27) (1) (35) (109) -- (172) Other additions (deductions) -- -- 8 (7) -- 1 ---- --- ---- ---- --- ---- Balance, end of quarter $121 $88 $410 $72 $21 $712 ==== === ==== === === ==== ================================================================================================================================== (1) Additions to other real estate mortgage loans include $28 million for land (excluding 1-4 family land) and $22 million for office buildings.
21 The table below summarizes the quarterly trend of the changes in foreclosed assets.
=================================================================================================================== SEPT. 30, June 30, March 31, Dec. 31, Sept. 30, (in millions) 1994 1994 1994 1993 1993 - ------------------------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF QUARTER $344 $354 $348 $357 $391 Additions 30 63 62 100 65 Sales (64) (63) (42) (89) (76) Charge-offs (1) (3) (8) (10) (8) Write-downs (2) (3) (6) (7) (10) Other deductions (1) (4) -- (3) (5) ---- ---- ---- ---- ---- BALANCE, END OF QUARTER $306 $344 $354 $348 $357 ==== ==== ==== ==== ==== ===================================================================================================================
Approximately 58% of the foreclosed assets at September 30, 1994 have been in the Company's portfolio less than one year. NONACCRUAL LOANS BY PERFORMANCE CATEGORY At September 30, 1994, an estimated $319 million, or 50%, of nonaccrual loans were less than 90 days past due, including an estimated $248 million, or 39%, that were current (less than 30 days past due) as to payment of principal and interest. This compares with an estimated $336 million, or 47%, of nonaccrual loans that were less than 90 days past due at June 30, 1994, including an estimated $242 million, or 34%, that were current. For all loans on nonaccrual during the third and second quarter of 1994 (including loans no longer on nonaccrual at September 30, 1994 and June 30, 1994), cash interest payments of $16 million and $18 million, respectively, were received while the loans were on nonaccrual status. Of the $16 million received in the third quarter, $4 million was recognized as interest income and $12 million was applied to principal. Of the $18 million received in the second quarter, $7 million was recognized as interest income and $11 million was applied to principal. The average nonaccrual book principal loan balances (net of charge-offs and interest applied to principal) were $662 million and $830 million for the quarters ended September 30, 1994 and June 30, 1994, respectively. The table on the following page presents the estimated amount of nonaccrual loans that were contractually past due and those that were contractually current at the end of the third and second quarters of 1994. There can be no assurance that individual borrowers will continue to perform at the level indicated or that the performance characteristics will not change significantly. Both book and contractual principal balances are presented in the table, the difference reflecting charge-offs and interest applied to principal. The ratio of book to 22 contractual principal balance was 64% at September 30, 1994, compared with 66% at June 30, 1994.
==================================================================================================== Cumulative cash Book interest Contractual principal Cumulative applied to principal (in millions) balance charge-offs(5) principal(5) balance - ---------------------------------------------------------------------------------------------------- SEPTEMBER 30, 1994 ------------------------------------------------------ Contractually past due (1): Payments not made (2): 90 days or more past due $113 $ 5 $ -- $ 118 Less than 90 days past due 2 -- -- 2 ---- ---- ---- ------ 115 5 -- 120 ---- ---- ---- ------ Payments made (3): 90 days or more past due 205 79 22 306 Less than 90 days past due 69 38 23 130 ---- ---- ---- ------ 274 117 45 436 ---- ---- ---- ------ Total past due 389 122 45 556 Contractually current (4) 248 131 60 439 ---- ---- ---- ------ Total nonaccrual loans $637 $253 $105 $ 995 ==== ==== ==== ====== - ---------------------------------------------------------------------------------------------------- June 30, 1994 ------------------------------------------------------- Contractually past due (1): Payments not made (2): 90 days or more past due $155 $ 4 $ -- $ 159 Less than 90 days past due 14 1 -- 15 ---- ---- ----- ------ 169 5 -- 174 ---- ---- ----- ------ Payments made (3): 90 days or more past due 221 80 27 328 Less than 90 days past due 80 43 20 143 ---- ---- ----- ----- 301 123 47 471 ---- ---- ----- ----- Total past due 470 128 47 645 Contractually current (4) 242 125 61 428 ---- ---- ----- ----- Total nonaccrual loans $712 $253 $108 $1,073 ==== ==== ==== ====== ==================================================================================================== (1) Contractually past due is defined as a borrower whose loan principal or interest payment is 30 days or more past due. (2) Borrower has made no payments since being placed on nonaccrual. (3) Borrower has made some payments since being placed on nonaccrual. Approximately $215 million and $239 million of these loans had some payments made on them during the third and second quarters of 1994, respectively. (4) Contractually current is defined as a loan for which principal and interest are being paid in accordance with the terms of the loan. All of the contractually current loans were placed on nonaccrual due to uncertainty of receiving full timely collection of interest or principal. (5) Cumulative amounts recorded since inception of the loan.
23 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.
==================================================================================================================== SEPT. 30, June 30, March 31, Dec. 31, Sept. 30, (in millions) 1994 1994 1994 1993 1993 - -------------------------------------------------------------------------------------------------------------------- Commercial $ 7 $ 7 $ 6 $ 4 $ 10 Real estate 1-4 family first mortgage 19 25 19 19 31 Other real estate mortgage 45 53 68 14 28 Real estate construction 1 4 11 8 4 Consumer: Real estate 1-4 family junior lien mortgage 5 7 6 6 8 Credit card 31 33 40 43 42 Other revolving credit and monthly payment 5 2 1 1 2 ---- ---- ---- --- ---- Total consumer 41 42 47 50 52 Lease financing -- -- 1 -- -- ---- ---- ---- --- ---- Total $113 $131 $152 $95 $125 ==== ==== ==== === ==== ====================================================================================================================
24
ALLOWANCE FOR LOAN LOSSES ============================================================================================================= Quarter ended Nine months ended ---------------------------------- --------------------- SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30, (in millions) 1994 1994 1993 1994 1993 - ------------------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF PERIOD $2,120 $2,121 $2,124 $2,122 $2,067 Provision for loan losses 50 60 120 170 470 Loan charge-offs: Commercial (1) (9) (5) (22) (39) (81) Real estate 1-4 family first mortgage (5) (6) (5) (16) (17) Other real estate mortgage (23) (22) (61) (58) (176) Real estate construction (9) (1) (16) (14) (55) Consumer: Real estate 1-4 family junior lien mortgage (5) (7) (5) (20) (19) Credit card (32) (35) (43) (107) (137) Other revolving credit and monthly payment (7) (10) (9) (25) (32) ------ ------ ------ ------ ------ Total consumer (44) (52) (57) (152) (188) Lease financing (3) (4) (4) (11) (13) ------ ------ ------ ------ ------ Total loan charge-offs (93) (90) (165) (290) (530) ------ ------ ------ ------ ------ Loan recoveries: Commercial (2) 10 12 11 30 49 Real estate 1-4 family first mortgage 2 1 1 6 2 Other real estate mortgage 7 2 19 19 31 Real estate construction 5 2 1 12 1 Consumer: Real estate 1-4 family junior lien mortgage 1 1 1 3 2 Credit card 3 7 5 15 15 Other revolving credit and monthly payment 3 2 3 8 9 ------ ------ ------ ------ ------ Total consumer 7 10 9 26 26 Lease financing 2 2 3 15 7 ------ ------ ------ ------ ------ Total loan recoveries 33 29 44 108 116 ------ ------ ------ ------ ------ Total net loan charge-offs (60) (61) (121) (182) (414) ------ ------ ------ ------ ------ BALANCE, END OF PERIOD $2,110 $2,120 $2,123 $2,110 $2,123 ====== ====== ====== ====== ====== Total net loan charge-offs as a percentage of average total loans (annualized) .69% .73% 1.42% .72% 1.59% ====== ====== ====== ====== ====== Allowance as a percentage of total loans 6.04% 6.20% 6.32% 6.04% 6.32% ====== ====== ====== ====== ====== ============================================================================================================= (1) Includes charge-offs of loans to real estate developers of none, none and $1 million in the quarters ended September 30, 1994, June 30, 1994 and September 30, 1993, respectively, and $10 million and $5 million in the nine months ended September 30, 1994 and 1993, respectively. (2) Includes recoveries from loans to real estate developers of $2 million, none and $1 million in the quarters ended September 30, 1994, June 30, 1994 and September 30, 1993, and $2 million and $2 million in the nine months ended September 30, 1994 and 1993, respectively.
25 The table below presents net charge-offs by loan category.
================================================================================================================== Quarter ended --------------------------------------------------------------- SEPTEMBER 30, 1994 June 30, 1994 September 30, 1993 ------------------ ----------------- ------------------ % OF % of % of AVERAGE average average (in millions) AMOUNT LOANS(1) Amount loans(1) Amount loans(1) - ------------------------------------------------------------------------------------------------------------------ Commercial $(1) (.04)% $(7) (.41)% $ 11 .58% Real estate 1-4 family first mortgage 3 .12 5 .24 4 .26 Other real estate mortgage 16 .72 20 1.00 42 1.75 Real estate construction 4 1.54 (1) (.57) 15 4.88 Consumer: Real estate 1-4 family junior lien mortgage 4 .49 6 .71 4 .92 Credit card (2) 29 4.27 28 4.49 38 5.95 Other revolving credit and monthly payment 4 .98 8 1.39 6 .60 --- --- ---- Total consumer 37 1.89 42 2.11 48 2.32 Lease financing 1 .32 2 .68 1 .63 --- --- ---- Total net loan charge-offs $60 .69 % $61 .73 % $121 1.42% === ==== === ==== ==== ==== ================================================================================================================== (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 third quarter of 1994 were .69% of average total loans on an annualized basis. Net charge-offs were largely due to credit card loans and other real estate mortgage loans. Credit card net charge-offs were primarily due to bankruptcies and the current economic environment (particularly in Southern California). Despite the high level in relation to other loan types, credit card net charge-offs continued to improve over their peak levels in mid-1992, primarily due to the economic improvements in California. The other real estate mortgage net charge-offs were primarily due to loans related to shopping centers and industrial buildings. Although net charge-offs during 1991 and 1992 were higher than historical norms, they steadily declined during 1993 and are expected to remain lower in 1994 than 1993 due to the improvement in the credit quality of the Company's loan portfolio. The Company considers the allowance for loan losses of $2,110 million adequate to cover losses inherent in loans, loan commitments and standby letters of credit at September 30, 1994. The Company's determination of the level of the allowance and, correspondingly, the provision for loan losses rests upon various judgments and assumptions, including general (particularly California) economic conditions, loan portfolio composition, prior loan loss experience and the Company's ongoing examination process and that of its regulators. The provision for loan losses declined to $50 million in the third quarter of 1994 from $120 million in the same period a year ago. The lower provision reflects continued improvement in credit quality. A further reduction in the provision is currently expected in the fourth quarter of 1994, assuming continued improvements in credit quality. Statement of Financial Accounting Standards No. 114 (FAS 114), Accounting by Creditors for Impairment of a Loan, addresses the accounting treatment of certain impaired loans and amends FASB Statements No. 5 and 15; however, it does not address the overall adequacy of the 26 allowance for loan losses. The Statement is effective January 1, 1995, and can only be applied prospectively. In October 1994, the FASB issued FAS 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. FAS 118 amends FAS 114 and allows creditors to use existing methods for recognizing interest income on an impaired loan and changes certain disclosure requirements. FAS 118 is effective concurrent with the effective date of FAS 114. The Company does not currently intend to implement the Statements before their effective date. Based on the Company's interpretations, the allowance will not increase as a result of adopting these Statements.
OTHER ASSETS ===================================================================================== SEPTEMBER 30, December 31, September 30, (in millions) 1994 1993 1993 - ------------------------------------------------------------------------------------- Net deferred tax asset (1) $ 953 $ 884 $ 828 Nonmarketable equity investments 405 396 343 Certain identifiable intangible assets 343 373 391 Foreclosed assets 306 348 357 Other 465 423 512 ------ ------ ------ Total other assets $2,472 $2,424 $2,431 ====== ====== ====== ===================================================================================== (1) Net of a valuation allowance of $2 million, $2 million and $5 million at September 30, 1994, December 31, 1993 and September 30, 1993, respectively.
The Company estimates that approximately $831 million of the $953 million net deferred tax asset at September 30, 1994 could be realized by the recovery of previously paid federal taxes; however, the Company expects to actually realize the federal net deferred tax asset by claiming deductions against future taxable income. The balance of approximately $122 million relates to approximately $1.6 billion of net deductions that are expected to reduce future California taxable income (California tax law does not permit recovery of previously paid taxes). The Company believes that it is more likely than not that it will have sufficient future California taxable income to fully utilize these deductions. The identifiable intangible assets are generally amortized using an accelerated method, which is based on estimated useful lives ranging from 5 to 15 years. Amortization expense was $18 million, $20 million and $22 million for the quarters ended September 30, 1994, December 31, 1993 and September 30, 1993, respectively. 27
DEPOSITS ================================================================================ SEPTEMBER 30, December 31, September 30, (in millions) 1994 1993 1993 - -------------------------------------------------------------------------------- Noninterest-bearing $ 9,447 $ 9,719 $ 9,096 Interest-bearing checking 4,486 4,789 4,496 Savings 2,500 2,544 2,610 Market rate savings 15,643 17,084 16,831 Savings certificates 7,021 7,155 7,499 ------- ------- ------- Core deposits 39,097 41,291 40,532 Other 903 353 333 ------- ------- ------- Total deposits $40,000 $41,644 $40,865 ======= ======= ======= ================================================================================
CAPITAL ADEQUACY/RATIOS Risk-based capital (RBC) guidelines issued by the Federal Reserve Board (FRB) establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures. The Company's Tier 1 and Tier 2 capital components are presented on the following page. The guidelines require a minimum total RBC ratio of 8%, with at least half of the total capital in the form of Tier 1 capital. To supplement the RBC guidelines, the FRB established a minimum leverage ratio guideline of 3% of Tier 1 capital to average total assets. The decrease in the Company's RBC and leverage ratios at September 30, 1994 compared with December 31, 1993 resulted primarily from common stock repurchases of 555,853 shares, 1,124,856 shares and 1,777,598 shares in the first, second and third quarters of 1994, respectively, and secondarily from the redemption of $150 million in Series A preferred stock (at its liquidation preference carrying amount) in the first quarter of 1994. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a "well capitalized" bank must have a Tier 1 RBC ratio of at least 6%, a combined Tier 1 and Tier 2 ratio of at least 10% and a leverage ratio of at least 5%. At September 30, 1994, the Bank had a Tier 1 RBC ratio of 10.72%, a combined Tier 1 and Tier 2 ratio of 13.87% and a leverage ratio of 7.76%. 28 The table below presents the Company's risk-based capital and leverage ratios.
============================================================================================= SEPTEMBER 30, December 31, September 30, (in billions) 1994 1993 1993 - --------------------------------------------------------------------------------------------- Tier 1: Common stockholders' equity $ 3.5 $ 3.7 $ 3.5 Preferred stock .5 .6 .6 Less goodwill and other deductions (1) (.4) (.5) (.5) ------ ------ ------ Total Tier 1 capital 3.6 3.8 3.6 ------ ------ ------ Tier 2: Mandatory convertible debt .1 .1 .1 Subordinated debt and unsecured senior debt 1.0 1.1 1.2 Allowance for loan losses allowable in Tier 2 .5 .4 .5 ------ ------ ------ Total Tier 2 capital 1.6 1.6 1.8 ------ ------ ------ Total risk-based capital $ 5.2 $ 5.4 $ 5.4 ====== ====== ====== Risk-weighted balance sheet assets $ 37.1 $ 36.1 $ 36.7 Risk-weighted off-balance sheet items: Commitments to make or purchase loans 1.7 1.3 1.3 Standby letters of credit .6 .6 .7 Other .2 .2 .1 ------ ------ ------ Total risk-weighted off-balance sheet items 2.5 2.1 2.1 ------ ------ ------ Goodwill and other deductions (1) (.4) (.5) (.5) Allowance for loan losses not included in Tier 2 (1.6) (1.7) (1.6) ------ ------ ------ Total risk-weighted assets $ 37.6 $ 36.0 $ 36.7 ====== ====== ====== Risk-based capital ratios: Tier 1 capital (4% minimum requirement) 9.62% 10.48% 9.91% Total capital (8% minimum requirement) 13.93 15.12 14.60 Leverage ratio (3% minimum requirement) (2) 7.01% 7.39% 7.21% ============================================================================================= (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).
29 ASSET/LIABILITY MANAGEMENT As is typical in the banking industry, most of the Company's assets and liabilities are sensitive to fluctuations in interest rates. Accordingly, an essential objective of asset/liability management is to control interest rate risk. The Company manages portfolio assets by matching them with funding sources that have similar repricing characteristics. The Company uses various asset/liability strategies to manage the repricing characteristics of its assets, liabilities and off-balance sheet financial instruments to ensure that exposure to interest rate fluctuations is limited within Company guidelines of acceptable levels of risk-taking. Hedging strategies, including the use of interest rate contracts, are used to reduce mismatches in interest rate maturities of portfolio assets and their funding sources. One way to measure the impact that future changes in interest rates will have on net interest income is through a cumulative gap measure. The gap represents the net position of assets and liabilities subject to repricing in specified time periods. Generally, a liability sensitivity gap indicates that there would be a net negative impact on the net interest margin of the Company over the next year in an increasing interest rate environment since the Company's liabilities would reprice to higher market interest rates before its assets would. A net positive impact would result from a decreasing interest rate environment. At September 30, 1994, the under-one-year cumulative gap was a $678 million (1.3% of total assets) net liability position, compared with a $415 million (.8% of total assets) net liability position at June 30, 1994 and a $1,402 million (2.7% of total assets) net asset position at December 31, 1993. The increase in the net liability position at September 30, 1994 compared with June 30, 1994 was predominately due to an increase in short-term borrowings, as well as a lower level of investment securities that are expected to mature or prepay within a year due to the increasing interest rate environment. This was primarily offset by a decrease in market rate savings and an increase in the under-one-year balance of the commercial loan portfolio. Two adjustments to the cumulative gap provide comparability with banks that present interest rate sensitivity in an alternative manner. However, management does not believe that these adjustments necessarily depict its interest rate risk. The first adjustment excludes noninterest earning assets, noninterest- bearing liabilities and stockholders' equity from the cumulative gap calculation so only earning assets, interest-bearing liabilities and interest rate financial contracts are reported. The second adjustment moves interest-bearing checking and savings deposits from the nonmarket, over-one-year liability category to the shortest rate maturity category. The second adjustment reflects the availability of the deposits for immediate withdrawal. The resulting adjusted under-one-year cumulative gap (net liability position) was $7.7 billion, $7.4 billion and $5.9 billion at September 30, 1994, June 30, 1994 and December 31, 1993, respectively. Since interest rate changes do not affect all categories of assets and liabilities equally or simultaneously, a cumulative gap analysis alone is not adequate to evaluate the Company's interest rate sensitivity position. To supplement traditional gap analysis, the Company performs simulation modeling to estimate the potential effects of changing interest rates. The process 30 allows the Company to fully explore the complex relationships within the gap over time and various interest rate environments. In October 1994, the FASB issued Statement of Financial Accounting Standards No. 119 (FAS 119), Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments. FAS 119 requires various disclosures regarding derivative activities commencing with the Company's 1994 Annual Report. 31 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 4 The Company hereby agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of securities of the Company. 11 Computation of Earnings Per Common Share 27 Financial Data Schedule 99 Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges, including interest on deposits, were 2.23 and 1.94 for the quarters ended September 30, 1994 and 1993, respectively, and 2.28 and 1.81 for the first nine months of 1994 and 1993, respectively. The ratios of earnings to fixed charges, excluding interest on deposits, were 5.12 and 4.72 for the quarters ended September 30, 1994 and 1993, respectively, and 5.53 and 4.26 for the first nine months of 1994 and 1993, respectively. (b) The Company filed the following reports on Form 8-K during the third quarter of 1994 and through the date hereof: (1) July 20, 1994 under Item 5, containing the Press Releases that announced the Company's financial results for the quarter ended June 30, 1994, the share repurchase program, the quarterly common stock dividend and the retirement of Chairman Carl E. Reichardt on December 31, 1994 (2) October 18, 1994 under Item 5, containing the Press Release that announced the Company's financial results for the quarter ended September 30, 1994 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 10, 1994. WELLS FARGO & COMPANY By: FRANK A. MOESLEIN --------------------------------------- Frank A. Moeslein Executive Vice President and Controller (Principal Accounting Officer) 32 EX-11 2 EXHIBIT 11 EXHIBIT 11 WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE
=========================================================================================== Quarter Nine months ended Sept. 30, ended Sept. 30, --------------- ---------------- (in millions) 1994 1993 1994 1993 - ------------------------------------------------------------------------------------------- PRIMARY EARNINGS PER COMMON SHARE Net income $ 217 $ 165 $ 625 $ 422 Less preferred dividends 10 13 33 38 ----- ----- ------ ----- Net income for calculating primary earnings per common share $ 207 $ 152 $ 592 $ 384 ===== ===== ====== ===== Average common shares outstanding 53.6 55.7 54.7 55.5 ===== ===== ====== ===== PRIMARY EARNINGS PER COMMON SHARE $3.86 $2.74 $10.83 $6.92 ===== ===== ====== ===== FULLY DILUTED EARNINGS PER COMMON SHARE (1) Net income $ 217 $ 165 $ 625 $ 422 Less preferred dividends 10 13 33 38 ----- ----- ------ ----- Net income for calculating fully diluted earnings per common share $ 207 $ 152 $ 592 $ 384 ===== ===== ====== ===== Average common shares outstanding 53.6 55.7 54.7 55.5 Add exercise of options, warrants and share rights, reduced by the number of shares that could have been purchased with the proceeds from such exercise 1.4 1.3 1.4 1.3 ----- ----- ------ ----- Average common shares outstanding as adjusted 55.0 57.0 56.1 56.8 ===== ===== ====== ===== FULLY DILUTED EARNINGS PER COMMON SHARE $3.76 $2.68 $10.56 $6.77 ===== ===== ====== ===== =========================================================================================== (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-27 3 EXHIBIT 27
9 This schedule contains summary financial information extracted from the 10-Q dated November 10, 1994 for the period ended September 30, 1994 and is qualified in its entirety by reference to such financial information. 1,000,000 9-MOS DEC-31-1994 JAN-01-1994 SEP-30-1994 2,828 0 36 0 3,140 9,120 8,821 34,951 2,110 52,164 40,000 3,915 954 3,192 264 0 489 3,269 52,164 2,206 567 8 2,781 624 827 1,954 170 8 1,580 1,110 625 0 0 625 10.83 10.56 5.55 637 113 4 0 2,122 290 108 2,110 0 0 0
EX-99 4 EXHIBIT 99 EXHIBIT 99 WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
=============================================================================================================== Quarter ended Sept. 30, Nine months ended Sept. 30, ---------------------- -------------------------- (in millions) 1994 1993 1994 1993 - --------------------------------------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 383 $ 264 $1,110 $ 714 Fixed charges 311 282 869 878 ----- ----- ------ ------ $ 694 $ 546 $1,979 $1,592 ===== ===== ====== ====== Fixed charges (1): Interest expense $ 297 $ 270 $ 827 $ 840 Estimated interest component of net rental expense 14 12 42 38 ----- ----- ------ ------ $ 311 $ 282 $ 869 $ 878 ===== ===== ====== ====== Ratio of earnings to fixed charges (2) 2.23 1.94 2.28 1.81 ===== ===== ====== ====== EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 383 $ 264 $1,110 $ 714 Fixed charges 93 71 245 219 ----- ----- ------ ------ $ 476 $ 335 $1,355 $ 933 ===== ===== ====== ====== Fixed charges: Interest expense $ 297 $ 270 $ 827 $ 840 Less interest on deposits (218) (211) (624) (659) Estimated interest component of net rental expense 14 12 42 38 ----- ----- ------ ------ $ 93 $ 71 $ 245 $ 219 ===== ===== ====== ====== Ratio of earnings to fixed charges 5.12 4.72 5.53 4.26 ===== ===== ====== ====== =============================================================================================================== (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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