-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GUaEHeoyLGyfPEX4BvXZN/sBKL8WBlOr752TkqXLQv9Ca7/gySiC7BhsWOfR4d5N vDQ9LLcwYEMX+/593fw1Xw== 0000912057-95-009978.txt : 19951119 0000912057-95-009978.hdr.sgml : 19951119 ACCESSION NUMBER: 0000912057-95-009978 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06214 FILM NUMBER: 95592518 BUSINESS ADDRESS: STREET 1: 420 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94163 BUSINESS PHONE: 4154771000 MAIL ADDRESS: STREET 1: 343 SANSOME ST 3RD FL STREET 2: WELLS FARGO BANK CITY: SAN FRANCISCO STATE: CA ZIP: 94163 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended Commission file number 1-6214 September 30, 1995 --------------------------- WELLS FARGO & COMPANY (Exact name of Registrant as specified in its charter) Delaware 13-2553920 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 420 Montgomery Street, San Francisco, California 94163 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 415-477-1000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding October 31, 1995 ------------------ Common stock, $5 par value 46,966,721 FORM 10-Q TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Financial Statements Page ---- Consolidated Statement of Income . . . . . . . . . . . . . . . . 2 Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . 3 Consolidated Statement of Changes in Stockholders' Equity. . . . 4 Consolidated Statement of Cash Flows . . . . . . . . . . . . . . 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Summary Financial Data . . . . . . . . . . . . . . . . . . . . . 6 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Proposed Merger with First Interstate Bancorp. . . . . . . . . . 8 Line of Business Results . . . . . . . . . . . . . . . . . . . . 10 Earnings Performance . . . . . . . . . . . . . . . . . . . . . . 14 Net Interest Income . . . . . . . . . . . . . . . . . . . . 14 Noninterest Income. . . . . . . . . . . . . . . . . . . . . 18 Noninterest Expense . . . . . . . . . . . . . . . . . . . . 20 Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . 21 Balance Sheet Analysis . . . . . . . . . . . . . . . . . . . . . 22 Investment Securities . . . . . . . . . . . . . . . . . . . 22 Loan Portfolio. . . . . . . . . . . . . . . . . . . . . . . 25 Commercial real estate . . . . . . . . . . . . . . . . 25 Nonaccrual and Restructured Loans and Other Assets. . . . . 26 Quarterly trend of changes in nonaccrual loans . . . . 27 Changes in nonaccrual loans by loan category . . . . . 27 Quarterly trend of changes in foreclosed assets. . . . 28 Nonaccrual loans by performance category . . . . . . . 28 Loans 90 days past due and still accruing. . . . . . . 30 Allowance for Loan Losses . . . . . . . . . . . . . . . . . 31 Other Assets. . . . . . . . . . . . . . . . . . . . . . . . 33 Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . 34 Capital Adequacy/Ratios . . . . . . . . . . . . . . . . . . 34 Asset/Liability Management. . . . . . . . . . . . . . . . . 36 Derivative Financial Instruments. . . . . . . . . . . . . . 37 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 39 SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 ============================================================================== The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for such periods. Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year. The interim financial information should be read in conjunction with the Company's 1994 Annual Report on Form 10-K. 1 PART I - FINANCIAL INFORMATION WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
============================================================================================= Quarter Nine months ended September 30, ended September 30, ------------------ ------------------ (in millions) 1995 1994 1995 1994 - --------------------------------------------------------------------------------------------- INTEREST INCOME Federal funds sold and securities purchased under resale agreements $ 1 $ 1 $ 3 $ 6 Investment securities 143 185 460 567 Mortgage loans held for sale 19 -- 73 -- Loans 855 768 2,536 2,206 Other 1 -- 2 2 ------ ----- ------ ------ Total interest income 1,019 954 3,074 2,781 ------ ----- ------ ------ INTEREST EXPENSE Deposits 254 218 750 624 Federal funds purchased and securities sold under repurchase agreements 46 28 160 54 Commercial paper and other short-term borrowings 6 2 25 5 Senior and subordinated debt 50 49 152 144 ------ ----- ------ ------ Total interest expense 356 297 1,087 827 ------ ----- ------ ------ NET INTEREST INCOME 663 657 1,987 1,954 Provision for loan losses -- 50 -- 170 ------ ----- ------ ------ Net interest income after provision for loan losses 663 607 1,987 1,784 ------ ----- ------ ------ NONINTEREST INCOME Service charges on deposit accounts 121 119 357 355 Fees and commissions 112 104 316 281 Trust and investment services income 63 52 176 152 Investment securities gains (losses) -- 1 (15) 8 Other 43 31 56 110 ------ ----- ------ ------ Total noninterest income 339 307 890 906 ------ ----- ------ ------ NONINTEREST EXPENSE Salaries 176 172 526 500 Incentive compensation 33 44 92 106 Employee benefits 46 50 147 153 Net occupancy 54 53 159 161 Equipment 47 40 139 120 Federal deposit insurance -- 25 47 76 Other 186 147 528 464 ------ ----- ------ ------ Total noninterest expense 542 531 1,638 1,580 ------ ----- ------ ------ INCOME BEFORE INCOME TAX EXPENSE 460 383 1,239 1,110 Income tax expense 199 166 513 485 ------ ----- ------ ------ NET INCOME $ 261 $ 217 $ 726 $ 625 ====== ===== ====== ====== NET INCOME APPLICABLE TO COMMON STOCK $ 251 $ 207 $ 695 $ 592 ====== ===== ====== ====== PER COMMON SHARE Net income $ 5.23 $3.86 $14.14 $10.83 ====== ===== ====== ====== Dividends declared $ 1.15 $1.00 $ 3.45 $ 3.00 ====== ===== ====== ====== Average common shares outstanding 47.9 53.6 49.2 54.7 ====== ===== ====== ====== =============================================================================================
2 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
================================================================================================ SEPTEMBER 30, December 31, September 30, (in millions) 1995 1994 1994 - ------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 3,183 $ 2,974 $ 2,828 Federal funds sold and securities purchased under resale agreements 52 260 36 Investment securities: At cost (estimated fair value $6,903, $8,185 and $8,821) 6,960 8,619 9,120 At fair value 2,476 2,989 3,140 -------- -------- -------- Total investment securities 9,436 11,608 12,260 Mortgage loans held for sale 510 -- -- Loans 34,298 36,347 34,951 Allowance for loan losses 1,872 2,082 2,110 -------- -------- -------- Net loans 32,426 34,265 32,841 -------- -------- -------- Due from customers on acceptances 83 77 81 Accrued interest receivable 321 328 313 Premises and equipment, net 873 886 883 Goodwill 391 416 450 Other assets 2,659 2,560 2,472 -------- -------- -------- Total assets $ 49,934 $ 53,374 $ 52,164 ======== ======== ======== LIABILITIES Noninterest-bearing deposits $ 9,627 $ 10,145 $ 9,447 Interest-bearing deposits 29,321 32,187 30,553 -------- -------- -------- Total deposits 38,948 42,332 40,000 Federal funds purchased and securities sold under repurchase agreements 2,554 3,022 3,729 Commercial paper and other short-term borrowings 417 189 186 Acceptances outstanding 83 77 81 Accrued interest payable 113 60 93 Other liabilities 925 930 861 Senior debt 1,544 1,393 1,732 Subordinated debt 1,476 1,460 1,460 -------- -------- -------- Total liabilities 46,060 49,463 48,142 -------- -------- -------- STOCKHOLDERS' EQUITY Preferred stock 489 489 489 Common stock - $5 par value, authorized 150,000,000 shares; issued and outstanding 47,465,721 shares, 51,251,648 shares and 52,790,062 shares 237 256 264 Additional paid-in capital 1,221 871 1,084 Retained earnings 1,932 2,409 2,256 Cumulative foreign currency translation adjustments (4) (4) (4) Investment securities valuation allowance (1) (110) (67) -------- -------- -------- Total stockholders' equity 3,874 3,911 4,022 -------- -------- -------- Total liabilities and stockholders' equity $ 49,934 $ 53,374 $ 52,164 ======== ======== ======== =================================================================================================
3 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
============================================================================== Nine months ended September 30, ------------------------------ (in millions) 1995 1994 - ------------------------------------------------------------------------------ PREFERRED STOCK Balance, beginning of period $ 489 $ 639 Preferred stock redeemed -- (150) ------ ------ Balance, end of period 489 489 ------ ------ COMMON STOCK Balance, beginning of period 256 279 Common stock issued under employee benefit and dividend reinvestment plans 3 2 Common stock repurchased (22) (17) ------ ------ Balance, end of period 237 264 ------ ------ ADDITIONAL PAID-IN CAPITAL Balance, beginning of period 871 551 Common stock issued under employee benefit and dividend reinvestment plans 78 34 Common stock repurchased (728) (501) Transfer from retained earnings 1,000 1,000 ------ ------ Balance, end of period 1,221 1,084 ------ ------ RETAINED EARNINGS Balance, beginning of period 2,409 2,829 Net income 726 625 Preferred stock dividends (31) (33) Common stock dividends (172) (165) Transfer to additional paid-in-capital (1,000) (1,000) ------ ------ Balance, end of period 1,932 2,256 ------ ------ CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENTS Balance, beginning and end of period (4) (4) ------ ------ INVESTMENT SECURITIES VALUATION ALLOWANCE Balance, beginning of period (110) 21 Change in unrealized net gain (loss), after applicable taxes 109 (88) ------ ------ Balance, end of period (1) (67) ------ ------ Total stockholders' equity $3,874 $4,022 ====== ====== ==============================================================================
4 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
========================================================================================================= Nine months ended September 30, ------------------------------ (in millions) 1995 1994 - --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 726 $ 625 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses -- 170 Depreciation and amortization 204 183 Deferred income tax benefit -- (20) Decrease in net deferred loan fees (10) (4) Net (increase) decrease in accrued interest receivable 7 (16) Write-down on mortgage loans held for sale 71 -- Net increase in accrued interest payable 53 30 Other, net (366) (66) ------- ------- Net cash provided by operating activities 685 902 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment securities: At cost: Proceeds from prepayments and maturities 1,715 3,207 Purchases (56) (2,440) At fair value: Proceeds from sales 670 17 Proceeds from prepayments and maturities 78 593 Purchases (63) (723) Proceeds from sales of mortgage loans held for sale 3,803 -- Net increase in loans resulting from originations and collections (2,369) (1,878) Proceeds from sales (including participations) of loans 400 98 Purchases (including participations) of loans (215) (243) Proceeds from sales of foreclosed assets 147 199 Net decrease in federal funds sold and securities purchased under resale agreements 208 1,632 Other, net (442) (265) ------- ------- Net cash provided by investing activities 3,876 197 ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in deposits (3,384) (1,644) Net increase (decrease) in short-term borrowings (240) 2,648 Proceeds from issuance of senior debt 980 -- Repayment of senior debt (801) (517) Repayment of subordinated debt -- (526) Proceeds from issuance of common stock 81 36 Redemption of preferred stock -- (150) Repurchase of common stock (750) (518) Payment of cash dividends on preferred stock (41) (33) Payment of cash dividends on common stock (172) (165) Other, net (25) (46) ------- ------- Net cash used by financing activities (4,352) (915) ------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM BANKS) 209 184 Cash and cash equivalents at beginning of period 2,974 2,644 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,183 $ 2,828 ======= ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1,034 $ 797 ======= ======= Income taxes $ 455 $ 542 ======= ======= Noncash investing activities: Transfers from loans to foreclosed assets $ 91 $ 155 ======= ======= Transfers from loans to mortgage loans held for sale $ 4,440 $ -- ======= ======= =========================================================================================================
5 FINANCIAL REVIEW
SUMMARY FINANCIAL DATA =================================================================================================================================== % Change Quarter ended Sept. 30, 1995 from Nine months ended --------------------------------- --------------------- --------------------- SEPT. 30, June 30, Sept. 30, June 30, Sept. 30, SEPT. 30, Sept. 30, % (in millions) 1995 1995 1994 1995 1994 1995 1994 Change - ----------------------------------------------------------------------------------------------------------------------------------- FOR THE PERIOD Net income $ 261 $ 232 $ 217 13% 20% $ 726 $ 625 16% Per common share Net income $ 5.23 $ 4.51 $ 3.86 16 35 $ 14.14 $ 10.83 31 Dividends declared 1.15 1.15 1.00 -- 15 3.45 3.00 15 Average common shares outstanding 47.9 49.1 53.6 (2) (11) 49.2 54.7 (10) Profitability ratios (annualized) Net income to average total assets (ROA) 2.07% 1.81% 1.65% 14 25 1.89% 1.61% 17 Net income applicable to common stock to average common stockholders' equity (ROE) 30.13 26.71 22.99 13 31 27.91 21.91 27 Efficiency ratio (1) 54.1% 57.8% 55.1% (6) (2) 56.9% 55.3% 3 Average loans $ 34,103 $ 33,202 $ 34,325 3 (1) $ 34,538 $ 33,607 3 Average assets 50,062 51,491 52,061 (3) (4) 51,306 51,768 (1) Average core deposits 36,618 36,226 39,466 1 (7) 36,515 40,025 (9) Net interest margin 5.90% 5.66% 5.53% 4 7 5.72% 5.55% 3 Average staff (full-time equivalent) 19,651 19,403 19,705 1 -- 19,516 19,596 -- AT PERIOD END Investment securities $ 9,436 $ 10,135 $ 12,260 (7) (23) $ 9,436 $ 12,260 (23) Loans (2) 34,298 33,896 34,951 1 (2) 34,298 34,951 (2) Allowance for loan losses 1,872 1,947 2,110 (4) (11) 1,872 2,110 (11) Assets 49,934 50,931 52,164 (2) (4) 49,934 52,164 (4) Core deposits 37,151 37,026 39,097 -- (5) 37,151 39,097 (5) Common stockholders' equity 3,385 3,373 3,533 -- (4) 3,385 3,533 (4) Stockholders' equity 3,874 3,862 4,022 -- (4) 3,874 4,022 (4) Tier 1 capital (3) 3,436 3,418 3,620 1 (5) 3,436 3,620 (5) Total capital (Tiers 1 and 2) (3) 4,918 4,959 5,244 (1) (6) 4,918 5,244 (6) Capital ratios Common stockholders' equity to assets 6.78% 6.62% 6.77% 2 -- 6.78% 6.77% -- Stockholders' equity to assets 7.76 7.58 7.71 2 1 7.76 7.71 1 Risk-based capital (3) Tier 1 capital 8.56 8.60 9.62 -- (11) 8.56 9.62 (11) Total capital 12.25 12.48 13.93 (2) (12) 12.25 13.93 (12) Leverage (3) 6.93 6.69 7.01 4 (1) 6.93 7.01 (1) Book value per common share $ 71.32 $ 69.59 $ 66.93 2 7 $ 71.32 $ 66.93 7 COMMON STOCK PRICE High $ 189 $ 185-7/8 $ 160-3/8 2 18 $ 189 $ 160-3/8 18 Low 177-3/4 157 145-1/8 13 22 143-3/8 127-5/8 12 Period end 185-5/8 180-1/4 145-1/8 3 28 185-5/8 145-1/8 28 ===================================================================================================================================
(1) The efficiency ratio is defined as noninterest expense divided by the total of net interest income and noninterest income. (2) Loans exclude mortgage loans held for sale of $510 million and $1,336 million at September 30, 1995 and June 30, 1995, respectively. (3) See the Capital Adequacy/Ratios section for additional information. 6 OVERVIEW Wells Fargo & Company (Parent) is a bank holding company whose principal subsidiary is Wells Fargo Bank, N.A. (Bank). In this Form 10-Q, Wells Fargo & Company and its subsidiaries are referred to as the Company. Net income in the third quarter of 1995 was $261 million, compared with $217 million in the third quarter of 1994, an increase of 20%. Per share earnings for the third quarter of 1995 were $5.23 per share, compared with $3.86 per share in the third quarter of 1994, an increase of 35%. The percentage increase in per share earnings was greater than the percentage increase in net income due to the Company's continuing stock repurchase program. Net income for the first nine months ended September 30, 1995 was $726 million, or $14.14 per share, compared with $625 million, or $10.83 per share, in the same period of 1994. The higher third quarter 1995 results were substantially due to a zero loan loss provision, compared with $50 million in the third quarter of 1994, and an increase in noninterest income of $32 million. Return on average assets (ROA) was 2.07% and 1.89% in the third quarter and first nine months of 1995, respectively, compared with 1.65% and 1.61% in the same periods of 1994. Return on average common equity (ROE) was 30.13% and 27.91% in the third quarter and first nine months of 1995, respectively, compared with 22.99% and 21.91%, respectively, in the same periods of 1994. Net interest income on a taxable-equivalent basis was $663 million and $656 million in the third quarter of 1995 and 1994, respectively. The Company's net interest margin was 5.90% for the third quarter of 1995, compared with 5.53% in the same quarter of 1994. The increase in the margin was largely attributable to changes in the spread between loans and deposits. Noninterest income in the third quarter of 1995 was $339 million, up 10% from $307 million in the same quarter of 1994, reflecting an overall increase in revenue from fee-based products and services. Noninterest expense in the third quarter of 1995 was $542 million, up 2% from $531 million. Noninterest expense benefited from a $23 million refund received from the FDIC for the period June 1 through September 30, 1995. During the third quarter of 1995, net charge-offs totaled $75 million, or .86% of average loans (annualized). This compared with $70 million, or .84%, during the second quarter of 1995 and $60 million, or .69%, during the third quarter of 1994. The allowance for loan losses was 5.46% of total loans (excluding mortgage loans held for sale) at September 30, 1995, compared with 5.74% at June 30, 1995 and 6.04% at September 30, 1994. Total nonaccrual and restructured loans were $600 million at September 30, 1995, compared with $644 million at June 30, 1995 and $641 million at September 30, 1994. Foreclosed 7 assets amounted to $214 million at September 30, 1995, $224 million at June 30, 1995 and $306 million at September 30, 1994. Common stockholders' equity to total assets was 6.78% at September 30, 1995, compared with 6.62% and 6.77% at June 30, 1995 and September 30, 1994, respectively. The Company's total risk-based capital ratio at September 30, 1995 was 12.25% and its Tier 1 risk-based capital ratio was 8.56%, exceeding minimum guidelines of 8% and 4%, respectively, for bank holding companies and the "well capitalized" guidelines for banks of 10% and 6%, respectively. At June 30, 1995, the risk-based capital ratios were 12.48% and 8.60%, respectively; at September 30, 1994, these ratios were 13.93% and 9.62%, respectively. The decrease in total and Tier 1 risk-based capital ratios between June 30, 1995 and September 30, 1995 resulted primarily from the repurchase of 1.2 million shares of common stock during the third quarter. The Company's leverage ratios were 6.93%, 6.69% and 7.01% at September 30, 1995, June 30, 1995 and September 30, 1994, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies and the "well capitalized" guideline of 5% for banks. During the third quarter of 1995, the California economy showed further progress. Job gains were twice as much as those in the second quarter of 1995. Gains were strongest in software and in employment agencies. Growth is now more rapid in Southern California than in the North, while the Central Valley continues on a moderate path. Consumer spending has also increased, but at a more moderate rate. Lending by financial institutions continued to rise, especially in commercial and industrial markets. California is now firmly entrenched in a recovery of moderate proportions following the worst recession in sixty years. Lower interest and inflation rates played a part in this recovery, as did stronger export markets. The only significant areas of weakness are in the persistent cuts in defense spending and slow growth in new home construction. PROPOSED MERGER WITH FIRST INTERSTATE BANCORP On October 18, 1995, the Company announced a proposed merger with First Interstate Bancorp (FIB). Under the terms of the merger proposal, FIB's shareholders would receive a tax-free exchange of 0.625 shares of the Company's common stock for each share of FIB. FIB has more than 1,100 offices in thirteen western states. It is the fourteenth largest bank holding company nationally, with $55 billion in assets and is the third largest California bank. On October 24, the Company filed a Hart-Scott-Rodino Act notification with the appropriate regulatory authorities in order to be in a position to purchase shares of FIB. On November 6, 1995, FIB announced it had agreed to merge with First Bank System, Inc. (FBS). Under the terms of the agreement, FIB shareholders would receive 2.6 common shares of FBS for each common share of FIB. In discussions with William Siart, Chairman of FIB, which occurred prior to FIB's announcement, the Company offered to increase the exchange ratio to 0.65. The Company believes the value of its offer would have been greater than the agreement FIB has reached with FBS. 8 On November 13, 1995, the Company announced that it intends to take its offer to acquire FIB directly to the stockholders of FIB by beginning an exchange offer. The Company will offer stockholders of FIB an opportunity to tender their shares in an exchange offer in which each FIB share tendered would be exchanged for two-thirds of a share of the Company's common stock. Based on the closing price of the Company's common stock on November 10, the value of the exchange offer is $143.58 per share of FIB common stock. FIB has approximately 75.7 million shares outstanding, giving the transaction a total value of approximately $10.9 billion. The terms and conditions of the exchange offer are to be set forth in a registration statement that will be filed promptly with the Securities and Exchange Commission (SEC). The exchange offer will begin when the registration statement is declared effective by the SEC. The exchange offer will be conditioned on, among other things, the acquisition of a majority of FIB common stock, the redemption or invalidation of FIB's "poison pill," receipt of all necessary governmental regulatory approvals and consents, and approval by the Company's stockholders of the issuance of the Company's shares in the exchange offer. The Company filed an application on November 13 with the Federal Reserve to approve the acquisition of FIB by the Company. In addition, the Company anticipates filing preliminary materials with the SEC for the solicitation of written consents from stockholders of FIB to remove FIB's current board of directors and to replace them with nominees of the Company who are committed to removing any impediments to the consummation of the acquisition of FIB by the Company. The Company also intends to file proxy materials with the SEC to be used for soliciting FIB stockholders for proxies to vote against approval of the merger with FBS at any meeting of stockholders of FIB to be called to consider that merger proposal. Finally, the Company filed a complaint on November 13 in the Delaware Chancery Court seeking to invalidate the break-up fees and lock-up option granted to FBS by FIB. In addition, the complaint seeks injunctive relief requiring the FIB Board to redeem the FIB poison pill and to prevent FIB from using anti-takeover devices or taking other actions intended to impede or delay the acquisition of FIB by the Company. Also, a letter was sent on November 13 by Paul Hazen, Chairman of the Company, to William Siart noting that FIB's agreement with FBS authorized FIB to terminate the agreement if FIB's "Board of Directors, after having consulted with and considered the advice of outside legal counsel, reasonably determines in good faith that such action is necessary in the exercise of its fiduciary duties under applicable laws." In the event that FIB's Board of Directors would rather not terminate the agreement with FBS, if FIB and FBS would agree, the Company would agree to a different process by which the Company and FBS would each be given 10 days to submit its best and final merger proposal, and FIB would agree to submit both proposals promptly to its stockholders in a manner fair and acceptable to both bidders so that the stockholders would be able to decide for themselves which proposal is in their best interests. 9
LINE OF BUSINESS RESULTS (ESTIMATED) =================================================================================================================================== (income/expense in millions, average balances in billions) - ----------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1995 1994 1995 1994 1995 1994 -------------------- ------------------ ------------------- ------------------- Retail Business Distribution Banking Investment Real Estate Group Group Group Group ------------------------------------------------------------------------------------------- QUARTER ENDED SEPT. 30, Net interest income (1) $ 114 $ 104 $ 94 $ 76 $ 113 $ 101 $ 61 $ 52 Provision for loan losses (2) (3) -- -- 9 7 -- -- 7 7 Noninterest income (4) 153 154 38 31 80 85 12 4 Noninterest expense (4) 244 225 72 67 106 117 25 8 Income before income ----- ----- ----- ----- ----- ----- ----- ----- tax expense 23 33 51 33 87 69 41 41 Income tax expense (5) 11 15 22 15 38 30 18 18 ----- ----- ----- ----- ----- ----- ----- ----- Net income $ 12 $ 18 $ 29 $ 18 $ 49 $ 39 $ 23 $ 23 ===== ===== ===== ===== ===== ===== ===== ===== Average loans (6) (7) $ -- $ -- $ 2.5 $ 1.9 $ .5 $ .5 $ 6.2 $ 6.1 Average assets 1.2 1.2 3.8 3.1 1.0 1.0 6.6 6.5 Average core deposits 9.3 10.3 6.4 7.1 18.0 19.5 .1 .1 Return on equity (8) (9) 14% 23% 33% 24% 43% 34% 15% 15% Risk-adjusted efficiency ratio (9) (10) 97% 93% 68% 78% 62% 71% 69% 41% NINE MONTHS ENDED SEPT. 30, Net interest income (1) $ 338 $ 306 $ 269 $ 209 $ 350 $ 274 $ 180 $ 159 Provision for loan losses (2) (3) -- 1 25 19 1 1 21 21 Noninterest income (4) 470 463 104 99 225 224 22 16 Noninterest expense (4) 714 676 214 199 340 322 59 49 ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) before income tax expense (benefit) 94 92 134 90 234 175 122 105 Income tax expense (benefit) (5) 43 43 59 40 103 78 52 45 ----- ----- ----- ----- ----- ----- ----- ----- Net income (loss) $ 51 $ 49 $ 75 $ 50 $ 131 $ 97 $ 70 $ 60 ===== ===== ===== ===== ===== ===== ===== ===== Average loans (6) (7) $ -- $ -- $ 2.3 $ 1.8 $ .5 $ .5 $ 6.3 $ 6.3 Average assets 1.2 1.2 3.5 3.0 1.0 1.0 6.7 6.7 Average core deposits 9.6 10.3 6.4 7.2 17.7 19.9 .1 .1 Return on equity (8) (9) 20% 22% 31% 22% 40% 28% 15% 13% Risk-adjusted efficiency ratio (9) (10) 94% 93% 71% 81% 67% 75% 65% 75% ===================================================================================================================================
(1) Net interest income is the difference between actual interest earned on assets (and interest paid on liabilities) owned by a group and a funding charge (and credit) based on the Company's cost of funds. Groups are charged a cost to fund any assets (e.g., loans) and are paid a funding credit for any funds provided (e.g., deposits). The interest spread is the difference between the interest rate earned on an asset or paid on a liability and the Company's cost of funds rate. (2) The provision allocated to the line groups is based on management's current assessment of the normalized net charge-off ratio for each line of business. In any particular year, the actual net charge-offs can be higher or lower than the normalized provision allocated to the lines of business. The difference between the normalized provision and the Company provision is included in Other. (3) Consumer Lending includes a provision for credit card loan losses of $47 million and $35 million for the quarters ended September 30, 1995 and 1994, respectively, and $128 million and $99 million for the nine months ended September 30, 1995 and 1994, respectively. (4) Retail Distribution Group's charges to the product groups are shown as noninterest income to the branches and noninterest expense to the product groups. They amounted to $52 million and $43 million for the quarters ended September 30, 1995 and 1994, respectively, and $154 million and $135 million for the nine months ended September 30, 1995 and 1994, respectively. These charges are eliminated in the Other category in arriving at the Consolidated Company totals for noninterest income and expense. (5) Businesses are taxed at the Company's marginal (statutory) tax rate, adjusted for any nondeductible expenses. Any differences between the marginal and effective tax rates are in Other. (6) The Real Estate Group's average loans include commercial loans to real estate developers of $.5 billion and $.4 billion, other real estate loans of $4.7 billion and $4.9 billion and real estate construction loans of $1.0 billion and $.8 billion for the quarters ended September 30, 1995 and 1994, respectively. The Group's average loans include commercial loans to real estate developers of $.5 billion and $.4 billion, other real estate loans of $4.9 billion and $5.1 billion and real estate construction loans of $.9 billion and $.8 billion for the nine months ended September 30, 1995 and 1994, respectively. 10
=================================================================================================================================== - ----------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1995 1994 1995 1994 1995 1994 ---------------- ---------------- ---------------- ---------------- Wholesale Products Consumer Mortgage Group Lending Business Other - ----------------------------------------------------------------------------------------------------------------------------------- QUARTER ENDED SEPT. 30, Net interest income (1) $ 108 $ 94 $ 167 $ 138 $ 12 $ 23 $ (6) $ 69 Provision for loan losses (2) (3) 11 9 62 45 1 3 (90) (21) Noninterest income (4) 35 38 53 36 18 4 (50) (45) Noninterest expense (4) 46 46 70 61 9 20 (30) (13) Income before income ------ ------ ------ ------ ------ ------ ------ ------ tax expense 86 77 88 68 20 4 64 58 Income tax expense (5) 37 31 38 29 8 2 27 26 ------ ------ ------ ------ ------ ------ ------ ------ Net income $ 49 $ 46 $ 50 $ 39 $ 12 $ 2 $ 37 $ 32 ====== ====== ====== ====== ====== ====== ====== ====== Average loans (6) (7) $ 9.5 $ 8.3 $ 11.1 $ 9.3 $ 4.1 $ 7.9 $ .2 $ .3 Average assets 10.4 9.2 11.2 9.5 5.3 8.0 10.6 13.6 Average core deposits 2.5 2.4 .1 -- .2 .1 -- -- Return on equity (8) (9) 25% 26% 29% 26% --% --% --% --% Risk-adjusted efficiency ratio (9) (10) 49% 52% 55% 61% --% --% --% --% NINE MONTHS ENDED SEPT. 30, Net interest income (1) $ 312 $ 266 $ 468 $ 404 $ 55 $ 73 $ 15 $ 263 Provision for loan losses (2) (3) 31 27 167 130 5 7 (250) (36) Noninterest income (4) 120 105 141 105 (62) 12 (130) (118) Noninterest expense (4) 143 136 210 192 33 63 (75) (57) ------ ------ ------ ------ ------ ------ ------ ------ Income (loss) before income tax expense (benefit) 258 208 232 187 (45) 15 210 238 Income tax expense (benefit) (5) 109 87 99 80 (20) 6 68 106 ------ ------ ------ ------ ------ ------ ------ ------ Net income (loss) $ 149 $ 121 $ 133 $ 107 $ (25) $ 9 $ 142 $ 132 ====== ====== ====== ====== ====== ====== ====== ====== Average loans (6) (7) $ 9.1 $ 8.0 $ 10.6 $ 9.2 $ 5.4 $ 7.5 $ .3 $ .3 Average assets 10.0 8.9 10.7 9.3 6.9 7.6 11.3 14.1 Average core deposits 2.4 2.4 .1 -- .2 .1 -- -- Return on equity (8) (9) 26% 23% 27% 25% --% --% --% --% Risk-adjusted efficiency 49% 55% 60% 64% --% --% --% --% ratio (9) (10) ================================================================================================================================== =================================================================== - ------------------------------------------------------------------- 1995 1994 ------------------ Consolidated Company ------------------------- QUARTER ENDED SEPT. 30, Net interest income (1) $ 663 $ 657 Provision for loan losses (2) (3) -- 50 Noninterest income (4) 339 307 Noninterest expense (4) 542 531 Income before income ------ ------ tax expense 460 383 Income tax expense (5) 199 166 ------ ------ Net income $ 261 $ 217 ====== ====== Average loans (6) (7) $ 34.1 $ 34.3 Average assets 50.1 52.1 Average core deposits 36.6 39.5 Return on equity (8) (9) 30% 23% Risk-adjusted efficiency ratio (9) (10) --% --% NINE MONTHS ENDED SEPT. 30, Net interest income (1) $1,987 $1,954 Provision for loan losses (2) (3) -- 170 Noninterest income (4) 890 906 Noninterest expense (4) 1,638 1,580 ------ ------ Income (loss) before income tax expense (benefit) 1,239 1,110 Income tax expense (benefit) (5) 513 485 ------ ------ Net income (loss) $ 726 $ 625 ====== ====== Average loans (6) (7) $ 34.5 $ 33.6 Average assets 51.3 51.8 Average core deposits 36.5 40.0 Return on equity (8) (9) 28% 22% Risk-adjusted efficiency ratio (9) (10) --% --% ===================================================================
(7) The Wholesale Products Group's average loans include commercial real estate loans of $2.4 billion and $2.3 billion, and other commercial loans of $7.1 billion and $6.0 billion for the quarters ended September 30, 1995 and 1994, respectively. The Group's average loans include commercial real estate loans of $2.3 billion and $2.2 billion and other commercial loans of $6.8 billion and $5.8 billion for the nine months ended September 30, 1995 and 1994, respectively. These loans were originated largely by the Company's Commercial Banking Group which deals mostly with middle market borrowers. (8) Equity is allocated to the lines of business based on an assessment of the inherent risk associated with each business so that the returns on allocated equity are on a risk-adjusted basis and comparable across business lines. (9) Ratios for Mortgage Business are not meaningful at this time due to ongoing organizational changes. (10) 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. 11 The line of business results show financial performance of the major business units comparing the quarter and nine months ended September 30, 1995 with the same periods of 1994. 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 period to the next. The Retail Distribution Group's net income for the third quarter of 1995 decreased $6 million, or 33%. Net income for the nine months ended September 30, 1995 increased $2 million, or 4%. Net interest income for both periods increased due to wider spreads on core deposits, primarily offset by lower balances. Noninterest income for both periods reflected higher charges to the product groups from increased sales through the branches and alternative distribution channels, higher ATM shared network fees and increased point of sale interchange income. These increases were largely offset by accruals related to the disposition of premises for scheduled branch closures. Noninterest expense for both periods increased substantially due to expenditures on alternative distribution channels, including supermarket banking centers, partly offset by the allocation of a refund received from the FDIC. The Business Banking Group's net income for the quarter and nine months ended September 30, 1995 increased $11 million, or 61%, and $25 million, or 50%, respectively. Net interest income for both periods increased due to wider spreads on core deposits and higher loan balances. Noninterest income for both periods increased due to higher sweep account balances and activity, and increased fees from mass market products. Noninterest expense for both periods increased due to higher expenses associated with increased mass market lending volumes. The Investment Group's net income for the quarter and nine months ended September 30, 1995 increased $10 million, or 26%, and $34 million, or 35%, respectively. Net interest income for both periods increased due to wider spreads on core deposits, of which a major portion was offset by a decline in deposit balances. Noninterest income in the third quarter decreased due to lower commissions on investment product sales, of which a major portion was offset by higher fees earned on assets under management. Noninterest expense for the third quarter of 1995 declined due to the allocation of a refund received from the FDIC and lower incentive compensation paid on investment sales. A significant portion of this decrease was offset by the distribution costs from higher sales of time deposits. Noninterest expense for the nine months ended September 30, 1995 substantially increased due to higher branch costs to sell time deposits, largely offset by the allocation of the FDIC refund. In June 1995, the Company, together with The Nikko Securities Co., LTD (Nikko), signed a definitive agreement to sell their joint venture interest in Wells Fargo Nikko Investment Advisors (WFNIA) to Barclays PLC of the U.K. As part of the sale, Barclays will also acquire the Investment Group's MasterWorks division. Under the terms of the sale, the Company and Nikko will receive a total of about $440 million. The Company expects to realize an estimated after- tax gain of about $100 million from this sale. This transaction is subject to regulatory approval and to a number of contingencies that may affect both the total proceeds and the gain. The sale is expected to close around the end of the year. The combined contribution to the Company's net income for the first nine months of 1995 and 1994 from WFNIA and MasterWorks was less than $6 million for each of these periods. 12 The Real Estate Group's net income for the third quarter of 1995 was unchanged from the third quarter of 1994. For the nine months ended September 30, 1995, net income increased $10 million, or 17%. Net interest income for the third quarter and nine months of 1995 increased due to recoveries on loans where interest had been previously applied to principal and due to the payoff of loans purchased at a discount. Noninterest income for both the third quarter and nine months increased due to gains on the sale of assets. Noninterest expense in both periods increased primarily due to gains on foreclosed assets recognized in the prior periods and higher personnel costs from the expansion of the Real Estate Capital Markets area. The Wholesale Products Group's net income for the quarter and nine months ended September 30, 1995 increased $3 million, or 7%, and $28 million, or 23%, respectively. Net interest income for both periods increased due to higher loan balances and wider core deposit spreads. Noninterest income for the third quarter and first nine months of 1995 reflected growth in cash management products and foreign exchange gains. Noninterest income for the first nine months of 1995 also reflected gains from loan sales. In the third quarter of 1994, noninterest income included gains on sales of leases. A significant portion of the increase in noninterest expense for the first nine months of 1995 was due to the increase in cash management and other ongoing product development as well as the enhancement of existing products. Consumer Lending's net income for the quarter and nine months ended September 30, 1995 increased $11 million, or 28%, and $26 million, or 24%, respectively. The increase in net interest income for both periods was due to higher credit card balances. A significant portion of the increase was offset by lower spreads. Noninterest income for both periods increased primarily due to higher credit card fee income. Noninterest expense for both periods increased primarily due to the cost of servicing a higher number of open accounts. Mortgage Business (formerly, Mortgage Lending) decided at year-end 1994 to cease the origination of 1-4 family first mortgage loans due to concerns regarding the long-run economics of the first mortgage origination business. In April 1995, the Company agreed in principle to form an alliance with Norwest Mortgage Inc. Under the terms of the resulting agreement, the new joint venture, Town Square Mortgage, will fund residential mortgages for the Company's customers and the Company will service a portion of these loans. Norwest Mortgage Inc. provides underwriting for these loans. The joint venture began operations in October 1995 and is being accounted for as an equity method investment. Accordingly, pretax income from the joint venture will be reported as income from equity investments accounted for by the equity method as part of noninterest income. In the first quarter of 1995, as a result of reevaluating its asset/liability management strategies in light of Mortgage Business' decision to cease the origination of first mortgages, the Company decided to sell certain types of products within the real estate 1-4 family first mortgage portfolio. Accordingly, approximately $4 billion of first mortgages were reclassified on March 31, 1995 to a held for sale category and an $83 million write-down to the lower of cost or estimated market was recorded as a loss on sale of loans in noninterest income. During the second and third quarter of 1995, substantially all of these loans were sold and the remaining balance of $510 million, net of an estimated $13 million write-down to the lower of cost or estimated market, is expected to be sold in the fourth quarter of 1995. 13 The Other category includes the Company's investment securities portfolio, the difference between the normalized loan loss 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 effects of unallocated systems and other support groups. It also includes the impact of asset/liability strategies the Company has put in place to manage the sensitivity of net interest spreads. Net income for the Other category for the quarter and nine months ended September 30, 1995 increased $5 million, or 16%, and $10 million, or 8%, respectively. Net interest income for both periods decreased due to higher funding costs and lower hedging income. The decrease was substantially offset by a higher loan loss provision credit. The first nine months of 1995 also reflects a reduction in income tax expense related to the settlement with the Internal Revenue Service of certain audit issues pertaining to auto leases. EARNINGS PERFORMANCE NET INTEREST INCOME Net interest income on a taxable-equivalent basis was $663 million in the third quarter of 1995, compared with $656 million in the third quarter of 1994. The Company's net interest margin was 5.90% in the third quarter of 1995, compared with 5.53% in the third quarter of 1994. Net interest income on a taxable- equivalent basis was $1,987 million in the first nine months of 1995, compared with $1,954 million in the first nine months of 1994. The Company's net interest margin was 5.72% in the first nine months of 1995, compared with 5.55% in the first nine months of 1994. The increase in the margin in the third quarter and first nine months of 1995 compared with the same periods of 1994 was largely attributable to changes in the spread between loans and deposits as loan yields climbed and deposit rates were slow to react. The increasing loan/deposit spread was primarily offset by a reduction in hedging income. The reduction in hedging income resulted primarily from maturing interest rate floor and swap hedges. Hedging income from derivative contracts decreased $20 million and $108 million in the third quarter and first nine months of 1995 compared with the same periods of 1994, reducing the margin by 17 and 31 basis points, respectively. Individual components of net interest income and the net interest margin are presented in the rate/yield table on pages 16 and 17. Loans (excluding the mortgage loans held for sale) averaged $34.1 billion in the third quarter of 1995, compared with $34.3 billion in the third quarter of 1994, and $34.5 billion in the first nine months of 1995, compared with $33.6 billion in the first nine months of 1994. The largest increase occurred in commercial loans. This increase was substantially in middle market and small business loans resulting from ongoing marketing efforts. Investment securities averaged $9.7 billion during the third quarter of 1995, compared with $12.8 billion in the third quarter of 1994. Investment securities averaged $10.4 billion in the first nine 14 months of 1995, compared with $13.0 billion in the first nine months of 1994. The decrease was largely due to the maturity of investment securities. Investment securities are expected to continue to decrease as the cash received from their maturities is used to fund loan growth. Average core deposits were $36.6 billion and $39.5 billion in the third quarter of 1995 and 1994, respectively, and funded 73% and 76% of the Company's average total assets in the same quarter of 1995 and 1994, respectively. For the first nine months of 1995 and 1994, average core deposits were $36.5 billion and $40.0 billion, respectively, and funded 71% and 77% of the Company's average total assets in the same periods of 1995 and 1994, respectively. Net interest income for the fourth quarter of 1995 is expected to remain about the same as the third quarter. However, as the remaining mortgage loans held for sale are sold and the level of earning assets decreases, the net interest margin is likely to increase modestly. 15 AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1)
=================================================================================================================================== Quarter ended September 30, ------------------------------------------------------------------ 1995 1994 ----------------------------- ------------------------------ INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ (in millions) BALANCE RATES EXPENSE balance rates expense - ---------------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 79 6.32% $ 1 $ 80 4.71% $ 1 Investment securities: At cost: U.S. Treasury securities 1,203 4.89 15 2,382 4.66 28 Securities of U.S. government agencies and corporations 4,663 6.04 70 5,808 6.00 87 Private collateralized mortgage obligations 1,205 5.77 17 1,358 5.74 19 Other securities 161 7.08 3 133 5.72 2 ------- ----- ------- ----- Total investment securities at cost 7,232 5.83 105 9,681 5.63 136 At fair value (2): U.S. Treasury securities 430 6.54 7 293 6.65 5 Securities of U.S. government agencies and corporations 1,008 5.37 14 1,503 5.78 23 Private collateralized mortgage obligations 964 6.27 15 1,245 6.00 20 Other securities 68 14.28 2 67 14.43 1 ------- ----- ------- ----- Total investment securities at fair value 2,470 6.07 38 3,108 6.06 49 ------- ----- ------- ----- Total investment securities 9,702 5.89 143 12,789 5.74 185 Mortgage loans held for sale (2) 963 7.94 19 -- -- -- Loans: Commercial 8,869 9.90 221 7,218 9.20 167 Real estate 1-4 family first mortgage 4,962 7.50 93 8,754 6.80 149 Other real estate mortgage 7,994 9.47 191 7,982 8.74 176 Real estate construction 1,184 10.24 31 969 9.88 24 Consumer: Real estate 1-4 family junior lien mortgage 3,364 8.58 72 3,342 7.84 66 Credit card 3,738 15.56 145 2,744 15.46 106 Other revolving credit and monthly payment 2,445 10.73 67 2,010 9.75 49 ------- ----- ------- ----- Total consumer 9,547 11.87 284 8,096 10.90 221 Lease financing 1,528 9.28 35 1,277 9.15 29 Foreign 19 -- -- 29 -- -- ------- ----- ------- ----- Total loans 34,103 9.98 855 34,325 8.89 766 Other 57 5.82 1 53 5.94 1 ------- ----- ------- ----- Total earning assets $44,904 9.05 1,019 $47,247 8.02 953 ======= ===== ======= ===== FUNDING SOURCES Interest-bearing liabilities: Deposits: Interest-bearing checking $ 4,118 1.00 10 $ 4,585 .98 11 Market rate and other savings 14,970 2.66 100 18,867 2.36 112 Savings certificates 8,398 5.39 114 7,000 4.27 75 Other time deposits 444 6.99 8 298 7.33 6 Deposits in foreign offices 1,464 5.84 22 1,203 4.52 14 ------- ----- ------- ----- Total interest-bearing deposits 29,394 3.43 254 31,953 2.71 218 Federal funds purchased and securities sold under repurchase agreements 3,144 5.77 46 2,427 4.50 28 Commercial paper and other short-term borrowings 442 5.65 6 210 4.31 2 Senior debt 1,555 6.56 26 1,912 5.65 27 Subordinated debt 1,478 6.47 24 1,456 6.07 22 ------- ----- ------- ----- Total interest-bearing liabilities 36,013 3.92 356 37,958 3.11 297 Portion of noninterest-bearing funding sources 8,891 -- -- 9,289 -- -- ------- ----- ------- ----- Total funding sources $44,904 3.15 356 $47,247 2.49 297 ======= ===== ======= ===== NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (3) 5.90% $ 663 5.53% $ 656 ===== ===== ===== ===== NONINTEREST-EARNING ASSETS Cash and due from banks $ 2,673 $ 2,622 Other 2,485 2,192 ------- ------- Total noninterest-earning assets $ 5,158 $ 4,814 ======= ======= NONINTEREST-BEARING FUNDING SOURCES Deposits $ 9,132 $ 9,014 Other liabilities 1,124 1,031 Preferred stockholders' equity 489 489 Common stockholders' equity 3,304 3,569 Noninterest-bearing funding sources used to fund earning assets (8,891) (9,289) ------- ------- Net noninterest-bearing funding sources $ 5,158 $ 4,814 ======= ======= TOTAL ASSETS $50,062 $52,061 ======= ======= ==================================================================================================================================
(1) The average prime rate of Wells Fargo Bank was 8.77% and 7.50% for the quarters ended September 30, 1995 and 1994, respectively, and 8.86% and 6.81% for the nine months ended September 30, 1995 and 1994, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 5.89% and 4.97% for the quarters ended September 30, 1995 and 1994, respectively, and 6.10% and 4.34% for the nine months ended September 30, 1995 and 1994, respectively. (2) Yields are based on amortized cost balances. The average balance for investment securities at fair value totaled $2,482 million and $3,203 million for the quarters ended September 30, 1995 and 1994, respectively, and $2,617 million and $3,107 million for the nine months ended September 30, 1995 and 1994, respectively. The average balance for mortgage loans held for sale totaled $963 million and $1,300 million for the quarter and nine months ended September 30, 1995, respectively. (3) Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal and applicable state income taxes. The federal statutory tax rate was 35% for all periods presented. 16
================================================================================================================================== Nine months ended September 30, ----------------------------------------------------------------- 1995 1994 ----------------------------- ------------------------------ INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ BALANCE RATES EXPENSE balance rates expense (in millions) ----------------------------------------------------------------- EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 64 6.09% $ 3 $ 237 3.41% $ 6 Investment securities: At cost: U.S. Treasury securities 1,438 4.86 52 2,563 4.80 92 Securities of U.S. government agencies and corporations 4,962 6.04 225 6,041 6.05 274 Private collateralized mortgage obligations 1,246 5.85 55 1,216 5.75 52 Other securities 160 6.86 8 135 5.71 6 ------- ------ ------- ------ Total investment securities at cost 7,806 5.81 340 9,955 5.69 424 At fair value (2): U.S. Treasury securities 414 6.64 20 131 6.70 7 Securities of U.S. government agencies and corporations 1,072 5.52 46 1,591 5.87 72 Private collateralized mortgage obligations 1,003 6.35 50 1,255 6.12 60 Other securities 65 14.42 5 74 14.10 4 ------- ------ ------- ------ Total investment securities at fair value 2,554 6.17 121 3,051 6.12 143 ------- ------ ------- ------ Total investment securities 10,360 5.90 461 13,006 5.79 567 Mortgage loans held for sale (2) 1,286 7.46 73 -- -- -- Loans: Commercial 8,455 9.89 626 6,902 9.13 472 Real estate 1-4 family first mortgage 6,341 7.32 348 8,332 6.82 426 Other real estate mortgage 8,058 9.52 574 8,076 8.55 517 Real estate construction 1,092 10.20 83 979 9.03 66 Consumer: Real estate 1-4 family junior lien mortgage 3,347 8.59 216 3,406 7.57 193 Credit card 3,435 15.64 403 2,633 15.36 304 Other revolving credit and monthly payment 2,356 10.58 186 1,989 9.43 140 ------- ------ ------- ------ Total consumer 9,138 11.75 805 8,028 10.58 637 Lease financing 1,429 9.22 99 1,256 9.24 87 Foreign 25 7.58 1 34 4.78 1 ------- ------ ------- ------ Total loans 34,538 9.80 2,536 33,607 8.76 2,206 Other 59 5.57 2 52 5.98 2 ------- ------ ------- ------ Total earning assets $46,307 8.85 3,075 $46,902 7.90 2,781 ======= ====== ======= ====== FUNDING SOURCES Interest-bearing liabilities: Deposits: Interest-bearing checking $ 4,230 1.00 32 $ 4,658 .98 34 Market rate and other savings 15,417 2.59 298 19,384 2.28 331 Savings certificates 7,901 5.20 307 7,021 4.19 220 Other time deposits 415 5.78 18 307 7.32 17 Deposits in foreign offices 2,142 5.93 95 684 4.31 22 ------- ------ ------- ------ Total interest-bearing deposits 30,105 3.33 750 32,054 2.60 624 Federal funds purchased and securities sold under repurchase agreements 3,649 5.88 160 1,798 3.99 54 Commercial paper and other short-term borrowings 582 5.85 26 179 3.78 5 Senior debt 1,568 6.78 80 2,048 5.05 77 Subordinated debt 1,477 6.53 72 1,527 5.83 67 ------- ------ ------- ------ Total interest-bearing liabilities 37,381 3.89 1,088 37,606 2.94 827 Portion of noninterest-bearing funding sources 8,926 -- -- 9,296 -- -- ------- ------ ------- ------ Total funding sources $46,307 3.13 1,088 $46,902 2.35 827 ======= ====== ======= ====== NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (3) 5.72% $1,987 5.55% $1,954 ===== ====== ===== ====== NONINTEREST-EARNING ASSETS Cash and due from banks $ 2,621 $ 2,598 Other 2,378 2,268 ------- ------- Total noninterest-earning assets $ 4,999 $ 4,866 ======= ======= NONINTEREST-BEARING FUNDING SOURCES Deposits $ 8,967 $ 8,962 Other liabilities 1,140 1,055 Preferred stockholders' equity 489 532 Common stockholders' equity 3,329 3,613 Noninterest-bearing funding sources used to fund earning assets (8,926) (9,296) ------- ------- Net noninterest-bearing funding sources $ 4,999 $ 4,866 ======= ======= TOTAL ASSETS $51,306 $51,768 ======= ======= ==================================================================================================================================
17 NONINTEREST INCOME
===================================================================================================================== Quarter Nine months ended September 30, ended September 30, ------------------ % ------------------ % (in millions) 1995 1994 Change 1995 1994 Change - --------------------------------------------------------------------------------------------------------------------- Service charges on deposit accounts $121 $119 2% $357 $355 1% Fees and commissions: Credit card membership and other credit card fees 27 16 69 68 47 45 Debit and credit card merchant fees 17 15 13 48 40 20 Shared ATM network fees 13 11 18 38 31 23 Charges and fees on loans 13 11 18 36 32 13 Mutual fund and annuity sales fees 7 23 (70) 25 44 (43) All other 35 28 25 101 87 16 ---- ---- ---- ---- Total fees and commissions 112 104 8 316 281 12 Trust and investment services income: Asset management and custody fees 33 30 10 96 93 3 Mutual fund management fees 19 12 58 51 34 50 All other 11 10 10 29 25 16 ---- ---- ---- ---- Total trust and investment services income 63 52 21 176 152 16 Investment securities gains (losses) -- 1 (100) (15) 8 -- Income from equity investments accounted for by the: Cost method 9 -- -- 41 17 141 Equity method 11 8 38 31 24 29 Check printing charges 9 10 (10) 29 30 (3) Gains (losses) from dispositions of operations (13) -- -- (22) 10 -- Gains (losses) on sales of loans 19 1 -- (46) 3 -- All other 8 12 (33) 23 26 (12) ---- ---- ---- ---- Total $339 $307 10% $890 $906 (2)% ==== ==== === ==== ==== ==== =====================================================================================================================
The increase in credit card membership and other credit card fees for the third quarter and nine months ended September 30, 1995 compared with the same periods of 1994 was predominately due to late fees and other transaction fees charged to customers. In the third quarter and nine months ended September 30, 1995, mutual fund and annuity sales fees substantially reflected a lower sales volume of commission- based fixed-rate annuities. "All other" fees and commissions include mortgage loan servicing fees and the related amortization expense for purchased mortgage servicing rights. Mortgage loan servicing fees totaled $15 million and $4 million for the third quarter of 1995 and 1994, respectively. The related amortization expense was $11 million and $2 million for the same periods, respectively. For the nine months ended September 30, 1995 and 1994, mortgage loan servicing fees were $40 million and $12 million, respectively. The related amortization expense was $28 million and $5 million for the same periods, respectively. The balance of purchased mortgage servicing rights was $156 million and $36 million at September 30, 1995 and 1994, respectively. The mortgage loan servicing portfolio totaled $19 billion at September 30, 1995. 18 The increase in trust and investment services income for the third quarter and nine months ended September 30, 1995 was primarily due to an increase in mutual fund management fees, reflecting the overall growth in the fund families' net assets. The Stagecoach family of 27 funds had $8.7 billion of assets under management at September 30, 1995, compared with $5.8 billion at September 30, 1994. The Stagecoach family consists of both retail and institutional funds. The retail funds are primarily distributed through the branch network. These funds had $7.1 billion of assets under management at September 30, 1995, compared with $4.9 billion at September 30, 1994. The institutional funds are offered primarily to selected groups of investors and certain corporations, partnerships and other business entities. At September 30, 1995, these funds had $1.6 billion of assets under management, compared with $.9 billion at September 30, 1994. The Overland Express family of 12 funds, which is sold through brokers around the country, had $3.3 billion of assets under management at September 30, 1995, compared with $3.6 billion at September 30, 1994. In addition to managing Stagecoach and Overland Express Funds, the Company also managed or maintained personal trust, employee benefit trust and agency assets of approximately $53 billion and $46 billion at September 30, 1995 and 1994, respectively. Investment securities losses in the nine months ended September 30, 1995 resulted predominantly from the first quarter sale of $685 million in debt securities from the available-for-sale portfolio. Income from cost method equity investments in the third quarter of 1995 was primarily due to a $5 million cash distribution from a nonmarketable equity investment. For the nine months ended September 30, 1995, income from cost method equity investments reflected both net gains on the sales of and distributions from nonmarketable equity investments. Losses from the disposition of operations included accruals of $13 million and $21 million for the quarter and nine months ended September 30, 1995, respectively, related to the disposition of premises and, to a lesser extent, severance associated with scheduled branch closures. Additional accruals may be made in the fourth quarter of 1995 for branch closures or relocations as the Company continues to open more supermarket branches and banking centers. The opening of the supermarket branches is part of the Company's ongoing effort to provide higher-convenience, lower-cost service to its customers. Gains and losses on sales of loans for the nine months ended September 30, 1995 included a first quarter loss on sale from an $83 million write-down to the lower of cost or estimated market resulting from the reclassification of certain types of products within the real estate 1-4 family first mortgage loan portfolio to mortgage loans held for sale. (See Line of Business Results - Mortgage Business section for further information.) In the third quarter of 1995, as substantially all of the remaining mortgage loans held for sale were sold and because such sales were at prices greater than originally estimated, the Company recorded a $12 million gain on sale. Noninterest income from fee-based products and mutual fund management fees is expected to continue to be higher in 1995 than 1994. 19 NONINTEREST EXPENSE
======================================================================================================== Quarter Nine months ended September 30, ended September 30, ------------------ % ------------------ % (in millions) 1995 1994 Change 1995 1994 Change - -------------------------------------------------------------------------------------------------------- Salaries $176 $172 2% $ 526 $ 500 5% Incentive compensation 33 44 (25) 92 106 (13) Employee benefits 46 50 (8) 147 153 (4) Net occupancy 54 53 2 159 161 (1) Equipment 47 40 18 139 120 16 Contract services 40 27 48 104 71 46 Advertising and promotion 18 11 64 49 44 11 Federal deposit insurance -- 25 (100) 47 76 (38) Telecommunications 16 12 33 43 35 23 Certain identifiable intangibles 13 15 (13) 41 47 (13) Operating losses 13 16 (19) 39 41 (5) Postage 13 11 18 39 33 18 Outside professional services 11 6 83 31 25 24 Stationery and supplies 9 7 29 27 22 23 Goodwill 9 9 -- 26 27 (4) Travel and entertainment 9 7 29 26 22 18 Check printing 6 8 (25) 19 23 (17) Security 5 5 -- 15 15 -- Escrow and collection agency fees 3 5 (40) 11 15 (27) Outside data processing 3 2 50 8 7 14 Foreclosed assets 4 (8) -- 2 (2) -- All other 14 14 -- 48 39 23 ---- ---- ------ ------ Total $542 $531 2% $1,638 $1,580 4% ==== ==== ==== ====== ====== ==== ========================================================================================================
The increase in salaries expense in the third quarter and nine months ended September 30, 1995 compared with the same periods of 1994 was primarily attributable to increased temporary help expense and higher salary levels. The Company's full-time equivalent staff, including hourly employees, averaged 19,651 in the third quarter of 1995, compared with 19,705 in the third quarter of 1994. The decrease in incentive compensation in the third quarter of 1995 was predominantly due to a differing mix of product sales, reflecting a shift away from commissioned retail products, such as fixed-rate annuities. Additionally, for the nine months ended September 30, 1995, the decrease reflected a decline in incentive compensation related to Mortgage Business' decision in the first quarter to cease the origination of first mortgages. The increase in equipment expense in the third quarter and the nine months ended September 30, 1995 compared with the same periods in 1994 was primarily due to a higher level of spending on software and technology for product development and increased depreciation expense on equipment related to business initiatives and system upgrades. The majority of the increase in contract services in the third quarter and the nine months ended September 30, 1995 compared with the same periods of 1994 was related to new product development and marketing initiatives. 20 The FDIC Board of Directors voted in August 1995 to significantly reduce the deposit insurance premiums paid by most banks. Under the new rate structure, the best-rated institutions insured by the Bank Insurance Fund (BIF) will pay four cents per $100 of domestic deposits, down from the previous rate of 23 cents per $100. The new assessment rates are retroactive to June 1, 1995, the first day of the month after the BIF was recapitalized. In the third quarter of 1995, the Company received a $23 million refund for the overpayment of assessments made for the period June 1 through September 30, 1995. The Company expects total noninterest expense to be higher in 1995 compared with 1994, reflecting ongoing expenditures on new business initiatives. In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (FAS 123), Accounting for Stock-Based Compensation. This Statement establishes a new fair value based accounting method for stock-based compensation plans and encourages (but does not require) employers to adopt the new method in place of the provisions of Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. Companies may continue to apply the accounting provisions of APB 25 in determining net income; however, they must apply the disclosure requirements of FAS 123. The recognition provisions and disclosure requirements of FAS 123 are effective January 1, 1996, but may be applied immediately. The Company has decided it will not adopt the recognition provisions of FAS 123 and does not currently intend to adopt the disclosure requirements before the effective date. INCOME TAXES The Company's effective tax rate was 43% and 41% for the third quarter and first nine months of 1995, compared with 43% and 44% for the same periods of 1994, respectively. The decrease in the effective tax rate for the first nine months of 1995 was due to a $22 million reduction of income tax expense during the first quarter of 1995 related to the settlement with the Internal Revenue Service of certain audit issues pertaining to auto leases for the years 1987 through 1992. 21 BALANCE SHEET ANALYSIS INVESTMENT SECURITIES
========================================================================================================================= SEPTEMBER 30, December 31, September 30, 1995 1994 1994 ----------------- ----------------- ----------------- ESTIMATED Estimated Estimated FAIR fair fair (in millions) COST VALUE Cost Value Cost Value - ------------------------------------------------------------------------------------------------------------------------- HELD-TO-MATURITY SECURITIES AT COST: U.S. Treasury securities $1,073 $1,064 $1,772 $1,720 $1,958 $1,917 Securities of U.S. government agencies and corporations (1) 4,535 4,503 5,394 5,101 5,687 5,493 Private collateralized mortgage obligations (2) 1,189 1,172 1,306 1,221 1,343 1,282 Other 163 164 147 143 132 129 ------ ------ ------ ------ ------ ------ Total debt securities $6,960 $6,903 $8,619 $8,185 $9,120 $8,821 ====== ====== ====== ====== ====== ====== AVAILABLE-FOR-SALE SECURITIES AT FAIR VALUE: U.S. Treasury securities $ 423 $ 430 $ 372 $ 362 $ 372 $ 369 Securities of U.S. government agencies and corporations (1) 1,032 1,010 1,476 1,380 1,536 1,472 Private collateralized mortgage obligations (2) 981 963 1,290 1,178 1,308 1,229 Other 25 36 24 38 24 38 ------ ------ ------ ------ ------ ------ Total debt securities 2,461 2,439 3,162 2,958 3,240 3,108 Marketable equity securities 17 37 16 31 16 32 ------ ------ ------ ------ ------ ------ Total $2,478 $2,476 $3,178 $2,989 $3,256 $3,140 ====== ====== ====== ====== ====== ====== =========================================================================================================================
(1) All securities of U.S. government agencies and corporations are mortgage- backed securities. (2) Substantially all private collateralized mortgage obligations (CMOs) are AAA rated bonds collateralized by 1-4 family residential first mortgages. At September 30, 1995, the held-to-maturity securities portfolio had an estimated unrealized net loss of $57 million (estimated unrealized gross gains were $25 million), or less than 1% of the cost of the portfolio. At December 31, 1994, the held-to-maturity portfolio had an estimated unrealized net loss of $434 million (estimated unrealized gross gains were zero), or 5% of the cost of the portfolio. At September 30, 1994, the held-to-maturity securities portfolio had an estimated unrealized net loss of $299 million (estimated unrealized gross gains were $4 million), or 3% of the cost of the portfolio. The available-for-sale portfolio includes both debt and marketable equity securities. At September 30, 1995, the available-for-sale securities portfolio had an unrealized net loss of $2 million, comprised of unrealized gross losses of $45 million and unrealized gross gains of $43 million. At December 31, 1994, the available-for-sale securities portfolio had an unrealized net loss of $189 million, comprised of unrealized gross losses of $221 million and unrealized gross gains of $32 million. At September 30, 1994, the available-for-sale securities portfolio had an unrealized net loss of $116 million, comprised of unrealized gross losses of $147 million and unrealized gross gains of $31 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 September 30, 1995, the unrealized net after-tax loss amounted to $1 22 million, compared with unrealized net after-tax losses of $110 million and $67 million at December 31, 1994 and September 30, 1994, respectively. 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 reflect current interest rates that are higher than those at the time the securities were purchased. 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 earnings assets (for example, to offset loan growth that may exceed expected maturities and prepayments of securities), which may result in the recognition of losses. During the first nine months of 1995, realized losses on the sale of investment securities totaled $15 million. These losses resulted from the sale of $397 million of securities of U.S. government agencies and corporations, $288 million of private collateralized mortgage obligations and $2 million of marketable equity securities from the available-for-sale portfolio for asset/liability purposes. During the first nine months of 1994, realized gains and losses resulting from the sale of available-for-sale securities were $9 million and $1 million, respectively. Of the $9 million, $5 million resulted from the sale of corporate debt securities and $4 million resulted from the sale of marketable equity securities. The $1 million realized gross loss resulted from a write-down due to other-than-temporary impairment in the fair value of certain debt securities. Investment securities are expected to continue to decrease in the future as the cash received from their maturities is used to fund loan growth. 23 The following table provides the expected remaining maturities and yields (taxable-equivalent basis) of debt securities within the investment portfolio.
========================================================================================================================== September 30, 1995 --------------------------------------------------------- Expected remaining principal maturity --------------------------------------------------------- Weighted average expected Weighted remaining One year or less Total average maturity ------------------ (in millions) amount yield (in yrs.-mos.) Amount Yield - -------------------------------------------------------------------------------------------------------------------------- HELD-TO-MATURITY SECURITIES: U.S. Treasury securities $1,073 4.88% 1-1 $ 599 4.74% Securities of U.S. government agencies and corporations 4,535 6.18 2-5 1,331 5.81 Private collateralized mortgage obligations 1,189 6.07 1-11 275 5.91 Other 163 6.73 2-3 36 5.50 ------ ------ Total cost $6,960 5.99% 2-2 $2,241 5.53% ====== ===== ====== ===== Estimated fair value $6,903 $2,226 ====== ====== AVAILABLE-FOR-SALE SECURITIES (1): U.S. Treasury securities $ 423 6.68% 2-2 $ 76 6.17% Securities of U.S. government agencies and corporations 1,032 5.41 2-2 80 5.23 Private collateralized mortgage obligations 981 6.46 3-8 81 6.13 Other 25 22.40 5-2 -- -- ------ ------ Total cost $2,461 6.22% 2-10 $ 237 5.84% ====== ===== ====== ===== Estimated fair value $2,439 $ 233 ====== ====== TOTAL COST OF DEBT SECURITIES $9,421 6.05% 2-4 $2,478 5.56% ====== ===== ==== ====== ===== ========================================================================================================================== =================================================================================================================================== September 30, 1995 ------------------------------------------------------------------ Expected remaining principal maturity ------------------------------------------------------------------ After one year After five years through five years through ten years After ten years ------------------ ------------------ ------------------ (in millions) Amount Yield Amount Yield Amount Yield - ----------------------------------------------------------------------------------------------------------------------------------- HELD-TO-MATURITY SECURITIES: U.S. Treasury securities $ 474 5.28% $ -- --% $ -- --% Securities of U.S. government agencies and corporations 2,471 6.09 622 7.12 111 7.40 Private collateralized mortgage obligations 888 6.12 26 6.12 -- -- Other 125 7.09 -- -- 2 6.37 ------ ---- ---- Total cost $3,958 6.03% $648 7.08% $113 7.38% ====== ===== ==== ===== ==== ===== Estimated fair value $3,920 $645 $112 ====== ==== ==== AVAILABLE-FOR-SALE SECURITIES (1): U.S. Treasury securities $ 347 6.79% $ -- --% $ -- --% Securities of U.S. government agencies and corporations 947 5.42 5 5.81 -- -- Private collateralized mortgage obligations 669 6.25 221 6.46 10 23.52 Other -- -- 25 22.40 -- -- ------ ---- ---- Total cost $1,963 5.95% $251 8.03% $ 10 23.52% ====== ===== ==== ===== ==== ===== Estimated fair value $1,936 $258 $ 12 ====== ==== ==== TOTAL COST OF DEBT SECURITIES $5,921 6.00% $899 7.35% $123 8.69% ====== ===== ==== ===== ==== ===== ===================================================================================================================================
(1) The weighted average yield is computed using the amortized cost of available-for-sale investment securities carried at fair value. The weighted average expected remaining maturity of the debt securities portfolio was 2 years and 4 months at September 30, 1995, compared with 2 years and 7 months at June 30, 1995 and 2 years and 10 months at December 31, 1994. The short-term debt securities portfolio serves to maintain asset liquidity and to fund loan growth. 24
LOAN PORTFOLIO ======================================================================================================= % Change Sept. 30, 1995 from ------------------- SEPT. 30, Dec. 31, Sept. 30, Dec. 31, Sept. 30, (in millions) 1995 1994 1994 1994 1994 - ------------------------------------------------------------------------------------------------------- Commercial (1)(2) $ 9,247 $ 8,162 $ 7,511 13 % 23 % Real estate 1-4 family first mortgage (3) 4,496 9,050 8,883 (50) (49) Other real estate mortgage (4) 7,943 8,079 8,040 (2) (1) Real estate construction 1,283 1,013 950 27 35 Consumer: Real estate 1-4 family junior lien mortgage 3,365 3,332 3,342 1 1 Credit card 3,852 3,125 2,830 23 36 Other revolving credit and monthly payment 2,479 2,229 2,071 11 20 ------- ------- ------- Total consumer 9,696 8,686 8,243 12 18 Lease financing 1,610 1,330 1,300 21 24 Foreign 23 27 24 (15) (4) ------- ------- -------- Total loans (net of unearned income, including net deferred loan fees, of $431, $361 and $348) $34,298 $36,347 $34,951 (6)% (2)% ======= ======= ======= ==== ==== =======================================================================================================
(1) Includes loans to real estate developers of $455 million, $525 million and $371 million at September 30, 1995, December 31, 1994 and September 30, 1994, respectively. (2) Includes agricultural loans (loans to finance agricultural production and other loans to farmers) of $931 million, $822 million and $696 million at September 30, 1995, December 31, 1994 and September 30, 1994, respectively. (3) Excludes mortgage loans held for sale at September 30, 1995 of $510 million, net of an estimated $13 million write-down to the lower of cost or estimated market. (4) Includes agricultural loans that are secured by real estate of $247 million, $256 million and $260 million at September 30, 1995, December 31, 1994 and September 30, 1994, respectively. The commercial loan portfolio grew by $1.1 billion in the first nine months of 1995. This increase predominantly reflected growth in middle market and small business loans resulting from ongoing marketing efforts. The increase in the credit card loan portfolio during the first nine months of 1995 was due to new accounts resulting from nationwide direct mail campaigns as well as increased loan balances from the Company's existing cardholders. The table below presents comparative period-end commercial real estate loans.
======================================================================================================= % Change Sept. 30, 1995 from ------------------- SEPT. 30, Dec. 31, Sept. 30, Dec. 31, Sept. 30, (in millions) 1995 1994 1994 1994 1994 - ------------------------------------------------------------------------------------------------------- Commercial loans to real estate developers (1) $ 455 $ 525 $ 371 (13)% 23 % Other real estate mortgage 7,943 8,079 8,040 (2) (1) Real estate construction 1,283 1,013 950 27 35 ------- ------- ------- Total $ 9,681 $ 9,617 $ 9,361 1 % 3 % ======= ======= ======= ==== ==== Nonaccrual loans $ 413 $ 416 $ 473 (1)% (13)% ======= ======= ======= ==== ==== Nonaccrual loans as a % of total 4.3% 4.3% 5.1% ======= ======= ======= =======================================================================================================
(1) Included in commercial loans. 25
NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS ======================================================================================================= SEPT. 30, June 30, Mar. 31, Dec. 31, Sept. 30, (in millions) 1995 1995 1995 1994 1994 - ------------------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial (1)(2) $ 128 $ 121 $ 79 $ 88 $ 109 Real estate 1-4 family first mortgage 56 64 71 81 76 Other real estate mortgage (3) 335 373 324 328 334 Real estate construction 55 58 77 58 101 Consumer: Real estate 1-4 family junior lien mortgage 11 12 12 11 14 Other revolving credit and monthly payment 1 3 3 1 3 ----- ----- ----- ----- ----- Total nonaccrual loans (4) 586 631 566 567 637 Restructured loans 14 13 15 15 4 ----- ----- ----- ----- ----- Nonaccrual and restructured loans 600 644 581 582 641 As a percentage of total loans (5) 1.8% 1.9% 1.8% 1.6% 1.8% Foreclosed assets (6) 214 224 273 272 306 Real estate investments (7) 13 14 17 17 12 ----- ----- ----- ----- ----- Total nonaccrual and restructured loans and other assets $ 827 $ 882 $ 871 $ 871 $ 959 ===== ===== ===== ===== ===== =======================================================================================================
(1) Includes loans to real estate developers of $23 million, $27 million, $28 million, $30 million and $38 million at September 30, 1995, June 30, 1995, March 31, 1995, December 31, 1994 and September 30, 1994, respectively. (2) Includes agricultural loans of $7 million or less for all periods presented. (3) Includes agricultural loans secured by real estate of $1 million or less for all periods presented. (4) Of the total nonaccrual loans at September 30, 1995, June 30, 1995 and March 31, 1995, $468 million, $516 million and $442 million, respectively, were considered impaired under FAS 114 (Accounting by Creditors for Impairment of a Loan). (5) Total loans exclude mortgage loans held for sale at September 30, 1995, June 30, 1995 and March 31, 1995. (6) Includes agricultural properties of $23 million or less for all periods presented. (7) Represents the amount of real estate investments (contingent interest loans accounted for as investments) that would be classified as nonaccrual if such assets were loans. Real estate investments totaled $116 million, $75 million, $64 million, $54 million and $26 million at September 30, 1995, June 30, 1995, March 31, 1995, December 31, 1994 and September 30, 1994, respectively. As indicated in earlier periods, the overall credit quality of the loan portfolio has improved since 1992, however, the total nonaccrual balance could fluctuate from quarter to quarter. The Company anticipates normal influxes of nonaccrual loans as it further increases its lending activity as well as resolutions of loans in the nonaccrual portfolio. The performance of any individual loan can be impacted by external factors such as the interest rate environment or factors particular to a borrower such as actions taken by a borrower's management. In addition, from time to time, the Company purchases loans from other financial institutions that may be classified as nonaccrual based on its policies. 26 The table below summarizes the quarterly trend of the changes in total nonaccrual loans.
======================================================================================================= SEPT. 30, June 30, Mar. 31, Dec. 31, Sept. 30, (in millions) 1995 1995 1995 1994 1994 - ------------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF QUARTER $631 $566 $567 $637 $712 New loans placed on nonaccrual 108 173 127 71 93 Loans purchased -- 1 13 25 -- Loans sold (13) -- -- -- -- Charge-offs (27) (18) (28) (25) (38) Payments (70) (49) (55) (61) (71) Transfers to foreclosed assets (29) (19) (36) (18) (14) Loans returned to accrual (14) (23) (24) (62) (45) Other additions -- -- 2 -- -- ---- ---- ---- ---- ---- BALANCE, END OF QUARTER $586 $631 $566 $567 $637 ==== ==== ==== ==== ==== =======================================================================================================
The table below summarizes the changes in nonaccrual loans by loan category for the quarters ended September 30, 1995 and June 30, 1995.
================================================================================================================================== Real estate 1-4 family Other real first estate Real estate (in millions) Commercial mortgage mortgage construction Consumer Total - ---------------------------------------------------------------------------------------------------------------------------------- QUARTER ENDED SEPTEMBER 30, 1995 BALANCE, BEGINNING OF QUARTER $ 121 $ 64 $373 $ 58 $15 $631 New loans placed on nonaccrual (1)(2) 40 25 40 -- 3 108 Loans sold -- -- (13) -- -- (13) Charge-offs (12) 1 (14) (1) (1) (27) Payments: Principal (3) (18) (7) (29) (1) (3) (58) Interest applied to principal (3) -- (8) (1) -- (12) Transfers to foreclosed assets -- (21) (7) -- (1) (29) Loans returned to accrual -- (6) (7) -- (1) (14) ----- ---- ---- ---- --- ---- BALANCE, END OF QUARTER $ 128 $ 56 $335 $ 55 $12 $586 ===== ==== ==== ==== === ==== QUARTER ENDED JUNE 30, 1995 Balance, beginning of quarter $ 79 $ 71 $324 $ 77 $15 $566 New loans placed on nonaccrual (1)(2) 61 24 83 1 4 173 Loans purchased -- -- 1 -- -- 1 Charge-offs (6) -- (11) (1) -- (18) Payments: Principal (8) (4) (8) (17) (2) (39) Interest applied to principal (2) -- (6) (2) -- (10) Transfers to foreclosed assets -- (15) (3) -- (1) (19) Loans returned to accrual (3) (12) (7) -- (1) (23) ----- ---- ---- ---- --- ---- Balance, end of quarter $ 121 $ 64 $373 $ 58 $15 $631 ===== ==== ==== ==== === ==== ==================================================================================================================================
(1) No commercial loan placed on nonaccrual status during the third and second quarters of 1995 exceeded $26 million. A major portion of these loans is located in Central and Southern California. (2) No other real estate mortgage loan placed on nonaccrual status in the third and second quarters of 1995 exceeded $15 million. The majority of these loans are located in Southern California. (3) The amount for other real estate mortgage loans primarily reflected the payoff of a loan. 27 The table below summarizes the quarterly trend of the changes in foreclosed assets.
======================================================================================================= SEPT. 30, June 30, Mar. 31, Dec. 31, Sept. 30, (in millions) 1995 1995 1995 1994 1994 - ------------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF QUARTER $224 $273 $272 $306 $344 Additions 30 19 42 19 30 Sales (32) (62) (29) (37) (64) Charge-offs (3) (2) (2) (11) (1) Write-downs (5) (1) (3) (2) (2) Other deductions -- (3) (7) (3) (1) ---- ---- ---- ---- ---- BALANCE, END OF QUARTER $214 $224 $273 $272 $306 ==== ==== ==== ==== ==== =======================================================================================================
Approximately 57% of the foreclosed assets at September 30, 1995 have been in the Company's portfolio less than two years. NONACCRUAL LOANS BY PERFORMANCE CATEGORY At September 30, 1995, an estimated $267 million, or 46%, of nonaccrual loans were either current or less than 90 days past due, compared with an estimated $299 million, or 47%, at June 30, 1995. For all loans on nonaccrual during the third and second quarters of 1995 (including loans no longer on nonaccrual at September 30, 1995 and June 30, 1995), cash interest payments of $15 million and $16 million, respectively, were received while the loans were on nonaccrual status. Of the $15 million received in the third quarter of 1995, $8 million was recognized as interest income and $7 million was applied to principal. Of the $16 million received in the second quarter of 1995, $6 million was recognized as interest income and $10 million was applied to principal. The average nonaccrual book principal loan balances (net of charge-offs and interest applied to principal) were $604 million and $592 million for the quarters ended September 30, 1995 and June 30, 1995, respectively. The table on the following page presents the estimated amount of nonaccrual loans that were contractually past due and those that were contractually current at the end of the third and second quarters of 1995. There can be no assurance that individual borrowers will continue to perform at the level indicated or that the performance characteristics will not change significantly. Both book and contractual principal balances are presented in the table, the difference reflecting charge-offs and interest applied to principal. The ratio of book to contractual principal balance 28 was 65% at September 30, 1995, compared with 68% at June 30, 1995.
======================================================================================================================== Cumulative cash Book interest Contractual principal Cumulative applied to principal (in millions) balance charge-offs(5) principal(5) balance - ------------------------------------------------------------------------------------------------------------------------ SEPTEMBER 30, 1995 ------------------------------------------------------------------------- Contractually past due (1): Payments not made (2): 90 days or more past due $ 90 $ 2 $ -- $ 92 Less than 90 days past due 5 -- -- 5 ---- ---- ---- ---- 95 2 -- 97 ---- ---- ---- ---- Payments made (3): 90 days or more past due 229 131 48 408 Less than 90 days past due 38 6 8 52 ---- ---- ---- ---- 267 137 56 460 ---- ---- ---- ---- Total past due 362 139 56 557 Contractually current (4) 224 66 53 343 ---- ---- ---- ---- Total nonaccrual loans $586 $205 $109 $900 ==== ==== ==== ==== - ------------------------------------------------------------------------------------------------------------------------ June 30, 1995 ------------------------------------------------------------------------- Contractually past due (1): Payments not made (2): 90 days or more past due $117 $ 3 $ -- $120 Less than 90 days past due 1 -- -- 1 ---- ---- ---- ---- 118 3 -- 121 ---- ---- ---- ---- Payments made (3): 90 days or more past due 215 62 33 310 Less than 90 days past due 83 58 22 163 ---- ---- ---- ---- 298 120 55 473 ---- ---- ---- ---- Total past due 416 123 55 594 Contractually current (4) 215 67 51 333 ---- ---- ---- ---- Total nonaccrual loans $631 $190 $106 $927 ==== ==== ==== ==== ========================================================================================================================
(1) Past due is defined as a borrower whose loan principal or interest payment is 30 days or more past due. (2) Borrower has made no payments since being placed on nonaccrual. (3) Borrower has made some payments since being placed on nonaccrual. Approximately $197 million and $259 million of these loans had some payments made on them during the third and second quarters of 1995, respectively. (4) Current is defined as a loan for which principal and interest are being paid in accordance with the terms of the loan or is less than 30 days past due. All of the contractually current loans were placed on nonaccrual due to uncertainty of receiving full timely collection of interest or principal. (5) Cumulative amounts recorded since inception of the loan. 29 LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING The following table shows loans contractually past due 90 days or more as to interest or principal, but not included in the nonaccrual or restructured categories. All loans in this category are both well-secured and in the process of collection or are real estate 1-4 family first mortgage loans or consumer loans that are exempt under regulatory rules from being classified as nonaccrual because they are automatically charged off after being past due for a prescribed period. Notwithstanding, real estate 1-4 family loans (first liens and junior liens) are placed on nonaccrual within 150 days of becoming past due.
======================================================================================================= SEPT. 30, June 30, Mar. 31, Dec. 31, Sept. 30, (in millions) 1995 1995 1995 1994 1994 - ------------------------------------------------------------------------------------------------------- Commercial $ 15 $ 1 $ 9 $ 6 $ 7 Real estate 1-4 family first mortgage 7 8 14 18 19 Other real estate mortgage 29 66 58 47 45 Real estate construction 4 -- 1 -- 1 Consumer: Real estate 1-4 family junior lien mortgage 4 5 4 4 5 Credit card 75 54 46 42 31 Other revolving credit and monthly payment 1 1 -- 1 5 ---- ---- ---- ---- ---- Total consumer 80 60 50 47 41 ---- ---- ---- ---- ---- Total $135 $135 $132 $118 $113 ==== ==== ==== ==== ==== =======================================================================================================
30 ALLOWANCE FOR LOAN LOSSES
================================================================================================================================== Quarter ended Nine months ended -------------------------------- -------------------- SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30, (in millions) 1995 1995 1994 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF PERIOD $1,947 $2,017 $2,120 $2,082 $2,122 Provision for loan losses -- -- 50 -- 170 Loan charge-offs: Commercial (1) (15) (10) (9) (32) (39) Real estate 1-4 family first mortgage (4) (3) (5) (10) (16) Other real estate mortgage (15) (12) (23) (49) (58) Real estate construction (1) (1) (9) (5) (14) Consumer: Real estate 1-4 family junior lien mortgage (5) (4) (5) (12) (20) Credit card (55) (46) (32) (138) (107) Other revolving credit and monthly payment (15) (13) (7) (38) (25) ------ ------ ------ ------ ------ Total consumer (75) (63) (44) (188) (152) Lease financing (4) (3) (3) (11) (11) ------ ------ ------ ------ ------ Total loan charge-offs (114) (92) (93) (295) (290) ------ ------ ------ ------ ------ Loan recoveries: Commercial (2) 17 6 10 31 30 Real estate 1-4 family first mortgage 1 1 2 3 6 Other real estate mortgage 7 7 7 20 19 Real estate construction -- -- 5 1 12 Consumer: Real estate 1-4 family junior lien mortgage 1 1 1 3 3 Credit card 3 3 3 9 15 Other revolving credit and monthly payment 4 3 3 9 8 ------ ------ ------ ------ ------ Total consumer 8 7 7 21 26 Lease financing 6 1 2 9 15 ------ ------ ------ ------ ------ Total loan recoveries 39 22 33 85 108 ------ ------ ------ ------ ------ Total net loan charge-offs (75) (70) (60) (210) (182) ------ ------ ------ ------ ------ BALANCE, END OF PERIOD $1,872 $1,947 $2,110 $1,872 $2,110 ====== ====== ====== ====== ====== Total net loan charge-offs as a percentage of average loans (annualized) .86 % .84 % .69 % .81 % .72 % ====== ====== ====== ====== ====== Allowance as a percentage of total loans (3) 5.46 % 5.74 % 6.04 % 5.46 % 6.04 % ====== ====== ====== ====== ====== ==================================================================================================================================
(1) There were no charge-offs of commercial loans to real estate developers for any of the periods presented, except for $10 million in the nine months ended September 30, 1994. (2) Includes recoveries from loans to real estate developers of $1 million, $1 million and $2 million in the quarters ended September 30, 1995, June 30, 1995 and September 30, 1994, respectively, and $3 million and $2 million in the nine months ended September 30, 1995 and 1994, respectively. (3) Total loans exclude mortgage loans held for sale at September 30, 1995 and June 30, 1995. 31 The table below presents net charge-offs by loan category.
================================================================================================================================== Quarter Ended ------------------------------------------------------------------------ SEPTEMBER 30, 1995 June 30, 1995 September 30, 1994 ------------------- ------------------- ------------------- % OF % of % of AVERAGE average average (in millions) AMOUNT LOANS(1) Amount loans(1) Amount loans(1) - ---------------------------------------------------------------------------------------------------------------------------------- Commercial $ (2) (.06)% $ 4 .22% $ (1) (.04)% Real estate 1-4 family first mortgage 3 .21 2 .14 3 .12 Other real estate mortgage 8 .41 5 .24 16 .72 Real estate construction 1 .28 1 .33 4 1.54 Consumer: Real estate 1-4 family junior lien mortgage 4 .47 3 .42 4 .49 Credit card 52 5.49 43 4.95 29 4.27 Other revolving credit and monthly payment 11 1.78 10 1.65 4 .98 ---- ---- ---- Total consumer 67 2.78 56 2.44 37 1.89 Lease financing (2) (.54) 2 .60 1 .32 ---- ---- ---- Total net loan charge-offs $ 75 .86 % $ 70 .84% $ 60 .69 % ==== ==== ==== ==== ==== ==== ==================================================================================================================================
(1) Calculated on an annualized basis. The largest category of net charge-offs in the first three quarters of 1995 was credit card loans, comprising more than 50% of total net charge-offs in each period. The total amount of credit card charge-offs and the percentage of net charge-offs to average credit card loans is expected to continue to increase in the fourth quarter of 1995, partially reflecting a 36% increase in the portfolio since the second quarter of 1994. The Company considers the allowance for loan losses of $1,872 million adequate to cover losses inherent in loans, loan commitments and standby letters of credit at September 30, 1995. The Company's determination of the level of the allowance and, correspondingly, the provision for loan losses rests upon various judgments and assumptions, including general (particularly California) economic conditions, loan portfolio composition, prior loan loss experience and the Company's ongoing examination process and that of its regulators. There was no provision for loan losses in the first nine months of 1995, compared with $170 million in the same period a year ago. Assuming the economic recovery in California continues and there is no material adverse change in the Company's credit quality, there is likely to be no provision for the fourth quarter of 1995. 32 OTHER ASSETS
========================================================================================== SEPTEMBER 30, December 31, September 30, (in millions) 1995 1994 1994 - ------------------------------------------------------------------------------------------ Net deferred tax asset (1) $ 908 $ 998 $ 953 Nonmarketable equity investments 425 407 405 Certain identifiable intangible assets 404 388 343 Foreclosed assets 214 272 306 Other 708 495 465 ------ ------ ------ Total other assets $2,659 $2,560 $2,472 ====== ====== ====== ==========================================================================================
(1) Net of a valuation allowance of $2 million for all periods presented. The Company estimates that approximately $770 million of the $908 million net deferred tax asset at September 30, 1995 could be realized by the recovery of previously paid federal taxes; however, the Company expects to actually realize the federal net deferred tax asset by claiming deductions against future taxable income. The balance of approximately $138 million relates to approximately $1.9 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. Certain identifiable intangible assets include purchased mortgage servicing rights of $156 million, $96 million and $36 million at September 30, 1995, December 31, 1994 and September 30, 1994, respectively. The identifiable intangible assets are generally amortized using an accelerated method, which is based on estimated useful lives ranging from 5 to 15 years. Amortization expense was $25 million, $18 million and $18 million for the quarters ended September 30, 1995, December 31, 1994 and September 30, 1994, respectively. In March 1995, the FASB issued Statement of Financial Accounting Standards No. 121 (FAS 121), Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of. This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Additionally, FAS 121 requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of their carrying amount or fair value less costs to sell. In May 1995, the FASB issued FAS 122, Accounting for Mortgage Servicing Rights. This Statement amends FAS 65, Accounting for Certain Mortgage Banking Activities, to require that, for mortgage loans originated for sale, rights to service those loans be recognized as separate assets, similar to purchased mortgage servicing rights. This Statement also requires that all mortgage servicing rights be assessed for impairment based on the fair value of those rights. 33 These Statements are effective January 1, 1996; earlier implementation is encouraged. The Company has not yet determined when it will implement these Statements; however, it is currently expected that, upon adoption, the Statements will not have a material effect on its financial statements, assuming for the purposes of FAS 122 that there will not be a significant change in the current interest rate environment. DEPOSITS
========================================================================================== SEPTEMBER 30, December 31, September 30, (in millions) 1995 1994 1994 - ------------------------------------------------------------------------------------------ Noninterest-bearing $ 9,627 $10,145 $ 9,447 Interest-bearing checking 4,067 4,518 4,486 Market rate and other savings 14,850 16,713 18,143 Savings certificates 8,607 7,132 7,021 ------- ------- ------- Core deposits 37,151 38,508 39,097 Other time deposits 248 284 302 Deposits in foreign offices (1) 1,549 3,540 601 ------- ------- ------- Total deposits $38,948 $42,332 $40,000 ======= ======= ======= ==========================================================================================
(1) Short-term (under 90 days) interest-bearing deposits used to fund short- term borrowing needs. CAPITAL ADEQUACY/RATIOS Risk-based capital (RBC) guidelines issued by the Federal Reserve Board (FRB) establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures. The Company's Tier 1 and Tier 2 capital components are presented on the following page. The guidelines require a minimum total RBC ratio of 8%, with at least half of the total capital in the form of Tier 1 capital. To supplement the RBC guidelines, the FRB established a minimum leverage ratio guideline of 3% of Tier 1 capital to average total assets. The decrease in the Company's RBC and leverage ratios at September 30, 1995 compared with December 31, 1994 resulted primarily from the repurchases of common stock of 2.1 million shares, 1.2 million shares and 1.2 million shares in the first, second and third quarters of 1995, respectively. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a "well capitalized" bank must have a Tier 1 RBC ratio of at least 6%, a combined Tier 1 and Tier 2 ratio of at least 10% and a leverage ratio of at least 5%. At September 30, 1995, the Bank had a Tier 1 RBC ratio of 10.36%, a combined Tier 1 and Tier 2 ratio of 13.52% and a leverage ratio of 7.77%. 34 The table below presents the Company's risk-based capital and leverage ratios.
========================================================================================== SEPTEMBER 30, December 31, September 30, (in billions) 1995 1994 1994 - ------------------------------------------------------------------------------------------ Tier 1: Common stockholders' equity $ 3.4 $ 3.4 $ 3.5 Preferred stock .5 .5 .5 Less goodwill and other deductions (1) (.5) (.3) (.4) ------ ------ ------ Total Tier 1 capital 3.4 3.6 3.6 ------ ------ ------ Tier 2: Mandatory convertible debt -- .1 .1 Subordinated debt and unsecured senior debt 1.0 1.0 1.0 Allowance for loan losses allowable in Tier 2 .5 .5 .5 ------ ------ ------ Total Tier 2 capital 1.5 1.6 1.6 ------ ------ ------ Total risk-based capital $ 4.9 $ 5.2 $ 5.2 ====== ====== ====== Risk-weighted balance sheet assets $ 38.5 $ 38.3 $ 37.1 Risk-weighted off-balance sheet items: Commitments to make or purchase loans 2.6 1.9 1.7 Standby letters of credit .6 .6 .6 Other .3 .3 .2 ------ ------ ------ Total risk-weighted off-balance sheet items 3.5 2.8 2.5 ------ ------ ------ Goodwill and other deductions (1) (.5) (.3) (.4) Allowance for loan losses not included in Tier 2 (1.4) (1.6) (1.6) ------ ------ ------ Total risk-weighted assets $ 40.1 $ 39.2 $ 37.6 ====== ====== ====== Risk-based capital ratios: Tier 1 capital (4% minimum requirement) 8.56 % 9.09 % 9.62 % Total capital (8% minimum requirement) 12.25 13.16 13.93 Leverage ratio (3% minimum requirement) (2) 6.93 % 6.89 % 7.01 % ==========================================================================================
(1) Other deductions include the unrealized net 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). 35 ASSET/LIABILITY MANAGEMENT As is typical in the banking industry, most of the Company's assets and liabilities are sensitive to fluctuations in interest rates. Accordingly, an essential objective of asset/liability management is to control interest rate risk. 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 the two will decline or turn negative if rates increase. The Company refers to this type of risk as "term structure risk." Another source of interest rate risk, "basis risk," results from changing spreads between loan and deposit rates. More difficult to quantify and manage, this type of risk is not highly correlated to changes in the level of interest rates, and is driven by other market conditions. The Company employs various asset/liability strategies, including the use of interest rate derivative products, to ensure that exposure to interest rate fluctuations is limited within Company guidelines of acceptable levels of risk- taking. The Company uses interest rate derivatives as an asset/liability management tool to hedge mismatches in interest rate maturities. For example, futures are used to shorten the rate maturity of market rate savings to better match the maturity of prime-based loans. One way to measure the impact that future changes in interest rates will have on net interest income is through a cumulative gap measure. The gap represents the net position of assets and liabilities subject to repricing in specified time periods. Generally, a liability sensitive gap indicates that there would be a net negative impact on the net interest margin from an increasing rate environment. At September 30, 1995, the under-one-year cumulative gap was a $432 million (.9% of total assets) net liability position, compared with net liability positions of $293 million (.6% of total assets) at June 30, 1995 and $520 million (1.0% of total assets) at December 31, 1994. The increase in the net liability position at September 30, 1995, compared with June 30, 1995, was primarily due to decreases in mortgage loans held for sale, federal funds sold and securities purchased under resale agreements and real estate 1-4 family first mortgages. This was substantially offset by a decrease in federal funds purchased and securities sold under repurchase agreements. Two adjustments to the cumulative gap provide comparability with those bank holding companies that present interest rate sensitivity in an alternative manner. However, management does not believe that these adjustments depict its interest rate risk. The first adjustment excludes noninterest-earning assets, noninterest-bearing liabilities and stockholders' equity from the reported cumulative gap. The second adjustment moves interest-bearing checking and certain savings deposits in the nonmarket category to the shortest possible maturity category. The second adjustment reflects the availability of the deposits for immediate withdrawal. The resulting adjusted under-one-year cumulative gap (net liability position) was $8.7 billion, $8.9 billion and $10.1 billion at September 30, 1995, June 30, 1995 and December 31, 1994, respectively. 36 The gap analysis provides a useful framework to measure the term structure risk. To more fully explore the complex relationships within the gap over time and interest rate environments, the Company performs simulation modeling to estimate the potential effects of changing interest rates. 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 interest rate derivatives do not represent amounts exchanged by the parties and therefore are not a measure of exposure through the use of derivatives. The amounts exchanged are determined by reference to the notional amounts and the other terms of the derivatives. The contract or notional amounts do not represent exposure to liquidity risk. The 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 not a dealer in 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 Company also enters into foreign exchange positions, such as forward, spot and option contracts, primarily as customer accommodations. 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. 37 The following table summarizes the aggregate notional or contractual amounts, credit risk amounts and net fair values for the Company's derivative financial instruments at September 30, 1995 and December 31, 1994.
================================================================================================================================== SEPTEMBER 30, 1995 December 31, 1994 ----------------------------------- ----------------------------------- NOTIONAL OR CREDIT ESTIMATED Notional or Credit Estimated CONTRACTUAL RISK FAIR contractual risk fair (in millions) AMOUNT AMOUNT(3) VALUE amount amount(3) value - ---------------------------------------------------------------------------------------------------------------------------------- ASSET/LIABILITY MANAGEMENT HEDGES Interest rate contracts: Futures contracts $ 5,126 $ -- $ -- $ 5,009 $ -- $ -- Forward contracts -- -- -- 8 -- -- Floors purchased (1) 15,790 117 117 14,355 25 25 Caps purchased (1) 236 2 2 244 6 6 Futures options purchased 300 -- -- -- -- -- Swap contracts (1) 5,126 89 65 3,103 3 (65) Foreign exchange contracts: Cross currency swaps (1) 118 92 92 118 76 76 Forward contracts (1) 25 -- -- 25 -- -- CUSTOMER ACCOMMODATIONS Interest rate contracts: Futures contracts 30 -- -- -- -- -- Floors written 6 -- -- -- -- -- Caps written 1,137 -- (6) 1,039 -- (15) Floors purchased (1) 6 -- -- -- -- -- Caps purchased (1) 1,200 6 6 1,016 15 15 Swap contracts (1) 425 1 -- 176 1 -- Foreign exchange contracts (2): Forward and spot contracts (1) 698 12 1 590 7 -- Option contracts purchased 46 1 1 319 -- -- Option contracts written 36 -- (1) 318 -- -- ==================================================================================================================================
(1) The Company anticipates performance by substantially all of the counterparties for these financial instruments. (2) The Company has immaterial trading positions in certain of these contracts. (3) Credit risk amounts reflect the replacement cost for those contracts in a gain position in the event of nonperformance by counterparties. 38 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 4 The Company hereby agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of securities of the Company. 11 Computation of Earnings Per Common Share 27 Financial Data Schedule 99(a) Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges, including interest on deposits, were 2.24 and 2.23 for the quarters ended September 30, 1995 and 1994, respectively, and 2.09 and 2.28 for the nine months ended 1995 and 1994, respectively. The ratios of earnings to fixed charges, excluding interest on deposits, were 4.90 and 5.12 for the quarters ended September 30, 1995 and 1994, respectively, and 4.22 and 5.53 for the nine months ended September 30, 1995 and 1994, respectively. (b) Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends -- the ratios of earnings to fixed charges and preferred dividends, including interest on deposits, were 2.13 and 2.11 for the quarters ended September 30, 1995 and 1994, respectively, and 2.00 and 2.13 for the nine months ended September 30, 1995 and 1994, respectively. The ratios of earnings to fixed charges and preferred dividends, excluding interest on deposits, were 4.25 and 4.29 for the quarters ended September 30, 1995 and 1994, respectively, and 3.71 and 4.46 for the nine months ended September 30, 1995 and 1994, respectively. (c) Press release, dated November 6, 1995, containing the Company's response to the announcement of First Interstate Bancorp's merger plan with First Bank System, Inc. (d) Press release, dated November 13, 1995, announcing that the Company increased its offer for First Interstate Bancorp and intends to take its offer directly to the stockholders of First Interstate Bancorp. The Company also intends to begin consent and proxy solicitations. 39 (b) The Company filed the following reports on Form 8-K during the third quarter of 1995 and through the date hereof: (1) July 18, 1995, under Item 5, containing the Press Release that announced the Company's financial results for the quarter ended June 30, 1995 (2) October 17, 1995, under Item 5, containing the Press Release that announced the Company's financial results for the quarter ended September 30, 1995 (3) October 19, 1995, under Item 5, containing the Press Release that announced the Company's proposed merger with First Interstate Bancorp (4) October 24, 1995, under Item 5, containing the October 23 Press Release that announced the Company's intention to file a Hart-Scott-Rodino Act notification with the appropriate regulatory authorities in order to be in a position to purchase shares of First Interstate Bancorp. The notification was filed on October 24. SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 14, 1995. WELLS FARGO & COMPANY By: FRANK A. MOESLEIN --------------------------------------- Frank A. Moeslein Executive Vice President and Controller (Principal Accounting Officer) 40 EX-11 2 EXHIBIT 11 EXHIBIT 11 WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE
================================================================================================== Quarter Nine months ended September 30, ended September 30, --------------------- --------------------- (in millions) 1995 1994 1995 1994 - -------------------------------------------------------------------------------------------------- PRIMARY EARNINGS PER COMMON SHARE Net income $ 261 $ 217 $ 726 $ 625 Less preferred dividends 10 10 31 33 ----- ----- ------ ------ Net income for calculating primary earnings per common share $ 251 $ 207 $ 695 $ 592 ===== ===== ====== ====== Average common shares outstanding 47.9 53.6 49.2 54.7 ===== ===== ====== ====== PRIMARY EARNINGS PER COMMON SHARE $5.23 $3.86 $14.14 $10.83 ===== ===== ====== ====== FULLY DILUTED EARNINGS PER COMMON SHARE (1) Net income $ 261 $ 217 $ 726 $ 625 Less preferred dividends 10 10 31 33 ----- ----- ------ ------ Net income for calculating fully diluted earnings per common share $ 251 $ 207 $ 695 $ 592 ===== ===== ====== ====== Average common shares outstanding 47.9 53.6 49.2 54.7 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 1.0 1.4 1.1 1.4 ----- ----- ------ ------ Average common shares outstanding as adjusted 48.9 55.0 50.3 56.1 ===== ===== ====== ====== FULLY DILUTED EARNINGS PER COMMON SHARE $5.12 $3.76 $13.83 $10.56 ===== ===== ====== ====== ==================================================================================================
(1) This presentation is submitted in accordance with Item 601(b)(11) of Regulation S-K. This presentation is not required by APB Opinion No. 15, because it results in dilution of less than 3%. EX-27 3 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-Q DATED NOVEMBER 14, 1995 FOR THE PERIOD ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1,000,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 3,183 0 52 0 2,476 6,960 6,903 34,298 1,872 49,934 38,948 2,971 1,038 3,020 237 0 489 3,148 49,934 2,536 460 2 3,074 750 1,087 1,987 0 (15) 1,638 1,239 726 0 0 726 14.14 13.83 5.72 586 135 14 0 2,082 295 85 1,872 0 0 0
EX-99.(A) 4 EXHIBIT 99(A) EXHIBIT 99(a) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
============================================================================================================================= Quarter Nine months ended September 30, ended September 30, --------------------- ------------------- (in millions) 1995 1994 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 460 $ 383 $1,239 $1,110 Fixed charges 372 311 1,135 869 ------ ------ ------ ------ $ 832 $ 694 $2,374 $1,979 ====== ====== ====== ====== Fixed charges (1): Interest expense $ 356 $ 297 $1,087 $ 827 Estimated interest component of net rental expense 16 14 48 42 ------ ------ ------ ------ $ 372 $ 311 $1,135 $ 869 ====== ====== ====== ====== Ratio of earnings to fixed charges (2) 2.24 2.23 2.09 2.28 ====== ====== ====== ====== EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 460 $ 383 $1,239 $1,110 Fixed charges 118 93 385 245 ------ ------ ------ ------ $ 578 $ 476 $1,624 $1,355 ====== ====== ====== ====== Fixed charges: Interest expense $ 356 $ 297 $1,087 $ 827 Less interest on deposits (254) (218) (750) (624) Estimated interest component of net rental expense 16 14 48 42 ------ ------ ------ ------ $ 118 $ 93 $ 385 $ 245 ====== ====== ====== ====== Ratio of earnings to fixed charges (2) 4.90 5.12 4.22 5.53 ====== ====== ====== ====== =============================================================================================================================
(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 was no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there was no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates. EX-99.(B) 5 EXHIBIT 99(B) EXHIBIT 99(b) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
============================================================================================================================= Quarter Nine months ended September 30, ended September 30, --------------------- ------------------- (in millions) 1995 1994 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 460 $ 383 $1,239 $1,110 Fixed charges 372 311 1,135 869 ------ ------ ------ ------ $ 832 $ 694 $2,374 $1,979 ====== ====== ====== ====== Preferred dividend requirement $ 10 $ 10 $ 31 $ 33 Ratio of income before income tax expense to net income 1.76 1.76 1.71 1.78 ------ ------ ------ ------ Preferred dividends (2) $ 18 $ 18 $ 53 $ 59 ------ ------ ------ ------ Fixed charges (1): Interest expense 356 297 1,087 827 Estimated interest component of net rental expense 16 14 48 42 ------ ------ ------ ------ 372 311 1,135 869 ------ ------ ------ ------ Fixed charges and preferred dividends $ 390 $ 329 $1,188 $ 928 ====== ====== ====== ====== Ratio of earnings to fixed charges and preferred dividends (3) 2.13 2.11 2.00 2.13 ====== ====== ====== ====== EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 460 $ 383 $1,239 $1,110 Fixed charges 118 93 385 245 ------ ------ ------ ------ $ 578 $ 476 $1,624 $1,355 ====== ====== ====== ====== Preferred dividends (2) $ 18 $ 18 $ 53 $ 59 ------ ------ ------ ------ Fixed charges: Interest expense 356 297 1,087 827 Less interest on deposits (254) (218) (750) (624) Estimated interest component of net rental expense 16 14 48 42 ------ ------ ------ ------ 118 93 385 245 ------ ------ ------ ------ Fixed charges and preferred dividends $ 136 $ 111 $ 438 $ 304 ====== ====== ====== ====== Ratio of earnings to fixed charges and preferred dividends (3) 4.25 4.29 3.71 4.46 ====== ====== ====== ====== =============================================================================================================================
(1) As defined in Item 503(d) of Regulation S-K. (2) The preferred dividends were increased to amounts representing the pretax earnings that would be required to cover such dividend requirements. (3) These computations are included herein in compliance with Securities and Exchange Commission regulations. However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there was no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there was no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates. EX-99.(C) 6 EXHIBIT 99(C) [WELLS FARGO LETTERHEAD] FOR IMMEDIATE RELEASE - --------------------- MON., NOV. 6, 1995 WELLS FARGO RESPONDS TO ANNOUNCEMENT OF FIRST INTERSTATE MERGER PLAN WELLS FARGO & CO. TODAY SAID IT DOES NOT BELIEVE THAT FIRST INTERSTATE BANCORP'S (NYSE: I) ANNOUNCEMENT THAT IT HAS AGREED TO MERGE WITH FIRST BANK SYSTEM, INC. (NYSE: FBS) IS IN THE BEST INTEREST OF FIRST INTERSTATE'S SHAREHOLDERS. "IN OUR OPINION, THIS DECISION DOES NOT SERVE THE BEST INTERESTS OF FIRST INTERSTATE'S SHAREHOLDERS," SAID PAUL HAZEN, CHAIRMAN OF WELLS FARGO. "WE DO NOT BELIEVE THAT FIRST INTERSTATE'S SHAREHOLDERS WILL SETTLE FOR SOMETHING LESS THAN WHAT THEY WOULD HAVE OBTAINED THROUGH A MERGER WITH WELLS FARGO. WE OFFERED NOT ONLY A PREMIUM TO MARKET, BUT ALSO THE POTENTIAL OF APPROXIMATELY ANOTHER $30 PER SHARE BASED ON THE PRESENT VALUE OF EXPENSE CUTS. THE INITIAL MARKET REACTION TO OUR PROPOSED MERGER CAUSED THE PRICE OF WELLS FARGO STOCK TO CLOSE ABOVE $230 PER SHARE, IMPLYING A VALUE PER SHARE FOR FIRST INTERSTATE OF ABOUT $144 PER SHARE BASED ON THE 0.625 EXCHANGE RATIO. IN DISCUSSIONS WITH MR. SIART, WE ALSO OFFERED TO INCREASE THE EXCHANGE RATIO TO 0.65, WHICH WOULD HAVE FURTHER INCREASED THE VALUE OF FIRST INTERSTATE SHARES TO ABOUT $150 PER SHARE AND THE SIZE OF OUR OFFER BY ROUGHLY $450 MILLION. WE BELIEVE THAT THERE WOULD HAVE BEEN AN EVEN MORE POSITIVE RESPONSE IF AN ACTUAL MERGER WITH WELLS FARGO HAD BEEN ANNOUNCED. IT IS UNFORTUNATE THAT FIRST INTERSTATE'S SHAREHOLDERS WERE NOT GIVEN THE OPPORTUNITY TO VOICE THEIR OPINION." ### EX-99.(D) 7 EXHIBIT 99(D) [Wells Fargo Letterhead] FOR IMMEDIATE RELEASE - --------------------- Mon., Nov. 13, 1995 WELLS FARGO INCREASES OFFER FOR FIRST INTERSTATE; ANNOUNCES EXCHANGE OFFER FOR COMMON STOCK INTENDS TO BEGIN CONSENT AND PROXY SOLICITATIONS SAN FRANCISCO -- Wells Fargo & Co. (NYSE: WFC) today announced that it intends to take its offer to acquire First Interstate Bancorp (NYSE: I) directly to the stockholders of First Interstate by beginning an exchange offer. Wells Fargo will offer stockholders of First Interstate an opportunity to tender their shares in an exchange offer in which each First Interstate share tendered would be exchanged for two-thirds of a share of Wells Fargo common stock. Based on the closing price of Wells Fargo common stock on November 10, the value of the exchange offer is $143.58 per share of First Interstate common stock. First Interstate has approximately 75.7 million shares outstanding, giving the transaction a total value of approximately $10.9 billion. "Our offer is superior to First Bank System's and we believe it is too compelling to ignore," said Paul Hazen, chairman of Wells Fargo & Co. "Our Board and major stockholders are fully supportive of the steps we are announcing today and are determined that Wells Fargo be successful in acquiring First Interstate. We are convinced that First Interstate stockholders will appreciate the extraordinary value of our proposal." The terms and conditions of the exchange offer are to be set forth in a registration statement that will be filed promptly with the Securities and Exchange Commission (SEC). The exchange offer will begin when the registration statement is declared effective by the SEC. The exchange offer will be conditioned on, among other things, the acquisition of a majority of First Interstate common stock, the redemption or invalidation of First Interstate's "poison pill", receipt of all necessary governmental regulatory approvals and consents, and approval by Wells Fargo stockholders of the issuance of Wells Fargo shares in the exchange offer. -more- - -2- Wells Fargo intends to file an application today with the Federal Reserve Bank of San Francisco to approve the acquisition by Wells Fargo of First Interstate under the Bank Holding Company Act of 1956. The Company anticipates no difficulty in obtaining approval by the Federal Reserve Board on a timely basis, and is committed to making all appropriate divestitures. In addition, Wells Fargo said that it anticipates filing preliminary materials with the SEC for the solicitation of written consents from stockholders of First Interstate to remove First Interstate's current board of directors and to replace them with nominees of Wells Fargo who are committed to removing any impediments to the consummation of the acquisition of First Interstate by Wells Fargo. Wells Fargo also intends to file preliminary proxy materials with the SEC. These would be used in connection with the solicitation of First Interstate stockholders for proxies to vote against approval of the merger with First Bank System at any meeting of stockholders of First Interstate to be called to consider that merger proposal. Finally, Wells Fargo today is filing a complaint against First Interstate, First Interstate's Board of Directors and First Bank System in the Delaware Chancery Court. The complaint seeks to invalidate the break-up fees and lock-up option granted to First Bank System by First Interstate. In addition, the complaint seeks injunctive relief requiring the First Interstate Board to redeem the First Interstate poison pill and to prevent First Interstate from using anti-takeover devices or taking other actions intended to impede or delay the acquisition of First Interstate by Wells Fargo. "We want to do everything we can to keep California banking strong and to keep banking headquarters in our state, not thousands of miles away," said Hazen. "We strongly believe that our merger proposal serves the best interests of California's many constituents. Our combined companies will bolster competition, bring customers a wider range of products and services and create the potential for new jobs. We believe stockholders deserve the opportunity to vote on the merits of each merger proposal." -more- - -3- NOTE TO EDITORS: FOLLOWING THIS RELEASE IS THE FULL TEXT OF A LETTER BEING DELIVERED TODAY BY PAUL HAZEN TO WILLIAM SIART, CHAIRMAN AND CEO OF FIRST INTERSTATE BANCORP. November 13, 1995 Mr. William Siart Chairman and Chief Executive Officer First Interstate Bancorp 633 West Fifth Street Los Angeles, CA 90071 Dear Bill: We were disappointed to learn that First Interstate had agreed to merge with First Bank System in a transaction that would offer First Interstate stockholders less value than they would receive pursuant to our then pending merger proposal, which offered .65 of a share of Wells Fargo common stock for each share of First Interstate common stock. From our prior conversations you know how determined Wells Fargo is to combine the operations of our two companies. We remain more determined than ever. Accordingly, Wells Fargo today announced that it intends to file with the Securities and Exchange Commission a registration statement with respect to an exchange offer pursuant to which Wells Fargo will offer to exchange 2/3 of a share of Wells Fargo common stock for each outstanding share of First Interstate common stock. We note that your agreement with First Bank System authorized First Interstate to terminate it if your "Board of Directors, after having consulted with and considered the advice of outside legal counsel, reasonably determines in good faith that such action is necessary in the exercise of its fiduciary duties under applicable laws". In light of the higher value of the proposal we intend to make directly to your stockholders, it is our firm conviction that the fiduciary duties owed by your Board to First Interstate stockholders compel your Board to exercise that termination right forthwith. As you know, our strong preference is to combine our two companies in a transaction endorsed by First Interstate's Board of Directors. In that connection, Wells Fargo would be prepared to enter into a merger agreement with First Interstate providing your stockholders with the same consideration as offered in our exchange offer, and we would not seek any break-up fees or lock- up options. - more - - -4- In the event that your Board of Directors would rather not terminate the agreement with First Bank System, if you and First Bank System would agree, we would agree to a different process by which Wells Fargo and First Bank System would each be given 10 days to submit its best and final merger proposal, and First Interstate would agree to submit both proposals promptly to its stockholders in a manner fair and acceptable to both bidders so that the stockholders would be able to decide for themselves which proposal is in their best interests. Your Board would approve each proposal, in the alternative, for Delaware law purposes. As you know, the economic benefit to our respective stockholders that can be generated from the combination of our two companies is enormous, and far outstrips the benefits of a First Interstate - First Bank System combination. As a result, we are confident that the First Interstate Board and its advisors will conclude that our proposal, evaluated on an impartial basis, offers significantly more value to First Interstate stockholders than the First Bank System transaction. We look forward to receiving your prompt response. Enclosed is a copy of the press release we are issuing today about our exchange offer and related matters. Sincerely, Paul Hazen Chairman and CEO Enclosure ### -----END PRIVACY-ENHANCED MESSAGE-----