-----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, WhOk1he7IlL6F+6YJ7gczQJlUoHJcwOCaCexdw72v++YRlmPHXKY5OKpjrpugqe/ G+jKz5Qm6eRll3RNzM1X5g== 0000912057-95-001533.txt : 19950616 0000912057-95-001533.hdr.sgml : 19950616 ACCESSION NUMBER: 0000912057-95-001533 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950321 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WELLS FARGO & CO CENTRAL INDEX KEY: 0000105598 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 132553920 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06214 FILM NUMBER: 95522107 BUSINESS ADDRESS: STREET 1: 420 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94163 BUSINESS PHONE: 4154771000 MAIL ADDRESS: STREET 1: 343 SANSOME ST 3RD FL STREET 2: WELLS FARGO BANK CITY: SAN FRANCISCO STATE: CA ZIP: 94163 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the year ended December 31, 1994 Commission file number 1-6214 ------------------------------------------ WELLS FARGO & COMPANY (Exact name of registrant as specified in its charter) Delaware No. 13-2553920 (State of incorporation) (I.R.S. Employer Identification No.) 420 Montgomery Street, San Francisco, California 94163 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 477-1000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of Each Exchange Title of Each Class on Which Registered ------------------- --------------------- Common Stock, par value $5 New York Stock Exchange Pacific Stock Exchange Adjustable Rate Cumulative Preferred Stock, Series B New York Stock Exchange 9% Preferred Stock, Series C New York Stock Exchange 8 7/8% Preferred Stock, Series D New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is contained herein, or will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes X No ----- ----- As of February 17, 1995 (the latest practicable date), 50,921,627 shares of common stock were outstanding. On the same date, the aggregate market value of common stock held by nonaffiliates was approximately $7,810 million. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1994 Annual Report to Shareholders - Incorporated into Parts I, II and IV. Portions of the Proxy Statement for the 1995 Annual Meeting of Shareholders - Incorporated into Part III. FORM 10-K CROSS-REFERENCE INDEX
Page -------------------------------------------- FORM Annual Proxy 10-K Report (1) Statement (2) ---- ------ --------- PART I Item 1. Business Description of Business 2-5 6-68 -- Statistical Disclosure: Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential 6 11-13 -- Investment Portfolio 7 16-17, 43, 46-47 -- Loan Portfolio 7 18-27, 44, 48-49 -- Summary of Loan Loss Experience 8-10 27-28, 44, 49 -- Deposits 10 12-13, 28-29 -- Return on Equity and Assets -- 6-7 -- Short-Term Borrowings 11 -- -- Item 2. Properties 11 -- -- Item 3. Legal Proceedings -- 61 -- Item 4. Submission of Matters to a Vote of Security- Holders (in fourth quarter 1994) (3) -- -- -- Executive Officers of the Registrant 12 -- -- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters -- 38, 45 -- Item 6. Selected Financial Data -- 8 -- Item 7. Management's Discussion and Analysis of Finan- cial Condition and Results of Operations -- 6-38 -- Item 8. Financial Statements and Supplementary Data -- 39-68 -- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure (3) -- -- -- PART III Item 10. Directors and Executive Officers of the Registrant 12 -- 6-9 Item 11. Executive Compensation -- -- 3-4, 10-15 Item 12. Security Ownership of Certain Beneficial Owners and Management -- -- 5-6 Item 13. Certain Relationships and Related Transactions -- -- 17-19 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 13-15 39-68 -- SIGNATURES 16 -- -- - ----------------------------------------------------------------------------------------------------------------------------- (1) The 1994 Annual Report to Shareholders, portions of which are incorporated by reference into this Form 10-K. (2) The Proxy Statement dated March 13, 1995 for the 1995 Annual Meeting of Shareholders, portions of which are incorporated by reference into this Form 10-K. (3) None.
1 DESCRIPTION OF BUSINESS GENERAL Wells Fargo & Company (Parent) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Based on assets at December 31, 1994, it was the 15th largest bank holding company in the United States. Its principal subsidiary is Wells Fargo Bank, N.A. (Bank), the seventh largest bank in the U.S. Wells Fargo & Company and its subsidiaries are hereinafter referred to as the Company. THE BANK HISTORY AND GROWTH The Bank is the successor to the banking portion of the business founded by Henry Wells and William G. Fargo in 1852. That business later operated the westernmost leg of the Pony Express and ran stagecoach lines in the western part of the United States. The California banking business was separated from the express business in 1905 and was merged in 1960 with American Trust Company, another of the oldest banks in the Western United States. The Bank became Wells Fargo Bank, N.A., a national banking association, in 1968. Its head office is located in San Francisco, California. In 1986, the Company acquired from Midland Bank plc all the common stock of Crocker National Corporation, a bank holding company whose principal subsidiary was Crocker National Bank, the 17th largest bank in the U.S. at the time. In 1988, the Company acquired Barclays Bank of California with assets of $1.3 billion. In 1990 and 1991, the Company completed the two-phase purchase of the 130-branch California network of Great American Bank (GA), a Federal Savings Bank. The Company acquired assets with a GA book value of $5.8 billion. Also during 1990, the Company completed the acquisition of four California banking companies with combined assets of $1.9 billion: Valley National Bank of Glendale, Central Pacific Corporation of Bakersfield, the Torrey Pines Group of Solana Beach and Citizens Holdings and its two banking subsidiaries in Orange County. For further information, see the Line of Business Results section of the 1994 Annual Report to Shareholders. 2 The following table shows selected information for the Bank:
- ---------------------------------------------------------------------------------------------- December 31, ------------------------------------------------ (in billions) 1994 1993 1992 1991 1990 - ---------------------------------------------------------------------------------------------- Investment securities $11.2 $12.7 $ 9.0 $ 3.6 $ 1.3 Loans $35.7 $32.4 $36.0 $43.0 $47.3 Assets $51.9 $50.7 $50.7 $51.6 $53.7 Deposits $42.4 $42.4 $43.1 $44.5 $42.7 Staff (full-time equivalent) 19,522 19,644 21,276 20,954 21,635 Branches (domestic, all California) 634 624 626 612 574 - ----------------------------------------------------------------------------------------------
NONBANK SUBSIDIARIES The Company has wholly-owned subsidiaries that provide various banking-related services. In the aggregate, these subsidiaries are not material to the Company's assets or net income. COMPETITION The Company competes for deposits, loans and other banking services in its principal geographic market in California, as well as in selected national markets as opportunities arise. The banking business is highly competitive and has become increasingly so in recent years; the industry continues to consolidate and strong, unregulated competitors have entered core banking markets with focused products targeted at highly profitable customer segments. These unregulated competitors, such as investment companies, specialized lenders and multinational financial services companies, compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services in nearly all significant products. These competitive trends are likely to continue. Within the banking industry, ongoing consolidation has increased pressure on the Company from its most significant competitor in California, Bank of America, now the second largest bank holding company in the United States. Moreover, federal and state legislation adopted in recent years has increased competition by allowing banking organizations from other parts of the country to enter the Company's core geographic market (see "Supervision and Regulation" for further discussion of such legislation and the competitive environment in which the Company operates). Among commercial banks, the Bank is presently the second largest holder of customer deposits in California. There is no meaningful measure of overall market share within the broadly defined financial services industry. 3 MONETARY POLICY The earnings of the Company are affected not only by general economic conditions, but also by the policies of various governmental regulatory authorities in the U.S. and abroad. In particular, the Federal Reserve System exerts a substantial influence on interest rates and credit conditions, primarily through open market operations in U.S. Government securities, varying the discount rate on member bank borrowings and setting reserve requirements against deposits. Federal Reserve monetary policies have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. SUPERVISION AND REGULATION Under the Bank Holding Company Act, the Company is required to file reports of its operations with the Board of Governors of the Federal Reserve System and is subject to examination by it. Further, the Act restricts the activities in which the Company may engage and the nature of any company in which the Parent may own more than 5% of the voting shares. Generally, permissible activities are limited to banking, the business of managing and controlling banks, and activities so closely related to banking as determined by the Board of Governors to be proper incidents thereto. Under the Act, the acquisition of substantially all of the assets of any domestic bank or savings association or the ownership or control of more than 5% of its voting shares by a bank holding company is subject to prior approval by the Board of Governors. In no case, however, may the Board approve the acquisition by the Parent of the voting shares of, or substantially all assets of, any bank located outside of California unless such acquisition is specifically authorized by the laws of the state in which the bank to be acquired is located or the Federal Deposit Insurance Corporation (FDIC) arranges the acquisition under its authority to aid financially troubled banks. Federal legislation enacted in 1994 will remove many of the remaining barriers to interstate expansion and acquisition. Effective September 29, 1995, bank holding companies which are adequately capitalized and adequately managed will be permitted to make interstate acquisitions of banks without regard to state law restrictions. Beginning in 1997, the merger of commonly owned banks in different states will also be permitted, except in states which have passed legislation to prohibit such mergers. The new statute will also permit banks to establish branches outside their home state in states which pass legislation to permit such interstate branching. The Bank is subject to certain restrictions under the Federal Reserve Act, including restrictions on the terms of transactions between the Bank and its affiliates and on any extension of credit to its affiliates. Dividends payable by the Bank to the Parent without the express approval of the Office of the Comptroller of the Currency are limited by a formula. For more information regarding restrictions on loans and dividends by the Bank to its affiliates, see Note 2 to the Financial Statements in the 1994 Annual Report to Shareholders. There are various requirements and restrictions in the laws of the U.S. and California affecting the Bank and its operations, including restrictions on the amount of its loans and the nature and amount of its investments, its activities as an underwriter of securities, its opening of branches and its acquisition of other banks or savings associations. The Bank, as a 4 national bank, is subject to regulation and examination by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the FDIC. Major regulatory changes affecting the Bank, banking and the financial services industry in general have occurred in the last several years and can be expected to occur increasingly in the future. Federal banking legislation since 1980 has deregulated interest rate ceilings on deposits at banks and thrift institutions, has increased the types of accounts that can be offered and has increased the cost of FDIC insurance of deposits. Generally, the effect of these changes has been to increase the Bank's cost of its traditionally important sources of consumer deposits. In addition, federal banking legislation has narrowed the functional distinctions among financial institutions. The consumer and commercial banking powers of thrift institutions have expanded, and state-chartered banks are authorized to engage in all activities which are permissible for national banks and in certain cases may, with approval of the FDIC, engage in activities, such as insurance underwriting, which are not authorized for national banks. Non-depository institutions can be expected to increase the extent to which they act as financial intermediaries, particularly in the area of consumer credit services. Large institutional users and sources of credit may also increase the extent to which they interact directly, meeting business credit needs outside the banking system. Furthermore, the geographic constraints on portions of the financial services industry can be expected to continue to erode. These changes create significant opportunities for the Company, as well as the financial services industry, to compete in financial markets on a less-regulated basis. They also suggest that the Company and, particularly, the Bank will face new and major competitors in geographic and product markets in which their operations historically have been protected by banking laws and regulations. 5 ANALYSIS OF CHANGES IN NET INTEREST INCOME The following table allocates the changes in net interest income on a taxable-equivalent basis to changes in either average balances or average rates for both interest-earning assets and interest-bearing liabilities. Because of the numerous simultaneous volume and rate changes during any period, it is not possible to precisely allocate such changes between volume and rate. For this table, changes that are not solely due to either volume or rate are allocated to these categories in proportion to the percentage changes in average volume and average rate.
- -------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1994 OVER 1993 1993 over 1992 ------------------------------ ---------------------------- (in millions) VOLUME RATE TOTAL Volume Rate Total - -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in interest income: Investment securities: At cost: U.S. Treasury securities $ 4 $ (6) $ (2) $ 37 $ (13) $ 24 Securities of U.S. government agencies and corporations (127) (27) (154) 248 (46) 202 Private collateralized mortgage obligations 19 16 35 24 12 36 Other securities (3) -- (3) 4 -- 4 At fair value: U.S. Treasury Securities 13 -- 13 -- -- -- Securities of U.S. government agencies and corporations 93 -- 93 -- -- -- Private collateralized mortgage obligations 80 -- 80 -- -- -- Other securities 6 -- 6 -- -- -- At lower of cost or market -- -- -- (5) (4) (9) Federal funds sold and securities purchased under resale agreements (18) 2 (16) (6) (4) (10) Loans: Commercial (6) (12) (18) (232) 77 (155) Real estate 1-4 family first mortgage 122 (79) 43 (73) (96) (169) Other real estate mortgage (119) 43 (76) (96) (1) (97) Real estate construction (30) 10 (20) (46) 1 (45) Consumer: Real estate 1-4 family junior lien mortgage (39) 28 (11) (50) (50) (100) Credit card 18 (6) 12 (28) (9) (37) Other revolving credit and monthly payment 12 3 15 (18) (8) (26) Lease financing 7 (8) (1) 2 (6) (4) Foreign 2 -- 2 -- -- -- Other 3 -- 3 -- -- -- ----- ---- ----- ----- ----- ---- Total increase (decrease) in interest income 37 (36) 1 (239) (147) (386) ----- ---- ----- ----- ----- ---- Increase (decrease) in interest expense: Deposits: Interest-bearing checking -- (10) (10) 1 (27) (26) Savings deposits (4) (5) (9) (13) (18) (31) Market rate savings (5) 18 13 35 (99) (64) Savings certificates (39) (7) (46) (129) (56) (185) Certificates of deposit (1) (1) (2) (8) (1) (9) Other time deposits (1) 1 -- (1) -- (1) Deposits in foreign offices 44 -- 44 (1) (2) (3) Federal funds purchased and securities sold under repurchase agreements 45 25 70 (8) (4) (12) Commercial paper and other short-term borrowings 1 3 4 (1) (2) (3) Senior debt (12) 11 (1) -- (23) (23) Subordinated debt (26) 13 (13) 5 5 10 ----- ---- ----- ----- ----- ---- Total increase (decrease) in interest expense 2 48 50 (120) (227) (347) ----- ---- ----- ----- ----- ---- Increase (decrease) in net interest income on a taxable-equivalent basis $ 35 $(84) $ (49) $(119) $ 80 $(39) ===== ==== ===== ===== ===== ==== - ---------------------------------------------------------------------------------------------------------------------------------
6 INVESTMENT SECURITIES At December 31, 1994, there were no investment securities issued by a single issuer (excluding the U.S. government and its agencies and corporations) that exceeded 10% of stockholders' equity, except for private collateralized mortgage obligations issued by The Prudential Home Mortgage Securities Company, Inc. and Countrywide Mortgage Backed Securities, Inc. The securities issued by The Prudential Home Mortgage Securities Company, Inc. had a cost basis and fair value of $974 million and $897 million, respectively, and were distributed among 42 series of mortgage pass-through certificates; each series was collateralized by separate trusts. The largest series had a cost basis and fair value of $51 million and $46 million, respectively. The securities issued by Countrywide Mortgage Backed Securities, Inc. had a cost basis and fair value of $452 million and $417 million, respectively, and were distributed among 17 series of mortgage pass-through certificates; each series was collateralized by separate trusts. The largest series had a cost basis and fair value of $42 million and $38 million, respectively. LOAN PORTFOLIO The following table presents the remaining contractual principal maturities of selected loan categories at December 31, 1994 and a summary of the major categories of loans outstanding at the end of the last five years. At December 31, 1994, the Company did not have loan concentrations that exceeded 10% of total loans, except as shown below.
- --------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1994 ---------------------------------------------------------- Over One Year Through Five Years Over Five Years ------------------ --------------- Floating Floating or or One Year Fixed Adjustable Fixed Adjustable December 31, ----------------------------------- (in millions) or less rate rate rate rate total 1993 1992 1991 1990 - ---------------------------------------------------------------------------------------------------------------------------------- Selected loan maturities: Commercial $4,267 $ 250 $2,874 $ 62 $ 709 $ 8,162 $ 6,912 $ 8,214 $11,270 $14,639 Real estate 1-4 family first mortgage (1) 24 74 35 5,197 3,720 9,050 7,458 6,836 8,612 9,865 Other real estate mortgage 2,060 1,046 3,236 613 1,124 8,079 8,286 10,128 10,751 10,505 Real estate construction 628 43 309 5 28 1,013 1,110 1,600 2,055 2,669 Foreign 27 -- -- -- -- 27 18 5 2 9 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total selected loan maturities $7,006 $1,413 $6,454 $5,877 $5,581 26,331 23,784 26,783 32,690 37,687 ====== ====== ====== ====== ====== ------ ------ ------ ------ ------ Other loan categories: Real estate 1-4 family junior lien mortgage 3,332 3,583 4,157 5,053 5,178 Credit card 3,125 2,600 2,807 2,900 2,788 Other revolving credit and monthly payment 2,229 1,920 1,979 2,286 2,163 ------ ------ ------ ------ ------ Total consumer 8,686 8,103 8,943 10,239 10,129 Lease financing 1,330 1,212 1,177 1,170 1,161 ------ ------ ------ ------ ------ Total loans $36,347 $33,099 $36,903 $44,099 $48,977 ======= ======= ======= ======= ======= - ---------------------------------------------------------------------------------------------------------------------------------- (1) Includes approximately $2.7 billion of fixed-initial-rate mortgage (FIRM) loans in the over 5 year fixed rate category. FIRM loans carry fixed rates during the first 3, 5, 7 or 10 years (based on the period selected by the borrower) of the loan term and carry adjustable rates thereafter.
7 CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------------------------------------------------- Year ended December 31, ------------------------------------------------------------ (in millions) 1994 1993 1992 1991 1990 - --------------------------------------------------------------------------------------------------------------------------- Balance, beginning of year $2,122 $2,067 $1,646 $ 885 $ 738 Allowance related to acquisitions (dispositions) -- -- -- (2) 33 Provision for loan losses 200 550 1,215 1,335 310 Loan charge-offs: Commercial (54) (110) (238) (402) (75) Real estate 1-4 family first mortgage (18) (25) (17) (11) (5) Other real estate mortgage (66) (197) (290) (88) (25) Real estate construction (19) (68) (93) (29) (19) Consumer: Real estate 1-4 family junior lien mortgage (24) (28) (28) (7) (6) Credit card (138) (177) (189) (161) (107) Other revolving credit and monthly payment (36) (41) (41) (42) (26) ------ ------ ------ ------ ----- Total consumer (198) (246) (258) (210) (139) Lease financing (14) (18) (19) (19) (17) ------ ------ ------ ------ ----- Total loan charge-offs (369) (664) (915) (759) (280) ------ ------ ------ ------ ----- Loan recoveries: Commercial 37 71 59 98 40 Real estate 1-4 family first mortgage 6 2 2 -- -- Other real estate mortgage 22 47 9 2 7 Real estate construction 15 4 3 3 1 Consumer: Real estate 1-4 family junior lien mortgage 4 3 1 -- -- Credit card 18 21 21 19 17 Other revolving credit and monthly payment 11 12 12 11 12 ------ ------ ------ ------ ----- Total consumer 33 36 34 30 29 Lease financing 16 9 9 5 5 Foreign -- -- 1 49 30 ------ ------ ------ ------ ----- Total loan recoveries 129 169 117 187 112 ------ ------ ------ ------ ----- Total net loan charge-offs (240) (495) (798) (572) (168) Recoveries (losses) on the sale or swap of developing country loans -- -- 4 -- (28) ------ ------ ------ ------ ----- Balance, end of year $2,082 $2,122 $2,067 $1,646 $ 885 ====== ====== ====== ====== ===== Total net loan charge-offs as a percentage of average total loans .70% 1.44% 1.97% 1.22% .38% ====== ====== ====== ====== ===== Allowance as a percentage of total loans 5.73% 6.41% 5.60% 3.73% 1.81% ====== ====== ====== ====== ===== - ---------------------------------------------------------------------------------------------------------------------------
8 The Securities and Exchange Commission requires the Company to present the ratio of the allowance for loan losses to total nonaccrual loans. This ratio was 367% and 178% at December 31, 1994 and 1993, respectively. This ratio may fluctuate significantly from period to period due to such factors as the prospects of borrowers and the value and marketability of collateral as well as, for the nonaccrual portfolio taken as a whole, wide variances from period to period in terms of delinquency and relationship of book to contractual principal balance. (For example, at December 31, 1994 and 1993, the percentage of nonaccrual loan balances that were current as to payment of principal and interest were 32% and 50%, respectively.) Classification of a loan as nonaccrual does not necessarily indicate that the principal of a loan is uncollectible in whole or in part. Consequently, the ratio of the allowance for loan losses to nonaccrual loans, taken alone and without taking into account numerous additional factors, is not a reliable indicator of the adequacy of the allowance for loan losses. Indicators of the credit quality of the Company's loan portfolio and the method of determining the allowance for loan losses are discussed in the 1994 Annual Report to Shareholders. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The table on the following page provides a breakdown of the allowance for loan losses by loan category. The allocated component of the allowance reflects inherent losses resulting from the analysis of individual loans and is developed through specific credit allocations for individual loans and historical loss experience for each loan category and degree of criticism within each category. The total of these allocations is then supplemented by the unallocated component of the allowance for loan losses, which includes adjustments to the historical loss experience for the various loan categories to reflect any current conditions that could affect loss recognition. The unallocated component includes management's judgmental determination of the amounts necessary for concentrations, economic uncertainties and other subjective factors; correspondingly, the relationship of the unallocated component to the total allowance for loan losses may fluctuate significantly from period to period. Although management has allocated the allowance to specific loan categories, the adequacy of the allowance must be considered in its entirety. 9
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES - --------------------------------------------------------------------------------------------------------------------------- December 31, - --------------------------------------------------------------------------------------------------------------------------- (in millions) 1994 1993 1992 1991 1990 - --------------------------------------------------------------------------------------------------------------------------- Commercial $ 109 $ 152 $ 373 $ 417 $177 Real estate 1-4 family first mortgage 41 39 37 33 32 Other real estate mortgage 212 357 589 350 63 Real estate construction 45 92 181 121 36 Consumer: Credit card (1) 87 96 107 239 193 Other consumer 70 87 58 51 32 ------ ------ ------ ------ ---- Total consumer 157 183 165 290 225 Lease financing 21 19 17 15 13 Foreign -- -- -- -- 6 Unallocated component of the allowance (2) 1,497 1,280 705 420 333 ------ ------ ------ ------ ---- Total $2,082 $2,122 $2,067 $1,646 $885 ====== ====== ====== ====== ==== - --------------------------------------------------------------------------------------------------------------------------- December 31, ------------------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 ---------------- ---------------- ---------------- ---------------- ---------------- ALLOC. LOAN Alloc. Loan Alloc. Loan Alloc. Loan Alloc. Loan ALLOW. CATGRY allow. catgry allow. catgry allow. catgry allow. catgry AS % AS % as % as % as % as % as % as % as % as % OF LOAN OF TOTAL of loan of total of loan of total of loan of total of loan of total CATGRY LOANS catgry loans catgry loans catgry loans catgry loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Commercial 1.34% 22% 2.20% 21% 4.54% 22% 3.70% 25% 1.21% 31% Real estate 1-4 family first mortgage .45 25 .52 23 .54 19 .38 20 .32 20 Other real estate mortgage 2.62 22 4.31 25 5.82 27 3.26 24 .60 21 Real estate construction 4.44 3 8.29 3 11.31 4 5.89 5 1.35 5 Consumer: Credit card (1) 2.78 9 3.69 8 3.81 8 8.24 7 6.92 6 Other consumer 1.26 15 1.58 16 .95 17 .69 16 .44 15 --- --- --- --- --- Total consumer 1.81 24 2.26 24 1.85 25 2.83 23 2.22 21 Lease financing 1.58 4 1.57 4 1.44 3 1.28 3 1.12 2 Foreign -- -- -- -- -- -- -- -- 66.67 -- --- --- --- --- --- Total 5.73% 100% 6.41% 100% 5.60% 100% 3.73% 100% 1.81% 100% ==== === ==== === ==== === ==== === ==== === - ---------------------------------------------------------------------------------------------------------------------------------- (1) In 1992, the calculation method for the allocation of the allowance for loan losses for credit card loans was changed in order to better conform to industry practice, whereby the allocation now approximates 7 months (formerly, 18 to 21 months) of projected losses. Based on the revised method, the estimated allocation for credit card loans would have been reduced (and, correspondingly, the unallocated portion of the allowance would have been increased) by about $140 million and $130 million at December 31, 1991 and 1990, respectively. (2) This amount and any unabsorbed portion of the allocated allowance are also available for any of the above listed loan categories.
DEPOSITS At December 31, 1994, the contractual principal maturities of domestic time certificates of deposit and other time deposits issued in amounts of $100,000 or more were as follows (based on time remaining until maturity): $522 million maturing in 3 months or less; $227 million over 3 through 6 months; $396 million over 6 through 12 months and $471 million over 12 months. Time certificates of deposit and other time deposits issued by foreign offices in amounts of $100,000 or more represent substantially all of the foreign deposit liabilities of $3,540 million at December 31, 1994. 10 SHORT-TERM BORROWINGS The following table shows selected information for those short-term borrowings that exceed 30% of stockholders' equity:
- ------------------------------------------------------------------------------ Year ended December 31, ---------------------------------- (in millions) 1994 1993 1992 - ------------------------------------------------------------------------------ FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS (1) Average amount outstanding $2,223 $1,051 $1,299 Daily average rate 4.45% 2.79% 3.16% Highest month-end balance $3,887 $1,378 $2,164 Year-end balance $3,022 $1,079 $1,311 Weighted average rate on outstandings at year end 5.24% 2.67% 2.56% - ------------------------------------------------------------------------------ (1) These borrowings generally mature in less than 30 days.
PROPERTIES The Company owns and leases various properties, primarily in the financial district of San Francisco and other locations throughout California. The Company owns its 12-story headquarters building in San Francisco and a four-story administrative building and a five-story data processing center, both in El Monte, California. The Company is also a joint venture partner in a 54-story office building in downtown Los Angeles, of which approximately 200,000 square feet is occupied by administrative staff and 60,000 square feet is sublet. In addition, the Company leases approximately 2,600,000 square feet of office space for data processing support and various administrative departments in four major buildings in San Francisco, two other major locations in the San Francisco Bay area and four major locations in Southern California. At December 31, 1994, the Bank operated 634 domestic branch offices (including 23 banking centers), of which 344 were in Northern California and 290 in Southern California. The Company owns the land and buildings occupied by 230 of the branch offices and leases 404 branch offices (including 23 banking centers). The leases are generally for terms not exceeding 30 years. 11 EXECUTIVE OFFICERS OF THE REGISTRANT Date from Name Office held which held Age - ---------------------- --------------------------- -------------- --- Paul Hazen Chairman and Chief January 1995 53 Executive Officer William F. Zuendt President and Chief January 1995 48 Operating Officer Michael J. Gillfillan Vice Chairman January 1992 46 Charles M. Johnson Vice Chairman January 1992 53 Clyde W. Ostler Vice Chairman January 1990 48 Rodney L. Jacobs Vice Chairman and Chief January 1990 54 Financial Officer Patricia R. Callahan Executive Vice President March 1993 41 and Personnel Director Frank A. Moeslein Executive Vice President April 1991 51 and Controller Guy Rounsaville, Jr. Executive Vice President, March 1985 51 Chief Counsel and Secretary Ross J. Kari Senior Vice President January 1995 36 and General Auditor Carl E. Reichardt, former Chairman and Chief Executive Officer, retired from the Company effective December 31, 1994. He remains on the Board of Directors. Accordingly, as of January 1, 1995, Paul Hazen, former President and Chief Operating Officer, became Chairman and Chief Executive Officer. William F. Zuendt, a former Vice Chairman, became President and Chief Operating Officer, and joined the Board of Directors at that time. William F. Aldinger III, a former Vice Chairman, and Stuart V.M. Campbell, former Executive Vice President and General Auditor, resigned from the Company in August 1994 and January 1995, respectively. The principal occupation of each of the executive officers during the past five years has been in the position reported above or in other positions as an officer with the Company. There is no family relationship among the above officers. All executive officers serve at the pleasure of the Board of Directors. 12 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements, Schedules and Exhibits: (1) The consolidated financial statements and related notes, the independent auditors' report thereon and supplementary data that appear on pages 39 through 68 of the 1994 Annual Report to Shareholders are incorporated herein by reference. (2) Financial Statement Schedules: All schedules are omitted, because the conditions requiring their filing do not exist. (3) Exhibits: Exhibit number Description ------ ----------- 3(a) Restated Certificate of Incorporation, incorporated by reference to Exhibit 3(a) of Form 10-K filed March 21, 1994 (b) Certificate of the Voting Powers, Designation, Preferences and Relative, Participating, Optional or Other Special Rights, and the Qualifications, Limitations or Restrictions Thereof, Which Have Not Been Set Forth in the Certificate of Incorporation or in any Amendment Thereto, of the Adjustable Rate Cumulative Preferred Stock, Series B, incorporated by reference to Exhibit 3(c) of Form 10-K filed March 21, 1994 (c) Certificate of the Voting Powers, Designation, Preferences and Relative, Participating, Optional or Other Special Rights, and the Qualifications, Limitations or Restrictions Thereof, Which Have Not Been Set Forth in the Certificate of Incorporation or in any Amendment Thereto, of the 9% Preferred Stock, Series C, incorporated by reference to Exhibit 3 of Form 8-K filed October 24, 1991 (d) Certificate of the Voting Powers, Designation, Preferences and Relative, Participating, Optional or Other Special Rights, and the Qualifications, Limitations or Restrictions Thereof, Which Have Not Been Set Forth in the Certificate of Incorporation or in any Amendment Thereto, of the 8 7/8% Preferred Stock, Series D, incorporated by reference to Exhibit 3 of Form 8-K filed March 5, 1992 (e) By-Laws 4(a) The Company hereby agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of senior and subordinated debt of the Company. (b) Deposit Agreement dated as of October 24, 1991 among Wells Fargo & Company, Marine Midland Bank, N.A. as Depositary and the holders from time to time of the Depositary Shares representing one-twentieth of a share of 9% Preferred Stock, Series C, incorporated by reference to Exhibit 4(a) of Form 8-K filed October 24, 1991 (c) Specimen of certificate for the 9% Preferred Stock, Series C, incorporated by reference to Exhibit 4(b) of Form 8-K filed October 24, 1991 (d) Specimen of Depositary Receipt for the Depositary Shares, each representing a one-twentieth interest in a share of the 9% Preferred Stock, Series C, incorporated by reference to Exhibit 4(c) of Form 8-K filed October 24, 1991 13 Exhibit number Description ------ ----------- (e) Deposit Agreement dated as of March 5, 1992 among Wells Fargo & Company, Marine Midland Bank, N.A. as Depositary and the holders from time to time of the Depositary Shares representing one-twentieth of a share of 8 7/8% Preferred Stock, Series D, incorporated by reference to Exhibit 4(a) of Form 8-K filed March 5, 1992 (f) Specimen of certificate for the 8 7/8% Preferred Stock, Series D, incorporated by reference to Exhibit 4(b) of Form 8-K filed March 5, 1992 (g) Specimen of Depositary Receipt for the Depositary Shares, each representing a one-twentieth interest in a share of the 8 7/8% Preferred Stock, Series D, incorporated by reference to Exhibit 4(c) of Form 8-K filed March 5, 1992 10(a) Benefits Restoration Program, incorporated by reference to Exhibit 10(a) of Form 10-K for the year ended December 31, 1990 (b) Deferral Plan for Directors, as amended through November 19, 1991, incorporated by reference to Exhibit 10(b) of Form 10- K for the year ended December 31, 1991 (c) 1990 Director Option Plan, as amended through November 19, 1991, incorporated by reference to Exhibit 10(c) of Form 10- K for the year ended December 31, 1991 (d) 1987 Director Option Plan, as amended through November 19, 1991, incorporated by reference to Exhibit 10(d) of Form 10- K for the year ended December 31, 1991 (e) Director Retirement Plan, incorporated by reference to Exhibit 10(e) of Form 10-K for the year ended December 31, 1993 (f) 1990 Equity Incentive Plan, incorporated by reference to Exhibit 10(f) of Form 10-K for the year ended December 31, 1990 (g) 1982 Equity Incentive Plan, as amended through November 15, 1988, incorporated by reference to Exhibit 10(g) of Form 10- K for the year ended December 31, 1993 (h) Executive Incentive Pay Plan, incorporated by reference to Exhibit 10(h) of Form 10-K for the year ended December 31, 1990 (i) Executive Loan Plan (j) Passivity Agreement dated July 31, 1991 between the Company and Berkshire Hathaway Inc., including the form of proxy granted in connection therewith, incorporated by reference to Exhibit 19 of Form 10-Q for the quarter ended June 30, 1991 (k) Long-Term Incentive Plan, incorporated by reference to Exhibit A of the Proxy Statement filed March 14, 1994 (l) Senior Executive Performance Plan, incorporated by reference to Exhibit B of the Proxy Statement filed March 14, 1994 11 Computation of Earnings Per Common Share 12 Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges, including interest on deposits, were 2.20, 1.90, 1.33, 1.02 and 1.43 for the years ended December 31, 1994, 1993, 1992, 1991 and 1990, respectively. The ratios of earnings to fixed charges, excluding interest on deposits, were 5.04, 4.53, 2.56, 1.10 and 2.42 for the years ended December 31, 1994, 1993, 1992, 1991 and 1990, respectively. 14 Exhibit number Description ------ ----------- 13 1994 Annual Report to Shareholders -- only those sections of the Annual Report to Shareholders referenced in the index on page 1 are incorporated in the Form 10-K. 21 Subsidiaries of the Registrant -- Wells Fargo & Company's only significant subsidiary, as defined, is Wells Fargo Bank, N.A. 23 Consent of Independent Accountants 27 Financial Data Schedule (b) The Company filed the following reports on Form 8-K during the fourth quarter of 1994 and through the date hereof in 1995: (1) October 18, 1994 under Item 5, containing the Press Release that announced the Company's financial results for the quarter and nine months ended September 30, 1994 (2) January 17, 1995 under Item 5, containing the Press Releases that announced the Company's financial results for the quarter and year ended December 31, 1994 and the increase in the Company's common stock dividend STATUS OF PRIOR DOCUMENTS The Wells Fargo & Company Annual Report on Form 10-K for the year ended December 31, 1994, at the time of filing with the Securities and Exchange Commission, shall modify and supersede all prior documents filed pursuant to Sections 13, 14 and 15(d) of the Securities Exchange Act of 1934 for purposes of any offers or sales of any securities after the date of such filing pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933 which incorporates by reference such Annual Report on Form 10-K. 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 21, 1995. WELLS FARGO & COMPANY By: FRANK A. MOESLEIN ---------------------------------------- Frank A. Moeslein (Executive Vice President and Controller) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 21, 1995:
PAUL HAZEN Chairman and Chief ROBERT K. JAEDICKE Director - ------------------- Executive Officer ---------------------- (Paul Hazen) (Principal Executive (Robert K. Jaedicke) Officer) PAUL A. MILLER Director ---------------------- (Paul A. Miller) RODNEY L. JACOBS Vice Chairman and Chief ELLEN M. NEWMAN Director - -------------------- Financial Officer ---------------------- (Rodney L. Jacobs) (Principal Financial (Ellen M. Newman) Officer) PHILIP J. QUIGLEY Director ---------------------- (Philip J. Quigley) FRANK A. MOESLEIN Executive Vice President CARL E. REICHARDT Director - ------------------- and Controller (Principal ----------------------- (Frank A. Moeslein) Accounting Officer) (Carl E. Reichardt) DONALD B. RICE Director ----------------------- (Donald B. Rice) H. JESSE ARNELLE Director SUSAN G. SWENSON Director - ------------------- ----------------------- (H. Jesse Arnelle) (Susan G. Swenson) WILLIAM R. BREUNER Director CHANG-LIN TIEN Director - ------------------- ----------------------- (William R. Breuner) (Chang-Lin Tien) Director JOHN A. YOUNG Director - ------------------- ----------------------- (William S. Davila) (John A. Young) RAYBURN S. DEZEMBER Director WILLIAM F. ZUENDT Director - ------------------- ----------------------- (Rayburn S. Dezember) (William F. Zuendt)
16 EX-3.(E) 2 BY-LAWS BY-LAWS OF WELLS FARGO & COMPANY (A DELAWARE CORPORATION), AS AMENDED JANUARY 1, 1995 ______________ ARTICLE I MEETINGS OF STOCKHOLDER SECTION 1. ANNUAL MEETINGS. The annual meeting of stockholders of Wells Fargo & Company (the "corporation") shall be held on the third Tuesday of April in each year at such time of day as may be fixed by the Board of Directors, at the principal office of the corporation, if not a bank holiday, and if a bank holiday then on the next succeeding business day at the same hour and place, or at such other time, date or place, within or without the State of Delaware, as may be determined by the Board of Directors. At such meeting, Directors shall be elected, reports of the affairs of the corporation may be considered, and any other proper business may be transacted. SECTION 2. SPECIAL MEETINGS. Special meetings of the stockholders, unless otherwise regulated by statute, for any purpose or purposes whatsoever, may be called at any time by the Board of Directors, the Chairman of the Board, the President, the Chief Executive Officer (if other than the Chairman of the Board or the President), or one or more stockholders holding not less than 10 percent of the voting power of the corporation. Such meetings may be held at any place within or without the State of Delaware designated by the Board of Directors of the corporation. SECTION 3. NOTICE OF MEETINGS. Notice of all meetings of the stockholders, both annual and special, shall be given by the Secretary in writing to stockholders entitled to vote. A notice may be given either personally or by mail or other means of written communication, charges prepaid, addressed to any -1- stockholder at his address appearing on the books of the corporation or at the address given by such stockholder to the corporation for the purpose of notice. Notice of any meeting of stockholders shall be sent to each stockholder entitled thereto not less than 10 nor more than 60 days prior to such meeting. Such notice shall state the place, date and hour of the meeting and shall also state (i) in the case of a special meeting, the general nature of the business to be transacted and that no other business may be transacted, (ii) in the case of an annual meeting, those matters which the Board of Directors intends at the time of the mailing of the notice to present for stockholder action and that any other proper matter may be presented for stockholder action to the meeting, and (iii) in the case of any meeting at which Directors are to be elected, the names of the nominees which the management intends at the time of the mailing of the notice to present for election. SECTION 4. QUORUM. Except as otherwise provided by law, the presence of the holders of a majority of the stock issued and outstanding present in person or represented by proxy and entitled to vote is requisite and shall constitute a quorum for the transaction of business at all meetings of the stockholders, and the vote of a majority of such stock present and voting at a duly held meeting at which there is a quorum present shall decide any question brought before such meeting. SECTION 5. VOTING. Unless otherwise provided in the Certificate of Incorporation, every stockholder shall be entitled to one vote for every share of stock standing in his name on the books of the corporation, and may vote either in person or by proxy. ARTICLE II DIRECTORS SECTION 1. NUMBER, TERM. The property, business and affairs of the corporation shall be managed and all corporate power shall be exercised by or under the direction of the Board of Directors as from time to time constituted. The number of Directors of this corporation shall be not less than 10 nor more than 20, the exact number within the limits so specified to be fixed from time to time by a By-Law adopted by the stockholders -2- or by the Board of Directors. Until some other number is so fixed, the number of Directors shall be 15. The term of office of each Director shall be from the time of his election until the annual meeting next succeeding his election and until his successor shall have been duly elected, or until his death, resignation or lawful removal pursuant to the provisions of the General Corporation Law of Delaware. SECTION 2. POWERS. In addition to the powers expressly conferred by these By-Laws, the Board of Directors may exercise all corporate powers and do such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws required to be exercised or approved by the stockholders. SECTION 3. COMPENSATION. Directors and Advisory Directors (as provided in Section 12 of this Article) as such may receive such compensation, if any, as the Board of Directors by resolution may direct, including salary or a fixed sum plus expenses, if any, for attendance at meetings of the Board of Directors or of its committees. SECTION 4. ORGANIZATIONAL MEETING. An organizational meeting of the Board of Directors shall be held each year immediately following the adjournment of the annual meeting of stockholders of the corporation for the purpose of electing officers, the members of the Formal Committees provided in Section 11 of this Article and the Advisory Directors provided in Section 12 of this Article, and for the transaction of any other business. Said organizational meeting shall be held without any notice other than this By-Law. SECTION 5. PLACE OF MEETINGS. The Board of Directors shall hold its meetings at the main office of the corporation or at such other place as may from time to time be designated by the Board of Directors or by the chief executive officer. SECTION 6. REGULAR MEETINGS. Regular meetings of the Board of Directors will be held on the third Tuesday of each month (except for the months of August and December) at the later of the following times: (i) 10:30 a.m. or (ii) immediately following the adjournment of any regular meeting of the Board of Directors of Wells Fargo Bank, National Association, held on the same day. If the day of any regular meeting shall fall upon a bank holiday, the meeting shall be held at the same hour on the -3- first day following which is not a bank holiday. No call or notice of a regular meeting need be given unless the meeting is to be held at a place other than the main office of the corporation. SECTION 7. SPECIAL MEETINGS. Special meetings shall be held when called by the chief executive officer or at the written request of four Directors. SECTION 8. QUORUM; ADJOURNED MEETINGS. A majority of the authorized number of Directors shall constitute a quorum for the transaction of business. A majority of the Directors present, whether or not a quorum, may adjourn any meeting to another time and place, provided that, if the meeting is adjourned for more than 30 days, notice of the adjournment shall be given in accordance with these By-Laws. SECTION 9. NOTICE, WAIVERS OF NOTICE. Notice of special meetings and notice of regular meetings held at a place other than the head office of the corporation shall be given to each Director, and notice of the adjournment of a meeting adjourned for more than 30 days shall be given prior to the adjourned meeting to all Directors not present at the time of the adjournment. No such notice need specify the purpose of the meeting. Such notice shall be given four days prior to the meeting if given by mail or on the day preceding the day of the meeting if delivered personally or by telephone, facsimile, telex or telegram. Such notice shall be addressed or delivered to each Director at such Director's address as shown upon the records of the corporation or as may have been given to the corporation by the Director for the purposes of notice. Notice need not be given to any Director who signs a waiver of notice (whether before or after the meeting) or who attends the meeting without protesting the lack of notice prior to its commencement. All such waivers shall be filed with and made a part of the minutes of the meeting. SECTION 10. TELEPHONIC MEETINGS. A meeting of the Board of Directors or of any Committee thereof may be held through the use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in such a meeting shall constitute presence at such meeting. -4- SECTION 11. WRITTEN CONSENTS. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board of Directors shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. Such action by written consent shall have the same force and effect as the unanimous vote of the Directors. SECTION 12. RESIGNATIONS. Any Director may resign his position as such at any time by giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors. Such resignation shall take effect as of the time such notice is given or as of any later time specified therein and the acceptance thereof shall not be necessary to make it effective. SECTION 13. VACANCIES. Vacancies in the membership of the Board of Directors shall be deemed to exist (i) in case of the death, resignation or removal of any Director, (ii) if the authorized number of Directors is increased, or (iii) if the stockholders fail, at a meeting of stockholders at which Directors are elected, to elect the full authorized number of Directors to be elected at that meeting. Vacancies in the membership of the Board of Directors may be filled by a majority of the remaining Directors, though less than a quorum, or by a sole remaining Director, and each Director so elected shall hold office until his successor is elected at an annual or a special meeting of the stockholders. The stockholders may elect a Director at any time to fill any vacancy not filled by the Directors. SECTION 14. COMMITTEES OF THE BOARD OF DIRECTORS. By resolution adopted by a majority of the authorized number of Directors, the Board of Directors may designate one or more Committees to act as or on behalf of the Board of Directors. Each such Committee shall consist of one or more Directors designated by the Board of Directors to serve on such Committee at the pleasure of the Board of Directors. The Board of Directors may designate one or more Directors as alternate members of any Committee, which alternate members may replace any absent member at any meeting of such Committee. In the absence or disqualification of a member of a Committee, the member or members thereof present at any meeting and not disqualified from -5- voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any Committee, to the extent provided in the resolution of the Board of Directors, these By-Laws or the Certificate of Incorporation, may have all the authority of the Board of Directors, except with respect to: (i) amending the Certificate of Incorporation (except that a Committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (ii) adopting an agreement of merger or consolidation under Section 251 or 252 of the General Corporation Law of Delaware, (iii) recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amending these By-Laws. Included among the Committees shall be the following: (a) EXECUTIVE COMMITTEE. There shall be an Executive Committee consisting of its ex officio member and such additional Directors, in no event less than seven, as the Board of Directors may from time to time deem appropriate, elected by the Board of Directors at its organizational meeting or otherwise. Subject to such limitations as may from time to time be imposed by the Board of Directors or as are imposed by these By-Laws, the Executive Committee shall have the fullest authority to act for and on behalf of the corporation, and it shall have all of the powers of the Board of Directors which, under the law, it is possible for a Board of Directors to delegate to such a committee, including the supervision of the general management, direction and superintendence of the business and affairs of the corporation and the power to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. -6- (b) COMMITTEE ON EXAMINATIONS AND AUDITS. There shall be a Committee on Examinations and Audits consisting of not less than three Directors who are not officers of the corporation and who shall be elected by the Board of Directors at its organizational meeting or otherwise. It shall be the duty of this Committee (i) to make, or cause to be made, in accordance with the procedures from time to time approved by the Board of Directors, internal examinations and audits of the affairs of the corporation and the affairs of any subsidiary which by resolution of its board of directors has authorized the Committee on Examinations and Audits to act hereunder, (ii) to make recommendations to the Board of Directors of the corporation and of each such subsidiary with respect to the selection of and scope of work for the independent auditors for the corporation and for each subsidiary, (iii) to review, or cause to be reviewed in accordance with procedures from time to time approved by the Board of Directors, all reports of internal examinations and audits, all audit-related reports made by the independent auditors for the corporation and each such subsidiary and all reports of examination of the corporation and of any subsidiary made by regulatory authorities, (iv) from time to time, to review and discuss with the management, and independently with the General Auditor, the Risk Control Officer and the independent auditors, the accounting and reporting principles, policies and practices employed by the corporation and its subsidiaries and the adequacy of their accounting, financial, operating and administrative controls, including the review and approval of any policy statements relating thereto, and (v) to perform such other duties as the Board of Directors may from time to time assign to it. The Committee on Examinations and Audits shall submit reports of its findings, conclusions and recommendations, if any, to the Board of Directors. (c) MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE. There shall be a Management Development and Compensation Committee consisting of not less than six directors, who shall be elected by the Board of Directors at its organizational meeting or otherwise and none of whom shall be eligible to participate in either the Wells Fargo & Company Stock Appreciation Rights Plan, the Wells Fargo & Company Stock Option Plan the Wells Fargo & Company Employee Stock Purchase Plan or any similar employee stock plan (or shall have been so eligible within the year next preceding the date of becoming a member of the Management Development and Compensation Committee). It shall be the duty of -7- the Management Development and Compensation Committee, and it shall have authority, (i) to advise the Chief Executive Officer concerning the corporation's salary policies, (ii) to administer such compensation programs as from time to time are delegated to it by the Board of Directors, (iii) to accept or reject the recommendations of the Chief Executive Officer with respect to all salaries in excess of such dollar amount or of officers of such grade or grades as the Board of Directors may from time to time by resolution determine to be appropriate and (iv) upon the request of any subsidiary which by resolution of its board of directors has authorized the Management Development and Compensation Committee to act hereunder, to advise its chief executive officer concerning such subsidiary's salary policies and compensation programs. (d) NOMINATING COMMITTEE. There shall be a Nominating Committee consisting of not less than three Directors, who shall be elected by the Board of Directors at its organizational meeting or otherwise. It shall be the duty of the Nominating Committee, annually and in the event of vacancies on the Board of Directors, to nominate candidates for election to the Board of Directors. The Chairman of the Board, or in the absence of the Chairman of the Board, the acting chief executive officer, if a Director, shall be an EX OFFICIO member of all the Committees except the Committee on Examinations and Audits, the Management and Development and Compensation Committee, the Nominating Committee and such other Committees which by resolution the Board of Directors expressly limit membership to non-officer Directors. Each Committee member shall serve until the organizational meeting of the Board of Directors immediately following the adjournment of the annual meeting of stockholders next following his election and until his successor shall have been elected, but any such member may be removed at any time by the Board of Directors. Vacancies in any of said committees, however created, shall be filled by the Board of Directors. A majority of the members of any such committee shall be necessary to constitute a quorum and sufficient for the transaction of business, and any act of a majority present at a meeting of any such committee at which there is a quorum present shall be the act of such committee. Subject to these By-Laws and the authority of the Board of Directors, each committee shall have -8- the power to determine the form of its organization. The provisions of these By-Laws governing the calling, notice and place of special meetings of the Board of Directors shall apply to all meetings of any Committee unless such committee fixes a time and place for regular meetings, in which case notice for such meeting shall be unnecessary. The provisions of these By-Laws regarding actions taken by the Board of Directors, however called or noticed, shall apply to all meetings of any Committee. Each committee shall cause to be kept a full and complete record of its proceedings, which shall be available for inspection by any Director. There shall be presented at each meeting of the Board of Directors a summary of the minutes of all proceedings of each committee since the preceding meeting of the Board of Directors. SECTION 15. ADVISORY DIRECTORS. There shall be not more than 10 Advisory Directors, who shall be elected by the Board of Directors at its organizational meeting. An Advisory Director shall serve until the organizational meeting of the Board of Directors immediately following the adjournment of the annual meeting of stockholders next following his election. Any Advisory Director may be removed at any time by the Board of Directors. Vacancies may, but need not be, filled by the Board of Directors. Advisory Directors may attend meetings of the Board of Directors and, if appointed thereto as an advisor by the Board of Directors, meetings of Formal Committees with the privilege of participating in all discussions but without the right to vote. SECTION 16. DIRECTORS EMERITI. There shall be not more than ten (10) Directors Emeriti who shall be elected by the Board of Directors at its organizational meeting. A Director Emeritus shall serve until the next following organizational meeting of the Board of Directors. No person may be elected a Director Emeritus unless at some time prior thereto such person has been a Director of the corporation. Any Director Emeritus may be removed at any time by the Board of Directors. Vacancies, however created, may, but need not, be filled by the Board of Directors. Directors Emeriti may attend meetings of the Board of Directors and, if appointed thereto as an advisor by the Board of Directors, meetings of Committees with the privilege of participating in all discussions but without the right to vote. -9- ARTICLE III OFFICERS SECTION 1. ELECTION OF EXECUTIVE OFFICERS. The corporation shall have (i) a Chairman of the Board, (ii) a President, (iii) a Secretary and (iv) a Chief Financial Officer. The Corporation also may have a Vice Chairman of the Board, one or more Vice Chairmen, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a Controller, a Treasurer, one or more Assistant Vice Presidents, one or more Assistant Treasurers, one or more Assistant Secretaries, a General Auditor, a Risk Control Officer, and such other officers as the Board of Directors, or the Chief Executive Officer or any officer or committee whom he may authorize to perform this duty, may from time to time deem necessary or expedient for the proper conduct of business by the corporation. The Chairman of the Board, the Vice Chairman of the Board, if any, and the President shall be elected from among the members of the Board of Directors. The following offices shall be filled only pursuant to election by the Board of Directors: Chairman of the Board, Vice Chairman of the Board, President, Vice Chairman, Executive Vice President, Senior Vice President, Secretary, Controller, Treasurer, General Auditor and Risk Control Officer. Other officers may be appointed by the Chief Executive Officer or by any officer or committee whom he may authorize to perform this duty. All officers shall hold office at will, at the pleasure of the Board of Directors, the Chief Executive Officer, the officer or committee having the authority to appoint such officers, and the officer or committee authorized by the Chief Executive Officer to remove such officers, and may be removed at any time, with or without notice and with or without cause. No authorization by the Chief Executive Officer to perform such duty of appointment or removal shall be effective unless done in writing and signed by the Chief Executive Officer. Two or more offices may be held by the same person. SECTION 2. CHAIRMAN OF THE BOARD. The Chairman of the Board shall, when present, preside at all meetings of the stockholders and of the Board of Directors and shall be the Chief Executive Officer of the corporation. As Chief Executive Officer, he shall (i) exercise, and be responsible to the Board of Directors for, the general supervision of the property, -10- affairs and business of the corporation, (ii) report at each meeting of the Board of Directors upon all matters within his knowledge which the interests of the corporation may require to be brought to its notice, (iii) prescribe, or to the extent he may deem appropriate designate an officer or committee to prescribe, the duties, authority and signing power of all other officers and employees of the corporation and (iv) exercise, subject to these By-Laws, such other powers and perform such other duties as may from time to time be prescribed by the Board of Directors. SECTION 3. VICE CHAIRMAN OF THE BOARD. The Vice Chairman of the Board shall, subject to these By-Laws, exercise such powers and perform such duties as may from time to time be prescribed by the Board of Directors. In the absence of the Chairman of the Board and the President, the Vice Chairman of the Board shall preside over the meetings of the stockholders and the Board of Directors. SECTION 4. PRESIDENT. The President shall, subject to these By-Laws, be the chief operating officer of the corporation and shall exercise such other powers and perform such other duties as may from time to time be prescribed by the Board of Directors. In the absence of the Chairman of the Board, the President shall preside over the meetings of the stockholders and the Board of Directors. SECTION 5. ABSENCE OR DISABILITY OF CHIEF EXECUTIVE OFFICER. In the absence or disability of the Chairman of the Board, the President shall act as Chief Executive Officer. In the absence or the disability of both the Chairman of the Board and the President, the Vice Chairman of the Board shall act as Chief Executive Officer. In the absence of the Chairman of the Board, the President and the Vice Chairman of the Board, the officer designated by the Board of Directors, or if there be no such designation the officer designated by the Chairman of the Board, shall act as Chief Executive Officer. The Chairman of the Board shall at all times have on file with the Secretary his written designation of the officer from time to time so designated by him to act as Chief Executive Officer in his absence or disability and in the absence or disability of the President and the Vice Chairman of the Board. -11- SECTION 6. EXECUTIVE VICE PRESIDENTS; SENIOR VICE PRESIDENTS; VICE PRESIDENTS. The Executive Vice Presidents, the Senior Vice Presidents and the Vice Presidents shall have all such powers and duties as may be prescribed by the Board of Directors or by the Chief Executive Officer. SECTION 7. SECRETARY. The Secretary shall keep a full and accurate record of all meetings of the stockholders and of the Board of Directors, and shall have the custody of all books and papers belonging to the corporation which are located in its principal office. He shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors, and all other notices required by law or by these By-Laws. He shall be the custodian of the corporate seal or seals. In general, he shall perform all duties ordinarily incident to the office of a secretary of a corporation, and such other duties as from time to time may be assigned to him by the Board of Directors or the Chief Executive Officer. SECTION 8. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the corporation, and shall deposit, or cause to be deposited, in the name of the corporation all moneys or other valuable effects in such banks, trust companies, or other depositories as shall from time to time be selected by the Board of Directors. He shall render to the Chief Executive Officer and the Board of Directors, whenever requested, an account of the financial condition of the corporation. In general, he shall perform all duties ordinarily incident to the office of a chief financial officer of a corporation, and such other duties as may be assigned to him by the Board of Directors or the Chief Executive Officer. SECTION 9. GENERAL AUDITOR. The General Auditor shall be responsible to the Board of Directors for evaluating the ongoing operation, and the adequacy, effectiveness and efficiency, of the system of control within the corporation and of each subsidiary which has authorized the Committee on Examinations and Audits to act under Section 14(b) of Article II of these By-Laws. He shall make, or cause to be made, such internal audits and reports of the corporation and each such subsidiary as may be required by the Board of Directors or by the Committee on Examinations and Audits. He shall coordinate the auditing work performed for the corporation and its subsidiaries -12- by public accounting firms and, in connection therewith, he shall determine whether the internal auditing functions being performed within the subsidiaries are adequate. He shall also perform such other duties as the Chief Executive Officer may prescribe, and shall report to the Chief Executive Officer on all matters concerning the safety of the operations of the corporation and of any subsidiary which he deems advisable or which the Chief Executive Officer may request. Additionally, the General Auditor shall have the duty of reporting independently of all officers of the corporation to the Committee on Examinations and Audits at least quarterly on all matters concerning the safety of the operations of the corporation and its subsidiaries which should be brought in such manner through such committee to the attention of the Board of Directors. Should the General Auditor deem any matter to be of especial immediate importance, he shall report thereon forthwith through the Committee on Examinations and Audits to the Board of Directors. SECTION 10. RISK CONTROL OFFICER. The Risk Control Officer shall report to the Board of Directors through its Committee on Examinations and Audits. The Risk Control Officer shall be responsible for directing a number of control related activities principally affecting the Company's credit function and shall have such other duties and responsibilities as shall be prescribed from time to time by the chief executive officer and the Committee on Examinations and Audits. Should the Risk Control Officer deem any matter to be of special importance, the Risk Control Officer shall report thereon forthwith through the Committee to the Board of Directors. ARTICLE IV INDEMNIFICATION SECTION 1. ACTION, ETC. OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding or investigation, whether civil, criminal or administrative, and whether external or internal to the corporation (other than a judicial action or suit brought by or in the right of the corporation), by reason of the fact that he or she is or was an -13- Agent (as hereinafter defined) against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the Agent in connection with such action, suit or proceeding, or any appeal therein, if the Agent acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe such conduct was unlawful. The termination of any action, suit or proceeding -- whether by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent -- shall not, of itself, create a presumption that the Agent did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, that the Agent had reasonable cause to believe that his or her conduct was unlawful. For purposes of this Article, an "Agent" shall be any director, officer of employee of the corporation, or any person who, being or having been such a director, officer or employee, is or was serving at the request of the corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. SECTION 2. ACTION, ETC. BY OR IN THE RIGHT OF THE CORPORATION. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed judicial action or suit brought by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was an Agent (as defined above) against expenses (including attorneys' fees) and amounts paid in settlement actually and reasonably incurred by such person in connection with the defense, settlement or appeal of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to -14- indemnify for such expenses which the Court of Chancery or such other court shall deem proper. SECTION 3. DETERMINATION OF RIGHT OF INDEMNIFICATION OR CONTRIBUTION. Unless otherwise ordered by a court, any indemnification under Section 1 or 2, and any contribution under Section 6, of this Article shall be made by the corporation to an Agent unless a determination is reasonably and promptly made, either (i) by the Board of Directors acting by a majority vote of a quorum consisting of Directors who were not party to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or if obtainable and such quorum so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders, that such Agent acted in bad faith and in a manner that such Agent did not believe to be in or not opposed to the best interests of the corporation or, with respect to any criminal proceeding, that such Agent believed or had reasonable cause to believe that his or her conduct was unlawful. SECTION 4. ADVANCES OF EXPENSES. Except as limited by Section 5 of this Article, costs, charges and expenses (including attorneys' fees) incurred by an Agent in defense of any action, suit, proceeding or investigation of the nature referred to in Section 1 or 2 of this Article or any appeal therefrom shall be paid by the corporation in advance of the final disposition of such matter; provided, however, that if the General Corporation Law of Delaware then so requires, such payment shall be made only if the Agent shall undertake to reimburse the corporation for such payment in the event that it is ultimately determined, as provided herein, that such person is not entitled to indemnification. SECTION 5. RIGHT OF AGENT TO INDEMNIFICATION OR ADVANCE UPON APPLICATION; PROCEDURE UPON APPLICATION. Any indemnification under Section 1 or 2, or advance under Section 4, of this Article shall be made promptly and in any event within 90 days, upon the written request of the Agent, unless with respect to an application under said Sections 1 or 2 an adverse determination is reasonably and promptly made pursuant to Section 3 of this Article or unless with respect to an application under said Section 4 an adverse determination is made pursuant to said Section 4. The right to indemnification or advances as granted by this Article shall be enforceable by the Agent in any court of competent jurisdiction if the Board of Directors or independent -15- legal counsel improperly denies the claim, in whole or in part, or if no disposition of such claim is made within 90 days. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any action, suit or proceeding in advance of its final disposition where any required undertaking has been tendered to the corporation) that the Agent has not met the standards of conduct which would require the corporation to indemnify or advance the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including the Board of Directors, independent legal counsel and the stockholders) to have made a determination prior to the commencement of such action that indemnification of the Agent is proper in the circumstances because he or she has met the applicable standard of conduct, nor an actual determination by the corporation (including the Board of Directors, independent legal counsel and the stockholders) that the Agent had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Agent had not met the applicable standard of conduct. The Agent's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the corporation. SECTION 6. CONTRIBUTION. In the event that the indemnification provided for in this Article is held by a court of competent jurisdiction to be unavailable to an Agent in whole or in part, then in respect of any threatened, pending or completed action, suit or proceeding in which the corporation is jointly liable with the Agent (or would be if joined in such action, suit or proceeding), to the extent permitted by the General Corporation Law of Delaware the corporation shall contribute to the amount of expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by the Agent in such proportion as is appropriate to reflect (i) the relative benefits received by the corporation on the one hand and the Agent on the other from the transaction from which such action, suit or proceeding arose and (ii) the relative fault of the corporation on the one hand and of the Agent on the other in connection with the events which resulted in such expenses, judgments, fines or settlement amounts, as well as any other relevant equitable considerations. The relative fault of the corporation on the one hand and of the Agent on the other shall be determined by -16- reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such expenses, judgments, fines or settlement amounts. SECTION 7. OTHER RIGHTS AND REMEDIES. Indemnification under this Article shall be provided regardless of when the events alleged to underlie any action, suit or proceeding may have occurred, shall continue as to a person who has ceased to be an Agent and shall inure to the benefit of the heirs, executors and administrators of such a person. All rights to indemnification and advancement of expenses under this Article shall be deemed to be provided by a contract between the corporation and the Agent who serves as such at any time while these By-Laws and other relevant provisions of the General Corporation Law of Delaware and other applicable law, if any, are in effect. Any repeal or modification thereof shall not affect any rights or obligations then existing. SECTION 8. INSURANCE. Upon resolution passed by the Board of Directors, the corporation may purchase and maintain insurance on behalf of any person who is or was an Agent against any liability asserted against such person and incurred by him or her in any such capacity, or arising out of his or her status as such, regardless of whether the corporation would have the power to indemnify such person against such liability under the provisions of this Article. The corporation may create a trust fund, grant a security interest or use other means, including without limitation a letter of credit, to ensure the payment of such sums as may become necessary to effect indemnification as provided herein. SECTION 9. CONSTITUENT CORPORATIONS. For the purposes of this Article, references to "the corporation" include all constituent corporations (including any constituent of a constituent) absorbed in a consolidation or merger as well as the resulting or surviving corporation, so that any person who is or was a director, officer or employee of such a constituent corporation or who, being or having been such a director, officer or employee, is or was serving at the request of such constituent corporation as a director, officer, employee or trustee of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article with respect to the resulting or surviving -17- corporation as such person would if he or she had served the resulting or surviving corporation in the same capacity. SECTION 10. OTHER ENTERPRISES, FINES, AND SERVING AT CORPORATION'S REQUEST. For purposes of this Article, references to "other enterprise" in Sections 1 and 9 shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the corporation" shall include any service by an Agent as director, officer, employee, trustee or agent of the corporation which imposes duties on, or involves services by, such Agent with respect to any employee benefit plan, its participants, or beneficiaries. A person who acted in good faith and in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interest of the corporation" for purposes of this Article. SECTION 11. SAVINGS CLAUSE. If this Article or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each Agent as to expenses (including attorneys' fees, judgments, finds and amounts paid in settlement with respect to any action, suit, appeal, proceeding or investigation, whether civil, criminal or administrative, and whether internal or external, including a grand jury proceeding and an action or suit brought by or in the right of the corporation, to the full extent permitted by the applicable portion of this Article that shall not have been invalidated, or by any other applicable law. SECTION 12. ACTIONS INITIATED BY AGENT. Anything to the contrary in this Article notwithstanding, the corporation shall indemnify any Agent in connection with an action, suit or proceeding initiated by such Agent (other than actions, suits, or proceedings commenced pursuant to Section 5 of this Article) only if such action, suit or proceeding was authorized by the Board of Directors. SECTION 13. STATUTORY AND OTHER INFORMATION. Notwithstanding any other provision of this Article, the corporation shall indemnify any Agent and advance expenses incurred by such Agent in any action, suit or proceeding of the nature referred to in Section 1 or 2 of this Article to the -18- fullest extent permitted by the General Corporation Law of Delaware, as the same may be amended from time to time, except that no amount shall be paid pursuant to this Article in the event of an adverse determination pursuant to Section 3 of this Article or in respect of remuneration to the extent that it shall be determined to have been paid in violation of law or in respect of amounts owing under Section 16(b) of the Securities Exchange Act of 1934. The rights to indemnification and advancement of expenses provided by any provision of this Article, including without limitation those rights conferred by the preceding sentence, shall not be deemed exclusive of, and shall not affect, any other rights to which an Agent seeking indemnification or advancement of expenses may be entitled under any provision of any law, certificate of incorporation, by-law, agreement or by any vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while serving as an Agent. The corporation may, by action of the Board of Directors, provide indemnification and advancement of expenses to agents of the corporation to the extent deemed appropriate, not to exceed the scope and effect provided under this Article to directors, officers and employees. ARTICLE V MISCELLANEOUS SECTION 1. FISCAL YEAR. The fiscal year of the corporation shall be the calendar year. SECTION 2. STOCK CERTIFICATES. Each stockholder shall be entitled to a certificate representing the number of shares of the stock of the corporation owned by such stockholder and the class or series of such shares. Each certificate shall be signed in the name of the corporation by (i) the Chairman of the Board, the Vice Chairman of the Board, the President, an Executive Vice President, a Senior Vice President, or a Vice President, and (ii) the Treasurer, an Assistant Treasurer, the Secretary, or an Assistant Secretary. Any of the signatures on the certificate may be facsimile. Prior to due presentment for registration of transfer in the stock transfer book of the corporation, the registered owner for any share of stock of the corporation shall be treated as the person exclusively entitled to vote, to receive notice, and to exercise all other rights and receive all other -19- entitlements of a stockholder with respect to such share, except as may be provided otherwise by law. SECTION 3. EXECUTION OF WRITTEN INSTRUMENTS. All written instruments shall be binding upon the corporation if signed on its behalf by (i) any two of the following officers: the Chairman of the Board, the President, the Vice Chairman of the Board, the Vice Chairmen or the Executive Vice Presidents; or (ii) any one of the foregoing officers signing jointly with any Senior Vice President. Whenever any other officer or person shall be authorized to execute any agreement, document or instrument by resolution of the Board of Directors, or by the Chief Executive Officer, or by any two of the officers identified in the immediately preceding sentence, such execution by such other officer or person shall be equally binding upon the corporation. SECTION 4. SUBSIDIARY. As used in these By-Laws the term "subsidiary" or "subsidiaries" means any corporation 25 percent or more of whose voting shares is directly or indirectly owned or controlled by the corporation, or any other affiliate of the corporation designated in writing as a subsidiary of the corporation by the Chief Executive Officer of the corporation. All such written designations shall be filed with the Secretary of the corporation. SECTION 5. AMENDMENTS. These By-Laws may be altered, amended or repealed by a vote of the stockholders entitled to exercise a majority of the voting power of the corporation, by written consent of such stockholders or by the Board of Directors. SECTION 6. ANNUAL REPORT. The Board of Directors shall cause an annual report to be sent to the stockholders not later than 120 days after the close of the fiscal year and at least 15 days prior to the annual meeting of stockholders to be held during the ensuing fiscal year. SECTION 7. CONSTRUCTION. Unless the context clearly requires it, nothing in these By-Laws shall be construed as a limitation on any powers or rights of the corporation, its Directors or its officers provided by the General Corporation Law of Delaware. Unless the context otherwise requires, the General -20- Corporation Law of Delaware shall govern the construction of these By-Laws. SECTION 8. LOANS TO OFFICERS. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the Board of Directors or any committee thereof, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest, and may be unsecured, or secured in such manner as the Board of Directors or such committee shall approve, including, without limitation, a pledge of shares of stock of the corporation. This Section shall not be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. SECTION 9. NOTICES; WAIVERS. Whenever, under any provision of the General Corporation Law of Delaware, the Certificate of Incorporation or these By-Laws, notice is required to be given to any director or stockholder, such provision shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such Director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by facsimile, telex or telegram. A waiver in writing of any such required notice, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. -21- EX-10.(I) 3 EXECUTIVE LOAN PLAN WELLS FARGO & COMPANY EXECUTIVE LOAN PLAN PURPOSE: Wells Fargo & Company ("Company") hereby establishes this Executive Loan Plan ("Plan") pursuant to Article IV, Section 8 of its By-Laws and Section 315(b) of the California Corporations Code in order to enable the Company to attract and retain outstanding executives in key management positions with the Company and its subsidiaries by offering such individuals financial assistance, either through direct loans from the Company or through Company guarantees of third-party loans, for such purposes as are described herein. ADMINISTRATION: The Plan shall be administered by the Management Development and Compensation Committee ("Committee") of the Board of Directors of the Company ("Board"). The Committee shall have full authority to adopt rules, regulations, and guidelines for the proper administration of the Plan and may appoint one or more officers of the Company or Wells Fargo Bank, N.A. (collectively, "Administrators") who shall each have the authority to authorize extensions or guarantees of loans pursuant to the terms of the Plan and any rules, regulations, or guidelines adopted hereunder by the Committee. In no event, however, shall any individual Administrator participate in the authorization of the extension or guarantee of any loan in which he or she has an interest. ELIGIBILITY FOR FINANCIAL ASSISTANCE: Executives of the Company and its subsidiaries, including officers (whether or not they are directors), may from time to time request financial assistance from the Company in accordance with the provisions of this Plan. Loans extended or guaranteed may be either mortgage loans or general purpose loans. A mortgage loan shall be for the purpose of purchasing or constructing the executive's principal residence, improving his or her principal residence, refinancing outstanding indebtedness on his or her principal residence (including an indebtedness to the Company or one of its subsidiaries), or a combination thereof. A general purpose loan shall be for the purpose of personal household expenses, education or support of dependents, extraordinary medical or dental expenses of the individual or dependents, expenses relating to the executive's principal residence, income taxes, or such other purposes as an Administrator shall deem appropriate; provided that no general purpose loan shall be made solely for investment purposes. Loans to acquire shares of common stock under a stock option plan or similar plan of the Company shall be made solely in accordance with the terms of such plan and not pursuant to this Plan. No financial assistance shall be provided to an executive under the Plan, unless an Administrator determines that the purpose for which such assistance is requested is one of the purposes authorized under the Plan and that a Company loan or guarantee under the Plan on behalf of such executive would be in the best interests of the Company. The Administrators shall make semiannual reports to the Committee of loans extended or guaranteed under the Plan. EXTENSION OR GUARANTEE OF LOANS: The Company shall, in accordance with the authorization of an Administrator, extend a loan to an executive or shall guarantee a third-party loan to such individual, provided that any such Company loan or guarantee shall be subject to the following terms and conditions: 1. The principal balance of a mortgage loan extended or guaranteed under the Plan shall not exceed the lesser of one million five hundred thousand dollars ($1,500,000) or, when aggregated with all other outstanding indebtedness secured by the residence with respect to which the loan is made, one hundred percent (100%) of the fair market value of such residence. 2. The principal balance of a general purpose loan extended or guaranteed under the Plan shall not, when aggregated with any outstanding general purpose loan extended or guaranteed under the Plan to the same executive, exceed the lesser of two hundred fifty thousand dollars ($250,000) or one hundred fifty percent (150%) of the executive's annual base salary. 3. The term of the extended loan or guarantee shall not exceed thirty (30) years for a mortgage loan or ten (10) years for a general purpose loan. If an executive with an outstanding loan under the Plan voluntarily terminates employment with Wells Fargo or is discharged for gross and willful misconduct, the term of such loan shall end (and the entire remaining principal balance and any accrued, unpaid interest under such loan shall become payable) on the earlier of (i) the end of the original term of the loan or (ii) 120 days following termination of employment, unless the Committee determines, in its sole discretion and based on extraordinary circumstances, that an extension of the term is appropriate. "Gross and willful misconduct" shall include (without limitation) the wrongful appropriation of funds of Wells Fargo or the commission of a felony. 4. If a direct Company loan is made, the loan shall be evidenced by the executive's promissory note made payable to the Company's order. Such note shall bear interest at the applicable federal rate in effect at the time the loan is made under section 1274(d) of the Internal Revenue code of 1954, as amended ("Code"), (or such higher rate as shall be necessary to avoid imputation of foregone interest under section 7872 of the Code or any successor provision); PROVIDED THAT, upon authorization of an Administrator, the interest rate may be reduced by up to five (5) percentage points during the period that the borrowing executive remains in the employ of the Company or one of its subsidiaries. Principal and interest (if any) on the note may provide for payment either in full upon the expiration of the term or from time to time during such term; and the note may be secured or nonsecured. 5. Such other terms and conditions as the Committee shall specify by rule, regulation, or guideline. The remaining terms of a loan or loan guarantee under the Plan shall be determined by the authorizing Administrator, provided that such terms shall not be inconsistent with the terms and conditions set forth above. All direct Company loans shall be made from the general funds of the Company. EFFECTIVE DATE, AMENDMENT AND TERMINATION: This Plan shall become effective upon adoption by the Board and may be amended from time to time by action of the Committee. The Plan shall remain in effect until terminated by action of the Board or the Committee. EX-11 4 COMPUTATION OF EARNINGS EXHIBIT 11 WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE
- ------------------------------------------------------------------------------- Year ended December 31, -------------------------- (in millions) 1994 1993 1992 - ------------------------------------------------------------------------------- PRIMARY EARNINGS PER COMMON SHARE Net income $ 841 $ 612 $283 Less preferred dividends 43 50 48 ------ ------ ---- Net income for calculating primary earnings per common share $ 798 $ 562 $235 ====== ====== ==== Average common shares outstanding 53.9 55.6 52.9 ====== ====== ==== PRIMARY EARNINGS PER COMMON SHARE $14.78 $10.10 $4.44 ====== ====== ==== FULLY DILUTED EARNINGS PER COMMON SHARE (1) Net income $ 841 $ 612 $283 Less preferred dividends 43 50 48 ------ ------ ---- Net income for calculating fully diluted earnings per common share $ 798 $ 562 $235 ====== ====== ==== Average common shares outstanding 53.9 55.6 52.9 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 1.2 .7 ------ ------ ---- Average common shares outstanding, as adjusted 55.3 56.8 53.6 ====== ====== ==== FULLY DILUTED EARNINGS PER COMMON SHARE $14.42 $ 9.88 $4.38 ====== ====== ==== - ------------------------------------------------------------------------------- (1) This presentation is submitted in accordance with Item 601(b)(11) of Regulation S-K. This presentation is not required by APB Opinion No. 15, because it results in dilution of less than 3%.
EX-12 5 COMPUTATION OF RATIO OF EARNINGS EXHIBIT 12 WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
- -------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, ----------------------------------------------------------------- (in millions) 1994 1993 1992 1991 1990 - -------------------------------------------------------------------------------------------------------------------------------- Earnings, including interest on deposits (1): Income before income tax expense $1,454 $1,038 $ 500 $ 54 $1,196 Fixed charges 1,214 1,157 1,505 2,504 2,784 ------ ------ ------ ------ ------ $2,668 $2,195 $2,005 $2,558 $3,980 ====== ====== ====== ====== ====== Fixed charges (1): Interest expense $1,155 $1,104 $1,454 $2,452 $2,737 Estimated interest component of net rental expense 59 53 51 52 47 ------ ------ ------ ------ ------ $1,214 $1,157 $1,505 $2,504 $2,784 ====== ====== ====== ====== ====== Ratio of earnings to fixed charges (2) 2.20 1.90 1.33 1.02 1.43 ====== ====== ====== ====== ====== Earnings, excluding interest on deposits: Income before income tax expense $1,454 $1,038 $ 500 $ 54 $1,196 Fixed charges 360 294 320 539 839 ------ ------ ------ ------ ------ $1,814 $1,332 $ 820 $ 593 $2,035 ====== ====== ====== ====== ====== Fixed charges: Interest expense $1,155 $1,104 $1,454 $2,452 $2,737 Less interest on deposits (854) (863) (1,185) (1,965) (1,945) Estimated interest component of net rental expense 59 53 51 52 47 ------ ------ ------ ------ ------ $ 360 $ 294 $ 320 $ 539 $ 839 ====== ====== ====== ====== ====== Ratio of earnings to fixed charges 5.04 4.53 2.56 1.10 2.42 ====== ====== ====== ====== ====== (1) As defined in Item 503(d) of Regulation S-K. (2) These computations are included herein in compliance with Securities and Exchange Commission regulations. However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there were no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there were no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates.
EX-13 6 EXHIBIT 13,ANNUAL REPORT WELLS FARGO & COMPANY AND SUBSIDIARIES FINANCIAL REVIEW OVERVIEW - -------------------------------------------------------------------------------- Wells Fargo & Company (Parent) is a bank holding company whose principal subsidiary is Wells Fargo Bank, N.A. (Bank). In this Annual Report, Wells Fargo & Company and its subsidiaries are referred to as the Company. Net income in 1994 was $841 million, compared with $612 million in 1993, an increase of 37%. Net income per share was $14.78, compared with $10.10 in 1993, an increase of 46%. The increase in earnings from a year ago was largely due to a lower loan loss provision. The percentage increase in per share earnings was greater than the percentage increase in net income due to the Company's continuing stock repurchase program. [RETURN ON AVERAGE TOTAL ASSETS (ROA) (GRAPH) (%)] SEE APPENDIX [RETURN ON COMMON STOCKHOLDERS' EQUITY (GRAPH) (ROE) (%)] SEE APPENDIX Return on average assets (ROA) was 1.62% and return on average common equity (ROE) was 22.41% in 1994, compared with 1.20% and 16.74%, respectively, in 1993. Net interest income on a taxable-equivalent basis was $2,610 million in 1994, compared with $2,659 million a year ago. The Company's net interest margin was 5.55% for 1994, down from 5.74% in 1993. This decrease was substantially due to lower hedging income, largely offset by an increase in the rate spread between loans and deposits. Noninterest income increased from $1,093 million in 1993 to $1,200 million in 1994, an increase of 10%. The growth was primarily due to higher service charges on deposit accounts and increases in trust and investment services income. Noninterest expense decreased from $2,162 million in 1993 to $2,156 million in 1994. A major portion of the decrease in noninterest expense was due to a decrease in foreclosed assets expense, largely offset by higher levels of incentive compensation. The Company's provision for loan losses was $200 million in 1994, compared with $550 million in 1993. During 1994, net charge-offs were $240 million, or .70% of average total loans, compared with $495 million, or 1.44%, during 1993. The allowance for loan losses was $2,082 million, or 5.73% of total loans, at December 31, 1994, compared with $2,122 million, or 6.41%, at December 31, 1993. Total loan balances increased 10% since December 31, 1993, rising to $36.3 billion at December 31, 1994. At December 31, 1994, total nonaccrual and restructured loans were $582 million, or 1.6% of total loans, compared with $1,200 million, or 3.6%, at December 31, 1993. Loans new to nonaccrual in 1994 were $340 million, compared with $821 million in 1993. At December 31, 1994, an estimated $246 million, or 43%, of nonaccrual loans were less than 90 days past due, compared with an estimated $704 million, or 59%, at December 31, 1993. Foreclosed assets were $272 million at December 31, 1994, compared with $348 million at December 31, 1993. At December 31, 1994, the ratio of common stockholders' equity to total assets was 6.41%, compared with 7.00% at December 31, 1993. The Company's total risk-based capital (RBC) ratio at December 31, 1994 was 13.16% and its Tier 1 RBC ratio was 9.09%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies and the "well capitalized" guidelines for banks of 10% and 6%, respectively. The Company's ratios at 6 December 31, 1993 were 15.12% and 10.48%, respectively. The Company's leverage ratios were 6.89% and 7.39% at December 31, 1994 and 1993, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies and the well capitalized guideline for banks of 5%. The decreases in the risk-based capital and leverage ratios resulted primarily from the repurchase of 5,122,597 shares of common stock during 1994. The Company has bought in the past, and will continue to buy, shares to offset stock issued or expected to be issued under the Company's employee benefit and dividend reinvestment plans. In addition to these shares, the Board of Directors authorized in July 1994 the repurchase of up to 5.4 million shares of the Company's outstanding common stock. This action reflects the Company's strong capital position and will allow the Company to effectively manage its overall capital position in the best interest of its shareholders. There is no scheduled date for completion of the program; the Company will repurchase shares from time to time, subject to market conditions. It is the Company's current intention, assuming continued Board authorization, to repurchase shares until the Company can find investment opportunities that provide sufficient returns. A discussion of RBC and leverage ratio guidelines is in the Capital Adequacy/Ratios section. In the first quarter of 1994, the Board of Directors approved an increase in the common stock quarterly dividend from $.75 to $1.00 per share. The quarterly dividend was increased again in January 1995 to $1.15 per share. A general economic recovery, of moderate proportions, has taken hold in California. The Company is directly affected by this recovery due to the fact it operates predominately in California markets. More industries are reporting higher sales and profits, the unemployment rate has dropped and confidence levels have improved. During much of 1994, sales at department stores strengthened, confirming the favorable results of a recent survey on small business. New jobs created in 1994 are estimated to be between 150,000 and 200,000, the best showing in four years. Business conditions varied widely, reflecting the different economic make- up of each region. Economic activity was strongest in California's Central Valley. This region has an agribusiness base that continued to prosper and expand during 1994. Yields and prices remained favorable, while a soft U.S. dollar in overseas markets helped the exports of fresh and processed foods. The Central Valley also continued to attract new business and capital from other regions of the state (and elsewhere) because of its favorable business climate. In Southern California, economic activity also improved following a long and deep recession. However, business conditions were somewhat hesitant and spotty, but, for the first time since 1990, the region added new jobs. In
TABLE 1 RATIOS AND PER COMMON SHARE DATA =========================================================================== Year ended December 31, -------------------------------- 1994 1993 1992 PROFITABILITY RATIOS Net income to average total assets (ROA) 1.62% 1.20% .54% Net income applicable to common stock to average common stockholders' equity (ROE) 22.41 16.74 7.93 Net income to average stockholders' equity 20.61 15.32 7.92 EFFICIENCY RATIO (1) 56.6% 57.7% 54.3% CAPITAL RATIOS At year end: Common stockholders' equity to assets 6.41% 7.00% 6.03% Stockholders' equity to assets 7.33 8.22 7.25 Risk-based capital (2) Tier 1 capital 9.09 10.48 8.22 Total capital 13.16 15.12 13.15 Leverage (2) 6.89 7.39 6.36 Average balances: Common stockholders' equity to assets 6.86 6.57 5.65 Stockholders' equity to assets 7.87 7.82 6.81 PER COMMON SHARE DATA Dividend payout (3) 27% 22% 34% Book value $ 66.77 $ 65.87 $ 57.44 Market prices (4): High $160-3/8 $ 133 $86-3/8 Low 127-5/8 75-1/2 59 Year end 145 129-3/8 76-3/8 - --------------------------------------------------------------------------- (1) The efficiency ratio is defined as noninterest expense divided by the total of net interest income and noninterest income. (2) See the Capital Adequacy/Ratios section for additional information. (3) Dividends declared per common share as a percentage of net income per common share. (4) Based on daily closing prices reported on the New York Stock Exchange Composite Transaction Reporting System.
addition, department stores reported better sales as incomes improved. The region's important tourist-entertainment sectors also were stronger. Defense cuts continued, but at a more moderate pace, while the demand for office space rose a little resulting in slightly lower vacancy rates. The Northern California region also recovered during much of 1994. Home sales remained buoyant, although by year end, they started to weaken because of rising mortgage rates. A major improvement took place in the Silicon Valley as the demand for computer chips and other high-tech products rose sharply. The area's economy was particularly strengthened by important international business trade with the Pacific Rim and Mexico that continued to fuel exports. 7
TABLE 2 SIX-YEAR SUMMARY OF SELECTED FINANCIAL DATA ================================================================================================================================== (in millions) 1994 1993 1992 1991 1990 1989 % Change Five-year 1994/ compound 1993 growth rate INCOME STATEMENT Net interest income $ 2,610 $ 2,657 $ 2,691 $ 2,520 $ 2,314 $ 2,159 (2)% 4 % Provision for loan losses 200 550 1,215 1,335 310 362 (64) (11) Noninterest income 1,200 1,093 1,059 889 909 779 10 9 Noninterest expense 2,156 2,162 2,035 2,020 1,717 1,575 -- 6 Net income 841 612 283 21 712 601 37 7 PER COMMON SHARE Net income $ 14.78 $ 10.10 $ 4.44 $ .04 $ 13.39 $ 11.02 46 6 Dividends declared 4.00 2.25 1.50 3.50 3.90 3.30 78 4 BALANCE SHEET (at year end) Investment securities $11,608 $13,058 $ 9,338 $ 3,833 $ 1,387 $ 1,738 (11)% 46 % Loans 36,347 33,099 36,903 44,099 48,977 41,727 10 (3) Allowances for loan losses 2,082 2,122 2,067 1,646 885 738 (2) 23 Assets 53,374 52,513 52,537 53,547 56,199 48,737 2 2 Core deposits 38,508 41,291 41,879 42,941 41,840 35,607 (7) 2 Senior/Subordinated debt 2,853 4,221 4,040 4,220 2,417 2,541 (32) 2 Stockholders' equity 3,911 4,315 3,809 3,271 3,360 2,861 (9) 6 - ----------------------------------------------------------------------------------------------------------------------------------
TABLE 3 LINE OF BUSINESS RESULTS (ESTIMATED) ================================================================================================================================== (income/expense in millions, Retail Business average balances in billions) Distribution Group Banking Group Investment Group Real Estate Group ------------------ ------------------ ------------------ -------------------- 1994 1993 1994 1993 1994 1993 1994 1993 Net interest income $ 417 $432 $293 $249 $ 386 $ 359 $213 $256 Provision for loan losses (1) 1 1 27 23 1 1 28 36 Noninterest income (2) 612 546 131 136 303 276 24 12 Noninterest expense (2) 914 939 273 272 445 366 67 140 ----- ---- ---- ---- ----- ----- ---- ---- Income before income tax expense (benefit) 114 38 124 90 243 268 142 92 Income tax expense (benefit)(3) 54 16 55 39 107 118 60 39 ----- ---- ---- ---- ----- ----- ---- ---- Net income $ 60 $ 22 $ 69 $ 51 $ 136 $ 150 $ 82 $ 53 ===== ==== ==== ==== ===== ===== ==== ==== Average loans (4)(5)(6) $ -- $ -- $1.8 $1.6 $ 0.5 $ 0.6 $6.2 $8.0 Average assets 1.2 1.1 3.0 2.7 1.0 1.1 6.6 8.6 Average core deposits 10.3 9.8 7.2 7.2 19.6 20.9 0.1 0.2 Return on equity (7) 17% 6% 22% 17% 30% 31% 13% 7% Risk-adjusted efficiency ratio (8) 96% 103% 84% 91% 78% 72% 90% 127% - ---------------------------------------------------------------------------------------------------------------------------------- (1) The provision allocated to the line groups is based on management's current assessment of the normalized net charge-off ratio for each line of business. In any particular year, the actual net charge-offs can be higher or lower than the normalized provision allocated to the lines of business. The difference between the normalized provision and the Company provision is included in Other. (2) Retail branch charges to the product groups are shown as noninterest income to the branches and noninterest expense to the product groups. They amounted to $178 million and $184 million in 1994 and 1993, respectively. These charges are eliminated in the Other category in arriving at the Consolidated Company totals for noninterest income and expense. (3) Businesses are taxed at the Company's marginal (statutory) tax rate, adjusted for any nondeductible expenses. Any differences between the marginal and effective tax rate are in Other. (4) The Real Estate Group's average loans include loans to real estate developers of $.4 billion and $.6 billion for 1994 and 1993, respectively, and other commercial real estate loans of $5.8 billion and $7.4 billion for 1994 and 1993, respectively.
8 LINE OF BUSINESS RESULTS - -------------------------------------------------------------------------------- The Company has identified seven distinct lines of business for the purposes of management reporting, as shown in Table 3. The line of business results show the financial performance of the major business units. Line of business results are determined based on the Company's management accounting process, which assigns balance sheet and income statement items to each responsible business unit. This process is dynamic and somewhat subjective. Unlike financial accounting, there is no comprehensive, authoritative body of guidance for management accounting equivalent to generally accepted accounting principles. The management accounting process measures the performance of the business lines based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. Changes in management structure and/or the allocation process may result in changes in allocations, transfers and assignments. In that case, results for prior periods would be restated to allow comparability from one year to the next. The provision for loan losses is allocated based on management's current assessment of the long-term, normalized net charge-off ratio for each business. Internal expense allocations are independently negotiated between business units and, where possible, service and price is measured against comparable services available in the external marketplace. Equity is allocated based on an assessment of the inherent risk of each business unit. The ROEs are comparable across business lines and are measured against the Company's market required return. The following describes the major business units. THE RETAIL DISTRIBUTION GROUP sells and services a complete line of retail financial products for consumers and small businesses. It encompasses a branch network (including supermarket branches and banking centers), the 24-hour Customer Sales and Service Centers (telephone banking), the ATM network and Wells Fargo ON-LINE, the Company's personal computer banking service. In addition, Retail Distribution includes product management for the consumer checking business, which primarily uses the branches as a source of new customers. As part of the ongoing effort to provide higher-convenience, lower-cost service to customers, the Company opened supermarket branches, which are a more efficient delivery channel for a full line of retail banking services, and banking centers in California in 1994. The supermarket banking centers (modularly designed kiosks equipped
TABLE 3 LINE OF BUSINESS RESULTS (ESTIMATED) (Continued) ================================================================================================================================== Wholesale Products Group Consumer Lending Mortgage Lending Other Consolidated Company --------------- ---------------- ---------------- ---------------- -------------------- 1994 1993 1994 1993 1994 1993 1994 1993 1994 1993 Net interest income $352 $323 $458 $439 $ 203 $ 225 $ 288 $ 374 $2,610 $2,657 Provision for loan losses (1) 37 37 176 168 15 14 (85) 270 200 550 Noninterest income (2) 135 109 139 137 11 21 (155) (144) 1,200 1,093 Noninterest expense (2) 178 169 228 211 122 126 (71) (61) 2,156 2,162 ---- ---- ---- ---- ----- ----- ----- ----- ------ ------ Income before income tax expense (benefit) 272 226 193 197 77 106 289 21 1,454 1,038 Income tax expense (benefit) (3) 116 94 82 83 32 44 107 (7) 613 426 ---- ---- ---- ---- ----- ----- ----- ----- ------ ------ Net income $156 $132 $111 $114 $ 45 $ 62 $ 182 $ 28 $ 841 $ 612 ==== ==== ==== ==== ===== ===== ===== ===== ====== ====== Average loans (4)(5)(6) $8.2 $8.2 $5.9 $5.6 $11.4 $10.2 $ -- $ 0.1 $ 34.0 $ 34.3 Average assets 9.0 8.9 6.0 5.8 11.5 10.3 13.5 12.6 51.8 51.1 Average core deposits 1.9 1.7 0.3 0.5 0.1 0.1 0.1 -- 39.6 40.4 Return on equity (7) 23% 19% 28% 30% 7% 12% --% --% 22% 17% Risk-adjusted efficiency ratio (8) 69% 77% 72% 69% 120% 98% --% --% --% --% - ---------------------------------------------------------------------------------------------------------------------------------- (5) The Wholesale Products Group's average loans include commercial real estate loans of $2.3 billion and $2.4 billion for 1994 and 1993, respectively, and other commercial loans of $5.9 billion and $5.8 billion for 1994 and 1993, respectively. These loans were originated largely by the Company's Commercial Banking Group which deals mostly with middle market borrowers. (6) Mortgage Lending's average loans include real estate 1-4 family first mortgage loans of $8.1 billion and $6.4 billion for 1994 and 1993, respectively, and junior mortgages and other loans of $3.3 billion and $3.8 billion for 1994 and 1993, respectively. (7) Equity is allocated to the lines of business based on an assessment of the inherent risk associated with each business so the returns on allocated equity are on a risk-adjusted basis and comparable across business lines. (8) The risk-adjusted efficiency ratio is defined as noninterest expense plus the cost of capital divided by revenues (net interest income and noninterest income) less normalized loan losses.
9 with ATMs, a customer service telephone and staffed by a banking officer) are capable of providing substantially all consumer services. Pretax income in 1994 for this group increased $76 million to $114 million. The 1994 results reflect higher deposit service charges and lower net interest income from lower spreads on checking deposits that were partially offset by higher balances. Lower occupancy and personnel expenses from reductions in branch space and the results of reengineering efforts in consumer checking were partially offset by systems investments in alternative distribution (non-branch) channels. Noninterest income in 1994 and 1993 included a $14 million and a $36 million accrual, respectively, related to the disposition of owned and leased premises associated with branch closures. (See Noninterest Income section for further information.) THE BUSINESS BANKING GROUP provides a full range of financial services to small businesses, including credit, deposits, investments, payroll services, retirement programs, and credit and debit card services. Business Banking customers include small businesses with annual sales up to $10 million in which the owner of the business is also the principal financial decision maker. Pretax income in 1994 increased $34 million to $124 million due to higher net interest income resulting from increased lending volumes and higher spreads on business checking. In addition, the group completed the formation in late 1993 of an alliance with Card Establishment Services (CES) to perform the processing of the credit and debit card services. The alliance resulted in lower noninterest income and noninterest expense, but did not result in a material impact on pretax income. (See Noninterest Income section for further information regarding CES.) THE INVESTMENT GROUP is responsible for the sales and management of savings and investment products, investment management and brokerage services. This includes the Stagecoach and Overland Express Funds and personal trust, employee benefit trust and agency assets. It also includes product management for market rate accounts, savings deposits, Individual Retirement Accounts (IRAs) and time deposits. The Investment Group also includes the Wells Fargo Nikko Investment Advisors (WFNIA) joint venture and Wells Fargo Insurance Services. The Investment Group's pretax income in 1994 declined $25 million to $243 million, resulting from higher incentive compensation expense due to an increase in sales of approximately $800 million through the Personal Finance Officer (PFO) program. The increase in compensation was partially offset by higher annuity sales fees, management fees and net interest income. Fee income did not keep pace with compensation in 1994 as a higher percentage of the PFO sales were in no-load funds. No-load funds do not charge a sales fee; revenue is generated from management fees collected on assets under management. The growth in net interest income was due to widening spreads on market rate accounts, which offset a year-over-year decline in balances. THE REAL ESTATE GROUP provides a complete line of services supporting the commercial real estate market. Products and services include construction loans for commercial and residential development, land acquisition and development loans, secured and unsecured lines of credit, interim financing arrangements for completed buildings, rehabilitation loans, affordable housing loans and letters of credit. Secondary market services are provided through the Real Estate Capital Markets area. Its business includes purchases of distressed loans at a discount, mezzanine financing, acquisition financing, origination of permanent loans for securitization, syndications, commercial real estate loan servicing and real estate pension fund advisory services. Pretax income in 1994 increased $50 million to $142 million due to the improvement in credit quality that resulted in lower credit-related expenses, including lower foreclosed assets expense. Average loans were $6.2 billion in 1994, down from $8.0 billion in 1993. The decline was primarily due to payments. The current portfolio primarily consists of construction, other real estate mortgage loans and lines of credit to developers and to selected real estate investment trusts throughout the United States. THE WHOLESALE PRODUCTS GROUP includes the Commercial Banking Group, which serves businesses headquartered in California with annual sales of $5 to $250 million, and the Corporate Banking Group, which maintains relationships with major corporations throughout the United States. The group is responsible for soliciting and maintaining credit and noncredit relationships with businesses by offering a variety of products and services including traditional commercial loans and lines, letters of credit, trade facilities and cash management. The improvement in credit quality and an ongoing emphasis on cross-selling fee-based products contributed to an increase in pretax income of $46 million to $272 million in 1994. CONSUMER LENDING offers a full array of consumer loan products. In 1994, this included $2.7 billion in credit card loans, $1.7 billion in auto financing and leases, and $1.5 billion in other installment loans and lines of credit. Pretax income decreased $4 million in 1994 to $193 million, primarily due to higher noninterest expense from credit card marketing and costs related to opening and maintaining a higher number of credit card accounts. This was partially offset by higher net interest income from wider spreads and higher credit card balances. MORTGAGE LENDING provides products in the residential marketplace for home purchases, refinancing and home equity financing. These products include home equity 10 lines of credit, fixed-rate, adjustable-rate (ARM) and fixed initial-rate (FIRM) mortgage loans. In 1994, pretax income for this area decreased by $29 million to $77 million. This was primarily due to lower net interest income resulting from low start rates on adjustable-rate mortgages and a net runoff of $.5 billion in junior mortgages and other loans. First mortgage balances grew $1.7 billion primarily due to a shift in consumer preferences away from 30-year fixed-rate loans into ARMs, which have generally been held for portfolio purposes. Because of concerns about the long-run economics of the 1-4 family first mortgage business, Mortgage Lending has decided to no longer directly offer this product after the second quarter of 1995. Instead, it is currently expected that customers will be referred to another financial institution partner who will originate these loans. A $10 million accrual was made in the fourth quarter of 1994 for the disposition of premises and severance associated with this decision. Mortgage Lending will continue to originate real estate 1-4 family junior lien mortgages. THE OTHER category includes the Company's investment securities portfolio, the difference between the normalized provision for the line groups and the Company provision, the net impact of transfer pricing loan and deposit balances, the cost of external debt, the elimination of intergroup noninterest income and expense, and any residual effect of unallocated systems and other support groups. It also includes the impact of asset/liability strategies the Company has put in place to manage the sensitivity of net interest spreads. The increase in pretax income in the Other category was primarily due to a lower Company loan loss provision. This was partially offset by a decline in net interest income from lower hedging income from maturing interest rate floor and swap hedges put in place in 1989 to protect the Company against lower loan/deposit spreads in a declining rate environment. (For further information, refer to the Asset/Liability Management section.) EARNINGS PERFORMANCE - -------------------------------------------------------------------------------- The Bank generated net income of $863 million and $632 million in 1994 and 1993, respectively. The Parent (excluding its equity in earnings of subsidiaries) and its nonbank subsidiaries had net losses of $22 million and $20 million for 1994 and 1993, respectively. NET INTEREST INCOME ................................................................................ Net interest income is the difference between interest income (which includes yield-related loan fees) and interest expense. Net interest income on a taxable- equivalent basis was $2,610 million in 1994, compared with $2,659 million in 1993. Net interest income on a taxable-equivalent basis expressed as a percentage of average total earning assets is referred to at the net interest margin, which represents the average net effective yield on earning assets. For 1994, the net interest margin was 5.55%, compared with 5.74% in 1993. Hedging income from derivative contracts decreased $179 million in 1994 compared with 1993, reducing the net interest margin by 39 basis points, primarily due to maturing interest rate derivative contracts. This was largely offset by the increase in the rate spread between loans and deposits, which added 30 basis points to the net interest margin. The additional decline in the net interest margin was attributed to the lower rates on investment securities relative to their funding sources. (For further information, refer to the Asset/Liability Management section.) The net interest margin in 1995 is expected to decline modestly, assuming deposit rates will gradually increase in response to rising market interest rates. However, net interest income is not currently expected to change significantly in 1995. [NET INTEREST MARGIN (GRAPH) (%)] SEE APPENDIX 11
TABLE 4 AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) ================================================================================================================================== (in millions) 1994 1993 --------------------------- --------------------------- Average Yields/ Interest Average Yields/ Interest balance rates income/ balance rates income/ expense expense EARNING ASSETS Investment securities: At cost: U.S. Treasury securities $ 2,376 4.77% $ 113 $ 2,283 5.03% $ 115 Securities of U.S. government agencies and corporations 5,902 6.05 357 7,974 6.41 511 Private collateralized mortgage obligations 1,242 5.74 71 864 4.16 36 Other securities 133 5.75 8 189 5.67 11 ------- ------ ------- ------ Total investment securities at cost 9,653 5.69 549 11,310 5.95 673 At fair value (2): U.S. Treasury securities 190 6.66 13 -- -- -- Securities of U.S. government agencies and corporations 1,547 5.82 93 -- -- -- Private collateralized mortgage obligations 1,240 6.14 80 -- -- -- Other securities 76 14.13 6 -- -- -- ------- ------ ------- ------ Total investment securities at fair value 3,053 6.12 192 -- -- -- At lower of cost or market -- -- -- -- -- -- ------- ------ ------- ------ Total investment securities 12,706 5.79 741 11,310 5.95 673 Federal funds sold and securities purchased under resale agreements 189 3.51 7 734 3.17 23 Loans: Commercial 7,092 9.19 652 7,154 9.36 670 Real estate 1-4 family first mortgage 8,484 6.85 581 6,787 7.92 538 Other real estate mortgage 8,071 8.68 700 9,467 8.20 776 Real estate construction 977 9.29 91 1,303 8.50 111 Consumer: Real estate 1-4 family junior lien mortgage 3,387 7.75 262 3,916 6.97 273 Credit card 2,703 15.39 416 2,587 15.62 404 Other revolving credit and monthly payment 2,023 9.60 194 1,893 9.45 179 ------- ------ ------- ------ Total consumer 8,113 10.75 872 8,396 10.19 856 Lease financing 1,271 9.16 116 1,190 9.83 117 Foreign 31 5.06 2 7 -- -- ------- ------ ------- ------ Total loans (3)(4) 34,039 8.85 3,014 34,304 8.94 3,068 Other 54 5.89 3 -- -- -- ------- ------ ------- ------ Total earning assets $46,988 8.00 3,765 $46,348 8.12 3,764 ======= ------ ======= ------ FUNDING SOURCES Interest-bearing liabilities: Deposits: Interest-bearing checking $ 4,622 .98 45 $ 4,626 1.18 55 Savings deposits 2,541 1.99 51 2,741 2.19 60 Market rate savings 16,380 2.39 391 16,592 2.28 378 Savings certificates 7,030 4.28 301 7,948 4.37 347 Certificates of deposit 206 7.70 16 219 7.99 18 Other time deposits 98 6.61 6 112 5.62 6 Deposits in foreign offices 925 4.75 44 7 -- -- ------- ------ ------- ------ Total interest-bearing deposits 31,802 2.69 854 32,245 2.68 864 Federal funds purchased and securities sold under repurchase agreements 2,223 4.45 99 1,051 2.79 29 Commercial paper and other short-term borrowings 224 4.25 10 207 2.90 6 Senior debt 1,930 5.29 102 2,174 4.75 103 Subordinated debt 1,510 5.94 90 1,958 5.23 103 ------- ------ ------- ------ Total interest-bearing liabilities 37,689 3.06 1,155 37,635 2.93 1,105 Portion of noninterest-bearing funding sources 9,299 -- -- 8,713 -- -- ------- ------ ------- ------ Total funding sources $46,988 2.45 1,155 $46,348 2.38 1,105 ======= ------ ======= ------ NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (5) 5.55% $2,610 5.74% $2,659 ===== ====== ===== ====== NONINTEREST-EARNING ASSETS Cash and due from banks $ 2,618 $ 2,456 Other 2,243 2,306 ------- ------- Total noninterest-earning assets $ 4,861 $ 4,762 ======= ======= NONINTEREST-BEARING FUNDING SOURCES Deposits $ 9,019 $ 8,482 Other liabilities 1,062 997 Preferred stockholders' equity 521 639 Common stockholders' equity 3,558 3,357 Noninterest-bearing funding sources used to fund earning assets (9,299) (8,713) ------- ------- Net noninterest-bearing funding sources $ 4,861 $ 4,762 ======= ======= TOTAL ASSETS $51,849 $51,110 ======= ======= - ---------------------------------------------------------------------------------------------------------------------------------- (1) The average prime rate of the Bank was 7.14%, 6.00%, 6.25%, 8.47% and 10.01% for 1994, 1993, 1992, 1991 and 1990, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 4.75%, 3.29%, 3.83%, 5.99% and 8.28% for the same years, respectively. (2) Yields are based on amortized cost balances, which totaled $3,131 million for the year ended December 31, 1994. (3) Interest income includes loan fees, net of deferred costs, of approximately $40 million, $41 million, $57 million, $63 million and $71 million in 1994, 1993, 1992, 1991 and 1990, respectively.
12
TABLE 4 AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) (continued) ================================================================================================================================== (in millions) 1992 1991 1990 ------------------------- ------------------------- ------------------------- Average Yields/ Interest Average Yields/ Interest Average Yields/ Interest balance rates income/ balance rates income/ balance rates income/ expense expense expense EARNING ASSETS Investment securities: At cost: U.S. Treasury securities $ 1,562 5.80% $ 91 $ 631 6.59% $ 41 $ 338 6.82% $ 23 Securities of U.S. government agencies and corporations 4,197 7.38 309 1,231 7.85 96 998 8.95 89 Private collateralized mortgage obligations -- -- -- -- -- -- -- -- -- Other securities 110 6.16 7 193 8.41 17 306 9.44 29 ------- ------ ------- ------ ------- ------ Total investment securities at cost 5,869 6.93 407 2,055 7.51 154 1,642 8.60 141 At fair value (2): U.S. Treasury securities -- -- -- -- -- -- -- -- -- Securities of U.S. government agencies and corporations -- -- -- -- -- -- -- -- -- Private collateralized mortgage obligations -- -- -- -- -- -- -- -- -- Other securities -- -- -- -- -- -- -- -- -- ------- ------ ------- ------ ------- ------ Total investment securities at fair value -- -- -- -- -- -- -- -- -- At lower of cost or market 108 8.73 9 -- -- -- -- -- -- ------- ------ ------- ------ ------- ------ Total investment securities 5,977 6.97 416 2,055 7.51 154 1,642 8.60 141 Federal funds sold and securities purchased under resale agreements 919 3.62 33 303 5.42 16 45 8.61 4 Loans: Commercial 9,702 8.50 825 12,974 9.64 1,252 14,382 10.92 1,570 Real estate 1-4 family first mortgage 7,628 9.27 707 9,367 10.16 952 8,268 10.47 866 Other real estate mortgage 10,634 8.21 873 10,773 9.58 1,033 7,022 10.62 746 Real estate construction 1,837 8.47 156 2,232 10.10 225 4,271 10.83 463 Consumer: Real estate 1-4 family junior lien mortgage 4,585 8.14 373 5,135 10.10 519 4,321 11.50 497 Credit card 2,771 15.93 441 2,758 16.25 448 2,566 16.24 416 Other revolving credit and monthly payment 2,083 9.85 205 2,323 11.11 258 2,072 11.95 248 ------- ------ ------- ------ ------- ------ Total consumer 9,439 10.81 1,019 10,216 11.99 1,225 8,959 12.96 1,161 Lease financing 1,165 10.36 121 1,167 11.34 132 1,129 10.63 120 Foreign 1 -- -- 7 23.86 2 30 8.41 3 ------- ------ ------- ------ ------- ------ Total loans (3)(4) 40,406 9.16 3,701 46,736 10.31 4,821 44,061 11.19 4,929 Other 1 -- -- 17 8.43 1 5 -- -- ------- ------ ------- ------ ------- ------ Total earning assets $47,303 8.77 4,150 $49,111 10.17 4,992 $45,753 11.09 5,074 ======= ------ ======= ------ ======= ------ FUNDING SOURCES Interest-bearing liabilities: Deposits: Interest-bearing checking $ 4,597 1.77 81 $ 4,379 3.72 163 $ 3,835 3.93 151 Savings deposits 3,250 2.81 91 3,398 4.88 166 3,508 5.01 176 Market rate savings 15,284 2.89 442 12,699 5.04 640 9,788 6.32 619 Savings certificates 10,763 4.94 532 13,758 6.57 905 11,905 7.74 921 Certificates of deposit 316 8.41 27 570 8.12 46 418 8.72 36 Other time deposits 128 5.32 7 149 7.89 12 177 8.23 15 Deposits in foreign offices 43 7.89 3 400 7.76 31 261 8.84 23 ------- ------ ------- ------ ------- ------ Total interest-bearing deposits 34,381 3.44 1,183 35,353 5.55 1,963 29,892 6.49 1,941 Federal funds purchased and securities sold under repurchase agreements 1,299 3.16 41 3,092 5.50 170 4,522 7.95 359 Commercial paper and other short-term borrowings 252 3.54 9 1,243 6.29 78 2,871 7.90 227 Senior debt 2,175 5.77 126 1,681 7.53 126 587 9.02 53 Subordinated debt 1,872 4.99 93 1,832 6.15 113 1,864 8.23 153 ------- ------ ------- ------ ------- ------ Total interest-bearing liabilities 39,979 3.63 1,452 43,201 5.67 2,450 39,736 6.88 2,733 Portion of noninterest-bearing funding sources 7,324 -- -- 5,910 -- -- 6,017 -- -- ------- ------ ------- ------ ------- ------ Total funding sources $47,303 3.07 1,452 $49,111 4.99 2,450 $45,753 5.97 2,733 ======= ------ ======= ------ ======= ----- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (5) 5.70% $2,698 5.18% $2,542 5.12% $2,341 ===== ====== ===== ====== ===== ====== NONINTEREST-EARNING ASSETS Cash and due from banks $ 2,536 $ 2,604 $ 2,616 Other 2,658 3,307 2,740 ------- ------- ------- Total noninterest-earning assets $ 5,194 $ 5,911 $ 5,356 ======= ======= ======= NONINTEREST-BEARING FUNDING SOURCES Deposits $ 7,885 $ 7,289 $ 7,183 Other liabilities 1,060 1,180 1,053 Preferred stockholders' equity 608 279 405 Common stockholders' equity 2,965 3,073 2,732 Noninterest-bearing funding sources used to fund earning assets (7,324) (5,910) (6,017) ------- ------- ------- Net noninterest-bearing funding sources $ 5,194 $ 5,911 $ 5,356 ======= ======= ======= TOTAL ASSETS $52,497 $55,022 $51,109 ======= ======= ======= - ---------------------------------------------------------------------------------------------------------------------------------- (4) Nonaccrual loans and related income are included in their respective loan categories. (5) Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal and applicable state income taxes. The federal statutory tax rate was 35% for 1994 and 1993 and 34% for the other years presented.
13 NONINTEREST INCOME .............................................................................. Table 5 shows the major components of noninterest income.
TABLE 5 NONINTEREST INCOME ============================================================================== (in millions) Year ended December 31, % Change ------------------------ --------------- 1994 1993 1992 1994/ 1993/ 1993 1992 Service charges on deposit accounts $ 473 $ 423 $ 394 12 % 7 % Fees and commissions: Credit card membership and other credit card fees 64 68 72 (6) (6) Mutual fund and annuity sales fees 64 43 29 49 48 Debit and credit card merchant fees 55 80 87 (31) (8) Shared ATM network fees 43 38 32 13 19 Charges and fees on loans 42 48 49 (13) (2) All other 119 99 94 20 5 ------ ------ ------ Total fees and commissions 387 376 363 3 4 Trust and investment services income: Asset management and custody fees 124 125 124 (1) 1 Mutual fund management fees 46 37 19 24 95 All other 33 28 22 18 27 ------ ------ ------ Total trust and investment services income 203 190 165 7 15 Investment securities gains 8 -- 45 -- (100) Income from equity investments accounted for by the: Equity method 31 24 24 29 -- Cost method 31 42 17 (26) 147 Check printing charges 40 38 36 5 6 Losses from dispositions of operations (5) (28) (8) (82) 250 All other 32 28 23 14 22 ------ ------ ------ Total $1,200 $1,093 $1,059 10 % 3 % ====== ====== ====== === ==== - ------------------------------------------------------------------------------
The growth in service charges on deposit accounts in 1994 compared with 1993 was predominantly due to increased service fees for overdrafts as well as increased cash management-related fee income earned on wholesale accounts. The increase in mutual fund and annuity sales fees was due to a $40 million growth in annuity sales fees from $17 million in 1993 to $57 million in 1994, primarily offset by a $19 million decrease in mutual fund sales fees from $26 million in 1993 to $7 million in 1994. Sales volume of annuities grew from $387 million in 1993 to $1,091 million in 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 noncommission retail products such as no-load Lifepath Funds. 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. Substantially all of the decrease in debit and credit card merchant fees was due to an alliance with Card Establishment Services (CES) that the Company entered into in November 1993 for merchant credit card and debit card processing services. Under this agreement, the Company is responsible for marketing, sales and initial merchant credit analysis; CES provides technology, processing operations and customer service. 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 $7 million to income from equity investments in 1994. In October 1994, it was announced that CES would be purchased by First Data Resources in 1995. The purchase is not expected to have a material impact on the alliance. The increase in "all other" fees and commissions was primarily due to a decrease in amortization expense for purchased mortgage servicing rights and increased loan servicing fees. Amortization expense for purchased mortgage servicing rights totaled $8 million in 1994, compared with $16 million in 1993. At December 31, 1994, the balance of purchased mortgage servicing rights was $96 million, compared with $15 million at December 31, 1993. In 1994, the Company purchased an additional $89 million ($64 million of which was purchased in the fourth quarter of 1994) in servicing rights. The increase in trust and investment services income in 1994 compared with 1993 was primarily 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 $6.4 billion of assets under management at December 31, 1994, compared with $4.3 billion at December 31, 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 $5.4 billion under management at December 31, 1994, compared with $3.8 billion at December 31, 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 December 31, 1994, these funds had $1.0 billion of assets under management compared with $530 million at December 31, 1993. The Overland Express family of 16 funds, which had $3.4 14 billion of assets under management at December 31, 1994, compared with $3.9 billion at December 31, 1993, is sold nationwide through brokers. The decline in the Overland Express Fund assets under management was mostly in the Variable Rate Government Fund, the largest Overland Express 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 $47 billion, compared with $45 billion at December 31, 1993. The investment securities gains in 1994 reflected the sale of both corporate debt and marketable equity securities from the available-for-sale portfolio. In 1994, losses from the disposition of operations included fourth quarter accruals for the disposition of premises and, to a lesser extent, severance of $14 million associated with scheduled branch closures and $10 million associated with ceasing the direct origination of 1-4 family first mortgage loans by the Company's mortgage lending unit. (See Line of Business Results--Mortgage Lending section for further information.) Partially offsetting these accruals was an $8 million payment received in the first quarter of 1994 that was contingent on performance in relation to the alliance formed with CES. Additional payments from the CES agreement are also contingent upon future performance. In 1993, losses from disposition of operations included a $36 million accrual related to the disposition of owned and leased premises resulting from reduced space requirements; for example, downsizing some full service branches into supermarket locations and into other smaller, mid-sized branches. Additional accruals may be made in 1995 for branch closures or relocations depending on the success of the Company's alternative distribution channels, particularly supermarket banking. "All other" noninterest income in 1993 included $18 million of interest income received as a result of the settlement of California Franchise Tax Board audits related to the appropriate years for claiming deductions applicable to the 1976 through 1986 tax returns. Noninterest income is expected to increase in 1995, reflecting growth from fee-based products, mutual fund management fees and deposit-related services. NONINTEREST EXPENSE .............................................................................. Table 6 shows the major components of noninterest expense.
TABLE 6 NONINTEREST EXPENSE ============================================================================== (in millions) Year ended December 31, % Change ------------------------ --------------- 1994 1993 1992 1994/ 1993/ 1993 1992 Salaries $ 671 $ 684 $ 650 (2)% 5 % Incentive compensation 155 109 73 42 49 Employee benefits 201 213 175 (6) 22 Net occupancy 215 224 222 (4) 1 Equipment 174 148 141 18 5 Federal deposit insurance 101 114 106 (11) 8 Contract services 101 61 48 66 27 Advertising and promotion 65 59 47 10 26 Certain identifiable intangibles 62 77 71 (19) 8 Operating losses 62 52 45 19 16 Telecommunications 49 44 44 11 -- Postage 44 43 42 2 2 Goodwill 36 37 37 (3) -- Outside professional services 33 42 45 (21) (7) Stationery and supplies 30 31 31 (3) -- Travel and entertainment 30 28 24 7 17 Check printing 29 34 33 (15) 3 Security 20 19 18 5 6 Escrow and collection agency fees 19 24 26 (21) (8) Outside data processing 10 16 18 (38) (11) Foreclosed assets -- 60 93 (100) (35) All other 49 43 46 14 (7) ------ ------ ------ Total $2,156 $2,162 $2,035 -- % 6 % ====== ====== ====== ==== === - ------------------------------------------------------------------------------
The decrease in salaries expense was due to a decline in the Company's full-time equivalent (FTE) staff. The Company's FTE staff, including hourly employees, averaged 19,558 in 1994 and 20,766 in 1993; it was 19,598 at December 31, 1994. Incentive compensation is comprised of sales and discretionary bonuses, senior and executive incentive performance bonuses and certain stock-based incentive bonuses. Substantially all of the increase in incentive compensation from 1993 to 1994 was due to various sales programs, of which a significant portion related to annuities and mutual funds. Employee benefits expense for 1993 included an incremental expense of $11 million related to the adoption of Statement of Financial Accounting Standards No. 106 (FAS 106), Employers' Accounting for Postretirement Benefits Other than Pensions. During 1993, the Company also adopted Statement of Financial Accounting Standards 15 No. 112 (FAS 112), Employers' Accounting for Postemployment Benefits, which resulted in an accrual of $12 million. (See a further discussion of FAS 106 and 112 in Note 9 to the Financial Statements.) Increases in equipment expense and contract services in 1994 were primarily related to system upgrades throughout the Company and the development of new products and services, including software programming. The decrease in federal deposit insurance expense in 1994 compared with 1993 was mostly due to a decrease in the federal deposit insurance rate in 1994. Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), the FDIC uses a risk-based assessment system under which the assessment rate for an insured depository institution varies according to the level of risk incurred in its activities. Based on semi-annual assessment risk evaluations performed by the FDIC, the Bank is assigned an annualized assessment rate between .230% and .310%. The FDIC is proposing to lower the assessment rate for certain institutions, which, if adopted, will reduce this expense in 1995 compared with 1994. The decrease in certain identifiable intangibles expense was largely due to lower amortization expense for core deposit intangibles. Amortization expense for core deposit intangibles was $49 million in 1994, compared with $61 million in 1993. At December 31, 1994, the balance of core deposit intangibles was $208 million. Table 7 shows the major components of foreclosed assets expense.
TABLE 7 FORECLOSED ASSETS EXPENSE ============================================================================== (in millions) Year ended December 31, ----------------------------- 1994 1993 1992 Operating expenses $ 50 $ 67 $ 80 Operating revenues (29) (40) (47) Net (gains) losses from write-downs/sales (21) 33 60 ---- ---- ---- Total $ -- $ 60 $ 93 ==== ==== ==== - ------------------------------------------------------------------------------
The 100% decrease in foreclosed assets expense in 1994 compared with 1993 was largely due to a decline in write-downs from $60 million in 1993 to $13 million in 1994 and increased gains on sales. The Company expects total noninterest expense to increase modestly in 1995 compared with 1994, reflecting expenditures to help generate new customer revenue. BALANCE SHEET ANALYSIS - -------------------------------------------------------------------------------- A comparison between the year-end 1994 and 1993 balance sheets is presented below. The Bank's assets of $51.9 billion and $50.7 billion at December 31, 1994 and 1993, respectively, represented substantially all of the Company's consolidated assets at year-end 1994 and 1993. INVESTMENT SECURITIES ................................................................................ The Company adopted Statement of Financial Accounting Standards No. 115 (FAS 115), Accounting for Certain Investments in Debt and Equity Securities, on December 31, 1993. This Statement addresses the accounting and reporting for certain investments in debt and marketable equity securities. (For further discussion of FAS 115, see Note 3 to the Financial Statements.) Total investment securities averaged $12.7 billion in 1994, a 12% increase from $11.3 billion in 1993. Investment securities totaled $11.6 billion at December 31, 1994, down 11% from $13.1 billion at December 31, 1993. The investment securities portfolio at December 31, 1994 was comprised of $8.6 billion held-to-maturity securities at cost and $3.0 billion available-for-sale securities at fair value. Investment securities are expected to continue to decrease in the future as the cash received from their maturities is used to fund loan growth. Table 8 provides expected remaining maturities and yields (taxable- equivalent basis) of debt securities within the investment portfolio. The weighted average expected remaining maturity of the debt securities portfolio was 2 years and 10 months at December 31, 1994, compared with 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. Expected remaining maturities will differ from remaining contractual maturities because borrowers may have the right to prepay certain obligations with or without penalties. It is more appropriate to monitor investment security maturities and yields using prepayment assumptions since this better reflects what the Company expects to occur. (Note 3 to the Financial Statements shows the remaining contractual principal maturities and yields of debt securities.) At December 31, 1994, the held-to-maturity securities portfolio had an estimated unrealized loss of $434 million 16
TABLE 8 INVESTMENT SECURITIES EXPECTED REMAINING MATURITIES AND YIELDS ================================================================================================================================== (in millions) December 31, 1994 -------------------------------------------------------------------------------------------------------- Total Weighted Weighted Within one year After one year After five years After ten years amount average average through five years through ten years yield expected --------------- ------------------ ----------------- --------------- remaining Amount Yield Amount Yield Amount Yield Amount Yield maturity (in yrs.--mos.) HELD-TO-MATURITY SECURITIES: U.S. Treasury securities $ 1,772 4.79% 1-3 $ 899 4.63% $ 873 4.95% $ -- --% $ -- --% Securities of U.S. government agencies and corporations 5,394 6.17 3-2 1,067 5.73 3,252 6.00 850 7.05 225 7.37 Private collateralized mortgage obligations 1,306 6.09 2-7 242 5.78 1,014 6.16 50 6.14 -- -- Other 147 6.36 2-2 35 5.32 110 6.69 -- -- 2 6.37 ------- ------ ------ ----- ---- Total cost $ 8,619 5.88% 2-8 $2,243 5.29% $5,249 5.87% $ 900 7.00% $227 7.36% ======= ===== ====== ==== ====== ==== ===== ===== ==== ===== ESTIMATED FAIR VALUE $ 8,185 $2,186 $4,948 $ 839 $212 ======= ====== ====== ===== ==== AVAILABLE-FOR-SALE SECURITIES (1): U.S. Treasury securities $ 372 6.62% 3-1 $ -- --% $ 372 6.62% $ -- --% $ -- --% Securities of U.S. government agencies and corporations 1,476 5.54 2-9 133 6.67 1,256 5.42 87 5.60 -- -- Private collateralized mortgage obligations 1,290 6.38 4-3 166 5.98 795 6.38 316 6.37 13 12.27 Other 24 22.46 5-8 -- -- -- -- 24 22.46 -- -- ------- ------ ------ ----- ---- Total cost $ 3,162 6.14% 3-5 $ 299 6.29% $2,423 5.92% $ 427 7.12% $ 13 12.27% ======= ===== ====== ==== ====== ==== ===== ===== ==== ===== ESTIMATED FAIR VALUE $ 2,958 $ 286 $2,259 $ 400 $ 13 ======= ====== ====== ===== ==== TOTAL COST OF DEBT SECURITIES $11,781 5.95% 2-10 $2,542 5.41% $7,672 5.89% $1,327 7.04% $240 7.63% ======= ===== ==== ====== ==== ====== ==== ===== ===== ==== ===== - ---------------------------------------------------------------------------------------------------------------------------------- (1) The weighted average yield is computed using the amortized cost of available-for-sale investment securities carried at fair value. See Note 3 to the Financial Statements for fair value of available-for-sale securities by type of security.
(estimated unrealized gross gains were zero), or 5.0% of the cost of the portfolio. At December 31, 1993, the held-to-maturity securities 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. The available-for-sale portfolio includes both debt and marketable equity securities. At December 31, 1994, the available-for-sale securities portfolio had an unrealized net loss of $189 million, comprised of unrealized gross losses of $221 million and unrealized gross gains of $32 million. At December 31, 1993, the available-for-sale securities portfolio had an unrealized net gain of $36 million, comprised of unrealized gross gains of $59 million and unrealized gross losses of $23 million. 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 December 31, 1994, the investment securities valuation allowance amounted to an unrealized net loss of $110 million, compared with an unrealized net gain of $21 million at December 31, 1993. 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 decline. The decline in the fair value of the investment securities portfolio is not considered to be an other-than-temporary impairment. For the held-to-maturity securities, the full amount of principal and interest is expected to be collected. The Company may decide to sell certain of the available-for-sale securities to manage the level of earning assets (for example, to offset loan growth that may exceed expected maturities and prepayments of securities), resulting in the realization of losses. (See Note 3 to the Financial Statements for investment securities at cost and at fair value by security type.) 17 LOAN PORTFOLIO ................................................................................ A comparative schedule of average loan balances is presented in Table 4; year- end balances are presented in Note 4 to the Financial Statements. Loans averaged $34.0 billion in 1994, compared with $34.3 billion in 1993. Total loans at December 31, 1994 increased to $36.3 billion, or 10% compared with year-end 1993, reflecting the fourth consecutive quarter of growth. A significant portion of this increase was due to increases in the real estate 1-4 family first mortgage portfolio. The Company anticipates an increase in its loan portfolio for 1995 as well as a shift in loan growth from 1-4 family mortgages to higher yielding consumer and commercial loans. The Company's total unfunded loan commitments grew 31% to $20.9 billion at December 31, 1994, from $16.0 billion at December 31, 1993, including a 39% increase in unfunded credit card commitments from $5.6 billion at December 31, 1993 to $7.8 billion at December 31, 1994. Commercial loans grew 19% to $8.2 billion at year-end 1994, from $6.9 billion at December 31, 1993. This growth primarily occurred in middle market loans, resulting from increased marketing efforts, and is expected to continue in 1995. Total unfunded commercial loan commitments grew from $5.1 billion at December 31, 1993 to $6.6 billion at December 31, 1994. Included in the commercial loan portfolio are agricultural loans of $822 million and $643 million at December 31, 1994 and 1993, respectively. Agricultural loans consist of loans to finance agricultural production and other loans to farmers. The Company's 1-4 family first mortgage loan portfolio increased 21% from $7.5 billion at December 31, 1993 to $9.1 billion at December 31, 1994. Most of the increase occurred in the first half of 1994. As a result of a rising interest rate environment in 1994, demand within the Company's 1-4 family first mortgage portfolio shifted from traditional fixed-rate loan products to adjustable-rate loan products, which have generally been held for portfolio purposes. Approximately 58% of the 1-4 family first mortgage loans outstanding at December 31, 1994 were at a fixed rate, a majority of which are FIRM loans that convert to ARMs at the end of an initial fixed period. Due to the recent, gradual increase in mortgage rates, the portfolio is expected to experience slower prepayments in 1995 than in the previous two years. (See Line of Business Results--Mortgage Lending section for further information.) Of the Company's 1-4 family first mortgage portfolio, 97% is located in California, of which 50% is located in Southern California. The portfolio has maintained relatively low nonaccrual levels. Of the total outstanding at December 31, 1994, loans made prior to 1989, which have seasoned to a greater extent than the rest of the portfolio, totaled $1.2 billion, with $22.4 million, or 1.9%, on nonaccrual. Loan originations from 1989 and 1990 have experienced the greatest decline in property values in the portfolio due to the peak of California housing prices in those years and, therefore, make up the largest component of loans on nonaccrual. Loans originated in 1989 and 1990 totaled $1.4 billion, with $49.0 million, or 3.5%, on nonaccrual. Loans originated from 1991 through 1994 totaled $6.5 billion, with only $9.3 million, or .1%, on nonaccrual. The Company's commercial real estate loan portfolio was $9.6 billion at December 31, 1994, compared with $9.9 billion at December 31, 1993, a 3% decrease. This decrease was primarily due to payments received. Net charge-offs for commercial real estate loans were $60 million in 1994, down from $232 million in 1993 and $406 million at their peak in 1992. Table 9 presents comparative period-end commercial real estate loans.
TABLE 9 COMMERCIAL REAL ESTATE LOANS ============================================================================== (in millions) December 31, % Change ------------------------- --------------- 1994 1993 1992 1994/ 1993/ 1993 1992 Commercial loans to real estate developers (1) $ 525 $ 505 $ 731 4 % (31)% Other real estate mortgage (2) 8,079 8,286 10,128 (2) (18) Real estate construction 1,013 1,110 1,600 (9) (31) ------ ------ ------- Total $9,617 $9,901 $12,459 (3)% (21)% ====== ====== ======= === === Nonaccrual loans $ 416 $ 904 $ 1,528 (54)% (41)% ====== ====== ======= === === Nonaccrual loans as a % of total 4.3% 9.1% 12.3% ====== ====== ======= - ------------------------------------------------------------------------------ (1) Included in commercial loans. (2) Agricultural loans that are primarily secured by real estate are included in other real estate mortgage loans; such loans were $256 million, $225 million and $261 million at December 31, 1994, 1993 and 1992, respectively.
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 1993, 1992 and 1991 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 18 were particularly affected. There is still an oversupply of certain types of commercial real estate in the U.S. (particularly California) that 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 has contributed significantly to the Company's progress in reducing its nonaccrual loans and foreclosed assets. As a result of this liquidity in the marketplace, nonaccrual commercial real estate loans have declined to 4.3% of the commercial real estate portfolio at December 31, 1994, down from 9.1% at December 31, 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 continued growth during 1995, as evidenced by an 80% increase in commitments from $929 million at December 31, 1993 to $1,672 million at December 31, 1994. In addition to originating new commercial real estate loans in 1994, the Company began purchasing loans at a discount from other financial institutions totaling $170 million, including $32 million that was classified as nonaccrual on the date of purchase. The Company expects to collect the full purchase price of these loans. Table 10 summarizes the other real estate mortgage loans by state and property type. Substantially all of the other real estate mortgage loans are secured by properties located in California, representing 81% of the portfolio at December 31, 1994, compared with 78% at December 31, 1993. No other state comprised more than 1% of the portfolio at December 31, 1994. The largest property type was office buildings, representing 29% and 28% of the portfolio at December 31, 1994 and 1993, respectively.
TABLE 10 REAL ESTATE MORTGAGE LOANS BY STATE AND TYPE (EXCLUDING 1-4 FAMILY FIRST MORTGAGE LOANS) =================================================================================================================================== (in millions) December 31, 1994 ---------------------------------------------------------------------------------------------------------------- Washington, Other Total % of Non- Non- California Texas Florida Oregon D.C. states (3) by total accrual accruals -------------- ------------- ------------- -------- ----------- -------------- type loans loans as a % Total Non- Total Non- Total Non- Total Total Total Non- by type of total loans accrual loans accrual loans accrual loans (2) loans (2) loans accrual by type Office buildings $2,086 $111 $ 27 $ 9 $19 $-- $ 9 $39 $ 206 $ 1 $2,386 29% $121 5% Industrial 1,275 24 8 -- 4 -- 3 -- 47 -- 1,337 17 24 2 Shopping centers 553 37 52 -- 37 -- 42 -- 396 2 1,080 13 39 4 Apartments 870 29 9 -- -- -- 16 -- 123 1 1,018 13 30 3 Hotels/motels 334 18 8 -- 25 25 8 -- 155 -- 530 7 43 8 Retail buildings (other than shopping centers) 437 18 11 -- 2 -- -- -- 12 1 462 6 19 4 Institutional 353 8 -- -- -- -- 1 -- 9 -- 363 4 8 2 Agricultural 254 3 -- -- -- -- -- -- 1 -- 255 3 3 1 Land 163 26 2 1 1 -- -- 33 22 -- 221 3 27 12 1-4 family (1): Land 11 -- -- -- -- -- -- -- -- -- 11 -- -- -- Structures 7 -- -- -- -- -- -- -- -- -- 7 -- -- -- Other 132 7 -- -- -- -- -- -- 277(4) 7 409 5 14 3 ------ ---- ---- --- --- --- --- --- ------ --- ------ --- ---- Total by state $6,475 $281 $117 $10 $88 $25 $79 $72 $1,248 $12 $8,079 100% $328 4% ====== ==== ==== === === === === === ====== === ====== === ==== == % of total loans 81% 1% 1% 1% 1% 15% 100% ====== ==== === === === ====== ====== Nonaccruals as a % of total by state 4% 9% 28% 1% ==== === === === - ----------------------------------------------------------------------------------------------------------------------------------- (1) Represents loans to real estate developers secured by 1-4 family residential developments. (2) There were no loans on nonaccrual status at December 31, 1994. (3) Consists of 30 states; no state had loans in excess of $71 million at December 31, 1994. (4) Includes loans secured by collateral pools of approximately $158 million (where the pool is a mixture of various real estate property types located in various states, non real estate-related assets and other guarantees).
19 [LOAN MIX AT YEAR END (GRAPH) (%)] SEE APPENDIX Table 11 summarizes other real estate mortgage loans in California by region (South, North and Central) and property type. The Company's Southern California real estate loans are primarily located in Los Angeles and Orange Counties; its Northern California loans are predominantly located in the San Francisco Bay Area; and its Central California real estate loans are mostly in Sacramento. Table 12 summarizes the real estate construction loans by state and project type. The Company's real estate construction loans were predominantly in California, representing 77% of the portfolio at December 31, 1994, compared with 82% at December 31, 1993. No other state comprised more than 6% of the portfolio at December 31, 1994. The largest project type was 1-4 family land, representing 51% of the portfolio at December 31, 1994, compared with 43% at December 31, 1993. Table 13 summarizes real estate construction loans in California by region (South, North and Central) and project type.
TABLE 11 CALIFORNIA REAL ESTATE MORTGAGE LOANS BY REGION AND TYPE (EXCLUDING 1-4 FAMILY FIRST MORTGAGE LOANS) ================================================================================================================================== (in millions) December 31, 1994 ------------------------------------------------------------------------------------------------------- Southern Northern Central Total % of Nonaccrual Nonaccruals California California California California total loans as a % --------------- --------------- --------------- by type California by type of total Total Non- Total Non- Total Non- loans by type loans accrual loans accrual loans accrual Office buildings $ 884 $ 88 $ 909 $ 3 $ 293 $20 $2,086 32% $111 5% Industrial 631 22 410 -- 234 2 1,275 20 24 2 Shopping centers 251 23 194 14 108 -- 553 9 37 7 Apartments 529 25 301 3 40 1 870 13 29 3 Hotels/motels 124 17 153 1 57 -- 334 5 18 5 Retail buildings (other than shopping centers) 170 15 173 1 94 2 437 7 18 4 Institutional 156 6 151 -- 46 2 353 5 8 2 Agricultural 49 2 39 1 166 -- 254 4 3 1 Land 89 24 35 1 39 1 163 3 26 16 1-4 family (1): Land 11 -- -- -- -- -- 11 -- -- -- Structures 7 -- -- -- -- -- 7 -- -- -- Other 71 5 46 1 15 1 132 2 7 5 ------ ---- ------ --- ------ --- ------ --- ---- Total by region $2,972 $227 $2,411 $25 $1,092 $29 $6,475 100% $281 4% ====== ==== ====== === ====== === ====== === ==== == % of total California loans 46% 37% 17% 100% ====== ====== ====== ====== Nonaccruals as a % of total by region 8% 1% 3% ==== === === - ---------------------------------------------------------------------------------------------------------------------------------- (1) Represents loans to real estate developers secured by 1-4 family residential developments.
20
TABLE 12 REAL ESTATE CONSTRUCTION LOANS BY STATE AND TYPE ================================================================================================================================== (in millions) December 31, 1994 ---------------------------------------------------------------------------------------------------- California Nevada Hawaii Other states (2) Total % of Non- Non- -------------- -------- -------- --------------- by type total accrual accruals Total Non- Total Total Total Non- loans loans as a % loans accrual loans (1) loans (1) loans accrual by type of total by type 1-4 family: Land $417 $ 7 $43 $43 $ 4 $-- $ 507 51% $ 7 1% Structures 138 6 5 -- -- -- 143 14 6 4 Land (excluding 1-4 family) 45 -- 11 -- 62 44 118 12 44 37 Apartments 48 -- -- -- 24 -- 72 7 -- -- Office buildings 26 1 -- -- 17 -- 43 4 1 2 Shopping centers 41 -- -- -- -- -- 41 4 -- -- Retail buildings (other than shopping centers) 17 -- -- -- 16 -- 33 3 -- -- Hotels/motels 29 -- -- -- -- -- 29 3 -- -- Industrial 11 -- -- -- 4 -- 15 1 -- -- Institutional 6 -- -- -- -- -- 6 1 -- -- Agricultural 4 -- -- -- -- -- 4 -- -- -- Other 2 -- -- -- -- -- 2 -- -- -- ---- --- --- --- ---- --- ------ --- --- Total by state $784 $14 $59 $43 $127 $44 $1,013 100% $58 6% ==== === === === ==== === ====== === === == % of total loans 77% 6% 4% 13% 100% ==== === === ==== ====== Nonaccruals as a % of total by state 2% 35% === === - ---------------------------------------------------------------------------------------------------------------------------------- (1) There were no loans on nonaccrual status at December 31, 1994. (2) Consists of 13 states; no state had loans in excess of $31 million at December 31, 1994.
TABLE 13 CALIFORNIA REAL ESTATE CONSTRUCTION LOANS BY REGION AND TYPE ================================================================================================================================== (in millions) December 31, 1994 ---------------------------------------------------------------------------------------------------- Southern Northern Central Total % of total Nonaccrual Nonaccruals California California California California California loans as a % -------------- ---------- --------------- by type loans by type of total Total Non- Total Total Non- by type loans accrual loans (1) loans accrual 1-4 family: Land $157 $ 4 $130 $130 $ 3 $417 53% $ 7 2% Structures 85 2 39 14 4 138 18 6 4 Land (excluding 1-4 family) 3 -- 35 7 -- 45 6 -- -- Apartments 9 -- 35 4 -- 48 6 -- -- Office buildings 15 1 11 -- -- 26 3 1 4 Shopping centers 33 -- 7 1 -- 41 5 -- -- Retail buildings (other than shopping centers) 4 -- 10 3 -- 17 2 -- -- Hotels/motels -- -- 29 -- -- 29 4 -- -- Industrial 3 -- 6 2 -- 11 1 -- -- Institutional 1 -- 3 2 -- 6 1 -- -- Agricultural -- -- 3 1 -- 4 1 -- -- Other -- -- 2 -- -- 2 -- -- -- ---- --- ---- ---- --- ---- --- --- Total by region $310 $ 7 $310 $164 $ 7 $784 100% $14 2% ==== === ==== ==== === ==== === === == % of total California loans 40% 40% 20% 100% ==== ==== ==== ==== Nonaccruals as a % of total by region 2% 4% === === - ---------------------------------------------------------------------------------------------------------------------------------- (1) There were no loans on nonaccrual status at December 31, 1994.
21 [NONACCRUAL LOANS ($ BILLIONS) (GRAPH)] SEE APPENDIX [NEW LOANS PLACED ON NONACCRUAL ($ BILLIONS) (GRAPH)] SEE APPENDIX NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS ................................................................................ Table 14 presents comparative data for nonaccrual and restructured loans and other assets. Management's classification of a loan as nonaccrual or restructured does not necessarily indicate that the principal of the loan is uncollectible in whole or in part. (Notes 1 and 5 to the Financial Statements describe the Company's accounting policies relating to nonaccrual and restructured loans and foreclosed assets, respectively.) Table 15 summarizes the approximate changes during 1994 and 1993 in nonaccrual loans by loan category. Table 16 summarizes the quarterly trend, for the last eight quarters, of the approximate changes in nonaccrual loans. The general decline of nonaccrual loans over the last nine quarters, with nonaccruals peaking at $2,399 million on September 30, 1992, 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 has improved, and is expected
TABLE 14 NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS ================================================================================================================================== (in millions) December 31, -------------------------------------------------------------- 1994 1993 1992 1991 1990 Nonaccrual loans: Commercial (1)(2) $ 88 $ 252 $ 560 $ 871 $ 603 Real estate 1-4 family first mortgage 81 99 96 73 24 Other real estate mortgage (3) 328 578 1,207 778 284 Real estate construction 58 235 235 226 82 Consumer: Real estate 1-4 family junior lien mortgage 11 27 29 23 14 Other revolving credit and monthly payment 1 3 7 6 -- ---- ------ ------ ------ ------ Total nonaccrual loans 567 1,194 2,134 1,977 1,007 Restructured loans 15 6 8 4 6 ---- ------ ------ ------ ------ Nonaccrual and restructured loans 582 1,200 2,142 1,981 1,013 As a percentage of total loans 1.6% 3.6% 5.8% 4.5% 2.1% Foreclosed assets (4)(5) 272 348 510 404 416 Real estate investments (6) 17 15 40 20 -- ---- ------ ------ ------ ------ Total nonaccrual and restructured loans and other assets $871 $1,563 $2,692 $2,405 $1,429 ==== ====== ====== ====== ====== - ---------------------------------------------------------------------------------------------------------------------------------- (1) Includes loans to real estate developers of $30 million, $91 million, $86 million, $199 million and $12 million at December 31, 1994, 1993, 1992, 1991 and 1990, respectively. (2) Includes agricultural loans of $1 million, $9 million, $18 million, $13 million and $18 million at December 31, 1994, 1993, 1992, 1991 and 1990, respectively. (3) Includes agricultural loans secured by real estate of $3 million, $24 million, $28 million, $13 million and $21 million at December 31, 1994, 1993, 1992, 1991 and 1990, respectively. (4) Includes agricultural properties of $23 million, $26 million, $55 million, $66 million and $67 million at December 31, 1994, 1993, 1992, 1991 and 1990, respectively. (5) Excludes in-substance foreclosures (ISFs) of $99 million reclassified to nonaccrual loans at June 30, 1993 due to clarification of criteria used in determining when a loan is in-substance foreclosed. Complete information is not available for prior periods; however, any ISFs that would be reclassified in prior periods would not be materially higher than $99 million. (6) 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 $54 million, $34 million, $93 million and $124 million at December 31, 1994, 1993, 1992 and 1991, respectively.
22
TABLE 15 CHANGES IN NONACCRUAL LOANS BY LOAN CATEGORY ================================================================================================================================== (in millions) Commercial Real estate Other Real estate Consumer Total 1-4 family real estate construction first mortgage mortgage YEAR ENDED DECEMBER 31, 1994 BALANCE, BEGINNING OF YEAR $ 252 $ 99 $ 578 $ 235 $ 30 $1,194 New loans placed on nonaccrual 71 46 160 57 6 340 Loans purchased -- 2 25 7 -- 34 Charge-offs (42) (3) (63) (15) (2) (125) Payments: Principal (82) (35) (92) (67) (15) (291) Interest applied to principal (20) -- (26) (6) (1) (53) Transfers to foreclosed assets (6) (15) (53) (18) (4) (96) Loans returned to accrual (1) (84) (11) (209) (131) (1) (436) Loans sold -- (3) -- -- -- (3) Other additions (deductions) (1) 1 8 (4) (1) 3 ----- ---- ------ ----- ---- ------ BALANCE, END OF YEAR $ 88 $ 81 $ 328 $ 58 $ 12 $ 567 ===== ==== ====== ===== ==== ====== YEAR ENDED DECEMBER 31, 1993 Balance, beginning of year $ 560 $ 96 $1,207 $ 235 $ 36 $2,134 New loans placed on nonaccrual (2) 278 47 326 156 14 821 Charge-offs (97) (1) (167) (54) (6) (325) Payments: Principal (293) (20) (269) (77) (14) (673) Interest applied to principal (42) (1) (67) (14) -- (124) Transfers to foreclosed assets (2) (20) (166) (53) -- (241) Transfer from foreclosed assets (3) 7 -- 48 44 -- 99 Loans returned to accrual (1) (66) (2) (383) (6) (1) (458) Loans sold (22) -- (11) -- -- (33) Other additions (deductions) (4) (71) -- 60 4 1 (6) ----- ---- ------ ----- ---- ------ Balance, end of year $ 252 $ 99 $ 578 $ 235 $ 30 $1,194 ===== ==== ====== ===== ==== ====== - ---------------------------------------------------------------------------------------------------------------------------------- (1) Other real estate mortgage loans returned to accrual were the result of loans restructured at market interest rates and the improvement in the credit quality of loans. (2) Additions to commercial loans include $68 million for loans to financial companies and $50 million for highly leveraged transaction loans. Additions to other real estate mortgage loans include $113 million for commercial buildings and $62 million for commercial land. Additions to real estate construction loans include $127 million for single family land. (3) Reclassification due to clarification of criteria used in determining when a loan is in-substance foreclosed. (4) Includes transfers of restructured loans from commercial to other real estate mortgage loans of approximately $52 million.
TABLE 16 QUARTERLY TREND OF CHANGES IN NONACCRUAL LOANS ================================================================================================================================== (in millions) Quarter ended ------------------------------------------------------------------------------------------------- December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31, 1994 1994 1994 1994 1993 1993 1993 1993 BALANCE, BEGINNING OF QUARTER $637 $712 $ 895 $1,194 $1,696 $1,898 $1,966 $2,134 New loans placed on nonaccrual 71 93 124 52 113 195 264 249 Loans purchased 25 -- 9 -- -- -- -- -- Charge-offs (25) (38) (27) (35) (55) (90) (71) (109) Payments (61) (71) (91) (121) (309) (188) (144) (156) Transfers to foreclosed assets (18) (14) (27) (37) (64) (32) (104) (41) Transfers from foreclosed assets (1) -- -- -- -- -- -- 99 -- Loans returned to accrual (62) (45) (172) (157) (188) (81) (107) (82) Loans sold -- -- -- (3) -- (2) (5) (26) Other additions (deductions) -- -- 1 2 1 (4) -- (3) ---- ---- ----- ------ ------ ------ ------ ------ BALANCE, END OF QUARTER $567 $637 $ 712 $ 895 $1,194 $1,696 $1,898 $1,966 ==== ==== ===== ====== ====== ====== ====== ====== - ---------------------------------------------------------------------------------------------------------------------------------- (1) Reclassification due to clarification of criteria used in determining when a loan is in-substance foreclosed. Complete information is not available for prior periods; however, any ISFs that would be reclassified in prior periods would not be materially higher than $99 million.
23 to continue, the total nonaccrual balance could fluctuate from quarter to quarter. The Company anticipates normal influxes of loans as it increases its lending activity as well as resolutions of loans in the nonaccrual portfolio. The performance of any individual loan can be impacted by external factors such as the interest rate environment or factors particular to the borrower such as actions taken by a borrower's management. In addition, from time to time, the Company purchases loans from other financial institutions that may be classified as nonaccrual based on its policies. Foreclosed assets at December 31, 1994 decreased to $272 million from $348 million at December 31, 1993 substantially due to $206 million in sales, predominantly offset by $174 million in additions. However, additions decreased $231 million from 1993. The majority of sales of foreclosed assets in 1994 consisted of 1-4 family properties and office buildings. Approximately 33% of foreclosed assets at December 31, 1994 have been in the portfolio less than one year, with land and 1-4 family properties representing a majority of the amount greater than one year old. Table 17 summarizes the approximate changes during 1994 and 1993 in foreclosed assets. Table 18 summarizes the quarterly trend in foreclosed assets for the past eight quarters. Table 19 summarizes foreclosed assets at December 31, 1994 by state and type and Table 20 summarizes California foreclosed assets at December 31, 1994 by region and type.
TABLE 17 CHANGES IN FORECLOSED ASSETS BY TYPE ================================================================================================================================== (in millions) Beginning Additions Sales Charge-offs Write-downs Transfers to Other Ending balance nonaccrual balance loans (1) YEAR ENDED DECEMBER 31, 1994 Land (excluding 1-4 family) $119 $ 14 $ (29) $ (4) $ (2) $ -- $ 2 $100 1-4 family 69 83 (83) (9) (9) -- (1) 50 Industrial buildings 27 12 (14) -- -- -- (1) 24 Agricultural 26 1 (4) -- -- -- -- 23 Apartments 15 23 (10) -- (1) -- (4) 23 Office buildings 51 17 (45) -- -- -- (3) 20 Shopping centers 27 17 (16) (10) (1) -- 2 19 Hotels/motels 6 2 (5) -- -- -- -- 3 Other 8 5 -- -- -- -- (3) 10 ---- ---- ----- ---- ---- ---- ---- ---- Total $348 $174 $(206) $(23) $(13) $ -- $ (8) $272 ==== ==== ===== ==== ==== ==== ==== ==== YEAR ENDED DECEMBER 31, 1993 Land (excluding 1-4 family) $122 $105 $ (18) $(12) $(13) $(34) $(31) $119 1-4 family 111 128 (109) (16) (18) (41) 14 69 Industrial buildings 44 24 (26) (2) (7) -- (6) 27 Agricultural 54 7 (21) (1) (5) (5) (3) 26 Apartments 23 20 (22) (4) (4) -- 2 15 Office buildings 119 51 (96) (6) (10) (5) (2) 51 Shopping centers 12 56 (27) (2) (2) (7) (3) 27 Hotels/motels 10 9 (7) (6) -- -- -- 6 Other 15 5 (2) -- (2) (7) (1) 8 ---- ---- ----- ---- ---- ---- ---- ---- Total $510 $405 $(328) $(49) $(61) $(99) $(30) $348 ==== ==== ===== ==== ==== ==== ==== ==== - ---------------------------------------------------------------------------------------------------------------------------------- (1) Reclassification due to clarification of criteria used in determining when a loan is in-substance foreclosed.
24
TABLE 18 QUARTERLY TREND OF CHANGES IN FORECLOSED ASSETS ================================================================================================================================== (in millions) Quarter ended ------------------------------------------------------------------------------------------------- December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31, 1994 1994 1994 1994 1993 1993 1993 1993 BALANCE, BEGINNING OF QUARTER $306 $344 $354 $348 $357 $391 $ 510 $510 Additions 19 30 63 62 100 65 150 90 Sales (37) (64) (63) (42) (89) (76) (117) (46) Charge-offs (11) (1) (3) (8) (10) (8) (23) (8) Write-downs (2) (2) (3) (6) (7) (10) (18) (26) Transfers to nonaccrual loans (1) -- -- -- -- -- -- (99) -- Other deductions (3) (1) (4) -- (3) (5) (12) (10) ---- ---- ---- ---- ---- ---- ----- ---- BALANCE, END OF QUARTER $272 $306 $344 $354 $348 $357 $ 391 $510 ==== ==== ==== ==== ==== ==== ===== ==== - ---------------------------------------------------------------------------------------------------------------------------------- (1) Reclassification due to clarification of criteria used in determining when a loan is in-substance foreclosed. Complete information is not available for prior periods; however, any ISFs that would be reclassified in prior periods would not be materially higher than $99 million.
TABLE 19 FORECLOSED ASSETS BY STATE AND TYPE ================================================================================================================================== (in millions) December 31, 1994 ------------------------------------------------------------------------------------- California Washington, Texas Other Total % of total D.C. states (1) by type foreclosed assets Land (excluding 1-4 family) $ 70 $13 $ 2 $15 $100 38% 1-4 family 47 -- 3 -- 50 18 Industrial buildings 24 -- -- -- 24 9 Agricultural 23 -- -- -- 23 8 Apartments 23 -- -- -- 23 8 Office buildings 14 -- -- 6 20 7 Shopping centers 7 7 5 -- 19 7 Hotels/motels -- -- -- 3 3 1 Other 6 -- -- 4 10 4 ---- --- --- --- ---- --- Total by state $214 $20 $10 $28 $272 100% ==== === === === ==== === % of total foreclosed assets 79% 7% 4% 10% 100% ==== === === === ==== - ---------------------------------------------------------------------------------------------------------------------------------- (1) Consists of 11 states; foreclosed assets in each of these states were less than $7 million at December 31, 1994.
TABLE 20 CALIFORNIA FORECLOSED ASSETS BY REGION AND TYPE ================================================================================================================================== (in millions) December 31, 1994 ------------------------------------------------------------------------------------- Southern Northern Central Total % of total California California California California California by type foreclosed assets Land (excluding 1-4 family) $ 61 $ 6 $ 3 $ 70 32% 1-4 family 35 5 7 47 22 Industrial buildings 17 7 -- 24 11 Agricultural -- 5 18 23 11 Apartments 23 -- -- 23 11 Office buildings 10 1 3 14 7 Shopping centers 6 -- 1 7 3 Other 3 3 -- 6 3 ---- --- --- ---- --- Total by region $155 $27 $32 $214 100% ==== === === ==== === % of total California foreclosed assets 72% 13% 15% 100% ==== === === ==== - ----------------------------------------------------------------------------------------------------------------------------------
25 NONACCRUAL LOANS BY PERFORMANCE CATEGORY At December 31, 1994, an estimated $246 million, or 43%, of nonaccrual loans were less than 90 days past due, including an estimated $184 million, or 32%, that were current (less than 30 days past due) as to payment of principal and interest. This compares with an estimated $704 million, or 59%, of nonaccrual loans that were less than 90 days past due at December 31, 1993, including an estimated $595 million, or 50%, that were current. For all loans on nonaccrual during 1994 and 1993 (including loans no longer on nonaccrual at December 31, 1994 and 1993), cash interest payments of $74 million and $137 million were received while the loans were on nonaccrual status in 1994 and 1993, respectively. Of the $74 million received in 1994, $24 million was recognized as interest income and $50 million was applied to principal. Of the $137 million received in 1993, $19 million was recognized as interest income and $118 million was applied to principal. The average nonaccrual book principal loan balances (net of charge-offs and interest applied to principal) were $799 million and $1,800 million during 1994 and 1993, respectively. Table 21 presents the amount of nonaccrual loans that were contractually past due and those that were contractually current at December 31, 1994 and 1993. Both book and contractual balances are presented in the table, the difference reflecting charge-offs and interest applied to principal. The ratio of book to contractual principal balance was 65% at December 31, 1994, compared with 66% at December 31, 1993.
TABLE 21 NONACCRUAL LOANS BY PERFORMANCE CATEGORY (ESTIMATED)(1) ================================================================================================================================== (in millions) December 31, --------------------------------------------------------------------------------------------------- 1994 1993 ------------------------------------------------ ------------------------------------------------ BOOK CUMULATIVE CUMULATIVE CONTRACTUAL Book Cumulative Cumulative Contractual PRINCIPAL CHARGE- CASH INTEREST PRINCIPAL principal charge- cash interest principal BALANCE OFFS (6) APPLIED TO BALANCE balance offs (6) applied to balance PRINCIPAL (6) principal (6) Contractually past due (2): Payments not made (3): 90 days or more past due $111 $ 3 $ -- $114 $ 161 $ 22 $ -- $ 183 Less than 90 days past due 2 -- -- 2 23 -- -- 23 ---- ---- ---- ---- ------ ---- ---- ------ 113 3 -- 116 184 22 -- 206 ---- ---- ---- ---- ------ ---- ---- ------ Payments made (4): 90 days or more past due 210 75 28 313 329 171 41 541 Less than 90 days past due 60 4 12 76 86 29 16 131 ---- ---- ---- ---- ------ ---- ---- ------ 270 79 40 389 415 200 57 672 ---- ---- ---- ---- ------ ---- ---- ------ Total past due 383 82 40 505 599 222 57 878 Contractually current (5) 184 115 62 361 595 214 120 929 ---- ---- ---- ---- ------ ---- ---- ------ Total nonaccrual loans $567 $197 $102 $866 $1,194 $436 $177 $1,807 ==== ==== ==== ==== ====== ==== ==== ====== - --------------------------------------------------------------------------------------------------------------------------------- (1) There can be no assurance that individual borrowers will continue to perform at the level indicated or that the performance characteristics will not change significantly. (2) Contractually past due is defined as a borrower whose loan principal or interest payment is 30 days or more past due. (3) Borrower has made no payment since being placed on nonaccrual. (4) Borrower has made some payments since being placed on nonaccrual. Approximately $168 million and $314 million of these loans had some payments made on them during the fourth quarter of 1994 and 1993, respectively. (5) Contractually current is defined as a loan for which principal and interest are being paid in accordance with the terms of the loan. All of the contractually current loans were placed on nonaccrual due to uncertainty of receiving full timely collection of interest or principal. (6) Cumulative amounts recorded since inception of the loan.
26 LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING Table 22 shows loans contractually past due 90 days or more as to interest or principal, but not included in the nonaccrual or restructured categories. All loans in this category are both well-secured and in the process of collection or are consumer loans or real estate 1-4 family first mortgage loans that are exempt under regulatory rules from being classified as nonaccrual.
TABLE 22 LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING ================================================================================================================================== (in millions) December 31, ------------------------------------------------------------------ 1994 1993 1992 1991 1990 Commercial $ 6 $ 4 $ 4 $ 26 $ 21 Real estate 1-4 family first mortgage 18 19 29 38 19 Other real estate mortgage 47 14 22 28 46 Real estate construction -- 8 11 3 10 Consumer: Real estate 1-4 family junior lien mortgage 4 6 9 13 12 Credit card 42 43 55 50 42 Other revolving credit and monthly payment 1 1 2 3 8 ---- --- ---- ---- ---- Total consumer 47 50 66 66 62 Lease financing -- -- 1 1 1 ---- --- ---- ---- ---- Total $118 $95 $133 $162 $159 ==== === ==== ==== ==== - ----------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES ................................................................................ An analysis of the changes in the allowance for loan losses, including charge- offs and recoveries by loan category, is presented in Note 4 to the Financial Statements. At December 31, 1994, the allowance for loan losses was $2,082 million, or 5.73% of total loans, compared with $2,122 million, or 6.41%, at December 31, 1993. The provision for loan losses declined to $200 million in 1994 from $550 million in 1993, due to the continued improvement of the Company's loan portfolio. Assuming the economic recovery in California and improvements in the Company's credit quality continue, there may be no provision for loan losses in 1995. Net charge-offs in 1994 were $240 million, or .70% of average total loans, compared with $495 million, or 1.44%, in 1993. Loan loss recoveries were $129 million in 1994, compared with $169 million in 1993. Table 23 summarizes net charge-offs by loan category. Since peaking in 1992, net charge-offs have steadily declined in 1993 and 1994. Net charge-offs in 1995 are expected to remain roughly flat with 1994 levels. The largest category of net charge-offs in 1994 was credit card loans, comprising 50% of the total net charge-offs. However, credit card net charge- offs declined from $156 million, or 6.06% of average credit card loans, in 1993 to $120 million, or 4.45% of average credit card loans, in 1994. The percentage of net charge-offs to average credit card loans is expected to increase slightly in 1995, reflecting the normal loss rates on new accounts. Any loan that is past due as to principal or interest and that is not both well-secured and in the process of collection is generally charged off (to the extent that it exceeds the fair value of any related collateral) after a predetermined
TABLE 23 NET CHARGE-OFFS BY LOAN CATEGORY ================================================================================================================================== (in millions) Year ended December 31, ------------------------------------------------------------------------ 1994 1993 1992 ------------------ ------------------ ------------------ AMOUNT % OF Amount % of Amount % of AVERAGE average average LOANS loans loans Commercial $ 17 .23 % $ 39 .54% $179 1.83% Real estate 1-4 family first mortgage 12 .14 23 .34 15 .19 Other real estate mortgage 44 .55 150 1.58 281 2.64 Real estate construction 4 .34 64 4.85 90 4.91 Consumer: Real estate 1-4 family junior lien mortgage 20 .59 25 .62 27 .57 Credit card 120 4.45 156 6.06 168 6.06 Other revolving credit and monthly payment 25 1.26 29 1.60 29 1.42 ---- ---- ---- Total consumer 165 2.04 210 2.52 224 2.37 Lease financing (2) (.15) 9 .82 10 .89 Foreign recoveries -- -- -- -- (1) (1.18) ---- ---- ---- Total net loan charge-offs $240 .70% $495 1.44% $798 1.97 % ==== ==== ==== ==== ==== ===== - ----------------------------------------------------------------------------------------------------------------------------------
27 period of time that is based on loan category. Additionally, loans are charged off when classified as a loss by either internal loan examiners or regulatory examiners. The Company has an established process to determine the adequacy of the allowance for loan losses that assesses the risk and losses inherent in its portfolio. This process provides an allowance consisting of two components, allocated and unallocated. The allocated component reflects inherent losses resulting from the analysis of individual loans. It is developed through specific credit allocations for individual loans, historical loss experience for each loan category and degree of criticism within each category. The total of these allocations is then supplemented by the unallocated component of the allowance. This includes adjustments to the historical loss experience for the various loan categories to reflect any current conditions that could affect losses inherent in the portfolio. The unallocated component includes management's judgmental determination of the amounts necessary for concentrations, economic uncertainties and other subjective factors. The Company's determination of the level of the allowance and, correspondingly, the provision for loan losses rests upon various judgments and assumptions, including general (particularly California's) economic conditions, loan portfolio composition, prior loan loss experience and the Company's ongoing examination process and that of its regulators. The Company has an internal risk analysis and review staff that reports to the Board of Directors and continuously reviews loan quality. Such reviews also assist management in establishing the level of the allowance. Similar to a number of other large national banks, the Bank has been for several years and continues to be examined by its primary regulator, the Office of the Comptroller of the Currency (OCC), and has OCC examiners in residence. These examinations occur throughout the year and target various activities of the Bank, including specific segments of the loan portfolio (for example, commercial real estate and shared national credits). In addition to the Bank being examined by the OCC, the Parent and its nonbank subsidiaries are examined by the Federal Reserve. The Company considers the allowance for loan losses of $2,082 million adequate to cover losses inherent in loans, commitments to extend credit and standby letters of credit at December 31, 1994. Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114 (FAS 114), Accounting by Creditors for Impairment of a Loan, as amended by FAS 118 (collectively referred to as FAS 114). These Statements address the disclosure requirements and allocations of the allowance for loan losses for certain impaired loans and amend FASB Statements No. 5 and 15; however, they do not address the overall adequacy of the allowance for loan losses. These Statements are effective January 1, 1995, and can only be applied prospectively. A loan within the scope of FAS 114 is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. When a loan to an individual borrower with unique risk characteristics has been identified as being impaired, the amount of impairment will be measured by the Company using discounted cash flows, except when it is determined that the sole (remaining) source of repayment for the loan is the operation or liquidation of the underlying collateral. In such case, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. Alternatively, some impaired loans will have risk characteristics similar to other impaired loans and will be aggregated for the purpose of measuring impairment using historical loss factors as a means of measurement. If the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs, and unamortized premium or discount), an impairment will be recognized by creating or adjusting an existing allocation of the allowance for loan losses. FAS 114 will not change the timing of charge-offs of loans to reflect the amount ultimately expected to be collected. Based on the Company's current interpretations, the preliminary estimate of the total loans within the scope of FAS 114 that were impaired as of January 1, 1995 were less than $500 million. DEPOSITS ................................................................................ Comparative detail of average deposit balances is presented in Table 4. Average core deposits decreased 2% in 1994 compared with 1993. Average core deposits funded 76% and 79% of the Company's average total assets in 1994 and 1993, respectively. Total average deposits remained flat compared with 1993, as the decrease in core deposits was offset by an increase in interest-bearing foreign deposits, which were used to fund short-term borrowing needs. 28 Year-end deposit balances are presented in Table 24.
TABLE 24 DEPOSITS ============================================================================== (in millions) December 31, % -------------------- Change 1994 1993 Noninterest-bearing $10,145 $ 9,719 4 % Interest-bearing checking 4,518 4,789 (6) Savings 2,395 2,544 (6) Market rate savings 14,318 17,084 (16) Savings certificates 7,132 7,155 -- ------- ------- Core deposits 38,508 41,291 (7) Foreign interest- bearing deposits (1) 3,540 38 -- Other 284 315 (10) ------- ------- Total deposits $42,332 $41,644 2 % ======= ======= === - ------------------------------------------------------------------------------ (1) Short-term (under 90 days) deposits used to fund short-term borrowing needs.
CERTAIN FAIR VALUE INFORMATION .............................................................................. FAS 107 requires that the Company disclose estimated fair values for certain financial instruments. Quoted market prices, when available, are used to reflect fair values. If market quotes are not available, which is the case for most of the Company's financial instruments, management has provided its best estimate of the calculation of the fair values using discounted cash flows. Fair value amounts differ from book balances because fair values attempt to capture the effect of current market conditions (for example, interest rates) on the Company's financial instruments. Due to rising interest rates, there was a decrease in the excess (premium) of the fair value over the carrying value of the Company's financial instruments at December 31, 1994 compared with December 31, 1993. The Company's FAS 107 disclosures are presented in Note 14 to the Financial Statements. CAPITAL ADEQUACY/RATIOS .............................................................................. The Company uses a variety of measures to evaluate capital adequacy. Management reviews the various capital measures monthly and takes appropriate action to ensure that they are within established internal and external guidelines. The Company's current capital position exceeds current guidelines established by industry regulators. [CORE DEPOSITS AT YEAR END ($ BILLIONS) (GRAPH)] SEE APPENDIX RISK-BASED CAPITAL RATIOS The Federal Reserve Board (FRB) and the OCC issue risk-based capital (RBC) guidelines for bank holding companies and national banks, respectively. The FRB is the primary regulator for the Parent and the OCC is the primary regulator for the Bank. RBC guidelines establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures. There are two categories of capital under the guidelines. Tier 1 capital includes common stockholders' equity and qualifying preferred stock, less goodwill and certain other deductions (including the unrealized net gains and losses, after applicable taxes, on available-for-sale investment securities carried at fair value); Tier 2 capital includes preferred stock not qualifying as Tier 1 capital, mandatory convertible debt, subordinated debt, certain unsecured senior debt issued by the Parent and the allowance for loan losses, subject to limitations by the guidelines. Tier 2 capital is limited to the amount of Tier 1 capital (i.e., at least half of the total capital must be in the form of Tier 1 capital). The Company's Tier 1 and Tier 2 capital components are shown in Table 25. Under the guidelines, one of four risk weights is applied to the different balance sheet assets, primarily based on the relative credit risk of the counterparty (for example, qualifying 1-4 family first mortgage loans are risk- weighted at 50%). Off-balance sheet items, such as loan commitments and derivative financial instruments, are also applied 29 a risk weight after calculating balance sheet equivalent amounts. One of four credit conversion factors are assigned to loan commitments based on the likelihood of the off-balance sheet item becoming an asset. (For example, certain loan commitments are converted at 50% and then risk-weighted at 100%.) Derivative financial instruments are converted to balance sheet equivalents based on notional values, replacement costs and remaining contractual terms. The credit conversion factors and risk weights are 0%, 20%, 50% and 100%. (Refer to Notes 4 and 13 to the Financial Statements for further discussion of off-balance sheet items.) The Company's total RBC ratio at December 31, 1994 was 13.16% and its Tier 1 RBC ratio was 9.09%, exceeding the minimum guidelines of 8% and 4%, respectively. The ratios at December 31, 1993 were 15.12% and 10.48%, respectively. The decrease in the Company's Tier 1 RBC ratio at December 31, 1994 compared with 1993 resulted primarily from the repurchase of 5,122,597 shares of common stock throughout 1994 and, secondarily, from the redemption of $150 million in Series A preferred stock (at its liquidation preference carrying amount) in the first quarter of 1994. The Company's risk-weighted assets are calculated as shown in Table 25. Risk-weighted balance sheet assets were $15.1 billion and $16.4 billion less than total assets on the consolidated balance sheet of $53.4 billion and $52.5 billion at December 31, 1994 and 1993, respectively, as a result of weighing certain types of assets at less than 100%; such assets, for both December 31, 1994 and 1993, substantially consisted of claims on or guarantees by the U.S. government or its agencies (risk-weighted at 0% to 20%), 1-4 family first mortgage loans (50%), private collateralized mortgage obligations backed by 1-4 family first mortgage loans (50%) and cash and due from banks (0% to 20%). The $2.2 billion increase in risk-weighted balance sheet assets in 1994 compared with 1993 was substantially due to an increase in loans (mostly commercial and 1-4 family first mortgage loans) and a corresponding decrease in investment securities, which are lower risk-weighted assets.
TABLE 25 RISK-BASED CAPITAL AND LEVERAGE RATIOS ============================================================================== (in billions) December 31, ------------------ 1994 1993 Tier 1: Common stockholders' equity $ 3.4 $ 3.7 Preferred stock .5 .6 Less goodwill and other deductions (1) (.3) (.5) ----- ----- Total Tier 1 capital 3.6 3.8 ----- ----- Tier 2: Mandatory convertible debt .1 .1 Subordinated debt and unsecured senior debt 1.0 1.1 Allowance for loan losses allowable in Tier 2 .5 .4 ----- ----- Total Tier 2 capital 1.6 1.6 ----- ----- Total risk-based capital $ 5.2 $ 5.4 ===== ===== Risk-weighted balance sheet assets $38.3 $36.1 Risk-weighted off-balance sheet items: Commitments to make or purchase loans 1.9 1.3 Standby letters of credit .6 .6 Other .3 .2 ----- ----- Total risk-weighted off-balance sheet items 2.8 2.1 ----- ----- Goodwill and other deductions (1) (.3) (.5) Allowance for loan losses not included in Tier 2 (1.6) (1.7) ----- ----- Total risk-weighted assets $39.2 $36.0 ===== ===== Risk-based capital ratios: Tier 1 capital (4% minimum requirement) 9.09% 10.48% Total capital (8% minimum requirement) 13.16 15.12 Leverage ratio (3% minimum requirement) (2) 6.89% 7.39% - ------------------------------------------------------------------------------ (1) Other deductions include the unrealized net gain (loss) on available-for- sale investment securities carried at fair value. (2) Tier 1 capital divided by quarterly average total assets (excluding goodwill and other items which were deducted to arrive at Tier 1 capital).
LEVERAGE RATIO To supplement the RBC guidelines, the FRB established a leverage ratio guideline. The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding goodwill and certain other items. The minimum leverage ratio guideline is 3% for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings and, in general, are considered top-rated, strong banking organizations. Other banking organizations are expected to have ratios of at least 4% to 5%, depending upon their particular condition and growth plans. Higher leverage ratios could be required by the particular circumstances or risk profile of a given banking organization. The Company's leverage ratios were 6.89% and 7.39% at December 31, 1994 and 1993, respectively. The decrease in the leverage ratio at December 31, 1994 compared with December 31, 1993 was primarily due to a decrease in Tier 1 capital. 30 FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 (FDICIA) In addition to adopting a risk-based assessment system, FDICIA required that the federal regulatory agencies adopt regulations defining five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under the regulations, a "well capitalized" institution must have a Tier 1 RBC ratio of at least 6%, a total capital ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a capital directive order. The Bank had a Tier 1 RBC ratio of 9.56%, a total capital ratio of 12.64% and a leverage ratio of 7.21% at December 31, 1994, compared with 10.36%, 13.99% and 7.30% at December 31, 1993, respectively. ASSET/LIABILITY MANAGEMENT ................................................................................ The principal objectives of asset/liability management are to manage the sensitivity of net interest spreads to potential changes in interest rates and to enhance profitability in ways that promise sufficient reward for understood and controlled risk. Funding positions are kept within predetermined limits designed to ensure that risk-taking is not excessive and that liquidity is properly managed. Interest rate risk occurs when assets and liabilities reprice at different times as interest rates change. For example, if fixed-rate assets are funded with floating-rate debt, the spread between asset and liability rates will decline or turn negative if rates increase. The Company refers to this type of risk as "term structure risk." There is, however, another source of interest rate risk, which results from changing spreads between loan and deposit rates. These changing spreads are not highly correlated to changes in the level of interest rates and are driven by other market conditions. The Company calls this type of risk "basis risk"; it is the Company's main source of interest rate risk and is significantly more difficult to quantify and manage than term structure risk. One way to analyze the impact that future changes in interest rates will have on net interest income is through a cumulative gap measure. The gap represents the net position of assets and liabilities subject to repricing in specified time periods. Table 26 shows in summary form the Company's interest rate sensitivity based on expected interest rate repricings in specific time frames for the balance sheet as of December 31, 1994. All swaps, except for forward swaps, are reported in the table. Table 27 presents an expanded, detailed report of the Company's interest rate sensitivity by major asset and liability categories, together with an adjusted cumulative gap measure.
TABLE 26 SUMMARY OF INTEREST RATE SENSITIVITY ================================================================================================================================== (in millions) December 31, 1994 ------------------------------------------------------------------------------------------ Prime- MRA 0-3 >3-6 >6-12 >1-5 >5 Non- Total based savings months months months years years market loans Assets $9,338 $ -- $ 10,951 $ 2,292 $ 3,240 $15,800 $ 3,533 $ 8,220 $ 53,374 Liabilities and stockholders' equity -- (10,663) (11,039) (1,256) (2,121) (2,552) (887) (24,856) (53,374) ------ -------- -------- ------- ------- ------- ------- -------- -------- Gap before interest rate swaps $9,338 $(10,663) $ (88) $ 1,036 $ 1,119 $13,248 $ 2,646 $(16,636) $ -- Interest rate swaps (1) -- -- (1,692) 281 149 1,245 17 -- -- ------ -------- -------- ------- ------- ------- ------- -------- -------- Gap adjusted for interest rate swaps $9,338 $(10,663) $ (1,780) $ 1,317 $ 1,268 $14,493 $ 2,663 $(16,636) $ -- ====== ======== ======== ======= ======= ======= ======= ======== ======== Cumulative gap $ -- $ (1,325) $ (3,105) $(1,788) $ (520) $13,973 $16,636 $ -- ====== ======== ======== ======= ======= ======= ======= ======== - ---------------------------------------------------------------------------------------------------------------------------------- (1) Amounts exclude receive-fixed rate, forward starting swaps with a notional amount of $1,415 million at December 31, 1994.
31
TABLE 27 INTEREST RATE SENSITIVITY ================================================================================================================================== (in millions) December 31, 1994 ------------------------------------------------------------------------------------------ Prime- MRA 0-3 >3-6 >6-12 >1-5 >5 Non- Total based savings months months months years years market loans ASSETS Investment securities (1) $ -- $ -- $ 554 $ 559 $ 1,416 $ 7,508 $ 1,540 $ 31 $11,608 Federal funds sold and securities purchased under resale agreements -- -- 260 -- -- -- -- -- 260 Loans: Commercial 4,510 -- 2,609 389 62 238 50 304 8,162 Real estate 1-4 family first mortgage 86 -- 1,014 445 615 5,356 1,453 81 9,050 Other real estate mortgage 2,482 -- 2,443 560 686 1,241 339 328 8,079 Real estate construction 748 -- 172 1 2 31 1 58 1,013 Consumer 1,512 -- 3,748 229 266 588 77 2,266 8,686 Lease financing -- -- 117 109 193 838 73 -- 1,330 Foreign -- -- 27 -- -- -- -- -- 27 ------ -------- -------- -------- -------- ------- ------- -------- ------- Total loans (2) 9,338 -- 10,130 1,733 1,824 8,292 1,993 3,037 36,347 ------ -------- -------- -------- -------- ------- ------- -------- ------- Other earning assets (3) -- -- 7 -- -- -- -- 52 59 ------ -------- -------- -------- -------- ------- ------- -------- ------- Total earning assets 9,338 -- 10,951 2,292 3,240 15,800 3,533 3,120 48,274 Noninterest-earning assets -- -- -- -- -- -- -- 5,100 5,100 ------ -------- -------- -------- -------- ------- ------- -------- ------- Total assets $9,338 $ -- $ 10,951 $ 2,292 $ 3,240 $15,800 $ 3,533 $ 8,220 $53,374 ------ -------- -------- -------- -------- ------- ------- -------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Interest-bearing checking $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 4,518 $ 4,518 Savings deposits -- -- -- -- -- -- -- 2,395 2,395 Market rate savings (4) -- 10,663 870 -- -- -- -- 2,785 14,318 Savings certificates -- -- 1,684 1,230 1,949 2,141 96 32 7,132 Other time deposits -- -- 45 25 40 168 4 2 284 Deposits in foreign offices -- -- 3,540 -- -- -- -- -- 3,540 ------ -------- -------- -------- -------- ------- ------- -------- ------- Total interest-bearing deposits -- 10,663 6,139 1,255 1,989 2,309 100 9,732 32,187 Short-term borrowings -- -- 3,211 -- -- -- -- -- 3,211 Senior debt -- -- 978 1 132 243 39 -- 1,393 Subordinated debt (5) -- -- 636 -- -- -- 748 76 1,460 ------ -------- -------- -------- -------- ------- ------- -------- ------- Total interest-bearing liabilities -- 10,663 10,964 1,256 2,121 2,552 887 9,808 38,251 Noninterest-bearing liabilities -- -- -- -- -- -- -- 11,212 11,212 Stockholders' equity -- -- 75 -- -- -- -- 3,836 3,911 ------ -------- -------- -------- -------- ------- ------- -------- ------- Total liabilities and stockholders' equity $ -- $ 10,663 $ 11,039 $ 1,256 $ 2,121 $ 2,552 $ 887 $ 24,856 $53,374 ------ -------- -------- -------- -------- ------- ------- -------- ------- Gap before interest rate swaps $9,338 $(10,663) $ (88) $ 1,036 $ 1,119 $13,248 $ 2,646 $(16,636) $ -- Interest rate swaps (6): Receive fixed -- -- (1,701) 204 216 1,264 17 -- -- Receive variable -- -- 86 -- (67) (19) -- -- -- Basis swaps -- -- (77) 77 -- -- -- -- -- ------ -------- -------- -------- -------- ------- ------- -------- ------- Gap adjusted for interest rate swaps $9,338 $(10,663) $ (1,780) $ 1,317 $ 1,268 $14,493 $ 2,663 $(16,636) $ -- ====== ======== ======== ======== ======== ======= ======= ======== ======= Cumulative gap $ -- $ (1,325) $ (3,105) $ (1,788) $ (520) $13,973 $16,636 $ -- ====== ======== ======== ======== ======== ======= ======= ======== Adjustments: Exclude noninterest-earning assets, noninterest-bearing liabilities and stockholders' equity -- -- 75 -- -- -- -- 9,948 Move interest-bearing checking, savings deposits and market rate savings from nonmarket to shortest maturity -- -- (9,698) -- -- -- -- 9,698 ------ -------- -------- -------- -------- ------- ------- -------- Adjusted cumulative gap $9,338 $ (1,325) $(12,728) $(11,411) $(10,143) $ 4,350 $ 7,013 $ 10,023 ====== ======== ======== ======== ======== ======= ======= ======== - ---------------------------------------------------------------------------------------------------------------------------------- (1) The nonmarket column consists of marketable equity securities. (2) The nonmarket column consists of nonaccrual loans of $567 million, fixed-rate credit card loans of $2,300 million (including $46 million in commercial credit card loans) and overdrafts of $170 million. (3) The nonmarket column consists of Federal Reserve Bank stock. (4) The nonmarket column consists of Wells Extra savings. (5) The nonmarket column substantially consists of foreign currency transaction adjustments to subordinated notes issued in German marks. (6) Amounts exclude receive-fixed rate, forward starting swaps with a notional amount of $1,415 million at December 31, 1994.
32 In categorizing assets and liabilities according to expected repricing time frames, management makes certain judgments and approximations. For example, a new three-year loan with a rate that is adjusted every 30 days would be included in the "0-3 months" category rather than the "over 1-5 years" category. There are also balance sheet categories that have a fixed rate and an unspecified maturity, or a rate which is administered but changes slowly or not at all as market rates change. An example of this type of account is interest- bearing checking, which has balances available on demand and pays a rate that changes infrequently. The balances are relatively stable from quarter to quarter, but could decline because of disintermediation if rates increased substantially. Another example is the revolving credit feature of fixed-rate credit card loans, which differentiates these loans from fixed-rate loans with specified contractual maturities. Given the unusual rate maturity characteristics of these balance sheet items, they are placed in a "nonmarket category." This category is generally viewed as being relatively stable in terms of interest rate variability and the net nonmarket liabilities are viewed as funding fixed-rate assets with maturities greater than one year. Nonmarket assets include non-interest-earning assets, fixed-rate credit card loans, nonaccrual loans and equity securities. Nonmarket liabilities and stockholders' equity include savings deposits, interest-bearing checking, Wells Extra savings (included in market rate savings), noninterest-bearing deposits, other noninterest-bearing liabilities, common stockholders' equity and fixed-rate perpetual preferred stock. Some asset/liability managers allocate these nonmarket assets and liabilities to the various maturity categories. The Company believes that these allocations are mostly arbitrary and tend to provide a false sense that the gap structure is accurately defined. For this reason, they remain in the nonmarket category, in order to maintain the Company's focus on their unusual rate maturity characteristics. Mortgage-backed investment securities and fixed-rate loans in the real estate 1-4 family first mortgage, other real estate mortgage and consumer loan categories are based on expected maturities rather than on contractual maturities. The gap structure also does not allocate Prime-based loans and market rate account (MRA) savings deposits to specific maturity categories (MRA savings deposits exclude Wells Extra savings). Statistical evidence indicates that both Prime-based loans and MRA savings deposits have relatively short maturities, with that of MRA savings deposits being somewhat longer. Keeping them in distinct categories (as with nonmarket) helps maintain focus on these rates, since most of the Company's short-term net interest income variability depends on their relative movements. The Company uses interest rate derivative financial instruments as an asset/liability management tool to hedge mismatches in interest rate maturities. They are used to reduce the Company's exposure to interest rate fluctuations and provide more stable spreads between loan yields and the rates on their funding sources. For example, the Company uses interest rate futures to shorten the rate maturity of market rate savings to better match the maturity of Prime-based loans. The under-one-year net liability position at December 31, 1994 was $520 million (1.0% of total assets), compared with the under-one-year asset position of $1,402 million at December 31, 1993 (2.7% of total assets). This measure of term structure risk would indicate a nearly balanced interest rate risk position. The two adjustments to the cumulative gap amount shown on Table 27 provide comparability with those bank holding companies that present interest rate sensitivity information in this manner. However, management does not believe that these adjustments depict its interest rate risk. The first adjustment line excludes noninterest-earning assets, noninterest-bearing liabilities and stockholders' equity from the cumulative gap calculation so that only earning assets, interest-bearing liabilities and all interest rate swap contracts, excluding forward swaps, are reported. The second adjustment line moves interest-bearing checking, savings deposits and Wells Extra savings from the nonmarket liability category to the shortest rate maturity category. This second adjustment reflects the availability of these deposits for immediate withdrawal. The resulting adjusted under-one-year cumulative gap (net liability position) was $10.1 billion and $5.9 billion at December 31, 1994 and 1993, respectively. The gap analysis provides a useful framework to measure the term structure risk. In addition, the Company performs net interest income simulations to estimate the potential effects of changing interest rates. This process allows the Company to fully explore the complex relationships within the gap over time and various interest rate environments. To get a complete picture of its current interest rate risk position, the Company must look at both term structure risk and basis risk. The two most significant components of basis risk are the Prime/MRA spread and the rate paid on savings and interest-bearing checking accounts. During the last rate cycle, the Prime/MRA spread varied from a low of approximately 275 basis points in 1987 to a high of approximately 525 basis points when rates peaked in 1989. The increase in the Prime/MRA spread as well as lagged movement in other deposit rates caused spreads to increase to historic high levels. The Company's risk was that declining rates would cause margins to compress as loan rates dropped more rapidly than deposit rates. If loan rates decreased even 33 more than they had at the bottom of the last cycle, the Company's net interest margin could have come under severe pressure. At the peak of the rate cycle in 1989, interest rate floor contracts and a smaller amount of swaps were purchased to hedge against this type of margin compression. Most of these contracts matured by the end of 1994. The spread between loans and deposits increased again in 1994 as the Prime rate climbed 250 basis points and deposit rates were slow to react. The increasing loan/deposit spread roughly offset the loss of hedging income due to the maturing interest rate floor and swap hedges put in place in 1989. As the Company looks toward managing interest rate risk in 1995, it is confronted with several risk scenarios. If the Prime rate and other market rates remain at current levels, the Company may be faced with an environment in which deposit rates begin to creep upward, causing declines in net interest income. As stated earlier, the Prime rate increased 250 basis points during 1994, while the MRA savings deposit rate on average has moved only 35 basis points. During the last period of increasing rates, the MRA savings deposit rate moved approximately 45% of the movement in the Prime rate. Although market conditions are substantially different in this interest rate cycle, there may be further increases in deposit rates, causing a decline in net interest income. There is no cost-effective way to hedge against such a decline. If interest rates rise, net interest income may actually increase if deposit rates continue to lag increases in market rates. The Company could, however, experience significant pressure on net interest income if there is a substantial movement in deposit rates relative to market rates. This basis risk potentially could be hedged with interest rate caps, but the Company believes they are not cost-effective in relation to the risk they would mitigate. Finally, a declining interest rate environment might result in a decrease in loan rates while deposit rates remain relatively stable, since they have not increased much in this cycle. This rate scenario could also create significant risk to net interest income. The Company has partially hedged against this risk by again purchasing interest rate floor contracts as indicated in Table 28. In 1995, the Company anticipates that a significant amount of its loan growth will be funded by maturing fixed-rate investment securities. Since it is anticipated that the bulk of the loan growth will be at floating rates, these changes could significantly affect the gap structure. To partially hedge these projected gap changes, $1.4 billion of forward swaps were added in which the Company receives a fixed rate and pays a floating rate. These forward swaps are detailed in Table 29. DERIVATIVE FINANCIAL INSTRUMENTS ................................................................................ The Company uses interest rate derivative financial instruments as an asset/liability management tool to hedge mismatches in interest rate maturities to reduce the Company's exposure to interest rate fluctuations. The Company also offers contracts to its customers, but hedges such contracts by purchasing other financial contracts or uses the contracts for asset/liability management. Table 28 reconciles the beginning and ending notional or contractual amounts for derivative financial instruments for 1994 and shows the expected remaining maturity at year-end 1994. Table 29 summarizes the notional amount, expected maturities and weighted average interest rates associated with amounts to be received or paid on interest rate swap agreements, together with an indication of the asset/liability hedged. For a further discussion of derivative financial instruments, refer to Note 13 of the Financial Statements. LIQUIDITY MANAGEMENT ................................................................................ Liquidity refers to the Company's ability to maintain a cash flow adequate to fund operations and meet obligations and other commitments on a timely and cost- effective basis. In recent years, core deposits have provided the Company with a sizable source of relatively stable and low-cost funds. The Company's average core deposits and stockholders' equity funded 84% and 87% of its average total assets in 1994 and 1993, respectively. The remaining funding of average total assets was mostly provided by senior and subordinated debt, deposits in foreign offices and short-term borrowings (comprised of federal funds purchased and securities sold under repurchase agreements, commercial paper and other short-term borrowings). Senior and subordinated debt averaged $3.4 billion and $4.1 billion in 1994 and 1993, respectively. Short-term borrowings averaged $2.4 billion and $1.3 billion in 1994 and 1993, respectively. The weighted average expected remaining maturity of the debt securities within the investment securities portfolio was 2 years and 10 months at December 31, 1994. Of the $11.8 billion debt securities at cost at December 31, 1994, $2.5 billion, or 21%, is expected to mature or be prepaid in 1995 and an additional $2.5 billion, or 21%, is expected to mature or be prepaid in 1996. The Company has purchased shorter-term debt securities to maintain asset liquidity and to fund loan growth. 34
TABLE 28 DERIVATIVE ACTIVITIES ================================================================================================================================== (notional or contractual amounts in millions) Year ended December 31, 1994 -------------------------------------------------------------------------------- Beginning Additions Expirations Terminations (2) Ending Weighted balance balance average expected remaining maturity (in yrs.--mos.) Interest rate futures contracts $4,890 $20,291 $19,888(1) $284 $ 5,009 0-3 Interest rate forward contracts 75 246 313(1) -- 8 0-1 Interest rate caps written 1,170 535 533 133 1,039 1-9 Interest rate floors purchased 3,685 12,100 1,347 83 14,355 3-5 Interest rate caps purchased 1,514 474 536 192 1,260 2-0 Interest rate swap contracts 2,052 2,533 1,246 60 3,279 2-9 Foreign exchange contracts (forwards and spots) 320 16,775 16,480 -- 615 0-3 Foreign exchange option contracts purchased 14 459 154 -- 319 0-6 Foreign exchange option contracts written 6 444 132 -- 318 0-6 Cross currency swaps 192 -- 74 -- 118 0-11 When-issued securities 484 -- 484 -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- (1) To facilitate the settlement process, the Company enters into offsetting contracts 2 to 45 days prior to their maturity date. Concurrent with the closing of these positions, the Company generally enters into new interest rate futures and forward contracts with a later expiration date since the Company's use of these contracts predominantly relates to ongoing hedging programs. (2) Terminations occur if a customer that purchased a contract decides to cancel it before the maturity date. If the customer contract was hedged, the Company terminates the interest rate derivative instrument used to hedge the customer's contract upon cancellation. The impact of terminations on income before income taxes for 1994 was approximately $1 million.
TABLE 29 INTEREST RATE AND CROSS CURRENCY SWAP MATURITIES AND AVERAGE RATES (1) ================================================================================================================================== (notional amounts in millions) 1995 1996 1997 1998 Thereafter Total Receive-fixed rate (hedges loans) Notional amount $ 343 $ 533 $ 398 $ 56 $ 45 $1,375 Weighted average rate received 7.59% 4.52% 4.88% 5.87% 7.45% 5.55% Weighted average rate paid 5.77 5.74 5.76 6.11 7.62 5.83 Receive-fixed rate (hedges senior debt) Notional amount $ 12 $ 224 $ -- $ -- $ -- $ 236 Weighted average rate received 7.21% 7.38% --% --% --% 7.37% Weighted average rate paid 5.51 5.77 -- -- -- 5.75 Receive-fixed rate, forward starting swaps (hedges loans) (2) Notional amount $ -- $ -- $ -- $ 150 $1,265 $1,415 Basis swaps (hedges subordinated debt) (3) Notional amount $ 77 $ -- $ -- $ -- $ -- $ 77 Weighted average rate received 5.30% --% --% --% --% 5.30% Weighted average rate paid 6.43 -- -- -- -- 6.43 Cross currency swaps (hedges subordinated debt) Notional amount $ 118 $ -- $ -- $ -- $ -- $ 118 Weighted average rate received 5.11% --% --% --% --% 5.11% Weighted average rate paid 6.32 -- -- -- -- 6.32 Other swaps (4) Notional amount $ 132 $ 44 $ -- $ -- $ -- $ 176 Weighted average rate received 6.80% 5.39% --% --% --% 6.49% Weighted average rate paid 6.82 5.81 -- -- -- 6.56 Total notional amount $ 682 $ 801 $ 398 $ 206 $1,310 $3,397 ===== ===== ===== ===== ====== ====== - ---------------------------------------------------------------------------------------------------------------------------------- (1) Variable interest rates are presented on the basis of rates in effect at December 31, 1994. These rates may change substantially in the future due to open market factors. (2) These forward swaps, which will hedge loans, start in January 1995 for $15 million and in February, May, August and November 1995 for $350 million each month. (3) The Company has entered into interest rate basis swap agreements whereby the Company receives interest payments based on the six-month LIBOR rate and makes interest payments based on the one-month commercial paper rate. (4) Represents customer accommodation swaps not used for asset/liability management purposes. The notional amount reflects customer accommodations as well as the swaps used to hedge the customer accommodations.
35 Other sources of liquidity include maturity extensions of short-term borrowings and sale or runoff of assets. Commercial and real estate loans totaled $26.3 billion at December 31, 1994. Of these loans, $7.0 billion matures in one year or less, $7.9 billion matures in over one year through five years and $11.4 billion matures in over five years. Of the $19.3 billion that matures in over one year, $12.0 billion has floating or adjustable rates and $7.3 billion has fixed rates. Of the $7.3 billion of fixed-rate loans, approximately $2.7 billion represents fixed initial-rate mortgage (FIRM) loans. FIRM loans carry fixed rates for a minimum of 3 years to a maximum of 10 years of the loan term and carry adjustable rates thereafter. (Refer to the Consolidated Statement of Cash Flows for further information on the Company's cash flows from its operating, investing and financing activities.) Liquidity for the Parent Company and its nonbank subsidiaries is generated through its ability to raise funds in a variety of domestic and international money and capital markets, dividends from subsidiaries and lines of credit. A shelf registration statement filed with the Securities and Exchange Commission allows the issuance of up to $1.5 billion of senior or subordinated debt or preferred stock. At December 31, 1994, $1.3 billion remained unissued. An additional $500 million was issued in January 1995, which further reduced the shelf to $752 million. (Refer to Note 6 to the Financial Statements for a schedule of outstanding senior and subordinated debt.) The Company also had unused committed lines of credit of approximately $300 million at December 31, 1994. In 1994, a significant portion of the Parent's source of funding was due to dividends paid by the Bank totaling $1,001 million. The dividends received helped to fund the Company's ongoing stock repurchase program. The Company expects the Parent to continue to receive dividends from the Bank in 1995. (See Notes 2 and 11 to the Financial Statements for the Bank's dividend restriction and the Parent Company's financial statements, respectively.) To accommodate future growth and current business needs, the Company has a capital expenditure program. Capital expenditures for 1995 are estimated at $200 million for additional automation equipment for branches and offices, relocation and remodeling of Company facilities and routine replacement of furniture and equipment. The Company will fund these expenditures from various sources, including retained earnings of the Company and borrowings of various maturities. COMPARISON OF 1993 VERSUS 1992 - -------------------------------------------------------------------------------- Net income in 1993 was $612 million, compared with $283 million in 1992. Net income per share was $10.10, compared with $4.44 in 1992. Return on average assets (ROA) was 1.20% and return on average common equity (ROE) was 16.74% in 1993 compared with .54% and 7.93% respectively, in 1992. The increase in earnings in 1993 compared with 1992 was substantially due to a $665 million, or 55%, decrease in the loan loss provision. In addition, net interest income on a taxable-equivalent basis declined 1% to $2,659 million in 1993, while the net interest margin increased 4 basis points to 5.74%. The increase in the net interest margin was substantially due to lower rates paid on interest-bearing checking and savings accounts, wider spreads between Prime- and LIBOR-based loans and their funding source and recoveries on loans where interest had been previously applied to principal. These improvements were partially offset by a change in the mix of earning assets from higher-yielding loans to lower-yielding investment securities and lower income from derivative contracts used to hedge mismatches in the rate maturity of loans and their funding sources. Hedging income from derivative contracts decreased $32 million in 1993, resulting in a 7 basis point decline in the net interest margin due to the maturity of contracts. Average earning assets declined to $46.3 billion in 1993 from $47.3 billion in 1992. The decrease in earning assets was substantially due to a $6.1 billion decrease in average loans, primarily in commercial loans and other real estate mortgage loans, partially offset by a $5.3 billion increase in average investment securities, predominantly mortgage-backed securities. 36 Noninterest income was $1,093 million in 1993, compared with $1,059 million in 1992. Services charges on deposit accounts increased 7% to $423 million, primarily due to increases in service charges on individual and business checking accounts. Fees and commissions increased 4% to $376 million predominantly resulting from sales fees on mutual funds and annuities as well as increased shared ATM network income. Sales fee revenues on mutual funds and other financial products increased from $29 million in 1992 to $43 million in 1993 due to the introduction of the Personal Financial Officer program in the branches. Shared ATM network income increased to $38 million from $32 million in 1992, primarily due to a fee increase implemented in mid-1992 as well as a 7% increase in the volume of transactions processed through the ATM network. Trust and investment services income increased 15% to $190 million, mostly due to greater mutual fund investment management fees, reflecting growth in the funds' net assets. These fees amounted to $37 million in 1993, compared with $19 million in 1992. In 1992, the Company realized gains of $45 million from the sale of all of its 30-year mortgage-backed securities. These securities were previously designated as held for sale and carried at the lower of cost or market. The increase in losses from disposition of operations from 1992 to 1993 was due to a $36 million accrual made in the third quarter of 1993 primarily related to reduced space requirements. "All Other" noninterest income in 1993 included $18 million of interest income received as a result of the settlement of California Franchise Tax Board audits related to the appropriate years for claiming deductions applicable to the 1976 through 1986 tax returns. "All Other" noninterest income in 1992 included $14 million of interest income due to the settlement of Internal Revenue Service audits related to the appropriate years for claiming certain deductions and credits applicable to the 1978 through 1986 tax years. "All Other" noninterest income in 1992 also included real estate investment (contingent interest loans accounted for as investments) losses of $19 million, which were substantially due to a write-down on land for development in Southern California. Noninterest expense totaled $2,162 million in 1993, compared with $2,035 million in 1992. Salaries expense increased 5% to $684 million due to increases in merit pay and severance accruals primarily related to the reorganization of the Retail Distribution Group. Incentive compensation increased 49% to $109 million substantially due to various sales programs and a Company-wide employee appreciation program. Employee benefits expense increased 22% to $213 million primarily due to the adoption of Statement of Financial Accounting Standards No. 106 (FAS 106), Employers' Accounting for Postretirement Benefits Other Than Pensions, and FAS 112, Employers' Accounting for Postemployment Benefits. FAS 106 resulted in an incremental expense in 1993 of approximately $11 million; FAS 112 resulted in an accrual of $12 million. Total loans were $33.1 billion at December 31, 1993, a 10% decrease from December 31, 1992. This decrease was predominantly due to declines of 18% in other real estate mortgage loans and 16% in commercial loans. The provision for loan losses in 1993 was $550 million, compared with $1,215 million in 1992. Net charge-offs in 1993 were $495 million, or 1.44% of average total loans, compared with $798 million, or 1.97%, in 1992. Loan loss recoveries were $169 million in 1993, compared with $117 million in 1992. The allowance for loan losses was 6.41% of total loans at December 31, 1993, compared with 5.60% at December 31, 1992. The decline in the provision for loan losses reflected the continued improvement in the Company's loan portfolio. Total nonaccrual and restructured loans were $1,200 million, or 3.6% of total loans, at December 31, 1993, compared with $2,142 million, or 5.8% of total loans, at December 31, 1992. At December 31, 1993, an estimated $704 million, or 59%, of nonaccrual loans were less than 90 days past due, compared with an estimated $1,294 million, or 61%, at December 31, 1992. Foreclosed assets were $348 million at December 31, 1993, compared with $510 million at December 31, 1992. The average volume of core deposits in 1993 was $40.4 billion, 3% lower than in 1992. Average core deposits funded 79% of the Company's average total assets in 1993, compared with 80% in 1992. The Company adopted FAS 109, Accounting for Income Taxes, on January 1, 1993. Under this method, the computation of the net deferred tax asset or liability gives current recognition to changes in tax rates and laws. As a result, when the Omnibus Budget Reconciliation Act was signed into law in August of 1993, raising the corporate tax rate from 34% to 35%, effective January 1, 1993, an adjustment was made that increased the Company's deferred tax asset and, correspondingly, decreased income tax expense by approximately $18 million. Because the deferred tax asset was originally recorded at a lower tax rate, the higher tax rate in effect at that time increased the value of the asset. The decreased income tax expense was partially offset by a $9 million increase to reflect the application of the higher tax rate to 1993 earnings. 37 ADDITIONAL INFORMATION - -------------------------------------------------------------------------------- Common stock of the Company is traded on the New York Stock Exchange, the Pacific Stock Exchange, the London Stock Exchange and the Frankfurt Stock Exchange. The high, low and end-of-period annual and quarterly closing prices of the Company's stock as reported on the New York Stock Exchange Composite Transaction Reporting System are presented in the graphs. The number of holders of record of the Company's common stock was 27,758 as of January 31, 1995. [PRICE RANGE OF COMMON STOCK-ANNUAL (GRAPH) ($)] SEE APPENDIX [PRICE RANGE OF COMMON STOCK-QUARTERLY (GRAPH) ($)] SEE APPENDIX Common dividends declared per share totaled $4.00 in 1994, $2.25 in 1993 and $1.50 in 1992. The dividend was increased in the fourth quarter of 1993 from $.50 to $.75 per share, increased again to $1.00 per share in the first quarter of 1994 and to $1.15 per share in January 1995. Quarterly dividends are considered at the Board of Directors meeting the month following quarter end. Dividends declared are payable the second month after quarter end. The Company, with the approval of the Board of Directors, intends to continue its present policy of paying quarterly cash dividends to stockholders. The level of future dividends will be determined by the Board of Directors in light of the earnings and financial condition of the Company. In 1991, the FRB approved an application by Berkshire Hathaway, Inc. (Berkshire) to purchase additional shares of the Company's common stock in the open market, up to a total of 22%. Berkshire entered into a passivity agreement with the Company, in which it agrees not to exercise any control over the Company's management or policies. Accordingly, Berkshire granted its proxy to the Company to vote Berkshire's shares in accordance with the recommendations of the Board of Directors of the Company. Berkshire owned 13.3% and 12.2% of the Company's common stock at December 31, 1994 and 1993, respectively. 38 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
(in millions) Year ended December 31, ------------------------------------- 1994 1993 1992 INTEREST INCOME Loans $3,015 $3,066 $3,697 Investment securities 740 672 415 Federal funds sold and securities purchased under resale agreements 7 23 33 Other 3 -- -- ------ ------ ------ Total interest income 3,765 3,761 4,145 ------ ------ ------ INTEREST EXPENSE Deposits 854 863 1,185 Federal funds purchased and securities sold under repurchase agreements 99 29 41 Commercial paper and other short-term borrowings 10 6 9 Senior and subordinated debt 192 206 219 ------ ------ ------ Total interest expense 1,155 1,104 1,454 ------ ------ ------ NET INTEREST INCOME 2,610 2,657 2,691 Provision for loan losses 200 550 1,215 ------ ------ ------ Net interest income after provision for loan losses 2,410 2,107 1,476 ------ ------ ------ NONINTEREST INCOME Service charge on deposit accounts 473 423 394 Fees and commissions 387 376 363 Trust and investment services income 203 190 165 Investment securities gains 8 -- 45 Other 129 104 92 ------ ------ ------ Total noninterest income 1,200 1,093 1,059 ------ ------ ------ NONINTEREST EXPENSE Salaries 671 684 650 Incentive compensation 155 109 73 Employee benefits 201 213 175 Net occupancy 215 224 222 Equipment 174 148 141 Federal deposit insurance 101 114 106 Other 639 670 668 ------ ------ ------ Total noninterest expense 2,156 2,162 2,035 ------ ------ ------ INCOME BEFORE INCOME TAX EXPENSE 1,454 1,038 500 Income tax expense 613 426 217 ------ ------ ------ NET INCOME $ 841 $ 612 $ 283 ====== ====== ====== NET INCOME APPLICABLE TO COMMON STOCK $ 798 $ 562 $ 235 ====== ====== ====== PER COMMON SHARE Net income $14.78 $10.10 $ 4.44 ====== ====== ====== Dividends declared $ 4.00 $ 2.25 $ 1.50 ====== ====== ====== Average common shares outstanding 53.9 55.6 52.9 ====== ====== ======
The accompanying notes are an integral part of these statements. 39 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
(in millions) December 31, ----------------------- 1994 1993 ASSETS Cash and due from banks $ 2,974 $ 2,644 Investment securities: At cost (estimated fair value $8,185 and $9,978) 8,619 9,887 At fair value 2,989 3,171 ------- ------- Total investment securities 11,608 13,058 Federal funds sold and securities purchased under resale agreements 260 1,668 Loans 36,347 33,099 Allowance for loan losses 2,082 2,122 ------- ------- Net loans 34,265 30,977 ------- ------- Due from customer on acceptances 77 70 Accrued interest receivable 328 297 Premises and equipment, net 886 898 Goodwill 416 477 Other assets 2,560 2,424 ------- ------- Total assets $53,374 $52,513 ======= ======= LIABILITIES Noninterest-bearing deposits $10,145 $ 9,719 Interest-bearing deposits 32,187 31,925 ------- ------- Total deposits 42,332 41,644 Federal funds purchased and securities sold under repurchase agreements 3,022 1,079 Commercial paper and other short-term borrowings 189 188 Acceptances outstanding 77 70 Accrued interest payable 60 63 Other liabilities 930 933 Senior debt 1,393 2,256 Subordinated debt 1,460 1,965 ------- ------- Total liabilities 49,463 48,198 ------- ------- STOCKHOLDERS' EQUITY Preferred stock 489 639 Common stock--$5 par value, authorized 150,000,000 shares; issued and outstanding 51,251,648 shares and 55,812,592 shares 256 279 Additional paid-in capital 871 551 Retained earnings 2,409 2,829 Cumulative foreign currency translation adjustments (4) (4) Investment securities valuation allowance (110) 21 ------- ------- Total stockholders' equity 3,911 4,315 ------- ------- Total liabilities and stockholders' equity $53,374 $52,513 ======= =======
The accompanying notes are an integral part of these statements. 40 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in millions) Preferred Common Additional Retained Foreign Investment Total stock stock paid-in earnings currency securities stock- capital translation valuation holders' adjustments allowance equity BALANCE DECEMBER 31, 1991 $ 463 $260 $ 316 $ 2,236 $(4) $ -- $3,271 ----- ---- ------ ------- --- ----- ------ Net income--1992 283 283 Preferred stock issued, net of issuance costs 176 (7) 169 Common stock issued under employee benefit and dividend reinvestment plans 16 197 213 Preferred stock dividends (48) (48) Common stock dividends (79) (79) ----- ---- ------ ------- --- ----- ------ Net change 176 16 190 156 -- -- 538 ----- ---- ------ ------- --- ----- ------ BALANCE DECEMBER 31, 1992 639 276 506 2,392 (4) -- 3,809 ----- ---- ------ ------- --- ----- ------ Net income--1993 612 612 Common stock issued under employee benefit and dividend reinvestment plans 3 50 53 Common stock repurchased (5) (5) Preferred stock dividends (50) (50) Common stock dividends (125) (125) Cumulative unrealized net gains, after applicable taxes, at December 31, 1993 21 21 ----- ---- ------ ------- --- ----- ------ Net change -- 3 45 437 -- 21 506 ----- ---- ------ ------- --- ----- ------ BALANCE DECEMBER 31, 1993 639 279 551 2,829 (4) 21 4,315 ----- ---- ------ ------- --- ----- ------ Net income--1994 841 841 Common stock issued under employee benefit and dividend reinvestment plans 3 54 57 Preferred stock redeemed (150) (150) Common stock repurchased (26) (734) (760) Preferred stock dividends (43) (43) Common stock dividends (218) (218) Change in unrealized net gains, after applicable taxes (131) (131) Transfer 1,000 (1,000) -- ----- ---- ------ ------- --- ----- ------ Net change (150) (23) 320 (420) -- (131) (404) ----- ---- ------ ------- --- ----- ------ BALANCE DECEMBER 31, 1994 $ 489 $256 $ 871 $ 2,409 $(4) $(110) $3,911 ===== ==== ====== ======= === ===== ======
The accompanying notes are an integral part of these statements. 41 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions) Year ended December 31, -------------------------------------- 1994 1993 1992 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 841 $ 612 $ 283 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 200 550 1,215 Depreciation and amortization 246 266 268 Deferred income tax benefit (32) (145) (188) Net (increase) decrease in accrued interest receivable (31) 4 25 Net decrease in accrued interest payable (3) (25) (58) Other, net (77) 271 119 ------- ------- ------- Net cash provided by operating activities 1,144 1,533 1,664 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment securities: At cost: Proceeds from prepayments and maturities 3,866 2,492 1,605 Purchases (2,598) (6,168) (7,919) At lower of cost or market: Proceeds from sales -- -- 809 At fair value: Proceeds from sales 18 -- -- Proceeds from prepayments and maturities 670 -- -- Purchases (724) -- -- Net (increase) decrease in loans resulting from originations and collections (3,378) 2,754 3,991 Proceeds from sales (including participations) of loans 134 264 1,936 Purchases (including participations) of loans (375) (36) (31) Proceeds from sales of foreclosed assets 240 353 311 Net (increase) decrease in federal funds sold and securities purchased under resale agreements 1,408 (485) (1,174) Other, net (224) (59) (109) ------- ------- ------- Net cash used by investing activities (963) (885) (581) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 688 (600) (1,475) Net increase (decrease) in short-term borrowings 1,944 (246) 296 Proceeds from issuance of senior debt 248 980 508 Proceeds from issuance of subordinated debt -- 399 350 Repayment of senior debt (1,101) (884) (882) Repayment of subordinated debt (526) (300) (116) Proceeds from issuance of preferred stock -- -- 169 Proceeds from issuance of common stock 57 53 213 Redemption of preferred stock (150) -- -- Repurchase of common stock (760) (5) -- Payment of cash dividends on preferred stock (34) (50) (48) Payment of cash dividends on common stock (218) (125) (105) Other, net 1 84 (61) ------- ------- ------- Net cash provided (used) by financing activities 149 (694) (1,151) ------- ------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM BANKS) 330 (46) (68) Cash and cash equivalents at beginning of year 2,644 2,690 2,758 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,974 $ 2,644 $ 2,690 ======= ======= ======= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,158 $ 1,129 $ 1,512 ======= ======= ======= Income taxes $ 680 $ 481 $ 370 ======= ======= ======= Noncash investing activities: Transfers from investment securities at cost to investment securities at lower of cost or market $ -- $ -- $ 809 ======= ======= ======= Transfers from investment securities at cost to investment securities at fair value $ -- $ 3,077 $ -- ======= ======= ======= Transfers from foreclosed assets to nonaccrual loans $ -- $ 99 $ -- ======= ======= ======= Transfers from loans to foreclosed assets $ 174 $ 404 $ 600 ======= ======= =======
The accompanying notes are an integral part of these statements. 42 WELLS FARGO & COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- The accounting and reporting policies of Wells Fargo & Company and Subsidiaries (Company) conform with generally accepted accounting principles and prevailing practices within the banking industry. Certain amounts in the financial statements for prior years have been reclassified to conform with the current financial statement presentation. The following is a description of the significant accounting policies of the Company. CONSOLIDATION ................................................................................ The consolidated financial statements of the Company include the accounts of Wells Fargo & Company (Parent), Wells Fargo Bank, N.A. (Bank) and the nonbank subsidiaries of the Parent. Significant majority-owned subsidiaries are consolidated on a line-by-line basis. Significant intercompany accounts and transactions are eliminated in consolidation. Other subsidiaries and affiliates in which there is at least 20% ownership are generally accounted for by the equity method; those in which there is less than 20% ownership are generally carried at cost. Subsidiaries and affiliates that are accounted for by either the equity or cost method are included in other assets. SECURITIES ................................................................................ Securities are accounted for according to their purpose and holding period. INVESTMENT SECURITIES Securities generally acquired to meet long-term investment objectives, including yield and liquidity management purposes, are classified as investment securities. Realized gains and losses are recorded in noninterest income using the identified certificate method. SECURITIES AT COST Debt securities acquired with the positive intent and ability to hold to maturity are classified as securities carried at historical cost, adjusted for amortization of premium and accretion of discount, where appropriate. For certain debt securities (for example, Government National Mortgage Association securities), the Company anticipates prepayments of principal in the calculation of the effective yield. If it is probable that the carrying value of any debt security will not be realized due to other-than- temporary impairment, the estimated loss is recorded in noninterest income as a loss on investment securities. If a decision is made to dispose of securities at cost or should the Company become unable to hold securities until maturity, they would be reclassified to securities at fair value. SECURITIES AT FAIR VALUE Upon the adoption of Statement of Financial Accounting Standards No. 115 (FAS 115), Accounting for Certain Investments in Debt and Equity Securities, on December 31, 1993, debt securities that may not be held until maturity and marketable equity securities are considered available-for- sale and, as such, are classified as securities carried at fair value, with unrealized gains and losses, after applicable taxes, reported in a separate component of stockholders' equity. Declines in the value of debt securities and marketable equity securities that are considered other than temporary are recorded in noninterest income as a loss on investment securities. SECURITIES AT LOWER OF COST OR MARKET Prior to December 31, 1993, securities that were not held on a long-term basis or until maturity were classified as securities carried at the lower of cost or market. TRADING SECURITIES Securities, if any, acquired for short-term appreciation or other trading purposes are recorded in a trading portfolio and are carried at fair value, with unrealized gains and losses recorded in noninterest income. There were no trading securities in the past three years. NONMARKETABLE EQUITY SECURITIES Nonmarketable equity securities are acquired for various purposes, such as troubled debt restructurings and as a regulatory requirement (for example, Federal Reserve Bank stock). These securities are accounted for at cost and are included in other assets as they do not fall within the scope of FAS 115 since there are restrictions on their sale or liquidation. The asset value is reduced when declines in value are considered to be other than temporary. PREMISES AND EQUIPMENT ................................................................................ Premises and equipment are stated at cost less accumulated depreciation and amortization. Capital leases are included in premises and equipment, at the capitalized amount less accumulated amortization. Depreciation and amortization are computed primarily using the straight- line method. Estimated useful lives 43 range up to 40 years for buildings, 2 to 10 years for furniture and equipment, and up to the lease term for leasehold improvements. Capitalized leased assets are amortized on a straight-line basis over the lives of the respective leases, which generally range from 20 to 35 years. LOANS ................................................................................ Loans are reported at the principal amount outstanding, net of unearned income. Unearned income, which includes deferred fees net of deferred direct incremental loan origination costs, is amortized to interest income generally over the contractual life of the loan using an interest method or the straight-line method if it is not materially different. Loans identified as held for sale are carried at the lower of cost or market value. Nonrefundable fees, related direct loan origination costs and related hedging gains or losses, if any, are deferred and recognized as a component of the gain or loss on sale recorded in noninterest income. NONACCRUAL LOANS Loans are placed on nonaccrual status upon becoming 90 days past due as to interest or principal (unless both well-secured and in the process of collection), when the full timely collection of interest or principal becomes uncertain or when a portion of the principal balance has been charged off. Real estate 1-4 family loans (both first liens or junior liens) are placed on nonaccrual status within 150 days of becoming past due as to interest or principal, regardless of security. Generally, consumer loans not secured by real estate are only placed on nonaccrual status when a portion of the principal has been charged off. Generally, such loans are entirely charged off within 180 days of becoming past due. When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is reversed and the loan is accounted for on the cash or cost recovery method thereafter, until qualifying for return to accrual status. Generally, a loan may be returned to accrual status when all delinquent interest and principal become current in accordance with the terms of the loan agreement or when the loan is both well-secured and in the process of collection. RESTRUCTURED LOANS In cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications to contractual terms, the loan is classified as a restructured (accruing) loan, unless the yield is equivalent to that of a new loan. Generally, a nonaccrual loan that is restructured remains on nonaccrual for a period of six months to demonstrate that the borrower can meet the restructured terms. However, performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual at the time of restructuring or after a shorter performance period. If the borrower's ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. ALLOWANCE FOR LOAN LOSSES The Company's determination of the level of the allowance for loan losses rests upon various judgments and assumptions, including general economic conditions, loan portfolio composition, prior loan loss experience, evaluation of credit risk related to certain individual borrowers and the Company's ongoing examination process and that of its regulators. The Company considers the allowance for loan losses adequate to cover losses inherent in loans, loan commitments and standby letters of credit. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS ................................................................................ Goodwill, representing the excess of purchase price over the fair value of net assets acquired, results from acquisitions made by the Company. Most of the Company's goodwill is being amortized using the straight-line method over 20 years. The remaining period of amortization, on a weighted average basis, approximated 12 years at December 31,1994. Identifiable intangible assets that are included in other assets are generally amortized using an accelerated method over 5 to 15 years. Approximately 51% of the December 31, 1994 remaining balance will be amortized in 3 years. INCOME TAXES ................................................................................ The Company files a consolidated federal income tax return. Consolidated or combined state tax returns are filed in certain states, including California. Income taxes are generally allocated to individual subsidiaries as if each had filed a separate return. Payments are made to the Parent by those subsidiaries with net tax liabilities on a separate return basis. Subsidiaries with net tax losses and excess tax credits receive payments for these benefits from the Parent. Effective January 1, 1993, deferred income tax assets and liabilities are determined in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which uses the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. FAS 109 supersedes Accounting Principles Board Opinion No. 11 (APB 11), Accounting for Income Taxes, which was used prior to 1993 to determine the deferred tax assets and liabilities. Under APB 11, the net deferred tax asset or liability was an 44 accumulation of annual adjustments based on the tax effects of the book and tax income statement differences and was not adjusted for subsequent changes in tax rates and laws. INTEREST RATE DERIVATIVE FINANCIAL INSTRUMENTS ................................................................................ The Company uses interest rate derivative financial instruments (futures, forwards, caps, floors and swaps) primarily to hedge mismatches in the rate maturity of loans and their funding sources. Gains and losses on interest rate futures are deferred and amortized as a component of the interest income or expense reported on the asset or liability hedged. Amounts payable or receivable for swaps, caps and floors are accrued with the passage of time, the effect of which is included in the interest income or expense reported on the asset or liability hedged; fees on these financial contracts are amortized over their contractual life as a component of the interest reported on the asset or liability hedged. Gains or losses on the interest rate derivatives (e.g., forwards) hedging loans originated for sale are deferred and recognized as a component of the gain or loss recorded on the sale of the related loans in noninterest income. Cash flows resulting from interest rate derivative financial instruments that are accounted for as hedges of identifiable transactions are classified in the same category as the cash flows from the items being hedged. Credit risk related to interest rate derivative financial instruments is considered and, if material, provided for separately from the allowance for loan losses. The Company adopted Statement of Financial Accounting Standards No. 119 (FAS 119), Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments, on December 31, 1994. FAS 119 requires various disclosures regarding derivative activities which are set forth in Note 13 to the Financial Statements. NET INCOME PER COMMON SHARE ................................................................................ Net income per common share is computed by dividing net income (after deducting dividends on preferred stock) by the average number of common shares outstanding during the year. The impact of common stock equivalents, such as stock options, and other potentially dilutive securities is not material; therefore, they are not included in the computation. 2 CASH, LOAN AND DIVIDEND RESTRICTIONS - -------------------------------------------------------------------------------- Federal Reserve Board regulations require reserve balances on deposits to be maintained by the Bank with the Federal Reserve Bank. The average required reserve balance was $1.2 billion in both 1994 and 1993. The Bank is subject to certain restrictions under the Federal Reserve Act, including restrictions on extensions of credit to its affiliates. In particular, the Bank is prohibited from lending to the Parent and its nonbank subsidiaries unless the loans are secured by specified collateral. Such secured loans and other regulated transactions made by the Bank (including its subsidiaries) are limited in amount as to each of its affiliates, including the Parent, to 10% of the Bank's capital stock and surplus (as defined, which for this purpose includes the allowance for loan losses on an after-tax basis) and, in the aggregate to all of its affiliates, to 20% of the Bank's capital stock and surplus. The Bank's capital stock and surplus at December 31, 1994 was $5 billion. Dividends payable by the Bank to the Parent without the express approval of the Office of the Comptroller of the Currency (OCC) are limited to the Bank's retained net profits for the preceding two calendar years plus retained net profits up to the date of any dividend declaration in the current calendar year. Retained net profits are defined by the OCC as net income, less dividends declared during the period, both of which are based on regulatory accounting principles. Based on this definition, the Bank can declare dividends of approximately $539 million of its retained net profits at December 31, 1994 plus retained net profits up to the date of any such dividend declaration. Dividends declared by the Bank in 1994, 1993 and 1992 were $1,001 million, none and $117 million, respectively. 45 3 INVESTMENT SECURITIES - -------------------------------------------------------------------------------- The Company adopted Statement of Financial Accounting Standards No. 115 (FAS 115), Accounting for Certain Investments in Debt and Equity Securities, on December 31, 1993. FAS 115 addresses the accounting and reporting for certain investments in debt and marketable equity securities. FAS 115 establishes three classifications of securities, each of which receives different accounting treatment. Held-to-maturity investment securities are reported at cost. Available-for-sale investment securities are reported at fair value, with unrealized gains and losses, after applicable taxes, reported as a separate component of stockholders' equity. Trading securities are reported at fair value, with unrealized gains and losses included in earnings. The estimated fair value of investments is determined based on current quotations, where available. Where current quotations are not available, the estimated fair value is determined based primarily on the present value of future cash flows, adjusted for the quality rating of the securities, prepayment assumptions and other factors. The Company had no trading securities in 1994, 1993 or 1992. The following table provides the major components of investment securities at cost and at fair value:
================================================================================================================================== (in millions) December 31, ------------------------------------------------------------------------------------------------------- 1994 1993 1992 ----------------------------------------- ----------------------------------------- ----------------- COST ESTIMATED ESTIMATED ESTIMATED Cost Estimated Estimated Estimated Cost Estimated UNREALIZED UNREALIZED FAIR unrealized unrealized fair fair GROSS GROSS VALUE gross gross value value GAINS LOSSES gains losses HELD-TO-MATURITY SECURITIES AT COST: U.S. Treasury securities $1,772 $-- $ 52 $1,720 $2,365 $ 18 $-- $2,383 $1,964 $1,983 Securities of U.S. government agencies and corporations (1) 5,394 -- 293 5,101 6,570 91 17 6,644 7,206 7,278 Private collateralized mortgage obligations (2) 1,306 -- 85 1,221 815 4 6 813 -- -- Other 147 -- 4 143 137 1 -- 138 118 117 ------ --- ---- ------ ------ ---- --- ------ ------ ------ Total debt securities 8,619 -- 434 8,185 9,887 114 23 9,978 9,288 9,378 Federal Reserve Bank stock (3) -- -- -- -- -- -- -- -- 50 50 ------ --- ---- ------ ------ ---- --- ------ ------ ------ Total $8,619 $-- $434 $8,185 $9,887 $114 $23 $9,978 $9,338 $9,428 ====== === ==== ====== ====== ==== === ====== ====== ====== AVAILABLE-FOR-SALE SECURITIES AT FAIR VALUE: U.S. Treasury securities $ 372 $-- $ 10 $ 362 $ -- $ -- $-- $ -- Securities of U.S. government agencies and corporations (1) 1,476 -- 96 1,380 1,747 13 11 1,749 Private collateralized mortgage obligations (2) 1,290 1 113 1,178 1,340 5 11 1,334 Other 24 14 -- 38 31 17 -- 48 ------ --- ---- ------ ------ ---- --- ------ Total debt securities 3,162 15 219 2,958 3,118 35 22 3,131 Marketable equity securities 16 17 2 31 17 24 1 40 ------ --- ---- ------ ------ ---- --- ------ Total $3,178 $32 $221 $2,989 $3,135 $ 59 $23 $3,171 ====== === ==== ====== ====== ==== === ====== - ---------------------------------------------------------------------------------------------------------------------------------- (1) All securities of U.S. government agencies and corporations are mortgage-backed securities. (2) Substantially all private collateralized mortgage obligations are AAA rated bonds collateralized by 1-4 family residential first mortgages. (3) Federal Reserve Bank stock was reclassified at December 31, 1993 to other assets due to the implementation of FAS 115.
46 Proceeds from the sales of debt securities in the available-for-sale portfolio totaled $13 million in 1994, resulting in a $5 million gain. A loss of $1 million was realized in 1994 resulting from a write-down due to other-than- temporary impairment in the fair value of certain debt securities. Proceeds from the sales of marketable equity securities in the available-for-sale portfolio totaled $5 million in 1994, resulting in a $4 million gain. Proceeds from the sales of debt securities in the available-for-sale portfolio totaled $284 thousand in 1993, resulting in a $10 thousand gain. In 1992, 30-year mortgage-backed securities were reclassified from securities at cost to securities held for sale and carried at the lower of cost or market. Proceeds from the subsequent sales of these securities totaled $828 million. Gross gains of $45 million were realized on these sales. The following table provides the remaining contractual principal maturities and yields (taxable-equivalent basis) of debt securities within the investment portfolio. The remaining contractual principal maturities for mortgage-backed securities were allocated assuming no prepayments. Expected remaining maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without penalties. (See the Investment Securities section of the Financial Review for expected remaining maturities and yields.)
================================================================================================================================== (in millions) December 31, 1994 ------------------------------------------------------------------------------------------------------- Total Weighted Weighted Remaining contractual principal maturity amount average average ----------------------------------------------------------------------- yield remaining Within one year After one year After five years After ten years maturing (in through five years through ten years yrs.-mos.) --------------- ------------------ ----------------- --------------- Amount Yield Amount Yield Amount Yield Amount Yield HELD-TO-MATURITY SECURITIES: U.S. Treasury securities $ 1,772 4.79% 1-3 $ 899 4.63% $ 873 4.95% $ -- --% $ -- --% Securities of U.S. government agencies and corporations 5,394 6.17 5-5 361 5.69 2,568 5.98 1,837 6.32 628 6.80 Private collateralized mortgage obligations 1,306 6.09 6-7 80 5.78 485 6.03 450 6.15 291 6.19 Other 147 6.36 2-3 29 5.13 106 6.72 10 6.13 2 6.37 ------- ------ ------ ------ ------ Total cost $ 8,619 5.88% 4-8 $1,369 4.99% $4,032 5.78% $2,297 6.29% $ 921 6.61% ======= ===== ====== ==== ====== ==== ====== ==== ====== ==== ESTIMATED FAIR VALUE $ 8,185 $1,342 $3,820 $2,163 $ 860 ======= ====== ====== ====== ====== AVAILABLE-FOR-SALE SECURITIES (1): U.S. Treasury securities $ 372 6.62% 3-1 $ -- --% $ 372 6.62% $ -- --% $ -- --% Securities of U.S. government agencies and corporations 1,476 5.54 9-0 38 6.89 173 6.20 570 5.29 695 5.51 Private collateralized mortgage obligations 1,290 6.38 10-2 21 6.22 192 6.21 477 6.23 600 6.56 Other 24 22.46 5-8 -- -- -- -- 24 22.46 -- -- ------- ------ ------ ------ ------ Total cost $ 3,162 6.14% 8-9 $ 59 6.65% $ 737 6.41% $1,071 6.09% $1,295 6.00% ======= ===== ====== ==== ====== ==== ====== ===== ====== ==== ESTIMATED FAIR VALUE $ 2,958 $ 57 $ 708 $1,006 $1,187 ======= ====== ====== ====== ====== TOTAL COST OF DEBT SECURITIES $11,781 5.95% 5-9 $1,428 5.06% $4,769 5.88% $3,368 6.22% $2,216 6.25% ======= ===== ==== ====== ==== ====== ==== ====== ===== ====== ==== - ---------------------------------------------------------------------------------------------------------------------------------- (1) The weighted average yield is computed using the amortized cost of available-for-sale investment securities carried at fair value.
Dividend income of none, $3 million and $2 million in 1994, 1993 and 1992, respectively, is included in interest income on investment securities in the Consolidated Statement of Income. Substantially all income on investment securities is taxable. The cost of investment securities pledged to secure trust and public deposits and for other purposes as required or permitted by law was $3.1 billion, $2.2 billion and $1.9 billion at December 31, 1994, 1993 and 1992, respectively. 47 4 LOANS AND ALLOWANCE FOR LOAN LOSSES - -------------------------------------------------------------------------------- A summary of the major categories of loans outstanding and related unfunded commitments to extend credit is shown in the table below. At December 31, 1994 and 1993, the commercial loan category and related commitments did not have an industry concentration that exceeded 10% of total loans and commitments. Tables 10 through 13 in the Loan Portfolio section of the Financial Review summarize real estate mortgage (excluding 1-4 family first mortgage loans) and real estate construction loans by state and project type. Substantially all of the Company's real estate 1-4 family first mortgages and consumer loans are with customers located in California.
================================================================================================================================== (in millions) December 31, --------------------------------------------------------- 1994 1993 ------------------------- ------------------------- Outstanding Commitments Outstanding Commitments to extend to extend credit credit Commercial (1) $ 8,162 $ 6,551 $ 6,912 $ 5,092 Real estate 1-4 family first mortgage 9,050 651 7,458 664 Other real estate mortgage 8,079 522 8,286 364 Real estate construction 1,013 731 1,110 358 Consumer: Real estate 1-4 family junior lien mortgage 3,332 2,952 3,583 2,695 Credit card 3,125 7,780 2,600 5,576 Other revolving credit and monthly payment 2,229 1,752 1,920 1,230 ------- ------- ------- ------- Total consumer 8,686 12,484 8,103 9,501 Lease financing 1,330 -- 1,212 -- Foreign 27 -- 18 -- ------- ------- ------- ------- Total loans (2) $36,347 $20,939 $33,099 $15,979 ======= ======= ======= ======= - ---------------------------------------------------------------------------------------------------------------------------------- (1) Outstanding balances include loans to real estate developers of $525 million and $505 million at December 31, 1994 and 1993, respectively. (2) Outstanding loan balances at December 31, 1994 and 1993 are net of unearned income, including net deferred loan fees, of $361 million and $336 million, respectively.
In the course of evaluating the credit risk presented by a customer and the pricing that will adequately compensate the Company for assuming that risk, management determines a requisite amount of collateral support. The type of collateral held varies, but may include accounts receivable, inventory, land, buildings, equipment, income-producing commercial properties and residential real estate. The Company has the same collateral policy for loans whether they are funded immediately or on a delayed basis (commitment). A commitment to extend credit is a legally binding agreement to lend funds to a customer and is usually for a specified interest rate and purpose. These commitments have fixed expiration dates and generally require a fee. The extension of a commitment gives rise to credit risk. The actual liquidity needs or the credit risk that the Company will experience will be lower than the contractual amount of commitments to extend credit shown in the table above because a significant portion of these commitments is expected to expire without being drawn upon. Certain commitments are subject to a loan agreement containing covenants regarding the financial performance of the customer that must be met before the Company is required to fund the commitment. The Company uses the same credit policies in making commitments to extend credit as it does in making loans. In addition, the Company manages the potential credit risk in commitments to extend credit by limiting the total amount of arrangements, both by individual customer and in the aggregate; by monitoring the size and maturity structure of these portfolios; and by applying the same credit standards maintained for all of its credit activities. The credit risk associated with these commitments is considered in management's determination of the allowance for loan losses. Standby letters of credit totaled $836 million and $889 million at December 31, 1994 and 1993, respectively. Standby letters of credit are issued on behalf of customers in connection with contracts between the customers and third parties. Under a standby letter of credit, the Company assures that the third party will receive specified funds if a customer fails to meet his contractual obligation. The liquidity risk to the Company arises from its obligation to make payment in the event of a customer's contractual default. The credit risk involved in issuing letters of credit and the Company's management of that credit risk is the 48 same as for loans and is considered in management's determination of the allowance for loan losses. At December 31, 1994 and 1993, standby letters of credit included approximately $123 million and $143 million, respectively, of participations purchased and were net of approximately $81 million and $56 million, respectively, of participations sold. Approximately 63% of the Company's year-end 1994 standby letters of credit had maturities of one year or less and substantially all had maturities of seven years or less. Included in standby letters of credit are those that back financial instruments (financial guarantees). The Company had issued or purchased participations in financial guarantees of approximately $427 million and $473 million at December 31, 1994 and 1993, respectively. The Company also had commitments for commercial and similar letters of credit of $125 million and $105 million at December 31, 1994 and 1993, respectively. Substantially all fees received from the issuance of financial guarantees are deferred and amortized on a straight-line basis over the term of the guarantee. Losses on standby letters of credit and other similar letters of credit have been immaterial. On January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114 (FAS 114), Accounting by Creditors for Impairment of a Loan, as amended by FAS 118 (collectively referred to as FAS 114). These Statements address the accounting treatment of certain impaired loans and amend FAS 5 and 15. A further discussion of FAS 114 is in the Allowance for Loan Losses section of the Financial Review. Nonaccrual and restructured loans were $582 million and $1,200 million at December 31, 1994 and 1993, respectively. Related commitments to lend additional funds were approximately $67 million and $143 million at December 31, 1994 and 1993, respectively. Nonaccrual loans with a remaining recorded investment totaling $92 million and $117 million were restructured at market interest rates and returned to fully performing accrual status during 1994 and 1993, respectively. If interest due on the book balances of all nonaccrual and restructured loans (including loans no longer non-accrual or restructured at year end) had been accrued under their original terms, it is estimated that income before income tax expense would have been greater by the amounts shown in the table below:
============================================================================== (in millions) Year ended December 31, ------------------------------ 1994 1993 1992 Estimated interest that would have been recorded under original terms $70 $140 $189 Gross interest recorded 24 19 23 --- ---- ---- Reduction in interest income $46 $121 $166 === ==== ==== - ------------------------------------------------------------------------------
Changes in the allowance for loan losses were as follows:
============================================================================== (in millions) Year ended December 31, ------------------------------ 1994 1993 1992 BALANCE, BEGINNING OF YEAR $2,122 $2,067 $1,646 Provision for loan losses 200 550 1,215 Loan charge-offs: Commercial (1) (54) (110) (238) Real estate 1-4 family first mortgage (18) (25) (17) Other real estate mortgage (66) (197) (290) Real estate construction (19) (68) (93) Consumer: Real estate 1-4 family junior lien mortgage (24) (28) (28) Credit card (138) (177) (189) Other revolving credit and monthly payment (36) (41) (41) ------ ------ ------ Total consumer (198) (246) (258) Lease financing (14) (18) (19) ------ ------ ------ Total loan charge-offs (369) (664) (915) ------ ------ ------ Loan recoveries: Commercial (2) 37 71 59 Real estate 1-4 family first mortgage 6 2 2 Other real estate mortgage 22 47 9 Real estate construction 15 4 3 Consumer: Real estate 1-4 family junior lien mortgage 4 3 1 Credit card 18 21 21 Other revolving credit and monthly payment 11 12 12 ------ ------ ------ Total consumer 33 36 34 Lease financing 16 9 9 Foreign -- -- 1 ------ ------ ------ Total loan recoveries 129 169 117 ------ ------ ------ Total net loan charge-offs (240) (495) (798) Recoveries on the sale of developing country loans -- -- 4 ------ ------ ------ BALANCE, END OF YEAR $2,082 $2,122 $2,067 ====== ====== ====== Total net loan charge-offs as a percentage of average total loans .70% 1.44% 1.97% ====== ====== ====== Allowance as a percentage of total loans 5.73% 6.41% 5.60% ====== ====== ====== - ------------------------------------------------------------------------------ (1) Includes charge-offs of loans to real estate developers of $14 million, $21 million and $41 million in 1994, 1993 and 1992, respectively. (2) Includes recoveries from real estate developers of $2 million, $3 million and $6 million in 1994, 1993 and 1992, respectively.
Loans held for sale are included in their respective loan categories and recorded at lower of cost or market. At December 31, 1994 and 1993, loans held for sale were $324 million and $125 million, respectively. 49 5 PREMISES, EQUIPMENT, LEASE COMMITMENTS AND OTHER ASSETS - -------------------------------------------------------------------------------- The following table presents comparative data for premises and equipment:
============================================================================== (in millions) December 31, ------------------------- 1994 1993 Land $ 144 $ 148 Buildings 531 546 Furniture and equipment 608 571 Leasehold improvements 258 251 Premises leased under capital leases 68 71 ------ ------ Total 1,609 1,587 Less accumulated depreciation and amortization 723 689 ------ ------ Net book value $ 886 $ 898 ====== ====== - ------------------------------------------------------------------------------
Depreciation and amortization expense was $142 million, $140 million and $136 million for the years ended December 31, 1994, 1993 and 1992, respectively. The Company is obligated under a number of noncancelable operating leases for premises (including vacant premises) and equipment with terms up to 25 years, many of which provide for periodic adjustment of rentals based on changes in various economic indicators. The following table shows future minimum payments under noncancelable operating leases and capital leases with terms in excess of one year as of December 31, 1994:
============================================================================== (in millions) Operating leases Capital leases Year ended December 31, 1995 $ 144 $ 10 1996 135 10 1997 123 9 1998 109 9 1999 97 9 Thereafter 441 80 ------ --- Total minimum lease payments $1,049 127 ====== Executory costs (4) Amounts representing interest (68) ---- Present value of net minimum lease payments $ 55 ==== - ------------------------------------------------------------------------------
Total future minimum payments to be received under noncancelable operating subleases at December 31, 1994 were approximately $238 million; these payments are not reflected in the above table. Rental expense, net of rental income, for all operating leases was $97 million, $99 million and $100 million for the years ended December 31, 1994, 1993 and 1992, respectively. The components of other assets at December 31, 1994 and 1993 were as follows:
============================================================================== (in millions) December 31, ------------------------- 1994 1993 Net deferred tax asset (1) $ 998 $ 862 Nonmarketable equity investments (2) 407 396 Certain identifiable intangible assets 388 373 Foreclosed assets 272 348 Other 495 445 ------ ------ Total other assets $2,560 $2,424 ====== ====== - ------------------------------------------------------------------------------ (1) See Note 10 to the Financial Statements. (2) Commitments related to nonmarketable equity investments totaled $174 million and $130 million at December 31, 1994 and 1993, respectively.
Income from nonmarketable equity investments was $31 million, $42 million and $17 million for the years ended December 31, 1994, 1993 and 1992, respectively. The largest identifiable intangible asset was core deposit intangibles of $208 million and $257 million at December 31, 1994 and 1993, respectively. Amortization expense for core deposit intangibles was $49 million, $61 million and $57 million for the years ended December 31, 1994, 1993 and 1992, respectively. Total amortization expense for certain identifiable intangible assets recorded in noninterest expense was $62 million, $77 million and $71 million for the years ended December 31, 1994, 1993 and 1992, respectively. Foreclosed assets consist of assets (substantially real estate) acquired in satisfaction of troubled debt and are carried at the lower of fair value (less estimated costs to sell) or cost. Foreclosed assets expense, including disposition gains and losses, was none, $60 million and $93 million in 1994, 1993 and 1992, respectively. 50 6 SENIOR AND SUBORDINATED DEBT - -------------------------------------------------------------------------------- The following is a summary of senior and subordinated debt (reflecting unamortized debt discounts and premiums, where applicable) owed by the Parent and its subsidiaries:
================================================================================================================================== (in millions) Maturity Interest December 31, date rate ---------------------- 1994 1993 SENIOR Parent: Notes (1) 1994 8.5% $ -- $ 100 Notes (1) 1994 7.625% -- 175 Floating-Rate Notes 1994 Various -- 150 Floating-Rate Medium-Term Notes (2) 1994-99 Various 958 1,258 Notes (1) 1996 8.2% 200 200 Medium-Term Notes (1) 1994-96 4.7-9.1% 126 254 Notes payable by subsidiaries 54 59 Obligations of subsidiaries under capital leases (Note 5) 55 60 ------ ------ Total senior debt 1,393 2,256 ------ ------ SUBORDINATED Parent: Floating-Rate Notes (U.K. pounds sterling denominated L60 face amount) (3)(4)(5) 1994 Various -- 89 German Mark Floating-Rate Notes (DM 300 face amount) (3)(6) 1995 Various 194 173 Floating-Rate Notes (4)(7)(8) 1996 Various -- 100 Floating-Rate Capital Notes (4)(8)(9) 1996 Various -- 150 Floating-Rate Notes (3)(4)(8) 1997 Various -- 187 Floating-Rate Notes (4)(10) 1997 Various 101 101 Floating-Rate Notes (3)(4)(11) 1997 Various 100 100 Floating-Rate Capital Notes (3)(4)(9) 1998 Various 200 200 Floating-Rate Notes (3)(4) 2000 Various 118 118 Notes 2002 8.75% 199 199 Notes 2002 8.375% 149 149 Notes 2003 6.875% 150 150 Notes 2003 6.125% 249 249 ------ ------ Total subordinated debt 1,460 1,965 ------ ------ Total senior and subordinated debt $2,853 $4,221 ====== ====== - ---------------------------------------------------------------------------------------------------------------------------------- (1) The Company has entered into interest rate swap agreements for substantially all of these Notes, whereby the Company receives fixed-rate interest payments approximately equal to interest on the Notes and makes interest payments based on an average three-month LIBOR rate. (2) Of these Notes, $250 million have been called for redemption in March 1995, prior to maturity. (3) May be redeemed in whole, at par, at any time in the event withholding taxes are imposed by the United States. (4) Redeemable in whole or in part, at par. (5) The Company entered into a swap agreement whereby the Company received pounds sterling sufficient to cover floating-rate interest and principal on the Notes and made payments in U.S. dollars covering principal and interest. The transaction amount at the date of issue and swap was $74 million. The difference of $15 million at December 31, 1993 was due to the foreign currency transaction adjustment. (6) These Notes are subject to maximum interest rate of 8%. The Company has sold this interest rate cap under an agreement whereby it receives fixed payments in German marks and makes payments based on the amount by which a floating rate exceeds 8%. The Company has also entered into a swap agreement whereby the Company receives German marks approximately equal to principal and interest on the Notes and makes payments in U.S. dollars. The transaction amount at the date of issue and swap was $118 million. The differences of $76 million and $55 million at December 31, 1994 and 1993, respectively, were due to the foreign currency transaction adjustment. (7) Equity Commitment Notes. (8) These Notes were redeemed in 1994, prior to maturity. (9) Mandatory Equity Notes. (10) Subject to a maximum interest rate of 13% due to the purchase of an interest rate cap. (11) Subject to a maximum interest rate of 13%.
51 The principal payments, including sinking fund payments, on senior and subordinated debt are due as follows:
============================================================================== (in millions) Parent Company 1995 $ 678 $ 685 1996 588 593 1997 285 290 1998 200 205 1999 50 55 Thereafter 867 949 ------ ------ Total $2,668 $2,777 ====== ====== - ------------------------------------------------------------------------------
The interest rates on floating-rate notes are determined periodically by formulas based on certain money market rates, subject, on certain notes, to minimum or maximum interest rates. The Company's mandatory convertible debt, which is identified by notes (7) and (9) to the table on the preceding page, qualifies as Tier 2 capital but is subject to discounting and note fund restrictions under the risk-based capital rules. In 1994, $100 million of the Equity Commitment Notes and $150 million of the Mandatory Equity Notes, both due in 1996, were redeemed prior to maturity. The terms of the remaining $200 million of the Mandatory Equity Notes, due in 1998, require the Company to sell or exchange with the noteholder the Company's common stock, perpetual preferred stock or other capital securities at maturity or earlier redemption of the notes. At December 31, 1994, $127 million of stockholders' equity had been designated for the retirement or redemption of those notes. Certain of the agreements under which debt has been issued contain provisions that may limit the merger or sale of the Bank and the issuance of its capital stock or convertible securities. The Company was in compliance with the provisions of the borrowing agreements at December 31, 1994. 7 PREFERRED STOCK - ------------------------------------------------------------------------------ Of the 25,000,000 shares authorized, there were 2,327,500 shares and 5,327,500 shares of preferred stock issued and outstanding at December 31, 1994 and 1993, respectively. All preferred shares rank senior to common shares both as to dividends and liquidation preference but have no general voting rights. The following is a summary of Preferred Stock (Adjustable and Fixed):
================================================================================================================================== Shares issued Carrying amount Adjustable Dividends declared and outstanding (in millions) dividend rate (in millions) --------------------- ----------------- ----------------- ------------------------- December 31, December 31, Minimum Maximum Year ended December 31, --------------------- ----------------- ------------------------- 1994 1993 1994 1993 1994 1993 1992 Adjustable-Rate Cumulative, Series A (Liquidation preference $50) (1) -- 3,000,000 $ -- $150 6.0% 12.0% $ 2 $ 9 $ 9 Adjustable-Rate Cumulative, Series B (Liquidation preference $50) 1,500,000 1,500,000 75 75 5.5 10.5 4 4 5 9% Cumulative, Series C (Liquidation preference $500) 477,500 477,500 238 238 -- -- 21 21 21 8-7/8% Cumulative, Series D (Liquidation preference $500) 350,000 350,000 176 176 -- -- 16 16 13 --------- --------- ---- ---- --- --- --- Total 2,327,500 5,327,500 $489 $639 $43 $50 $48 ========= ========= ==== ==== === === === - ---------------------------------------------------------------------------------------------------------------------------------- (1) In March 1994, the Company redeemed all $150 million of its Series A preferred stock.
52 ADJUSTABLE-RATE CUMULATIVE PREFERRED STOCK, SERIES A In March 1994, the Company redeemed all $150 million of its Series A preferred stock at a price of $50 per share plus accrued and unpaid dividends. Dividends were cumulative and payable on the last day of each calendar quarter. For each quarterly period, the dividend rate was 2.75% less than the highest of the three-month Treasury bill discount rate, 10-year constant maturity Treasury security yield or 20-year constant maturity Treasury bond yield, but limited to a minimum of 6% and a maximum of 12% per year. The average dividend rate was 6.1% (annualized), 6.0% and 6.0% in 1994, 1993 and 1992, respectively. ADJUSTABLE-RATE CUMULATIVE PREFERRED STOCK, SERIES B These shares are redeemable at the option of the Company through May 14, 1996 at a price of $51.50 per share and, thereafter, at $50 per share plus accrued and unpaid dividends. Dividends are cumulative and payable quarterly on the 15th of February, May, August and November. For each quarterly period, the dividend rate is 76% of the highest of the three-month Treasury bill discount rate, 10-year constant maturity Treasury security yield or 20-year constant maturity Treasury bond yield, but limited to a minimum of 5.5% and a maximum of 10.5% per year. The average dividend rate was 5.7%, 5.6% and 6.2% during 1994, 1993 and 1992, respectively. 9% PREFERRED STOCK, SERIES C This class of preferred stock has been issued as depositary shares, each representing one-twentieth of a share of the Series C preferred stock. These shares are redeemable at the option of the Company on and after October 24, 1996 at a price of $500 per share plus accrued and unpaid dividends. Dividends of $11.25 per share (9% annualized rate) are cumulative and payable on the last day of each calendar quarter. 8-7/8% PREFERRED STOCK, SERIES D This class of preferred stock has been issued as depositary shares, each representing one-twentieth of a share of the Series D preferred stock. These shares are redeemable at the option of the Company on and after March 5, 1997 at a price of $500 per share plus accrued and unpaid dividends. Dividends of $11.09 per share (8-7/8% annualized rate) are cumulative and payable on the last day of each calendar quarter. 8 COMMON STOCK AND EMPLOYEE STOCK PLANS - ------------------------------------------------------------------------------ COMMON STOCK .............................................................................. The following table summarizes common stock authorized, reserved, issued and outstanding as of December 31, 1994:
============================================================================== Number of shares Tax Advantage and Retirement Plan 2,718,228 Long-Term and Equity Incentive Plans 4,616,345 Dividend Reinvestment and Common Stock Purchase Plan 4,182,041 Employee Stock Purchase Plan 625,495 Director Option Plans 167,099 Stock Bonus Plan 14,959 ----------- Total shares reserved 12,324,167 Shares not reserved 86,424,185 Shares issued and outstanding 51,251,648 ----------- Total shares authorized 150,000,000 =========== - ------------------------------------------------------------------------------
Under the terms of mandatory convertible debt, the Company must exchange with the noteholder, or sell, various capital securities of the Company as described in Note 6 to the Financial Statements. DIRECTOR OPTION PLANS .............................................................................. The 1990 Director Option Plan (1990 DOP) provides for annual grants of options to purchase 500 shares of common stock to each non-employee director elected or re-elected at the annual meeting of shareholders. Non-employee directors who join the Board between annual meetings receive options on a prorated basis. The options may be exercised until the tenth anniversary of the date of grant; they become exercisable after one year at an exercise price equal to the fair market value of the stock at the time of grant. The maximum total number of shares of common stock issuable under the 1990 DOP is 100,000 in the aggregate and 20,000 in any one calendar year. At December 31, 1994, 24,526 options 53 were outstanding under this plan, of which 18,938 options were exercisable. During 1994, 2,000 options were exercised. As the exercise price of the option is equal to the quoted market price of the stock at the time of grant, no compensation expense is recorded for the 1990 DOP. The 1987 Director Option Plan (1987 DOP) allows participating directors to file an irrevocable election to receive stock options in lieu of their retainer to be earned in any one calendar year. The options may be exercised until the tenth anniversary of the date of receipt; options become exercisable after one year at an exercise price of $1 per share. At December 31, 1994, 3,781 options were outstanding under this plan, of which 3,220 options were exercisable. During 1994, no options were exercised. Compensation expense for the 1987 DOP is measured as the difference between the quoted market price of the stock at the date of grant less the option exercise price. This expense is accrued as retainers are earned. EMPLOYEE STOCK PLANS ................................................................................ LONG-TERM AND EQUITY INCENTIVE PLANS The Wells Fargo & Company Long-Term Incentive Plan (LTIP) became effective upon the approval of shareholders in April 1994. The LTIP supersedes the 1990 Equity Incentive Plan (1990 EIP), which is itself the successor to the original 1982 Equity Incentive Plan (1982 EIP). No additional awards or grants will be issued under the 1990 or 1982 EIPs. While similar to the existing 1990 EIP, in that the LTIP includes provisions for the same kinds of awards that could have been made under the 1990 EIP, the LTIP varies from the 1990 EIP in certain respects. The following are certain of the more important differences. The LTIP provides for awards of restricted shares in addition to the stock options, stock appreciation rights and share rights that could have been awarded under the 1990 EIP. Stock appreciation rights awarded under the LTIP need not be in tandem with stock options, as was the case under the 1990 EIP, but may stand alone. Employee stock options granted under the LTIP can be granted with exercise prices at or, unlike the 1990 EIP, above the current value of the common stock and, except for incentive stock options, can have terms longer than 10 years, the maximum provided in the 1990 EIP. Employee stock options generally become fully exercisable over 3 years from the grant date. Upon termination of employment, the option period is reduced or the options are canceled. The LTIP also provides for grants to recipients not limited to present key employees of the Company. The total number of shares of common stock issuable under the LTIP is 2,500,000 in the aggregate (excluding outstanding awards under the 1990 and 1982 EIPs) and 800,000 in any one calendar year. No compensation expense has been recorded for the stock options under the LTIP (or 1990 and 1982 EIPs), as the exercise price is equal to the quoted market price of the stock at the time of grant. Transactions involving options of the LTIP and EIPs are summarized as follows:
================================================================================================================================== Number of shares ---------------------------------------------------------------------------------- LTIP 1990 EIP 1982 EIP -------------- ----------------------------- ----------------------------- 1994 1994 1993 1994 1993 Options outstanding, beginning of year -- 1,223,360 960,000 784,040 955,690 Granted 284,000 -- 400,400 -- -- Transferred(1) 400,400 (400,400) -- -- -- Canceled (28,500) (28,665) (54,840) -- (6,670) Exercised (720) (83,360) (79,862) (220,587) (156,080) Share/tax withholding -- -- (2,338) -- (8,900) --------- --------- --------- -------- -------- Options outstanding, end of year 655,180 710,935 1,223,360 563,453 784,040 ========= ========= ========= ======== ======== Options exercisable, end of year 371,180 710,935 340,245 563,453 784,040 Shares available for grant, end of year 2,219,872 -- 755,147 -- -- Price range of options: Outstanding $107.25-146.75 $68.75-79.38 $68.75-110.75 $33.50-71.00 $29.56-71.00 Exercised $110.75 $68.75-78.63 $68.75- 78.63 $29.56-71.00 $29.56-71.00 - ---------------------------------------------------------------------------------------------------------------------------------- (1) In accordance with the terms of the LTIP, the 400,400 options that were previously granted in 1993 under the 1990 EIP were assumed under the LTIP.
54 Loans may be made, at the discretion of the Company, to assist the participants of the LTIP and the EIPs in the acquisition of shares under options. The total of such interest-bearing loans were $6 million and $7 million at December 31, 1994 and 1993, respectively. The holders of restricted share rights that were granted prior to 1991 are entitled at no cost to 30% of the shares of common stock represented by the restricted share rights held three years after the restricted share rights were granted, an additional 30% after four years and the final 40% after five years. The holders of the restricted share rights granted in 1991 or later are entitled at no cost to the shares of common stock represented by the restricted share rights held by each person five years after the restricted share rights were granted. Upon receipt of the restricted share rights, holders are entitled to receive quarterly cash payments equal to the cash dividends that would be paid on the number of common shares equal to the number of restricted share rights. Except in limited circumstances, restricted share rights are canceled upon termination of employment. As of December 31, 1994, the LTIP, the 1990 EIP and the 1982 EIP had 58,229, 376,410 and 32,266 restricted share rights outstanding, respectively, to 655, 863 and 80 employees or their beneficiaries, respectively. The compensation expense for the restricted share rights equals the market price at the time of grant and is accrued on a straight-line basis over the vesting period of three to five years. The amount of expense accrued for the restricted share rights under the LTIP, 1990 and 1982 EIPs was $8 million, $7 million and $7 million in 1994, 1993 and 1992, respectively. EMPLOYEE STOCK PURCHASE PLAN Options to purchase up to 1,100,000 shares of common stock may be granted under the Employee Stock Purchase Plan (ESPP). Employees of the Company with at least one year of service, except hourly employees, are eligible to participate. Certain highly compensated employees may be excluded from participation at the discretion of the Management Development and Compensation Committee of the Board of Directors. The plan provides for an option price of the lower of market value at grant date or 85% to 100% (as determined by the Board of Directors for each option period) of the market value at the end of the one-year option period. For the current option period ending July 31, 1995, the Board approved a closing option price of 85% of the market value. The plan is noncompensatory and results in no expense to the Company. Transactions involving the ESPP are summarized as follows:
============================================================================== Number of options ----------------------- 1994 1993 Options outstanding, beginning of year 160,476 206,185 Granted 159,515 173,270 Canceled (1) (83,734) (103,240) Exercised (at $114.73 in 1994 and $69.05 in 1993) (92,853) (115,739) ------- -------- Options outstanding, end of year 143,404 160,476 ======= ======== Options available for grant, end of year 482,091 557,872 ======= ======== - ------------------------------------------------------------------------------ (1) At the beginning of the option period, participants are granted an additional 50% of options that are exercised only to the extent that the closing option price is sufficiently below the market value at grant date and based on the participant's level of participation. Since the closing option price was higher in 1994 and 1993, the additional option grants were canceled. These options represent a majority of the canceled options shown above.
For information on employee stock ownership through the Tax Advantage and Retirement Plan, see Note 9. DIVIDEND REINVESTMENT PLAN The Dividend Reinvestment and Common Stock Purchase and Share Custody Plan allows holders of the Company's common stock to purchase additional shares either by reinvesting all or part of their dividends, or by making optional cash payments. Currently, up to $6,000 of dividends per quarter may be used to purchase shares at a 3% discount. Dividends in excess of $6,000 per quarter and between $150 and $2,000 per month in optional cash payments may be used to purchase shares at fair market value. Shares may also be held in custody under the Plan even without the reinvestment of dividends. During 1994 and 1993, 97,256 and 222,679 shares, respectively, were issued under the plan. 55 9 EMPLOYEE BENEFITS AND OTHER EXPENSES - -------------------------------------------------------------------------------- RETIREMENT PLAN ................................................................................ The Company's retirement plan is known as the Tax Advantage and Retirement Plan (TAP), a defined contribution plan. As part of TAP, the Company makes basic retirement contributions to employee retirement accounts. Effective July 1994, the Company increased its basic retirement contributions from 4% to 6% of the total of employee base salary plus payments from certain bonus plans (covered compensation). The Company also makes special transition contributions related to the termination of a prior defined benefit plan of the Company ranging from .5% to 5% of covered compensation for certain employees. The plan covers salaried employees with at least one year of service and contains a vesting schedule graduated from three to seven years of service. Prior to July 1994, the Company made supplemental retirement contributions of 2% of employee-covered compensation. All salaried employees with at least one year of service were eligible to receive these Company contributions, which vested immediately. Effective July 1994, the supplemental retirement contributions were discontinued, except for those contributions that are made to employees hired before January 1, 1992. Those employees will continue to receive the supplemental 2% contribution and the 4% basic retirement contributions until fully vested. Upon becoming 100% vested, the basic retirement contribution will increase to 6% of employee-covered compensation and the supplemental 2% contributions will end. Salaried employees who have at least one year of service are eligible to contribute to TAP up to 10% of their pretax covered compensation through salary deductions under Section 401(k) of the Internal Revenue Code, although a lower contribution limit may be applied to certain employees in order to maintain the qualified status of the plan. The Company makes matching contributions of up to 4% of an employee's covered compensation for those who have at least three years of service and elect to contribute under the plan. Effective July 1994, the Company began to partially match contributions by employees with at least one but less than three years of service. For such employees who elect to contribute under the plan, the Company matches 50% of each dollar on the first 4% of the employee's covered compensation. The Company's matching contributions are immediately vested and, similar to retirement contributions, are tax deductible by the Company. Employees direct the investment of their TAP funds and may elect to invest in the Company's common stock. Expenses related to TAP for the years ended December 31, 1994, 1993 and 1992 were $56 million, $53 million and $50 million, respectively. HEALTH CARE AND LIFE INSURANCE ................................................................................ The Company provides health care and life insurance benefits for certain active and retired employees. The Company reserves its right to terminate these benefits at any time. The health care benefits for active and retired employees are self-funded by the Company with the Point-of-Service Managed Care Plan or provided through health maintenance organizations (HMOs). Effective January 1, 1993, the health care and life insurance benefits for retirees changed. The amount of subsidized health care coverage for active employees is based upon their eligibility to retire as of January 1, 1993. The amount of subsidized health care coverage for active employees is based upon their eligibility to retire as of January 1, 1993 and their years of service at the time of retirement. For those active employees with an adjusted service date after September 30, 1992, there are no medical or dental benefits upon retirement. Additionally, those employees who retire after January 1, 1993 are no longer eligible for the nominal Company-paid life insurance benefit. Effective January 1, 1994, newly hired employees are not eligible for Company-paid life insurance benefits. The Company recognized the cost of health care benefits for active eligible employees by expensing contributions totaling $45 million, $49 million and $47 million in 1994, 1993 and 1992, respectively. Life insurance benefits for active eligible employees are provided through an insurance company. The Company recognizes the cost of these benefits by expensing the annual insurance premiums, which were $2 million, $2 million and $3 million in 1994, 1993 and 1992, respectively. At December 31, 1994, the Company had approximately 18,300 active eligible employees and 6,220 retirees. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106 (FAS 106), Employers' Accounting for Postretirement Benefits Other Than Pensions. This Statement changed the method of accounting for postretirement benefits other than pensions from a cash to an accrual basis. 56 Under FAS 106, the determination of the accrued liability requires a calculation of the accumulated postretirement benefit obligation (APBO). The APBO represents the actuarial present value of postretirement benefits other than pensions to be paid out in the future (e.g., health benefits to be paid for retirees) that have been earned as of the end of the year. The unrecognized APBO at the time of adoption of FAS 106 (transition obligation) of $142 million for postretirement health care benefits is being amortized over 20 years. The following table sets forth the net periodic cost for postretirement health care benefits for 1994 and 1993:
============================================================================== (in millions) Year ended December 31, ----------------------- 1994 1993 Interest cost on APBO $ 8.7 $11.2 Amortization of transition obligation 7.1 7.2 Service cost (benefits attributed to service during the period) 1.0 1.0 ----- ----- Total $16.8 $19.4 ===== ===== - ------------------------------------------------------------------------------
The following table sets forth the funded status for postretirement health care benefits and provides an analysis of the accrued postretirement benefit cost included in the Company's Consolidated Balance Sheet at December 31, 1994 and 1993.
============================================================================== (in millions) December 31, ----------------------- 1994 1993 APBO (1): Retirees $ 69.7 $ 99.9 Eligible active employees 14.6 21.4 Other active employees 18.5 15.7 ------- ------- 102.8 137.0 Plan assets at fair value -- -- ------- ------- APBO in excess of plan assets 102.8 137.0 Unrecognized net gain from past experience different from that assumed and from changes in assumptions 44.8 10.4 Unrecognized transition obligation (127.8) (135.0) ------- ------- Accrued postretirement benefit cost (included in other liabilities) $ 19.8 $ 12.4 ======= ======= - ------------------------------------------------------------------------------ (1) Based on a discount rate of 8.55% and 6.45% in 1994 and 1993, respectively.
For measurement purposes, a health care cost trend rate was used to recognize the effect of expected changes in future health care costs due to medical inflation, utilization changes, technological changes, regulatory requirements and Medicare cost shifting. Average annual increases of 5.5% for HMOs and 8.5% for all other types of coverage in the per capita cost of covered health care benefits were assumed for 1995. The rate for other coverage was assumed to decrease gradually to 5.5% in 2001 and remain at that level thereafter. Increasing the assumed health care trend by one percentage point in each year would increase the APBO as of December 31, 1994 by $4.5 million and the aggregate of the interest cost and service cost components of the net periodic cost for 1994 by $0.4 million. In 1994, the $34.4 million increase in the unrecognized net gain was primarily due to an increase in the discount rate, a lower average per capita cost of health care coverage and a reduction in the health care cost trend rates for HMOs. The Company also provides postretirement life insurance to certain existing retirees. The APBO and expenses related to these benefits were not material. Effective July 1993, the Company also adopted Statement of Financial Accounting Standards No. 112 (FAS 112), Employers' Accounting for Postemployment Benefits. This Statement requires employers to recognize the obligation to provide benefits to former or inactive employees after employment but before retirement. The adoption of FAS 112 resulted in an accrual of $12 million in 1993. OTHER EXPENSES .............................................................................. Contract services expense was $101 million, $61 million and $48 million in 1994, 1993 and 1992, respectively. Advertising and promotion expense was $65 million, $59 million and $47 million in 1994, 1993 and 1992, respectively. Operating losses, which included losses from litigation, fraud and other matters, were $62 million, $52 million and $45 million in 1994, 1993 and 1992, respectively. 57 10 INCOME TAXES - ------------------------------------------------------------------------------ Total income taxes for the years ended December 31, 1994 and 1993 were recorded as follows:
============================================================================== (in millions) Year ended December 31, ---------------------- 1994 1993 Income taxes applicable to income before income tax expense $613 $426 Goodwill for tax benefits related to acquired assets (25) (8) ---- ---- Subtotal 588 418 Stockholders' equity for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes (13) (8) Stockholders' equity for tax effect of net unrealized gain (loss) on investment securities (95) 15 ---- ---- Total income taxes $480 $425 ==== ==== - ------------------------------------------------------------------------------
The following is a summary of the components of income tax expense (benefit) applicable to income before income taxes:
============================================================================== (in millions) Year ended December 31, ------------------------------------ 1994 1993 1992 Current: Federal $484 $ 445 $ 290 State and local 161 113 91 ---- ----- ----- 645 558 381 ---- ----- ----- Deferred: Federal (38) (125) (135) State and local 6 (7) (29) ---- ---- ---- (32) (132) (164) ---- ----- ----- Total $613 $ 426 $ 217 ==== ===== ===== - ------------------------------------------------------------------------------
Amounts for the current year are based upon estimates and assumptions as of the date of this report and could vary significantly from amounts shown on the tax returns as filed. Accordingly, the variances from the amounts previously reported for 1993 are primarily as a result of adjustments to conform to tax returns as filed. The Company's income tax expense for 1994, 1993 and 1992 included $3 million, under $1 million and $18 million, respectively, related to investment securities transactions. The Company had net deferred tax assets of $998 million, $862 million and $804 million at December 31, 1994, 1993 and 1992, respectively. The tax effect of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December 31, 1994 and 1993 are presented below:
============================================================================== (in millions) Year ended December 31, ---------------------- 1994 1993 DEFERRED TAX ASSETS Allowance for loan losses $ 844 $ 874 Net tax-deferred expenses 211 207 Investments 93 7 State tax expense 58 42 Foreclosed assets 49 58 ------ ------ 1,255 1,188 Valuation allowance (2) (2) ------ ------ Total deferred tax assets, less valuation allowance 1,253 1,186 ------ ------ DEFERRED TAX LIABILITIES Leasing 218 256 Certain identifiable intangibles 11 46 Depreciation 11 20 Other 15 2 ------ ------ Total deferred tax liabilities 255 324 ------ ------ NET DEFERRED TAX ASSET $ 998 $ 862 ====== ====== - ------------------------------------------------------------------------------
The Company's $998 million net deferred tax asset at December 31, 1994 included a valuation allowance of $2 million. The January 1, 1993 valuation allowance of $5 million was reduced by $3 million in 1993 due to the current utilization of a California capital loss carryforward. Substantially all of the Company's net deferred tax asset of $998 million at December 31, 1994 related to net expenses (the largest of which was the provision for loan losses) that have been reflected in the financial statements, but which will reduce future taxable income. At December 31, 1994, the Company did not have any net operating loss carryforwards. The Company estimates that approximately $875 million of the $998 million net deferred tax asset at December 31, 1994 could be realized by the recovery of previously paid federal taxes; however, the Company 58 expects to actually realize the federal net deferred tax asset by claiming deductions against future taxable income. The balance of approximately $123 million relates to approximately $1.8 billion of net deductions that are expected to reduce future California taxable income (California tax law does not permit recovery of previously paid taxes). The Company's California taxable income has averaged approximately $1.1 billion for each of the last three years. The Company believes that it is more likely than not that it will have sufficient future California taxable income to fully utilize these deductions. The significant components of deferred income tax (benefits) for the years ended December 31, 1994 and 1993 were as follows:
============================================================================== (in millions) Year ended December 31, ---------------------- 1994 1993 Deferred tax benefit (excluding below) $(32) $(107) Adjustments to deferred tax assets and liabilities for enacted changes in rates and laws -- (22) Decrease in valuation allowance -- (3) ---- ----- Total $(32) $(132) ==== ===== - ------------------------------------------------------------------------------
Under APB 11, the components of the deferred income tax (benefits) for the year ended December 31, 1992 were as follows:
============================================================================== (in millions) Year ended December 31, 1992 Lower loan loss deduction for tax return purposes $(180) Lower income for tax return purposes resulting from the net change in deferred income and expenses 20 Lower depreciation for tax return purposes (13) Higher state tax deduction for tax return purposes 13 Other, net (4) ----- Total $(164) ===== - ------------------------------------------------------------------------------
The following is a reconciliation of the statutory federal income tax expense and rate to the effective income tax expense and rate:
================================================================================================================================== (in millions) Year ended December 31, ----------------------------------------------------------------------- 1994 1993 1992 ------------------- ------------------- ------------------- Amount % Amount % Amount % Statutory federal income tax expense and rate $509 35.0 % $363 35.0 % $170 34.0 % Change in tax rate resulting from: State and local taxes on income, net of federal income tax benefit 110 7.5 75 7.2 39 7.8 Amortization of certain intangibles not deductible for tax return purposes 17 1.2 18 1.7 14 2.9 Adjustment to deferred tax assets and liabilities for enacted changes in tax rates and laws -- -- (22) (2.1) -- -- Other (23) (1.5) (8) (.8) (6) (1.3) ---- ---- ---- ---- ---- ---- Effective income tax expense and rate $613 42.2 % $426 41.0 % $217 43.4 % ==== ==== ==== ==== ==== ==== - ----------------------------------------------------------------------------------------------------------------------------------
The Company has not recognized a deferred tax liability of $45 million on $124 million of undistributed earnings of a foreign subsidiary and an affiliate because such earnings are indefinitely reinvested in those companies and are not taxable under current law. A deferred tax liability would be recognized to the extent the Company changed its intent to not indefinitely reinvest a portion or all of such undistributed earnings. In addition, a current tax liability would be recognized if the Company recovered those undistributed earnings in a taxable manner, such as through the receipt of dividends or sales of the entities, or if the tax law changed. 59 11 PARENT COMPANY - ------------------------------------------------------------------------------ Condensed financial information of Wells Fargo & Company (Parent) is presented below. For information regarding the Parent's long-term debt and derivative financial instruments, see Notes 6 and 13, respectively.
CONDENSED STATEMENT OF INCOME ============================================================================== (in millions) Year ended December 31, ------------------------------ 1994 1993 1992 INCOME Dividends from subsidiaries: Wells Fargo Bank $1,001 $ -- $117 Nonbank subsidiaries -- 3 1 Interest income from: Wells Fargo Bank 81 97 109 Nonbank subsidiaries 15 22 32 Other 51 56 60 Noninterest income 38 45 9 ------ ---- ---- Total income 1,186 223 328 ------ ---- ---- EXPENSE Interest on: Commercial paper and other short-term borrowings 8 5 8 Senior and subordinated debt 181 195 207 Provision for loan losses -- 9 39 Noninterest expense 56 39 42 ------ ---- ---- Total expense 245 248 296 ------ ---- ---- Income (loss) before income tax (expense) benefit and undistributed income of subsidiaries 941 (25) 32 Income tax (expense) benefit 27 (5) 36 Equity in undistributed income of subsidiaries (1): Wells Fargo Bank (138) 632 220 Nonbank subsidiaries 11 10 (5) ------ ---- ---- NET INCOME $ 841 $612 $283 ====== ==== ==== - ------------------------------------------------------------------------------ (1) The 1994 amount represents dividends distributed by Wells Fargo Bank in excess of its 1994 net income of $863 million.
CONDENSED BALANCE SHEET ============================================================================== (in millions) December 31, ------------------- 1994 1993 ASSETS Cash and due from Wells Fargo Bank (includes interest-earning deposits of none and $723) $ 25 $ 733 Investment securities: At cost (estimated fair value of $198 million and $341 million) 203 337 At fair value 211 50 ------ ------ Total investment securities 414 387 Securities purchased under resale agreements -- 250 Loans 333 359 Allowance for loan losses 58 60 ------ ------ Net loans 275 299 ------ ------ Loans and advances to subsidiaries: Wells Fargo Bank 1,258 1,682 Nonbank subsidiaries 198 303 Investment in subsidiaries: Wells Fargo Bank 4,219 4,479 Nonbank subsidiaries 101 95 Other assets 568 552 ------ ------ Total assets $7,058 $8,780 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper and other short-term borrowings $ 133 $ 138 Other liabilities 270 225 Senior debt 1,284 2,137 Subordinated debt 1,460 1,965 ------ ------ Total liabilities 3,147 4,465 Stockholders' equity 3,911 4,315 ------ ------ Total liabilities and stockholders' equity $7,058 $8,780 ====== ====== - ------------------------------------------------------------------------------
60
CONDENSED STATEMENT OF CASH FLOWS ============================================================================== (in millions) Year ended December 31, ------------------------------- 1994 1993 1992 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 841 $ 612 $ 283 Adjustments to reconcile net income to net cash provided by operating activities: Provisions for loan losses -- 9 39 Deferred income tax expense (benefit) (4) 30 (15) Equity in undistributed (income) loss of subsidiaries 127 (642) (215) Other, net (24) (32) 2 ------- ----- ----- Net cash provided (used) by operating activities 940 (23) 94 ------- ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES: Investment securities: At cost: Proceeds from prepayments and maturities 256 13 2 Purchases (122) (25) (127) At fair value: Proceeds from sales 5 -- -- Purchases (175) -- -- Net decrease in loans 24 87 32 Net decrease in loans and advances to subsidiaries 529 103 257 Net (increase) decrease in investment in subsidiaries 5 (111) (299) Net (increase) decrease in securities purchased under resale agreements 250 (250) -- Other, net 12 92 66 ------- ----- ----- Net cash provided (used) by investing activities 784 (91) (69) ------- ----- ----- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in short-term borrowings (5) (30) (58) Proceeds from issuance of senior debt 248 980 508 Proceeds from issuance of subordinated debt -- 399 350 Repayment of senior debt (1,101) (884) (882) Repayment of subordinated debt (526) (300) (116) Proceeds from issuance of preferred stock -- -- 169 Proceeds from issuance of common stock 57 53 213 Repurchase of preferred stock (150) -- -- Repurchase of common stock (760) (5) -- Payment of cash dividends on preferred stock (34) (50) (48) Payment of cash dividends on common stock (218) (125) (105) Other, net 57 (9) (26) ------- ----- ----- Net cash provided (used) by financing activities (2,432) 29 5 ------- ----- ----- NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM WELLS FARGO BANK) (708) (85) 30 Cash and cash equivalents at beginning of year 733 818 788 ------- ----- ----- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 25 $ 733 $ 818 ======= ===== ===== Noncash investing activities: Transfers from investment securities at cost to investment securities at fair value $ -- $ 25 $ -- ======= ===== ===== - ------------------------------------------------------------------------------
12 LEGAL ACTIONS - ------------------------------------------------------------------------------ In the normal course of business, the Company is at all times subject to numerous pending and threatened legal actions, some of which the relief or damages sought are substantial. After reviewing pending and threatened actions with counsel, management considers that the outcome of such actions will not have a material adverse effect on stockholders' equity of the Company; the Company is not able to predict whether the outcome of such actions may or may not have a material adverse effect on results of operations in a particular future period. 61 13 DERIVATIVE FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- The Company enters into a variety of financial contracts, which include interest rate futures and forward contracts, interest rate floors and caps and interest rate swap agreements. The contract or notional amounts of derivatives do not represent amounts exchanged by the parties and therefore are not a measure of exposure through the use of derivatives. The amounts exchanged are determined by reference to the notional amounts and the other terms of the derivatives. The contract or notional amounts to not represent exposure to liquidity risk. The Company is not a dealer but an end-user of these instruments and does not use them speculatively. The Company also offers contracts to its customers, but hedges such contracts by purchasing other financial contracts or uses the contracts for asset/liability management. The contracts are used primarily to hedge mismatches in interest rate maturities and, therefore, serve to reduce rather than increase the Company's exposure to movements in interest rates. The Company is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. The Company controls the credit risk of its financial contracts (except futures contracts and interest rate cap contracts written, for which credit risk is DE MINIMUS) through credit approvals, limits and monitoring procedures. Credit risk related to derivative financial instruments is considered and, if material, provided for separately from the allowance for loan losses. As the Company generally enters into transactions only with high quality institutions, losses associated with counterparty nonperformance on derivative financial instruments have been immaterial. The Company also enters into foreign exchange positions, such as forward, spot and option contracts. As these contracts are purchased for trading purposes, they are marked to market with gains and losses recognized in income. The Company adopted Statement of Financial Accounting Standards No. 119 (FAS 119), Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments, on December 31, 1994. FAS 119 requires various disclosures regarding derivative activities that are set forth on the following pages. The following table summarizes the aggregate notional or contractual amounts, credit risk amount and net fair value for the Company's derivative financial instruments at December 31, 1994 and 1993.
================================================================================================================================== (in millions) December 31, ---------------------------------------------------------------------------- 1994 1993 ------------------------------------ ------------------------------------ NOTIONAL OR CREDIT RISK ESTIMATED Notional or Credit risk Estimated CONTRACTUAL AMOUNT(4) FAIR VALUE contractual amount(4) fair value AMOUNT amount ASSET/LIABILITY MANAGEMENT HEDGES Interest rate contracts: Futures contracts $ 5,009 $-- $ -- $4,890 $ -- $ -- Forward contracts 8 -- -- 75 -- -- Floors purchased (1) 14,355 25 25 3,685 136 136 Caps purchased (1) 244 6 6 303 2 2 Swap contracts (1)(2) 3,103 3 (65) 1,872 82 82 Foreign exchange contracts: Cross currency swaps (1)(3) 118 76 76 192 70 70 Forward contracts (1) 25 -- -- 25 -- -- CUSTOMER ACCOMMODATIONS Interest rate contracts: Caps written 1,039 -- (15) 1,170 -- (3) Caps purchased (1) 1,016 15 15 1,211 3 3 Swap contracts (1) 176 1 -- 180 4 -- Foreign exchange contracts: Forward and spot contracts (1) 590 7 -- 295 5 1 Option contracts purchased 319 -- -- 14 -- -- Option contracts written 318 -- -- 6 -- -- OTHER When-issued securities -- -- -- 484 -- (1) - ---------------------------------------------------------------------------------------------------------------------------------- (1) The Company anticipates performance by substantially all of the counterparties for these financial instruments. (2) The Parent's share of the notional principal amount outstanding was $88 million and $107 million at December 31, 1994 and 1993, respectively. (3) These are off-balance sheet commitments of the Parent. (4) Credit risk amounts reflect the replacement cost for those contracts in a gain position in the event of nonperformance by counterparties.
62 Interest rate futures and forward contracts are contracts in which the buyer agrees to purchase and the seller agrees to make delivery of a specific financial instrument at a predetermined price or yield. Gains and losses on futures contracts are settled daily based on a notional (underlying) principal value and do not involve an actual transfer of the specific instrument. Futures contracts are standardized and are traded on exchanges. The exchange assumes the risk that a counterparty will not pay and generally requires margin payments to minimize such risk. Market risks arise from movements in interest rates and security values. The Company uses 90- to 120-day futures contracts on Eurodollar deposits and U.S. Treasury Notes mostly to shorten the rate maturity of market rate savings to better match the rate maturity of Prime-based loans. Initial margin requirements on futures contracts are provided by investment securities pledged as collateral. The net deferred losses related to interest rate futures contracts were $4 million at December 31, 1994, which will be fully amortized in 1995. The net deferred gains related to interest rate futures contracts were $4 million at December 31, 1993, which was fully amortized in 1994. The Company also uses forward contracts with maturities of two months and under to hedge the interest rate risk of fixed-rate real estate 1-4 family first mortgage loans originated for sale. Gains and losses attributable to the forward contracts are included with the gains or losses on the sales of the related loans. Interest rate floors and caps are interest rate protection instruments that involve the payment from the seller to the buyer of an interest differential. This differential represents the difference between current interest rates and an agreed-upon rate, the strike rate, applied to a notional principal amount. At December 31, 1994, the Company had $14.4 billion of floors to protect variable- rate loans from a drop in interest rates. Of the $14.4 billion, $2.0 billion had forward start dates in May 1995. By purchasing a floor, the Company will be paid by a counterparty the difference between a short-term rate (e.g., three-month LIBOR) and the strike rate, should the short-term rate fall below the strike level of the agreement. These contracts have a weighted average maturity of 3 years and 5 months. At December 31, 1994, there were $.2 billion of caps purchased to hedge caps embedded within loans. The Company generally receives cash quarterly on purchased floors (when the current interest rate falls below the strike rate) and purchased caps (when the current interest rate exceeds the strike rate). The premiums paid for interest rate purchased floor and cap agreements are included with the assets hedged. Interest rate swap contracts are entered into primarily as an asset/liability management strategy to reduce interest rate risk. Interest rate swap contracts are exchanges of interest payments, such as fixed-rate payments for floating-rate payments, based on a notional principal amount. Payments related to the Company's swap contracts are made either monthly, quarterly or semi-annually by one of the parties depending on the specific terms of the related contract. The primary risk associated with swaps is the exposure to movements in interest rates and the ability of the counterparties to meet the terms of the contract. At December 31, 1994, the Company had $3.1 billion of interest rate swaps outstanding for interest rate risk management purposes. Of this amount, $1.6 billion relates to swaps for which the Company receives payments based on fixed interest rates and makes payments based on variable rates (i.e., one- or three-month LIBOR rate). Of the $1.6 billion of receive- fixed rate swap agreements, $1.4 billion was used to convert floating-rate loans into fixed-rate assets. These contracts have a weighted average maturity of 1 year and 9 months, a weighted average receive rate of 5.55% and a weighted average pay rate of 5.83%. The remaining $.2 billion was used to convert fixed- rate debt into floating-rate obligations. These contracts have a weighted average maturity of 1 year and 10 months, a weighted average receive rate of 7.37% and a weighted average pay rate of 5.75%. The Company also had $1.4 billion of forward starting swaps in which the Company will receive payments based on fixed rates and will make payments based on variable rates. These contracts have a weighted average maturity of 4 years and 3 months. The Company also had $.1 billion basis swaps for which the Company receives a variable rate (i.e., six-month LIBOR) and pays another rate (i.e., one-month commercial paper rate). The basis swaps have a weighted average maturity of 10 months, a weighted average receive rate of 5.30% and a weighted average pay rate of 6.43%. At December 31, 1994, the Company had a $.1 billion cross currency swap to convert debt costs of variable-rate long-term debt issued in German marks into fixed-rate U.S. dollar obligations. Interest payments are settled quarterly, whereas the principal payment will be settled at the expiration of the contract in 1995, along with the maturity of the related hedged debt. 63 14 FAIR VALUE OF FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- Statement of Financial Accounting Standards No. 107 (FAS 107), Disclosures about Fair Value of Financial Instruments, requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods and assumptions, set forth below for the Company's financial instruments, are made solely to comply with the requirements of FAS 107 and should be read in conjunction with the financial statements and footnotes in this Annual Report. The carrying amounts in the table are recorded in the Consolidated Balance Sheet under the indicated captions except for the derivative financial instruments, which are recorded in the specific asset or liability balance being hedged or in other assets if the derivative financial instrument is a customer accommodation. Fair values are based on estimates or calculations at the transaction level using present value techniques in instances where quoted market prices are not available. Because broadly traded markets do not exist for most of the Company's financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. Fair valuations are management's estimates of the values, and they are often calculated based on current pricing policy, the economic and competitive environment, the characteristics of the financial instruments and other such factors. These calculations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. The Company has not included certain material items in its disclosure, such as the value of the long-term relationships with the Company's deposit, credit card and trust customers, since these intangibles are not financial instruments. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company. FINANCIAL ASSETS ................................................................................ SHORT-TERM FINANCIAL ASSETS This category includes cash and due from banks, federal funds sold and securities purchased under resale agreements and due from customers on acceptances. The carrying amount is a reasonable estimate of fair value because of the relatively short period of time between the origination of the instrument and its expected realization. INVESTMENT SECURITIES Investment securities at cost and fair value at December 31, 1994 and 1993 are set forth in Note 3. LOANS The fair valuation calculation process differentiates loans based on their financial characteristics, such as product classification, loan category, pricing features and remaining maturity. Prepayment estimates are evaluated by product and loan rate. Discount rates presented in the paragraphs below have a wide range due to the Company's mix of fixed- and variable-rate products. The Company used variable discount rates which incorporate relative credit quality to reflect the credit risk on their fair value calculation. The fair value of commercial loans, other real estate mortgage loans and real estate construction loans is calculated by discounting contractual cash flows using discount rates that reflect the Company's current pricing for loans with similar characteristics and remaining maturity. Most of the discount rates for commercial loans, other real estate mortgage loans and real estate construction loans are between 7.3% and 10.3%, 7.8% and 12.5%, and 8.0% and 12.5%, respectively, at December 31, 1994. Most of the discount rates for the same portfolios in 1993 were between 8.2% and 9.5%, 5.5% and 9.3%, and 6.0% and 8.0%, respectively. For real estate 1-4 family first and junior lien mortgages, fair value is calculated by discounting contractual cash flows, adjusted for prepayment estimates, using discount rates based on the Company's current pricing for loans of similar size, type, remaining maturity and repricing characteristics. Most of the discount rates applied to this portfolio are between 7.0% and 10.0% at December 31, 1994 and 5.7% and 7.3% at December 31, 1993. For credit card loans, the portfolio's yield is equal to the Company's current pricing and, therefore, the fair value is equal to book value. 64 The following table presents a summary of the Company's financial instruments, as defined by FAS 107:
================================================================================================================================== (in millions) December 31, ----------------------------------------------- 1994 1993 -------------------- -------------------- Carrying Estimated Carrying Estimated amount fair value amount fair value FINANCIAL ASSETS Cash and due from banks $ 2,974 $ 2,974 $ 2,644 $ 2,644 Investment securities: At cost 8,619 8,185 9,887 9,978 At fair value 2,989 2,989 3,171 3,171 ------- ------- ------- ------- Total investment securities 11,608 11,174 13,058 13,149 Federal funds sold and securities purchased under resale agreements 260 260 1,668 1,668 Loans: Commercial 8,162 8,209 6,912 6,829 Real estate 1-4 family first mortgage 9,050 8,604 7,458 7,534 Other real estate mortgage 8,079 7,933 8,286 8,127 Real estate construction 1,013 1,005 1,110 1,046 Consumer 8,686 8,439 8,103 7,973 Lease financing (1) 1,206 1,185 1,060 1,073 Foreign 27 27 18 17 ------- ------- ------- ------- 36,223 35,402 32,947 32,599 Less: Allowance for loan losses 2,082 -- 2,122 -- Net deferred fees on off-balance sheet financial instruments 28 -- 14 -- ------- ------- ------- ------- Net loans 34,113 35,402 30,811 32,599 Due from customers on acceptances 77 77 70 70 Nonmarketable equity investments 407 618 396 562 Other financial assets 97 97 73 73 FINANCIAL LIABILITIES Deposits $42,332 $42,354 $41,644 $41,863 Federal funds purchased and securities sold under repurchase agreements 3,022 3,022 1,079 1,079 Commercial paper and other short-term borrowings 189 189 188 188 Acceptances outstanding 77 77 70 70 Senior debt (2) 1,338 1,337 2,196 2,244 Subordinated debt (3) 1,460 1,399 1,965 2,008 DERIVATIVE FINANCIAL INSTRUMENTS (4) Interest rate floor contracts purchased in a receivable position $ 27 $ 25 $ 11 $ 136 Interest rate cap contracts purchased in a receivable position 12 21 13 5 Interest rate cap contracts written in a payable position (9) (15) (8) (3) Interest rate swap contracts in a receivable position -- 4 -- 86 Interest rate swap contracts in a payable position -- (69) -- (4) Cross currency swap contracts in a receivable position (3) 76 76 70 70 Foreign exchange contracts in a gain position 14 7 5 5 Foreign exchange contracts in a loss position (14) (7) (4) (4) When-issued securities in a loss position -- -- -- (1) - ---------------------------------------------------------------------------------------------------------------------------------- (1) The carrying amount and fair value exclude equipment leases of $124 million and $152 million at December 31, 1994 and 1993, respectively. (2) The carrying amount and fair value exclude obligations under capital leases of $55 million and $60 million at December 31, 1994 and 1993, respectively. (3) The Company entered into cross currency swap agreements to hedge floating-rate subordinated debt issued in German marks and British pounds. (4) The carrying amounts include unamortized fees paid or received, deferred gains or losses and gains or losses on derivative financial instruments receiving mark-to-market treatment.
65 For other consumer loans, the fair value is calculated by discounting the contractual cash flows, adjusted for prepayment estimates, based on the current rates offered by the Company for loans with similar characteristics. Most of the discount rates applied to this portfolio are between 9.5% and 16.0% at December 31, 1994 and 8.5% and 9.5% at December 31, 1993. For auto lease financing, the fair value is calculated by discounting the contractual cash flows at the Company's current pricing for items of similar remaining term, without including any tax benefits. Most of the discount rates applied to this portfolio are between 9.0% and 10.0% at December 31, 1994 and 8.0% and 9.3% at December 31, 1993. Commitments, standby letters of credit, and commercial and similar letters of credit not included in the previous table have contractual values of $20,939 million, $836 million and $125 million, respectively, at December 31, 1994, and $15,979 million, $889 million and $105 million, respectively, at December 31, 1993. These instruments generate ongoing fees at the Company's current pricing levels. Of the commitments at December 31, 1994, 81% mature within one year and 82% are commitments to extend credit at a floating rate. NONMARKETABLE EQUITY INVESTMENTS The Company's nonmarketable equity investments, including securities, are carried at cost and have a book value of $407 million and $396 million and an estimated fair value of $618 million and $562 million at December 31, 1994 and 1993, respectively. There are restrictions on the sale and/or liquidation of the Company's interest, which is generally in the form of limited partnerships; and the Company has no direct control over the investment decisions of the limited partnerships. To estimate fair value, a significant portion of the underlying limited partnerships' investments are valued based on market quotes. FINANCIAL LIABILITIES ................................................................................ DEPOSIT LIABILITIES FAS 107 states that the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking and savings deposits and market rate savings, is equal to the amount payable on demand at the measurement date. Although the Financial Accounting Standards Board's requirement for these categories is not consistent with the market practice of using prevailing interest rates to value these amounts, the amount included for these deposits in the previous table is their carrying value at December 31, 1994 and 1993. The fair value of certificates of deposit and other time deposits is calculated based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for like deposits with similar remaining maturities. SHORT-TERM FINANCIAL LIABILITIES This category includes federal funds purchased and securities sold under repurchase agreements, commercial paper and other short-term borrowings. The carrying amount is a reasonable estimate of fair value because of the relatively short period of time between the origination of the instrument and its expected realization. SENIOR AND SUBORDINATED DEBT The fair value of the Company's underwritten senior and subordinated debt is estimated based on the quoted market prices of the instruments. The fair value of the medium-term note programs, which are part of senior debt, is calculated based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for new notes with similar remaining maturities. DERIVATIVE FINANCIAL INSTRUMENTS ................................................................................ Derivative financial instruments are fair valued based on the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date (i.e., mark-to-market value). Dealer quotes are available for substantially all of the Company's derivative financial instruments. LIMITATIONS ................................................................................ These fair value disclosures are made solely to comply with the requirements of FAS 107. The calculations represent management's best estimates; however, due to the lack of broad markets and the significant items excluded from this disclosure, the calculations do not represent the underlying value of the Company. The information presented in this footnote is based on fair value calculations and market quotes as of December 31, 1994 and 1993. These amounts have not been updated since year end; therefore, the valuations may have changed significantly since that point in time. 66 INDEPENDENT AUDITORS' REPORT The Board of Director sand Stockholders of Wells Fargo & Company We have audited the accompanying consolidated balance sheet of Wells Fargo & Company and Subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wells Fargo & Company and Subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Certified Public Accountants San Francisco, California January 17, 1995 67 WELLS FARGO & COMPANY AND SUBSIDIARIES QUARTERLY FINANCIAL DATA
CONDENSED CONSOLIDATED STATEMENT OF INCOME -- QUARTERLY ================================================================================================================================== (in millions) 1994 1993 QUARTER ENDED Quarter ended -------------------------------------- -------------------------------------- DEC. 31 SEPT. 30 JUNE 30 MAR. 31 Dec. 31 Sept. 30 June 30 Mar. 31 INTEREST INCOME $ 984 $ 954 $ 932 $ 895 $ 930 $ 925 $ 936 $ 970 INTEREST EXPENSE 328 297 277 253 264 270 278 292 ----- ----- ----- ----- ----- ----- ----- ----- NET INTEREST INCOME 656 657 655 642 666 655 658 678 Provision for loan losses 30 50 60 60 80 120 140 210 ----- ----- ----- ----- ----- ----- ----- ----- Net interest income after provision for loan losses 626 607 595 582 586 535 518 468 ----- ----- ----- ----- ----- ----- ----- ----- NONINTEREST INCOME Service charges on deposit accounts 118 119 119 117 112 106 105 100 Fees and commissions 106 104 92 85 91 98 99 88 Trust and investment services income 51 52 50 50 48 48 48 46 Investment securities gains -- 1 3 4 -- -- -- -- Other 19 31 35 44 44 12 23 25 ----- ----- ----- ----- ----- ----- ----- ----- Total noninterest income 294 307 299 300 295 264 275 259 ----- ----- ----- ----- ----- ----- ----- ----- NONINTEREST EXPENSE Salaries 171 172 164 164 171 169 174 170 Incentive compensation 49 44 34 28 41 27 26 15 Employee benefits 48 50 49 54 48 60 52 53 Net occupancy 54 53 53 55 58 56 57 53 Equipment 54 40 41 39 44 36 34 34 Federal deposit insurance 25 25 25 26 28 28 26 32 Other 176 147 160 157 167 159 162 182 ----- ----- ----- ----- ----- ----- ----- ----- Total noninterest expense 577 531 526 523 557 535 531 539 ----- ----- ----- ----- ----- ----- ----- ----- INCOME BEFORE INCOME TAX EXPENSE 343 383 368 359 324 264 262 188 Income tax expense 128 166 162 157 134 99 113 80 ----- ----- ----- ----- ----- ----- ----- ----- NET INCOME $ 215 $ 217 $ 206 $ 202 $ 190 $ 165 $ 149 $ 108 ===== ===== ===== ===== ===== ===== ===== ===== NET INCOME APPLICABLE TO COMMON STOCK $ 205 $ 207 $ 195 $ 190 $ 178 $ 152 $ 137 $ 95 ===== ===== ===== ===== ===== ===== ===== ===== PER COMMON SHARE Net income $3.96 $3.86 $3.57 $3.41 $3.18 $2.74 $2.46 $1.72 ===== ===== ===== ===== ===== ===== ===== ===== Dividends declared(1) $1.00 $1.00 $1.00 $1.00 $ .75 $ .50 $ .50 $ .50 ===== ===== ===== ===== ===== ===== ===== ===== Average common shares outstanding 51.8 53.6 54.8 55.7 55.8 55.7 55.5 55.4 ===== ===== ===== ===== ===== ===== ===== ===== - ---------------------------------------------------------------------------------------------------------------------------------- (1)In January 1995, the Board of Directors declared a first quarter dividend of $1.15 per common share.
68 WELLS FARGO & COMPANY APPENDIX TO EXHIBIT 13
Description Page number 1. Line graph of Return on Average Total Assets (ROA) for 1994, 1993, 1992, 1991 and 1990 (shown in %). 1994 1.62 1993 1.20 1992 0.54 1991 0.04 1990 1.39 6
2. Line graph of Return on Common Stockholders' Equity (ROE)for 1994, 1993, 1992, 1991 and 1990 (shown in %).
1994 22.41 1993 16.74 1992 7.93 1991 0.07 1990 25.07 6
3. Line graph of Net Interest Margin for 1994, 1993 and 1992 (shown in %). Also presented is the yield on total earning assets and the rate on total funding sources for the same periods. This information is also presented in Table 4-AVERAGE BALANCES, YIELDS AND RATES PAID on pages 12 and 13. 11 4. Bar graph of the Loan Mix at Year End shown as a percentage of total loans at December 31, 1994, 1993 and 1992.
1994 1993 1992 Commercial 22% 21% 22% Real estate 1-4 family first mortgage 25 23 19 Other real estate mortgage 22 25 28 Real estate construction 3 3 4 Consumer 24 24 24 Lease Financing 4 4 3 --- --- --- Total 100% 100% 100% 20
5. Line graphs of Nonaccrual Loans and New Loans Placed on Nonaccrual for the past eight quarters of 1994 and 1993 (shown in billions). This information is also presented in Table 16-QUARTERLY TREND OF CHANGES IN NONACCRUAL LOANS on page 23. 22 6. Bar graph of Core Deposits at Year End at December 31, 1994, 1993 and 1992 (shown in billions).
1994 1993 1992 Noninterest-bearing $10.1 $ 9.7 $ 9.2 Interest-bearing checking 4.5 4.8 4.8 Savings 2.4 2.5 2.9 Market rate savings 14.3 17.1 15.9 Saving certificates 7.1 7.2 9.0 ----- ----- ------ Total Core Deposits $38.5 $41.3 $ 41.9 29
7. Bar graph on the Price Range of Common Stock (high, low, closing price) on an annual basis for 1994, 1993 and 1992 (shown in dollars). This information is also presented in Table 1- RATIOS AND PER COMMON SHARE DATA on page 7. 38 8. Bar graph on the Price Range of Common Stock (high, low, closing price) on a quarterly basis for 1994 and 1993 (shown in dollars).
HIGH LOW QTR END 1994 1Q $147 1/2 $127 5/8 $139 3/8 2Q 159 1/2 136 5/8 150 3/8 3Q 160 3/8 145 1/8 145 1/8 4Q 149 5/8 141 145 1993 1Q $109 1/2 $ 75 1/2 $108 5/8 2Q 120 95 3/4 110 1/4 3Q 127 3/8 107 1/4 126 3/8 4Q 133 105 7/8 129 3/8 38
EX-23 7 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors of Wells Fargo & Company We consent to the incorporation by reference in the Annual Report on Form 10-K for the year ended December 31, 1994 and in the Prospectuses constituting part of the following Registration Statements of Wells Fargo & Company of our report dated January 17, 1995 relating to the consolidated balance sheet of Wells Fargo & Company and Subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1994. Registration Statement Number Form Description - ---------------- ----- ----------- 33-34969 S-8 Employee Stock Purchase Plan 33-7274, 33-40781 S-8 Equity Incentive Plans 33-26052, 33-41731 S-8 Director Option Plans 2-93338 S-8 Tax Advantage Plan and Tax Advantage Plan Sales by Wells Fargo Bank 33-54441 S-8 Long-Term Incentive Plan 2-88534, 33-47434 S-3 Dividend Reinvestment and Common Stock Purchase and Share Custody Plan 33-51227 S-3 Shelf registrations of senior or subordinated debt securities or preferred stock KPMG PEAT MARWICK LLP San Francisco, California March 21, 1995 EX-27 8 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON FORM 10K DATED MARCH 21, 1995 FOR THE PERIOD ENDED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1,000,000 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 2,974 0 260 0 2,989 8,619 8,185 36,347 2,082 53,374 42,332 3,211 990 2,853 256 0 489 3,166 53,374 3,015 740 10 3,765 854 1,155 2,610 200 8 2,156 1,454 841 0 0 841 14.78 14.42 5.55 567 118 15 0 2,122 369 129 2,082 0 0 1,497
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